WAR FINANCE AS IT MIGHT HAVE BEEN--II

December, 1917

The Changed Spirit of the Country--A Great Opportunity thrownaway--What Taxation might have done--The Perils of Inflation--Driftingstupidly along the Line of Least Resistance--It is we who pay, not"Posterity."

In the November number of Sperling's Journal I dealt with the question of how our war finance might have been improved if a longerview had been taken from the beginning concerning the length of thewar and the measures that would be necessary for raising the money.The subject was too big to be fully covered in the course of onearticle, and I have been given this opportunity of continuing itsexamination. Before doing so I wish to remind my readers once moreof the great difference in the spirit of the country with regard tofinancial self-sacrifice in the early days of the war and at thepresent time, after three years of high profits, public and privateextravagance, and successful demands for higher wages have demoralisedthe public temper into a belief that war is a time for making bigprofits and earning big wages at the expense of the community. In theearly days the spirit of the country was very different, and it mighthave remained so if it had been trained by the use made of publicfinance along the right line. In the early days the Labour leadersannounced that there were to be no strikes during the war, and theproperty-owning classes, with their hearts full of gratitude for thepromptitude with which Mr Lloyd George had met the early war crisis,were ready to do anything that the country asked from them in thematter of monetary sacrifice. Mr Asquith's grandiloquent phrase, "No price is too high when Honour is at stake," might then have been takenliterally by all classes of the community as a call to them to dotheir financial duty. Now it has been largely translated into a beliefthat no price is too high to exact from the Government by thosewho have goods to sell to it, or work to place at its disposal. Inconsidering what might have been in matters of finance we have to bevery careful to remember this evil change which has taken place in thepublic spirit owing to the short-sighted financial measures which havebeen 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 beenbegun when the war was in its early stages, and when public opinionwas still ready to do its duty in finance. The conclusion at which wearrived a month ago was that by taxation rather than by borrowing andinflation much more satisfactory results could have been got out ofthe country. If, instead of manufacturing currency for the prosecutionof the war, the Government had taken money from the citizens either bytaxation or by loans raised exclusively out of real savings, the risein prices which has made the war so terribly costly, and has raised sogreat a danger through the unrest and dissatisfaction of the workingclasses, might have been to a great extent avoided, and the higher therate of taxation had been, and the less the amount provided by loans,the less would have been the seriousness of the problem that nowawaits us when the war is over and we have to face the question of theredemption of the debt.

In this matter of taxation we have certainly done much more thanany of the countries who are fighting either with us or against us.Germany set the example at the beginning of the war of raising nomoney at all by taxation, puffed up with the vain belief that the costof the war, and a good deal more, was going to be handed over to herin the shape of indemnities by her vanquished enemies. This terriblemiscalculation on her part led her to set a very bad example to thewarring Powers, and when protests are made in this country concerningthe low proportion of the war's costs that is being met out oftaxation it is easy for the official apologist to answer, "See howmuch more we are doing than Germany." It is easy, but it is not a goodanswer. Germany had no financial prestige to maintain; the money thatGermany is raising for financing the war is raised almost entirelyat home, and she rejoices in a population so entirely tame under adominant 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 offinancial jugglery, and to induce her tame and deluded creditors tobelieve that they have been quite handsomely treated.

Here, however, in England, we have a financial prestige which is basedupon financial leadership of more than a century. We have also raiseda large part of the money we have used for the prosecution of thewar by borrowing abroad, and so we have to be specially careful inhusbanding that credit, which is so strong a weapon on the side ofliberty and justice. And, further, we have a public which thinks foritself, and will be highly sceptical, and is already inclined to besceptical, concerning the manner in which the Government may treat thenational creditors. Its tendency to think for itself in matters offinance is accompanied by very gross ignorance, which very ofteninduces it to think quite wrongly; and when we find it necessary forthe Chancellor of the Exchequer to make it clear at a succession ofpublic meetings that those who subscribe to War Loans need have nofear that their property in them will be treated worse than any otherkinds of property, we see what evil results the process of too muchborrowing and too little taxation can have in a community which isacutely suspicious and distrustful of its Government, and very liableto ignorant blundering on financial subjects.

What, then, might have been done if, at the beginning of the war, areally courageous Government, with some power of foreseeing the needsof finance for several years ahead if the war lasted, had made a rightappeal to a people which was at that time ready to do all that wasasked from it for the cause of justice against the common foe? Theproblem by which the Government was faced was this, that it had toacquire for the war an enormous and growing amount of goods andservices required by our fighting forces, some of which could only begot from abroad, and some could only be produced at home, while atthe same time it had to maintain the civilian population with such asupply of the necessaries of life as would maintain them in efficiencyfor doing the work at home which was required to support the effort ofour fighters at the Front. With regard to the goods which came fromabroad, either for war purposes or for the maintenance of the civilianpopulation, the Government obviously had no choice about the manner inwhich payment had to be made. It had no power to tax the suppliers inforeign countries of the goods and services that we needed during thewar period. It consequently could only induce them to supply thesegoods and services by selling them either commodities produced byour own industry, or securities held by our capitalists, or its ownpromises 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 largenumber of our industrial population into the ranks of the Army andinto munition factories. This curtailment, on the other hand, mightto a certain extent be made good by a reduction in consumption on thepart of the civilian population, so setting free a larger proportionof our manufacturing energy for the production of goods for export.Otherwise the problem of paying for goods purchased from abroad couldonly be solved by the export of securities, and by borrowing fromforeign countries, so that the shells and other war material that wererequired, for example, from America, might be paid for by Americaninvestors in consideration of receiving from us a promise to pay themback some day, and to pay them interest in the meantime. In otherwords, we could only pay for what we needed from abroad by shippinggoods or securities. As is well known, we have financed the war bythese methods to an enormous extent; the actual extent to which wehave done so is not known, but it is believed that we have roughlybalanced by this process the sums that we have lent to our Allies andDominions, which now amount to well over 1300 millions.

