War-Time Financial Problems
Hartley Withers

Part 1 out of 5

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Works by Hartley Withers


Second Impression.

"He treats of the subject mainly in its relation to industry, and
smooths the path for those who find the way rather thorny. Timely and
instructive."--_Financial Times_.


Second Impression.

"It should be read at once by every taxpayer. Mr. Withers' latest book
can be most heartily commended,"--_Morning Post_.


Fifth Impression.

"It is a good book, it is sure of its public."--_Morning Post_.


Eighteenth Impression.

"Will supersede all other introductions to monetary science; a
safe and indispensable guide through the mazes of the Money
Market."--_Financial News_.


Second Impression.

"Mr. Withers makes the topic interesting in spite of its obvious
and irrepressible technicality. Occasionally he renders it really
amusing."--_Financial News_.


Third Impression.

"Views its subject from the advantageous position of an impartial
observer, the respective cases for capital and labour, rich and poor,
being brought to the reader's attention in a convincingly logical
manner."--_Financial Times_.


Fourth Impression.

"Nothing could be clearer or more enlightening for the general
reader."--_The Times_.


Third Impression.

"We heartily commend a timely work dealt with in popular and simple
style, a standard financial work."--_Morning Post_.


Third Impression.

A Description of the Money Market, by WALTER BAGEHOT. Edited with a
new Preface by HARTLEY WITHERS. "There is no city man, however
ripe his experience, who could not add to his knowledge from its
pages."--_Financial News_.

"Blest paper credit! last and best supply!
That lends Corruption lighter wings to fly:
Gold imp'd by thee, can compass hardest things,
Can pocket States, can fetch or carry Kings;
A single leaf shall waft an Army o'er,
Or ship off Senates to a distant Shore;
A leaf, like Sibyl's, scatter to and fro
Our fates and fortunes, as the winds shall blow;
Pregnant with thousands flits the Scrap unseen,
And silent sells a King, or buys a Queen."

POPE, _Moral Essays_.


At a time when Finance is of greater importance than ever before, it
is hoped that this small volume may be of interest and value to the
public, and help the application of war's lessons to the problems that
face us in peace.

The contents, with the exception of the last article on "Money or
Goods?" (which appeared in the Trade Supplement of the _Times_ for
December, 1918), have already been published in _Sperling's Journal_,
from September, 1917, to March, 1919; they have been left as they were
written, except for a few verbal corrections.

I desire to express my thanks to the Editors of _Sperling's Journal_
and of the _Times_ for their kind permission to reprint the articles.


June, 1919.


The Creation of Capital--The Inducement--War and Capital

London after the War--A German View--The Rocks Ahead--Our Relative
Position secure--Faulty Finance--The Strength we have shown--The Nature
and Limits of American Competition--No other likely Rivals

Financial Conditions in August, 1914--No Scheme prepared to meet the
Possibility of War--A Short Struggle expected--The Importance of Finance
as a Weapon--Labour's Example--The Economic Problem of War--The
Advantages of Direct Taxation--The Government follows the Path of Least
Resistance--The Effect of Currency Inflation

The Changed Spirit of the Country--A Great Opportunely 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

The Objects of the Levy--Its Origin and History--How it would work in
Practice--The Attitude of the Chancellor--The Effects of the Scheme in
discouraging Thrift--Its Fallacies and Injustices--The Insuperable
Obstacles to its Application--Its Influence on Production--One of the
Tests of a Tax--Judged by this Test the Proposed Levy is doomed

The Recent Amalgamations--Will the Provinces suffer?--Consolidation not
a New Movement--The Figures of the Past Three Decades--Reduction of
Competion not yet a Danger--The Alleged Neglect of Local
Interests--Shall we ultimately have One Huge Banking Monopoly?--The
Suggested Repeal of the Bank Act--Sir E. Holden's Proposal

Another Government Committee--The Fallacy of imitating
Germany--Prussianising British Commerce--The Inquiry into the Companies
Acts--Will Labour Influence dominate the Report?--Increased Production
the Great Need--Will it be met by tightening up the Companies Acts?--The
Dangers of too much Strictness--Some Reforms necessary--Publicity,
Education, Higher Ideals the only Lasting Solution--The Importance of
Foreign Investments--Industry cannot take all Risks and no Profits

The Figures of the National Budget--A Large Increase in Revenue and a
Larger in Expenditure--Comparison with Last Year and with the
Estimates--The Proportion borne by Taxation still too Low--The Folly of
our Policy of Incessant Borrowing--Its Injustice to the Fighting Men

The New Budget--Our own and Germany's Balance-sheets--The Enemy's
Difficulties--Mr Bonar Law's Optimism--Special Advantages which Peace
will bring to Germany--A Comparison with American Finance--How much have
we raised from Revenue?--The Value of the Pound To-day--The 1918 Budget
an Improvement on its Predecessors--But Direct Taxation still too
Low--Deductions from the Chancellor's Estimates

An Inopportune Proposal--What is Currency?--The Primitive System of
Barter--The Advantages possessed by the Precious Metals--Gold as a
Standard of Value--Its Failure to remain Constant--Currency and
Prices--The Complication of other Instruments of Credit--No Substitute
for Gold in Sight--Its Acceptability not shaken by the War--A
Fluctuating Standard not wholly Disadvantageous--An International
Currency fatal to the Task of Reconstruction--Stability and Certainty
the Great Needs

A Deluge of Bonus Shares--The Effect on the Market--A Problem in
Financial Psychology--The Capitalisation of Reserves--The Stock Exchange
View--The Issue of Bonus-carrying Shares--The Case of the A.B.C.--A
Wiser Variation from Canada--Bonus Shares on Flotation--An American
Device--Midwife or Doctor?--The Good and Bad Points of both Systems

Bank Fusions and the State--Their Effects on the Bank of England--Mr
Sidney Webb's Forecast--His Views of the Benefits of a Bank
Monopoly--The Contrast between German Experts and British
Amateurs--Bankers' Charges as affected by Fusions--The Effects of
Monopoly without the Fact--The "Disinterested Management" Fallacy--The
Proposal to split Banking Functions--A Picture of the State in Control

The Difference between Aims and Acts--Should Foreign Capital be allowed
in British Industry?--The Supremacy of London and National Trade--No
need to fear German Capital--We shall need all we can get--Foreign
Shares in British Companies--Can and should the Disclosure of Foreign
Ownership be forced?--The Difficulties of the Problem--Aliens and
British Shipping--The Position of "Key" Industries--Freedom to Import
and Export Capital our Best Policy

The Present Economic Structure--Its Weaknesses and Injustices--Were
things ever better?--The Aim of State Socialism--A Rival Theory--The New
Movement of Guild Socialism--Its Doctrines and Assumptions--Payment "as
Human Beings"--The "Degradation" of earning Wages--Production
irrespective of Demand--Is that the Real Meaning of Freedom?--The Old
Evils under a New Name--A Conceivably Practical Scheme for some other

Taxation after the War--Mr. Hoare's Scheme described and analysed--The
Position of the Rentier--Estimates of the Post-War Debt--The Compulsory
Loan Proposal--What Advantages has it over a Levy on Capital?--The
Argument from Social Justice--Questions still to be answered--The Choice
between a Levy and Stiff Taxation--Are we still a Creditor Nation?--Our
Debt not a Hopeless Problem--Suggestions for solving it

Currency Policy during the War--Its Disastrous Medievalism--The Report
of the Cunliffe Committee--A Blast of Common Sense--The Condemnation of
our War Finance--Inflation and the Rise in Prices--The Figures of the
Present Position--The Break in the Old Relation between Legal Tender and
Gold--How to restore it--Stop Borrowing and reduce the Floating
Debt--Return to the Old System--The Committee's Sane Conservatism--A
Sound Currency vital to National Recovery

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

Macaulay on Depreciated Currency--Its Evils To-day--The Plight of the
Rentier--Mr Goodenough's Suggestion--Sir Edward Holden's Criticisms of
the Currency Committee--His Scheme of Reform--Two Departments or One in
the Bank of England?--Not a Vital Question--The Ratio of Notes to
Gold--Objections to a Hard-and-fast Ratio--The Limit on Note Issues--The
Federal Reserve Act and American Optimism--Currency and Commercial
Paper--A Central Gold Reserve with Central Control

The New Meaning of Licence--The Question of Capital Issues--Text of the
Treasury Regulations--Their Scope and Effect--The Position of the Stock
Exchange--Wider Issues at Stake--Should Capital be set Free?--The
Arguments for and against--Perils of an Excessive Caution--The New
Committee and its Terms of Reference--The Absurdity of prohibiting
Share-splitting--The Storm in the House of Commons--Disappearance of the
Retrospective Clause--A Sample of Bureaucratic Stupidity

"Boundless Wealth"--Money and the Volume of Trade--The Quantity
Theory--The Gold Standard--How is the Volume of Paper to be
regulated?--Mr Kitson's Ideal





_September_, 1917

The Creation of Capital--The Inducement--War and Capital

One of the questions that are now most keenly agitating the minds of
the investing public and of financiers who cater for its wants, and
also of employers and organisers of industry who are trying to see
their way into after-the-war conditions, is that of the supply of
capital. On this subject there are two contradictory theories: one
considers that owing to the destruction of capital during the war,
capital will be for many years at a famine price; the other, that
owing to the exhaustion of all the warring powers, that is, of the
greater part of the civilised world, the spirit of enterprise will be
almost dead, the demand for capital will be extremely limited, and
consequently the supply of it on offer will go begging to find a user.
It seems likely that, as usual, the truth lies somewhere between these
two extreme views; but we shall best answer the question if we first
get a clear idea of what we mean by capital.

