What are Consols?

A consol is a type of government debt in the United Kingdom. The full name for Consols is Consolidated Fund Annuities. They represent debt that never has to be paid back. This is why we say the debt is “perpetual.”

How the UK government issues Consols

Consols are part of the UK government’s gilt program. Gilts are how the government borrows money. When the government needs more money than it gets from taxes, it issues gilts.

The Bank of England handles the government’s Consols. The money from selling Consols goes into the government’s tax revenue account at the Bank of England.

Features of Consols

Consols are a bit different from regular gilts or government bonds:

• Consols don’t have a maturity date. This means the government never has to pay back the original amount borrowed. The debt lasts forever unless the government decides to redeem the Consols.
• The government can redeem Consols and repay the original amount (par value) at any time. But in practice, the government never redeems Consols.
• People who own Consols receive interest payments from the government forever or until the Consols are redeemed. The interest rate on Consols is usually low.

So when the government issues Consols, it’s like they are borrowing money they never have to pay back, but they must keep paying interest on it forever.

History of Consols

Consols in the 18th century

Consols were first issued in 1751. They initially paid an interest rate of 3.5%, which was reduced to 3% in 1757. This 3% Consol is sometimes called a “Goschen,” named after George Goschen, the Exchequer Chancellor in the late 1800s.

Consols in the 19th and 20th centuries

Consols remained a significant part of the UK government’s debt through the 1800s and early 1900s. During World War I, the government issued much debt, including consols, to fund military spending. After the war, the UK had a lot of debt.

In the 1920s, the government did a “debt conversion.” They allowed people to convert their 5% Consols into new 3.5% Consols. Many people made this switch because they were worried the government might be unable to keep paying the higher 5% interest rate.

Why does the government issue Consols?

Advantages for the government

There are a few reasons why the UK government likes to issue Consols:

1. Consols provide a way for the government to borrow money it never has to repay. It’s like getting money now in exchange for a promise to pay interest forever. This can be attractive when the government needs money.
2. The interest rate on Consols is usually relatively low, so the government’s ongoing cost is lower than borrowing through regular gilts or bonds, which must be paid back after a certain period.
3. Because Consols are perpetual, the government doesn’t have to worry about a big chunk of debt coming due all at once. With regular bonds, the government has to repay the original amount borrowed when the bond matures, which can be tricky to manage.

Disadvantages for the government

But Consols also have some drawbacks for the government:

1. Although the interest rate is low, those interest payments add up over time since they must be paid forever (unless the Consols are redeemed). This creates a never-ending expense for the government.
2. In times of low interest rates, the government pays a higher interest rate on Consols than it would for regular gilts or bonds. So, consols can become a more expensive way to borrow in the long run.

Investing in Consols

How Consols work for investors

If you have money to invest, you can buy Consols. When you buy a Consol, you’re essentially lending money to the government. You get interest payments forever (or until the government redeems the Consols).

The price of Consols can go up or down. The price depends on a few factors:

• Interest rates: When interest rates in the economy go up, the price of Consols usually goes down. That’s because the fixed interest payments from Consols become less attractive compared to other investments that pay higher interest.
• Demand for Consols: If a lot of people want to buy Consols (high demand), the price will go up. The cost will decrease if people want to sell Consols (low demand).

Risks and benefits of Consols for investors

Investing in Consols has benefits and drawbacks:

• Additionally, Consols provides a steady income stream through interest payments. And because the UK government issues Consols, they’re considered a very safe investment. The UK government is unlikely to default on its debts.
• However, the interest rate on Consols is usually relatively low. So, while the income is steady, it may not be much compared to other investments. There’s also the risk that the government could decide to redeem the Consols at par value. If you had bought your Consols for a higher price, you would lose money.
• Another risk is that inflation will erode the value of your interest payments over time. Because the interest rate is fixed, its purchasing power declines if inflation increases.

In summary, Consols can be a good option if you want a low-risk investment with a steady income stream and are okay with a relatively low income.