Many would prefer that any necessary adjustment
should be made by raising the rate on the Bonds ;
and it seems to be assumed by most people that
the rate offered must rise for every successive loan.
It would be difficult to find any solid basis for this
assumption. It is certain that if rates are raised,
either for the continuous loans or a new large loan,
there will be a corresponding depreciation of all
existing securities, except in the case of those which
carry conversion rights, and here another heavy
burden would be thrown on the taxpayer. It does
not appear that anything would be gained. Foreign
money will certainly not be subscribed to loans
liable to unlimited income-tax. Nor is it easy to
see how home savings or home investment will be
increased. As new issues are very properly under
control, there is no question of the competition of
alternative forms of investment. Indeed, it might
be doubted whether the present 5 per cent, rate was
really necessary. It is probable that, if the con-
tinuous system had been introduced at the outset,
all the requirements of the country could have been



1 It is, moreover, open to question whether large holdings of short
London paper in foreign hands are desirable. There were great com-
plaints on this score after the South African War. It was said that
the market was persistently depressed because so large an amount of
Treasury Bills was held abroad, in regard to which it was difficult ta
judge whether or not they would be renewed at maturity.



WAYS AND MEANS 47

financed at a maximum of 4j per cent., or even,
as Mr. Gibson holds, of 4 per cent. But a 5 per cent,
rate should in any case be offered for one year and
longer small Post Office investments, not only for
simplicity of calculation, but because the sacrifice
of saving is far greater in the case of those with
small means, who require stronger inducements to
make it. Our present system gives the easiest
terms to the haute finance. But we are now com-
mitted to the 5 per cent, rate for five-year Bonds.
Surely we may stop there, and neither increase the
rate on the Bonds nor extend the Bond rate to a
colossal loan. The better policy would seem to be
to lower the rate on the shorter paper until five-
year or longer Bonds are taken up in the desired
proportion. Foreign money requires independent
treatment. It can only be attracted by loans placed
abroad, in foreign currency, free of all British taxes,
and issued at whatever may be found the necessary
rates. If we depreciate the national credit by rais-
ing our home rates this will only further raise the
rates we shall have to offer abroad.

If we suppose that rates have been properly ad-
justed, so as to secure the right proportion of longer
paper or Bonds, does any reason remain for a big
spectacular loan ? It may be said that our friends
the French, excellent financiers as they are, thought
it necessary to have a large consolidating loan in
November last. But the history of French war



48 PAPERS ON CURRENT FINANCE

finance, viewed as a whole, seems to confirm the
argument for continuous borrowing. It is note-
worthy that the Loan of Victory was the first raised
by France in this war. Up to November 16th,
1915, France had raised about 1,040 millions sterling,
or 69 millions a month, without resort to loans :
276 millions by advances from the Banque de
France, 487 millions by continuous issues of Bonds
and Bills, 220 millions out of revenue or " unused
credits," 60 millions from foreign loans (the Anglo-
Franco-American loan not included). Of this only
one-sixth, or 180 millions, was spent abroad. 1 The
great bulk of what was lent, then, so far as the
question of account is concerned, was returned to the
country by the Government expenditure, in what M.
Thery calls a " mouvement giratoire" so that banking
disturbance was reduced to a minimum. M. Thery
gives figures which go far to support his claim that
the amount of floating money and power of sub-
scription increased in proportion to the military
expenditure. The Victory Loan absorbed some of
the floating fund ; but Government expenditure will
soon restore it, when the " mouvement giratoire "
will resume its old proportions. It must always be
remembered that there was a special reason for a
consolidating loan in France. The outbreak of war
not only struck an exceptionally heavy blow at

1 In November, 1914, Mr. Lloyd George said that four-fifths of our
war expenditure would be spent in the country.



WAYS AND MEANS 49

French finance, but it caught her market at a most
inconvenient time. A new loan had just been
issued, but not yet transferred to permanent holders.
The position required regularisation in many respects.
Nor was it so much the short as the long French
paper which was absorbed in the Loan. Out of
some 150 millions sterling of Bonds, 127| millions,
or nearly 84 per cent., were converted. Out of
360 millions sterling of Bills, only 89 millions, or
about 25 per cent., were converted. This, though
the Bonds yielded 5*60 per cent., the Bills only 5 per
cent. Short paper is so attractive that we cannot
trust to a big loan to reduce the proportion taken
up. Here, in London, we have already had two
large loans, the last of which was a consolidating
loan, giving conversion facilities. Things are now
running smoothly with us, and no special reason
exists for a third loan.