On the subject of the definition of capital, economists differ with
all the consistency that they only show in differing. One of the
earliest descriptions of capital was given by Turgot, who thought that
capital meant "valeurs accumulees." In this wide sense the word covers
all goods which have value, that is, can be exchanged into other
goods. From this point of view, the schoolboy who invests sixpence in
marbles is a capitalist, because he has bought an asset which is not
immediately consumed, but can, later on, if his fancy urges him, be
exchanged into white mice or any other object of his desire. On the
other hand, the schoolfellow who at the same time spends sixpence on
cherries and eats them has put his money into immediate consumption,
his asset is digested, and he has no capital in any sense of the word.

Later, the definition was narrowed by John Stuart Mill, for instance,
into the sense of wealth set aside to increase production. From this
point of view capital practically means the equipment and tools of
industry in the widest sense of the word, including agriculture and
transport. Lately economists have shown a tendency to go back to the
wider application of the word, and an American economist, Dr Anderson,
who has just published a book on the Value of Money, goes so far
therein as to state that a "dollar is capital." The language of the
City generally uses the word in the narrow sense adopted by Mill, and
there is very much to be said for this view of the real meaning of
capital. Marbles to play with, houses to live in, motor-cars to go
joy-riding in--all these are assets which can be disposed of, and so,
in a sense, may be called capital. But the businesslike meaning of the
word is the tools and equipment of industry, because it is only by
their possession that the wealth of mankind not only increases man's
present enjoyment, but enhances his future output of the goods
necessary for his existence.

If we take the word in this sense it becomes at once apparent that the
theory is exaggerated which maintains that war is destroying capital,
so that capital will long be at a famine price. The extent to which
war is actually destroying the tools and equipment of industry is
quite limited. On the actual battlefield that sort of destruction
proceeds apace when factories are shelled into shapeless lumps of
bricks, and when the surface of the earth, that man's skill had
developed into great productive fertility, is torn into craters and
covered with rubbish. There is also rapid destruction of a very
important part of the equipment of industry owing to the submarine
campaign, which is sinking so many fine ships that were meant to
carry goods from one country to another. But, apart from this actual
destruction on the battlefield and on the sea, the tools and equipment
of industry over the greater part of the earth remain untouched. It is
true that, owing to the preoccupations of the war, not so much work
as usual is being put into the upkeep and repair of our railways,
factories and other industrial tools. But at the same time an enormous
amount of new machinery is being created for the manufacture of
munitions and other stuff needed for the war, and a large part of this
new machinery ought to be available as industrial capital when the war
is over. Those people who talk so glibly of the enormous destruction
of capital by the war are surely making a mistake common to minds
which look at economic questions through a financial telescope,
mistaking money for capital. They see that an enormous amount of money
is being spent on the war, and they jump to the conclusion that this
money, if not spent upon the war, would have been put into capital
investments and so have increased the tools and equipment of industry.
In fact, a great deal of the money now spent upon the war would
have been spent, if there had been no war, not upon increasing the
equipment of production, but upon purely frivolous and extravagant
consumption. There is no need to dwell on the effect of war in
reducing many kinds of expenditure on which hundreds of millions
must have gone in peace time, and this restriction of extravagant
consumption has to be deducted before we even admit, not that all
money spent upon the war is destroyed capital, but even that all the
money spent upon the war is destroying what might otherwise have
become capital.

If, then, it is true that the war is not making a very terribly
substantial inroad upon the mass of existing capital, how is it going
to affect the supply of capital in the future? To answer this question
we have to see how capital is created. The answer to this question is
very simple, very obvious, and very dull. Capital can only be created
by saving.

Saving is such an entirely unpopular virtue that it seems at first
sight a disastrous conclusion to arrive at, that if we want to
increase the supply of capital it can only be done by stimulating
this unattractive habit; and there is a further question to be
asked--whether it will be necessary or desirable to have a great
increase in the supply of capital. As was pointed out above, one
theory of after-war needs maintains that the world will be so
exhausted by this great struggle that it will have no enterprise and
no energy left, and that capital will go begging. If this be so, we
need not trouble to inquire as to whether the supply of capital can be
made plentiful. But I venture to think that this view is very probably
wrong, though it is very dangerous to prophesy concerning the purely
psychological question of the state of mind in which the citizens of
the warring Powers will end the war. It is, however, at least
probable that the prices which are then likely to rule will stimulate
enterprise all over the world; that every one will see that there is
a great work to be done in getting industry back on to a peace
basis, and a great profit to be made by those who do this work most
successfully, and that the demand for capital is likely, for some
years at least, to clamour for all that can be produced.

To go back, then, to the statement that only by saving can capital
be created. The man who saves, instead of spending money on his own
enjoyment, hands it over to some company or Government to be spent on
some industrial or national purpose. When it is put into industry
it builds a factory or a ship or a railway or a canal, or clears a
wilderness for cultivation, or does one of the innumerable other
things which are necessary for the production and transport of the
goods which mankind enjoys. And it is only by this process of handing
over buying power, instead of using it for our own amusement and
enjoyment, to others who will use it for furthering production that
the tools and equipment of industry can be multiplied.

Something can be done by banks and financiers in supplying credit in
the form of advances and acceptances; but this method is only like
oiling the wheel of industry, the real driving power of which has to
be saved capital. Creating credits simply means that a certain amount
of buying power is manufactured and handed over to those to whom the
credit is given. It does not set free any labour or goods to be
put into industry. That is only done by the man who abstains from
consumption and saves money by restraining his desire to spend it on
himself, and puts it at the disposal of industry. The man who saves
money, who has always hitherto been rather despised by his companions
and resented by a certain class of social reformer and many other
uneducated people as a capitalist bloodsucker, is thus, in fact, the
person who leaves the world richer than he found it, having put his
money, the product of his own work, into increasing the world's
output, instead of spending it on such forms of enjoyment as heavy
lunches and cinema shows.

The man who does this beneficent work, increasing mankind's output of
goods, and providing employment as long as the factory or railway that
he helps to build is running, is induced to do so, as a rule, by the
purely selfish motive of providing for his old age or for those who
come after him by earning the rate of interest that is paid to him for
his capital. What is this rate of interest going to be, and how much
effect does it have upon the creation of capital?

Some people argue that a low rate of interest makes people save more
because it is necessary for them to save more in order to acquire
independence. Others maintain that a high rate of interest induces
people to save because they can see the direct advantage of doing so.
Both these arguments are probably true in some cases. But, as a rule,
people who have the instinct of saving will save, within certain
limits, whatever the rate of interest may be. When the rate of
interest is low they will certainly not reduce their saving because
each hundred pounds that they put away brings them in comparatively
little, and when the rate of interest is high the attraction of the
high rate will also deter them from diminishing the amount that they
put aside. Moreover, we have to consider, not only the money payment
involved by the rate of interest, but its buying power in goods. In
1896 trustee securities could only be bought to return a yield of
2-1/2 per cent. for the buyer; now the investor can get 5-1/4 per
cent. and more from the British Government. And yet the power that
this 5-1/4 gives him over the goods and services that he wants for his
comfort Is probably not greater, and very likely rather less, than the
power which he got in 1896 from his 2-1/2 per cent. One of the few
facts which seem to stand out clearly from a study of the movement of
the prices of securities, and consequently of the rate of interest to
be derived from them, is that the rate of interest is high when the
price of commodities is high, and vice versa. So that the answer to
the question: What is the rate of interest likely to be after the war?
may be given, in Quaker fashion, by another question: What will happen
to the index number of the prices of commodities? It seems fairly
probable that both these questions may be answered, very tentatively
and diffidently, by the expression of a hope that after a time, when
peace conditions have settled down and all the merchant ships of the
world have been restored to their peaceful occupations, the general
level of the price of commodities will be materially lower than it is
now, though probably considerably higher than it was before the war.
If this be so, then it is fairly safe to expect that the rate of
interest, as expressed in money, will follow the movement of prices of
goods. But it must be remembered that by rate of interest I mean the
pure rate of interest, that is to say, the rate earned on perpetual
fixed-charge securities of the highest class. It may be that, owing to
the very large amount of gilt-edged securities created in the course
of the war by the various warring Governments, the rate of profit to
be earned by the man who takes the risks of industry from dividends
on ordinary shares and stocks will have to be made relatively more
attractive than it was before the war.

