For several hundred years, the Exchequer financed and funded English sovereigns by issuing IOUs, in the form of wooden tally sticks split into two parts. Individual creditors were given the Stock as a receipt and as a credit token which was returnable to the Exchequer in payment of taxes: the Exchequer retained the counter-stock or foil to be matched against returned Stock.
By the time the (privately incorporated) Bank of England came along to privatise the money supply in the late 17th century there were at least £17m worth of tallies in issue at a time when the total cost of the operation of the Kingdom was perhaps £2m to £3m per annum.
From 1660 onwards, the UK began to issue interest-bearing Stock wholesale which met a demand for long term risk free annuity investments. This Stock paid interest periodically to the holder and became very popular with long term investors, representing the lowest risk and most solid income stream available. Meanwhile the physical tally stick accounting system gradually fell into disuse as the accounting system became a more secure double-entry book-keeping system.
Several classes of Stock were issued and in 1752 these were consolidated into what became known as Consolidated Stock or Consols. Further issues were made and in 1888 these were all brought together by (Chancellor) Goschen’s Conversion as the 2.5% Consols which remain in existence to this day.
A Return to Stock
Under professional management of credit managers/service providers, and the accountable supervision of the Bank of England as monetary authority, local Treasury branches could issue, in virtual form, undated Stock which would be redeemable in payment against taxes.
Stock would be issued at a discount – eg a Unit of £1.00 of Stock sold for 90p – and the rate of return depends on the period over which the Stock is returned to the Treasury in payment of taxes. The very word return alludes to this long forgotten practice of returning Stock to the issuer.
Stock revolutionises long term investment by transforming the risk. There is no longer a risk that debt and interest will not be paid. The stockholder may redeem Units against taxation, or may sell Units to other taxpayers/investors. Even if pure investors will not buy Stock, taxpayers will always buy Stock when the price is below £1.00.
The rate of return depends literally upon the date of return of the Stock to the Treasury or the date of sale: the former depends on the rate and basis of taxation, while the latter depends on liquidity – the ability to sell stock.
Liquidity is transformed: instead of a market in debt fragmented by different rates of interest; repayment dates; and trading platforms, there will be a single wholesale market in Stock, probably through periodic auctions on the Treasury web-site. The retail market in Stock takes place throughout the nation: Units of Stock in bearer form – Treasury Notes – may simply circulate alongside Bank notes as they still do in the US.
Stock also revolutionises Government funding, since massively reduced funding costs enable the issuance of new Stock to create new productive assets – which was precisely the reason why the wiser sovereigns issued Stock in the first place.
The outcome of such 21st Century Stock issuance would be to transform the quality rather than the quantity of UK public credit – a debt/equity swap on a national scale.
Such Qualitative Easing will give a short/medium term breathing space for the transition of the UK economy to a sustainable long term fiscal basis.
But that is another story……..