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WAR-TIME FINANCIAL PROBLEMS
by
HARTLEY WITHERS
Works by Hartley Withers
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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.
PREFACE
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.
H. WITHERS.
June, 1919.
CONTENTS
I
THE OUTLOOK FOR CAPITAL
The Creation of Capital—The Inducement—War and Capital
II
LONDON'S FINANCIAL POSITION
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
III
WAR FINANCE AS IT MIGHT HAVE BEEN—I
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
IV WAR FINANCE AS IT MIGHT HAVE BEEN—II 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 "Posterity"
V
A LEVY ON CAPITAL
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
VI
OUR BANKING MACHINERY
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
VII
THE COMPANIES ACTS
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
VIII
THE YEAR'S BALANCE-SHEET
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
IX COMPARATIVE WAR FINANCE 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
X
INTERNATIONAL CURRENCY
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
XI
BONUS SHARES
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
XII
STATE MONOPOLY IN BANKING
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
XIII FOREIGN CAPITAL 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
XIV
NATIONAL GUILDS
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
World
XV
POST-WAR FINANCE
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
XVI
THE CURRENCY REPORT
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
XVII MEETING THE WAR BILL 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
XVIII
THE REGULATION OF THE CURRENCY
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
XIX
TIGHTENING THE FETTERS OF FINANCE
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
XX
MONEY OR GOODS?
"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
INDEX
WAR-TIME FINANCIAL PROBLEMS
I
THE OUTLOOK FOR CAPITAL
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 accumulées." 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.
II
LONDON'S FINANCIAL POSITION
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 Exchange:—
"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 equitably."
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 rôle 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 position.
"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 finance.
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 sterling.
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 depôt for the entrepôt 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 quickly.
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.
III
WAR FINANCE AS IT MIGHT HAVE BEEN—I
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 £5. 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 £5; 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 £1 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 £1 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 £1000 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.
IV
WAR FINANCE AS IT MIGHT HAVE BEEN—II
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 "Posterity."
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 £1000 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 £1000 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 irresistible.
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.
V
A LEVY ON CAPITAL
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 £1000 to £20,000; 10 per cent. on £20,000 to £50,000; up to 30 per cent. on sums over £1,000,000; 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 £100,000 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 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, a process which would seem likely to produce a pretty state of affairs in the property market; and a very pleasant state of affairs indeed would arise for the holders of War Loan scrip, since there would be a large crowd of compulsory buyers in the market from whom the holders would apparently be able to extort any price that they liked for their stock.
The next stage in the proceedings was a deputation to the Chancellor of the Exchequer, concerning which more anon, of leaders of various groups of the Labour Party, to press upon Mr Bonar Law the principle of what is called "the Conscription of Wealth," and the publication at or soon after that time, which was about the middle of November, of a pamphlet on the subject of the "Conscription of Riches," by the War Emergency Workers' National Committee, 1, Victoria Street, S.W. Among what this pamphlet describes as "the three practicable methods of conscripting wealth" No. 1 is as follows:—
A Capital Tax, on the lines of the present Death Duties, which are graduated from nothing (on estates under £300, and legacies under £20) up to about 20 per cent. (on very large estates left as legacies to strangers).
If a "Death Duty" at the existing rates were now levied simultaneously on every person in the kingdom possessing over £300 wealth (every person might be legally deemed to have died, and to be his own heir), it might yield to the Chancellor of the Exchequer about £900,000,000. It would be necessary to offer a discount for payment in cash; and in order to avoid simultaneous forced sales, to accept, in lieu of cash, securities at a valuation; and to take mortgages on land.
Here it will be seen that the Emergency Workers had improved on the Round Table, and agreed with Mr Gardiner, by providing that the Government should take securities at a valuation and mortgages on land in lieu of cash in order to avoid simultaneous forced sales. But they do not seem to have perceived that, in so far as the Government took securities or accepted mortgages on land, it would not be getting money to pay for the war, which was the object of the proposed Conscription of Wealth, but would only be obtaining property from which the Government would in due course later on receive an income, probably averaging about one-twentieth of its value.
Perhaps, however, it would be more correct to say that those who put the scheme forward did not ignore this drawback to it, but rather liked it, for reasons quite irrelevant to the objects that they were apparently pursuing. A good deal of prominence was given about the same time to the question of a levy on capital in the New Statesman well known to be the organ of Mr Sidney Webb and other members of the Fabian Society. These distinguished and very intellectual Socialists would, of course, be quite pleased if, in an apparent endeavour to pay for the war, they actually succeeded in securing, by the Government's acquisition of blocks of securities from property owners, that official control of industry and production which is the object of State Socialists.
It will be noted, however, in this scheme that no mention is made of any forms of property to be accepted by the Government in lieu of cash except securities and mortgages on land. Items such as furniture, books, pictures and jewellery are ignored, and in one of the articles in the New Statesman, discussing the question of a capital levy, it was distinctly suggested that these commodities should be left out of the scheme so as to save the trouble involved by valuation. Unfortunately, if we leave out these forms of property the natural result is to stimulate the tendency, lately shown by an unfortunately large number of patriotic taxpayers, of putting money into pearl necklaces and other such gewgaws in order to avoid income tax. If by buying fur coats, old masters and diamond tiaras it will be be possible in future to avoid paying, not only income tax, but also a capital levy, it is to be feared that appeals to people to save their money and invest it in War Bonds are likely to be seriously interfered with.
Unfortunately, the Statesman was able to announce that the appeal for this system of taxation had been received with a good deal of sympathy by the Chancellor of the Exchequer, and the next stage in the history of the agitation was the publication on Boxing Day in several of the daily papers of what appeared to be an official summary, issued through the Central News, of what the Chancellor had said to the deputation of Labour Leaders introduced by Mr Sidney Webb, which waited on him, as already described, in the middle of November. Having pointed out that he had never seen any proposal which seemed to him to be practicable for getting money during the war by conscripting wealth, Mr Bonar Law added that, though "perhaps he had not thought enough about it to justify him in saying so," his own feeling was that it would be better, both for the wealthy classes and the country, to have this levy on capital, and reduce the burden of the national debt when the war was over. It need not be said that this statement by the Chancellor has been very far from helpful to the efforts of those who are trying to induce unthrifty citizens to save their money and put it into National War Bonds for the finance of the war.
"Why," people argue, "should we go out of our way to save and take these securities if, when the war is over, a large slice of our savings is to be taken away from us by means of this levy on capital? If we had been doubting between the enjoyment of such comforts and luxuries as are possible in war-time and the austere duty of thrift, we shall naturally now choose the pleasanter path, spend our money on ourselves and on those who depend on us, instead of saving it up to be taken away again when the war is over, while those who have spent their money as they liked will be let off scot free." Certainly, it is much to be regretted that the Chancellor of the Exchequer should have let such a statement go forth, especially as he himself admits that perhaps he has not thought enough about it to justify him in saying so. If the Chancellor of the Exchequer has not time to think about what he is going to say to a Labour deputation which approaches him on an extremely important revolution in our fiscal system, it is surely high time that we should get one who has sufficient leisure to enable him to give his mind to problems of this sort when they are put before him.
In the course of this review of the forms in which suggestions for a levy on capital have been put forward, some of the difficulties and injustices inherent in it have already been pointed out. Its advocates seem as a rule to base the demand for it upon an assumption which involves a complete fallacy. This is that, since the conscription of life has been applied during the war, it is necessary that conscription of wealth should also be brought to bear in order to make the war sacrifice of all classes equal. For instance, the Emergency Workers' pamphlet, quoted above, states that, "in view of the fact that the Government has not shrunk from Compulsory Conscription of Men," the Committee demands that "for all the future money required to carry on the war, the Government ought, in common fairness, to accompany the Conscription of Men by the Conscription of Wealth."
This contention seems to imply that the conscription of men and the conscription of wealth apply to two different classes; in other words, that the owners of wealth have been able to avoid the conscription of men. This, of course, is absolutely untrue. The wealthiest and the poorest have to serve the country in the front line alike, if they are fit. The proportion of those who are fit is probably higher among the wealthy classes, and, consequently, the conscription of men applies to them more severely. Again, the officers are largely drawn from the comparatively wealthy classes, and it is pretty certain that the proportion of casualties among officers has been higher during the war than among the rank and file. Thus, as far as the conscription of men is concerned, the sacrifice imposed upon all classes in the community is alike, or, if anything, presses rather more heavily upon those who own wealth. Conscription of wealth as well as conscription of life thus involves a double sacrifice to the owners of property.
This double sacrifice, in fact, the owners of property have, as is quite right, borne throughout the war by the much more rapid increase in direct taxation than in indirect. It is right that the owners of property should bear the heavier monetary burden of the war because they, having more to lose and therefore more to gain by a successful end of the war, should certainly pay a larger proportion of its cost. It was also inevitable that they should do so because, when money is wanted for the war or any other purpose, it can only be taken in large amounts from those who have a surplus over what is needed to provide them with the necessaries and decencies of life. But the argument which puts forward a capital levy on the ground that the rich have been escaping war sacrifice is fallacious in itself, and is a wicked misrepresentation likely to embitter still further the bad feeling between classes.
Nevertheless, Mr Bonar Law thinks that, since the cost of the war must inevitably fall chiefly upon the owners of property, and since it therefore becomes a question of expediency with them whether they should pay at once in the form of a capital levy or over a long series of years in increased taxation, he is inclined to think that the former method is one which would be most convenient to them and best for the country. This contention cannot be set aside lightly, and there can be no doubt that if, by making a dead lift, the wealthy classes of the country could throw off their shoulders a large part of the burden of the war debt, such a scheme is well worth considering as long as it does not carry with it serious drawbacks.
It seems to me, however, that the drawbacks are very considerable. In the first place, I have not seen any really practicable scheme of redeeming debt by means of a levy on capital In so far as the levy is paid in the form of surrendered War Loans, it is simple enough. In so far as it is paid in other securities or mortgages on land or other forms of property, it is difficult to see how the assets acquired by the State through the levy could be distributed among the debt holders whom it is proposed to pay off. Would they be forced to take securities, mortgages on land, furniture, etc., as the Government chose to distribute them, or would the Government have to nurse an enormous holding of various forms of property and gradually realise them and so pay off debt?