If, then, capital can only be created by saving, how far will the war
have helped towards its more plentiful production?

Here, again, we are faced with a psychological question which can only
be answered by those who are bold enough to forecast the state of mind
in which the majority of people will find themselves when the war is
over. If there is a great reaction, and everybody's one desire is to
throw this nightmare of war off their chests and go back to the times
as they were before it happened, then all that the war has taught us
about the production of capital will have been wasted. But I rather
doubt whether this will be so. Saving merely means the diversion of
a certain proportion of the output of industry into the further
equipment of industry. The war has taught us lessons which, if we
use them aright, will help us to increase enormously the output of
industry. So that if these lessons are used aright, and industry does
not waste its time in squabbles over the sharing of its product, its
output may be so great that a comparatively smaller amount of saving
in relation to the total output may produce a larger amount of capital
than was made available in days before the war. There is a further
point, that the war has taught a great many people who never saved at
all to save a good deal. It was estimated before the war that we in
this country were saving about four hundred millions a year. This
figure was necessarily a guess, and must be taken for what it is
worth. There can be no doubt that the amount of real saving now in
progress, voluntary, owing to the patriotic effort of people who think
they ought to restrict their own consumption so that the needs of
our fighters may be provided, and enforced through the action of the
Government in taking taxes and inflating the currency, is very much
greater than it was before the war; probably at least twice as much
when all allowance has been made for depreciation of the currency.
Some people think that this saving lesson will have been learned, will
have become a habit, will continue and will grow. If so, if people
save a larger proportion of their income than they did before, and
if the total output of goods is increased, as it easily may be, it
becomes at once evident that there is a possibility of a freer supply
of capital for industry than has ever been seen. But in looking at
this hopeful and optimistic picture, we must never forget that it can
only be painted by those who are prepared to leave out of the canvas
all the danger of industrial strife and dislocation, and all the
danger of reaction to the old habits of luxurious spending which are
so strong a possibility in the other direction. The war has shown us
how we can, if we like, increase production, reduce consumption, and
so have a larger margin than ever before to be put into providing
capital for industry. Whether we really have learned these lessons and
will apply them remains to be seen.

There is also a possibility that some people may recognise that saving
money and applying it to the re-equipment of the world for peace
industry is a patriotically praiseworthy object not less than saving
in time of war for the equipment of the Army. It may be that the
benefit conferred by those who save, in increasing the output of
mankind, will be more generally recognised, and that the supply of
capital may, when the war is over, be increased on patriotic grounds,
or on grounds even wider than mere patriotism--a desire to help a
great stride forward in the material welfare of mankind.

Capital is a very tender plant, and it will be very easy, if mistakes
are made, to frighten those who see the benefits of accumulation for
themselves and others. Labour troubles and industrial unrest are
extremely likely to have the effect of destroying capital by
preventing it coming into existence. If we remember that capital can
only be created by being saved, it becomes evident that if those who
save are threatened with too deep an inroad into their reward for so
doing, on the part of labour, they will hesitate to save; and if the
action of labour has this effect, labour will be sawing off the bough
on which it sits. For it is new capital that sets new industry going,
and it is only by a continual supply of new industry that a continual
demand for fresh labour can be maintained.

There is also at present much mischievous talk about a great tax on
capital for the purpose of redeeming, or hastening the redemption of,
war debt. It is clear at once that it is not possible to tax capital
if we remember that capital consists of the tools and equipment of
industry, or even, in the wider sense of the word, of accumulated
assets which have not been consumed. Unless the Government is prepared
to take payment in factory chimneys, railway sleepers, houses and
fields, or the securities and mortgages that are claims on their
product, it is not possible to tax capital. The only thing that the
Government can tax is the output, that is to say, the annual income
of the people. In other words, a tax on capital is simply a form of
income tax assessed, not according to a man's income, but according to
the assets of which he is possessed. The effect of such a tax would
be that he who has spent everything that he has earned on his own
enjoyment would go scot free in the matter of the capital tax, and
would be rewarded for his improvidence by being asked to make no
sacrifice; while his thrifty brother who, out of a smaller income, has
set aside a certain proportion during the last twenty or thirty years,
would have to hand over a portion of his current income assessed
upon the value of the assets into which he has put his savings.
Incidentally, it may be remarked that it would take years to make this
necessary valuation, and that it would probably be done in a very
inequitable manner by untrained and incompetent officials. But the
important point is this, that if the Government shows a tendency to
take the possession of assets as a basis for taxation it will be
directly encouraging those who spend their whole income in riotous
living and frivolous amusement, and discouraging those who help to
increase mankind's output by adding to the capital available.

Finally, it may be added that the shyness of the saver will be greatly
diminished if he can feel that there is a trustworthy machinery of
company promotion, so that he can rely on any savings that he puts
into industry having at least a fair chance of yielding him a fair
reward. This subject is too vast to enter into at present, but it
is one to which those who are responsible for the management of our
financial affairs cannot give too much attention. Every time the real
investor is swindled out of his money there is more than a chance that
he will look upon all forms of saving as a folly to be left to the
credulous. It is easy to say that it was his own fault, that he ought
to have been more careful, or consulted a better broker; but he will,
with equal ease, retort that If honest financiers knew their business
better, they would have long ago made things easier for the ignorant
investor to know whether he was putting his money into genuine
enterprise or throwing it down a sink.

Like all other divagations on the subject of what may happen in the
future, this attempt to forecast has necessarily consisted of "dim
glimpses into the obvious," as the undergraduate said of Jowett's
sermon. All that we can be sure of is this: that if the great
opportunities that will lie open to mankind at the end of the war
are rightly used, if we use its lessons to increase our production,
restrict our frivolous consumption, and put a larger proportion of our
larger production into stimulating production still further, there
ought to be a great increase in the amount of capital available to
supply the great increase which may be expected in the amount of
capital demanded. The fact that the chief nations of the world will
have enormous debts on which to pay interest is not one that need
necessarily terrify us from this point of view. The arranging and
imposition of the taxation necessary for meeting the interest on these
debts will involve very serious political and social questions; but
the payment of this interest need not necessarily diminish production,
and it may probably help in checking consumption. It will not impair
the total wealth of the world as a whole; it will merely affect its
distribution. And since it will mean that a considerable part of the
world's output will, for this reason, be handed over to the holders of
the various Government debts, who, _ex hypothesi_, will be people who
have saved money in the past, it is at least possible that they may
devote a considerable amount of the spin so received to further saving
or increasing the supply of capital available.



_October_, 1917

London after the War--A German View--The Rocks Ahead--Our Relative
Position secure--Faulty Finance--The Strength we have shown--The
Nature and Limits of American Competition--No other likely Rivals.

Will the prestige of the London money market be maintained when the
war is over? This is a question of enormous importance, not only
to every one who works in and about the City, but to all who are
interested in the maintenance and increase of England's wealth. Like
all other questions about what is going to happen some day, the answer
to it will depend to a very great extent on what happens between the
present moment and the return of peace. To arrive at an answer we have
first to consider on what London's financial prestige has been based
in the past, and on this subject we are able to cite in evidence the
opinion of an enemy. Our own views about the reasons which gave us
financial eminence may well be coloured by national and patriotic
prejudice, but when we take the opinion of a German we may be pretty
sure that it is not warped by any predisposition in favour of English
character and achievement.

