Chapter 4

Therefore the real economic problem that any Government has to face in war-time is that of inducing its citizens to reduce their purchase of goods and services, that is to say, to spend less, so that all the things required for the Army and Navy may be obtained by the Government. It is true that some of the goods and services required for carrying on war can be obtained from foreign countries by any belligerent which is able to communicate with them freely. In that case the current production of the foreigner can be called in to help. But this can only be done if the warring country is able to ship goods to the foreigner in payment for what it buys, or if it is able to obtain a loan from the foreigner, or some other foreign country, in order to pay for its purchases abroad, or again, if, as in our case, it holds a large accumulation of securities which foreign countries are prepared to take in exchange for goods that they send for the purposes of the war. By these two last-named processes, raising money abroad, and selling securities to foreign nations, the warring country impoverishes itself for the future. When it borrows abroad it pledges itself to export goods and services in future to meet interest and sinking fund on the money so raised, so getting no goods and services in return. When it ships its accumulated wealth in the form of securities it gives up for the future any claim to goods and services from the debtor country which used to come to it to meet interest and redemption. It is only by shipping goods in return for goods imported for the war that a country can keep its financial staying-power on an even keel.

Thus the problem which a statesman who had thought out the economics of war beforehand would have recognised as the keystone of his policy, would have been that of diverting the activities of the country from providing itself with comforts and amusements to turning out goods required for war, and of doing so with the least possible friction, the least possible alteration in the economic equilibrium of the country, and, above all, with the least possible cost to the national finances. We arrive at the true aspect of this problem more easily if we leave out the question of money altogether and think of it in units of energy. When a nation goes to war it means to say that it has to apply so many units of energy to the business of fighting, and to provide the fighters with all that they need. If at the beginning of the war its utmost capacity of output was, to mention merely a fanciful figure, a thousand million units of energy, and if it was clear that the fighting forces of the country would need for their proper maintenance five hundred million units of energy, then it is clear that the nation's ordinary consumption of goods and services would have to be reduced to the extent of five hundred millions of units of energy, which would have to be applied to the war, that is, assuming that its possible output remained the same.

In other words, the spending power of the citizens of the country had to be reduced so that the industrial energy that used to go into meeting their wants might be made available for the purposes of fighting forces. Now what was the straightest, simplest and cleanest way of bringing about this reduction in buying power on the part of the ordinary citizen which has been shown to be necessary for the purposes of war finance? Clearly the best way of doing it is by taxation equitably imposed. When the State taxes, it says in effect to the citizens, "Your country needs certain goods and services, you therefore will have to go without those goods and services, and the simplest way to make you do this is to take away your money and so ration your buying power. Whatever is needed for the Army and Navy will be taken away from you by taxation, and the result of this will be that, instead of your indulging in comforts and luxuries, to the extent of the war's needs the Government will use your money for paying for what is needed for the Army and Navy."

If such a policy had been carried out the cost of the war to the community would have been enormously cheapened. There need have been no general rise in prices because there would have been no increase in demand for goods and services. Anything that the Government spent would have been counter-balanced by decreased spending by the individual; any work that the Government needed for the war would have been counter-balanced by a reduction in demand for work on the part of individual citizens. There would have been no multiplication of currency owing to enormous credits raised by the Government; there would have been merely a transfer of buying power from individuals to the State. The process would have been gradual, there need have been no acute dislocation, but as the cost of the war increased, that is to say, as the Government needed more and more goods and services for its prosecution, the community would gradually have shed one after another the extravagances on which it spent so many hundreds of millions in days before the war. As it shed these extravagances the labour and energy needed to produce them would have been automatically transferred to the service of the war, or to the production of necessaries of life. By this simple process of monetary rationing all the frantic appeals for economy, and most of the complicated, tangled problems raised by such matters as Food Control or National Service would have been avoided.

