Julyan to Herbert (Assistant Under-Secretary)
Offices of the Crown Agents for the Colonies,
Spring Gardens, London, S.W.
26th August 1870
I have the honor to acknowledge your letter of the 29th June last forwarding copy of a despatch from the Governor of British Columbia respecting the position of the Public Debts of that Colony and suggesting an alternative scheme to that proposed in my letter of the 31st January preceding.
On this alternative scheme I beg to offer for the Earl of Kimberley's consideration the following observations.
In the first place the difference of about £13,000, (spread over a quarter of a Century) in favor of Governor Musgrave's proposals as compared to mine, even if it could be realized, would,accordingManuscript image according to my views offer but a very poor compensation for the injury to the credit of the Colony, and to the interests of the present Bondholders, which the course he proposes to pursue could not fail to inflict. But in reality no such difference exists. My scheme provided for the absorption of a local debt of £56,000, and made provision for the interest of substituted new debt up to its final extinction—whereas the scheme of the Governor provides for the absorption of something less than £50,000, of local debt, and fails to provide for the payment of sufficient interest on that reduced amount for the last 5 8/12 years of its currency.
The rectification of these oversights will be found to convert the £13,019, said to be in favor of the Governor's scheme (as shown by statement No 2) into a sum of £14,120 in favor of mine.
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The difference shown in statement No 1 will in like manner be reduced from £13,069, to £2,143, which, spread over 30 years gives a small fraction over £70 a year.
For facility of reference I return the two statements enclosed in the Governor's despatch, with amended statements attached to them, showing how these results are arrived at.
Then with regard to the character of the two schemes—Mine, as I look upon it, is calculated to make the whole debt of the Colony more popular, to give a practical and enhanced value to the Debentures in the London Market, by converting the various fragmentary debts into one General Loan, the price of which would be stimulated more and more as time elapsed, by the continual growth of thesumsManuscript image sums devoted to annual Drawings at par.
Such influences would operate strongly in favor of the credit, or borrowing power, of the Colony in my estimation, and more than counterbalance any of those prejudicial effects which the Governor apprehends may be caused by raising the annual rate of Interest from 6 to 6 1/4 per Cent.
The alternative scheme, on the contrary, starts with raising a new 6 per Cent Loan at 85 which will yield the lenders £7.1.2 per Cent per annum during the currency of the debentures, and finally give them a bonus—or increase of capital—equal to £17.13.0 per cent more.
An additional 5 per Cent is also to be paid by the Government if they desire to pay off the debt before maturity: or, in other words,aManuscript image a Debenture sold by the Government for £85, may be purchased back for £105.
Anything better calculated to depreciate the securities of British Columbia than the negotiation of a Loan on such terms it is difficult to conceive.
In fact it is simply saying to the lenders: "this is our own measure of the value of the public credit of the Colony"—and the result would be, not only damaging to the Colonial Government, as lessening public confidence in its stability, but would seriously diminish the value of every Debenture circulating under the old loans, and give the lenders—or present holders—just cause of complaint against the borrowers, who had so unnecessarily brought about the depreciation.
In suggesting 6 1/4 per cent as the rate upon which it might be reckoned that the holders of thevariousManuscript image various old Debentures would be content to come into a consolidation scheme, I put it at its worst, in order not lightly to create expectations too favorable to be realized, and which might give rise to dissatisfaction on the part of the Colonial Government; but I think it just possible that the operation might be carried out at six per cent, if the market happens to be favorable at the moment.
The only inducement to holders would then be, the chance of having their Bonds Drawn, which would be equivalent to selling them at 100.
Whilst I think this quite possible, it would in my opinion be unwise to fix the limit of interest below 6 1/4 per cent. It would be better to leave the rate, within that limit, to the discretion of the Crown Agents when they are about to operate.
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Of course any reduction in the rate of interest would operate proportionately against the selling price of the proposed new issue. Whatever that price may be however—and under whatsoever scheme the new Loan may be launched—there can be no doubt that very much better terms can be obtained in London than, according to the Governor's Estimate, will be realized in the Colony.
I fancy there will be a further considerable advantage in receiving the borrowed money here instead of at the Colonial Treasury.
