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War-Time Financial Problems - XVII


2. I

3. II

4. III

5. IV

6. V

7. VI

8. VII


10. IX

11. X

12. XI

13. XII

14. XIII

15. XIV

16. XV

17. XVI

18. XVII


20. XIX

21. XX



_January_, 1919

The Total War Debt--What are our Loans to the Allies worth?--Other
Uncertain Items--The Prospects of making Germany pay--The Right Way to
regard the Debt--Our Capital largely intact--A Reform of the Income
Tax--The Debt to America--The Levy on Capital and other Schemes--The
only Real Aids to Recovery.

A table published week by week by the _Economist_ shows that from
August 1, 1914, to November 9, 1918, the Government paid out L8612
millions sterling. From this we have to deduct an estimate of the
amount that the Government would have spent if there had not been a
war, so that we are at once landed in the realm of conjecture. The
last pre-war financial year saw an expenditure of L198 millions, and
it is safe to assume that this figure would have swollen by a few
millions a year if peace had continued, so that we may take at least
L860 millions from the above total as normal peace expenditure for the
4-1/2 years. This gives us L7752 millions as the gross cost of the
war, as far as the period of actual fighting is concerned. From this
figure, however, we are able to make some big deductions. There are
loans to Allies and Dominions, and some other much more readily
realisable assets than these. We do not know the actual figure of the
loans to Allies and Dominions during the war period, because they are
not included in the weekly financial statements. The amount that we
borrow abroad is set out week by week--at least, that is believed to
be the meaning of the cryptic item "Other Debt"--but the amount that
we lend to Allies and Dominions is hidden away in the Supply Services
or somewhere, and we only get occasional information about it from the
Chancellor in the course of his speeches on the Budget or on Votes of
Credit. In his last Vote of Credit speech, on November 12, 1918, Mr
Bonar Law gave the chief items of the loans to Allies, and a very
interesting list it was. The totals up to October 19, 1918, were L1465
millions to Allies and L218-1/2 millions to Dominions. The Allies
were indebted to us as follows:--Russia, L568 millions; France, L425
millions; Italy, L345 millions; smaller States, L127 millions.[1]

[Footnote 1: Parliamentary Debates, Vol. 110, No. 114, p. 2560.]

Some of these debts may be written off at once, and that cheerfully,
seeing that they have been lent brothers-in-arms who have been
hit much harder than we have by the war, and had nothing like our
financial strength. The question is, what figure ought we to put on
this asset in deducting it from gross war expenditure in order to
arrive at a guess at the real cost? We take our loans to Dominions, of
course, as good to the last penny. Mr Bonar Law, in his Budget speech
last April, took our loans to Allies at half their face value. Strict
bookkeeping would probably demand a lower figure than 50 per cent.;
but let us follow the ex-Chancellor's example and take loans to
Allies, which we will estimate at L1480 millions up to November 9th,
as good for L740 millions, and loans to Dominions at L220 millions up
to the same date, a total of L960 millions, to be deducted from gross
war cost. Concerning L740 millions of this sum, however, there is a
certain amount of doubt. No one questions for a moment the solvency
of France and Italy, but in view of the pressure that the war has
exercised on their producing power, and, in the case of France, the
complication added by the uncertainties of the position in Russia, in
which French investors are so deeply interested, one cannot feel sure
that they will be able at once to make interest payments. Much will
depend on the sums that they are able to recover from Germany against
their bill of damages, on which more anon. But in any case it seems
likely that a general scheme of interest funding, as between the
Allies, may have to be adopted for some years to come.

As to the other assets that we have to set against our gross
expenditure during the fighting period, they were enumerated by the
Chancellor in his Budget speech last April in the following terms;--

Balances in agents' hands, debts
due, foodstuffs, etc L375 millions.
Land, securities, buildings and ships 97 "
Stores in Munitions Department
(cost price 325 millions) taken at 100 "
Additions this financial year 100 "
Arrears of taxation 500 "
Total[1] L1172

[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, pp. 698-699.]

