The total amount of these cer-
tificates of indebtedness exceeded the returns from the
loans. The sale of war savings certificates and thrift
stamps was inaugurated to appeal to the class of savers
who could not purchase bonds, and incidentally to secure
some additional revenue from those who had made bond
purchases. The post office was used extensively as the
agent for these sales.

Success of Loan Policy. This brief outline of our loan
policy cannot but bring into contrast the effectiveness of
the methods employed as compared with those used in
attempting to secure loans at the time of the Civil War.
The possibility of employing private agencies was seized
eagerly, and every possible means was used to create a
desire for the securities. Recognition was made of the
fact that, in order for the public to buy, they must either
be supplied with what they want, or be made to want
what is supplied. Not only were the bonds made attrac-
tive, but every effort was made to create desire for them.
Even the titles Liberty Loan to each of the first four
issues, and Victory Loan to the fifth indicate that a
psychological appeal was intended.

Fiscal Problems Did Not End with the War. If
the fiscal problems and difficulties caused by a war would
end with the war, the task of the fiscal official would be
materially lessened. The problems, however, do not
cease, but, on the other hand, the return of peace fre-
quently makes the solution of the problems more diffi-
cult. The cessation of hostilities does not immediately
disband armies or pay interest on a huge public debt, so
that war expenditures really last much longer than the
war. The end of the war, however, produces a change in
the nature of the taxpayer. Taxes that were willingly
paid while the war was in progress are now evaded or
grudgingly paid. The low prices of the readjustment
period make taxpaying all the more burdensome and dis-
tasteful. Some important sources of revenue, such as
excess profits or war profits, begin to melt away. Legisla-
tors are confronted with the problem, then, of readjusting
the revenue system so that a sufficient amount of funds
will be received with as little injustice and objection as
possible.

Many Changes Suggested. There has been no dearth
of remedies suggested to Congress as a cure for the pres-
ent ailments in the fiscal system. Some have suggested
that a tax on the undistributed earnings of corporations,
and a flat tax on corporation profits or incomes, be sub-
stituted for the now dwindling and highly unsatisfactory
excess profits tax. Another suggestion has been to re-
model the tariff on a purely revenue basis. Some have
advocated a tax on gasoline as well as one of varying
amounts on the owners of passenger automobiles. An in-
creased taxation of land values, especially upon those of
unimproved land, has had its share of advocates. Opin-
ion has generally been favorable to the removal of the
excess profits tax and the higher surtaxes on personal
incomes.

Secretary of the Treasury Mellon made some recom-
mendations to Congress for remedying the situation. He



FINANCING AN EMERGENCY 473

would repeal the excess profits tax and make good the
loss of revenue by means of some other tax on corporation
profits or by an addition to the income tax on corpora-
tions. He would readjust the income tax rates so that
for 1921 the maximum combined normal and surtaxes
would be 40 per cent, and 33 per cent thereafter. He
asked for the retention ofcmany of the sales taxes, such as
those on transportation*; admissions, and such goo3s as
tobacdo, but asked for the elimination of those thgt had
proved a nuisance, such as taxes upon sales at soda foun-
tains.

Advantages of Sales Tax. One of the most strongly
advocated and widely discussed changes has been for the
adoption of a general sales or turnover tax. This might
take a number of forms, but the plan that has been most
widely advocated has been a 1 per cent tax upon all
sales of whatever nature. The Tax League of America
has set forth the following arguments in favor of the sales
tax: (1) It will undoubtedly produce all the revenue
needed. (2) Under it the flow of revenue will be prompt,
constant, and dependable. (pj^It willjbgjpaid by the
whole body of thepeojple, but m infinitely small amounts,
by each individual. (4) It is^jmple i^ operation and will
be promptly, completely, and economically collected,
without burdening anybody. (5) When supplemented by
^moderate income tax it will rest equitably upon all.
(6) It will abolish the present harmful method of class
taxation, and business will promptly get back on its feet
and prosperity return. (7) It will reduce the high cost of
living without reducing the profits of the producer.

iSany advocates of the tax refer to its successful use in
other countries, such as the Philippines, Canada, and
France. The dissimilarities in the tax used, or in the busi-
ness conducted, however, make the argument from ana-
logy of little weight.

