MEETING THE WAR BILL

January, 1919

The Total War Debt--What are our Loans to the Allies worth?--OtherUncertain Items--The Prospects of making Germany pay--The Right Way toregard the Debt--Our Capital largely intact--A Reform of the IncomeTax--The Debt to America--The Levy on Capital and other Schemes--Theonly Real Aids to Recovery.

A table published week by week by the Economist shows that fromAugust 1, 1914, to November 9, 1918, the Government paid out L8612millions sterling. From this we have to deduct an estimate of theamount that the Government would have spent if there had not been awar, so that we are at once landed in the realm of conjecture. Thelast pre-war financial year saw an expenditure of L198 millions, andit is safe to assume that this figure would have swollen by a fewmillions a year if peace had continued, so that we may take at leastL860 millions from the above total as normal peace expenditure for the4-1/2 years. This gives us L7752 millions as the gross cost of thewar, as far as the period of actual fighting is concerned. From thisfigure, however, we are able to make some big deductions. There areloans to Allies and Dominions, and some other much more readilyrealisable assets than these. We do not know the actual figure of theloans to Allies and Dominions during the war period, because they arenot included in the weekly financial statements. The amount that weborrow abroad is set out week by week--at least, that is believed tobe the meaning of the cryptic item "Other Debt"--but the amount thatwe lend to Allies and Dominions is hidden away in the Supply Servicesor somewhere, and we only get occasional information about it from theChancellor in the course of his speeches on the Budget or on Votes ofCredit. In his last Vote of Credit speech, on November 12, 1918, MrBonar Law gave the chief items of the loans to Allies, and a veryinteresting list it was. The totals up to October 19, 1918, were L1465millions to Allies and L218-1/2 millions to Dominions. The Allieswere indebted to us as follows:--Russia, L568 millions; France, L425millions; 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 beenhit much harder than we have by the war, and had nothing like ourfinancial strength. The question is, what figure ought we to put onthis asset in deducting it from gross war expenditure in order toarrive at a guess at the real cost? We take our loans to Dominions, ofcourse, as good to the last penny. Mr Bonar Law, in his Budget speechlast April, took our loans to Allies at half their face value. Strictbookkeeping would probably demand a lower figure than 50 per cent.;but let us follow the ex-Chancellor's example and take loans toAllies, which we will estimate at L1480 millions up to November 9th,as good for L740 millions, and loans to Dominions at L220 millions upto the same date, a total of L960 millions, to be deducted from grosswar cost. Concerning L740 millions of this sum, however, there is acertain amount of doubt. No one questions for a moment the solvencyof France and Italy, but in view of the pressure that the war hasexercised on their producing power, and, in the case of France, thecomplication added by the uncertainties of the position in Russia, inwhich French investors are so deeply interested, one cannot feel surethat they will be able at once to make interest payments. Much willdepend on the sums that they are able to recover from Germany againsttheir bill of damages, on which more anon. But in any case it seemslikely that a general scheme of interest funding, as between theAllies, may have to be adopted for some years to come.

As to the other assets that we have to set against our grossexpenditure during the fighting period, they were enumerated by theChancellor 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 wasproceeding on the assumption that the war would last till March 31stnext--the date at which our financial year ends--and would then beconvenient enough to stop. Happily for us, the valour of our soldiersand those of our Allies, the splendid success of our Fleet and ourmerchantmen In bringing over American troops and their food andequipment with astonishing speed, and the straightforward diplomacyof President Wilson, combined to achieve victory nearly five monthsearlier than the most sanguine had dared to expect. With the verypleasant result--though it is a small matter when compared with theend of the killing of the best of our manhood--that the financialposition is very greatly improved. With regard to the figures givenabove, it should be observed that the "debts" are advances toDominions, but on quite a different basis from our loans to them,being money owed by them against goods and services supplied.[1] Theyand 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 gooddeal of scepticism, since such articles as land, buildings, ships andstores, bought or built by Government during a war, are likely to findan extremely sluggish demand when the war is over. However, Mr BonarLaw assured the House that his valuation of these amounts had beenarrived at on a conservative basis, and, what is better still, in hisVote of Credit speech on November 12th, he was able to state thatrevised estimates had shown that their value would be "far greater"than he had previously expected. So perhaps we are entitled to takethem 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 fightingperiod:--
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 shouldthus now be able to see, more or less, how we stand. During thefighting period the Government raised by taxation the sum of L2120millions,[1] from which we have again to deduct L860 millions as anestimate for normal peace taxation, if the war had not happened,leaving L1350 millions as the net war taxation, and L4142 millions asthe 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 comein to both sides of the account. There is the cost of maintaining ourArmy and Navy during the armistice period, the cost of demobilisation,and the cost of putting an end to war munitions contracts running formany months ahead, holders of which will have to be compensated. Whohas enough assurance to venture on an estimate of the cost of theseitems? Shall we guess them at something between L1000 and L1500millions? And when we have made this guess are we at the end of thewar's cost? Ought we not to include pensions to be paid, and if so, atwhat figure? Fifty millions a year for thirty years? If so, there isanother L1500 millions. And interest on war debt, and for how long?