It may be said, however, that the five-year Bond
is too short. If so, Bonds of longer date should be
offered. Mr. Drummond Fraser, one of the earliest
advocates of continuous borrowing, recommended
the issue of Bonds for three, five, seven, and ten
years ; and there is much to be said for giving this
wider option. The French Bonds are redeemable in
five or ten years at the option of the Government.
The fourth German Loan just issued consists of
4j per cent. Imperial Treasury Bonds at 95, divided
into ten series, redeemable by yearly drawings from



F.C.F.



50 PAPERS ON CURRENT FINANCE

1923 to 1932 ; and also of a 5 per cent. Imperial
Loan issued at 98*50, and not redeemable before
1924. The Germans have good reason for preferring
longer bonds. They expect financial trouble when
the war ends. We need not. But whatever term
for redemption may be considered desirable, this
term can be applied as easily to continuously
issued bonds as to a new funded loan. Even a loan
must be redeemable at some not distant fixed date.
The risk of depreciation must be limited.

There are some who advocate the big loan on the
ground that if a really colossal issue could be made
it would stimulate investment at home and have a
useful political effect abroad. The political effect
is doubtful : for it is well understood that the larger
the loan, the more artificial it must necessarily be.
The kind of advertisement required to stimulate
investors is being well arranged by bankers and
brokers. Their timely hints to customers will in
the long run be more effective than the nine days'
wonder caused by the splash of a big loan. The
big loan, too, will require heavy subscriptions by
the banks, and corresponding creations of bank
credit. This will cause inflation and further rise
of prices, thus increasing the cost of the war, and
involving the country in a kind of rake's progress.
Each successive large loan, too, seems to make an
epoch, and is held to imply a rise in the loan rate.
The continuous system, with its absence of definite



WAYS AND MEANS 51

breaks, is free from this costly defect. In short,
the continuous form of issue seems to hold the
field. Its various options are convenient to the
investor, and therefore cheap to the State ; it is
smooth in its working, putting the minimum pressure
and loss on the banks ; it enables Government,
by the adjustment of rates, to obtain loans for
precisely the terms which from time to time seem
desirable ; above all, it tends to base our loan sub-
scriptions on real economies rather than on artificial
finance. 1

Reference has been made to the point that a cer-
tain amount of loan may have to be raised abroad,
if only to rectify exchange. The exchange position
has greatly improved in the last three or four months.
Large sales of securities have been made, and much
has been done to centralise the various operations
affecting the exchange. 2 The result is encouraging.
The Dutch exchange, which fell heavily at the turn
of the year, is still some 5 J per cent, against us ;
but the more important New York exchange seems
well in hand. This state of things can only be
maintained, however, by continued efforts on our
part. We must either raise further foreign loans,
or, preferably, further sales of securities must be

1 It need hardly be said that the more artificial the loan, the more
certain it is to depreciate.

2 Similar concentration has taken place in Austria- Hungary and
Germany, and, as we now learn (February 22nd), in Petrograd.



52 PAPERS ON CURRENT FINANCE

made and private credits arranged. We may, and
should, diminish our imports ; we can hardly expect
to increase our exports. In the first eleven months
of 1915 the Bank of England exported between 80
and 90 millions of gold ; * almost the whole of the
world's supply for the period (say 97 millions a
year). Perhaps 50 millions of the 1916 supply may
be exported this year. But it would be doubtful
policy to seriously reduce our modest store of gold.
The national reserve still carries huge responsibilities,
and we do not know what further liabilities may
be incurred. The French call upon us to correct
the Dutch exchange by a gold export. They do
not take similar steps to correct the Paris exchange
on London. If they were to remit direct to Holland
they could at the same time right both exchanges.
It is not certain that this would be wise. The Bank
of France, in its Annual Report, gave good reasons
why it might not be. Similarly with our New
York exchange, heavy exports of gold might be mis-
chievous. New York is already glutted with gold,
and further exports would only raise prices against
usjpn our large balance of imports. The import-
ance of correcting exchange is very much a question
of the volume and the character of the transactions
affected by the exchange. It is perhaps most im-
portant to us, because, if the loss of parity goes too
far, it may interfere with the freedom of our gold

