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                        OUR MONEY AND THE STATE




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                         E. P. DUTTON & COMPANY
                                NEW YORK




                             OUR MONEY AND
                               THE STATE

                           BY HARTLEY WITHERS


              Life is like playing a violin solo in public
              and learning the instrument as one goes on.
            SAMUEL BUTLER, _Essays on Life, Art and Science_

                             [Illustration]


                                NEW YORK
                         E. P. DUTTON & COMPANY
                            681 FIFTH AVENUE




                            COPYRIGHT, 1917
                       By E. P. DUTTON & COMPANY

                Printed in the United States of America




                    PREFACE TO THE AMERICAN EDITION


Problems of Public Finance are looked at from different angles by
different peoples, but are, in essence, much the same all over the
world. Moreover it is possible that if the present war ends in the
establishment of a League of Peace, based on the brotherhood of
Mankind, as foreshadowed by President Wilson in his noble message to
the Russian people, there may be a change in the outlook on questions
of taxation, and they may be henceforward looked at from a new point
of view, directed to the furtherance of that brotherhood. In any case,
since one of the benefits that the people of the United States have
always enjoyed is the power to profit by the mistakes of Europe, it is
possible that an English view of the relations between the State and
the property of its citizens may be of some interest in America.

                                                 HARTLEY WITHERS.

  _July_ 1917.




                     PREFACE TO THE ENGLISH EDITION


This book grew out of a course of lectures on Public Finance delivered
at the London School of Economics in February and March. The subject
had already been dealt with ably and fully by writers who had made a
special study of it; but the present war, by making us spend with such
titanic recklessness, has supplied us with a huge magnifying glass,
by which cause and effect are more clearly seen than in times of
peace. The results of borrowing, inflation of currency, and inequities
in taxation are seen at work now on such a scale that if we use the
experiences of the war aright they may help us to better financial
methods when the war is over. Students who wish to pursue the subject
into its technical and scientific details can do so with the help
of _Public Finance_, by Prof. Bastable; _The Income Tax_, and other
works on taxation by Prof. Edwin R. A. Seligman; _British Budgets,
1887-1913_, by Sir Bernard Mallet; _The System of National Finance_,
by Mr. E. Hilton Young, M.P.; _The Financial System of the United
Kingdom_, by H. Higgs, C.B.; and that monument of industry and mine of
statistical and other information, the House of Commons Return (366)
of 1869, on Public Income and Expenditure, etc., drawn up in years
of patient labour by Henry W. Chisholm, sometime Chief Clerk of the
Exchequer: it is commonly called _Chisholm’s Analysis of the Public
Accounts, 1688-1869_.

                                                  HARTLEY WITHERS.
  6, LINDEN GARDENS,
  _June_ 1917.




                                CONTENTS


                               CHAPTER I

                                                                 PAGE

              THE OBJECTS OF GOVERNMENTAL SPENDING                  1

  Government spends to secure property of citizens,
  to defend national honour, to increase country’s
  material resources and promote national health--Government’s
  theoretical right to take all citizens’
  property modified by practical inability--Change in
  view as to governmental activity--Spencer--Huxley--Adam
  Smith.


                               CHAPTER II

  MONEY TAKEN BY BORROWING                                         25

  Borrowing popular owing to belief that it makes
  posterity pay--This belief delusive--War paid for
  while it goes on--Borrowing only affects distribution
  of posterity’s income--Borrowing at home--Its
  drawbacks--Borrowing abroad.


                              CHAPTER III

  MONEY WATERED BY INFLATION                                       52

  Medieval debasement of currency--Modern inflation--Methods
  by which currency is increased--Why
  it happens--Evil effects.


                               CHAPTER IV

  MONEY TAKEN BY TAXATION                                          73

  Does money left with citizens always “fructify”?--Adam
  Smith’s maxims--Walker’s criticism--Graduation
  and differentiation--The ideal income tax--Unfairness
  of indirect taxes--Import duties.


                               CHAPTER V

  THE LIMITS OF GOVERNMENTAL SPENDING                             105

  Can the State earn revenue by trade enterprise?--Fabian
  scheme--Imperial Committee’s proposal--Adverse
  experiences--Limits to taxation--Willingness
  of taxpayers essential.