It will be remembered that in his Budget speech the Chancellor was
proceeding on the assumption that the war would last till March 31st
next--the date at which our financial year ends--and would then be
convenient enough to stop. Happily for us, the valour of our soldiers
and those of our Allies, the splendid success of our Fleet and our
merchantmen In bringing over American troops and their food and
equipment with astonishing speed, and the straightforward diplomacy
of President Wilson, combined to achieve victory nearly five months
earlier than the most sanguine had dared to expect. With the very
pleasant result--though it is a small matter when compared with the
end of the killing of the best of our manhood--that the financial
position is very greatly improved. With regard to the figures given
above, it should be observed that the "debts" are advances to
Dominions, but on quite a different basis from our loans to them,
being money owed by them against goods and services supplied.[1] They
and the balances in the hands of agents are both as good as gold.
Concerning the others, one is entitled at first sight to feel a good
deal of scepticism, since such articles as land, buildings, ships and
stores, bought or built by Government during a war, are likely to find
an extremely sluggish demand when the war is over. However, Mr Bonar
Law assured the House that his valuation of these amounts had been
arrived at on a conservative basis, and, what is better still, in his
Vote of Credit speech on November 12th, he was able to state that
revised estimates had shown that their value would be "far greater"
than he had previously expected. So perhaps we are entitled to take
them at L1300 millions.

[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, p. 698.]

If so, we get the following results for the cost of the fighting

Total Government expenditure,
August 1, 1914, to November
9, 1918 L8612 millions.
Less estimate of normal peace expenditure 860 "
7752 "
Less Loans to Dominions 220 millions.
Less Loans to Allies
(half face value) 740 "
Realisable assets 1300 "
2260 "
Net cost of period L5492 "

If war cost would be good enough to cease with the fighting we should
thus now be able to see, more or less, how we stand. During the
fighting period the Government raised by taxation the sum of L2120
millions,[1] from which we have again to deduct L860 millions as an
estimate for normal peace taxation, if the war had not happened,
leaving L1350 millions as the net war taxation, and L4142 millions as
the net addition to debt from the war.

[Footnote 1: _Economist_, Nov. 16, 1918.]

But, of course, there are still some large and uncertain sums to come
in to both sides of the account. There is the cost of maintaining our
Army and Navy during the armistice period, the cost of demobilisation,
and the cost of putting an end to war munitions contracts running for
many months ahead, holders of which will have to be compensated. Who
has enough assurance to venture on an estimate of the cost of these
items? Shall we guess them at something between L1000 and L1500
millions? And when we have made this guess are we at the end of the
war's cost? Ought we not to include pensions to be paid, and if so, at
what figure? Fifty millions a year for thirty years? If so, there is
another L1500 millions. And interest on war debt, and for how long?

On the other side of the balance-sheet, the only asset that has not
yet been included in the calculation is the sum that we are going to
receive from Germany, Some cheery optimists think that it is possible
for us and for the Allies to make Germany pay the whole of our war
cost. If so, we have halcyon days ahead, for not only shall we be able
to repay the whole war debt but also to pay back to the taxpayer all
the L1350 millions that he produced during the war, unless, as seems
more likely, the Government finds other uses, or abuses, for the
money, and sets its motley horde of wasters to work again. But this
problem, of course, is not going to arise. It would not be physically
possible for Germany to pay the whole of the Allies' war cost, except
in the course of many generations, and, moreover, the Allies have
bound themselves not to make any such demand by the rider that they
added to President Wilson's peace terms, in giving their assent to
them as the basis on which they were prepared to make peace. Early
in November they stated that President Wilson's reference to
"restoration" of invaded countries should, in their view, be expanded
into a claim for compensation "for all damage done to the civilian
population of the Allies and to their property by the aggression of
Germany by land, by sea, and from the air."[1] This is letting Germany
off lightly; but, after stating their readiness to make peace on the
basis of the fourteen points, if amended as above (and also with
regard to the Freedom of the Seas question) it is not possible for
the European Allies, as the Prime Minister's late manifesto says they
propose to do[2] to expand this claim for civilian damage into a
demand for the whole of their war cost up to the limit of the capacity
of the Central Powers to pay, without a serious breach of faith. So
that the question of how much we can get out of Germany is complicated
by the further uncertainty of the size of the bill for damages that we
can present. It will be big enough. We know that the Germans have sunk
8-1/2 million tons of British ships during the war. As to the price
at which, for "restoration" purposes, we shall value those ships and
their cargoes, and all the civilian property damaged by aircraft and
bombardment, this is a matter which it would be obviously improper
to discuss; but we may be sure that the bill will mount up to many
hundreds of millions, and it remains to be seen whether, after Belgium
and France have presented their account, it will be possible for us to
secure payment even for all the civilian damage that we have suffered.