1 Morning Post, December 2nd, 1915.



WAYS AND MEANS 53

market, which we desire to maintain. To other
nations this consideration does not appeal. In
estimating their position too much is usually made
of the discount on their exchange, perhaps because
it is always clearly in evidence and quotable. Under
war conditions it cannot be held to prove either
decline of national credit or depreciation of currency.
A striking example of the exaggeration of exchange
indications is seen in the contention of a distin-
guished writer that we should relax the blockade
on German imports in order to increase the discount
on the mark exchange. The blockade may be vital
to the issue of the war. The discount on exchange
is evidently not considered of such importance
in Germany as to warrant the export of gold to
correct it.

But in our case exchange operations are very
large ; and, as has been said, the rate is otherwise
important. Sir George Paish, who will not be
accused of pessimism, estimates our adverse balance
for next year at 600 millions. 1 If we could finance
so much of this as relates to Government expendi-
ture, say 250 millions, by loans or credits secured
abroad, we might perhaps make up the balance by
sales of securities. 2 It is, however, doubtful if we

1 Statist, January 8th, 1916.

2 Sir George Paish estimates that we hold some 1,770 millions of
securities (South American and Canadian are included in this figure)
which American investors might conceivably be willing to buy. The
Times of January 24th, 1916, mentions a New York estimate that the



54 PAPEKS ON CURKENT FINANCE

can depend on the United States to finance the
whole of this huge sum. That country has surprised
the world by the unexpected financial strength it
has shown under the strain of the war : but we need
not look solely to New York. Very large profits
have been made in Holland and Scandinavia. The
Bank of the Netherlands has a gold reserve of more
than 80 per cent, against its note issue, treble the
amount held in normal times (nearly 39 as against
12| millions sterling). 1 The Bank of Sweden is so
glutted with gold that it has obtained the repeal
of the law obliging it to buy all gold offered at a fixed
price. We are not without powerful friends in these
countries. They are all in close relation with the
Amsterdam market. Why not offer them a loan
with interest payable in florins in Amsterdam, and
of course tax free ? At present we hear that the
New York loan is being bought for Dutch account.
It would be a fitting compliment to the strength and
international importance of Amsterdam if the next
foreign placement were made there. The hoarded
wealth of India has been proverbial for ages. Is
it impossible that a well-planned rupee loan should
be floated in that country ? Japan, the only other
possible lender, whose recent prosperity is remarkable,

United States has absorbed 350 millions sterling of securities since
May 1st, 1914.

1 The consortium of Dutch banks lowered their deposit rates to | per
cent., " the lowest figure ever known in Holland," February 24th,
1916.



WAYS AND MEANS 55

is now rendering effective service to the Allies by
financing Kussia, and by buying back the 4j per
cent, loans she raised in London. She can hardly
be expected to do more.

In regard to the sale of securities abroad, as in so
many other respects, our national finance largely
depends for its success on the efficiency of the Stock
Exchange. It is still necessary to insist on the import-
ance of freeing this great market from arbitrary
restrictions. Much has been done in the last three
months by way of removing minimum prices ; but
while each successive removal has left the market
stronger, it has emphasised the unfairness of such
minima as remain. This has been especially felt by
the unfortunate payers of death duties. The pres-
sure of this tax, always difficult to finance, has been
trebly increased. The war has multiplied the occa-
sions for its imposition (in direct proportion to the
public sacrifices of the families concerned) ; the rate
has been raised ; and, owing to the minimum prices
enforced, although a partial allowance has been made,
it is often found that the securities passing have
been assessed above real market values. What is
gained by this artificial system ? Bankers and others
may be concerned at having to write down securities
in their balance-sheets. But official minimum prices
do not alter real values ; they only destroy market-
ability on the official market. It is notorious that
transactions are being carried on at prices nearer



