paragraph 119. it is not possible to identify all the individual items of debt repaid with the particular source of the cash. applied, the proportion of the total saving due to each of these factors cannot be exactly determined.

Some guidance can, however, be obtained from the more. detailed comparison of the interest payments in 1920-21 and 1925-26 given in the following table :

184. The outstanding item in this table is the reduction in the total interest payable on Treasury Bills. A part of this decrease is, of course, offset by the interest on other forms of debt from the proceeds of which Bills were repaid. The actual reduction in the volume of Bills, comparing the commencement and end of the period, was £540 millions, but the volume outstanding at any point in the year is naturally subject to variation. Since the average rate of interest paid on Bills in 1920-21 was about £6 9s. per cent., the saving of interest due to these repayments may be roughly put at about £32 millions. The fall in the average rate of interest to about £4 5s. in 1925-26 may be taken to have reduced the charge on Bills still outstanding by, say, £12 millions.

The fall in interest on Ways and Means advances appears to be due in the main to the replacement of bank advances by advances from public departments, rather than to the diminution in the volume of those advances.

185. If we exclude the changes in the interest charge due to the reduction of the Floating Debt and the lower rate of

interest paid on the amount still outstanding, there is an increase in the period of £28,717,000, of which the interest on the debt to the United States Government accounts for £28,026,000. The increase as the result of other alterations in the debt is thus £691,000. Very largely, of course, the changes in the items of debt are due to conversion operations, including identifiable re-borrowings, which resulted in a saving of £1,553,000 (excluding transactions prior to 1st April, 1920). Thus the net effect of all other operations on the debt was to increase the interest charge by £2,244,000; that is to say, general borrowings not identifiable directly with a particular item of debt redeemed have increased the interest charge by that figure.

186. It has to be borne in mind that, as mentioned in paragraph 70, the interest on Savings Certificates represents the actual amount paid in the year upon repaid certificates. The charge, therefore, bears no fixed relation to the volume. of certificates outstanding. The increased charge in the above table appears, however, on a rough approximation, to correspond closely with the increase which would have been necessary had accruing interest been paid in full There is, therefore, no disturbing element in the general comparison.

187. The considerations set out above suggest that the reduction of £47 millions in the interest charge since 1920-21 (para. 182) is due, as to £12 millions, to the lower rate of interest. now payable on Treasury Bills; as to £4 millions to the change in the source of Ways and Means advances; as to £1 millions to conversion operations and identifiable reborrowings; and as to the balance of £29 millions to the repayment of debt out of revenue, &c., The latter figure is probably somewhat lower than the gross reduction, owing to a small increase in the charge resulting from minor changes in the form of the debt. This allocation must, however, be regarded as illustrative rather than as being the result of definite calculations. Apart from the difficulties referred to above, some disturbance naturally arises from the fact that the interest charge is actually paid on a volume of debt which differs from that outstanding at the beginning or end of the year.

188. Although, therefore, these figures can only be offered. as a rough estimate, they are, we think, sufficiently close to show that the reduction is due in the main to two factorsthe very large sums which have been provided for debt redemption out of revenue, and the considerable scope for saving afforded over the period by the fall in short money rates, a fall no doubt largely due to the sound financial policy followed by the Government. On the former item alone, assuming that debt has been redeemed at 5 per cent., the saving would be almost £33 millions. Up to the present time the saving effected by conversion operations has, as was to

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be anticipated, been small, and obviously the future gain which may be secured from such operations depends entirely upon the continuance of a decline in the general rate of interest.