But, it may be contended, this is setting up an ideal so absurdly too high that you cannot expect any modern nation to rise up to it. Perhaps this is true, though I am not at all sure that if we had had a really bold and far-sighted Finance Minister at the beginning of the war he might not have persuaded the nation to tackle its war problem on this exalted line. At least it can be claimed that our financial rulers might have looked into the history of the matter and seen what our ancestors had done in big wars in this matter of paying for war costs out of taxation, with the determination to do at least as well as they did, and perhaps rather better, owing to the overwhelming scale of modern financial problems. If they had done so they would have found that both in the Napoleonic and the Crimean wars we paid for nearly half the cost of the war out of revenue as they went on, whereas in the present war the proportion that we are paying by taxation, instead of being 47 per cent., as it was when our sturdy ancestors fought against Napoleon, is less than 20 per cent.[1] Why has this been so? Partly, no doubt, owing to the slackness and cowardice of our politicians, and the apathy of the overworked officials, who have been too busy with the details of finance to think the problem out on a large scale. But it is chiefly, I think, because our system of taxation, though probably the best in the world, involves so many inequities that it cannot be applied on a really large scale without producing a discontent which might have had serious consequences on our conduct of the war.

[Footnote 1: See _Economist_, August 4, 1917, p. 151.]

It is not possible nowadays, now that the working classes are conscious of their strength, to apply taxation to ordinary articles of general consumption with anything like the ruthlessness which in former days produced such widespread misery. Indirect taxation of this kind carries with it this inherent weakness that its burden falls most heavily on those who are least able to bear it, consequently it is bound to break in the hand of those who attempt to apply it with anything like vigour to a community which is prepared to stand up for fair treatment. A tax on bread or salt obviously hits the wage-earner at 30s. a week infinitely harder than it hits the millionaire, and so the country would not tolerate taxes on bread or salt. Direct taxes, such as Income Tax and Death Duties, have this enormous advantage, that they can really be regulated so as to press with continually increasing severity upon those who are best able to bear them. Unfortunately our Income Tax is still so unjustly imposed that it was clearly impossible to make full use of it without its being first reformed. That two men, each earning £1000 a year, should pay the same Income Tax, in spite of one having a wife and five children, while the other is a careless bachelor, is such a blot upon this otherwise excellent tax that it is generally agreed that the present rate of 5s. is as high as it can be made to go unless some reform is introduced into its incidence. The need for its reform is made the excuse for a sparing use of the tax, and we have been on several occasions assured that, as soon as the war is over, this reform will be set about.

In the meantime the Government falls back on funding about 80 per cent. of its requirements of the war on a system of borrowing. In so far as the money subscribed to its loans is money that is being genuinely saved by investors this process has exactly the same effect as taxation, that is to say, somebody goes without goods and services and hands over his power to buy them to the State to be used for the war. Borrowing of this kind consequently does everything that is needed for the solution of the immediate war problem, and the only objection to it is that it leaves later on the difficulties involved by raising taxes when the war is over, and economic problems are much more complicated in times of peace than in war, for meeting the interest and redemption of debt. But, in fact, it is well known that by no means all that the Government has borrowed for war purposes has been provided in this way. Much of the money that the Government has obtained for war purposes has been got not out of genuine savings of investors, but by arrangements of various kinds with the banking machinery of the country, or by the simple use of the printing-press, with the result that the Government has provided itself with an enormous mass of new currency which has not been taken out of anybody else's pocket, but has been manufactured by or for the Government.

The consequence of the profligate use of this dishonest process is that general rise in prices, which is in effect an indirect tax on the necessaries of life, involving all the injustice and ill-feeling which arises from such a measure. It is inevitable that the working classes, finding themselves subjected to a rise in prices, the cause of which they do not understand, but the result of which they see to be a great decrease in the buying power of their wages, should believe that they are being exploited by profiteers, that the rich classes are growing richer at their expense out of the war, and that they and the country are being bled by a set of unpatriotic capitalist blood-suckers. It is also natural that the property-owning classes, who find themselves paying an Income Tax which they regard as extortionate, should consider that the working classes by their continuous demands for higher wages to meet higher cost of living, are trying to exploit the country in their own interests in a time of national crisis, and displaying a most unedifying spirit. The social result of this evil policy of inflation, in embittering class against class, is a matter which it is difficult to exaggerate. Some people think that it was inevitable. This is too wide a question to be entered into now, but at least it must be contended that if it is inevitable the extent to which it is being practised might have been very greatly diminished.