56 PAPERS ON CURRENT FINANCE

to real values by outside dealers, who are not subject
to any of the rules imposed in the public interest on
members of the " House." Is it really desired to
drive the public into the hands of these outside firms ?
After all, and in spite of the partial abolition of
minimum prices, the fall in values has been remark-
ably small. The 3,000 odd millions' worth of securi-
ties scheduled every month in the Bankers' Magazine
only lost 6*6 per cent, in value between January 20th,
1915, and December 17th, 1915. Half of this fall was
consequent upon the issue of the 4| per cent. War
Loan, which radically altered the basis of valuation. 1

If we consider the change in the rate of interest
caused by the immense war loans, the fall in capital
values is astonishingly small. Indeed, if we reckoned
our holdings, as the French do their Rentes, by their
yield, it is doubtful whether, on average, there
would be any serious loss to bring to account : for
there have been profitable exchanges from American
securities into war loans, and large conversions from
older loans into loans at higher rates. Whatever
the loss, it is more than set off by the immense advan-
tages of an effective, active market, with real instead
of merely nominal values.

An able American writer has said that it is im-
possible to conceive the modern banking system in

1 By the return just to hand, it appears that, in the two months since
the last return of December 17th, 1915, the fall in aggregate values
has only been 0*6 per cent., in spite of the removal of minima from
Colonial Government Stocks.



WAYS AND MEANS 57

the absence of an effective stock exchange. 1 To no
banking system is it more important than to our own,
which makes so large a use of securities as collateral.
Nor is it less essential to public finance. Some of
the earliest and ablest defences of the London Stock
Exchange contend that it was absolutely indispen-
sable to our system of funded loans, by the help of
which the British Empire was built up in the eighteenth
century. Pinto, and other experts, held that its
efficiency, and the volume of its business, were a
principal reason of the transference of financial
supremacy from Amsterdam to London. In view
of the huge and unprecedented financial operations
now confronting us, it is surely desirable to give all
possible facilities for the free working of what is still
the world's greatest market for securities. The part
it has to play in maintaining the Empire at this crisis
in our fortunes is hardly less vital than the part it
played in its creation.

When the position of the Stock market is regu-
larised, our loan machinery will be in good order ;
at any rate, so far as the ordinary investing classes
are concerned. But a difficult problem remains.
The people as a whole must be brought in ; the War
Loans must become national institutions. The differ-
ence in this respect between Consols and Rentes is
extraordinary. Men at the university, attending

1 Of. Prof. H. C. Emery, Speculation on the Stock and Produce Exchanges
of the United States, 1896, p. 157.



58 PAPERS ON CURRENT FINANCE

lectures on economics, have been known to ask what
Consols were. Rentes are a household word to the
humblest Frenchman. They serve as a savings bank
to the peasant, and the middle class go in and out
of Rentes instead of keeping a current account with
a banker. They can be bought and sold in the
smallest amounts at every Post Office ; in fact,
down to the sum of three francs (i.e. 100 francs, or
4, stock). It is a very old maxim in this country
that the best way to attract gold is to give every
facility for taking it away again. The French have
applied this sound rule to savings. By their con-
sideration for the small investor they have made
their Rentes the best held funds in the world. In
1908 there were 4,631,857 holders of Rentes against
255,112 holders of Consols ; and if we do not take
into account Consol certificates, the average size of
the holding of Rentes is one-nineteenth the average
size of the holding of Consols. Their funds, like
their National Bank, are thoroughly democratic ;
and they are taking care that it shall be the same
with the new War Loans. French Treasury Bills
(three months at 4 per cent., six months and twelve
months at 5 per cent.) are being issued down to 100
francs (say, 4 : our limit is 1,000 !). Bonds can be
bought in amounts as small as 5 francs and 20 francs
at every Post Office, where they are at once handed
over against cash. 1 As M. Thery well says, the

