These conclusions might be deemed obvious if experience did not show that many conservative bankers regard it as more consonant with their cloth, and also as economising thought, to shift public discussion of financial topics off the logical on to an alleged “moral” plane, which means a realm of thought where vested interest can be triumphant over the common good without further debate. But it makes them untrustworthy guides in a perilous age of transition. The State must never neglect the importance of so acting in ordinary matters as to promote certainty and security in business. But when great decisions are to be made, the State is a sovereign body of which the purpose is to promote the greatest good of the whole. When, therefore, we enter the realm of State action, everything is to be considered and weighed on its merits. Changes in Death Duties, Income Tax, Land Tenure, Licensing, Game Laws, Church Establishment, Feudal Rights, Slavery, and so on through all ages, have received the same denunciations from the absolutists of contract,—who are the real parents of Revolution.
In our own country the question of the Capital Levy depends for its answer on whether the great increase in the claims of the bond-holder, arising out of the fact that it was easier, and perhaps more expedient, to raise a large part of the current costs of the war by loans rather than by taxes, is more than the taxpayer can be required, in the long run, to support. The high levels of the Death Duties and of the income- and super-taxes on unearned income, by which the net return to the bond-holder is substantially diminished,[17] modify the case. Nevertheless, immediately after the war, when it seemed that the normal budget could scarcely be balanced without a level of taxation of which a tax on earned income at a standard rate between 6s. and 10s. in the £ would be typical, a levy seemed to be necessary. At the present time the case is rather more doubtful. It is not yet possible to know how the normal budget will work out, and much depends on the level at which sterling prices are stabilised. If the level of sterling prices is materially lowered, whether in pursuance of a policy of restoring the old gold parity or for any other reason, a levy may be required. If, however, sterling prices are stabilised somewhere between 80 and 100 per cent above the pre-war level—a settlement probably desirable on other grounds—and if the progressive prosperity of the country is restored, then perhaps we may balance our future budgets without oppressive taxation on earned income and without a levy either. A levy is from the practical view perfectly feasible, and is not open to more objection than any other new tax of like magnitude. Nevertheless, like all new taxes, it cannot be brought in without friction, and is, therefore, scarcely worth advocating for its own sake merely in substitution for an existing tax of similar incidence. It is to be regarded as the fairest and most expedient method of adjusting the burden of taxation between past accumulations and the fruits of present efforts, whenever, in the general judgment of the country, the discouragement to the latter is excessive. A levy is to be judged, not by itself, but as against the practicable alternatives. Experience shows with great certainty that the active part of the community will not submit in the long run to pay too much to vested interest, and, if the necessary adjustment is not made in one way, it will be made in another,—probably by the depreciation of the currency.
[17] The net return to the French rentier is more than 6 per cent; to the British not much above 3 per cent.
In several countries the existing burden of the internal debt renders Devaluation inevitable and certain sooner or later. It will be sufficient to illustrate the case by reference to the situation of France,—the home of absolutism of all kinds, and hence, sooner or later, of bouleversement. The finances of Humpty Dumpty are as follows:
At the end of 1922 the internal debt of France, excluding altogether her external debt, exceeded 250 milliard francs. Further borrowing budgeted for in the ensuing period, together with loans on reconstruction account guaranteed by the Government, may bring this total to the neighbourhood of 300 milliards by the end of 1923. The service of this debt will absorb nearly 18 milliards per annum. The total normal receipts under the provisional[18] Budget for 1923 are estimated at round 23 milliards. That is to say, the service of the debt will shortly absorb, at the value of the franc current early in 1923, almost the entire yield of taxation. Since other Government expenditure in the ordinary budget (i.e., excluding war pensions and future expenditure on reconstruction) cannot be put below 12 milliards a year, it follows that, even on the improbable hypothesis that further expenditure in the extraordinary budget after 1923 will be paid for by Germany, the yield of taxation must be increased permanently by 30 per cent to make both ends meet. If, however, the franc were to depreciate to (say) 100 to the pound sterling, the ordinary budget could be balanced by taking little more of the real income of the country than in 1922.
[18] The forecasts of the final outcome of the year are frequently changed and may be somewhat different from the above,—though not sufficiently to affect the argument. M. de Lasteyrie has lately pointed out with pride how the further depreciation of the franc, since he first introduced his budget, is already improving the receipts measured in terms of francs.
In these circumstances it will be difficult, if not impossible, to avoid the subtle assistance of a further depreciation. What, then, is to be said of those who still discuss seriously the project of restoring the franc to its former parity? In such an event the already intolerable burden of the rentier’s claims would be about trebled. It is unthinkable that the French taxpayer would submit. Even if the franc were put back to par by a miracle, it could not stay there. Fresh inflation due to the inadequacy of tax receipts must drive it anew on its downward course. Yet I have assumed the cancellation of the whole of France’s external debt, and the assumption by Germany of the burdens of the extraordinary budget after 1923, an assumption which is not justified by present expectations. These facts alone render it certain that the franc cannot be restored to its former value.
France must come in due course to some compromise between increasing taxation, and diminishing expenditure, and reducing what they owe their rentiers. I have not much doubt that the French public, as they have hitherto, will consider a further dose of depreciation—attributing it to the “bad will” of Germany or to financial Machiavellism in London and New York—as far more conservative, orthodox, and in the interest of small savers, than a justly constructed Capital Levy, the odium of which could be less easily escaped by the French Ministry of Finance.
If we look ahead, averting our eyes from the ups and downs which can make and unmake fortunes in the meantime, the level of the franc is going to be settled in the long run not by speculation or the balance of trade, or even the outcome of the Ruhr adventure, but by the proportion of his earned income which the French taxpayer will permit to be taken from him to pay the claims of the French rentier. The level of the franc exchange will continue to fall until the commodity-value of the francs due to the rentier has fallen to a proportion of the national income, which accords with the habits and mentality of the country.