[Footnote 1: _Times_, November 7, 1918.]

[Footnote 2: _Times_, December 6, 1918.]

It thus appears that the net cost of the fighting period has been
somewhere in the neighbourhood of L5500 millions, taking our loans
to Allies at half their face value; and that the armistice and
demobilisation period is likely to cost another L1000 to L1500
millions more, to say nothing of pensions and debt charge that will go
on for years (unless the supporters of Levy on Capital have their way
and wipe the debt out), and that against this further expenditure we
can set whatever sum is recovered from Germany.

Seeing that our total pre-war debt was L710-1/2 millions, or, omitting
what the Government returns call the Other Capital Liabilities,
L653-1/2 millions, these figures of war debt and war cost are at first
sight somewhat appalling. But there is no reason why they should
terrify us, and there are several reasons why they are, when looked at
with a discriminating eye, much less frightening than when we first
set them out.

In the first place, we have always to remember that these figures are
in after-war pounds, and that the after-war pound is, thanks to the
profligate use by our war Governments of the printing-press and the
banking machine, just about half the size, when measured in actual
buying power, of the pre-war pound. Any one who pays L100 in taxes
to-day thereby surrenders claims to about the same amount of goods and
service as he did if he paid L50 in taxes before the war. So that in
making any comparison between the position now and the position then
we have to divide the figures of to-day by two.

In the second, we need not be misled by the Jeremiahs who tell us that
now that we have won the war we have before us the task of paying for
it. This is not true, or true only to a small extent--to the extent,
that is to say, to which we shall, when all these assets and
liabilities have been settled up and balanced, be afflicted with a
foreign debt. Let us leave this question on one side for the time
being, and consider what the position really is with regard to that
part of the war's cost that has been raised at home. In so far as that
has been done, the war cost has been raised by us while the war went
on. In fact, all the war cost has to be raised by somebody while
the war goes on, because the war is fought with stuff and services
produced at the time and paid for at the time. But when Americans lend
us money to pay for some of the stuff that they send us, they pay at
the time and we, or our posterity, have to pay them back later on;
this is the only way in which we can make posterity pay for the war,
and then it only means that our posterity pays America's. It is not
possible to carry on war with wealth that is going to be produced some
day. The effort of self-sacrifice that war demands has to be made by
somebody during its progress--otherwise the war could not be fought.

That effort of self-sacrifice we have already made in so far as we
have paid for our war cost out of money raised at home. That money has
been raised in three ways--by taxation, by borrowing saved money, and
by inflation. When it is raised by taxation the sacrifice is obvious,
and, in nearly all cases, inevitable: we pay our larger war taxes and
so we have less to spend on ourselves, and so we go without things. A
few people raise money to pay taxes during war by borrowing or drafts
on capital, but they are probably so exceptional that their case need
not be considered. We transfer our buying power to the Government to
be used for the fighters, and so we set free the labour and material
that used to go in providing us with comforts and pleasures; our
competition for goods is reduced, and so the Government is able to get
what it needs out of the nation's production, which is _pro tanto_
relieved of our demand. The same thing happens when the Government
gets money for the war by borrowing money that we save. We reduce
expenditure, and transfer buying power to the State and diminish our
demand on the nation's production, or that of its foreign supplies. If
the whole war cost had been met by these two methods there need have
been little or no increase in prices here, and the cost of the war
would have been about half what it has been. Of the two methods,
taxation is obviously the cleaner, simpler and more honest. By
borrowing, the State hires those who have a margin to put part of it
at the disposal of the State at a time of national crisis, instead of
taking it from them outright. As most of the taxation involved by
the subsequent debt charge falls on those who have a margin (as it
obviously should) the result is that the people who subscribed to the
loans are afterwards taxed to pay themselves interest and to repay
themselves their debt.

