1823 James Monroe - The Sinking Fund

This post discusses the Sinking fund that federal government established in 1817 to cover it's debt.   A sinking fund is one where an entity sets aside revenue over a period of time to pay back long term debt. It is often used funds for bonds where an organization might deposit money regularly in the fund to buy back the bonds each year before they mature.  The purpose is to lower the outstanding principlal before it becomes due.  On March 3, 1817 the federal government reorganized it's Revolutionary, war and Louisiana debt into a new sinking fund.  The bill, wiped out all previous structure of the earlier debt and created a wholly new fund.  Under this bill, the commissioners of the debt would take an annual sum of $10 million from the general revenue of the government it received from duites, taxes and sale of public lands.  Additional payments for $4 to $6 million could also be made each year if the Treasury finances allowed it.  It was hailed as a simple sinking fund with no fixed payments on the principal, no contracts with creditors, and no hoarding of paid off debt.  In 1817, President James Monroe briefly discussed the sinking fund in his State of the Union address:

"In the present state of the Treasury the whole of the Louisiana debt may be redeemed in the year 1819, after which, if the public debt continues as it now is, above par, there will be annually about $5M of the sinking fund unexpended until the year 1825, when the loan of 1812 and the stock created by funding Treasury notes will be redeemable."

Over the life of the sinking fund, there were some $3 million payments missed in the first 7 years, but were made up in the following years.  Overall, the sinking fund was in good shape.  But starting in 1825, a large amount of the war debt and some of the Revolutionary debt was to become redeemable.   The entire principle of the debt was to be paid over a 10 year period from 1825 to 1835.  Yet, Monroe was happy to report that due to the simplicity of the sinking fund that had been set up, this remaining principle would be able to be paid by simply continuing the $10 million in payments established by the Sinking fund bill until 1835.  At that point, it was expected that the only remaining debt would be around $13 million of debt of whose date of redemption was at the pleasure of the Government.  Here are the words of President James Monroe in his 1823 State of the Union Address:

"On [1825-01-01], a large amount of the war debt and a part of the Revolutionary debt become redeemable. Additional portions of the former will continue to become redeemable annually until the year 1835. it is believed, however, that if the United States remain at peace the whole of that debt may be redeemed by the ordinary revenue of those years during that period under the provision of the act of [1817-03-03], creating the sinking fund, and in that case the only part of the debt that will remain after the year 1835 will be the $7M of 5% stock subscribed to the Bank of the United States, and the 3% Revolutionary debt, amounting to $13,296,099.06, both of which are redeemable at the pleasure of the Government."

And sure enough, by 1835 President Andrew Jackson was in a position to say "The condition of the public finances was never more flattering than at the present period."   In that year, Jackson reported that the remaining debt was at $11 million.  $2 million lower that what Monroe had predicted 12 years earlier.

"The extinction of the public debt having taken place, there is no longer any use for the offices of Commissioners of Loans and of the Sinking Fund. I recommend, therefore, that they be abolished, and that proper measures be taken for the transfer to the Treasury Department of any funds, books, and papers connected with the operations of those offices, and that the proper power be given to that Department for closing finally any portion of their business which may remain to be settled."

http://www.presidency.ucsb.edu/ws/index.php?pid=29465
http://www.presidency.ucsb.edu/ws/index.php?pid=29459
http://www.presidency.ucsb.edu/ws/index.php?pid=29477

https://www.presidency.ucsb.edu/documents/seventh-annual-message-2
Sinking Funds, Edward Alsworth Ross, American economic association, 1892  pgs 73-76
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