My dear Minister,
I have talked to various people at the Treasury on Saturday and today and have got further figures from them, the effect of which and the various arguments about which are summarised in the following paragraphs. These paragraphs should be read in the light of the letter to me from the Government Actuary's Department of 22nd January 1938 and the Treasury memorandum (undated) which reached me on Saturday¹. A copy of both these documents is enclosed. The Table referred to in the final paragraph on the second page of the Treasury memorandum has not yet been received.

The Local Loans Fund did not get any of the Special Duties until 1936-7 when £350,000 was paid by Exchequer and in 1937-8 (current year) £125,000 is expected to be paid.

These amounts were one-half the balance available after meeting the various payments excluding (i) Local Loans Fund and (ii) Sinking Funds on Land advances. Applying the same system in respect of years 1932-33 .... 1935-6 (4 years) they credit the Fund with £715,000.

The figure of £6.92 million is arrived at by adding to the present value at 3½% of the remaining payments the accumulated excess of the payments due between 1932 and 1938 over what the British now regard (on an arbitrary basis) as having been available in those years out of the Special Duties. These items are respectively £4.20 million and £2.72 million.

We cannot accept the £2.72 millions on the grounds that it is immaterial to us whether the Fund was actually recouped out of the Duties by the Treasury or whether in fact such Duties yielded the necessary amounts. We ought accept either of the following:

(i) Their own statement that 'The Treasury consider that the only equitable method to calculate the capital equivalent is to discount future annuities at a rate of interest roughly equivalent to that at which the United Kingdom Government could borrow, namely 3½%.' On this basis the liability as at 31st March 1938 is £4.195 million, as at present is £4.155 million

(The only disadvantageous point in this arrangement is that we acquiesce in the rate of interest which is that at which the United Kingdom Government can borrow. If basis of negotiations is mutual equity should not rate at which Irish Government can borrow be taken into account? This is example of British play for safety).

(ii) The liability in (i) is somewhat higher than the capital outstanding according to the Schedule in their own accounts, namely £4.126 million.

The British contend that the Schedule should be ignored because the £600,000 annuity for 20 years was accepted on the basis of an average price of £81.13.3 to liquidate a liability of £10,343,000 and that the present price of Local Loans stock is very greatly in excess of £80. In reply to this I have argued

(a) that the £10,343,000 was a nominal liability, i.e. it was the nominal amount of stock outstanding

(b) that the actual liability which the British wrote into their accounts in respect of it was £8,446,000 (which was on the basis of the average price). It might be argued that they should only have written in the amount according to the then current market price which was about 65 (instead of 81) - but this argument should be used with caution because it would involve a repercussion inasmuch as the annuity should, for consistency, be calculated on an equivalent interest basis.

The point under (b) really is that the actual liability was much less than the £10,343,000

(c) The present price is not very greatly in excess of £81.13.3 (not 80 as they say) - being about 88. In this connection they seem to have overlooked the fact that the price was constantly less than 70 from 1926 to 1931 during which period they must have been able to purchase considerably more stock than the Schedule shows could have been written off on the basis of a price of £81.13.3d.²

Apart from Local Loans the following claims arise:

The reduction in the British claim by 1.15 million is due to changing the date at which liability is calculated from 31st December 1936 to 31st March 1938. The method adopted for this purpose is a reasonable approximation and the computations are correct on figures submitted, and I doubt whether much, if any, advantage to us would accrue from investigation of precise figures which Harvey³ says would take 7 to 10 days. In any event they would only relate to 30th September 1937 and would have to be further adjusted.

Suggestions for reducing claim of £11.7 million:

1. This includes R.I.C. (External) which in 1936 was £3.2 million and on proportionate basis would be £2.9 million in 1938. On grounds that the Externals include a large proportion of older men it is suggested that the proportionate basis is not quite appropriate and 3.0 or 3.05 might be defended.
2. What about 'Disbandment' and 'Others' allocation? This to some extent cuts across the 'internal' and 'external' division and is inconsistent with it.
3. The capitalisation of the £10,000 a year at 3½% giving .15 is on basis that this sum is payable for about 22 years. This seems excessive and should be reduced more rapidly. We should knock off the .05 i.e. £50,000.
4. All calculations are at 3½% interest. There may be a case for higher rate.

I have arranged to supply the British on paper with a number of the foregoing arguments, but do not like to do so until I have seen the official minutes of the Ministerial discussions which are not yet forthcoming. The absence of these is a considerable handicap as all the Treasury officials with whom I have had contact have had access to them or actually have copies of them. Walshehas been expecting to receive them daily for the last three or four days, but up to late this afternoon they had not arrived.

I have arranged an interview with Sir Warren Fisher at the Treasury. While, as you will see from the figures, I have made some impression on the officers lower down, it has not been as much as I had hoped.