Julyan to Sandford (Assistant Under-Secretary)

In reply to your letter of the 9th ultimo, relating to the
Public Debt of British Columbia, I have the honor to offer for
Earl Granville's information the following observations on the
suggestions contained in the enclosures to that letter.

2. There can be no manner of doubt but that the devotion of one
third of the revenue of the Colony to the payment of Interest
and Principal on the public debt proves a heavy burden on the
local Exchequer, but it may fairly be supposed that the
re-productive works—as represented at the time of borrowing—upon
which the money was expended are by this time yielding
a portion, if not the whole, of the amount required to meet the
annual charge which the debt involves. And if this be so, then
there can be but little to object to with regard to the nature
of this burden.

*

3. The Debts of the Colony—English and Colonial—and all
particulars respecting them, are given in the enclosed Statement marked
A.

4. The sums payable annually in respect of those debts are as
follows, viz,

For the first 2 1/2 years £32,590

The next 7 1/2 years 25,090

The next 1/2 year 21,090

The next 9 1/4 years 16,090

The final 5 1/4 years 7,840

making a total sum, to be provided between the present date and
1st January 1895, of £470,187 which, added to the amount
already in the Sinking Fund, makes a total of £547,394, which
will still be required to meet the interest and pay off the
capital when due.

5. The contributions to the Sinking Funds are certainly high,
but most of them were I believe originally determined on the
understanding that the money was to be invested in Imperial
Securities paying about 3 per cent, whereas all investments have
for some time past been made in Colonial Debentures yielding on
an average at least 5 per cent.

6. Should the latter rate of Interest be maintained throughout,
then the liabilities of the Colony in this respect will
gradually decline until 1st January 1895, when they will be
totally extinguished.

7. The suggestion made by the Acting Colonial Secretary for
diminishing the present very heavy annual burden borne by the
Colony, by substituting a new Loan which would spread the
liability over fifty years, for the several comparatively short
Loans now in existence, is in theory perfectly sound, and has
been adopted by other Colonies—notably so in the case of New
Zealand last year, when the Crown Agents devised a scheme by
which £28,500 a year, and the accumulations in the Sinking
Funds, were saved to the Colony—but unfortunately the case of
British Columbia lacks that one element which forms the very
essence of all such schemes, vizt—good public
credit!
Without this quality who could be expected to exchange a
Debenture payable in 1873 for one which would not become due
until 1920?

8. As illustrative of the actual state of affairs in this
respect, I may observe that during the last month the Crown
Agents purchased British Columbia Debentures due
in 1894 at 95, whereas they found it impossible to buy those
falling due in 1873 at 100.

9. The difference in time between these two Loans is 21 years,
and that between the maturity of the 1873 Loan, and the proposed
50 years Loan is 47 years.

10. The basis of such an operation would be the Market value of
the
new 50 years 6 per cent Debentures, and if for example we suppose
them to be saleable at 85, it would be necessary to issue 118 of
the new (or nearly so) in exchange for 100 of 1873. This
process applied to the whole of the existing debt, would so
increase its amount as to render the operation undesirable.

11. I think it possible however that the debt of the Colony
might be dealt with in another manner, which would afford no
inconsiderable relief to the debtors, vizt as follows:

1st Pay off the £50,000 due on 1st January 1873 at par, out
of the present Sinking Fund—or failing this, then set aside so
much of that fund as would produce sufficient to meet the
Interest thereon during the three years still unexpired, and pay
off the principal at the end of that period.

2nd Devote the balance which would still remain in the Sinking
Fund—after paying contingent expenses therefrom—to the
extinction of a part of the local Debt. See Statement marked B
enclosed.

3rd Create new Debentures to an extent corresponding to those
maturing in the years 1883 and 1894, but bearing interest at
6 1/4 instead of 6 per cent, and let these new Debentures be
redeemable at par by a 2 per cent cumulative Sinking Fund
devoted to annual Drawings, which would spread the operation
evenly over 23 years (£190,000/See Statements A and B).

4th Offer the new Debentures in exchange for the old at par,
thus holding out the inducement of a 1/4 per cent more Interest,
and whatever advantages might be gained from the chance of
drawing at par, whenever the Debentures were at a discount in the Market.

5th Issue a further number of these new Debentures sufficient
to realize in the London Market enough to pay off the balance
of the local Debt (£33,000/Statemt B).

12. The benefit which the Government might reasonably expect to
derive from the operation—supposing all the present holders to
fall into the scheme, and supposing the new Debentures which it
is proposed to sell to pay off the balance of the present local
debt could be placed in the Market at or about par—would be the
immediate reduction of the annual charge from £32,590 to
£18,397. And although this difference would be lessened as
time elapsed, and instalments of the existing debts were paid
off, yet it would continue to be very considerable for the
following ten and a half years, and—including provision for
extinguishing the local debt—would result finally in the
payment of about £47,000 less in the aggregate than will
otherwise have to be paid. See Statement A.

13. These calculations are based on the supposition that the
Sinking Fund of the old Loans will continue to return interest
at an average rate of 5 per cent, but should this rate not be
maintained throughout, then the difference in favor of the
suggested measure would be increased in proportion to the
diminished productiveness of the old Funds.

14. On the other hand, in paying off the debt by annual
drawings, all uncertainty will be obviated, notwithstanding any
fluctuation that might take place in the current rate of interest.

15. To carry out such an operation as I have suggested, it
would be necessary to pass a new Loan Act authorizing the issue
of the 6 1/4 per cent Debentures to an extent not exceeding
£223,000. Or to provide against the possibility that Debentures
for £33,000 to be sold to pay off local debts, might not realize
the estimated price, it would be prudent to authorize the issue
of £225,000, limiting the application of the new Loan exclusively
to the extinction of existing Debts, and providing a 2 per cent
cumulative Sinking Fund payable half yearly.

16. The principal, interest, and contribution to Sinking Fund,
should be charged preferentially on the Revenue and Assets of
the Colony, reserving always the rights of such holders as may
not choose to come into the new scheme.

17. Authority should also be taken in the same Act for
appropriating the sums already accumulated in the Sinking Fund
of the old Loans, in the manner before described with similar
reservations.

18. With regard to the Sinking Fund of the new Loan it will be
sufficient to enact that it be applied exclusively to the
extinction of the debt, in such manner as the Secretary of State
for the Colonies may direct, without describing the particular
mode in which it shall be used for that purpose.

19. By a cumulative Sinking Fund it is to be understood that
the annual charge would continue at £18397 throughout the whole
23 years, and that the drawn Bonds would be vested in the
Trustees, who would thenceforward receive the interest thereon
and devote it, together with the 2 per cent contributions, to
the annual drawings, so that eventually they would become the
holders of the whole issue.