Again, a great injustice would surely be involved by laying the whole burden of this oppressive levy upon owners of accumulated property, so penalising those who save capital for the community and letting off those who squander their incomes. A characteristic argument on this point was provided by the New Statesman in a recent issue. It argued that, because ordinary income tax would still be exacted, the contrast between the successful barrister with an Income of £20,000 a year and no savings, who would consequently escape the capital levy, and the poor clergyman who had saved £1000 and would consequently be liable to it, fell to the ground. In other words, because both lawyer and parson paid income tax, it was fair that the former should escape the capital levy while the latter should have to pay it!
But needs must when the devil drives, and in a crisis of this kind it is not always possible to look too closely into questions of equity in raising money. It is necessary, however, to look very closely into the probable economic effects of any suggested form of taxation, and, if we find that it is likely to diminish the future wealth production of the nation, to reject it, however attractive it may seem to be at first sight. A levy on capital which would certainly check the incentive to save, by the fear that, if such a thing were once successfully put through, it might very likely be repeated, would dry up the springs of that supply of capital which is absolutely essential to the increase of the nation's productive power. Moreover, business men who suddenly found themselves shorn of 10 to 20 per cent. of their available capital would find their ability to enter into fresh enterprise seriously diminished just at the very time when it is essential that all the organisers of production and commerce in this country should be most actively engaged in every possible form of enterprise, in order to make good the ravages of war.
VI
OUR BANKING MACHINERY
February, 1918
The Recent Amalgamations—Will the Provinces suffer?—Consolidation not a New Movement—The Figures of the Past Three Decades—Reduction of Competition 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.
Banking problems have lately loomed large in the financial landscape. It will be remembered that about a year and a half ago a Committee was appointed to consider the creation of a new institution specially adapted for financing overseas trade and for the encouragement of industrial and other ventures through their years of infancy, and that the charter which was finally granted to the British Trade Corporation, as this institution was ultimately called, roused a great deal of opposition both on the part of banks and of traders who thought that a Government institution with a monopoly character was going to cut into their business with the help of a Government subsidy. In fact, there was no subsidy at all in question, and the fears of the trading world of competition on the part of the new chartered institution only arose owing to its unfortunate name, which was given to it in order to allay the apprehensions of the banks which had been provoked by the title originally designed for it, namely, the British Trade Bank. There seems no reason why this Company should not do good work for British trade without treading on the toes of anybody. Although naturally its activities cannot be developed on any substantial scale until the war is over, its Chairman assured the shareholders at the end of January that its preliminary spadework was being carefully attended to.
After this small storm in a teacup had died down those interested in our banking efficiency were again excited by the rapid progress made by the process of amalgamation among our great banks, which began to show acute activity again in the last months of 1917. The suddenly announced amalgamation of the London and South-Western and London and Provincial Banks led to a whole host of rumours as to other amalgamations which were to follow; and though most of these proved to be untrue a fresh sensation was aroused when the union was announced of the National Provincial Bank of England and the Union of London and Smith's Bank. All the old arguments were heard again on the subject of the objections, from the point of view of industry in the provinces, to the formation of great banking institutions, with enormous figures on both sides of the balance-sheet, working from London, often, it was alleged, with no consideration for the needs of the provincial users of credit. These latest amalgamations, which have united banks which already had head offices in London, gave less cause than usual for these provincial apprehensions, which had far more solid reason behind them when purely provincial banks were amalgamated with institutions whose head office was in London. Nevertheless, the argument was heard that the great size and scale on which these amalgamated banks were bound to work would necessarily make them more monopolistic and bureaucratic in their outlook, and less elastic and adaptable in their dealings with their local customers.
It seems to me that there is so far very little solid ground for any apprehension on the part of the business community that the recent development of banking evolution will tend to any damage to their interests. The banks have grown in size with the growth of industry. As industry has tended more and more to be worked by big battalions, it became necessary to have banking institutions with sufficiently large resources at their command to meet the great requirements of the huge industrial organisations that they had to serve. Nevertheless, the tendency towards fewer banks and bigger figures has grown with extraordinary celerity, as the following table shows:—
MOVEMENT OF ENGLISH JOINT-STOCK BANK DEPOSITS, ETC., SINCE 1886.
December No. of Number of Capital Deposit and Total 31st Banks Branches Paid up Current Liabilities Accounts 1886 109 1,547 £38,468,000 £299,195,000 £376,808,000 1891 106 2,245 43,406,000 391,842,000 486,632,000 1896 94 3,051 45,203,000 495,233,000 599,518,000 1901 74 3,935 46,631,000 584,841,000 698,150,000 1906 55 4,840 48,122,000 647,889,000 782,353,000 1911 44 5,417 47,265,000 748,641,000 885,069,000 1916 35 5,993 48,237,000 1,154,877,000 1,316,220,000
This table is taken from the annual banking numbers of the Economist. It will be noticed that in 1886 there were in England 109 joint-stock banks with 1547 offices, whose accounts were tabulated in the Economist's annual review. Their total paid-up capital was 38-1/2 millions, their deposit and current accounts were just under 300 millions, and their total liabilities were 377 millions. In the course of thirty years the 109 banks had shrunk by the process of amalgamation and absorption to thirty-five, that is to say, they had been divided by three; the number of their offices, however, had been multiplied by nearly four, while their deposit accounts had grown from 300 millions to 1155, and their total liabilities from 377 to 1316 millions. By the amalgamations announced at the end of 1917, and that of the County of Westminster with Parr's announced on February 1st, the number of joint stock banks will be reduced to 32. The picture would be still more striking if the figures of the private banks were included, since their number has been reduced, since 1891, from 37 to 6. These figures are eloquent of the manner in which the number of individual banks has been reduced, while the extent of the banking accommodation given to the community has enormously grown, so that the power wielded by each individual bank has increased by the force of both these processes.
The consequent reduction in competition which is causing some concern among the trading community has not, as it seems to me, gone far enough yet to be a serious danger. The idea that the big banks with offices in London give scant consideration to the needs of their local customers seems to be so contrary to the interests of the banks that they would be extraordinarily bad men of business if those who were responsible for their management allowed it to be the fact. It is probably nearer the truth that banking competition in the provinces is still so keen that the London management is very careful not to allow anything like bureaucratic stiffness to get into the methods by which their business is managed. By the appointment of local committees they are careful to do all they can to see that the local interests get all the credit that is good for them. That local interests get as much credit as they want is probably very seldom the case, because it is a natural instinct on the part of an eager business man to want rather more credit than he ought to have, from a banking point of view. Business interests, as long as they exist in private hands, will always want rather more credit than there is available, and it will always be the duty of the banker to ensure that the country's industry is kept on a sound basis by checking the tendency of the eager business man to undertake rather more than is good for him. From the sentimental point of view it is certainly a pity to have seen many of the picturesque old private banks extinguished, the partners in which were in close personal touch with their customers, and entered into the lives of the local communities in a manner which their modern counterpart is perhaps unable to do. Nevertheless, it is difficult to get away from the fact that if these institutions had been as efficient and as well managed as their admirers depict them to have been they would hardly have been driven out of existence by the stress of modern developments and competition. Whatever we may think of modern competition, in certain of its aspects, we may at least be sure of this—that it does not destroy an institution which is really wanted by the business community. And if the complaint of local interests is true, that they are swamped by the cosmopolitan aspirations of the great London offices, they always have it in their power to create an institution of the kind that they want, and by giving it their business to ensure for it a prosperous career. As long as no such tendency is visible in the banking world we may be pretty sure that the views expressed concerning the neglect of local interests by the enormous banks which have grown up with London centres in the last thirty years is to a great extent a myth. It has now announced, however, that the whole problem involved by the amalgamation process is to be sifted by a committee to be appointed for this purpose.
Another apprehension has arisen in the minds of those who view with critical vigilance the present tendencies of business and the present development of economic opinion among a great section of the community. If, it is urged, the banks continue to swallow one another up by the process of amalgamation, how will this tendency end except in the creation of one huge bank working a gigantic money monopoly which the Socialistic tendencies of the present day will, with some reason, insist ought to be taken over by the State for the profit of the taxpayer? This view is frankly put forward by those advocates of a Socialistic organisation of society, who say that the modern tendency of industry towards combinations, rings and trusts is rapidly bringing the Socialistic millennium within their reach without any effort on the part of Socialistic preachers. They consider that the trust movement is doing the work of Socialism, much faster than Socialism could do it for itself; that, in short, as has been argued above in regard to banking, the tendency towards centralisation and the elimination of competition can only end in the assumption by the State of the functions of industry and finance. If this should be so, the future is dark for those of us who believe that individual effort is the soul of industrial and financial progress, and that industry carried on by Government Departments, however efficient and economical it might be, would be such a deadly dull and unenterprising business that all the adaptability and tendency to variation in accordance with the needs of the moment, which are so strongly shown by individual enterprise, would be lost, to the great detriment of the material progress of mankind.
As things are at present, there is little need to fear that Socialistic organisation of industry could stand up against competent individual effort. Anybody who has ever had any business dealings with a Government Department will inevitably shudder when he tries to imagine how many forms would have to be filled up, how many divisions of the Department the inevitable mass of papers would have to go through, and how much delay and tedium would be involved before the simplest business proposition could be carried out. But, of course, it is argued by Socialists that Government Departments are only slow and tied up with red tape because they have so long been encouraged to do as little as possible, and that as soon as they are really urged to do things instead of pursuing a policy of masterly inactivity, there is no reason why they should not develop a promptitude and elasticity quite as great as that hitherto shown by the business community. That such a development as this might take place in the course of generations nobody can deny; at present it must be admitted that with the great majority of men the money-making incentive is required to get the best out of them. If the process of education produces so great a change in the human spirit that men will work as well for the small salary of the Civil Service, with a K.C.B. thrown in, as they will now in order to gain the prizes of industry and finance, then perhaps, from the purely economic point of view, the Socialisation of banking may be justified. But we are a long way yet from any such achievement, and if it is the case that the rapid centralisation of banking power in comparatively few hands carries with it the danger of an attempt to nationalise a business which requires, above all, extreme adaptability and sensitiveness to the needs of the moment as they arise, this is certainly a danger which has to be carefully considered by those who are responsible for the development of these amalgamation processes.
