Julyan to Herbert (Assistant Under-Secretary)

I have the honor to acknowledge your letter of the 29th June
last forwarding copy of a despatch from the Governor of British
Columbia respecting the position of the Public Debts of that
Colony and suggesting an alternative scheme to that proposed in
my letter of the 31st January preceding.

On this alternative scheme I beg to offer for the Earl of
Kimberley's consideration the following observations.

In the first place the difference of about £13,000, (spread over
a quarter of a Century) in favor of Governor Musgrave's proposals
as compared to mine, even if it could be realized, would,
according to my views offer but a very poor compensation for the
injury to the credit of the Colony, and to the interests of the
present Bondholders, which the course he proposes to pursue
could not fail to inflict. But in reality no such difference
exists. My scheme provided for the absorption of a local debt
of £56,000, and made provision for the interest of substituted
new debt up to its final extinction—whereas the scheme of the
Governor provides for the absorption of something less than
£50,000, of local debt, and fails to provide for the payment of
sufficient interest on that reduced amount for the last 5 8/12
years of its currency.

The rectification of these oversights will be found to convert
the £13,019, said to be in favor of the Governor's scheme (as
shown by statement No 2) into a sum of £14,120 in favor of mine.

The difference shown in statement No 1 will in like manner be
reduced from £13,069, to £2,143, which, spread over 30 years
gives a small fraction over £70 a year.

For facility of reference I return the two statements enclosed
in the Governor's despatch, with amended statements attached to
them, showing how these results are arrived at.

Then with regard to the character of the two schemes—Mine, as
I look upon it, is calculated to make the whole debt of the
Colony more popular, to give a practical and enhanced value to
the Debentures in the London Market, by converting the various
fragmentary debts into one General Loan, the price of which
would be stimulated more and more as time elapsed, by the
continual growth of the sums devoted to annual Drawings at par.

Such influences would operate strongly in favor of the credit,
or borrowing power, of the Colony in my estimation, and more
than counterbalance any of those prejudicial effects which the
Governor apprehends may be caused by raising the annual rate of
Interest from 6 to 6 1/4 per Cent.

The alternative scheme, on the contrary, starts with raising a
new 6 per Cent Loan at 85 which will yield the lenders £7.1.2
per Cent per annum during the currency of the debentures, and
finally give them a bonus—or increase of capital—equal to
£17.13.0 per cent more.

An additional 5 per Cent is also to be paid by the Government if
they desire to pay off the debt before maturity: or, in other
words, a Debenture sold by the Government for £85, may be
purchased back for £105.

Anything better calculated to depreciate the securities of
British Columbia than the negotiation of a Loan on such terms it
is difficult to conceive.

In fact it is simply saying to the lenders: "this is our own
measure of the value of the public credit of the Colony"—and
the result would be, not only damaging to the Colonial
Government, as lessening public confidence in its stability, but
would seriously diminish the value of every Debenture
circulating under the old loans, and give the lenders—or
present holders—just cause of complaint against the borrowers,
who had so unnecessarily brought about the depreciation.

In suggesting 6 1/4 per cent as the rate upon which it might be
reckoned that the holders of the various old Debentures would
be content to come into a consolidation scheme, I put it at its
worst, in order not lightly to create expectations too favorable
to be realized, and which might give rise to dissatisfaction on
the part of the Colonial Government; but I think it just
possible that the operation might be carried out at
six per cent, if the market happens to be favorable at the moment.

The only inducement to holders would then be, the chance of
having their Bonds Drawn, which would be equivalent to selling
them at 100.

Whilst I think this quite possible, it would in my opinion be
unwise to fix the limit of interest below 6 1/4 per cent. It
would be better to leave the rate, within that limit, to the
discretion of the Crown Agents when they are about to operate.

Of course any reduction in the rate of interest would operate
proportionately against the selling price of the proposed new
issue. Whatever that price may be however—and under whatsoever
scheme the new Loan may be launched—there can be no doubt that
very much better terms can be obtained in London than, according
to the Governor's Estimate, will be realized in the Colony.

I fancy there will be a further considerable advantage in
receiving the borrowed money here instead of at the Colonial Treasury.

The Governor's Drafts on the Crown Agents at 60 d/s,
would—according to the average rate of Exchange during the past
twelve months—realize about $5 per £1 sterling, which would be
a further addition of upwards of 4 per Cent to the proceeds of
the new issue, irrespective of time.

Another point to which I would advert, is the belief expressed
in the seventh paragraph of the Governor's despatch that—"to
substitute new Debentures for those now extant would require the
consent of all the holders before the existing securities and
engagements could be modified."

If this were really so, it would indeed be useless to attempt to
carry out such a scheme as I have proposed; for no conceivable
terms that the Government could afford to offer would produce
unanimity of action amongst so many shareholders.

The nearest approach to that state will be produced by making it
clear to the minds of the present holders that it will be
decidedly to their benefit to exchange their old Securities for
new. The existing interests of those who decline to follow that
course must be carefully reserved in the Act authorizing
the Conversion, and though some few may not immediately be
tempted to come in on the terms offered, yet, as the market
value of the New Stock would soon be greater than that of the
old, the latter would be pretty sure to be converted whenever
the present holders might have to resort to the Market to sell.
In this manner the whole of the old loans would gradually be
displaced by the new—the only drawback being, that instead of
Government reaping the full benefit at once, that stage would
only be fully attained at the end of a few years.

If any attempt be made at consolidation however, I am of opinion
that the whole of the old Loans should be embraced in the
scheme. This would not necessitate offering the same rate of
exchange in all cases, though but one rate of interest should be
allowed. Much prejudice exists in this market against a
plurality of small loans emanating from one Government. In each
of such loans transactions are few and far between, and
frequently too limited in extent to command a notice in the
Share Lists of the Stock Exchange, where less than £500 sold is
not quoted, and consequently the public do not see that
transactions have taken place as often as could be desired, the
Securities remain unpopular, and prices are not stimulated as
they ought to be by a healthy demand.

Against such small loans Brokers moreover set their faces, on
the alleged difficulty of "doing business in them."

For these reasons the debentures of British Columbia would
command higher prices if they formed but one loan, than they
ever can in their present condition.

In my original scheme I had assumed, as Governor Musgrave truly
states, that the local debt of £56,000 would continue to bear
interest at 12% until a 2% Sinking Fund should suffice to
extinguish it. In doing so I simply took the debt as it was
then represented to stand, and, with regard to
rate of interest, as it had stood for some years past.

This local debt had gone on increasing, and, unless I am much
mistaken, the sum above named falls short of the actual
indebtedness of the Colonial Government by a considerable amount
as I find that, at the present moment the assets on this side
fall short of the liabilities—including the October
dividends—by about £4,600, the greater part of which is due to
Sinking Funds which, when thus allowed to get into arrears,
dislocate all calculations and finally fall short of meeting the
obligations they were intended to discharge.

In leaving liabilities of this nature unsatisfied, I was in a
measure forced to believe that the Government had no means of
diminishing either the local debt, or the rate of interest paid
on it, unless by some such alternative as I suggested; and under
the circumstances I could only represent things as they stood,
and appeared likely to stand, and compare them with what I
proposed to substitute in their stead.

I regret the delay which has taken place in making this report
but the absence of my colleague for a short holiday, and the
pressure of current affairs which could not be postponed, left
me but little time for the consideration of an abstruse subject
of this kind.