Allow me also to say that I think in your comparison of the effect of taxes and loans you have looked (p. 262) too much to the effect on labour at the moment. Capital and labour are in permanent competition for the division of the fruits of production. When in years of war say twenty millions annually are provided by loan say for three, five, or ten years, then two consequences follow.
1. An immense factitious stimulus is given to labour at the time—and thus much more labour is brought into the market.
2. When that stimulus is withdrawn an augmented quantity of labour is left to compete in the market with a greatly diminished quantity of capital.
Here is the story of the misery of great masses of the English people after 1815, or at the least a material part of that story.
I hold by the doctrine that war loans are in many ways a great evil: but I admit their necessity, and in fact the budget of 1855 was handed over by me to Sir George Lewis, and underwent in his hands little alteration unless such as, with the growing demands of the war, I should myself have had to make in it, i.e. some, not very considerable, enlargement.
Writing a second letter to Northcote a few days later (August 11, 1862), he goes a little deeper into the subject:—
The general question of loans v. taxes for war purposes is one of the utmost interest, but one that I have never seen worked out in print. But assuming as data the established principles of our financial system, and by no means denying the necessity of loans, I have not the least doubt that it is for the interest of labour, as opposed to capital, that as large a share as possible of war expenditure should be defrayed from taxes. When war breaks out the wages of labour on the whole have a tendency to rise, and the labour of the country is well able to bear some augmentation of taxes. The sums added to the public expenditure are likely at the outset, and for some time, to be larger than the sums withdrawn from commerce. When war ends, on the contrary, a great mass of persons are dismissed from public employment, and, flooding the labour market, reduce the rate of wages. But again, when war comes, it is quite certain that a large share of the war taxes will be laid upon property: and that, in war, property will bear a larger share of our total taxation than in peace. From this it seems to follow at once that, up to the point at which endurance is practicable, payment by war-taxes rather than by taxes in peace is for the interest of the people at large. I am not one of those who think that our system of taxation, taken as a whole, is an over-liberal one towards them. These observations are mere contributions to a discussion, and by no means pretend to dispose of the question.
II
DISPUTE WITH THE BANK
In the autumn he had a sharp tussle with the Bank of England, and displayed a toughness, stiffness, and sustained anger that greatly astonished Threadneedle Street. In the spring he had introduced a change in the mode of issuing deficiency bills, limiting the quarterly amount to such a sum as would cover the maximum of dividends payable, as known by long experience to be called for. The Bank held this to be illegal; claimed the whole amount required, along with balances actually in hand, to cover the entire amount payable; and asked him to take the opinion of the law officers. The lawyers backed the chancellor of the exchequer. Then the Bank took an opinion of their own; their counsel (Kelly and Palmer) advised that the attorney and solicitor were wrong; and recommended the Bank to bring their grievance before the prime minister. Mr. Gladstone was righteously incensed at this refusal to abide by an opinion invited by the Bank itself, and by which if it had been adverse he would himself have been bound. 'And then,' said Bethell, urging Mr. Gladstone to stand to his guns, 'its counsel call the Bank a trustee for the public! Proh pudor! What stuff lawyers will talk. But 'tis their vocation.' Mr. Gladstone's letters were often prolix, but nobody could be more terse and direct when occasion moved him, and the proceedings of the lawyers with their high Bank views and the equivocal faith of the directors in bringing fresh lawyers into the case at all provoked more than one stern and brief epistle. The governor, who was his private friend, winced. 'I do not study diplomacy in letters of this kind,' Mr. Gladstone replied, 'and there is no sort of doubt that I am very angry about the matter of the opinion; but affected and sarcastic politeness is an instrument which in writing to you I should think it the worst taste and the worst feeling to employ. I admire the old fashion according to which in English pugilism (which, however, I do not admire) the combatants shook hands before they fought; only I think much time ought not to be spent upon such salutations when there is other work to do.'