The Element of Lottery in British Government Bonds, 1694-1919

Abstract

At a time when several governments are attempting to reduce the element of chance in their bond offerings, by selling non-marketable issues which are redeemable at the option of the holder or by bond support operations, it is interesting to consider in retrospect British attempts to save interest on the public debt by offering investors the chance to gamble. The British Treasury has extended two principal types of gamble to the investor: (1) the gamble on capital gain, and (2) the gamble on life-expectancy. The first was created by the sale of bonds at a heavy discount. The possibility of later redemption at par created the gamble of capital gain. Similarly this gamble was extended by combining a lottery with debt offerings. The gamble on lifeexpectancy was made possible by inviting subscriptions to life annuities. In appraising the effectiveness of these features in saving interest, two kinds of interest saving must be distinguished. ' Explicit ' saving in rate may be measured by a comparison of the market yield on a security which does not offer the element of chance and the yield, at issue price, of the security in which chance is involved. The amount of explicit interest saving is then this difference in rates multiplied by the amount raised by the gambling feature. In addition, the use of such a special-feature security to raise some part of the funds required would diminish the amount to be raised by ordinary issues and would tend therefore, if the demand for them were not perfectly elastic, to lower the rate that must be paid on them. The 'implicit' saving in rate is the difference between the rate paid on ordinary borrowing and the rate that would have had to be paid had the entire amount been raised by the issue of the ordinary security. The amount of implicit saving is this difference multiplied by the total amount borrowed.2