The Governor's Drafts on the Crown Agents at 60 d/s, would—according to the average rate of Exchange during the past twelve months—realize about $5 per £1 sterling, which would be a further addition of upwards of 4 per Cent to the proceeds of the new issue, irrespective of time.
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Another point to which I would advert, is the belief expressed in the seventh paragraph of the Governor's despatch that—"to substitute new Debentures for those now extant would require the consent of all the holders before the existing securities and engagements could be modified."
If this were really so, it would indeed be useless to attempt to carry out such a scheme as I have proposed; for no conceivable terms that the Government could afford to offer would produce unanimity of action amongst so many shareholders.
The nearest approach to that state will be produced by making it clear to the minds of the present holders that it will be decidedly to their benefit to exchange their old Securities for new. The existing interests of those who decline to follow that course must be carefully reserved in the ActauthorizingManuscript image authorizing the Conversion, and though some few may not immediately be tempted to come in on the terms offered, yet, as the market value of the New Stock would soon be greater than that of the old, the latter would be pretty sure to be converted whenever the present holders might have to resort to the Market to sell. In this manner the whole of the old loans would gradually be displaced by the new—the only drawback being, that instead of Government reaping the full benefit at once, that stage would only be fully attained at the end of a few years.
If any attempt be made at consolidation however, I am of opinion that the whole of the old Loans should be embraced in the scheme. This would not necessitate offering the same rate of exchange in all cases, though but one rate of interest should be allowed.MuchManuscript image Much prejudice exists in this market against a plurality of small loans emanating from one Government. In each of such loans transactions are few and far between, and frequently too limited in extent to command a notice in the Share Lists of the Stock Exchange, where less than £500 sold is not quoted, and consequently the public do not see that transactions have taken place as often as could be desired, the Securities remain unpopular, and prices are not stimulated as they ought to be by a healthy demand.
Against such small loans Brokers moreover set their faces, on the alleged difficulty of "doing business in them."
For these reasons the debentures of British Columbia would command higher prices if they formed but one loan, than they ever can in their present condition.
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In my original scheme I had assumed, as Governor Musgrave truly states, that the local debt of £56,000 would continue to bear interest at 12% until a 2% Sinking Fund should suffice to extinguish it. In doing so I simply took the debt as it was then represented to stand, and, with regard to rate of interest, as it had stood for some years past.
This local debt had gone on increasing, and, unless I am much mistaken, the sum above named falls short of the actual indebtedness of the Colonial Government by a considerable amount as I find that, at the present moment the assets on this side fall short of the liabilities—including the October dividends—by about £4,600, the greater part of which is due to Sinking Funds which, when thus allowed to get into arrears, dislocate all calculations and finally fall short of meeting the obligations they were intended to discharge.
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In leaving liabilities of this nature unsatisfied, I was in a measure forced to believe that the Government had no means of diminishing either the local debt, or the rate of interest paid on it, unless by some such alternative as I suggested; and under the circumstances I could only represent things as they stood, and appeared likely to stand, and compare them with what I proposed to substitute in their stead.
I regret the delay which has taken place in making this report but the absence of my colleague for a short holiday, and the pressure of current affairs which could not be postponed, left me but little time for the consideration of an abstruse subject of this kind.
I have the honor to be,
Your most obedient Servant
P.G. Julyan
Minutes by CO staff
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CC 29/8
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Mr Julyan writes with much experience of Colonial Loans, & the general principles enunciated by him are those which I have heard expressed by persons familiar with the subject.
A copy of his letter should be sent to the Govr of British Columbia with the observation that his views appear to demand very serious consideration, & with the hope that they may lead to the adoption in the Colony of a scheme likely to be more successful in its operation than that proposed in his despatch of 17 May.
Draft at once.
RGWH Sep 1/70
Documents enclosed with the main document (not transcribed)
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Two statements from Musgrave's despatch No. 71 of 17 May showing his calculations for refinancing the debt, along with amended versions of the same statements bearing additional comments by Julyan.
Other documents included in the file
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Draft reply, Kimberley to Musgrave, No. 19, 5 September 1870.