Do we mean to go on to the end of the war with this muddling policy of bad finance? If we still insist on believing that the war cannot last another six months, and there is therefore no need to pull ourselves up short financially and put things in order, then we certainly shall do so. But we should surely recognise that there is at least a chance that the war may go on for years, that if so our present financial methods will leave us with a burden of debt which is appalling to consider, and that in any case, whether the war lasts another six months or another six years, a reform of our financial methods is long overdue, is inevitable some time, and will pay us better the sooner it is set about.

IV

WAR FINANCE AS IT MIGHT HAVE BEEN--II

_December_, 1917

The Changed Spirit of the Country--A Great Opportunity thrown away--What Taxation might have done--The Perils of Inflation--Drifting stupidly along the Line of Least Resistance--It is we who pay, not "Posterity."

In the November number of _Sperling's Journal_ I dealt with the question of how our war finance might have been improved if a longer view had been taken from the beginning concerning the length of the war and the measures that would be necessary for raising the money. The subject was too big to be fully covered in the course of one article, and I have been given this opportunity of continuing its examination. Before doing so I wish to remind my readers once more of the great difference in the spirit of the country with regard to financial self-sacrifice in the early days of the war and at the present time, after three years of high profits, public and private extravagance, and successful demands for higher wages have demoralised the public temper into a belief that war is a time for making big profits and earning big wages at the expense of the community. In the early days the spirit of the country was very different, and it might have remained so if it had been trained by the use made of public finance along the right line. In the early days the Labour leaders announced that there were to be no strikes during the war, and the property-owning classes, with their hearts full of gratitude for the promptitude with which Mr Lloyd George had met the early war crisis, were ready to do anything that the country asked from them in the matter of monetary sacrifice. Mr Asquith's grandiloquent phrase, "No price is too high when Honour is at stake," might then have been taken literally by all classes of the community as a call to them to do their financial duty. Now it has been largely translated into a belief that no price is too high to exact from the Government by those who have goods to sell to it, or work to place at its disposal. In considering what might have been in matters of finance we have to be very careful to remember this evil change which has taken place in the public spirit owing to the short-sighted financial measures which have been taken by our rulers.

Thus, when we consider how our war finance might have been improved, we imply all along that the improvements suggested should have been begun when the war was in its early stages, and when public opinion was still ready to do its duty in finance. The conclusion at which we arrived a month ago was that by taxation rather than by borrowing and inflation much more satisfactory results could have been got out of the country. If, instead of manufacturing currency for the prosecution of the war, the Government had taken money from the citizens either by taxation or by loans raised exclusively out of real savings, the rise in prices which has made the war so terribly costly, and has raised so great a danger through the unrest and dissatisfaction of the working classes, might have been to a great extent avoided, and the higher the rate of taxation had been, and the less the amount provided by loans, the less would have been the seriousness of the problem that now awaits us when the war is over and we have to face the question of the redemption of the debt.

In this matter of taxation we have certainly done much more than any of the countries who are fighting either with us or against us. Germany set the example at the beginning of the war of raising no money at all by taxation, puffed up with the vain belief that the cost of the war, and a good deal more, was going to be handed over to her in the shape of indemnities by her vanquished enemies. This terrible miscalculation on her part led her to set a very bad example to the warring Powers, and when protests are made in this country concerning the low proportion of the war's costs that is being met out of taxation it is easy for the official apologist to answer, "See how much more we are doing than Germany." It is easy, but it is not a good answer. Germany had no financial prestige to maintain; the money that Germany is raising for financing the war is raised almost entirely at home, and she rejoices in a population so entirely tame under a dominant caste that it would very likely be quite easy for her, when, the war is over, to cancel a large part of the debt by some process of financial jugglery, and to induce her tame and deluded creditors to believe that they have been quite handsomely treated.