Objections to Sales Tax. The favor with which the
proposition of a sales tax was at first received decreased



474 OUTLINES OF PUBLIC FINANCE

materially as it became more generally studied and dis-
cussed. The important objections that have been brought
out have been summed up as follows: (JTJ) The general
sales tax is essentially unjust in that it is a tax levied ac-
cording to needs rather than according to ability to pay.
(2) The general sales tax is grossly discriminatory. In
so far as "the tax cannot be shifted, it is distributed accord-
ing to gross income, which furnishes no measure of tax-
paying ability. The tax treats as being alike transactions
which are fundamentally unlike; it subjects to very un-
equal risks taxpayers in substantially similar positions;
it affords an indefensible bounty to the large, integrated
industry, as compared with smaller industrial units. (3)
The tax rests upon an artificial basis in that it turns upon
the mere form of business transactions, and would lead
to undesirable changes in business practice. 1

Shifting and Incidence. One of the most common and
weighty objections to the sales tax as well as to most
forms of corporation taxes is that the burden will be
shifted to the consumer. Consequently, the mass of the
population with small and moderate incomes will be bear-
ing the bulk of the tax burden. This appears particularly
objectionable in the sales tax, since it is thought all the
taxes on sales from the production of the raw materials
to the final disposal of the finished product will be pyra-
mided and rest on the consumer. The American Federa-
tion of Labor and numerous other organizations are, con-
sequently, opposed to the introduction of the sales tax.
^Protests have also been registered by a number of manu-
facturers' and merchants' associations, which would indi-
'cate that they are not so sure about the possibilities of
shifting the burden.

The same underlying principles of shifting and incidence
that were discussed in Chapter VIII apply to sales taxes
and the various taxes on corporations. The laws of price

1 Arthur A, Ballantine, The Annals of (he American Academy of Political
and Social 8cience t vol xov, p. 214,



FINANCING AN EMERGENCY 475

are the determining factors. No one will want a good to
any greater extent because it is taxed, and consequently
will be willing to pay no more for it* In case the demand
for the good be very inelastic, then it will be possible to
shift practically the entire burden and dispose of the same
number of goods. A review of the principles upon whicrA
the shifting of taxes is based will indicate that it is impos- |
sible to categorically state whether or not sales taxes and ]
corporation taxes will be shifted.

236. England Financed the War Through a Combina-
tion of Loans and Taxes. The war came upon England
as a bolt from the clear sky, and she consequently had no
time to put her fiscal house in order to meet the unwel-
come guest. The first problem which presented itself,
and which demanded quick action, was the protection of
the domestic financial institutions and of the country's
gold supply. This the government attempted to do by
setting aside the note issue requirements of the Peel Act,
issuing a paper currency which was loaned to the banks,
raising the rate of discount at the Bank of England, and
closing the Stock Exchange. When these objects were ac-
complished, attention was turned to securing needed
funds. The first measures, however, indicate a striking
feature of the war policy in that, throughout the war, a
rapid increase in the amount of paper currency was in
evidence.

Loan Policy. The first use of the loan policy was in
the issue of short-term treasury obligations which were
readily discounted at the banks. The paralyzed condition
of industry had increased the funds in the banks to such
an extent that the chance to use them in this way was
welcome. The rapidly growing needs, however, could not
be long sustained by the treasury certificates, and long-
term bonds were issued early. Several other issues of
bonds were made, with varying rates of interest and tax
exemptions. An extensive use of the treasury certificates
was made, however, throughout the war. Borrowing



476 OUTLINES OF PUBLIC FINANCE

abroad was also carried on to some extent. As in the
United States, small savings were secured through war
savings certificates a feature which was urged, however,
more extensively than in this country.