1 Econ. Eur. February 18th, 1916, p. 105.



WAYS AND MEANS 59

creation of these Bonds answers rather to political
than financial considerations ; but it is certainly
worth while. Small savings are thus enlisted in the
finance of national defence ; and the reflex effect
on economy is equally important. We have lately
taken useful steps in the same direction. Much
has been done to reach the small investor through
the Post Office, the only kind of financial machinery
he understands. The arrangement for the custody
of Bonds by the Post Office is excellent. Best of
all are the provisions recently announced making the
new Certificates and Scrip Vouchers under 5 payable
in cash on demand. It would be well if this system
were extended, so that amounts of War Loan under
100 might be dealt in at the Post Office at just
remunerative commissions. The institution of
savings banks, and still more of the Post Office
banks, gave an immense stimulus to thrift. Perhaps
a still greater advance would be made if we could
give our national funds something of the position
and popularity the Rentes enjoy in France.

Thrift, it may be hoped, is now coming into its
own again. The War has found out many weak
points in our policy, none more glaring than our
recent attitude towards thrift. It has been the
fashion, even with some of our economists, to decry
it as a sordid and mischievous vice. Politicians
have held it up to odium, and punished it by
extra taxation. Worse still, the State has described



60 PAPERS ON CURRENT FINANCE

income derived from saving as " unearned," a term
which to most men carries the meaning of undeserved.
Income derived from saving is really twice earned.
To the majority, people of small means, the effort
of saving is much harder than the original earning
of what is saved. The exercise of faculty in earning
wages, salaries, and profits is often agreeable ; and
some day, when labour is ideally organised, we may
hope it will be agreeable to all of us. But saving
will always involve self-control and self-sacrifice.
It ought not to be too hardly felt ; every facility
should be offered, and all possible concessions made,
to small savings. Like every other useful habit,
saving may be carried to excess. But in due degree
it contributes a very necessary element to character ;
and we should have less waste, and a more thorough
utilisation of wages and incomes, if saving were
more common. Nor has there ever been a time in
history when saving was more imperatively neces-
sary. Even before the War there had been a serious
rise in the rate of interest, which went far to com-
pensate the saver, in automatic fashion, for the
burdens imposed on him by the politician. But
there must be an unprecedented shortage of capital
after the War. To establish habits of economy
should now be the first concern of the statesman. 1



1 Even in the United States, to which the War has brought nothing
but prosperity, a Thrift Campaign has just been inaugurated by the
American Bankers' Association.



WAYS AND MEANS 61

It will be extremely difficult to make England
thrifty. Thrift involves intelligence no less than
self-control. Above all, it requires what is really
the highest quality of mind, I mean imagination.
Nothing is harder than to actualise the future ; to
realise that its wants will be as urgent as those felt
in the present, and for older persons, more expen-
sive to provide. It is their education, spirit, and
intellectuality which have made those two brilliant
peoples, the Scotch and the French, the most thrifty
of European nations. Perhaps this explains why
the English do not take so kindly to saving. So
it has been for centuries past. There was no better
judge of national psychology than the great Daniel
De Foe. Here is his estimate of us in 1704. " Good
husbandry is no English vertue, it may have been
brought over, & in some places where it has been
planted it has thriven well enough, but 'tis a forreign
species, it neither loves, nor is belov'd by an English-
man. . . . Tho' this be a fault, yet I observe from
it something of the natural temper & genius of the
nation ; generally speaking, they cannot save their
money. 'Tis generally said, the English get estates,
& the Dutch save them. . . . English labouring
people eat & drink, but especially the latter, three
times as much in value as any sort of forreigners of
the same dimensions in the world." * Another
brilliant observer, M. Taine, says that the Englishman

1 De Foe, Giving Alms no Charity. 1704.



62 PAPERS ON CURRENT FINANCE

provides for the future, not by his savings, but
by his expenses. There is something to be said for
this solution, for we must never encourage people
to starve themselves into inefficiency. But it does
not establish the habit of thrift, nor meet the need
of the hour.

