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War-Time Financial Problems - IV


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



_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

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.

It is a commonplace of political theory that the Government has a
right to take the whole of the property and the whole of the labour of
its citizens. But it would not, of course, have been possible for the
Government immediately to inaugurate a policy of setting everybody to
work on things required for the war and paying them all a maintenance
wage. This might have been done in theory, but in practice it would
have involved questions of industrial conscription, which would
probably have raised a storm of difficulty. What the Government might
have done would have been by commandeering the buying power of the
citizen to have set free the whole industrial energy of the community
for supplying the war's needs and the necessaries of life. At present
the national output, which is only another way of expressing the
national income, is produced from certain channels of production in
response to the expectation of demand from those whose possession of
claims to goods, that is to say, money, gives them the right to say
what kind of goods they will consume, and consequently the industrial
part of the population will produce.

Had the Government laid down that the whole cost of the war was to be
borne by taxation, the effect of this measure would have been that
everything which was needed for the war would have been placed at the
disposal of the Government by a reduction in spending on the part of
those who have the spending power. In other words, the only process
required would have been the readjustment of industrial output from
the production of goods needed (or thought to be needed) for ordinary
individuals to those required for war purposes. This readjustment
would have gone on gradually as the war's cost increased. There
would have been no competition between the Government and private
individuals for a limited amount of goods in a restricted market,
which has had such a disastrous effect on prices during the course of
the war; there would have been no manufacture of new currency, which
means the creation of new buying power at a time when there are less
goods to buy, which has had an equally fatal effect on prices; there
would have had to be a very drastic reform in our system of taxation,
by which the income tax, the only really equitable engine by which the
Government can get much money out of us, would have been reformed so
as to have borne less hardly upon those with families to bring up.

Mr Sidney Webb and the Fabians have advocated a system by which the
basis of assessment for income tax should be the income divided by the
number of members of a family, rather than the mere income without any
consideration for the number of people that have to be provided for
out of it. With some such scheme as this adopted there is no reason
why the Government should not have taken, for example, the whole of
all incomes above L1000 a year for each individual, due allowance
being made for obligations, such as rent, which involve long
contracts. For any single individual to want to spend more than
L1000 a year on himself or herself at such a crisis would have been
recognised, in the early days of the war, as an absurdity; any surplus
above that line might readily have been handed over to the Government,
half of it perhaps in taxation and the other half in the form of a
forced loan.

So sweeping a change would not have been necessary at first, perhaps
not at all, because the war's cost would not have grown nearly so
rapidly. All surplus income above a certain line would have been taken
for the time being, but with the promise to repay half the amount
taken, so that it should not be made a disadvantage to be rich, and no
discouragement to accumulation would have been brought about. By this
means the whole of the nation's buying power among the richer classes
would have been concentrated upon the war, with the result that the
private extravagance, which is still disgracing us in the fourth year
of the war, would not have been allowed to produce its evil effects.
With the rich thus drastically taxed, the working classes would have
been much less restive under the application of income tax to their
own wages. We should have a much more freely supplied labour market,
and since the rise in prices would not have been nearly so severe,
labour's claim to higher wages would have been much less equitable,
and labour's power to enforce the claim would have been much less

What the Government has actually done has been to do a little bit of
taxation, much more than anybody else, but still a little bit when
compared with the total cost of the war; a great deal of borrowing,
and a great deal of inflation. By this last-named method it produces
the result required, that of diverting to itself a large part of the
industrial output of the country, by the very worst possible means. It
still, by its failure to tax, leaves buying power in the hands of a
large number of people who see no reason why they should not live very
much as usual; that is to say, why they should not demand for their
own purposes a proportion of the nation's energy which they have no
real right to require at such a time of crisis. But in order to check
their demands, and to provide its own needs, the Government, by
setting the bankers to work to provide it with book credits, gives
itself an enormous amount of new buying power with which, by the
process of competition, it secures for itself what is needed for the
war. There is thus throughout the country this unwholesome process
of competition between the Government on one hand and unpatriotic
spenders on the other, who, between them, put up prices against the
Government and against all those unfortunate, defenceless people who,
being in possession of fixed salaries, or of fixed incomes, have no
remedy against rising prices and rising taxation. All that could
possibly have been spent on the war in this country was the total
income of the people, less what was required for maintaining the
people in health and efficiency. That total income Government might,
in theory, have taken. If it had done so it could and would have paid
for the whole of the war out of taxation.