The English plan of borrowing incorporated some pecul-
iar features which are of interest. The short-term obliga-
tions were not offered entirely to the banks, but were
open to purchase by the public after the first few months
of hostilities. The sale was generally at a rate favorable
to the government. During the latter part of the war a
continuous short-term obligation and bond sale was in-
augurated. The advantage claimed for this was that it
did away with the expense and excitement of particular
drives. Special subscription days and weeks were fre-
quently inaugurated, however, and enthusiastic individ-
uals would sometimes offer prizes to those who would
draw securities with a certain number. The revenue from
this continuous sale generally proved to be satisfactory in
amount. England, of course, was interested in securing
credit in this country to enable her to purchase goods.
One method by which she accomplished this was to buy
up American securities from her subjects with the pay-
ment of short-term obligations, and in turn using these as
collateral to obtain credit here.

Tax Policy. The fiscal officials were severely criticized
in many quarters for not making a heavier use of taxes.
Precedent had been set of meeting nearly half of such
extraordinary needs from taxes, and many considered
that the precedent should not be broken. As the war
progressed, taxes tended to form a larger part of the bud-
get. The budget had been passed shortly before the out-
break of the war, and was not remodeled. Substantial
increases in revenue over the previous budget were pro-
vided, however, for the purpose of carrying out an exten-
sive social program. The increases in the next budget
were slight, consisting in small increases in the taxes on
incomes, tea, and beer.



FINANCING AN EMERGENCY 477

The appalling increase in expenditures, and the increas-
ing strain upon the credit machinery, caused the recogni-
tion of the need for heavier taxes. The normal income
tax was raised to over 17 per cent, and the exemption was
lowered to about $650. The rates of the supertax were
also raised. In addition, a war profits tax was inaugu-
rated. This took 50 per cent of the profits which arose
from war activities. It differed from the excess profits
tax of the United States in that it did not attempt to
reach abnormal profits except as they arose from the war.
In order that those with incomes of less than the exemp-
tion amount might help share the burden, the tax upon
generally consumed goods was raised 50 per cent. The
budget of the following year placed a progressive rate upon
incomes which reached 25 per cent for those over $12,500,
while the war profits tax was iner eased to 60 per cent.
The rates on consumable goods were raised and more
commodities were added to the taxable list. Somewhat
later the war profits tax was increased to 80 per cent,
while the last budget that properly can be called a war
budget increased income taxes slightly and introduced
taxes upon luxuries.

237. The Revenue of France Was Secured Largely by
Borrowing. The opening of the war found France in a
very different economic condition than that which pre-
vailed in England. The finances were none too sound,
and the current revenue was not meeting current expendi-
tures, while a bond issue had been provided to make up
the deficiency. Payment on this bond issue was to be
made in installments, two of which had been made at the
outbreak of the war. The general derangement after this
event put the treasury in a condition of distress; first,
because individuals could not secure funds to meet the
remaining installments on their loan subscription, and,
second, because the occupation of one of the richest sec-
tions of France wiped out the accustomed revenue from
this territory. The problem of France at first was much



478 OUTLINES OF PUBLIC FINANCE

the same as that of England to stabilize the domestic
credit system. This she attempted to do through regulat-
ing the withdrawal of bank deposits, closing and super-
vising the Stock Exchange, and declaring a moratorium.

Bank Aid and Loans. Those who are acquainted with
the nature of the bank of France would expect the govern-
ment to rely upon it extensively for aid, which proved to
be the situation throughout the war. This aid was given
through the large loans to the government, and through
the large increase in the number of bank notes. The en-
larged mass of this cheap currency began to endanger the
gold supply, and specie payments were stopped. So much
of the specie had been hoarded that a scarcity of money
for small transactions was felt and paper notes of small
denominations were struck. The needs of the government
soon outgrew any aid the banks could give, and treasury
bills were issued and sold both at home and abroad. Their
insufficiency was soon manifest, and resort was made to
long-term loans. Because of the weakened credit condi-
tions, the terms upon which they could be sold were un-
favorable to the government. Citizens loaned their Amer-
ican securities to the government, and these were used as
collateral in securing credit from America. The entrance
of the United States into the war, and the subsequent ex-
tension of credit, improved the situation.