Here, however, in England, we have a financial prestige which is based upon financial leadership of more than a century. We have also raised a large part of the money we have used for the prosecution of the war by borrowing abroad, and so we have to be specially careful in husbanding that credit, which is so strong a weapon on the side of liberty and justice. And, further, we have a public which thinks for itself, and will be highly sceptical, and is already inclined to be sceptical, concerning the manner in which the Government may treat the national creditors. Its tendency to think for itself in matters of finance is accompanied by very gross ignorance, which very often induces it to think quite wrongly; and when we find it necessary for the Chancellor of the Exchequer to make it clear at a succession of public meetings that those who subscribe to War Loans need have no fear that their property in them will be treated worse than any other kinds of property, we see what evil results the process of too much borrowing and too little taxation can have in a community which is acutely suspicious and distrustful of its Government, and very liable to ignorant blundering on financial subjects.

What, then, might have been done if, at the beginning of the war, a really courageous Government, with some power of foreseeing the needs of finance for several years ahead if the war lasted, had made a right appeal to a people which was at that time ready to do all that was asked from it for the cause of justice against the common foe? The problem by which the Government was faced was this, that it had to acquire for the war an enormous and growing amount of goods and services required by our fighting forces, some of which could only be got from abroad, and some could only be produced at home, while at the same time it had to maintain the civilian population with such a supply of the necessaries of life as would maintain them in efficiency for doing the work at home which was required to support the effort of our fighters at the Front. With regard to the goods which came from abroad, either for war purposes or for the maintenance of the civilian population, the Government obviously had no choice about the manner in which payment had to be made. It had no power to tax the suppliers in foreign countries of the goods and services that we needed during the war period. It consequently could only induce them to supply these goods and services by selling them either commodities produced by our own industry, or securities held by our capitalists, or its own promises to pay.

With regard to the goods that we might have available for export, these were likely to be curtailed owing to the diversion of a large number of our industrial population into the ranks of the Army and into munition factories. This curtailment, on the other hand, might to a certain extent be made good by a reduction in consumption on the part of the civilian population, so setting free a larger proportion of our manufacturing energy for the production of goods for export. Otherwise the problem of paying for goods purchased from abroad could only be solved by the export of securities, and by borrowing from foreign countries, so that the shells and other war material that were required, for example, from America, might be paid for by American investors in consideration of receiving from us a promise to pay them back some day, and to pay them interest in the meantime. In other words, we could only pay for what we needed from abroad by shipping goods or securities. As is well known, we have financed the war by these methods to an enormous extent; the actual extent to which we have done so is not known, but it is believed that we have roughly balanced by this process the sums that we have lent to our Allies and Dominions, which now amount to well over 1300 millions.

If this is so, we have, in fact, financed the whole of the real cost of the war to ourselves at home, and we have done so by taxation, by borrowing saved money, and by inflation--that is to say, by the manufacture of new currency, with the inevitable result of depreciating the buying power of our existing currency as a whole. How much better could the thing have been done? In other words, how much of the war's cost in so far as it was raised at home could have been raised by taxation? In theory the answer is very simple, for in theory the whole cost of the war, in so far as it is raised at home, could have been raised by taxation if it could have been raised at all. It is not possible to raise more by any other method than it is theoretically possible to raise by taxation. It is often said, "All this preaching about taxation is all very well, but you couldn't possibly get anything like the amount that is needed for the war by taxation, or even by borrowing of saved money. This inflation against which economic theorists are continually railing is inevitable in time of war because there isn't enough money in the country to provide all that is needed."

This argument is simply the embodiment of the old delusion, so common among people who handle the machinery of finance, that you can really increase the supply of necessary goods by increasing the supply of money, which is nothing else than claims to goods expressed either in pieces of metal or pieces of paper. As we have seen, all that we have been able to raise abroad has been required for advances to our Allies and Dominions, consequently we have had to fall back upon our own home production for everything needed for our own war costs. Either we have turned out the goods at home or we have turned out goods to sell to foreigners in exchange for goods that we require from them. But since we thus had to rely on home production for the whole of the war's needs as far as we were concerned, it is clear that the Government could, if it had been gifted with ideal courage and devotion, and if it had a people behind it ready to do all that was needed for victory, have taken the whole of the home production, except what was wanted for maintaining the civilian population in efficiency, for the purposes of the war.