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Sinking fund

From Academic Kids

A Sinking Fund was a device used in the 18th century to reduce national debt. It was first introduced by Robert Walpole in 1716 and was used effectively in the 1720s and early 1730s.

However, the problem was that the fund was rarely given any priority in government strategy. The result of this was that the fund was often raided by "hard-pressed finance minister" in need of funds quickly.

In 1772, the nonconformist minister Richard Price published a pamphlet on methods of reducing the national debt. The pamphlet caught the interest of William Pitt the Younger, who drafted a proposal to reform the Sinking Fund in 1786. Lord North recommended "the Creation of a Fund, to be appropriated, and invariably applied, under proper Direction, in the gradual Diminution of the Debt". Pitt's way of securing "proper Direction" was to introduce legislation that prevented ministers of raiding the fund in crises. He also increased taxes to ensure a 1 million surplus could be used to reduce the national debt. The legislation also placed administration of the fund in the hands of "Commissioners for Reducing the National Debt".

The scheme worked well between 1786 an 1793, with the commissioners receiving 8 million and reinvesting it to reduce the debt by more than 10 million. However, the advent of war with France in 1793 "destroyed the rationale of the Sinking Fund" (Evans). The fund was only abandoned by Lord Liverpool's government in the 1820s.

Modern meaning

In modern finance, a sinking fund is method by which an organization sets aside money over time to retire its indebtedness.

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