A little book published this year by Messrs. Macmillan and Co.,
entitled "England's Financial Supremacy," contains a translation of
a series of articles from the _Frankfurter Zeitung_, and from this
witness we are able to get some information which may be valuable, and
is certainly interesting.

The basis of England's financial supremacy is recapitulated as follows
by this devil's advocate:--

"The influence of history, a mighty empire, a cosmopolitan Stock
Exchange, intimate business connections throughout the whole world,
cheap money, a free gold market, steady exchanges, an almost unlimited
market for capital and an excellent credit system, an elastic system
of company legislation, a model Insurance organisation and the help of
Germans, these are the factors that have created England's financial
supremacy. Perhaps we have omitted one other factor, the errors and
omissions of other nations."

Coming closer to detail, our critic says, with regard to the
international nature of the business done on the London Stock

"In recent years London had almost lost its place as the busiest stock
market in the world. New York, as a rule, Berlin on many occasions,
could show more dealings than London. But there was no denying the
international character of its business. This was due to England's
position of company promoter and money lender to the world; to the way
in which new capital was issued there; to its Stock Exchange rules,
so independent of legislative and Treasury interference; to the
international character of its Stock Exchange members, and to the
cosmopolitan character of its clients,"

On the subject of our Insurance business and the fair-mindedness and
quickness of settlement with which it was conducted, we can cite the
same witness as follows:--

"Insurance, again, represented by the well-known organisation of
Lloyds, which in form is something between a stock exchange and a
co-operative partnership, is nowhere more elastic and adaptable than
in London. It must be said, to the credit of Lloyds, that anyone
asking to be insured there was never hindered by bureaucratic
restrictions, and always found his wishes met to the furthest possible
extent. The agencies of Lloyds abroad are also so arranged that both
the insured and the insurer can have their claims settled quickly and

But one of the most remarkable tributes to a quality with which
Englishmen are seldom credited, and one of the frankest confessions of
a complete absence of this quality in our German rivals, is contained
in the following passage:--

"A further bad habit, harmful to our economic development, is
narrow-mindedness. This, too, is very prevalent in Germany--and
elsewhere as well. And this is not surprising. Even among the
generation which is active to-day, the older members grew up at a time
when possibilities of development were restricted and environment was
narrow. With commendable foresight many of these older men have
freed themselves from this petty spirit, and are second to none in
enterprise and energy. Germany can be as proud of its 'captains of
industry' as America itself. But many commercial circles in Germany
are still unable to free themselves from these shackles. The relations
between buyer and seller are still often disturbed by petty quibbling.
In those industries where cartels and syndicates have not yet been
formed, too great a role is played by dubious practices of many kinds,
by infringements of payment stipulations, by unjustifiable deductions,
etc., while, on the other hand, the cartels are often too ruthless
in their action. In this field we have very much to learn from the
English business man. Long commercial tradition and international
business experience have taught him long ago that broad-mindedness is
the best business principle. Look at the English form of contract, the
methods of insurance companies, the settlement of business disputes!
You will find no narrow-mindedness there. Tolerance, another quality
which the German lacks, has been of great practical advantage to the
Englishman. Until recently the City has never resented the settlement
of foreigners, who were soon able to win positions of importance
there. Can one imagine that in Berlin an Italian or a South American,
with very little knowledge of the German language, would be not only
entrusted with the management of leading banks and companies, but
would be allowed in German clubs to lay down--in their faulty
German--the law as to the way in which Germany should be developed?
Impossible! Yet this could be seen again and again in England, and
the country gained greatly by it. If the English have now developed
a hatred of the foreigner, it only means that the end of England's
supremacy is all the nearer."

According to our German critic the great fabric that has been built up
on these characteristics and qualities is threatened with ruin by the
war; and the heritage which we are supposed to be losing is to fall,
by some process which is not made very clear, largely into the hands
of Berlin. In order that we may not be accused of taking the laudatory
plums out of this German pudding and leaving out all criticisms and
accusations, let us quote in full the passage in which he dances in
anticipation on London's corpse:--

"Let us sum up. England's reputation for honest business dealing and
for trustworthy administration has suffered. Her insular inviolability
has been put in question. The ravages of war have undermined the
achievements of many generations. Her free gold market has broken
down. The flow of capital towards London will fall off, for those who
cannot borrow there will no longer send deposits. The surplus shown
in her balance-sheet will contract. Foreign trade will also decrease.
Hand in hand with this fall, free trade, that mighty agent in the
development of England's supremacy, will, in all probability, give
place to protection. Stock Exchange business will grow less. Rates of
interest will be permanently higher."

How much truth is there in all this? Has our reputation for honest
dealing and for trustworthy administration suffered? Surely not in the
eyes of any reasonable and unprejudiced observer. In the course of the
greatest war in history, fought by Germany with weapons which have
involved the violation of the most sacred laws of humanity and
civilisation, England has acted with a respect for the interests of
neutrals which has been severely criticised by impatient observers at
home. As for our "insular inviolability" having been put in question,
it certainly has not, so far, suffered any serious damage. Our Fleet
has defended us from invasion with complete success, and the damage
done by marine and aerial raiders to our property on shore is
negligible. Our free gold market is said to have broken down. The
proof of the pudding is in the eating. Germany, when the war began,
immediately relieved the Reichsbank from any obligation of meeting
its notes in gold, and frankly went on to a paper basis. England has
already shipped well over 200 millions in gold to America to finance
her purchases there and those of her Allies.

It may be true that capital will not flow to London if London is not
in a position to lend, but we see no reason why London should not be
able to resume her position as an international money lender, not
perhaps immediately on the declaration of peace, but as soon as the
aftermath of war has been cleared away and the first few months of
difficulty and danger have been passed. The prophecy that foreign
trade will decrease may also be true for a time owing to the
destruction of merchant shipping that the war is causing. This
possibility, however, may be remedied between now and the end of the
war if the great programmes of merchant shipbuilding which have been
undertaken by the British and American Governments are duly carried
out. In any case, even if foreign trade decreases, there is no reason
whatever to expect that England's will decrease faster than that of
other nations.

In all these problems we have to look for the relative answer and to
consider not whether England has suffered by the war, for it is most
obvious that she has, but whether she will have been found to have
suffered more than any competitor who may threaten her after-war

"Free trade," says our German Jeremiah, "that mighty agent in the
development of England's supremacy, will, in all probability, give
place to protection." We venture to think that it will be recognised
that the Free Trade policy of the past gave us a well-distributed
wealth which was an invaluable weapon in time of war, and that any
attempt to impose import duties when peace comes will be admitted,
even by the most ardent Tariff Reformers, as untimely when there is
likely to be a world-wide scramble for food and raw materials, and the
one object of every nation will be to get them wherever they can and
as cheaply as they can.

If Stock Exchange business will be less, though this does not by any
means follow, there is no reason why it should be relatively less
here than in other centres. As to rates of interest being permanently
higher, the same answer applies. It may be true, but there is no
reason why they should be relatively higher in London than elsewhere;
and, if they are high, it will be because there will be a great demand
for capital, which will mean a great trade expansion; both in the
provision of capital and in meeting the demands of trade expansion
England will be doing what she has done with marked success in the
past and can, if she works in the right way now and after the war, do
again with equal and still greater success.

There is, however, a danger that threatens our financial position
after the war, on the subject of which our German critic is discreetly
silent, because that danger threatens the position of Germany very
much more emphatically. It consists in the way in which our Government
is at present meeting the needs of war finance, not by compelling
economy on the civilian population through taxation and borrowing
direct from investors, but by manufacturing currency for the purposes
of the war by means of the printing press and the banking machinery.
The effect of this policy is seen in the enormous mass of Treasury
notes with which the country has been flooded. Their total is now
nearly 180 millions or perhaps 100 millions more than the gold which
they were originally designed to replace.

It is also to be seen in the great increase in banking deposits which
has been a feature of our financial history since the war began. Some
people regard this feature as a phenomenal proof of the growth of our
wealth during the war. I am afraid there is little foundation for this
pleasant assumption, for these new deposits have been called into
being by the banks subscribing to Government securities, whether War
Loan, Treasury Bills, Exchequer Bonds or Ways and Means advances or
lending their customers the wherewithal to do so. By this process
the balance-sheets of the banks are swollen on both sides, by the
Government securities and advances to customers among the assets,
against which the banks create new deposits, so giving the community
as a whole the right to draw more cheques.

Every time the bank makes an advance it gives the borrower a credit in
its books, that is to say, the right to draw cheques to that amount;
the borrower draws on the credit and hands it to any one to whom he
owes money; but as long as the advance is outstanding there will be a
deposit out against it in the books of some bank or another.