And now another great stone has been thrown into the middle of the banking pond, causing an ever-widening circle of ripples and provoking the beginning of a discussion which is likely to be with us for some time to come. Sir Edward Holden, at the meeting of the London City and Midland Bank shareholders on January 29th, made an urgent demand for the immediate repeal of the Bank Act of 1844. This Act was passed, as all men know, in order to restrict the creation of credit in the United Kingdom. In the early part of the last century the most important part of a bank's business consisted of the issue of notes, and banking had been carried on in a manner which the country considered unsatisfactory because banks had not paid sufficient attention to the proportion of cash that they ought to hold in their tills to meet notes if they were presented. Parliament in its wisdom consequently ordained that the amount of notes which the banks should be allowed to issue, except against actual metal in their vaults, should be fixed at the amount of their issue at that time. Above the limit so laid down any notes issued by the banks were to be backed by metal. In the case of the Bank of England the limit then established was £14,000,000, and it was enacted that if any note-issuing bank gave up its right to a note issue the Bank of England should be empowered to increase its power to issue notes against securities to the extent of two-thirds of the power enjoyed by the bank which was giving up its privilege. By this process the Bank of England's right to issue notes against securities, what is usually called its fiduciary issue, has risen to £18,450,000; above that limit every note issued by it has to be backed by bullion, and is actually backed by gold, though under the Act one-fifth might be in silver. It was thus anticipated by the framers of the Act that in future any credit required by industry could only be granted by an increase in the gold held by the issuing banks. If the Act had fulfilled the anticipations of the Parliament which passed it, if English trade had grown to anything like the extent which it has done since, it could only have done so by the amassing of a mountain of gold, which would have lain in the vaults of the Bank of England.
Fortunately, however, the banking community had at its disposal a weapon of which it was already making considerable use, namely, the system of issuing credit by means of banking deposits operated on by cheques. Eight years before Peel's Act was passed two Joint Stock Banks had been founded in London, although the Bank of England note-issuing monopoly still made it impossible for any Joint Stock Bank to issue notes in the London district. It is thus evident that deposit banking was already well founded as a profitable business when Peel, and Parliament behind him, thought that they could sufficiently regulate the country's banking system so long as they controlled the issue of notes by the Bank of England and other note-issuing banks. It is perhaps fortunate that Parliament made this mistake, and so enabled our banking machinery to develop by means of deposit banking, and so to ignore the hard-and-fast regulations laid upon it by Peel's Act. This, at least, is what has happened; only in times of acute crisis have the strict regulations of Peel's Act caused any inconvenience, and when that inconvenience arose the Act has been suspended by the granting of a letter of indemnity from the Treasury to the Governor of the Bank.
Under Peel's Act the present rather anomalous form of the Bank of England's Weekly Return was also laid down. It shows, as all men know, two separate statements; one of the Issue Department and the other of the Banking Department. The Issue Department's statement shows the notes issued as a liability, and on the assets side Government debt and other securities (which are, in fact, also Government securities), amounting to £18,450,000 as allowed by the Act, and a balance of gold. The Banking Department's statement shows capital, "Rest" or reserve fund, and deposits, public and other, among the liabilities, and on the other side of the account Government and other securities, all the notes issued by the Issue Department which are not in circulation, and a small amount of gold and silver which the Banking Department holds as till money.
Sir Edward Holden's proposal is that the Act should be repealed practically in accordance with the system which has been adopted by the German Reichsbank. The principles which he enumerates, as those on which other national banks of issue work, are as follows:—
1. One bank of issue, and not divided into departments.
2. Notes are created and issued on the security of bills of exchange and on the cash balance, so that a relation is established between the notes issued and the discounts.
3. The notes issued are controlled by a fixed ratio of gold to notes or of the cash balance to notes.
4. This fixed ratio may be lowered on payment of a tax.
5. The notes should not exceed three times the gold or cash balance.
By this revolution Sir Edward would abolish all legal restriction on the issue of notes by the Bank of England. It would hold a certain amount of gold or a certain amount of cash balance against its notes, but in the "cash balance" Sir Edward apparently would include 11 millions odd of Government debt, or of Treasury notes. As long as its notes were only three times the amount of the gold or of the "cash balance," and were backed as to the other two-thirds by bills of exchange, the situation would be regarded as normal, but if, owing to abnormal circumstances, the Bank desired to increase the amount of notes issued against bills of exchange only and to reduce the ratio of its gold or its cash balance to its notes, it would, at any time, be enabled to do so by the payment of a tax, without going through the humiliating necessity for an appeal to the Treasury to allow it to exceed the legal limit.
At the same time, by the abolition of Peel's Act the cumbrous methods of stating the Bank's position, as published week by week in the Bank Return, would be abolished. The two accounts would be put together, with the result that the Bank's position would be apparently stronger than it appears to be under the present system, which makes the Banking Department's Return weak at the expense of the great strength that it gives to the appearance of the Issue Department. This will be shown from the following statement given by Sir Edward Holden of the Return as issued on January 16th, and as amended according to his ideas:—
BANK STATEMENT, JANUARY 16, 1918.
ISSUE DEPARTMENT
Notes Issued .. £76,076,000 Gold ……………… £57,626,000
Government Debt ……. 11,015,000
Other Securities …… 7,435,000
—————- —————-
£76,076,000 £76,076,000
Ratio of Gold to Notes Issued = 75.7 per cent.
BANKING DEPARTMENT.
Capital ……. £14,553,000 Government Securities …… £56,768,000 Rest ………. 3,363,000 Other Securities ……….. 92,278,000 Deposits— Notes ………. £30,750,000 Public £41,416,000 Gold and Silver 1,143,000 Other 121,589,000 —————- 163,005,000 ——————- 31,893,000 Other Liabilities … 18,000 —————- —————- £180,939,000 £180,939,000
Ratio of Cash Balance to Liabilities = 19.6 per cent.
RECONSTRUCTED BALANCE-SHEET OF THE BANK, JANUARY 16, 1918.
Capital £14,553,000 Rest 3,363,000 Notes Issued (circulation) 45,325,000 Deposits 163,005,000 Other Liabilities 18,000 ___________ £226,264,000
Gold £58,768,000 Currency Notes 11,015,000 ___________ £69,783,000
Government Securities 56,768,000 Other Securities 7,435,000 _________ 64,203,000
Other Securities 92,278,000
___________
£226,264,000
Ratio of Gold to Notes =129.7 per cent.
" " Cash Balance to Liabilities = 33.5 "
It need not be said that these proposals have aroused the liveliest interest. At the Bank Meetings held since then several chairmen have been asked by their shareholders to express their views on Sir Edward's proposed revolution. Sir Felix Schuster pronounced cautiously in favour of the revision of the Bank Act, and said that he had advocated it seventeen years ago. Lord Inchcape, at the National Provincial Meeting, thought that the matter required careful consideration. Most of us will agree with this view. There is certainly much to be said for a reform of the Weekly Statement of the Bank of England, giving, it may be added, a good deal more detail than Sir Edward's revised balance-sheet affords. But concerning his proposal to reconstruct our system of note issue on a foreign model, there is certain to be much difference of opinion. In the first place, owing to the development of our system of banking by deposit and cheque rather than by issue and circulation of notes, the note issue is not nearly so important a business in normal times in this country as it is in Germany and France. Moreover, the check imposed upon our banking community by the need for an appeal to the Treasury before it can extend its note issue beyond a certain point often acts with, a salutary effect, and the view has even been expressed that if that check were taken away from our system it might be difficult, if not impossible, to maintain the gold standard which has been of such enormous value in building up the prestige of London as a financial centre. I do not think there is much weight in this argument, since, under Sir Edward's plan, the note issue could only be increased against discounts, and the Bank, by the charge that it made for discounts, would still be able to control the situation. From the practical point of view of the present moment, a strong objection to the scheme is that it would open the door to fresh inflation by unrestricted credit-making just when the dangers of this process are beginning to dawn even on the minds of our rulers.
VII
THE COMPANIES ACTS
March, 1918
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.
Every week—almost every day—brings with it the announcement of some new committee considering some question that may, or may not, arise now or when the war is over. Especially in the realm of finance has the Government's output of committees been notably prolific of late. We have had a Committee on Currency, a Committee on Banking Amalgamations, and a Committee appointed, humorously enough, by the Ministry of Reconstruction to consider what measures, if any, should be taken to protect the public interest in connection with the policy of industrial combinations—a policy which the Board of Trade has been sedulously fostering. Now comes a Committee to inquire "what amendments are expedient in the Companies Acts, 1908-1917, principally having regard to the circumstances arising out of the war, and to the developments likely to arise on its conclusion, and to report to the Board of Trade and to the Ministry of Reconstruction." It is composed of the Right Hon. Lord Wrenbury (chairman), Mr A.S. Comyns Carr, Sir F. Crisp, Mr G.W. Currie, M.P., Mr F. Gaspard Farrer, Mr Frank Gore-Browne, K.C., Mr James Martin, the Hon. Algernon H. Mills, Mr R.D. Muir, Mr C.T. Needham, M.P., Mr H.A. Payne, Sir Owen Philipps, M.P., Sir William Plender, Mr O.C. Quekett, and Mr A.W. Tait. The secretary is Mr W.W. Coombs, 55, Whitehall, S.W. 1. There are some good names on the Committee. Mr. Gaspard Farrer represents a great issuing house; Sir Frank Crisp, company lawyers; Sir William Plender, the accountants; Mr O.C. Quekett, the Stock Exchange; and Sir Owen Philipps, the shipping interest. Nevertheless, one cannot help shuddering when one considers the dangers that threaten British finance and industry from ill-considered measures which might possibly be recommended by a Committee influenced by the atmosphere of the present outlook on financial and commercial affairs.
