Chapter 16
Moreover, we have to remember that by no means the whole of the war debt represents the gains of those who "have turned a national emergency to personal profit." Some people whose incomes have been actually decreased by the war, especially when currency depreciation is taken into account, have, in response to the appeals of the War Savings Committee, saved more than they ever saved before by patriotically stinting themselves. And even the savers who have saved out of war profits were so far more patriotic than the war profiteers who did not save but squandered. In all the discussion concerning the Levy on Capital I have not seen any answer (even in Mr Pethick Lawrence's very persuasive little book in its favour) to the three great objections to it (1) that it lets off the squanderer and penalises the saver; (2) that the difficulty, trouble and expense involved by the necessary valuation, and the iniquities and frauds that are almost certain to arise out of it, will be enormous; and (3) that its economic effect may be very serious in discouraging accumulation. "Why should any one save," the unthrifty soul will most naturally ask, "if his savings are liable to have a slice cut out of them by a levy at any time?" The advocates of the Levy, and "Ex-M.P." in his advocacy of a Compulsory Loan for repayment of debt; assume that it can be done once and for all and never again. "Take one-fifth of a man's savings away as an emergency measure not to be repeated, and he will at once endeavour to save it back again." But how will you persuade him that it is an emergency measure not to be repeated? How can you be sure that it is so? I have heard a very distinguished Socialist, discussing in private the beauties of the Levy on Capital, point out that it is the sort of thing which, when once the ice has been broken, can be done again so easily. From the Socialist point of view the Levy on Capital is, of course, a simple means of getting, by repetitions of it at regular intervals, all the means of production into the hands of the State; but would the State make a good use of them?
Another assumption about the Levy on Capital that seems to me to be the merest will o' the wisp is the delusion that the whole saving that it would entail by reducing the debt charge would necessarily and certainly go to the relief of income tax. On this assumption Mr Pethick Lawrence bases his most persuasive appeal to the smaller income-tax payer, by showing that he would be better off after a Levy on Capital than before it, thanks to the reduction in income tax, which is assumed as axiomatically arising in its train. But is this certain or even likely? Is it not much more probable that our Government, finding its post-war Budget greatly lightened by a Levy on Capital or a Compulsory Loan to redeem debt, will think itself free to indulge in extravagance, maintaining a considerable part of the war income tax and wasting it on rash experiments? All these weaknesses, which appear to be inherent alike in the Levy on Capital or in the scheme which gilds the pill by calling it a Compulsory Loan, seem to be ignored or neglected (perhaps because they are unanswerable) by their advocates. On the other hand, there are certain psychological arguments on the other side. If the well-to-do, who would have to pay the Levy or subscribe to the Compulsory Loan, would prefer that system to a high income tax, there is no more to be said. A tax that is popular with the payer, as compared with other modes of shearing his fleece, needs no further recommendation. But, in view of the probability of the experiment, once tried, being shortly and frequently repeated, I Very much doubt whether this is so; as far as I have been able by personal inquiry to test opinion on the point I have found it almost unanimously adverse among those whom the Levy would most seriously affect. If, as is much more likely, the imposition of a Levy created better feeling among the working classes and the returning soldiers and tended to more harmonious co-operation in after-war tasks of reconstruction, it might be worth while to face its evils and its dangers. But here again it is quite probable that if the burden of war debt were clearly and palpably put on the shoulders best able to bear it, that is, on those who are lifted by the gifts of fortune--either in inherited money or unusual brainpower or faculties--by an equitably graded income tax, the effect might be just as good on the minds of those who suspect that the rich have battened throughout the war on exploitation of the poor.
This much at least seems to be agreed by most reasonable people about the debt charge--that it will have to be raised, either by a Levy on Capital or by income tax or some other form of direct taxation, from those who are blessed with a margin. We are not likely to repeat our ancestors' mistake, after the Napoleonic War, of throwing the whole burden on to the general consumer by indirect taxation of necessaries and of articles of general consumption. Even Tariff "Reformers" say little about the revenue that their fiscal schemes would bring in. And with good reason. For in so far as they secured Protection they would bring in no revenue; we cannot at once keep out foreign goods and tax them; and any revenue that they brought in would be most expensively raised, because a large part of the extra price paid by the consumer would go not to the State but into the pockets of the home producer. Nor is it likely that any of the many schemes--of which Mr Stilwell's "Great Plan, How to Pay for the War," is a particularly bold example--for paying off debt by a huge issue of inconvertible currency, will achieve any practical result. Not only would they defraud the debt-holder by paying him off in currency enormously depreciated by the multiplication of it that would be involved; but they would also, by that depreciation, throw the burden of the debt on the shoulders of the general consumer through a further disastrous rise in prices, and so would accentuate the bitterness and discontent already rife owing to the war-time dearness and all the suspicions of profiteering and exploitation that it has engendered.