There is, however, another equally well-marked
trait of our national character which might be turned
to account. Sentiment apart, there seems no solid
objection to utilising for the national profit the in-
veterate and irrepressible desire to " try one's luck,"
which is so often found in healthy, and therefore
optimistic, human beings. In spite of our prudery
on this point, there is no country in the world where
this desire is so strong as in Great Britain, or so
grossly exploited by rascality. Very much of what
is euphemistically called " sport " is really gambling,
and sometimes worse. As things are, the gambling
instinct cannot be suppressed, and often leads to
ruin. Why not furnish an innocent means of grati-
fying it, which will actually develop habits of thrift,
and where the result of the stake, so far as it is un-
certain, will be due to pure chance, and not to a
mixture of chance and fraud ? This seems to be
the object of the proposal to issue premium or bonus
bonds. These bonds would carry 2j or 3 per cent,
interest in any case, together with rights to a chance
of a bonus in addition. Thus the " sportsman "
would become a " rentier malgre lui" ; and, perhaps,



WAYS AND MEANS 63

in due time, the unfailing virtue of interest might
come to be held more substantial than the mere
chance of luck. Such an issue by the Government
has been declared perfectly legal. It seems the only
way to get hold of the spare cash of a large class who
squander most freely.

In any case a popular campaign will be required.
The imagination must be stirred. The people are
everywhere waiting for a lead. Except for the
invaluable example of H.M. the King, they have
not had one that makes an adequate appeal. They
see waste everywhere, and on such a huge scale that
their small private economies seem useless ; for they
cannot appreciate the magic of large numbers. If
one-tenth the energy ordinarily spent on party
struggles were devoted to the advocacy of economy,
our financial problems would be solved.

It is in the public service that waste is most
flagrant, and its example most discouraging. It
looks as if all the old checks on expenditure were in
abeyance, or at least ineffective. Army supply
officers have been heard to say that the whole popu-
lation of Belgium could be supported on the waste
of the British army in France. After allowance for
the vigour of expression which we like and expect
to find in the soldier, it is certain that not only
abroad, but at home, expenditure has been reckless.
Everyone you meet can give you a score of examples
of it from personal observation. It is startling to



64 PAPERS ON CURRENT FINANCE

hear that at a single stroke the expenditure on shells
could be cut down by 400,000 a week ! Another
source of serious loss is the imperfect utilisation by
the State of requisitioned resources, as, for instance,
in matters of transport ; and the failure to find work
for so many highly skilled men ; engineers, for example,
when others are being heavily overworked. Abun-
dant supplies of funds to huge bureaux of officials
is another cause of waste. If it be true of the English
generally that they are apt to take the amount of
their incomes as a kind of indication of what they
are justified in spending, this is still more true of
English officials, public or municipal. They seem
bound to justify their existence by some kind of
activity, sometimes merely obstructive, sometimes,
as where there are Works Departments, seriously
wasteful. Local authorities, with less excuse, have
been almost as bad as the central authorities. Local
rates have doubled in twenty years. The " unpro-
ductive " local debt has more than doubled in the
same time. The only way to check these abuses
is to cut down the supplies. Grants from national
funds to local authorities should be withdrawn
during the war. Officials will spend all they can get
without provoking a kick from the tax-paying
Issachar. But they know when it is wise to stop.
They will in general cut their coat according to their
cloth, and avoid unduly raising rates.

Example and appeal should be used for all they



WAYS AND MEANS 65

are worth ; but you cannot extemporise national
habits. It must come to pressure in the end, before
the necessary economy will be secured. Either
high prices or taxation might serve the purpose.
It would seem that in Germany they have mainly
relied on the effect of high prices, aided in certain
cases by the system of rations. The consumption
of the masses, whose wages have not risen in propor-
tion, has thus been reduced. Certain classes have
made large profits, but these are the classes who
naturally save. Moreover, their increased resources
are easily visible in bank balances, etc., and means
are found to induce the investment of these resources
in the German loans. It used to be said that medi-
aeval sovereigns used the Jews as a financial sponge.
They were allowed to absorb wealth from the people,
to be periodically squeezed into the coffers of the
prince. Germany seems to be using her wealthy
classes, and Austria-Hungary her bankers, in similar
fashion. This policy is not open to us. While a
certain number of employers have made large profits,
the bulk of the classes who normally save have been
hard hit by the war. The working classes, who are
unusually prosperous, are not as a rule savers other-
wise than by subscriptions to societies. The best way
to tap the extra earnings of both employers and
employed is by taxation.