One of the interesting features of the present war atmosphere is the fact that, now when we are fighting as hard as we can to defeat all that is meant by Prussianism a great many of our rulers and public men are doing their best to impose Prussianising methods upon this unfortunate country, merely because it is generally assumed that Prussian methods have been shown, during the course of the war, to carry with them a certain amount of efficiency. It is certainly true that Prussian methods do very well as applied to the Prussians and submitted to by other races of Germans. On the other hand, it is at least open to argument that the British method of freedom, individual initiative, elasticity and adaptability have produced results, during the present war, which have so far been paralleled by no other country engaged in the contest. Working on interior lines with the assistance of docile and entirely submissive allies, Germany has certainly done wonderful things in the war, but it by no means follows that the verdict of posterity will not give the palm of achievement to England, who has not only carried out everything that she promised to do before the war, but has incidentally and in the course of it created and equipped an Army on a Continental scale, and otherwise done very much more for the assistance of her Allies than was contemplated before the war began.
It is untrue to say that we were unprepared for the war. We were more than prepared to do all that we promised to do. What we were unprepared for was finding ourselves required to turn ourselves into, not only the greatest naval Power in the world, but one of the greatest military Powers also. This demand was sprang upon us, and we have met it with extraordinary success. The whole idea that Germany's achievement has been such as to warrant any attempt on our part to model our institutions on her pattern seems to me to fall to pieces as soon as one looks calmly at the actual results produced by the different systems. Moreover, even if we were to admit that Germany's achievement in the war has been immeasurably greater than ours, it still would not follow that we could improve matters here by following the German system. It ought not to be necessary to observe that a system which is good for one nation or individual is not necessarily good for another. In the simple matter of diet, for instance, a most scientifically planned diet given to a child who does not happen to like it will not do that child any good. These things ought to be obvious, but unfortunately in these times, which call for eminently practical thought and effort, there is a curious doctrinaire spirit abroad, and the theorist is continually encouraged to imagine how much better things would be if everything were quite different, whereas what we want is the application of practical common sense to practical facts as they are.
In the realm of finance the freedom and individual initiative and elasticity of our English system have long been the envy of the world. Our banking system, as was shown, on an earlier page, has always worked with much less restriction on the part of legislative and official interference than any other, and, with the help of this freedom from official control, English bankers and finance houses had made London the financial centre of the world before the war. The attempt of Parliament to control banking by Peel's Act of 1844 was quietly set aside by the banking machinery through the development of the use of cheques, which made the regulations imposed on the note issue a matter of quite minor importance, except in times of severe crisis, when these regulations could always be set aside by an appeal to the Chancellor of the Exchequer. There was no Government interference in the matter of new issues of securities on the London Stock Exchange or of the quotations granted to new securities by the Committee of the Stock Exchange. Now the Companies Acts are to be revised in view of what may be necessary after the war, and there is only too much reason to fear that mistakes may occur through the imposition of drastic restrictions, which look so easy to work on paper, but are more than likely to have the actual effect of doing much more harm than good.
"Circumstances arising out of the war and developments likely to arise on its conclusion" give this Committee a roving commission to consider all kinds of things, which may or may not happen, in the light of wisdom which may be put before it by interested witnesses, and, worse still, in the light of semi-official pressure to produce a report which will go down well with the House of Commons. Our politicians are at present in a state of extreme servility before the enterprising gentlemen who are now at the head of what is called the Labour Party. Every one will sympathise with the aspirations of this party in so far as they aim at bettering the lot of those who do the hard and uninteresting work of the world, and giving them a larger share of the productions that they help to turn out; but that is not the same thing as giving obsequious attention to the views which their representatives may have concerning the management of financial affairs, on the subject of which their knowledge is necessarily limited and their outlook is likely to be, to a certain extent, prejudiced. A recent manifesto put forward by the leaders of the new Labour Party includes in its programme the acquisition by the nation of the means of production—in other words, the expropriation of private capitalists. The Labour people very probably think that by this simple method they will be able to save the labourer the cost of providing capital and the interest which is paid for its use; and people who are actuated by this fallacy, which implies that the rate paid to capital is thinly disguised robbery, inevitably have warped views concerning the machinery of finance and the earnings of financiers. These views, expressed in practical legislation, might have the most serious effects not only upon England's financial supremacy but also on the industrial activity which that financial supremacy does so much to maintain and foster.
What, after the war, will be the most important need, from the material point of view, for the inhabitants of this country? However the war may end, and whatever may happen between now and the end of it, there can be only one answer to this question, and that answer is greatly increased production. The war has already diminished our capital resources to the extent of the whole amount that we have raised by borrowing abroad, that is to say, by pledging the production of our existing capital, and by selling to foreign countries the foreign securities in which our capitalists had invested during the previous century. No one knows the extent to which our capital resources have been impaired by these two processes, but it may be guessed at as somewhere in the neighbourhood of 1500 millions; that is to say, about 10 per cent. of a liberal estimate of the total accumulated property of the country at the beginning of the war. To this direct diminution in our capital resources we have to add the impossibility, which has existed during the war, of maintaining our factories and industrial equipment in first-class working order by expenditure on account of depreciation of plant. On the other side of the balance-sheet we can put a large amount of new machinery introduced, which may or may not be useful for industrial purposes after the war; greatly improved methods of organisation, the effect of which may or may not be spoilt when the war is over by uncomfortable relations between Capital and Labour; and our loans to Allies and Dominions, some of which may have to be written off, and most of which will return us no interest for some time to come, or will at first pay us interest if we lend our debtors the money to pay it with. What the country will need, above all, on the material side, is an abundant revenue, which can only be produced by vigorous and steady effort in industry, which, again, can only be forthcoming if the machinery of credit and finance is given the fullest possible freedom to provide every one who wants to engage in industry and increase the output of the country with the financial facilities, without which nothing can be done.
Is it, then, wise at such a time to impose restrictions by a drastic tightening up of the Companies Act, upon those who wish by financial activity, to further the efforts of industries and producers? On the contrary, it would seem to be a time to give the greatest possible freedom to the financial machine so that there shall be the least possible delay and difficulty in providing enterprise with the resources that it needs. We can only make good the ravages of war by activity in production and strict economy in consumption. What we want to do is to stimulate the people of this country to work as hard as they can, to produce as much as possible, to consume as little as possible on unnecessary enjoyment and luxury, and, so, by procuring a big balance of production over consumption, to have the largest possible volume of available goods for sale to the rest of the world, in order to rebuild our position as a creditor country, which the war's demands upon us have to some extent impaired.
It is a commonplace that if it had not been for the great mass of foreign securities, which this country held at the beginning of the war, we could not nearly so easily have financed the enormous amount of food and munitions which we have had to provide for our population, for our armies, and for the population and armies of our Allies. If, instead of holding a mass of easily marketable securities, we had had to rely, in order to pay for our purchases of foreign goods, on the productions of our own mines and factories, and on our power to borrow abroad, then we should have had to restrict very greatly the number of men we have put into the firing-line so as to keep them at home for productive work, or, by the enormous amount of our borrowings, we should have cheapened the value of British credit abroad to a much greater extent than has been the case. Our position as a great creditor country was an enormously valuable asset, not only during the war but also before it, both from a financial and industrial point of view. It gave us control of the foreign exchanges by enabling us, at any time, to turn the balance of trade in our favour by ceasing for a time to lend money abroad, and calling upon foreign countries to pay us the interest due from them. The financial connections which it implied were of the greatest possible assistance to us in enhancing British prestige, and so helping our industry and commerce to push the wares that they produced and handled.
Reform of the Companies Acts has often before the war been a more or less burning question. Whenever the public thought that it had been swindled by the company promoting machinery, it used to write letters to the newspapers and point out that it was a scandal that the sharks of the City should be allowed to prey upon the ignorant public, and that something ought to be done by Parliament to insure that investments offered to the public should somehow or other be made absolutely watertight and safe, while by some unexplained method the public would still be somehow able to derive large benefits from fortunate speculations in enterprises which turned out right. Every one must admit there have been some black pages in the history of British company promoting, and that many swindles have been perpetrated by which the public has lost its money and dishonest and third-rate promoters have retired with the spoil. The question is, however, what is the remedy for this admitted and glaring evil? Is it to be found by making the Companies Laws so strict that no respectable citizen would venture to become a director owing to the fear of penal servitude if the company on whose board he sat did not happen to pay a dividend, and that no prospectus could be issued except in the case of a concern which had already stood so severe a test that its earning capacity was placed beyond doubt? It would certainly be possible by legislative enactment to make any security that was offered as safe as Consols, and less subject to fluctuation in value. But when this had been done the effect would be very much like the effect upon rabbits of the recent fixing of their price. No more securities would be offered.
It is certainly extremely important for the future financial and industrial development of this country that the machinery of finance and company promotion should be made as clean as possible. What we want to do is to make everybody see that a great increase in output is required, that this great increase in output can only be brought about if there is a great increase in the available amount of capital, that capital can only be brought into being by being saved, and that it is therefore everybody's business, both for his own sake and that of the country, to earn as much as he can and save as much as he can so that the country's capital fund can be increased; so that industry, which will have many difficult problems to face when the war is over, shall be as far as possible relieved from any difficulty of finding all the capital that it needs. To produce these results it is highly necessary to increase the confidence of the public in the machinery of the Stock Exchange, in company promotion and all financial issues. Any one who sincerely believes that these results can be produced by tightening up the Companies Acts is not only entitled but bound to press as hard as he can for the securing of this object. But is this the right way to do it? There is much to be said at first sight for making more strict the regulations under which prospectuses have to be issued under the Companies Acts, demanding a franker statement of the profits in the past, a fuller statement concerning the prices paid to vendors, and the prices paid by vendors to sub-vendors, and so forth. Any one who sits down with a pre-war industrial prospectus in his hand can find many openings for the hand of the reformer. The accounts published by public companies might also be made fuller and more informing with advantage. But even if these obviously beneficial reforms were carried out, there would always be danger of their evasion. They might tend to the placing of securities by hole-and-corner methods without the issue of prospectuses at all, and to all the endless devices for dodging the law which are so readily provided as soon as any attempt is made by legislation to go too far ahead of public education and public feeling.
