The National Debt: A Short History by Martin Slater

Author:Martin Slater [Slater, Martin]
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 0101-01-01T00:00:00+00:00

STABILISING THE MEDIUM-TERM DEBT

After the floating debt, the next most pressing problem was the approaching maturity of much of the medium-term debt issued during the later stages of the war. In some cases this was rolled over into new medium-term debt. War Bonds and Exchequer Bonds were replaced by Treasury Bonds of similar maturities. But increasingly the aim was to replace with longer-term issues if possible.

In 1921, the first of these was the 3.5 per cent Conversion Loan, redeemable after 1961, originally issued to replace £600 million of expiring War Bonds, with subsequent issues for cash and to replace further expiring bonds. This was notable as being the first return to a perpetuity with no fixed redemption date. However the wisdom of its timing was questionable: despite the low nominal coupon of 3.5 per cent—probably chosen to indicate a desired return to peacetime interest rates—the market rate interest rate had not fallen, so the issue had to be floated considerably under par, at an effective interest rate of over 5 per cent, which was now locked in until 1961. A more sensible course might have been to refinance one more time with a medium-term issue until interest rates did fall—which would then be the time to lock in a long-term rate. However, the over-riding political objective of the time was to increase the maturity of debt to remove the permanent feeling of near-crisis over forthcoming redemptions, so policymakers probably wanted to make a statement, and were perhaps a little blind to its long-term costs.

Other conversion loans followed, although these did have fixed redemption dates at twenty to forty years’ distance. In 1927 there was another perpetuity issue: 4 per cent Consols, redeemable after 1957. Issued at eighty-five, again this conceded an interest rate close to 5 per cent for at least thirty years.

By far the largest problem was the 5 per cent War Loan issued in 1917. Over £2 billion of this stock existed, and it was repayable between 1929 and 1947. The government’s greatest nightmare was having to repay or refinance such an enormous sum in one go, perhaps at an unfortunate time in the markets. But at least after 1929, although not before, there would be a possibility of interest rate conversion. Unfortunately, as we have seen, interest rates initially remained high, first because of the government’s continual need to refinance the floating debt, and secondly to support the exchange rate. But the government gradually got on top of the floating debt, and in 1931 finally gave up the attempt to maintain the pre-war gold-standard parity, allowing market interest rates to fall. This in turn allowed the Chancellor Neville Chamberlain to execute an ambitious but successful conversion scheme in 1932, reducing the interest rate to 3.5 per cent, and converting the stock to a perpetuity, redeemable after 1952.6 Finally the government had been able to achieve its ideal objective of simultaneously increasing maturity and reducing the interest burden. The reduction of the interest burden was very significant—1.5 per cent of £2 billion is £30 million per year.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.