189. The witnesses who have appeared before us have expressed no very pronounced views on this question. Dr. Dalton was of opinion that during the next 10 years there was unlikely to be any scope for downward conversion except in the case of the 5 per cent. and 5 per cent. issues, and in default of straightforward repayment, upward conversion would be necessary in the case of some of the other items (Ev. p. 394: E in C: 8). Professor Cannan thought that on the whole the probability was in favour of some reduction by conversion, but not a great one (Q. 838-40)

190. We are not ourselves prepared to make any prophecy regarding future interest rates. While over a period there is ground for hoping that a downward movement will be shownand the policy in regard to debt repayment may itself exercise some influence in this direction-it cannot be ignored that in certain circumstances, such as a trade revival, an upward movement would probably be the initial result. Nor can it be overlooked that, whatever the general trend, temporary movements coinciding with the maturity of debt, may affect the terms of the new bargain to be made with holders of Government securities. But in view of the frequently expressed belief that a considerable saving is likely to be achieved by future conversions, we think it desirable to define clearly the utmost that could be gained in that direction upon certain arbitrary assumptions regarding the rate of interest which may be required to be paid upon conversion.

FUTURE CONVERSION OPERATIONS-LIMITS OF

POSSIBLE SAVINGS.

191. We print in Appendix VII a table showing in round figures the internal debt maturing year by year, together with the present interest charge and the annual saving which would accrue if, at maturity, the debt were converted to a 4 per cent. basis or to a 3 per cent. basis. For convenience of comparison the interest on 4 per cent. Income Tax compounded issues has been assumed to be equivalent to 5 per cent. taxable. If the tax compounded issues were actually to be converted into taxable loans, the saving on the interest charge would be less than is shown, but the method adopted facilitates comparison when account is taken of the decrease in tax revenue to which we refer later. It is clear that the opportunities of conversion are limited to the unfunded debt, and we may also exclude from consideration the issues of Funding Loan and Victory Bonds to which special redemption arrangements are attached. Leaving out of

account for the time being the Floating Debt and Savings Certificates, it will be seen from the table that the remaining debt. amounts to £3,598 millions, involving a present interest charge of £177 millions, or an average rate of interest of 4.92 per cent.

192. Taking first the assumption that each loan is converted at the date at which the Government is bound to redeem it, we find that the interest savings on the hypotheses taken would be as follows:

In the case of two loans included in this table-the 3 per cent. War Loan and 3 per cent. Exchequer Bonds-the interest charge would be slightly increased on the 4 per cent. basis, and, in the case of the latter loan only, on the 3 per cent. basis.

193. The above summary shows the outstanding position in this connection of the 5 per cent. War Loan. It has also to be borne in mind that 5 per cent. National War Bonds are (with the exception of the fourth series), convertible into this loan at the option of the holder; if this option were fully exercised the amount of the 5 per cent. War Loan would be increased by nearly £500 millions. Similarly the 4 per cent. War Loan might be increased by nearly £140 millions by conversion of 4 per cent. Bonds. The interest saving shown as possible in 1927-28 would then be entirely postponed, and that shown as possible in 1928-29 would be mainly postponed, until the year 1947-48, with a slight alteration in the amount, owing to the fact that conversion of 5 per cent. Bonds is on the basis of £95 bonds for each £100 War Loan.

194. If we now examine the position on the assumption that the Government were able to convert at the earliest dates at which it has an option to redeem loans, the interest savings year by year would be as follows:

The principal change in the date at which a saving might be made arises, of course, from the option to repay the 5 per cent. War Loan on the 1st June, 1929. If circumstances should enable that option to be exercised, conversions of National War Bonds into 5 per cent. War Loan will result in only a slight lengthening of their life.

195. We have excluded from these statements the external debt, Floating Debt and Savings Certificates. As regards the external debt some £29 millions of 20 year bonds due in 1936-37 are convertible at the option of the holder into 5 per cent National War Bonds on terms which involve a small increase in the interest charge; practically all the remainder is now in annuity form, with the exception of a part of the loans from certain Allied Governments which may be regarded as available for set-off against loans to those Governments. In the case of the Floating Debt, it can only be said that, so far as it may be converted into longer term debt, it is to be anticipated that, whatever the course of interest rates may be, there will be some increase over the cost of maintaining it in its present form; it is clear that there is no possibility of a fall in the future rate of interest on this debt of the dimensions registered in the past few years. We have already mentioned the position regarding the provision of interest on Savings Certificates (para. 70). The