War-Time Financial Problems

by Hartley Withers

In the second, we need not be misled by the Jeremiahs who tell us that now that we have won the war we have before us the task of paying for it. This is not true, or true only to a small extent—to the extent, that is to say, to which we shall, when all these assets and liabilities have been settled up and balanced, be afflicted with a foreign debt. Let us leave this question on one side for the time being, and consider what the position really is with regard to that part of the war's cost that has been raised at home. In so far as that has been done, the war cost has been raised by us while the war went on. In fact, all the war cost has to be raised by somebody while the war goes on, because the war is fought with stuff and services produced at the time and paid for at the time. But when Americans lend us money to pay for some of the stuff that they send us, they pay at the time and we, or our posterity, have to pay them back later on; this is the only way in which we can make posterity pay for the war, and then it only means that our posterity pays America's. It is not possible to carry on war with wealth that is going to be produced some day. The effort of self-sacrifice that war demands has to be made by somebody during its progress—otherwise the war could not be fought.

That effort of self-sacrifice we have already made in so far as we have paid for our war cost out of money raised at home. That money has been raised in three ways—by taxation, by borrowing saved money, and by inflation. When it is raised by taxation the sacrifice is obvious, and, in nearly all cases, inevitable: we pay our larger war taxes and so we have less to spend on ourselves, and so we go without things. A few people raise money to pay taxes during war by borrowing or drafts on capital, but they are probably so exceptional that their case need not be considered. We transfer our buying power to the Government to be used for the fighters, and so we set free the labour and material that used to go in providing us with comforts and pleasures; our competition for goods is reduced, and so the Government is able to get what it needs out of the nation's production, which is pro tanto relieved of our demand. The same thing happens when the Government gets money for the war by borrowing money that we save. We reduce expenditure, and transfer buying power to the State and diminish our demand on the nation's production, or that of its foreign supplies. If the whole war cost had been met by these two methods there need have been little or no increase in prices here, and the cost of the war would have been about half what it has been. Of the two methods, taxation is obviously the cleaner, simpler and more honest. By borrowing, the State hires those who have a margin to put part of it at the disposal of the State at a time of national crisis, instead of taking it from them outright. As most of the taxation involved by the subsequent debt charge falls on those who have a margin (as it obviously should) the result is that the people who subscribed to the loans are afterwards taxed to pay themselves interest and to repay themselves their debt.

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

Inflation, the third method of paying for war, again produces the same effect of a reduction of consumption by the civilian population, but in a roundabout manner, which works at first without being noticed, and so is particularly dear to the adroit politician. By it nobody transfers buying power to the Government, but the Government and the bankers, who are generally most reluctant accessories to the transaction, between them create new buying power, which, coming into a restricted market for goods in addition to all the existing buying power, simply forces everybody to consume less because the money in their pockets fetches less goods owing to the rise in prices.

The evil attached to this system is obvious enough. It amounts to a tax on the general consumer in proportion to his consumption, and so it lays the sacrifice on the shoulders of those least able to bear it. No Government would have the courage to impose such a tax openly and frankly. All the warring Governments in varying degrees have used this roundabout device of imposing it, very likely being quite unaware of the fraud on the consumer that they were perpetrating. Our own Government, in fact, having first added by this process to a rise in the price of bread, then reduced it by a special subsidy—a pleasant touch of Alice in Wonderland finance. This mode of taxing by raising prices hits, of course, all those who live on fixed incomes and salaries and wages. Those who can strike, or take more out of the consumer, can evade it, and so it falls on the weakest shoulders and incidentally produces friction, discontent and dangerous suspicion. But even it works at the time when it happens. Each creation of new buying power gives the Government, for the moment, control of so much in goods and services at the expense of the consumer; but when once the new buying power has been distributed by the State's payments it is in the hands of the nation as a whole. If the process ceased, the nation would still have control of the whole of its output, which is its income, though the injustice involved, to those who are not strong enough to resist the effects of higher prices, would continue.