Tax Measures. Nothing was done for more than a
year after the outbreak of hostilities to increase the rev-
enue from taxes, but the authorities were finally driven
to adopt more stringent tax measures. The income tax,
adopted two years before, became operative in 1916. The
rate was 2 per cent, but the exemptions were so arranged
as to make it progressive. The war profits tax was also
inaugurated in 1916 after much opposition, and imposed a
50 per cent tax on such returns. At the same time various
other new taxes were levied, while some of the old rates
were increased. In 1917 still other new taxes were imposed
on business profits, and on the turnover in retail establish-



FINANCING AN EMERGENCY 479

ments. Other rulings were that taxes should be placed
upon agricultural profits, salaries, and similar returns.
Had this policy been adopted earlier, the credit of the
nation would doubtless have remained more firm.

Other Allied Countries. The fiscal policy of the other
Entente allies was just as indefinite, but space does not
permit a review of the systems used. Suffice it to point
out that Canada, after appealing to banks for aid, started
a vigorous system of taxes which, of course, did not prove
adequate, and loans were resorted to at various tunes.
In Australia public works were being built with borrowed
funds, yet her war loans were successful, as was also the
income tax. In Russia taxes were used only sparingly,
but most reliance was put upon loans and the issue of
paper. In Italy, first resort was taken to aid from banks,
followed by the use of both new and old taxes to secure
revenue. A liberal amount of borrowing was also done.

238. The Central Powers Used Loans Most Extensively.
Germany, unlike the allied nations, entered the war
with closely laid fiscal plans, which had been formulated
and developed through long years of preparation. The
method for securing funds was based upon the military
plan of a short and victorious war, with large indemnities
hi settlement. The reliance upon an extensive system of
credit instruments was the result, the expectation being
to redeem these with the funds secured from the indemni-
ties. The defeat of the military program was consequently
reflected in the breakdown of the fiscal program.

Preparatory Measures. The credit machinery which
was in existence at the declaration of the war, or which
was immediately put into existence, showed that careful
preparation had been made for such a crisis. A few months
before the break, the amount of gold in the war chest had
been increased from $21,000,000 to more than $50,000,000.
Systematic attempts had been made for some years to
increase the gold reserve of the country as a basis for the
issue of notes when the need came. The central banking



480 OUTLINES OF PUBLIC FINANCE

institution had been given more extensive control over the
banking machinery of the country in order that the gov-
ernment might be better able to control the gold fund.
Some preparatory attempts were even made to prevent
the disturbance in the money market which usually ac-
companies the opening of hostilities.

The outbreak of the war called into clear relief the
preparations which had been made, and their efficacy in
meeting the demands. In spite of the anticipations of
the government, panic seized many, and they began to
demand gold from the banks. This led the central bank
to suspend specie payments. The preparation for creating
circulating instruments, however, was more successful.
The war chest fund was transferred to the bank as a basis
for note issue, and a large amount of bank notes continued
to be issued, which were made legal tender, but which
would not be redeemed in specie. Along with these suc-
cessive issues of bank notes, treasury notes were put out
by the government which were also made legal tender,
and denied specie payment. As might be expected, the
notes depreciated and prices became inflated. When
merchants refused to accept the notes at face value, the
regulation was adopted making it illegal to discount cur-
rency, whereupon prices went still higher.

Loan Policy. A vital part of the previous preparation
was to liquify the wealth of the country so as to make
it available for the government. As a part of the machin-
ery for accomplishing this, vario usbanks were established
throughout the country for the purpose of extending
credit upon collateral. Stocks, bonds, merchandise, and
nearly anything would be accepted as the basis for credit
expansion. A number of regular war loans were floated,
and these banks were used extensively to issue credit as
a basis for the purchase of loans. Even the loans to be
purchased were sometimes taken as collateral upon the
loan made. As the war progressed, however, the credit
machinery became more strained and the weakness of the



FINANCING AN EMERGENCY 481

loan policy became unsuccessful to an embarrassing de-
gree.