This is the real solution of this problem—publicity, the education of the public, and a higher ideal among financiers. As long as the public likes to speculate and is greedy and ignorant enough to be taken in by the wiles of the fraudulent promoter, attempts by legislation to check this gentleman's enterprise will be defeated by his ingenuity and the public's eagerness to be gulled. The ignorance of the public on the subject of its investments is abysmal, as anybody knows who is brought into practical touch with it. Just as the cure for the production of rotten and fraudulent patent medicines thrust down the public's throat by assiduous advertising is the education of the public concerning the things of its stomach, so the real cure for financial swindles is the education of the public concerning money matters, and its recognition of the fact that it is impossible to make a fortune in the City without running risks which involve the possible, not to say probable, loss of all the money with which the speculator starts. When once the public has learnt to distinguish between a speculation and an investment, and has also learnt honesty enough to be able to know whether it wants to speculate or invest, it will have gone much further towards checking the activity of the fraudulent promoter than any measure that can be recommended by the most respectable and industrious of committees. At the same time, it must be recognised by those responsible for our finance, that it is their business, and their interest, to keep the City's back premises clean; because insanitary conditions in the back yard raise a stink which fouls the whole City.
In the meantime, if gossip is to be believed, some of the members of the Government have the most disquieting intentions concerning the kind of regulations which they wish to impose on the activities of the City, especially in its financial branch. It is believed that some of the bright young gentlemen who now rule us are in favour of Government control over the investment of money placed at home, and the prohibition of the issue of foreign securities; and it is even whispered that a fantastic scheme for controlling the profits of all industrial companies, by which anything earned above a certain level is to be seized for the benefit of the nation, is now a fashionable project in influential Parliamentary circles. Every one must, of course, admit that a certain amount of control will be necessary for some time after the war. It may not be possible at once to throw open the London Money Market to all borrowers, leaving them and it to decide between them who is to be first favoured with a supply of the capital for which there will be so large a demand when the war is over. Certain industries, those especially on which our export trade depends, will have to be first served in the matter of the provision of capital. If it is a choice between the engineering or shipbuilding trades and a company that wants to start an aeroplane service between London and Brighton for the idle rich, it would not be reasonable, during the first few months after the war, that the unproductive project should be able, by bidding a high price for capital, to forestall the demand of the more useful producer. And with regard to the issue of foreign securities, there is this to be said, that foreign securities placed in London have the same effect upon foreign exchange as the import into England of goods shipped from any country; that is to say, for the time being they turn the exchange against us. On the other hand, it is a well-known commonplace that imports of securities have to be balanced by exports of goods or services; and as the times when our export trade is most active are those when most foreign securities are being placed in London, it follows that any restrictions placed upon the issue of foreign securities in London will hinder rather than help that recovery in our export trade which is so essential to the restoration of our position as a creditor country.
Moreover, our rulers must remember this, that in War-time, when all the letters sent abroad are subject to the eye of the Censor, it is possible to control the export of British funds abroad; but that in peace time (unless the censorship is to continue), it will not be possible to check foreign investment by restricting the issuing of foreign securities in London. If people see better rates to be earned abroad and more favourable prospects offered by the price of securities on foreign Stock Exchanges, they will invest abroad, whether securities are issued in London or not. As for the curious suggestion that the profits of industrial companies are henceforward to be limited and the whole balance above a statutory rate to be taken over by the State for the public good, this would be, in effect, the continuance on stricter lines of the Excess Profits Duty. As a war measure the Excess Profits Duty has much to be said for it at a time when the Government, by its inflationary policy, is putting large windfalls of profit into the hands of most people who have to hold a stock of goods and have only to hold them to see them rise in value. The argument that the State should take back a large proportion of this artificially produced profit is sound enough; but, if it is really to be the case that industry is to be asked for the future to take all the risk of enterprise and handover all the profit above a certain level to the Government, the reply of industry to such a proposition would inevitably be short, emphatic, unprintable, and by no means productive of revenue to the State.
VIII
THE YEAR'S BALANCE-SHEET
April, 1918
The Figures of the National Budget—A Large Increase in Revenue and a Larger in Expenditure—Comparisons with Last Year and with the Estimates—The Proportions borne by Taxation still too Low—The Folly of our Policy of Incessant Borrowing—Its Injustice to the Fighting Men.
At first sight the figures of revenue and expenditure for the year ending March 31st are extremely satisfactory, at any rate on the revenue side. The Chancellor anticipated a year ago a revenue from taxation and State services of £638 millions, and the receipts into the Exchequer on these accounts actually amount to £707 millions. On the expenditure side, however, the increase over the Budget estimate was very much greater. The estimate was £2290 millions, and the actual amount expended was £2696 millions. Instead, therefore, of a deficit of £1652 millions having to be met by borrowing, there was an actual gap, to be filled by this method, of, roughly, £1990 millions.
To take the revenue side of the matter first, this being by far the most cheering and satisfactory, we find that the details of the revenue, as compared with last year's, were as follows:—
Year ending Year ending
Mar. 31, 1918. Mar. 31, 1917. Increase. Decrease.
£ £ £ £
Customs 71,261,000 70,561,000 700,000 —-
Excise 38,772,000 56,380,000 —- 17,608,000
Estate, etc.,
Duties 31,674,000 31,232,000 442,000 —-
Stamps 8,300,000 7,878,000 422,000 —-
Land Tax 665,000 640,000 25,000 —-
House Duty 1,960,000 1,940,000 20,000 —-
Income Tax and
Super Tax 239,509,000 205,033,000 34,476,000 —-
Excess Profits
Duties, etc. 220,214,000 139,920,000 80,294,000 —-
Land Value
Duties 685,000 521,000 164,000 —-
Postal Service 35,300,000 34,100,000 1,200,000 —-
Crown Lands 690,000 650,000 40,000 —-
Sundry Loans, etc. 6,056,250 8,055,817 —- 1,999,567
Miscellaneous 52,148,315 16,516,765 35,631,550 —-
—————- —————- —————- —————-
707,234,565 573,427,582 153,414,550 19,607,567
| |
+—————-+—————+
£133,806,983
Net Increase.
A more interesting comparison perhaps is to take the actual receipts during the past financial year and compare them, not with the former year, but with the estimates of the expected yield of the various items. In this case we get the following comparisons:—
[Transcriber's Note: Corrected a typo in the table: "Sundry Loans" line should have a minus(-) instead of a plus(+) as printed.]
Actual. Estimated. Difference.
£ £ £
Customs 71,261,000 70,750,000 + 511,000
Excise 38,772,000 34,950,000 + 3,822,000
Estate Duties 31,674,000 29,000,000 + 2,674,000
Stamps 8,300,000 8,000,000 + 300,000
Land Tax and House Duty 2,625,000 2,600,000 + 25,000
Income Tax and Super Tax 239,509,000 224,000,000 + 15,509,000
Excess Profits Tax 220,214,000 200,000,000 + 20,214,000
Land Value Duties 685,000 400,000 + 285,000
Postal Services 35,300,000 33,700,000 + 1,600,000
Crown Lands 690,000 600,000 + 90,000
Sundry Loans, etc. 6,056,000 7,500,000 - 1,444,000
Miscellaneous 52,148,000 27,100,000 + 25,048,000
Certainly, the country is entitled to congratulate itself on this tremendous evidence of elasticity of revenue, and to a certain extent on the effort that it has made in providing this enormous sum of money from the proceeds of taxation and State services. But when this much has been admitted we have to hasten to add that the figures are not nearly so big as they look, and that there is much less "to write home about," as the schoolboy said, than there appears to be at first sight. Those champions of the Government methods of war finance who maintain that we have, during the past year, multiplied the pre-war revenue, of roughly, £200 millions by more than 3-1/2, so arriving at the present revenue of over £700 millions, are not comparing like with like. The statement is perfectly true on paper, and expressed in pounds sterling, but then the pound sterling of to-day is an entirely different article from the pre-war pound sterling. Owing to the system of finance pursued by our Government, and by every other Government now engaged in the war, of providing for a large part of the country's goods by the mere manufacture of new currency and credit, the buying power of the pound sterling has been greatly depreciated. By multiplying the amount of legal tender currency in the shape of Treasury notes, of token currency in the shape of silver and bronze coinage, and of banking currency through the bank deposits which are swollen by the banks' investments in Government securities, the Government has increased the amount of currency passing from hand to hand in the community while, at the same time, the volume of goods to be purchased has not been increased with anything like the same rapidity, and may, in fact, have been, actually decreased. The inevitable result has been a great flood of new money with a greatly depreciated value. Index numbers show a rise of over 100 per cent. in the average prices of commodities during the war. It is, however, perhaps unfair to assume that the buying power of the pound has actually been reduced by a half, but it is certainly safe to say that it has been reduced by a third. Therefore, the revenue raised by the Government during the past year has to be reduced by at least a third before we are justified in comparing our war achievements with the Government's pre-war revenue. If we take one-third off £707 millions it reduces the total raised during the past year by revenue to about £470 millions, less than two and a half times the pre-war revenue.
From another point of view our satisfaction with the tremendous figures of the past year's revenue has to be to some extent qualified. The great elasticity shown by the big increase of actual achievement over the Budget estimate has been almost entirely in revenue items which cannot be expected to continue to serve us when the war is over. The total increase in the receipts over estimate amounts to £69 millions, and of this £20 millions was provided by the Excess Profits Duty, a fiscal weapon which was invented during the war, and for the purpose of the war. It has always been assumed that it would be discontinued as soon as the war was over, and if it should not be discontinued its after-war effect is likely to be very unfortunate at a time when our industrial effort requires all the encouragement that it can get. Another £25 millions was provided by miscellaneous revenue, and this windfall again must be largely due to operations connected with the war. Finally, the £15-1/2 millions by which the income tax exceeded the estimate must again be largely due to inflation and extravagance on the part of the Government, which, by manufacturing money, and then spending it recklessly, puts big profits and big incomes into the hands of those who have stocks of goods to sell or who are in a position to produce them.
