The American system of debt paying began in 1790 with the application of a surplus from tunnage fees and imports to the purchase of public bonds in order partly to improve the market price of the bonds and facilitate conversion. In 1792 the bonds thus purchased, were made the basis of a sinking fund, it being determined that the interest on them should continue and be paid to a commission for the further purchase of public bonds. In 1795 the sinking fund commissioners were made the recipients of certain revenues to be applied to the payment of definite portions of the debt. Ross thus summarises this fund : " The sinking fund was now enlarged by the following additional appropriations: (1) so much of the permanent duties as, with existing income, should enable the commissioners to pay, in 1796 and thereafter, a yearly 2 per cent of the 6 per cent stock; (2) the surplus dividends on the government $2,000,000 of United States Bank stock after deducting the interest accruing on the remnant of the bank loan; (3) so much of the permanent duties as, with the surplus dividends, should suffice to pay a yearly $200,000 on the bank loan, till 1802, and then begin the redemption of the deferred stock; (4) the proceeds of the sale of public lands; (5) the proceeds of debts inherited from the old government; (6) all revenue surpluses of any year remaining unappropriated during the next session of Congress."1 This fund was not very efficient on account of the excess of expenditures. It served one very important purpose, however, that of regulating the credit of the United States by showing the intention to pay. In 1802 Gallatin organised another plan, which was continued for some time. It was to increase the revenues beyond the current expenditures and apply the surpluses to the debt payment. The results of the two plans have been compared as follows : " The inherited debt and accrued interest amounted in 1791, when funded, to $76,781,953.14. The Federalists in ten years reduced this to $72,733,599, but added $7,193,400 of new stock, mostly at 8 per cent, thus bequeathing a burden of $79,926,999 to their successors.

1 " Sinking Funds," p. 49.

Of this, Gallatin's sinking fund extinguished $46,022,810 between 1801 and 1811. The purchase of Louisiana, however, added $11,250,000 to the principal, so that on January 1, 1812, the public debt was $45,154,189, over thirty-one millions less than the original Revolutionary debt."1 This comparison is not altogether fair to Hamilton, the author of the older plan, for his fund enabled important conversions to be successfully made which reduced the debt charges. During the War of 1812 the payments to the sinking fund were suspended. After the war the debt stood :

1 Ross, p. 67.

2 Ross, p. 69, from Finance, Vol. II., p. 916.

Old debt remaining

. $39,905,183.66

Funded war debt

. 49,780,322.13

Treasury notes .

.

18,452,800.00

Temporary loans

550,900.00

Total burden on

the

sinking fund $108,689,205.79

Interest on stock held by com.

. $1,969,577.64

Receipts from public lands .

800,000.00

From duties ....

. 5,230,422.36

Sinking fund

. $8,000,000.00 2

The sinking fund was at that time composed of The policy of protection, inaugurated after the War of 1812, separated income from expenditure. The ultimate purpose of most of the taxation, namely protection, was considered so paramount that a high rate of taxation was continued for that reason. The available surpluses were, therefore, large, and were from time to time applied to the debt. Down to 1824, when all the debt contracted up to that time was practically paid, the sinking fund was managed by a special commission, but since then the secretary of the treasury has had charge of it. The Civil War debt was by the act of February 25, 1862, supposedly placed on a secure basis. " The coin paid for duties on imports was to be applied first to the payment of interest on the bonds and notes of the United States. It was then to be applied 'to the purchase or payment of 1 per cent of the entire debt . . . to be made within each fiscal year, which is to be set apart as a sinking fund, and the interest of which shall in like manner be applied.' . . . The residue of customs receipts was to be paid into the treasury."1 While no such regularity as was contemplated by this act was realised, yet the debt has been paid from surpluses more rapidly than was anticipated, until the reduction of the revenues in 1895, due to a change in the policy in regard to the protective duties, together with a redundancy in the monetary circulation, which resulted in a foreign drain upon the gold reserves held for the redemption of notes outstanding, made new borrowing necessary.

1 Ross, p. 79.

The commonwealth constitutions of the United States very generally charge upon the legislatures the duty of providing a sinking fund. Many of them, besides limiting the amount of debt that may be created, either by naming a fixed sum or a proportion ofthe revenues that may be used for interest payment, also provide that whenever a debt shall be contracted, a tax shall at the same time be levied sufficiently large to pay the interest charge and provide a sinking fund. The general distrust of the legislatures is emphasised in the constitutions by making such laws irrepealable until the debt is paid. The commonwealths are thus permanently committed to the policy of debt payment, not so much on account of any deep-seated belief in the efficacy of the particular methods laid down, which may necessitate the continuance of debt payment even at a time of borrowing, but on account of the well-founded distrust of the prudence of the legislatures. The same distrust has destroyed the danger of the system, by almost entirely forbidding debt-making by the commonwealths.1