on of surplus revenue to the payment of debt
is sound finance, and that to treat surpluses designed for that purpose
as a separate fund is a convenient arrangement need no demonstration.
There is not, however, anything magical or automatic in the operation of
compound interest, nor can the separation of a sinking fund from general
revenue have any real efficacy. Reduction of national debt, whatever
arrangements may be made for it, can only be effected by taxation.
During the years of peace, when the revenue was in excess of
expenditure, Pitt's sinking fund acted as a convenient mode of reducing
the debt. In 1792 a second fund of 1 per cent. on all loans was
established, and by 1793 the commissioners had reduced the debt by about
L10,000,000. Then came the war with France; the revenue fell short of
the expenditure, and Pitt met the deficiency by large loans raised at
great expense. Yet in order to preserve the benefit which, it was
believed, was derived from the uninterrupted operation of compound
interest, the payments to the sinking fund were regularly continued, so
that the state was actually borrowing money at a high rate of interest
in order to reduce a debt at a low rate of interest. No member of the
opposition saw the fallacy involved in Pitt's scheme. He is said,
probably with truth, to have himself discovered it later, but he
maintained the fund, which was useful as a means of keeping the duty of
reduction of debt before the nation and of helping it to face with
hopefulness the rapid accumulation of debt during the war with France.

[Sidenote: _COMMERCIAL TREATY WITH FRANCE._]

In 1787 Pitt laid before parliament a treaty of navigation and commerce
with France. The treaty of Versailles in 1783 provided that
commissioners should be appointed to make commercial arrangements
between the two countries. The French cabinet invited Shelburne to
proceed in the matter, and he was about to do so when he was driven from
office. Fox was opposed to a treaty. Pitt appointed a commissioner in
April, 1784, but nothing further was done. It was a critical matter, for
a commercial treaty with France was certain to give some offence at
home, and Pitt may for that reason alone have been willing to delay
action until his position was more secure. In 1785 the French council of
state, irritated by the large influx of British manufactures which were
smuggled into France, issued _arrets_ restraining trade with Great
Britain. Pitt was to