It is an easy way for the Government to finance the war by getting the
banks to manufacture money for it. Nobody feels any poorer for the
process, in fact, those who have new money in their pockets or in
their bank balance feel richer, but the result of thus multiplying
currency without any increase in the supply of goods and services to
be bought inevitably helps the rise in prices which makes the war
costly, puts the burden of it on to the wrong shoulders, and likewise
cheapens the value of the English pound as measured in other
currencies. This is why the evils involved by this process become so
relevant to the question now at issue.

If the Government is allowed to go on financing the war by increasing
the currency with the very reluctant help of the bankers, the
difficulties of maintaining our gold standard and keeping the
exchanges in favour of London will be very greatly magnified when
the war is over and our gold reserves are no longer protected by the
submarines and the high cost of shipping gold that they produce. It
therefore follows that all who have the true interests of the City at
heart should use all the influence they can to force the Government to
adopt a sounder financial policy before it is too late.

It is true that our war finance has hitherto been sounder than that of
any other warring Power, but it has fallen very short if we apply the
rough test of the proportion of the cost of war borne out of taxation
and compare our performance with the results achieved by our ancestors
in the Napoleonic and Crimean wars.

If we have done better than France, Italy, Russia and Germany in this
respect, it must also be remembered that the financial prestige which
these countries had to maintain was not nearly so great and well
established as ours, with the possible exception of France; and
France, being exposed to the ravages of a ruthless invader, was in a
position which put special obstacles in the way of the canons of sound

If, then, there are certain dangers that threaten our financial
position when the war is over, we must remember, on the other hand,
that the war has already done a great deal to maintain our financial
prestige and raise it to a height at which it never stood before.

When the war began we were expected to finance the Allies, to keep the
seas clear and put a small Expeditionary Force to support the left
flank of the French Army, and to do these things during a contest
which was expected by the consensus of expert opinion to last not more
than a few months. All these things we accomplished, and we were
the only Power at war which did actually accomplish all that it was
expected and asked to do. More than that, we also undertook a great
task which was not in our programme; we created a great army on a
Continental scale, and, at the same time, continued to carry out the
other tasks which had been assigned to us.

All these things we did, and that we should have done them was
evidence of economic strength and adaptability which have astonished
the world. To have financed the Allies and ourselves as long as we did
would have been comparatively easy if our population could have been
left at work to turn out the stuff and services, the provision of
which are implied by financing; but for us to have been able to do it
and at the same time to improvise an army which is now consistently
and regularly beating the Germans is an achievement which will
inevitably raise the world's opinion of our economic strength, on
which financial prestige is ultimately based.

But, as it has been said, in discussing this question we have to look
at it all the time from the relative point of view. How will our
prestige be when the war is over, not as compared with what it was
before the war, but as compared with what any other rival in any other
part of the world can show? Here we have to acknowledge at once,
freely and frankly, that, as compared with New York, we shall have
gone backward.

America will have been enormously enriched by the war, which we shall
certainly have not. America will have been opening up channels of
international trade and international finance, and so New York will
have been gaining at the expense of London. It is certain that when
the war is over America's dependence upon London for credits against
the shipments of goods to and from her shores will have been very
greatly lessened, if not altogether a thing of the past.

This change would have happened any way, war or no war, but it has
been greatly quickened by the war. Before the war America was already
making arrangements, under her new banking system, to promote the
machinery for acceptance and discount, in order that goods sent to her
from foreign countries should be financed by bills drawn on American
banks and houses in dollars instead of on English banks and houses in

Apart from this development, which would have happened in any case, it
remains to be seen how far New York will be in a position to act as
a rival of London as the world's financial centre. The internal
resources and potentialities of America are so enormous, and there is
such a vast amount of work to be done in developing them and bringing
them to full fruition, that it does not at all follow that America
will yet be inclined to take the position in international trade and
finance which will one day surely be hers, when she has done all the
work that is waiting to be done in her own back premises.

America has a new banking and monetary system on trial which has met
the difficult problems of the war with great success. These problems,
however, are not nearly as complicated and various as those which are
likely to arise in time of peace. When a nation is turning out an
enormous amount of goods for which the rest of the world is prepared
to pay any price, her finance is a comparatively simple business. Even
now, when America has assumed the duty of financing a large number of
Allies impoverished by three years of war which have been enriching
her, she is still simplifying the problem by restricting her advances
to the payment for goods bought in America.

That New York will be greatly strengthened by the war, which has
brought masses of American securities back to the country of origin
and has put into the hands of American bankers and investors large
blocks of European promises to pay, is as clear as noonday; but
whether when the war is over New York will care to be bothered much
with problems of international finance remains to be seen. In the
first place, the claims of her own country upon her financial
resources will be insatiable and imperative, In the second place, the
business of international finance is carried out on very finely cut
terms; and the Americans being accustomed to the fat rates of profit
which business at home has given them may not care to devote much
attention to the international market, in which the risks are big,
the turnover is enormous and the profits very finely cut. It has
been remarked by a shrewd observer that the Americans will never do
business for a thirty-second.

In the third place, it must be remembered that the geographical
position of London is more favourable than that of New York as a world
centre, as the world is at present constituted. England, anchored off
the coast of Europe, is clearly marked as the depot for the entrepot
trade of the Old and New Worlds. New York is clearly marked as the
centre for the trade of the Western hemisphere, and it is likely
enough that New York and London, acting together as the financial
chiefs of the two hemispheres, may be gradually united into what is
practically one market by the growing ties of mutual interest.

With regard to the position of other possible rivals to London's
position, it need only be said that they have certainly been weakened
much more rapidly than has London during the course of the war. Paris,
threatened by the near approach of an invading foe, has inevitably
suffered much more severely than London, and is likely to take longer
in recovering the great position as a provider of capital which was
given to her by the thrift of the average French citizen. Every one
expects with confidence to see, when the war is over, a miraculous
recovery in France produced by the same spirit which worked miracles
after the war of 1871, aided and abetted by the subsequent improvement
in man's control over the forces of nature, and also by the deep and
world-wide sympathy which all will feel for France as the champion of
freedom who has suffered most severely in its cause during the war.
But it is impossible to expect, after what France has suffered, that
she will be, for some time, in a position seriously to challenge
London as a financial rival. All Englishmen will hope that the day
when she will be in a position to challenge us again will come

As to Berlin, the only other possible rival to London in Europe, very
little need be said. The German authority quoted above has already
shown some of the difficulties with which Berlin has to struggle.
He spoke of the narrow-mindedness of German finance, of the "petty
quibbling" which often disturbs the relations between buyer and
seller, of the "dubious practices of many kinds, infringements of
payment stipulations, unjustifiable deductions," etc., and the
"ruthless" action of the cartels. He acknowledges that though Germany
had a gold standard "too much anxiety used to be shown when the gold
export point was reached," and that "it was also feared that to export
gold would incur the wrath of the Reichsbank."

With these disadvantages to struggle against, quoted from the mouth of
a German observer, Germany has also succeeded by her ruthless policy
during the war in earning the deep hostility of the greater part of
mankind. Sentiment probably enters into business relations a good deal
more than most business men admit, and for any country to set out to
gain the leadership in trade and finance by outraging the feelings of
most of its possible customers is an extraordinary piece of stupidity.

It seems, then, that apart from the relative weakening of London as
compared with New York, there is very little need for us to fear any
serious change in England's financial position after the war as long
as the Government's faulty finance is not allowed too seriously to
endanger the position of our gold standard. It is true that we shall
not benefit, as much as we undoubtedly have in the past, from the
"help of Germans" in developing our finance. But indirectly the
Germans will still be helping us by the great stimulus that the war
will have given us towards efficiency and hard work.

What we have to do in order to secure London's position after the war
is to restore as soon as we can the system that had established it in
the century before the war. We have to show the world that, far from
any intention to abandon Free Trade, we mean to take a long step
forward along the line of international activity which has been the
source of our greatness in the past. We want, as soon as possible, to
get back that freedom from Government control which has given us such
elasticity and adaptability to our money market, our Stock Exchange
and our Insurance business. A certain amount of Government control
will inevitably have to continue for a time after the war, but the
sooner we rid ourselves of it the sooner we shall restore to the
London money market those qualities which, after the reputation that
it has for honesty, soundness and straight dealing, were most helpful
in building up its eminence.

