Where did the profits for the founders of the Bank of England come from?
Upvote:3
Section XVIII of the Act specifies that the amounts you describe are to be kept apart in the accounts of the Exchequer.
This means that the retirement of the principal amount is not being paid annually, as your question assumes, but rather the specified amounts are being paid into what accountants now call a sinking fund. , which is paid out in full upon the termination of the Bond.
Sections XXVII and XXVIII of the Act outlines what investments are, and are not, allowed by the sinking fund.
More information on sinking funds, and other means of accounting for liabilities, can be obtained from any Intermediate Accounting course or text book on Liabilities.
Update - from my comments below:
Part of the reason for the sinking fund is that, provided it is competently managed, the subscribers to the Bond don't want to be paid back until the Bond reaches term. The subscribers, by having the accounts and the sinking fund audited, know that the Bond issuer (the Crown in this case) is saving up to repay the Bond.
The terms of Sections XXVII and XXVIII, though poorly described in terms of modern accounting and economics, in essence are describing that only low risk investments are suitable for the sinking fund to invest in. In modern terms: No stocks and no junk bonds.
Those notes you refer to in your comment are simply cheques by another name; financial instruments payable to a named payee that can be endorsed to another payee. Note the derivation of the (British) English term cheque, from exchequer.
Update #2 For readers who desire more information on this type of accounting, also see defeasance. Also, the term sinking fund is in no ways meant in a derogatory sense as it is the bond issuer's liability that is sinking, or reducing, not the fund or other assets of the Bond issuer.
Update #3:
Referencing cheque and check in the OED, the former is listed as an alternative spelling for two specific senses of the latter. Usage in this sense is evidenced from 1695 under check, and from 1706 under cheque, but the spelling in both cases through the 17th and early 18th centuries is cheque. The meaning at that time was really for the counterfoil, or what we now refer to as the cheque stub, rather than for the note or financial instrument itself. Check and exchequer both derive from the French word for a checked cloth, but evolve separately until uniting again in the late 17th century as the newly coined word cheque, essentially as a pun on the double derivation.
Rereading portions of the Act again, it seems evident that the subscribers were investing in what we now would call preferred shares of the new corporation, not in a bond; thus the permanent nature of the loan to the Crown.
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