The best justification of debt-making is that it distributes the burden of some heavy expenses upon a later period. The cost of this postponement is the payment of the annual interest. In order to fulfil the intention of the loanand to get rid of the cost of the process it is necessary to pay the debt. If these two reasons were not sufficient, the danger of the recurrence of similar extraordinary needs and new appeals to credit, and the eventual danger of bankruptcy, point in the same direction. As we have already seen, some of the forms of debts contain within themselves the provision for payment. Life and terminable annuities involve the payment of the principal in annual instalments. Other forms call for payment in larger instalments or at a definite termin, for which provision must be made by the collection of funds beforehand. If, however, the expiration of the period finds the debtor State not in the possession of the funds needed, it may have to borrow again to fulfil its agreements. In the case of most perpetual debts it would be obviously unfair to call upon certain holders for the surrender of their bonds and to allow other holders of the same sort of bonds to retain theirs, especially if the rate of redemption is below the market rate. The whole of any issue of bonds, therefore, must be treated as a unit. This involves the gradual accumulation of a fund for the payment of all of the debt of the same kind and issue. There is, however, another alternative. The government may enter the market with this fund, before it is large enough to pay all the debt, and purchase such of its securities as are offered for sale. Care must be exercised in the application of this method not to raise the price of the securities. Provision made for the accumulation of a fund for the redemption of the debt is called the sinking fund.1 The sinking fund may be defined in two ways; either it is an annual fund, i.e. a portion of the annual income, or it is the accumulated capital from this and other sources applicable to the payment of the debt.

1 See Ross, " Sinking Funds," Pub. Amer. Economic Assoc, VII, p. 445.

Not strictly the earliest, but the first important attempt at the arrangement of a regular sinking fund is that of England in 1786 under Pitt. This was a remarkable scheme. It is said to have been suggested by Price, a clergyman, who in 1772 wrote An Appeal to the Public on the Subject of the National Debt. His argument was based on the productiveness of compound interest. He urged that a fixed sum, however small, should be set aside every year for the purchase of public stock, and that the interest on the stock thus purchased should continue and should be applied to further purchases. There would then be two sources from which the debt would be cancelled: one, the payment of the annual amount ; the other, the ever increasing interest fund. The effect of such a scheme in eventually discharging any debt was regarded as almost magical. It was not perceived that the real efficacy of the scheme lay in the fact that the nation continued to bear the whole burden of the initial interest charge until the debt was paid, and that the real source of payment was the excess of taxation over expenditure. In accord with this idea Pitt appointed a "Board of Commissioners of the Sinking Fund," who were to receive a fixed sum each year, with which to purchase public stocks, at or below par. Interest on the stocks thus purchased was to be paid to the commissioners, and quarterly applied to new purchases. This much-admired scheme amounted to adding 1,000,000 annually to the taxes needed for other purposes, and continuing the entire burden of taxation until the debt was paid. It is clear that what was really used for debt payment was the surplus revenue. The 1,000,000 was clearly that, and the interest on the stocks purchased therewith need not have been paid but for the sinking fund. There is, indeed, no source from which the debt can be paid but taxation or similar net revenue. So great was the faith of the government in this scheme that it continued the payments to the sinking fund even while borrowing for the war of 1793 and after. The fallacy of Dr. Price's arguments was pointed out by Professor Robert Hamilton of Aberdeen in 1813. Shortly after that, it was estimated that, as a result of the sinking fund system kept up during a period of borrowing, the government had, between 1785 to 1829, borrowed 330,000,000 at 5 per cent to pay a debt of the same size at 4.5 per cent. The scheme was then abandoned, never to be resumed. From this time on only genuine surpluses were applied to the payment of the debt. This abandonment of the idea of Price and Pitt, however, had a rather disastrous result, in that it largely suspended debt payment in favour of tax remission. Since 1875 England has tried a new plan. Without committing herself to a policy which would involve paying debts with one hand and borrowing with the other, and without relying upon mere chance surpluses, she decided to appropriatea fixed sum from the consolidated fund for the national debt services, to be continued as long as there were no extraordinary calls upon the funds. 25,000,000 are now annually appropriated for the national debt services, of which, in 1895, 1,718,263 3s. 7d. went into the new sinking fund ; whereas in 1875 the sum was fixed at 28,000,000, and a larger amount went into the sinking fund. In addition to this England has been converting her debt into terminable annuities, resulting in a mechanical method of debt payment which may in time of pressure work as the old sinking fund did.