After all, this problem of the war debt, in so far as it is held at home, is not one that ought to terrify us if we look at it steadily. People talk and write as if when the war is over the business of paying for it will begin. That is not really so. The war has been paid for as it went on, and, except in so far as it has been financed by borrowing abroad, it has been paid for by us as a nation. Whatever we have used for the war we have paid for as it went on, partly with the help of loans from America and from other countries--Argentina, Holland, Switzerland, etc.--that have lent us money. These loans amount, as far as they can be traced from the official figures, to about £1300 millions. Against them we can set our loans to our Dominions, over £200 millions (a perfectly good asset), and our loans to our Allies, perhaps £1500 millions, which the Chancellor proposes to write down by 50 per cent., and might perhaps treat still more drastically. To meet this foreign debt we shall have to turn out so much stuff--goods and services of all kinds--for sale abroad to meet the interest and repayment. We have further impoverished ourselves by selling our foreign securities abroad No figure has been published giving any clue to the amount of these sales, and we may perhaps guess them at £1000 millions. If the pre-war estimates of our overseas investments at £4000 millions were anywhere near the mark. It thus appears that we shall end the war still a great creditor nation.
In so far as the debt was raised at home, the war was paid for by those who bought the securities offered, and we have now to pay them interest and set about repaying them the capital. This process will not diminish the national wealth, but will only affect its distribution. It will not diminish the amount of available capital, but may even rather increase it by gathering into the hands of the debt-holders--who are ex-hypothesi folk with an inclination for saving--money that might, if left in the hands of those from whom it is collected, have been squandered. The payment of the debt charge merely means that those who came forward with their money when they were asked to subscribe to war loans, have, according to the extent of the effort that they then made, a set-off against the subsequent taxation involved by the war debt. It would have been a much simpler and more businesslike proceeding to have taken, instead of borrowing, a much larger proportion of the war's cost during the war; but it is too late now to rub in this platitude which is now pretty generally admitted. Mr Hoare showed in last month's Journal that the creation of the War Debt has caused a huge addition to what he has called Rente--the gross income of the propertied classes; and there is much logic in his contention that this income is the source from which the debt charge should be met. At the same time both justice and economic expediency seem to demand that his wider interpretation of Rente, to make it include the earnings of those whose special qualifications (or, we may add, special luck) put them in a position to earn more easily than the struggling majority, should be applied to taxation involved by the debt charge.
How, then, shall we deal with the debt? In the first place we want a good Sinking Fund--1 per cent. at least--and all realisations of assets in the shape of loans repaid, ships, etc., sold, should be used for reduction of our foreign debt. For the home charge we want a special form of income tax that will fall as lightly and indirectly as possible on industry; that is, that it should be imposed on the individual taxpayer direct. So that what we want is an extended, reformed and better graduated form of the super-tax brought down so low that every one who is not merely rich but comfortable should pay his share, For example, any single man or woman with any excess over £500 a year of unearned income, or over £800 a year of earned income might well pay super-tax on that excess. The exemption limit might well be raised by 50 per cent. for married couples (if their joint incomes are still to be counted as one), and by £100 a year for each child between the age of five and twenty-five. But all these figures are mere suggestions, and the details of the scheme would have to be worked out by Inland Revenue officials, whose experience and knowledge of the practical working of such matters qualifies them for the task. The broad principle is a special tax for the debt charge to be raised direct from individual incomes with skilful differentiation, according to the circumstances of the taxpayer, in the matter of the number of his dependants, and also according to the source of the income, whether it is being earned by exertions which illness might terminate or received from invested funds, and therefore beyond the reach of the "slings and arrows of outrageous fortune." That portion of the tax that is required for Sinking Fund might be made payable, at the option of the taxpayer, in Government securities at prices giving some advantage to the holder. This form of special debt-charge super-tax would enable the ordinary income tax to be reduced considerably at once. Mr Edward Lees, secretary to the Manchester and County Bank, has put forward a scheme by which taxpayers can buy in advance immunity for so many years from so much annual income tax. If this suggestion could be worked it might provide a means of quickening the debt's repayment, though it looks rather like exchanging one form of debt for another. But, in any case, it is urgent that the long promised reform of income tax should be set in hand at once, so that it may be purged of its present inequities and anomalies and set to work in peace to redeem debt on a new and more scientific basis.