                        OUR MONEY AND THE STATE




                               CHAPTER I

                  THE OBJECTS OF GOVERNMENTAL SPENDING

[Sidenote: THE STATE’S CLAIM]

Why does the Government take our money? Because government costs money,
and cannot be had without it. Taxation is the price that we pay for
government and protection. Most of us do not want, or need, to be
governed ourselves. Respect for law, or for the duties and customs that
law embodies, is so engrained in us by centuries of tradition, that the
presence of the policeman on his beat is a fact that never influences
our conduct. But if we do not need to be governed ourselves, we very
much need other people to be governed and prevented from attacking
us or our belongings. Protection of our persons and property, from
home and foreign foes, is the first and most important business of
government; and the chief reason that it can give if we ask it “Why
should we pay taxes?” is this: “Because, if you don’t, you will be in
danger of losing everything that you have got.”

Government does so much in these days besides its first elementary task
of protecting us from one another and from outward foes, that we are
apt to forget that this is its original business. But as the point is
very important, as we shall see later, it is well to get it fixed into
our heads by reading the plain words in which it is set forth by John
Locke. In Chapter I of his _Essay concerning the True Original Extent
and End of Civil Government_ he says:

  “Political Power then I take to be a Right of making Laws with
  Penalties of Death, and consequently all less Penalties, for the
  regulating and preserving of Property, and of employing the Force
  of the Community in the Execution of such Laws, and in the Defence
  of the Commonwealth from Foreign Injury, and all this only for the
  Publick Good.”

In Chapter VIII of the same Essay we find:

  “The only Way whereby any one divests himself of his natural Liberty
  and puts on the Bonds of civil Society, is by agreeing with other men
  to join and unite into a Community, for their comfortable, safe, and
  peaceable living amongst one another, in a secure Enjoyment of their
  Properties, and a greater Security against any that are not of it.”

And in Chapter IX the matter is summed up thus:

  “The great and _chief End_ therefore, of Mens uniting into
  Commonwealths and putting themselves under Government, _is the
  Preservation of their Property_.”

Locke did not leave the object of government on this merely
businesslike foundation. He did not really mean that we only submit to
being governed in order that we may grow rich and fat and enjoy our
riches without fear of burglars or marauding foes. He says in another
passage that the End of Government is the Good of Mankind. This is a
more inspiring ideal, but we shall all acknowledge that it cannot be
secured unless man’s material wants are satisfied, and that as society
is at present constituted, this cannot be done unless property is
protected. Some day mankind will perhaps grow into a race of beings
who will work for the pleasure of working, and not mind who takes and
uses the stuff that they make and grow. There are already many more of
such people than old-fashioned economists admit. But in considering
present-day problems, we have to take human nature as it is, and
nations cannot at present increase their wealth, and so their power to
secure the Good of Mankind, unless those who increase it are secured in
the enjoyment of it.

Protection of the property of the citizens being thus the original,
and still a very important, duty of the State, it follows that the
State, in order to carry it out, can make any claims that it pleases
on the services and property of the citizens. The State, as Professor
Bastable tells us, “is entitled to claim all the services and property
of its subjects for the accomplishment of whatever aims it prescribes
to itself. When stated in so rigid a form,” he adds, “the proposition
is likely to awaken dissent, and yet, from the strictly legal and
administrative point of view, it is a commonplace since the time of
Austin.”[1] (Austin was a great authority on law, who lived and wrote
in the first half of the nineteenth century.) It is true enough, as
Professor Bastable suggests, that the average British paterfamilias may
be startled into an indignant denial of the great law that the State
has a right to take all his work and all his goods. But a few moments’
thought would convince him that the proposition is quite sound in
logic, since the State cannot do its business if all the citizens are
to be able to decide how much, or how little, they are to give, in work
or in goods, to its support; and he would also comfort himself with the
reflection that, however logical be this power of the State, it cannot
be exercised beyond a certain point. On paper, the State may be able
to set us all to work for it, but it cannot make us work hard or well
unless we are willing to do so. On paper, the State may be able to take
all our property, but if it did, then it would not be worth any one’s
while to get property. The citizens would cease to accumulate property,
that is, to leave the world richer than they found it. Either the State
would have to accumulate on its own account, which it could only do if
the citizens were willing to work for it, or it would find that it had
come to a standstill.