It is generally more equitable to tax by diminish-
ing incomes than by raising prices ; but it will be



F.C.F.



66 PAPERS ON CURRENT FINANCE

difficult to tax wage incomes directly. Commodi-
ties, especially certain imports, must be taxed, and
prices will rise in consequence. But every effort
should be made to check any avoidable cause of a
rise of prices. They should not be allowed to rise
through disorganisation of transport, or artificial
finance, for example. The rise aggravates our
financial burdens, upsets all estimates, and causes
social friction. It is already excessive. Prices
have risen 46 per cent, since the war began, and
10| per cent, in the two months, December, 1915,
and January, 1916. Not more than 3 per cent, of
this rise is due to gold supplies. A large part is due
to the increase of purchasing power (either currency
or bank credits) caused by the abnormal war demands.
Much of this is inevitable, though it can be reduced
to a minimum by continuous borrowing. Sir George
Paish thinks nearly one-half of the rise is due to
rise of freights. This urgently requires correction.
It is only in so far as prices are raised by methods
that create revenue that we can regard them as a
useful instrument of finance.

To taxation, then, and heavy taxation, we find
ourselves driven at last. The raising of loans is
connected in so many ways with the nature and
amount of taxation that neither question can be
satisfactorily handled without reference to the other.
But limits of space, already strained, prevent a dis-
cussion of tax-policy here. A few brief suggestions



WAYS AND MEANS 67

only can be made. True economy, whether in
time of peace or war, rests on a rational adjust-
ment of values. Taxation can do something to
enforce this. Such expenses as are merely ostentatious
or conventional form the best possible subjects of
taxation ; there is no loss of essential utilities, and
the labour released is urgently needed for necessary
services. There is no economy within the reach of
the middle classes at all comparable with what
would be gained by the reduction of domestic service.
Heavy taxes might be imposed on all servants (the
necessary exemptions made for the sick, young
children, hotels, etc.). Indeed, all licences should
be raised, and re-transferred, for the period of the
war, to the Consolidated Fund. If these taxes
proved prohibitive, large savings would at once be
possible ; if not, they would at least raise revenue
with a minimum of hardship. Consumption of all
but the poorest may be substantially reduced.
Professors Hopkins and Wood, after a careful study,
estimate that 60 millions might be saved in food
by those earning more than 30s. (say, now, 35s.) a
week. It is certain we should be none the worse if
100 millions were saved on alcohol. The heavy
taxation of spirits is obviously indicated on all
grounds. Lifelong smokers have found that it is
possible to dispense with tobacco. The consump-
tion of cigarettes is enormous. Here an expensive
import might be checked. The expenditure on



68 PAPERS ON CURRENT FINANCE

amusements, which seems higher than ever, should
be taxed ; so, too, advertisements and photographs.
The Italians have a tax on men of military age
exempted from military service. This tax is said
to have met with general approval. Taxes on war
profits are in all countries recognised as obvious
and equitable.

Whatever special taxes are selected, certain general
aims must be kept steadily in view. Taxation has
seldom been what Adam Smith said it should be,
a mere instrument of revenue. The great Colbert
used the tax-system as a sort of davepin, or keyboard,
by the manipulation of which he could control the
direction and development of the national industry.
Afterwards it was used to foster colonies and extend
empire. In modern times it has become the fashion
to use it as a means for redressing inequalities in
the distribution of wealth. To-day the question
of revenue is certainly urgent ; but the main objec-
tives of taxation must be to check unnecessary
consumption, and especially unnecessary imports ;
and generally to enforce economy and promote thrift.
Relatively, our resources are good if we are willing
to use them to the full, and intelligently. Nothing
less will serve.