If, therefore, the satisfaction with which we regard the big total of the Government's revenue receipts has to be considerably modified in the cold light of close observation, the enormous increase on the expenditure side gives us very little comfort and calls for the most determined and continued criticism if our reckless Government is to be made to turn over a new leaf. In the early days of the war there was much excuse for wasting money. We had to improvise a great Army, and a great organisation for equipping it; there was no time then to look too closely into the way the money was being spent, but this excuse is long obsolete. It is not possible to waste money without also wasting the energy and working power of the nation; on this energy and working power the staying power of the country depends in its struggle to avert the greatest disaster that can be imagined for civilisation, that is, the victory of the German military power. Seeing that for many months past we have no longer been obliged to finance Russia, and to provide Russia with the mass of materials and the equipment that she required, the way in which our expenditure has mounted up during the course of the year is a very serious blot on the year's balance-sheet. We spent during the year ending March 31st, £2696 millions against £2198 millions in the previous year, an increase of close upon £500 millions; £63 millions of this increase were due to interest on war debt, the rest of it was due to increased cost of the war, and few business men will deny that very many of these extra millions might have been saved if our rulers and our bureaucratic tyrants had been imbued with any real sense of the need for conserving the energy of the nation.
Much has been done by the Committee on National Expenditure to bring home to the Government opportunities for economy, and methods by which it can be secured. Can we be equally confident that much has been done by the Government to carry out the advice that has been given by this Committee? The Treasury is frequently blamed for its inability to check the rapacity and extravagance of the spending Departments. It is very likely that the Treasury might have done more if it had not been led by its own desire for a short-sighted economy into economising on its own staff, the activity and efficiency of which was so absolutely essential to the proper spending of the nation's money. But when this has been admitted, the fact remains that the Treasury cannot, or can only with great difficulty, be stronger on the side of economy than the Chancellor of the Exchequer, and that the task of the Chancellor of the Exchequer of imposing economy on a spendthrift War Cabinet is one of extreme difficulty. I hope it is not necessary to say that I do not urge economy from any sordid desire to save the nation's money if, by its spending, victory could be secured or brought a day nearer. I only urge it because I believe that the conservation of our resources is absolutely necessary to maintain our staying power, and that these resources are at present being scandalously wasted by the Government. Inter-departmental competition is still complained of in the latest report of the National Committee on Expenditure, and there seems to be still very little evidence that the Government Departments have yet possessed themselves of the simple fact that it is only out of these resources that victory can be secured, and that any waste of them is therefore a crime against the cause of liberty and progress.
It is possible that before these lines are in print the Chancellor will have brought in his new Budget, and therefore any attempt to forecast the measures by which he will meet next year's revenue would be even more futile than most other endeavours at prophecy. But from the figures of last year as they are before us we see once more that the proportion of expenditure raised by revenue still leaves very much to be desired; £707 millions out of, roughly, £2700 millions is not nearly enough. It is true that on the expenditure side large sums have been put into assets which may some day or other be recoverable, and it is therefore impossible to assume with any approach to accuracy what the actual cost of the war has been for us during the past year. We have made, for instance, very large advances to our Allies and Dominions, and it need not be said that our advances to our own Dominions may be regarded as quite as good as if they were still in our own pockets; but in the case of our Allies, our loans to Russia are a somewhat questionable asset, and our loans to our other brothers-in-arms cannot be regarded as likely to be recoverable for some time to come, owing to the severity with which the war's pressure has been laid upon them. With regard to the other assets in which the Government has invested our money, such as factories, machinery, ships, supplies and food, etc., it is at least possible that considerable loss may be involved in the realisation of some of them. It is, however, possible that the actual cost of the war to us during the year that is past may turn out some day to have been in the neighbourhood of £2000 millions. If, on the other hand, we deduct from the £700 millions raised by revenue the £200 millions which represent the normal pre-war cost of Government to this country we find that the proportion of war's cost raised out of revenue is slightly over 25 per cent. This proportion must be taken with all reserve for the reasons given above, but in any case it is very far below the 47 per cent. of the war's cost raised out of revenue by our ancestors in the course of the Napoleonic wars.
It seems to me that this policy of raising so large a proportion of the war's cost by borrowing is one that commends itself to short-sighted politicians, but is by no means in the interests of the country as a whole, or of the taxpayers who now and hereafter have to find the money for paying for the war. In so far as the war's needs have to be met abroad, borrowing abroad is to some extent inevitable if the borrowing nation has not the necessary resources and labour available to turn out goods for export to exchange against those which have to be purchased abroad, but in so far as the war's needs are financed at home, the policy of borrowing is one that should only be used within the narrowest possible limits. By its means the Government, instead of making the citizens pay by taxation for the war as it goes on, hires a certain number of them to pay for it by promising them a rate of interest, and their money back some day. The interest and the sinking fund for redemption have to be found by taxation, and so the borrowing process merely postpones taxation from the war period to the peace period. During the war period taxation can be raised comparatively easily owing to the patriotic stimulus and the simplification of the industrial problem which is provided by the Government's insatiable demand for commodities. When the days of peace return, however, there will be very grave disturbance and dislocation in industry, and it will have once more to face the problem of providing goods, not for a Government which will take all that it can get, but for a public, the demands of which will be uncertain, and whose buying power will be unevenly distributed, and difficult to calculate. The process, therefore, which postpones taxation during the war period to the peace period seems to be extraordinarily short-sighted from the point of view of the nation's economic progress. Recovery after the war may be astonishingly rapid if all goes well, but this can only happen if every opportunity is given to industry to get back to peace work with the least possible friction, and a heavy burden of after-war taxation, such as we shall inevitably have to face if our Chancellors of the Exchequer continue to pile up the debt charge as they have done in the past, will be anything but helpful to those whose business it will be to set the machinery of industry going under peace conditions.
As things are, if we continue to add anything like £2000 millions a year to the National Debt, it will not be possible to balance the after-war Budget without taxation on a heavier scale than is now imposed, or without retaining the Excess Profit Duty, and so stifling industry at a time when it will need all the fresh air that it can get. Apart from this expedient, which would seem to be disastrous from the point of view of its effect upon fresh industry, the most widely advertised alternative is the capital levy, the objections to which are patent to all business men. It would involve an enormously costly and tedious process of valuation, its yield would be problematical, and it might easily deal a blow at the incentive to save on which the supply of capital after the war entirely depends. A much higher rate of income tax, especially on large incomes, is another solution of the problem, and it also might obviously have most unfortunate effects upon the elasticity of industry. A tax on retail purchases has much to be said in its favour, but against it is the inequity inseparable from the impossibility of graduating it according to the ability of the taxpayer to bear the burden; and a general tariff on imported goods, though it would be welcomed by the many Protectionists in our midst, can hardly be considered as a practical fiscal weapon at a time when the need for food, raw material, and all the equipment of industry will make it necessary to import as rapidly and as cheaply as possible in order to promote our after-war recovery.
Apart from these purely economic arguments against the high proportion of the war's costs that we are meeting by borrowing, there is the much more important fact of its bad effect on the minds of our soldiers, and of those members of the civilian population who draw mistaken inferences from its effects. From the point of view of our soldiers, who have to go and fight for their country at a time when those who are left at home are earning high wages and making big profits, it is evidently highly unfair that the war should be financed by a method which postpones taxation. The civilian population left at home, earning high profits and high wages, should clearly pay as much as possible during the war by immediate taxation, so that the burden of taxation may be relieved for our soldiers when they return to civil life. In view of the hardships and dangers which our soldiers have to face, and the heroism with which they are facing them, this argument should be of overwhelming strength in the eyes of every citizen who has imagination enough to conceive what our fighting men are doing for us and how supreme is our duty to do everything to relieve them from any other burden except those which the war compels them to face. There is also the fact that many members of our uninstructed industrial population believe that the richer classes are growing richer owing to the war, and battening on the proceeds of the loans. I do not think that this is true; on the contrary, I believe that the war has brought a considerable shifting of buying power from the well-to-do classes to the manual workers. Nevertheless, in these times misconceptions are awkwardly active for evil. The well-to-do classes as a whole are not really benefited by having their future incomes pledged in order to meet the future debt charge, and if, at the same time, they are believed to be acquiring the right to wealth, which wealth they will have themselves to provide, the fatuity of the borrowing policy becomes more manifest. For these reasons it is sincerely to be hoped that our next fiscal year will be marked by a much higher revenue from taxation, a considerable decrease in expenditure, and a consequently great improvement in the proportion of war's cost met out of revenue, on what has been done in the past year. At our present rate of taxation we are not nearly meeting, out of permanent taxes, the sum which will be needed when the war is over for peace expenditure on the inevitably higher scale, pensions, and interest and sinking fund on war debt.
IX
COMPARATIVE WAR FINANCE
May, 1918
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.
One of the most interesting passages in a Budget speech of unusual interest was that in which the Chancellor of the Exchequer compared the financial methods of Germany and of this country, as shown by their systems of war finance. He began by admitting that it is difficult to make any accurate calculation on this subject, owing to the very thick mist of obscurity which envelops Germany's actual performance in the matter of finance since the war began. As the Chancellor says, our figures throughout have been presented with the object of showing quite clearly what is our financial position. Most of the people who are obliged to study the figures of Government finance would feel inclined to reply that, if this is really so, the Chancellor and the Treasury seem to have curiously narrow limitations in their capacity for clearness. Very few accountants, I imagine, consider the official figures, as periodically published, as models of lucidity. Nevertheless, we can at least claim that in this respect the figures furnished to us by the Government during the war have been quite as lucid as those which used to be presented in time of peace, and it is greatly to the credit of the Treasury that, in spite of the enormous figures now involved by Government expenditure, the financial statements have been published week by week, quarter by quarter, and year by year, with the same promptitude and punctuality that marked their appearance in peace-time. In Germany, the Chancellor says, it has not been the object of German financial statements to show the financial position quite clearly. It is, therefore, difficult to make an exact statement, but he was able to provide the House with a series of very interesting figures, taken from the statements of the German Finance Ministers themselves.