This subsequent taxation falls on them all alike in proportion to
their ability to pay, or would if the income tax was more equitably
imposed; those who have subscribed their fair share to the loans have
an offset, in the interest that they receive, against the taxation;
those who subscribed less are properly penalised, those who subscribed
more are properly benefited. If only the income tax did not make the
position of fathers of families so unjust, the whole arrangement would
look, at first sight, quite fair, though rather absurd and clumsy,
involving all this subscribing and taxing and paying back instead of
an outright tax and having done with it. But in fact a very grave
inequity is involved by this business of borrowing for war, and laid
upon just the people whom we ought, above all, to treat most fairly,
namely, those who fight for us. The soldiers and sailors risk their
lives for a pittance during the war, while their brothers and sisters
and cousins and uncles and aunts, left at home in security and
comfort, earn bloated profits and wages, and put them, or part of
them, into War Loans; then when the fighters come back, very likely
with their business and connection ruined or lost, they are expected
to contribute to the taxation that goes into the pockets of

Inflation, the third method of paying for war, again produces the same
effect of a reduction of consumption by the civilian population, but
in a roundabout manner, which works at first without being noticed,
and so is particularly dear to the adroit politician. By it nobody
transfers buying power to the Government, but the Government and
the bankers, who are generally most reluctant accessories to the
transaction, between them create new buying power, which, coming into
a restricted market for goods in addition to all the existing buying
power, simply forces everybody to consume less because the money in
their pockets fetches less goods owing to the rise in prices.

The evil attached to this system is obvious enough. It amounts to a
tax on the general consumer in proportion to his consumption, and so
it lays the sacrifice on the shoulders of those least able to bear it.
No Government would have the courage to impose such a tax openly and
frankly. All the warring Governments in varying degrees have used this
roundabout device of imposing it, very likely being quite unaware
of the fraud on the consumer that they were perpetrating. Our own
Government, in fact, having first added by this process to a rise in
the price of bread, then reduced it by a special subsidy--a pleasant
touch of Alice in Wonderland finance. This mode of taxing by raising
prices hits, of course, all those who live on fixed incomes and
salaries and wages. Those who can strike, or take more out of the
consumer, can evade it, and so it falls on the weakest shoulders and
incidentally produces friction, discontent and dangerous suspicion.
But even it works at the time when it happens. Each creation of new
buying power gives the Government, for the moment, control of so much
in goods and services at the expense of the consumer; but when once
the new buying power has been distributed by the State's payments it
is in the hands of the nation as a whole. If the process ceased, the
nation would still have control of the whole of its output, which is
its income, though the injustice involved, to those who are not strong
enough to resist the effects of higher prices, would continue.

Thus, whatever means--straightforward or devious--are used for
financing war, it is paid for while it goes on by the warring country
if the financing is done at home, or by its foreign creditors if the
financing is done abroad. And it is, necessarily, almost entirely paid
for out of income, that is, out of current production. It is curious
to find that many people still seem to think that the whole cost of
the war has come out of capital. Luckily for us it could not be done,
or only to a very small extent. Our capital mostly consisted of
railways, factories, ships, roads, agricultural land, machinery,
houses and other things that could not be taken and shot out of a gun.
These things we have still got, and though many of them are not in
such good shape as they were, some of them are much better equipped
and organised. We have drawn on our stocks of materials and goods--how
far it is impossible to say; we have lost 8-1/2 million tons of
shipping by war losses; in the meantime we have built, bought and
captured 5-1/2 millions of new tonnage, and we have a claim against
the Germans for such tonnage. On capital account we have suffered by
wear and tear in so far as our upkeep has been neglected owing to lack
of labour during the war, and by depletion of materials and stocks,
and also, of course, by the fact that if the war had not happened,
we should, if pre-war calculations were correct, have put some L1700
millions into new investments at home and abroad during the 4-1/4
years of fighting and some more hundreds of millions during the
after-war period of Government borrowing and restriction on private
investment. But a very large part of the money that went into victory
would otherwise have gone not to capital account but into the pleasant
frivolities, embellishments and vulgarities that made life an amusing
absurdity in days before the war.

If, then, the war sacrifice was made during the war, in so far as its
cost was raised at home, how far is it true that we are now faced with
the business of paying for it? If taxation were equitable it would
only be to the extent that those who ought to have made the sacrifice
and did not, will in future have to pay interest to those who did, or
their representatives. So that the first thing we have to do is to
make taxation equitable, that is, lay it on the taxpayer in proportion
to his ability to pay. There will still remain the injustice to those
who have fought for us, which might be cured, or amended, by special
exemptions. With taxation on a really sound basis no further sacrifice
would be involved by the debt charge, and no diminution of the
nation's wealth or consuming power, which will depend, as always, on
its output of goods and services; but only a transfer of consuming
power from taxpayers to debt-holders in accordance with the sacrifice
made by the latter during the war. What we produce as a nation we
shall consume as a nation, subject to the extent that we financed the
war during its course by operations abroad.