Above all, we have to work hard both in finance and industry and
commerce. Finance, which is the machinery for handling claims for
goods and services, can only be active and effective if industry and
commerce are active and effective behind it, turning out the goods and
services to meet the claims that finance creates. A great industrial
and commercial output, with severe restriction of unnecessary
consumption so that a great margin may go into capital equipment, will
soon repair the ravages of war, bring down the price of credit and of
capital and make London once more the place in which these things are
most cheaply and freely to be bought.

Finally, if we want to restore London as a place in which all the
financial transactions of the world were centred, we must remember
that we cannot do so if we restrict the facilities given to foreigners
to come here and settle and do business. It is not possible to be an
international centre with an insular sentiment.



_November_, 1917

Financial Conditions in August, 1914--No Scheme prepared to meet the
Possibility of War--A Short Struggle expected--The Importance of
Finance as a Weapon--Labour's Example--The Economic Problem of
War--The Advantages of Direct Taxation--The Government follows the
Path of Least Resistance--The Effect of Currency Inflation.

A legend current in the City says that the Imperial War Committee, or
whatever was the august body entrusted with the task of thinking out
war problems beforehand, had done its work with regard to the Army and
Navy, transport and provision, and everything else that we should want
for the war, and were going on to the question of finance next week,
when the war intervened. Whatever may be the truth of this story, the
events of the war confirm the opinion that if it was not true it ought
to have been. We are continually accused of not having been ready for
the war; but, in fact, we were quite ready to do everything that we
had promised to do with regard to military and naval operations. Our
Navy was ready in its place in the fighting line, and the dispatch
with which our Expeditionary Force was collected from all parts of the
kingdom, and shipped across to France, was a miracle of efficiency and
practical organisation. It is true that we had not got an Army on a
Continental scale, but it was no part of our contract that we should
have one. The fighting on land was in those days expected to be done
by our Allies, assisted by a small British force on the left flank of
the French Army. That British force was duly there, and circumstances
which were quite unforeseen made it necessary for us to undertake a
task which was no part of our original programme and create an Army
on a Continental scale, in addition to doing everything that we had
promised beforehand to a much greater extent than was in the bargain.

But in finance there was no evidence that any thought-out policy had
been arrived at in order to make the best possible use of the nation's
economic resources for the war when it came. The acute crisis in the
City which occurred in August, 1914, was a minor matter which hardly
affected the subsequent history of our war finance except by giving
dangerous evidence of the ease by which financial problems can be
apparently surmounted by the simple method of creating banking
credits. That crisis merely arose from the fact that we were so
strong financially, and had so great a hold upon the finance of other
countries in the world, that when we decided, owing to stress of war,
to leave off lending to foreigners and to call in loans that we had
made by way of accepting and bill-discounting arrangements, the whole
machinery of exchange broke down because from all over the world the
market in exchange went one way. Everybody wanted to buy bills on
London, and there were no bills to be had.

There was also the internal problem which arose because some of the
public and some of the banks took to the evil practice of hoarding
gold just at the wrong moment, and consequently there was no available
supply of legal tender currency except in the shape of Bank of England
notes, the smallest denomination of which is L5. It is known that our
bankers had long before pointed out to the Treasury that if ever a
banking crisis arose there would, or might be, this demand for a paper
currency of smaller denominations than L5; this suggestion got into a
pigeon-hole at the Treasury and was deep under the dust of Whitehall
by the time experience proved how big a gap in our financial armour
had been made by its neglect. If the L1 notes, with which we are now
so familiar, had been ready when the war broke out, or, still better,
if the Bank of England had been empowered and instructed to have an
issue of its own L1 notes ready, it may at least be contended that the
moratorium, which was so bad a financial beginning of the war, might
have been avoided.

But this opening crisis was a short-lived matter, and was promptly
dealt with, thanks to the energy and courage of Mr Lloyd George, who
was then Chancellor of the Exchequer, and saw that things had to be
done quickly, and took the advice of the City as to what had to be
done. The measures then employed erred, if at all, on the side of
doing too much, which was certainly a mistake in the right direction
if in any. What is much more evident is the fact that not only had
there been no attempt to provide against just such a jolt to our
financial machine as took place when the war began, but that, quite
apart from the financial machinery of the City, no reasoned and
thought-out attention had been given to the great problems of
governmental finance which war on such a scale brought with it. There
is, of course, the excuse that nobody expected the war to be on this
scale, or to last so long. The general view was that the struggle
would be over in a few months, and must certainly be so if for no
other reason because the economic strain would be so great that the
nations of Europe could not stand it for a long time. On the other
hand, we must remember that Lord Kitchener, whom most men then
regarded as representing all that was most trustworthy in military
opinion, made arrangements from the beginning on the assumption that
the war might last for three years. So, while some excuse may be made
for our lack of financial foresight, it does seem to have been the
duty of those whose business it is to manage our finances to have
thought out a complete scheme to be adopted in case of war if at any
time we should be involved in one on a European scale. Instead of
which, not only would it appear that no such endeavour had been made
by our Treasury experts before the war, but that no such endeavour
has ever been made by them since the war began. All through the
war's history many of the country's mistakes have been based on the
encouraging conviction that the war would be over in the next six
months. This conviction is still cherished to this day, and there can
be no doubt that if those who cherish it hold on to it long enough
they will come right some day.

But if delusions of this kind may be fairly excused in the man in
the street, they do not seem to be any excuse for those who are
responsible for our finance for their total lack of a thought-out
scheme at the beginning of the war, and their total failure to produce
one as the war went on. We have financed the war by haphazard methods,
limping along the line of least resistance. We are continuing to do
so, and we may do so to the end, though there are now growing signs of
an impatience both among the property-owning classes and others of
the system by which we are financing the war by piling up debt and
manufacturing banking credits.

The objections to the policy on the part of the "haves" and the "have
nots" are, of course, different, but as they both converge to the
same point, namely, to the reform of our system of war finance, it is
possible that they may in time have the effect of shaking even the
confidence of our politicians and officials in the haphazard and
slipshod methods which would long ago have produced financial disaster
if it had not been for the great financial strength of the country.

Finance is an enormously important weapon in the hands of our rulers
for gliding the economic activities of the people. This is so even in
peace time to a certain extent, though the revenue then collected is
so small an item in the total national income that it counts for much
less than in war, when the power that the Government can wield by
its policy in taxation and borrowing might have been all-powerful in
keeping the nation on the right lines in the matter of spending and
keeping down the cost of the war, and in maintaining our financial
staying power to a far greater extent than has actually been done.

It is easy, as they say on the Stock Exchange, to job backwards, and
it is also easy, and perhaps rather unprofitable, to hazard opinions
about what would have happened if things had been otherwise.
Nevertheless, when we look back on the spirit of the country as it was
in those early days of the war, when the violation of Belgium had sent
a chivalrous thrill through the hearts of all classes in the country,
when we all recognised that we were faced with the greatest crisis
in our history, that our country and the future of civilisation were
about to be tested by the severest strain ever applied to them, that
the life and fortune of the individual did not count, but that the
war and victory were the only interests that any one had a right to
consider--when one remembers all these things, and the use that a wise
financial policy might have made of them, it is impossible to avoid
the conclusion that the history of the war in this country and its
social and political effects might have been something much finer,
much cleaner and more noble if only the weapons of finance had been
more boldly and wisely used. It is not a good thing to indulge in
high-falutin' on this subject. It is absurd to suppose that the war
suddenly turned us all into plaster saints at the beginning, and that
we might have continued so to the end if the State had dealt with our
money in a proper way. But without setting up any such idealistic
arguments as these, looking back on those early days of the war, one
can still remember the thrill of earnestness and of eagerness for
self-sacrifice which has since then given way lamentably to war
profiteering, war strikes, and a general struggle among many classes
of the community to make as much as possible out of the war, merely
because our financial leaders have never really put the country's
financial problem properly before the country.

We were not plaster saints, but we were either Idealistic and perhaps
foolish people who attached great importance to the freedom and
security of small nations and all those items in the programme of
idealistic Radicalism, or else we were good, red-hot, true-blue
Jingoes with a hearty hatred for Germany, and enjoyed the thought that
the big fight which we had long foreseen between the two countries was
at last going to be fought out. Or, again, we were just commonplace
people who did not much believe in idealistic Radicalism or
anti-German bitterness, but saw that the whole future of our country
was at stake, and were prepared to do anything for it. A fine example
was set us in those days by the Trade Union leaders. The industrial
world was seething with discontent. The Suffragettes in London and the
Carsonites in Ireland had shown us how much could be done by appeals
to physical force in a lazy-minded community; and hints of industrial
revolution, with great organised strikes, which were going to tie up
the transport industry of the country were in the air. And then, when
the war came, the Labour leaders said, "No strikes until the war is
over. Our country comes first."