If this is so, we have, in fact, financed the whole of the real costof the war to ourselves at home, and we have done so by taxation,by borrowing saved money, and by inflation--that is to say, bythe manufacture of new currency, with the inevitable result ofdepreciating the buying power of our existing currency as a whole. Howmuch better could the thing have been done? In other words, how muchof the war's cost in so far as it was raised at home could have beenraised by taxation? In theory the answer is very simple, for in theorythe whole cost of the war, in so far as it is raised at home, couldhave 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 istheoretically possible to raise by taxation. It is often said, "Allthis preaching about taxation is all very well, but you couldn'tpossibly get anything like the amount that is needed for the war bytaxation, or even by borrowing of saved money. This inflation againstwhich economic theorists are continually railing is inevitable in timeof war because there isn't enough money in the country to provide allthat is needed."
This argument is simply the embodiment of the old delusion, so commonamong people who handle the machinery of finance, that you can reallyincrease the supply of necessary goods by increasing the supply ofmoney, which is nothing else than claims to goods expressed either inpieces of metal or pieces of paper. As we have seen, all that we havebeen able to raise abroad has been required for advances to our Alliesand Dominions, consequently we have had to fall back upon our own homeproduction for everything needed for our own war costs. Either we haveturned out the goods at home or we have turned out goods to sell toforeigners in exchange for goods that we require from them. But sincewe thus had to rely on home production for the whole of the war'sneeds as far as we were concerned, it is clear that the Governmentcould, if it had been gifted with ideal courage and devotion, and ifit 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 wantedfor maintaining the civilian population in efficiency, for thepurposes of the war.
It is a commonplace of political theory that the Government has aright to take the whole of the property and the whole of the labour ofits citizens. But it would not, of course, have been possible for theGovernment immediately to inaugurate a policy of setting everybody towork on things required for the war and paying them all a maintenancewage. This might have been done in theory, but in practice it wouldhave involved questions of industrial conscription, which wouldprobably have raised a storm of difficulty. What the Government mighthave done would have been by commandeering the buying power of thecitizen to have set free the whole industrial energy of the communityfor supplying the war's needs and the necessaries of life. At presentthe national output, which is only another way of expressing thenational income, is produced from certain channels of production inresponse to the expectation of demand from those whose possession ofclaims to goods, that is to say, money, gives them the right to saywhat kind of goods they will consume, and consequently the industrialpart of the population will produce.

Had the Government laid down that the whole cost of the war was to beborne by taxation, the effect of this measure would have been thateverything which was needed for the war would have been placed at thedisposal of the Government by a reduction in spending on the part ofthose who have the spending power. In other words, the only processrequired would have been the readjustment of industrial output fromthe production of goods needed (or thought to be needed) for ordinaryindividuals to those required for war purposes. This readjustmentwould have gone on gradually as the war's cost increased. Therewould have been no competition between the Government and privateindividuals for a limited amount of goods in a restricted market,which has had such a disastrous effect on prices during the course ofthe war; there would have been no manufacture of new currency, whichmeans the creation of new buying power at a time when there are lessgoods to buy, which has had an equally fatal effect on prices; therewould 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 theGovernment can get much money out of us, would have been reformed soas to have borne less hardly upon those with families to bring up.
Mr Sidney Webb and the Fabians have advocated a system by which thebasis of assessment for income tax should be the income divided by thenumber of members of a family, rather than the mere income without anyconsideration for the number of people that have to be provided forout of it. With some such scheme as this adopted there is no reasonwhy the Government should not have taken, for example, the whole ofall incomes above L1000 a year for each individual, due allowancebeing made for obligations, such as rent, which involve longcontracts. For any single individual to want to spend more thanL1000 a year on himself or herself at such a crisis would have beenrecognised, in the early days of the war, as an absurdity; any surplusabove 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 aforced loan.

So sweeping a change would not have been necessary at first, perhapsnot at all, because the war's cost would not have grown nearly sorapidly. All surplus income above a certain line would have been takenfor the time being, but with the promise to repay half the amounttaken, so that it should not be made a disadvantage to be rich, and nodiscouragement to accumulation would have been brought about. By thismeans the whole of the nation's buying power among the richer classeswould have been concentrated upon the war, with the result that theprivate extravagance, which is still disgracing us in the fourth yearof the war, would not have been allowed to produce its evil effects.With the rich thus drastically taxed, the working classes would havebeen much less restive under the application of income tax to theirown 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 lessirresistible.