On the other side of the balance-sheet, the only asset that has notyet been included in the calculation is the sum that we are going toreceive from Germany, Some cheery optimists think that it is possiblefor us and for the Allies to make Germany pay the whole of our warcost. If so, we have halcyon days ahead, for not only shall we be ableto repay the whole war debt but also to pay back to the taxpayer allthe L1350 millions that he produced during the war, unless, as seemsmore likely, the Government finds other uses, or abuses, for themoney, and sets its motley horde of wasters to work again. But thisproblem, of course, is not going to arise. It would not be physicallypossible for Germany to pay the whole of the Allies' war cost, exceptin the course of many generations, and, moreover, the Allies havebound themselves not to make any such demand by the rider that theyadded to President Wilson's peace terms, in giving their assent tothem as the basis on which they were prepared to make peace. Earlyin November they stated that President Wilson's reference to"restoration" of invaded countries should, in their view, be expandedinto a claim for compensation "for all damage done to the civilianpopulation of the Allies and to their property by the aggression ofGermany by land, by sea, and from the air."[1] This is letting Germanyoff lightly; but, after stating their readiness to make peace on thebasis of the fourteen points, if amended as above (and also withregard to the Freedom of the Seas question) it is not possible forthe European Allies, as the Prime Minister's late manifesto says theypropose to do[2] to expand this claim for civilian damage into ademand for the whole of their war cost up to the limit of the capacityof the Central Powers to pay, without a serious breach of faith. Sothat the question of how much we can get out of Germany is complicatedby the further uncertainty of the size of the bill for damages that wecan present. It will be big enough. We know that the Germans have sunk8-1/2 million tons of British ships during the war. As to the priceat which, for "restoration" purposes, we shall value those ships andtheir cargoes, and all the civilian property damaged by aircraft andbombardment, this is a matter which it would be obviously improperto discuss; but we may be sure that the bill will mount up to manyhundreds of millions, and it remains to be seen whether, after Belgiumand France have presented their account, it will be possible for us tosecure 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 beensomewhere in the neighbourhood of L5500 millions, taking our loansto Allies at half their face value; and that the armistice anddemobilisation period is likely to cost another L1000 to L1500millions more, to say nothing of pensions and debt charge that will goon for years (unless the supporters of Levy on Capital have their wayand wipe the debt out), and that against this further expenditure wecan set whatever sum is recovered from Germany.

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

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

In the second, we need not be misled by the Jeremiahs who tell us thatnow that we have won the war we have before us the task of paying forit. 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 andliabilities have been settled up and balanced, be afflicted with aforeign debt. Let us leave this question on one side for the timebeing, and consider what the position really is with regard to thatpart of the war's cost that has been raised at home. In so far as thathas been done, the war cost has been raised by us while the war wenton. In fact, all the war cost has to be raised by somebody whilethe war goes on, because the war is fought with stuff and servicesproduced at the time and paid for at the time. But when Americans lendus money to pay for some of the stuff that they send us, they pay atthe 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 notpossible to carry on war with wealth that is going to be produced someday. The effort of self-sacrifice that war demands has to be made bysomebody during its progress--otherwise the war could not be fought.