XVI
THE CURRENCY REPORT _December_, 1918
Currency Policy during the War--Its Disastrous Mediaevalism--The Report of the Cunliffe Committee--A Blast of Common Sense--The Condemnation of our War Finance--Inflation and the Rise in Prices--The Figures of the Present Position--The Break in the Old Relation between Legal Tender and Gold--How to restore it--Stop Borrowing and reduce the Floating Debt--Return to the Old System--The Committee's Sane Conservatism--A Sound Currency vital to National Recovery.
Among the many features of the late war (how comfortable it is to talk about the "late war"!) that seem likely to astonish the historian of the future, perhaps the thing that will surprise him most is the behaviour of the warring Governments in currency matters. It is surely, a most extraordinary thing after all that has been thought, said and written about monetary policy since money was invented that as soon as a great economic effort was necessary on the part of the leading civilised Powers, they should all have fallen back on the old mediaeval dodge of depreciating the currency, varied to suit modern needs, in order to pay part of their war bill, and should have continued this policy throughout the course of the war, in spite of the obvious results that it was producing in the shape of unrest, suspicion and bitterness on the part of the working classes, who very naturally thought that the consequent rise in prices was due to the machinations of unscrupulous capitalists who were exploiting them. It is even possible that the historian of a century hence may ascribe to this cause the beginning of the end of our present economic system, based on the private ownership of capital, for it is very evident that we have not yet seen the end of the harvest that this bitterness and discontent are producing.
A less important but still very objectionable consequence of the flood of currency and credit that the Government has poured out to fill a gap in its war finance is the encouragement that it has given to a host of monetary quacks who believe that all the financial ills of the world can be saved if only you give it enough money to handle, oblivious of the effect on prices of mere multiplication of claims to goods without a corresponding increase in the volume of goods. These enthusiasts have seen that during war a Government can produce money as fast as it likes, and since they think that producing money makes every one happy they propose to adopt this simple method for paying off war debt, restarting trade and generally creating a monetary millennium. How far their nostrums are likely to be adopted, no one can yet say, but some of the utterances of our rulers make one shudder.
Into this atmosphere of quackery and delusion the report of the Committee on Currency and Foreign Exchanges breathes a refreshing blast of sound common sense. Everybody ought to read it. It costs but twopence; it is only a dozen pages long, and it is described (if you want to order it) as Cd. 9182. In view of the many attacks that have been made on our banking system--especially the Bank Act of 1844--by Chambers of Commerce and others before the war, it is rather surprising that so little criticism should have been heard of this Report, which practically advocates a return, as rapidly as possible, to the practice and principles imposed by that Act. It may be that peace, and all the preoccupations that have followed it, have absorbed men's minds so entirely that questions of currency seem to be an untimely irrelevance; or possibly the very heavy weight of the Committee's authority may have silenced the opposition to its recommendations. Presided over by Lord Cunliffe, the late Governor of the Bank, and including Sir John Bradbury and Professor Pigou and an imposing list of notable bankers, it was a body whose opinion could only be challenged by critics gifted with the most serene self-confidence.