Thus, whatever means—straightforward or devious—are used for financing war, it is paid for while it goes on by the warring country if the financing is done at home, or by its foreign creditors if the financing is done abroad. And it is, necessarily, almost entirely paid for out of income, that is, out of current production. It is curious to find that many people still seem to think that the whole cost of the war has come out of capital. Luckily for us it could not be done, or only to a very small extent. Our capital mostly consisted of railways, factories, ships, roads, agricultural land, machinery, houses and other things that could not be taken and shot out of a gun. These things we have still got, and though many of them are not in such good shape as they were, some of them are much better equipped and organised. We have drawn on our stocks of materials and goods—how far it is impossible to say; we have lost 8-1/2 million tons of shipping by war losses; in the meantime we have built, bought and captured 5-1/2 millions of new tonnage, and we have a claim against the Germans for such tonnage. On capital account we have suffered by wear and tear in so far as our upkeep has been neglected owing to lack of labour during the war, and by depletion of materials and stocks, and also, of course, by the fact that if the war had not happened, we should, if pre-war calculations were correct, have put some £1700 millions into new investments at home and abroad during the 4-1/4 years of fighting and some more hundreds of millions during the after-war period of Government borrowing and restriction on private investment. But a very large part of the money that went into victory would otherwise have gone not to capital account but into the pleasant frivolities, embellishments and vulgarities that made life an amusing absurdity in days before the war.

If, then, the war sacrifice was made during the war, in so far as its cost was raised at home, how far is it true that we are now faced with the business of paying for it? If taxation were equitable it would only be to the extent that those who ought to have made the sacrifice and did not, will in future have to pay interest to those who did, or their representatives. So that the first thing we have to do is to make taxation equitable, that is, lay it on the taxpayer in proportion to his ability to pay. There will still remain the injustice to those who have fought for us, which might be cured, or amended, by special exemptions. With taxation on a really sound basis no further sacrifice would be involved by the debt charge, and no diminution of the nation's wealth or consuming power, which will depend, as always, on its output of goods and services; but only a transfer of consuming power from taxpayers to debt-holders in accordance with the sacrifice made by the latter during the war. What we produce as a nation we shall consume as a nation, subject to the extent that we financed the war during its course by operations abroad.

These operations were twofold. We sold to foreigners part of our holdings of foreign securities, thereby and to this extent paying for war cost out of capital—out of the investments made by ourselves and our forbears in America and elsewhere. Mr Bonar Law, in a recent interview in the Observer, stated that we had sent back to the United States practically the whole of our holdings of American securities to be sold or pledged as collateral for loans, and that the value of them was three billion dollars—£600 millions sterling. Any of them that have only been pledged can presumably be used to meet the loans raised as they fall due, and so will lighten our burden in the matter of repayment. These loans raised abroad are the second mode of foreign financing. By it we had raised up to November 9th nearly £1300 millions, as shown by the Economist's table, and to that extent we have pledged our future production and that of our posterity, to meet the annual service for interest and repayment. On the other hand, all this sum and more we have (as shown above) lent to our Allies and Dominions, so that the ex-Chancellor was well justified in his boast that we had only borrowed to finance our Allies, and that we had been self-sufficient for our own war cost.[1]

[Footnote 1: Budget Speech, Parliamentary Debates, vol. 105, No. 33.]

In other words, all that we needed for the war we were able to produce ourselves, or to obtain in exchange for our produce and assets. On paper, therefore, our position as a creditor country is only impaired by our sales of securities. But that is only so on paper. In fact, the loans that we have raised abroad are good debts that have to be met to the last penny, and are a first charge on our future output, but the advances that we have made to our Allies, much harder hit than we are by the war, are assets on which we cannot depend. They were taken in our balance-sheet above at half their face value, but there is much to be said for writing them off altogether and tearing up the I.O.U.'s of our foreign brothers-in-arms. Their need is greater than ours, it would be little satisfaction to receive interest and repayment from them, and the payment due from them, involving difficult problems of taxation for them, would not help the good relations with them which, we hope, may be a lasting effect of the war. And such an act of renunciation on our part would do something towards a restoration of the spirit with which we entered on war, a spirit which has been seriously demoralised during its course, largely owing to the results of our faulty finance, which encouraged profiteering in all classes.