This was the lead given to the country by those down at the bottom,
who had the least to lose, and whose patriotism during the course of
the war has frequently been questioned. At the top the financial and
property-owning classes, having been saved by Mr Lloyd George's able
adroitness from a bad crisis in the City, were entirely tame, and
would have suffered anything in the way of taxation or financial
conscription if the need for it had been properly put before them.

It is almost amusing to remember now that in those early days of the
war the shareholders in Home Railway companies were thought lucky. The
Government were taking the railways over, and were guaranteeing that
their proprietors should receive the same dividends as they had had
before the war. Such was the view in financial and property-owning
circles of results of war that, so far from any expectation of the
huge profits which war has put into the pockets of certain classes,
they were only too thankful if they could be assured that their gross
incomes were not going to be reduced.

Such was the spirit with which the Government of that day had to
deal. A spirit in all classes earnestly patriotic, and so thoroughly
frightened of the economic consequences of the war that it would have
been ready to face any sacrifices that the Government had asked of it.
How, then, would the Government have dealt with this spirit if it had
taken the trouble really to think out the problem of war finance on
a long view instead of proceeding along a haphazard line, adjusting
peace methods to war without any consideration as to their adequacy?
If the problem had been really thought out beforehand the Government
must have seen clearly that the real economic problem in war-time is
not merely a question of raising money, since that can at any time
be done easily by means of a printing-press, but of diverting the
industrial energy of the nation from peace to war purposes, that is
to say, transferring from the enjoyment of the individual citizen
the goods and services that used to contribute to his comfort and
amusement, and turning them over to the provision of the things needed
for the war. War's needs can only be met out of the current production
of the world as it is at present. All the warring powers begin a
war with certain accumulated war stores consisting of battleships,
ammunition, guns and all other forms of war material. Apart from these
stores with which they begin, the whole work of providing the armies
with the fighting materials that they require, and the food and
clothes that they consume, has to be done during the course of the
war, that is to say, out of the current production of the moment.

Therefore the real economic problem that any Government has to face in
war-time is that of inducing its citizens to reduce their purchase of
goods and services, that is to say, to spend less, so that all
the things required for the Army and Navy may be obtained by the
Government. It is true that some of the goods and services required
for carrying on war can be obtained from foreign countries by any
belligerent which is able to communicate with them freely. In that
case the current production of the foreigner can be called in to help.
But this can only be done if the warring country is able to ship goods
to the foreigner in payment for what it buys, or if it is able to
obtain a loan from the foreigner, or some other foreign country, in
order to pay for its purchases abroad, or again, if, as in our case,
it holds a large accumulation of securities which foreign countries
are prepared to take in exchange for goods that they send for the
purposes of the war. By these two last-named processes, raising money
abroad, and selling securities to foreign nations, the warring country
impoverishes itself for the future. When it borrows abroad it pledges
itself to export goods and services in future to meet interest and
sinking fund on the money so raised, so getting no goods and services
in return. When it ships its accumulated wealth in the form of
securities it gives up for the future any claim to goods and services
from the debtor country which used to come to it to meet interest and
redemption. It is only by shipping goods in return for goods imported
for the war that a country can keep its financial staying-power on an
even keel.

Thus the problem which a statesman who had thought out the economics
of war beforehand would have recognised as the keystone of his policy,
would have been that of diverting the activities of the country from
providing itself with comforts and amusements to turning out goods
required for war, and of doing so with the least possible friction,
the least possible alteration in the economic equilibrium of the
country, and, above all, with the least possible cost to the national
finances. We arrive at the true aspect of this problem more easily if
we leave out the question of money altogether and think of it in units
of energy. When a nation goes to war it means to say that it has to
apply so many units of energy to the business of fighting, and to
provide the fighters with all that they need. If at the beginning
of the war its utmost capacity of output was, to mention merely a
fanciful figure, a thousand million units of energy, and if it was
clear that the fighting forces of the country would need for their
proper maintenance five hundred million units of energy, then it is
clear that the nation's ordinary consumption of goods and services
would have to be reduced to the extent of five hundred millions of
units of energy, which would have to be applied to the war, that is,
assuming that its possible output remained the same.

In other words, the spending power of the citizens of the country
had to be reduced so that the industrial energy that used to go into
meeting their wants might be made available for the purposes of
fighting forces. Now what was the straightest, simplest and cleanest
way of bringing about this reduction in buying power on the part of
the ordinary citizen which has been shown to be necessary for the
purposes of war finance? Clearly the best way of doing it is by
taxation equitably imposed. When the State taxes, it says in effect
to the citizens, "Your country needs certain goods and services, you
therefore will have to go without those goods and services, and the
simplest way to make you do this is to take away your money and so
ration your buying power. Whatever is needed for the Army and Navy
will be taken away from you by taxation, and the result of this will
be that, instead of your indulging in comforts and luxuries, to the
extent of the war's needs the Government will use your money for
paying for what is needed for the Army and Navy."

If such a policy had been carried out the cost of the war to the
community would have been enormously cheapened. There need have been
no general rise in prices because there would have been no increase
in demand for goods and services. Anything that the Government
spent would have been counter-balanced by decreased spending by the
individual; any work that the Government needed for the war would have
been counter-balanced by a reduction in demand for work on the part
of individual citizens. There would have been no multiplication of
currency owing to enormous credits raised by the Government; there
would have been merely a transfer of buying power from individuals to
the State. The process would have been gradual, there need have been
no acute dislocation, but as the cost of the war increased, that is to
say, as the Government needed more and more goods and services for its
prosecution, the community would gradually have shed one after another
the extravagances on which it spent so many hundreds of millions in
days before the war. As it shed these extravagances the labour
and energy needed to produce them would have been automatically
transferred to the service of the war, or to the production of
necessaries of life. By this simple process of monetary rationing all
the frantic appeals for economy, and most of the complicated, tangled
problems raised by such matters as Food Control or National Service
would have been avoided.

But, it may be contended, this is setting up an ideal so absurdly
too high that you cannot expect any modern nation to rise up to it.
Perhaps this is true, though I am not at all sure that if we had had a
really bold and far-sighted Finance Minister at the beginning of the
war he might not have persuaded the nation to tackle its war problem
on this exalted line. At least it can be claimed that our financial
rulers might have looked into the history of the matter and seen what
our ancestors had done in big wars in this matter of paying for war
costs out of taxation, with the determination to do at least as well
as they did, and perhaps rather better, owing to the overwhelming
scale of modern financial problems. If they had done so they would
have found that both in the Napoleonic and the Crimean wars we paid
for nearly half the cost of the war out of revenue as they went on,
whereas in the present war the proportion that we are paying by
taxation, instead of being 47 per cent., as it was when our sturdy
ancestors fought against Napoleon, is less than 20 per cent.[1]
Why has this been so? Partly, no doubt, owing to the slackness and
cowardice of our politicians, and the apathy of the overworked
officials, who have been too busy with the details of finance to think
the problem out on a large scale. But it is chiefly, I think, because
our system of taxation, though probably the best in the world,
involves so many inequities that it cannot be applied on a really
large scale without producing a discontent which might have had
serious consequences on our conduct of the war.

[Footnote 1: See _Economist_, August 4, 1917, p. 151.]

It is not possible nowadays, now that the working classes are
conscious of their strength, to apply taxation to ordinary articles
of general consumption with anything like the ruthlessness which in
former days produced such widespread misery. Indirect taxation of this
kind carries with it this inherent weakness that its burden falls most
heavily on those who are least able to bear it, consequently it is
bound to break in the hand of those who attempt to apply it with
anything like vigour to a community which is prepared to stand up for
fair treatment. A tax on bread or salt obviously hits the wage-earner
at 30s. a week infinitely harder than it hits the millionaire, and so
the country would not tolerate taxes on bread or salt. Direct taxes,
such as Income Tax and Death Duties, have this enormous advantage,
that they can really be regulated so as to press with continually
increasing severity upon those who are best able to bear them.
Unfortunately our Income Tax is still so unjustly imposed that it was
clearly impossible to make full use of it without its being first
reformed. That two men, each earning L1000 a year, should pay the same
Income Tax, in spite of one having a wife and five children, while
the other is a careless bachelor, is such a blot upon this otherwise
excellent tax that it is generally agreed that the present rate of 5s.
is as high as it can be made to go unless some reform is introduced
into its incidence. The need for its reform is made the excuse for a
sparing use of the tax, and we have been on several occasions assured
that, as soon as the war is over, this reform will be set about.