That effort of self-sacrifice we have already made in so far as wehave paid for our war cost out of money raised at home. That money hasbeen raised in three ways--by taxation, by borrowing saved money, andby inflation. When it is raised by taxation the sacrifice is obvious,and, in nearly all cases, inevitable: we pay our larger war taxes andso we have less to spend on ourselves, and so we go without things. Afew people raise money to pay taxes during war by borrowing or draftson capital, but they are probably so exceptional that their case neednot be considered. We transfer our buying power to the Government tobe used for the fighters, and so we set free the labour and materialthat used to go in providing us with comforts and pleasures; ourcompetition for goods is reduced, and so the Government is able to getwhat it needs out of the nation's production, which is _pro tanto_relieved of our demand. The same thing happens when the Governmentgets money for the war by borrowing money that we save. We reduceexpenditure, and transfer buying power to the State and diminish ourdemand on the nation's production, or that of its foreign supplies. Ifthe whole war cost had been met by these two methods there need havebeen little or no increase in prices here, and the cost of the warwould have been about half what it has been. Of the two methods,taxation is obviously the cleaner, simpler and more honest. Byborrowing, the State hires those who have a margin to put part of itat the disposal of the State at a time of national crisis, instead oftaking it from them outright. As most of the taxation involved bythe subsequent debt charge falls on those who have a margin (as itobviously should) the result is that the people who subscribed to theloans are afterwards taxed to pay themselves interest and to repaythemselves their debt.

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

Inflation, the third method of paying for war, again produces the sameeffect of a reduction of consumption by the civilian population, butin a roundabout manner, which works at first without being noticed,and so is particularly dear to the adroit politician. By it nobodytransfers buying power to the Government, but the Government andthe bankers, who are generally most reluctant accessories to thetransaction, between them create new buying power, which, coming intoa restricted market for goods in addition to all the existing buyingpower, simply forces everybody to consume less because the money intheir pockets fetches less goods owing to the rise in prices.

The evil attached to this system is obvious enough. It amounts to atax on the general consumer in proportion to his consumption, and soit 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 andfrankly. All the warring Governments in varying degrees have used thisroundabout device of imposing it, very likely being quite unawareof the fraud on the consumer that they were perpetrating. Our ownGovernment, in fact, having first added by this process to a rise inthe price of bread, then reduced it by a special subsidy--a pleasanttouch of Alice in Wonderland finance. This mode of taxing by raisingprices hits, of course, all those who live on fixed incomes andsalaries and wages. Those who can strike, or take more out of theconsumer, can evade it, and so it falls on the weakest shoulders andincidentally produces friction, discontent and dangerous suspicion.But even it works at the time when it happens. Each creation of newbuying power gives the Government, for the moment, control of so muchin goods and services at the expense of the consumer; but when oncethe new buying power has been distributed by the State's payments itis in the hands of the nation as a whole. If the process ceased, thenation would still have control of the whole of its output, which isits income, though the injustice involved, to those who are not strongenough to resist the effects of higher prices, would continue.

Thus, whatever means--straightforward or devious--are used forfinancing war, it is paid for while it goes on by the warring countryif the financing is done at home, or by its foreign creditors if thefinancing is done abroad. And it is, necessarily, almost entirely paidfor out of income, that is, out of current production. It is curiousto find that many people still seem to think that the whole cost ofthe 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 ofrailways, 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 insuch good shape as they were, some of them are much better equippedand organised. We have drawn on our stocks of materials and goods--howfar it is impossible to say; we have lost 8-1/2 million tons ofshipping by war losses; in the meantime we have built, bought andcaptured 5-1/2 millions of new tonnage, and we have a claim againstthe Germans for such tonnage. On capital account we have suffered bywear and tear in so far as our upkeep has been neglected owing to lackof 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 L1700millions into new investments at home and abroad during the 4-1/4years of fighting and some more hundreds of millions during theafter-war period of Government borrowing and restriction on privateinvestment. But a very large part of the money that went into victorywould otherwise have gone not to capital account but into the pleasantfrivolities, embellishments and vulgarities that made life an amusingabsurdity in days before the war.

