Funding System

The practice of borrowing money to defray the expenses of government. In the early history of the system It was usual to set apart the revenue from some particular tax as a fund to the principal and interest of ttie loan. The earliest record of the funding system is found in the history of Venice. In the year 1171, during a war b^ tween the republic and the Byzantine emperor Manual Commenas, a Venetian fleet ravaged the eastern coasts, but, being detained by negotiations at Chios, suffered severely from the plague. The remnant of the expedition, returning, took with it the frightful pestilence, which ravaged Venice and produced a popular commotion in which the doge was killed. To carry on the war, the new doge, Sebastian Giani, ordered a forced loan. Every citizen was obliged to contribute onehundreth of his property, and he was to be paid by the state five per cent, interest, the revenues being mortgaged to secure the faithful performance of the contract. To manage the business, commissioners were appointed, called the Chamber of Loans, whldh after the lapse of centuries grew into the Bank of Venice. Florence and other Italian republics practised the system; and it afterwards beexigencies of the state, which it would be impossible to raise by direct taxation. In England the funding system was inaugurated in the reign of William III. The Bank of England, like the Bank of Venice and the Bank of St. George at Genoa, grew out of it In order to make it easy to procure money to carry on the war with France, the government proposed to raise a loan, for which, as usual, certain revenues were to be set aside, and the subscribers were to be made a corporation, with exclusive banking privileges. The loan was rapidly subscribed for, and the Bank of England was the corporation which it brought into existence. It was formerly the practice in England to borrow money for fixed periods; and these loans were called terminable annuities. Of late years, however, the practice is different, — loans being payable only at the option of the government; these are termed interminable annuities. The rate of interest on the earlier loans was generally fixed at three and a half per cent, and sold at such a rate below par as to conform to the state of the money-market. It is estimated that two-fifths of the entire debt of England consists of this excess over the amount of money actually received for it. The object of such a plan was to promote speculation and attract capitalists; and it is still pursued in France. Afterwards, however, the government receded from this policy, and, by borrowing at high rates, were enabled, when the rate of interest declined, by offering to pay off the loan, to reduce the Interest materially. The national debt of England consists of many different loans, all of which are included fcn the term funds. Of these, the largest in amount and importance are the “three per cent, consolidated annuities,” or consols, as they are commonly called. They originated in 1751, when an act was passed consolidating several separate three per cent, loans into one general stock, the dividends of which are payable on the 5th of January and 5th of July at the Bank of England. The bank being the fiscal agent of the government, pays the interest on most of the funds, and also keeps the transfer-books. When stock is sold, it is transferred on fhe books at the bank to the new purchaser, and the interest is paid to those parties in whose names the stock is registered, at the closing of the books a short time previous to the dividend-day. Stock is bought and sold at the stock exchange generally through brokers. Time sales, when the seller is not the actual possessor of the stock, are illegal, but common. They are usually made deliverable on certain fixed days, called accounting-days; and such transactions are called “for account,” to distinguish them from the ordinary sales and purchases for cash. Stock-jobbers are persons who act as middlemen between sellers and purchasers. i can always find a market for stock, or can purchase it in such quantities as they may desire, without delay or inconvenience. In America the funding system has been fully developed. The general government, as well as those of all the states, have found it necessary to anticipate their revenue for the promotion of public works and other purposes. The many magnificent works of internal improvement which have added so much to the wealth of the country were mainly constructed with money borrowed by the states. The canals of New York, and many railroads in the western states, owe their existence to the sy.stem. The funding system enables the government to raise money in exigencies, and to spread over many years the taxation which would press too scvorcly on one. It affords a ready method of investing money on good security, and it tends to identify the interest pf the state and the people. But it is open to many objections, — the principal of which is that it induces statesmen to countenance expensive and oftentimes questionable projects who would not dare to carry out their plans were they forced to provide the means from direct taxation. Mc Culloch, Diet of Comm.; Sewell, Banking.

The practice of borrowing money to defray the expenses of government, and creating a “sinking fund,” designed to keep down interest, and to effect the gradual reduction of the principal debt.