In the meantime the Government falls back on funding about 80 per
cent. of its requirements of the war on a system of borrowing. In
so far as the money subscribed to its loans is money that is being
genuinely saved by investors this process has exactly the same effect
as taxation, that is to say, somebody goes without goods and services
and hands over his power to buy them to the State to be used for the
war. Borrowing of this kind consequently does everything that is
needed for the solution of the immediate war problem, and the only
objection to it is that it leaves later on the difficulties involved
by raising taxes when the war is over, and economic problems are
much more complicated in times of peace than in war, for meeting the
interest and redemption of debt. But, in fact, it is well known that
by no means all that the Government has borrowed for war purposes has
been provided in this way. Much of the money that the Government has
obtained for war purposes has been got not out of genuine savings
of investors, but by arrangements of various kinds with the banking
machinery of the country, or by the simple use of the printing-press,
with the result that the Government has provided itself with an
enormous mass of new currency which has not been taken out of anybody
else's pocket, but has been manufactured by or for the Government.

The consequence of the profligate use of this dishonest process is
that general rise in prices, which is in effect an indirect tax on the
necessaries of life, involving all the injustice and ill-feeling which
arises from such a measure. It is inevitable that the working classes,
finding themselves subjected to a rise in prices, the cause of which
they do not understand, but the result of which they see to be a great
decrease in the buying power of their wages, should believe that they
are being exploited by profiteers, that the rich classes are growing
richer at their expense out of the war, and that they and the country
are being bled by a set of unpatriotic capitalist blood-suckers. It
is also natural that the property-owning classes, who find themselves
paying an Income Tax which they regard as extortionate, should
consider that the working classes by their continuous demands for
higher wages to meet higher cost of living, are trying to exploit
the country in their own interests in a time of national crisis, and
displaying a most unedifying spirit. The social result of this evil
policy of inflation, in embittering class against class, is a matter
which it is difficult to exaggerate. Some people think that it was
inevitable. This is too wide a question to be entered into now, but
at least it must be contended that if it is inevitable the extent to
which it is being practised might have been very greatly diminished.

Do we mean to go on to the end of the war with this muddling policy of
bad finance? If we still insist on believing that the war cannot last
another six months, and there is therefore no need to pull ourselves
up short financially and put things in order, then we certainly shall
do so. But we should surely recognise that there is at least a chance
that the war may go on for years, that if so our present financial
methods will leave us with a burden of debt which is appalling to
consider, and that in any case, whether the war lasts another six
months or another six years, a reform of our financial methods is long
overdue, is inevitable some time, and will pay us better the sooner it
is set about.



_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.



_January_, 1918

The Objects of the Levy--Its Origin and History--How it would work in
Practice--The Attitude of the Chancellor--The Effects of the Scheme
in discouraging Thrift--Its Fallacies and Injustices--The Insuperable
Obstacles to its Application--Its Influence on Production--One of the
Tests of a Tax--Judged by this Test the Proposed Levy is doomed.

By some curious mental process the idea of a levy on capital has come
into rapidly increasing prominence in the last few months, and seems
to be gaining popularity in quarters where one would least expect it.
On the other hand, it is naturally arousing intense opposition, both
among those who would be most closely affected by its imposition, and
also among those who view with grave concern the possible and probable
economic effects of such a system of dealing with the national debt. I
say "dealing with the national debt" because, as will be clear, as
a system of raising money for the war the suggestion of the levy on
capital has little or nothing to recommend it. But, as will also be
made clear, the proposal has been put forward as a thing to be done
immediately in order to increase the funds in the hands of the
Chancellor of the Exchequer to be spent on war purposes.

A levy on capital is, of course, merely a variation of the tax on
property, which has long existed in the United States, and had been
resorted to before now by Governments, of which the German Government
is a leading example, in order to provide funds for a special
emergency. This it can very easily do as long as the levy is not too
high. If, for example, you tax a man to the extent of 1-1/2 per cent.
to 2 per cent. of the value of his property, on which he may be
earning an average of 5 to 6 per cent. in interest, then the levy on
capital becomes merely a form of income tax, assessed not according to
the income of the taxpayer but according to the alleged value of his
property. It is thus, again, a variation of the system long adopted
in this country of a special rate of income tax on what is called
"unearned" income, i.e. income from invested property. But it is
only when one begins to adopt the broadminded views lately fashionable
of the possibilities of a levy on capital and to talk of taking, say,
20 per cent. of the value of a man's property from him in the course
of a year, that it becomes evident that he cannot be expected to pay
anything like this sum, in cash, unless either a market is somehow
provided--which seems difficult if all property owners at once are
to be mulcted of a larger amount than their incomes--or unless the
Government is prepared to accept part at least of the levy in the
shape of property handed over at a valuation.

Before, however, we come to deal in detail with the difficulties
and drawbacks of the suggestion, it may be interesting to trace the
history of the movement in its favour, and to see some of the forms in
which it has been put forward. It may be said that the ball was opened
early last September when, in the _Daily News_ of the 8th of that
month, its able and always interesting editor dealt in one of his
illuminating Saturday articles with the question of "How to Pay
for the War." He began with the assumption that the capital of the
individuals of the nation has increased during the war from 16,000
millions to 20,000 millions. A 10 per cent. levy on this, he
proceeded, would realise 2000 millions. It would extinguish debt to
that amount and reduce the interest on debt by 120 millions. The levy
would be graduated--say, 5 per cent. on fortunes of L1000 to L20,000;
10 per cent. on L20,000 to L50,000; up to 30 per cent. on sums over
L1,000,000; and the individual taxpayer was to pay the levy "in what
form was convenient, in his stocks or his shares, his houses or his
fields, in personalty or realty."

Just about the same time the _Round Table_, a quarterly magazine which
is usually most illuminating on the subject of finance, chimed in with
a more or less similar suggestion in an article on "Finance After the
War." It remarked that the difficulty of applying a levy on capital is
"probably not so great as appears at first sight." The total capital
wealth of the community it estimated at about 24,000 millions
sterling. To pay off a war debt of 3000 millions would therefore
require a levy of one-eighth. Evidently this could not be raised in
money, nor would it be necessary. Holders of War Loans would pay their
proportion in a simple way by surrendering one-eighth of their scrip.
Holders of other forms of property would be assessed for one-eighth of
its value and be called on to acquire and to surrender to the State
the same amount of War Loan scrip. To do this, they would be obliged
to realise a part of their property or to mortgage it, "but," added
the _Round Table_ cheerfully, "there is no insuperable difficulty
about that."

The first thing that strikes one when one examines these two schemes
is the difference in their view concerning the amount of capital
wealth available for taxation. Mr Gardiner made the comparatively
modest estimate of 16,000 millions to 20,000 millions; the _Round
Table_ plumps for 24,000 millions, and, incidentally, it may be
remarked that some conservative estimates put it as low as 11,000
millions. Thus we have a possible range for the fancy of the scheme
builder of from 11,000 to 24,000 millions in the property on which
taxation is proposed to be levied. But it is when we come to the
details of these schemes that the difficulties begin to glare. Mr
Gardiner tells us that millionaires would pay up to 30 per cent. of
their property, and that they would pay in what form was convenient,
in houses, fields, etc., etc. But he does not explain by what
principle the Government is to distribute among the holders of the
debt, the repayment of whom is the object of the levy, the strange
assortment of miscellaneous assets which it would thus collect from
the property owners of the country.

In commenting on this scheme the _Economist_ of September 15th took
the case of a man with a fortune of L100,000 invested before the war
in a well-assorted list of securities, the whole of which he had, for
patriotic reasons, converted during the war into War Loans. He would
have no difficulty about paying his capital levy, for he would
obviously surrender something between 10 and 20 per cent. of his
holding. But, "in exchange for nearly two-thirds of the rest, he might
find himself landed with houses and bits of land all over the country,
a batch of unsaleable mining shares, a collection of blue china, a
pearl necklace, a Chippendale sideboard, and a doubtful Titian,"
The _Round Table's_ suggestion seems to be even more impracticable.
According to it, holders of all other forms of property besides War
Loans would be assessed for one-eighth of its value--it does not
explain how the value is to be arrived at, nor how long it would take
to do it--and would then be called on to acquire and to surrender to


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