What the Government has actually done has been to do a little bit oftaxation, much more than anybody else, but still a little bit whencompared with the total cost of the war; a great deal of borrowing,and a great deal of inflation. By this last-named method it producesthe result required, that of diverting to itself a large part of theindustrial output of the country, by the very worst possible means. Itstill, by its failure to tax, leaves buying power in the hands of alarge number of people who see no reason why they should not live verymuch as usual; that is to say, why they should not demand for theirown purposes a proportion of the nation's energy which they have noreal right to require at such a time of crisis. But in order to checktheir demands, and to provide its own needs, the Government, bysetting the bankers to work to provide it with book credits, givesitself an enormous amount of new buying power with which, by theprocess of competition, it secures for itself what is needed for thewar. There is thus throughout the country this unwholesome processof competition between the Government on one hand and unpatrioticspenders on the other, who, between them, put up prices against theGovernment and against all those unfortunate, defenceless people who,being in possession of fixed salaries, or of fixed incomes, have noremedy against rising prices and rising taxation. All that couldpossibly have been spent on the war in this country was the totalincome of the people, less what was required for maintaining thepeople in health and efficiency. That total income Government might,in theory, have taken. If it had done so it could and would have paidfor 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, thoughit is by no means certain, when we look back on the very differenttemper that ruled In the country in the early months of the war. Ifanything of the kind could have been done it would certainly have beena practical proof of determination for the war which would have shownmore clearly than anything else that "no price was too high whenHonour was at stake." It would also have been an extraordinarydemonstration to the working classes of the sacrifices that propertyowners were ready to make, the result of which might have been thatthe fine spirit shown at the beginning of the war might have beenmaintained until the end, instead of degenerating into a series ofdemands for higher wages, each one of which, as conceded to one set ofworkmen, only stimulates another to demand the same. But even if wegrant that it is only theoretically possible to have performed such afeat as is outlined above, there is surely no question that much moremight have been done than has been done in the matter of paying forthe war by taxation. If we are reminded once more that our ancestorspaid nearly half the cost of the Napoleonic war out of revenue, whilewe are paying about a fifth of the cost of the present war from thesame source, it is easy to see that a much greater effort might havebeen made in view of the very much greater wealth of the country atthe present time. I was going to have added, in view also of itsgreater economic enlightenment, but I feel that after the experienceof the present war, and its financing by currency debasement, the lessabout economic enlightenment the better.

What, then, stood in the way of measures of finance which would haveobviously had results so much more desirable than those which willface us at the end of the war? As it is, the nation, with all classesembittered owing to suspicions of profiteering on the part of theemployers and of unpatriotic strikes on the part of the workers, willhave to face a load of debt, the service of which is already roughlyequivalent to our total pre-war revenue; while there seems everyprospect that the war may continue for many half-years yet, and everyhalf-year, as it is at present financed, leaves us with a load of debtwhich will require the total yield of the income tax and the super-taxbefore the war to meet the charge upon it. Why have we allowed ourpresent finance to go so wrong? In the first place, perhaps, we mayput the bad example of Germany. Then, surely, our rulers might haveknown better than to have been deluded by such an example. In thesecond place, it was the cowardice of the politicians, who had not thesense in the early days of the war to see how eager the spirit of thecountry was to do all that the war required of it, and consequentlywere afraid to tax at a time when higher taxation would have beensubmitted to most cheerfully by the country. There was also the absurdweakness of our Finance Ministers and our leading financial officials,which allowed our financial machinery to be so much weakened by thedemands of the War Office for enlistment that it has been said in theHouse of Commons by several Chancellors of the Exchequer that it isquite impossible to consider any form of new taxation becausethe machinery could not undertake it. There has also been greatshort-sightedness on the part of the business men of the country, whohave failed to give the Government a lead in this important matter.Like the Government, they have taken short views, always hoping thatthe war might soon be over, and so have left the country with aproblem that grows steadily more serious with each half-year as wedrift stupidly along the line of least resistance.

Such war finance as I have outlined--drastic and impracticable asit seems--would have paid us. Taxation in war-time, when industry'sproblem is simplified by the Government's demand for its product,hurts much less than in peace, when industry has not only to turn outthe stuff, but also find a buyer--often a more difficult and expensiveproblem. There is a general belief that by paying for war by loans wehand the business of paying for it on to posterity. In fact, we canno more make posterity pay us back our money than we can carry on warwith goods that posterity will produce. Whatever posterity produces itwill consume. Whatever it pays in interest and amortisation of ourwar debt, it will pay to itself. We cannot get a farthing out ofposterity. All we can do, by leaving it a debt charge, is to affectthe distribution of its wealth among its members. Each loan that weraise makes us taxpayers collectively poorer now, to the extent of thecapital value of the charge on our incomes that it involves. The lesswe thus charge our productive power, and the more we pay up in taxesas the war goes on, the readier we shall be to play a leading part inthe great time of reconstruction.