One of the most interesting--especially to advocates of sound finance--points in its Report is the implied condemnation that it pronounces on the methods by which the war has been financed by our rulers. It points out that "the need of the Government for funds wherewith to finance the war in excess of the amounts raised by taxation or by loans from the public has made necessary the creation of credits in their favour with the Bank of England.... The balances created by these operations passing by means of payments to contractors and others to the Joint Stock banks have formed the foundation of a great growth in their deposits, which have also been swelled by the creation of credits in connection with the subscriptions to the various War Loans.... The greatly increased volume of bank deposits, representing a corresponding increase of purchasing power and, therefore, tending in conjunction with other causes to a great rise of prices, has brought about a corresponding demand for legal tender currency which could not have been satisfied under the stringent provisions of the Act of 1844." Here we have the story of bad war finance put as clearly as it can be. Because the Government was not able to raise all the money needed for the war on sound lines--that is, by taxation and loans to it of money saved by investors--it had recourse to credits raised for it by the Bank of England and the other banks against Treasury Bills, Ways and Means Advances, War Loans, War Bonds, and loans to customers who were taking up War Loans, etc. Thereby as these credits created fresh deposits there was a huge increase in the community's purchasing power; and since the supply of goods to be purchased was stationary or reduced, the only result was a great increase in prices which made the war, perhaps, nearly twice as costly as it need have been and produced all the suspicion and unrest that has already been referred to. Considering that the Committee included an ex-Governor of the Bank and the Permanent Secretary to the Treasury it could hardly have been expected to use much plainer language concerning the failure of our rulers to get money out of us in the right way for the war and the vigour with which they made use of the demoralising weapon of inflation.
It followed as a necessary consequence that the volume of legal tender currency had to be greatly increased. As prices rose wages rose with them, and so much more "cash" was needed in order to pay for a turnover of goods which, fairly constant in volume, demanded more currency because of their inflated prices. As the Committee says in its Report (page 5): "Given the necessity for the creation of bank credits in favour of the Government for the purpose of financing war expenditure, these issues could not be avoided. If they had not been made, the banks would have been unable to obtain legal tender with which to meet cheques drawn for cash on their customers' accounts. The unlimited issue of currency notes in exchange for credits at the Bank of England is at once a consequence and an essential condition of the methods which the Government have found necessary to adopt in order to meet their war expenditure."
The effect of these causes upon the amount of legal tender currency (other than subsidiary coin) in the banks and in circulation is summarised by the Committee in the following table:--
"The amounts on June 30, 1914, may be estimated as follows:--
"Fiduciary Issue of the Bank of England £18,450,000
"Bank of England Notes issued against gold coin or bullion 38,476,000
"Estimated amount of gold coin held by Banks (excluding gold coin held in the Issue Department of the Bank of England) and in public circulation 123,000,000 ___________ "Grand total £179,926,000 ___________
"The corresponding figures on July 10, 1918, as nearly as they can be estimated, were:--
"Fiduciary Issue of the Bank of England 18,450,000 Currency Notes not covered by gold 230,412,000 ___________ "Total Fiduciary Issues [1] £248,862,000 Bank of England Notes issued against coin and bullion 65,368,000 Currency Notes covered by gold 28,500,000 Estimated amount of gold coin held by Banks (excluding gold coin held by Issue Department of Bank of England), say 40,000,000 ___________ "Grand total £382,730,000
"[Footnote 1: The notes issued by Scottish and Irish banks which have been made legal tender during the war have not been included in the foregoing figures. Strictly the amount (about £5,000,000) by which these issues exceed the amount of gold and currency notes held by those banks should be added to the figures of the present fiduciary issues given above.]
"There is also a certain amount of gold coin still in the hands of the public which ought to be added to the last-mentioned figure, but the amount is unknown."
It will be noted that the gold held by the banks (other than the Bank of England) and by the public has declined from £123 to £40 millions, according to the Committee's estimate, while, on the other hand, the circulation of bank notes has risen by £27 millions and the issue of currency notes has taken place to the tune of £259 millions (at the date of the Report; it is now nearly £300 millions), making a net addition to legal tender currency of over £200 millions. When we also remember that there has been a very heavy coinage of silver and copper, that the Bank of England's deposits have risen by over £100 millions and the deposits of the other banks by nearly £700 millions, and all this at a time when most of the industrial activity of the country was going into the production of destructive weapons and the support of those who were using them, the behaviour of commodities of ordinary use in rising by nearly 100 per cent. seems to be an example of remarkable moderation. With all this new buying power in the hands of the community there is little wonder that some people should think that we have enormously increased our wealth during this most destructive and costly war, and should then feel hurt and disappointed when they find that this new buying power is robbed of all its beauty by the fact that its efficiency as buying power is seriously diminished by its mere quantity.