War-Time Financial Problems

by Hartley Withers

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.