These operations were twofold. We sold to foreigners part of our
holdings of foreign securities, thereby and to this extent paying for
war cost out of capital--out of the investments made by ourselves
and our forbears in America and elsewhere. Mr Bonar Law, in a recent
interview in the _Observer_, stated that we had sent back to the
United States practically the whole of our holdings of American
securities to be sold or pledged as collateral for loans, and that the
value of them was three billion dollars--L600 millions sterling. Any
of them that have only been pledged can presumably be used to meet the
loans raised as they fall due, and so will lighten our burden in the
matter of repayment. These loans raised abroad are the second mode of
foreign financing. By it we had raised up to November 9th nearly L1300
millions, as shown by the _Economist's_ table, and to that extent we
have pledged our future production and that of our posterity, to meet
the annual service for interest and repayment. On the other hand, all
this sum and more we have (as shown above) lent to our Allies and
Dominions, so that the ex-Chancellor was well justified in his boast
that we had only borrowed to finance our Allies, and that we had been
self-sufficient for our own war cost.[1]

[Footnote 1: Budget Speech, Parliamentary Debates, vol. 105, No. 33.]

In other words, all that we needed for the war we were able to produce
ourselves, or to obtain in exchange for our produce and assets. On
paper, therefore, our position as a creditor country is only impaired
by our sales of securities. But that is only so on paper. In fact, the
loans that we have raised abroad are good debts that have to be met to
the last penny, and are a first charge on our future output, but the
advances that we have made to our Allies, much harder hit than we are
by the war, are assets on which we cannot depend. They were taken in
our balance-sheet above at half their face value, but there is much to
be said for writing them off altogether and tearing up the I.O.U.'s
of our foreign brothers-in-arms. Their need is greater than ours, it
would be little satisfaction to receive interest and repayment from
them, and the payment due from them, involving difficult problems of
taxation for them, would not help the good relations with them which,
we hope, may be a lasting effect of the war. And such an act of
renunciation on our part would do something towards a restoration
of the spirit with which we entered on war, a spirit which has been
seriously demoralised during its course, largely owing to the results
of our faulty finance, which encouraged profiteering in all classes.

In any case, there is our position. We have a big debt to meet at
home and abroad, and we are weakened on capital account by foreign
indebtedness, wear and tear of plant and dimunition of stocks and
materials. Wear and tear and depletion we can soon make good if we set
to work and work hard, if our bureaucracy takes away the fetters of
its restrictions and controls (instead of making further additions
to the "Black List" even after the armistice!), and if our ruling
wiseacres will refrain from trying to stimulate industry by taxing raw
and half-raw materials. For the debt charge many pleasant and
simple fancy strokes are suggested. The Levy on Capital is popular,
especially with those who do not own any, but its advocacy is by no
means confined to them. Mr Pethick Lawrence has published a persuasive
little book about it, but I cannot see that he meets the objections
to it. These are, the difficulty of valuation, the fact that in many
cases it would have to be paid by instalments, and so would be merely
another form of income tax, its sparing of the waster and penalising
of the saver, and, consequently, the grave danger that it would check
accumulation and so dry up the springs of capital. Mr Stilwell
has produced a "Great Plan to Pay for the War," by which all the
belligerents and neutrals who have been involved in expense by the war
would receive World Bonds from an International Congress for what
they have spent owing to the war, and would then pay one another any
international debts by exchanging these World Bonds, and deal with the
home debt by paying it off in new currency raised on the World Bonds.
But, surely, to pay off war debt with a huge addition to currency,
making war's inflation many times worse, would be a disastrous
beginning to that new era which is alleged to be dawning.

By hard work, sparing consumption of luxuries, and a big industrial
output, we can soon make the debt charge look smaller and smaller as
compared with our aggregate income. Our foreign debt we can only meet
by shipping goods and rendering services. But since it was all raised
to be lent to our Allies and our lending of it was essential to a
victory which has rid mankind of a terrible menace, it is surely
reasonable that our creditors should not press for repayment in the
first few difficult years, but should fund our short-dated debts into
loans with twenty-five or thirty years to run. As to the home debt,
we can only lighten its burden on the taxpayer by making taxation
equitable. To this end reform of the income tax is an urgent need. We
have to lighten its pressure much more effectively on those who are
bringing up families, and by collecting it through employers make it
an effective and just tax on those of the working class whose earnings
and family liabilities make them fairly subject to it.

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