Use of Taxes. As indicated above, taxes were not used
in the earlier years of the war because it was considered
they were not needed. It was thought that the good will
of the citizens would be increased if this extra burden were
not placed upon them. The failure of the military ma-
chine to accomplish its purpose as scheduled, and the
consequent weakening of the accepted fiscal policy, led the
Finance Minister, in desperation, to turn to taxes as a
supplementary source of revenue during the latter part
of the struggle. At first they were so slight as to meet
scarcely the interest charge, but near the end of the war
they were increased so as to secure a noticeable return.
It should be noted that the imperial government was
somewhat handicapped, since it could make no use of
direct taxes. The first war taxes were increased tele-
phone, telegraph, and postal rates, as well as new taxes
or increased rates upon war receipts, tobacco, bills of
lading, and a few other articles. Later these rates were
raised, and duties were levied upon railway tickets and
coal. When the war was nearly over a much more ex-
tensive use of taxes was attempted, and business transac-
tions, beverages, and many luxuries were subject to taxa-
tion. The revenue from these sources, while not great in
proportion to the need, aided somewhat hi establishing a
firmer fiscal system.

System in Austria and Hungary. The fiscal systems
used in Austria and Hungary followed closely that de-
scribed for Germany, yet more importance was attached
to taxes than was found in Germany. The impaired state
of the finances at the opening of hostilities made it more
difficult to carry out a sound policy for meeting the war
needs. Bank credits and national loans were relied upon
extensively, which resulted in a marked depreciation of
the currency. This, it seemed, the taxes could not pre-
vent. The direct tax on incomes was the principal source



482 OUTLINES OF PUBLIC FINANCE

of revenue, although taxes were placed upon other bases.
The rate on incomes was extremely high, as were those on
directors' fees, land revenues, etc. The tardy introduc-
tion of extensive taxes, however, could not overcome the
bad fiscal situation which had been caused by the borrow-
ing policy.

239. The Methods Used by the Different Countries
Present Interesting Comparisons. The fiscal systems of
no two countries were exactly alike, yet no purpose would
be served in outlining that used in any except the more
important belligerents. The interest in these countries
attaches to the amount of revenue raised, the methods
used in raising it, and the general effect on the citizenship.
Interest attaches also to the method of publicity for
securing loan subscribers, and to what extent loans were
used in proportion to taxes. 1

The United States and Great Britain stand out pre-
eminently as the two countries that placed most reliance
upon taxes. Reasons for this in the United States might
be that she had more time to prepare before entering the
conflict. Many so-called authorities advocated a pay-
as-you-go policy, which no doubt had an influence. The
net result, however, was that loans greatly exceeded the
amount secured from taxes. As a whole, probably a little
less than one third of the revenue was raised from taxes.

England's precedent in using so large a proportion of
taxes to finance a previous war gave her an ideal toward
which to work, and this no doubt had much to do with the
expansion of her tax system. The unexpected demand,
of course, could only be met by credit until the tax system
could be put into operation. This was done quite effec-
tively, however, and about the same proportion of the
entire fund was raised from this source as in the United
States. In both countries the results of inflation from
the issue of more bank notes, and the many securities, was


quickly reflected in the rapidly rising prices. France did
not use taxes early in the conflict, but strongly favored
borrowing, and this formed the source of the bulk of the
revenue until the breaking credit system needed to be
braced. The proportion of the entire expense which was
met from taxes was less than that of England or of the
United States.

Germany and Austria-Hungary form the best example
of recent emergency financiering, in which borrowing and
bank credits were relied upon almost exclusively. The
proof that it does not work successfully over a period of
years, with an excessive demand for funds, is clearly
demonstrated by the events in these countries. Deprecia-
tion of the currency, a failure of the credit machinery,
followed by a resort to taxes as a method of alleviation,
was simply a repetition of the story which has been writ-
ten each tune that a nation has tried to use borrowing
to excess.