May 1 1924


May 1 1924


WHAT is Canada going to do about her war debt? asks the Financial Post, in a series of articles which point to the increase in the Dominion’s obligations from $330,000,000 in 1914 to $2,450,000,000 in 1923.

The national financial alarm clock is ringing insistently, declares the writer, a student of public finance, who immediately points out that while the first call has been for reduction of taxation, the second will be for reduction of debt.

Certainly no country in the world has better security for her debts than Canada, but Canada is not exempt from the axiomatic principle of public finance that public borrowing without provision to meet interest charges and ultimate redemption will lead to serious fiscal embarrassment. Canada must arrange her financial program to take care of the war debt—and other debts.

For the past decade we have been wandering in a fool’s paradise, gathering in money at high interest rates without providing for its repayment in a reasonable number of years. Even last autumn when $172,000,000 of 1923 Victory bonds came due there was an evidence of this policy in the refunding operations. Instead of attempting to refund a smaller amount, $200,000,000 of bonds were sold and the interest charges mounted accordingly.

Canada has relied upon a short-sighted policy of meeting war expenditures by borrowing. From 1914 to 1921 the federal revenue was insufficient by $78,500,000 to meet ordinary expenditures and advances to railways. The other main item of expenditure for war and demobilization, amounting to $1,681,500,000, had to be met by Victory and War bonds and other instruments of indebtedness.

The consequence was an enormous increase in the net debt, which is exclusive of direct and guaranteed bonds issued for “productive” undertakings or active assets, from $335,996,850 in 1914 to a high point of $2,340,202,552 in 1923. The interest and ultimate redemption of these bonds Is a charge upon what have been the comparatively stationary earnings of the Canadian people, who have1 increased in population only about ten per cent. in. the same period.

Piling Up the Debt

"plIlS burden has increased from A $1,500,000,000 at the time of the armistice, to somewhat less than $2,500,000,000 at the present.

While Great Britain, United States and parts of the British Empire have been able to balance their budgets and steadily reduce their debts, Canada has not only added a billion dollars but has inflicted tax experiments almost to exasperation1 It is a principle of public finance that the payment of the principal of a debt tends neither to impoverish a nation nor to retard its material development; but, on the other hand, the maintenance of the principal and the constant payment of accruing interest tend to cripple the productive capacity of the people.

The enormity of the principal and interest of our debt, therefore, bring into relief the main mistakes of our revenue policy during the past decade which have been :

1. Inadequacy of taxation during pros-


2. Failure to provide for redemption of

debts after the war.

3. Inability to balance the budget since

the Armistice.

4. Ill-advised experiments in taxation.

5. Lack of stability in tax and tariff


6. Reluctance to make provision for

expert administration.

Fifty Years to Redeem Debt.

"l^HE reduction of debt is, at best, a 1 painful process, and when it amounts to $1,865,843,350, which is the amount of war bonds in Canada to be reduced, the effort seems stupenduous for a nation of nine million people. It will require a period of from fifty to a hundred years to liquidate it, depending on the amounts redeemed each year.

The annual charges upon the debt, amounts to $100,695,819, of which $50,307,644 is entirely exempt from taxation. In any plans proposed it is a prerequisite that no more tax-exempt bonds be issued and the advisability of making the refunding bonds callable at fixed prices should be carefully considered.

There are many variations of plans which may be devised to redeem the debt, but, in a general way, they can he summarized as follows: i 1) Sinking funds.

(2) Serial and instalment bond issues.

(3) Refunding smaller amounts at lower interest rates.

(4) Purchase and cancellation of outstanding bond issues.

Continued on page H

Continued from page 6 In the United States sinking funds are being accumulated to retire the debt. It is provided that $253,404,864 shall be appropriated each year as a cumulative sinking fund to purchase United States government securities which are subsequently cancelled. In addition, a sum amounting to the interest which would have been paid upon any securities cancelled must be paid into the sinking fund.

Applying this plan to the Canadian debt would mean that the present charges of $100,695,819 would be continued, and, if we set aside an additional sum of $10,000,000 annually as a sinking fund levy to be invested to yield an annual rate of four per cent., we would wipe out our debt in fifty years.

The virtue of this plan is that it calls for a relatively small amount which can be saved by economical administration. If the present plans for economy are put in operation the sinking fund levy of $10,000,000 would not mean any increase in taxation, and as the country developed the burden would become proportionately less.

Cancellation'of Securities

A VARIATION of this plan would provide for the cancellation of the Dominion government securities as they were purchased, which would be more similar to the policy adopted in the United States. Another sinking fund plan would be to set up a separate sinking fund for each loan to redeem it at maturity. Such a plan would have the same disadvantages that are attached to the first, and, in addition, it would entail a larger burden for interest and sinking fund in the first years than in the last years and this would increase proportionately the load at a time when taxes are already high.

On the whole, these plans are not so desirable as a modification of them which consists in building up small sinking funds and utilizing the investments to reduce the amount of bonds refunded.

Serial and Instalment Bonds

TN SELECTING any plan to reduce I systematically the amount of Victory and War Loan bonds in Canada, consideration must be given to the modern devices of serial and instalment bonds which are being more widely issued by municipalities than ever before. Confusion often exists, as to the distinction between the two types, a difference which, in reality, is simple.

In the true serial type the practice is to ! borrow a certain sum and to issue a defin! ' ite amount of debentures maturing yearly over the period of the loan. A loan of $1,000,000 for twenty years would require repayment of $50,000 principal annually for twenty years.

On the other hand, instalment issues require that the annual payment of principal and interest added together shall be equal in each year. The real difference is, therefore, that in the serial issues the annual payment of principal reduces the subsequent payment of interest while in the instalment issues the principal repaid becomes greater as the interest annually becomes less. In an ; instalment issue for $1,000,000 for twenty ! years at five per cent, interest, the annual instalment for principal and interest, according to mathematical calculation, would be $80,242.59, ranging from $30,242.59 for principal and $50,000.00 for interest in the first year to $76,421.51 for principal and $3,821.08 for interest in the last year.

These plans have had a considerable vogue in municipal finance where debentures are issued to pay for local improvements, the existence of which is limited to a definite number of years. In such a case when the last payment of principal is made the value of the j public works may have depreciated to zero. A new loan is then made and the ’ pavements, sidewalks or other improvements are reconstructed by the proceeds of another debenture issue. Such a course i does away with one of the flagrant abuses j of municipal finance which has been the refunding of debenture issues for improvements which have long ceased lo exist.

Serial and instalment bonds undoubtedly have their place in municipal issues where it is desirable to maintain a credit standing, and where the institution of sinking funds is not always prac-

ticable. They can be used to reduce our national debt but it would seem that their theoretical advantages are more than counterbalanced by their cost and their nature.

The final possibility, outside of levies for the immediate payment of the debt, is by the conversion or refunding of loans upon a callable basis, and utilizing surplus revenue for their purchase.