[Sidenote: TAXPAYERS’ STRIKE]

Professor Bastable’s proposition, though absolutely true as a
principle, is thus modified by the very real power of the citizen
to refuse to produce either the work or the property that the State
has the power to take. This power of the overtaxed citizen to strike
effectively against taxation is no fanciful suggestion of what might
possibly happen. It has happened. Under the Roman Empire taxation was
enormously heavy, for the support of the Army, the Imperial Court, and
“the great number of clerks made necessary by the bureaucratic form of
government.” It was also extremely oppressive, since the senatorial
class, the Army, Professors of Rhetoric, and the Clergy, were largely
freed from it, and so the whole burden fell on the curials, that is,
owners of twenty-five acres of land, or its equivalent.

  “When the curials were bankrupt and could no longer pay the taxes,
  they attempted in every way to escape from their class. Some of them
  succeeded in rising into the senatorial ranks; many of them deserted
  their lands and became slaves, or entered the Army or the Church. The
  Emperors, trying to prevent this, often seized the curial who had run
  away and compelled him to take up his old burden again.”[2]

[Sidenote: GOOD TAXATION PAYS]

This fact, of the taxpayers’ power to strike, is very relevant to
modern problems of finance, because it may come into play long before
there is any question of the State’s taking the whole of our goods. As
soon as the pressure of taxation begins to be heavy, the danger has
to be ever present in the mind of the statesman who is responsible,
that he may, by his present exactions, be preventing the future growth
of the country’s wealth, and so making the task of his successors
difficult, if not impossible. Taxation that is resented, beyond a
certain point, will be evaded or avoided. The tax-gatherer can only
work to his own satisfaction if he carries the sense of the taxpayers
with him. Hence it is of the utmost importance, not only that our
rulers should tax well, but that the citizens should understand about
taxation, recognize it as good when it is good, and pay it cheerfully
when it is equitable and well distributed.

“All taxes are confiscation,” said Mr. Joseph Hume in the House of
Commons in 1833.[3] In the original sense of the word confiscation,
which meant “putting into the Treasury,” this is clearly a platitude.
But as it now is generally taken to mean an arbitrary appropriation,
these words sum up a fallacy about taxation which has to be exorcised
and expelled before the fiscal arrangements of any nation can be
comfortable either for the taxer or the taxed. In fact, taxation is,
or ought to be, the process by which the State takes money from us,
in proportion to our ability to pay, to spend on the defense of our
property from home or foreign enemies, on the defense of the national
honor, if need be, on the increase of the material and other resources
of the country, and on the public health.

If this be a true description of taxation, taxation is a process to
which we must all submit gladly. All the objects for which the money
so taken from us, with one exception, will literally pay us, if they
are carried out. That exception is the defense of the national honor,
and he would be a craven skinflint who would grudge money well spent on
that. Defense of our property clearly pays us. So does the increase of
the country’s resources, because it will make the burden of taxation
lighter. If our particular income does not increase, but that of others
does, and if taxation is taken in proportion to our ability to pay, we
shall have to pay less in proportion. Public health pays us because
it lessens infectious and contagious disease, and so keeps down our
doctors’ bills.

But if this description of taxation be untrue, it is our business to
make it true, and this can only be done if everybody gives careful
thought to the matter, so that if our rulers make mistakes, there shall
be a strong body of well-informed opinion to criticize and correct
them; and also so that we may learn that it is not the object of every
citizen to pay as little in taxes as possible, because if that spirit
is abroad, the fiscal machinery of the country will never run smoothly
and well; we have to learn to judge whether taxes are fair from the
point of view of the nation as a whole, and when we recognize them as
fair, to pay them gladly and readily. In time of war this readiness to
pay is produced, sometimes, by patriotic enthusiasm. In the early days
of the present war, taxpayers wrote to the British Chancellor of the
Exchequer expressing the pleasure with which they paid income tax. If
we could be sure that money taken in taxes was taken fairly, and used
well for the national benefit, that pleasure ought at all times to be
present when we pay it.