His first point is with regard to the increase of expenditure. The alarming rate with which our expenditure has so steadily grown appears to be paralleled also in Germany. Up to June, 1916, Germany's monthly expenditure was £100 millions. It has now risen to over £187 millions. That means to say that their expenditure per diem is £6-1/4 millions, almost the same as ours, although our expenditure includes items such as separation allowances and other matters of that kind, borne by the States and municipalities in Germany, and so not appearing in the German imperial figures.
As to the precise extent of the German war debt, there is no certainty, but the Chancellor was able to tell the House that the last German Vote of Credit, which was estimated to carry them on to June or July, brings the total amount of all their Votes of Credit to £6200 millions, and that it is at least certain that that amount has been added to their War Debt, because their taxation during the war has not covered peace expenditure plus debt charge. Up to 1916 they imposed no new taxation. In 1916 they imposed a war increment tax, something in the nature of a capital levy, which is stated to have brought in £275 millions. They added also that year £25 millions nominally to their permanent revenue. In 1917 they added in addition £40 millions to their permanent revenue, "Assuming, therefore, that their estimates were realised, the total amount of new taxation levied by them since the beginning of the war comes to £365 millions, as against our £1044 millions. This £365 millions is not enough to pay the interest upon the War Debt which had been accumulated up to the end of the year."
Mr Bonar Law then proceeded to give an estimate of what the German balance-sheet will be a year hence on the same basis on which he had calculated ours. With regard to our position, he had calculated that on the present basis of taxation we shall have a margin of four millions at the end of the present year if peace should then break out. As will be shown later, this estimate of his is somewhat optimistic, but at any rate our position, compared with that of Germany, may be described as on velvet. A year hence the German War Debt will be not less than £8000 millions. The interest on that will be at least £400 millions, a sinking fund at 1/2 per cent. will be £40 millions. Their pension engagements, which will be much higher than ours owing to their far heavier casualties, have been estimated at amounts ranging as high as £200 millions. The Chancellor was sure that he was within the mark in saying that it will be at least £150 millions. Their normal pre-war expenditure was £130 millions, so that they will have to face a total expenditure at the end of the war of £720 millions. On the other side of the account their pre-war revenue was £150 millions. They have announced their intention of this year raising additional permanent Imperial revenue amounting to £120 millions. From the nature of the taxes the Chancellor considers it very difficult to believe that this amount will be realised, but, assuming that it is, it will make their total additional revenue £185 millions. That, added to the pre-war revenue, gives a total of £335 millions, showing "a deficit at the end of this year, comparing the revenue with the expenditure, of £385 millions at least." The Chancellor added that if that were our position he would certainly think that bankruptcy was not far from the British Government.
Another point that the Chancellor was able to make effectively, in comparing our war revenue with Germany's, was the fact that, with the exception of the war increment tax, scarcely any of the additional revenue has been obtained from the wealthier classes in Germany. Taxation has been indirect and on commodities which are paid for by the masses of the people. "The lesson to be drawn from these facts is not difficult to see. The rulers of Germany, in spite of their hopes of indemnity, must realise that financial stability is one of the elements of national strength. They have not added to their financial stability." The reason for this failure the Chancellor considers to be largely psychological. It is, in the first place, because they do not care to add to discontent by increased taxation all over the country, but "it is still more due to this, that in Germany the classes which have any influence on or control of the Government are the wealthier classes, and the Government have been absolutely afraid to force taxation upon them."
It is certainly very pleasant to be able to contemplate the financial blunders by which Germany is so greatly increasing the difficulties that it will have to face before the war is over. On the other hand, we have to recognise that the Chancellor, with that incorrigible optimism of his, has committed the common but serious error of over-stating his case by leaving out factors which are in Germany's favour, as, for instance, that Germany's debt is to a larger extent than ours held at home. Since the war began we have raised over £1000 millions by borrowing abroad. Our public accounts show that the item of "Other Debt," which is generally believed to refer to debt raised abroad, now amounts to £958 millions, while one of our loans in America, which is separately stated in the account because it was raised under a special Act, amounted to £51-1/2 millions. It is also quite possible that fair amounts of our Treasury bills, perhaps also of our Temporary Advances and of our other war securities, have been taken up by foreigners; but quite apart from that the two items already referred to now amount to more than £1000 millions, though at the end of March last their amount was only £988 millions. It is also well known that we have during the course of the war realised abroad the cream of our foreign investments, American Railroad Bonds, Municipal and Government holdings in Scandinavia, Argentina, and elsewhere, to an amount concerning which no accurate estimate can be made, except by those who have access to the Arcana of the Treasury. It may, however, be taken as roughly true that so far the extent of our total borrowings and realisation of securities abroad has been balanced by our loans to our Allies and Dominions, which amounted at the end of March last to £1526 millions. We have thus entered into an enormous liability on foreign debts and sold a batch of very excellent securities on which we used to receive interest from abroad in the shape of goods and services, against which we now hold claims upon our Allies and Dominions, in respect to the greater part of which it would be absurd to pretend that we can rely on receiving interest for some years after the war, in view of the much greater economic strain imposed by the war upon our Allies.
Germany, of course, has been doing these things also. Germany has parted with her foreign securities. She was selling them in blocks for some weeks before the war, and Germany, of course, has done everything that she could in order to induce neutrals, during the course of the war, to buy securities from her and to subscribe to her War Loans. Nevertheless, it cannot have been possible for Germany to carry out these operations to anything like the extent that we have, partly because her credit has not been nearly so good, partly because her ruthless and brutal conduct of the war has turned the sentiment of the world against her, and partly because the measures that we have taken to check remittances and transfers of money have not been altogether ineffective. On this side of the problem Germany has therefore an advantage over us, that her war finance, pitiful a$ it has been, has, not owing to any virtue of hers, but owing to force of circumstances, raised her a problem which is to a great extent internal, and will not have altered her relation to the finance of other countries so much as has been the case with regard to ourselves. We also have to remember that the process of demobilisation will be far simpler, quicker, and cheaper for Germany than for us. Even if the war ended to-morrow the German Army would not have far to go in order to get home, and we hope that by the time the war ends the German Army will all have been driven back into its own country and so will be on its own soil, only requiring to be redistributed to its peace occupations. Our Army will have to be fetched home, firstly, over Continental railways, probably battered into a condition of much inefficiency, and then in ships, of which the supply will be very short. The process will be very slow and very costly. Our Overseas Army will have to be sent back to distant Dominions, and the Army of our American Allies will have to be ferried back over the Atlantic. Consequently if Germany is able to obtain anything like the supply of raw material that she requires she will be able to get back to peace business much more quickly than any of her Anglo-Saxon enemies, and this is an advantage on her side which it would be unwise to ignore in considering the bad effects on her after-war activities of the very questionable methods by which she has financed and is financing the war.
Since we are indulging in these comparisons, it may be interesting to consider how our American Allies are showing in this matter of war finance. The Times, in its "City Notes" of April 15th, observed, in connection with the unexpectedly small amount of the third Liberty Loan, that the reason why the smaller figure was adopted for the issue was that it seems quite certain now that the original estimate for the expenditure in the fiscal year ending June 30th next was much too high. This estimate was 18,775 million dollars. The Times stated that the realised amount is likely to be hardly more than 12,000 million dollars, of which about 4500 million dollars will represent loans to Allies, and that the estimate for the year's largely increased tax revenue was 3886 million dollars, which now seems likely to be exceeded by the receipts. If this be so, out of a total expenditure of £2400 millions, of which £900 millions will be lent to the Allies, the Americans are apparently raising nearly £800 millions out of revenue. Therefore if we deduct from both sides of the account the pre-war expenditure of about £215 millions and deduct also the loans to Allies from the expenditure, it leaves the cost of the war to America £1285 millions for this year and the war revenue £562 millions. If these figures are correct it would thus appear that America is raising nearly half its actual war cost out of revenue as the war goes on.
On the other hand, in the New York Commercial Chronicle of April 6th the total estimated disbursements for the year are still stated at over 16,000 million dollars, that is to say, £3200 millions roughly, so that there seems to be considerable uncertainty as to what the actual amount of the expenditure of the United States will be during the year ending on June 30th. In any case, there can be no question that if the very high proportion of war cost paid out of revenue shown by the Times figures proves to be correct, it will be largely owing to accident or misfortune; if America's war expenditure has not proceeded nearly as fast as was expected, it will be, no doubt, owing not to economies but to shortcomings in the matter of delivery of war goods which the Government had expected to pay for in the course of the fiscal year. It certainly would have been expected that the Americans would in this matter of war finance be in a position to set a very much higher standard than any of the European belligerents owing to the enormous wealth that the country has acquired during the two and a half years in which it, in the position of a neutral, was able to sell its produce at highly satisfactory prices to the warring Powers without itself having to incur any of the expenses of war. On the other hand, its great distance from the actual seat of operations will naturally make it difficult for the American Government to impose taxation as freely as might have been done in the case of peoples which are actually on the scene of warfare; so that it is hardly safe to count on American example to improve the standard of war finance which has been so lamentably low in Europe in the course of the present war. According to their original estimates the proportion of war cost borne out of taxation seems to have been on very much the same level as ours, and this has all through the war been very much lower than the results achieved by our ancestors at the time of the Napoleonic and Crimean wars.