If, then, the war sacrifice was made during the war, in so far as itscost was raised at home, how far is it true that we are now faced withthe business of paying for it? If taxation were equitable it wouldonly be to the extent that those who ought to have made the sacrificeand did not, will in future have to pay interest to those who did, ortheir representatives. So that the first thing we have to do is tomake taxation equitable, that is, lay it on the taxpayer in proportionto his ability to pay. There will still remain the injustice to thosewho have fought for us, which might be cured, or amended, by specialexemptions. With taxation on a really sound basis no further sacrificewould be involved by the debt charge, and no diminution of thenation's wealth or consuming power, which will depend, as always, onits output of goods and services; but only a transfer of consumingpower from taxpayers to debt-holders in accordance with the sacrificemade by the latter during the war. What we produce as a nation weshall consume as a nation, subject to the extent that we financed thewar during its course by operations abroad.
These operations were twofold. We sold to foreigners part of ourholdings of foreign securities, thereby and to this extent paying forwar cost out of capital--out of the investments made by ourselvesand our forbears in America and elsewhere. Mr Bonar Law, in a recentinterview in the _Observer_, stated that we had sent back to theUnited States practically the whole of our holdings of Americansecurities to be sold or pledged as collateral for loans, and that thevalue of them was three billion dollars--L600 millions sterling. Anyof them that have only been pledged can presumably be used to meet theloans raised as they fall due, and so will lighten our burden in thematter of repayment. These loans raised abroad are the second mode offoreign financing. By it we had raised up to November 9th nearly L1300millions, as shown by the _Economist's_ table, and to that extent wehave pledged our future production and that of our posterity, to meetthe annual service for interest and repayment. On the other hand, allthis sum and more we have (as shown above) lent to our Allies andDominions, so that the ex-Chancellor was well justified in his boastthat we had only borrowed to finance our Allies, and that we had beenself-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 produceourselves, or to obtain in exchange for our produce and assets. Onpaper, therefore, our position as a creditor country is only impairedby our sales of securities. But that is only so on paper. In fact, theloans that we have raised abroad are good debts that have to be met tothe last penny, and are a first charge on our future output, but theadvances that we have made to our Allies, much harder hit than we areby the war, are assets on which we cannot depend. They were taken inour balance-sheet above at half their face value, but there is much tobe said for writing them off altogether and tearing up the I.O.U.'sof our foreign brothers-in-arms. Their need is greater than ours, itwould be little satisfaction to receive interest and repayment fromthem, and the payment due from them, involving difficult problems oftaxation 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 ofrenunciation on our part would do something towards a restorationof the spirit with which we entered on war, a spirit which has beenseriously demoralised during its course, largely owing to the resultsof our faulty finance, which encouraged profiteering in all classes.

In any case, there is our position. We have a big debt to meet athome and abroad, and we are weakened on capital account by foreignindebtedness, wear and tear of plant and dimunition of stocks andmaterials. Wear and tear and depletion we can soon make good if we setto work and work hard, if our bureaucracy takes away the fetters ofits restrictions and controls (instead of making further additionsto the "Black List" even after the armistice!), and if our rulingwiseacres will refrain from trying to stimulate industry by taxing rawand half-raw materials. For the debt charge many pleasant andsimple fancy strokes are suggested. The Levy on Capital is popular,especially with those who do not own any, but its advocacy is by nomeans confined to them. Mr Pethick Lawrence has published a persuasivelittle book about it, but I cannot see that he meets the objectionsto it. These are, the difficulty of valuation, the fact that in manycases it would have to be paid by instalments, and so would be merelyanother form of income tax, its sparing of the waster and penalisingof the saver, and, consequently, the grave danger that it would checkaccumulation and so dry up the springs of capital. Mr Stilwellhas produced a "Great Plan to Pay for the War," by which all thebelligerents and neutrals who have been involved in expense by the warwould receive World Bonds from an International Congress for whatthey have spent owing to the war, and would then pay one another anyinternational debts by exchanging these World Bonds, and deal with thehome 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 disastrousbeginning to that new era which is alleged to be dawning.

By hard work, sparing consumption of luxuries, and a big industrialoutput, we can soon make the debt charge look smaller and smaller ascompared with our aggregate income. Our foreign debt we can only meetby shipping goods and rendering services. But since it was all raisedto be lent to our Allies and our lending of it was essential to avictory which has rid mankind of a terrible menace, it is surelyreasonable that our creditors should not press for repayment in thefirst few difficult years, but should fund our short-dated debts intoloans with twenty-five or thirty years to run. As to the home debt,we can only lighten its burden on the taxpayer by making taxationequitable. To this end reform of the income tax is an urgent need. Wehave to lighten its pressure much more effectively on those who arebringing up families, and by collecting it through employers make itan effective and just tax on those of the working class whose earningsand family liabilities make them fairly subject to it.