All this, I shall be told, is much too theoretical and idealistic;
these things could not have been done in practice. Perhaps not, though
it is by no means certain, when we look back on the very different
temper that ruled In the country in the early months of the war. If
anything of the kind could have been done it would certainly have been
a practical proof of determination for the war which would have shown
more clearly than anything else that "no price was too high when
Honour was at stake." It would also have been an extraordinary
demonstration to the working classes of the sacrifices that property
owners were ready to make, the result of which might have been that
the fine spirit shown at the beginning of the war might have been
maintained until the end, instead of degenerating into a series of
demands for higher wages, each one of which, as conceded to one set of
workmen, only stimulates another to demand the same. But even if we
grant that it is only theoretically possible to have performed such a
feat as is outlined above, there is surely no question that much more
might have been done than has been done in the matter of paying for
the war by taxation. If we are reminded once more that our ancestors
paid nearly half the cost of the Napoleonic war out of revenue, while
we are paying about a fifth of the cost of the present war from the
same source, it is easy to see that a much greater effort might have
been made in view of the very much greater wealth of the country at
the present time. I was going to have added, in view also of its
greater economic enlightenment, but I feel that after the experience
of the present war, and its financing by currency debasement, the less
about economic enlightenment the better.

What, then, stood in the way of measures of finance which would have
obviously had results so much more desirable than those which will
face us at the end of the war? As it is, the nation, with all classes
embittered owing to suspicions of profiteering on the part of the
employers and of unpatriotic strikes on the part of the workers, will
have to face a load of debt, the service of which is already roughly
equivalent to our total pre-war revenue; while there seems every
prospect that the war may continue for many half-years yet, and every
half-year, as it is at present financed, leaves us with a load of debt
which will require the total yield of the income tax and the super-tax
before the war to meet the charge upon it. Why have we allowed our
present finance to go so wrong? In the first place, perhaps, we may
put the bad example of Germany. Then, surely, our rulers might have
known better than to have been deluded by such an example. In the
second place, it was the cowardice of the politicians, who had not the
sense in the early days of the war to see how eager the spirit of the
country was to do all that the war required of it, and consequently
were afraid to tax at a time when higher taxation would have been
submitted to most cheerfully by the country. There was also the absurd
weakness of our Finance Ministers and our leading financial officials,
which allowed our financial machinery to be so much weakened by the
demands of the War Office for enlistment that it has been said in the
House of Commons by several Chancellors of the Exchequer that it is
quite impossible to consider any form of new taxation because
the machinery could not undertake it. There has also been great
short-sightedness on the part of the business men of the country, who
have failed to give the Government a lead in this important matter.
Like the Government, they have taken short views, always hoping that
the war might soon be over, and so have left the country with a
problem that grows steadily more serious with each half-year as we
drift stupidly along the line of least resistance.

Such war finance as I have outlined--drastic and impracticable as
it seems--would have paid us. Taxation in war-time, when industry's
problem is simplified by the Government's demand for its product,
hurts much less than in peace, when industry has not only to turn out
the stuff, but also find a buyer--often a more difficult and expensive
problem. There is a general belief that by paying for war by loans we
hand the business of paying for it on to posterity. In fact, we can
no more make posterity pay us back our money than we can carry on war
with goods that posterity will produce. Whatever posterity produces it
will consume. Whatever it pays in interest and amortisation of our
war debt, it will pay to itself. We cannot get a farthing out of
posterity. All we can do, by leaving it a debt charge, is to affect
the distribution of its wealth among its members. Each loan that we
raise makes us taxpayers collectively poorer now, to the extent of the
capital value of the charge on our incomes that it involves. The less
we thus charge our productive power, and the more we pay up in taxes
as the war goes on, the readier we shall be to play a leading part in
the great time of reconstruction.

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