On this point the proportion of our expenditure, which has been borne out of revenue, the Chancellor stated that up to the end of last financial year, March 31, 1918, the proportion of total expenditure borne out of revenue was 26.3 per cent. On the estimates which he submitted to the House in his Budget speech on April 22nd, the proportion of total expenditure met out of revenue during the current financial year will be 28.3 per cent., and the proportion calculated over the whole period to the end of the current year will be 26.9 per cent. These proportions, however, are between total revenue and total expenditure during the war period. The proportion, of course, is not so high when we try to calculate actual war revenue and war expenditure by deducting on each side at a rate of £200 millions a year as representing normal expenditure and revenue and leaving out advances to Allies and Dominions. On this basis the proportion of war expenditure met out of war revenue up to March 31, 1918, was, the Chancellor stated, 21.7 per cent. For the year 1917-18 it was 25.3 per cent., for the current year it will be 26.5 per cent., and for the whole period up to the end of the current year 23.3 per cent. The corresponding figures for the Napoleonic and Crimean wars are given by Sir Bernard Mallet in his book on British Budgets as 47 per cent. and 47.4 per cent. So that it will be seen that, judged by this test, our war finance, though very much better than Germany's, is not on so high a standard as that set by previous wars. It is true, of course, that the rate of expenditure during the present war has been on a scale which altogether dwarfs the outgoing in any previous struggle. The Napoleonic War is calculated to have cost some £800 millions, having lasted some twenty-three years. Last year we spent £2696 millions, of which near £2000 millions may be taken as war cost, after deducting normal expenditure and loans to Allies.
Nevertheless, this argument of the enormous cost of the present war does not seem to me to be a good reason why the war should be financed badly, but rather a reason for making every possible effort to finance it well Are we doing so? At first sight it is a great achievement to have increased our total revenue from £200 millions before the war to £842 millions, the amount which we are expected to receive during the current year on the basis of the proposed additions to taxation, without taking into account any revenue from the suggested luxury tax. But, as I have already pointed out, the comparison of war pounds with pre-war pounds is in itself deceptive. The pounds that we are paying to-day in taxation are by no means the pounds that we paid before the war; their value in effective buying power has been diminished by something like one half. So that even with the proposed additions to taxation we shall not have much more than doubled the revenue of the country from taxation and State services as calculated in effective buying power. When we consider how much is at stake, that the very existence, not only of the country but of civilisation, is endangered by German aggression, it cannot be said that in the matter of taxation the country is doing anything like what it ought to have done or anything like what it would have done, willingly and readily, if a proper example had been set by the leading men among us, and if the right kind of financial lead had been given to the country by its rulers.
When we look at the details of the Budget, it will be seen that the Chancellor has made a considerable advance upon his achievement of a year ago, when he imposed fresh taxation amounting to £26 millions, twenty of which came from excess profits duty, and could therefore not be counted upon as permanent, in his Budget for a year which was expected to add over £1600 millions to the country's debt, and actually added nearly £2000 millions. For the present year he anticipates an expenditure of £2972 millions, and he is imposing fresh taxation which will realise £68 millions in the current year and £114-1/2 millions in a full year. On the basis of taxation at which it stood last year he estimates for an increase of £67 millions, income tax and super-tax on the old basis being expected to bring in £28 millions more, and excess profits duty £80 millions more, against which decreases were estimated at £3-1/2 millions in Excise and £37 millions in miscellaneous. He thus expects to get a total increase on the last year's figures of £135 millions, making for the current year a total revenue of £842 millions, and leaving a total deficit of £2130 millions to be provided by borrowing. Increases in taxation on spirits, beer, tobacco, and sugar bring in a total of nearly £41 millions. An increase of a penny in the stamp duty on cheques is estimated to bring in £750,000 this year and a million in a full year, and the increases in the income tax and the super-tax will bring in £23 millions in the present year and £61 millions in a full year. Increases in postal charges will bring in £3-1/2 millions this year and £4 millions in a full year.
There has been little serious criticism of these changes in taxation except that many people, who seem to regard the penny post as a kind of fetish, have expressed regret that the postal rate of the letter should be raised to 1-1/2 d. This addition seems to me to be merely an inadequate recognition of the depreciation of the buying power of the penny and to be fully warranted by the country's circumstances. Either it will bring in revenue or it will save the Post Office labour, and whichever of these objects is achieved will increase the country's power to continue the war. The extra penny stamp on cheques has been rather absurdly objected to as being likely to increase inflation. Since the effect of it is likely to be that people will draw a smaller number of small cheques, and will make a larger number of their purchases by means of Treasury notes, the tax will merely result in the substitution of one form of currency for another, and it is difficult to see how this process will in any way increase inflation. Other arguments might be adduced, which make it undesirable to increase the outstanding amounts of Treasury notes, but in the matter of inflation through addition to paper currency, it seems to me that the proposed tax is entirely blameless. The increase of a shilling in income tax and super-tax produced a feeling of relief in the City, being considerably lower than had been anticipated. It is hardly the business of the Chancellor of the Exchequer in this most serious crisis to produce feelings of relief among the taxpayers, and it seems to me a great pity that he did not make much freer use of these most equitable forms of taxation, having first made arrangements (which could easily have been done) by which their very severe pressure would have been relieved upon those who have families to bring up. Death duties, again, he altogether omitted as a source of extra revenue. His proposed luxury tax he has left to be evolved by the wisdom of a House of Commons Committee, and has thereby given plenty of time to extravagantly minded people to lay in a store of stuff before the tax is brought into being.
Space will not allow me to deal fully with the Chancellor's very interesting analysis of our position as he expects it to be at the end of the financial year on the supposition that the war was then over. He expects a revenue then of £540 millions on the present basis, making, with the yield of the new taxes in a full year, £654 millions in all, without including the excess profits duty, and he expects an after-war expenditure of £650 millions, including £50 millions for pensions and £380 millions for debt charge. It seems to me that his expectation of after-war revenue is too high, and of after-war expenditure is too low. He says that the estimates have been carefully made, but that they include "a recovery from the absence of war conditions," but surely the absence of war conditions is much more likely to produce a diminution than a recovery in taxation. Under the present circumstances, with prices continually rising, the profits of those who grow or hold stocks of goods of any kind automatically swell The rise in prices has only to cease, to say nothing of its being turned into a fall, to produce at once a big check in those profits, and when we consider the enormous dislocation likely to be produced by the beginning of the peace period expectations of an elastic revenue when the war is over seem to be almost criminally optimistic.
The Chancellor arrived at his after-war debt charge of £380 millions by estimating for a gross debt on March 31, 1919, of £7980 millions, which he reduces to a net debt of £6856 millions by deducting half the expected face value of loans to Allies, £816 millions, and £308 millions for loans to Dominions and India's obligation. But is he, in fact, entitled to count on receiving any interest at all from our Allies for some years to come after the war? If not, then on that portion of our debt which is represented by loans to Allies we shall have to meet interest for ourselves. He also gave an imposing list of assets in the shape of balances in hand, foodstuffs, land, securities, building ships, stores in munitions department, and arrears of taxation, amounting in all to nearly £1200 millions. It is certainly very pleasant to consider that we shall have all these valuable assets in hand; but against them we have to allow, which the Chancellor altogether omitted to do, for the big arrears of expenditure and the huge cost of demobilisation, which is at least likely to absorb the whole of them. On the whole, therefore, although we can claim that our war finance is very much better than that of our enemies, it is difficult to avoid the conclusion that it might have been very much better than it is, and that it is not nearly as good as it is represented to be by the optimistic fancy of the Chancellor of the Exchequer.
X
INTERNATIONAL CURRENCY
June, 1918
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.
As if mankind had not enough on its hands at the present moment, a number of well-meaning people seem to think that this is an opportune time for raising obscure questions of currency, and trying to make the public take an interest in schemes for bettering man's lot by improving the arrangements under which international payments are carried out. Nobody can deny that some improvement is possible in this respect, but it may very well be doubted whether, at the present moment, when very serious problems of rebuilding have inevitably to be faced and solved, it is advisable to complicate them by introducing this difficult question which, whenever it is raised, will require the most careful and earnest consideration.
Since, however, the question is in the air, it may be as well to consider what is wrong with our present methods, and what sort of improvements are suggested by the reformers. At present, as every one knows, international payments are in normal times ultimately settled by shipments from one country to another of gold. Gold has achieved this position for reasons which have been described in all the currency text-books. Mankind proceeded from a state of barter to a condition in which one particular commodity was used as the chief means of payment simply because this process was found to be much more convenient. Under a system of barter an exchange could only be effected between two people who happened to be possessed each of them of the thing which the other one wanted, and also at the same time to want the thing which the other one possessed, and the extent of their mutual wants had to lit so exactly that they were able to carry out the desired exchange. It must obviously have been rare that things happened so fortunately that mutually advantageous exchanges were possible, and the text-books invariably call attention to the difficulties of the baker who wanted a hat, but was unable to supply his need because the hatter did not want bread but fish or some other commodity.
It thus happened that we find in primitive communities one particular commodity of general use being selected for the purpose of what is now called currency. It is very likely that this process arose quite unconsciously; the hatter who did not want bread may very likely have observed that the baker had something, such as a hit of leather, which was more durable than bread, and which the hatter could be quite certain that either he himself would want at some time, or that somebody else would want, and he would therefore always be able to exchange it for something that he wanted. All that is needed for currency in a primitive or any other kind of people is that it should be, in the first place, durable, in the second place in universal demand, and, in the third place, more or less portable. If it also possessed the quality of being easily able to be sub-divided without impairing its value, and was such that the various pieces into which it was sub-divided could be relied on not to vary in desirability, then it came near to perfection from the point of view of currency.
All these qualities were possessed in an eminent degree by the precious metals. It is an amusing commentary on the commonly assumed material outlook of the average man that the article which has won its way to supremacy as currency by its universal desirability, should be the precious metals which are practically useless except for purposes of ornamentation. For inlaying armour and so adorning the person of a semi-barbarous chief, for making into ornaments for his wives, and for the embellishment of the temples of his gods, the precious metals had eminent advantages, so eminent that the practical common sense of mankind discovered that they could always be relied upon as being acceptable on the part of anybody who had anything to sell. In the matter of durability, their power to resist wear and tear was obviously much greater than that of the hides and tobacco and other commodities then fulfilling the functions of currency in primitive communities. They could also be carried about much more conveniently than the cattle which have been believed to have fulfilled the functions of currency in certain places, and they were capable of sub-division without any impairing of their value, that is to say, of their acceptability. Merely as currency, precious metals thus have advantages over any other commodity that can be thought of for this purpose.