It has been said that a nation gets the Government that it deserves,
and Public Finance is certainly a department in which the pressure
of enlightened public opinion can do much. But we shall never learn
to get our Public Finance on a sound and businesslike basis until we
understand our own domestic expenditure better. When we recognize the
responsibility that is attached to the use of our own money, we shall
be able to begin to see that our rulers make good use of the money of
the nation. As long as there is a common tendency among the citizens
to waste their incomes on fripperies and vulgarities in obedience
to fashion and convention, and to invest their savings in wild-cat
speculations in the hope of getting wealth without trouble, we need
not expect the national finances to be as well husbanded as they might
be. The sum of the national wisdom, in finance as in other things, may
be a little greater than the aggregate wisdom of all the citizens, but
cannot lead it by much.

Going back to our description of what taxation is, or ought to be, we
see at once that even if every one were to agree to it as stated, there
are several expressions in it about which agreement is not likely
to be reached as long as the present framework of society stands. In
the first place, the question of ability to pay is full of pitfalls
and difficulties which will be discussed in a later chapter. First of
all, we have to try to get something like a clear conclusion about the
objects on which the State is entitled to spend our money, when it has
taken it, and on this there has been, is, and always will be, a good
deal of divergence of opinion. As stated above, and with reservations
and restrictions to be noted later, I venture to think that, in these
days, most taxpayers would give at least a hesitating and guarded
consent to the scope of State expenditure. But there was a time when
it would have been thought to be much too wide, and many people now
will think it much too narrow. The _via media_ is a dull and unromantic
path, but it has a certain safety.

[Sidenote: HERBERT SPENCER’S VIEW]

Herbert Spencer may be taken as an extreme example of those who would
limit the spending of the State. To him it seemed that the State
should spend nothing except on public justice and defense. He was the
uncompromising apostle of personal freedom, and he believed that only
through it could progress and development, of the individual and of
the nation, best be achieved. He had an unconquerable objection to
anything like discipline or government, so strong that, when a lad of
thirteen, he walked home from Bath to Derby rather than stay at school.
He walked forty-eight miles in one day, forty-seven on the second, and
twenty-five on the third, without sleep, and with very little food.[4]
In his youth he did not even admit that the Government should spend
money on external defense. Either he believed that a mercenary army and
navy, hired by private subscription, would suffice to keep out enemies,
or else he took the extreme pacifist view that an unarmed nation need
not fear attack. But, in his later years, he abandoned this view, and
admitted national defense as a proper object of government expenditure.
He still, however, thought that the Postal Service would have been
much more cheaply and efficiently managed if it had been left to
private enterprise, which is quite possibly true, though it is hardly
likely that postal facilities would have been so well distributed.
He “advanced the doctrine that, as we trust the grocer to furnish us
with pounds of tea, and the baker to send us loaves of bread, so we
might trust Heaton & Sons or some of the other enterprising firms of
Birmingham to supply us with sovereigns and shillings at their own risk
and profit.”[5] He even contended that sanitation was not a proper
object of collective activity, and records with obvious pleasure how
the early efforts at drainage, being defective, sometimes produced
disease. It need not be said that education was a matter which every
citizen should, and could best, provide for himself or his children. He
is never tired of laughing at our belief in the power of the State to
do anything.

  “Conceiving [he says], the State-agency, as though it were something
  more than a cluster of men (a few clever, many ordinary, and some
  decidedly stupid), we ascribe to it marvellous powers of doing
  multitudinous things which men otherwise clustered are unable to do.
  We petition it to procure for us in some way which we do not doubt
  it can find, benefits of all orders; and pray it with unfaltering
  faith to secure us from every fresh evil. Time after time our hopes
  are balked. The good is not obtained, or something bad comes along
  with it; the evil is not cured, or some other evil as great or
  greater is produced.... This emotion which is excited by the forms
  of governmental power, and makes governmental power possible, is the
  root of a faith that springs up afresh however often cut down. To see
  how little the perennial confidence it generates is diminished by
  perennial disappointment, we need but remind ourselves of a few State
  performances in the chief State Departments.”[6]

He then proceeds to give several examples of administrative ineptitude,
the most tragical and absurd, perhaps, of which was the fact that it
took two centuries (1593 to 1795) for the British Admiralty to adopt
the use of lemon-juice as a protection for the crews of its warships
against scurvy.

  “And what [he asks] has been the effect of this amazing perversity
  of officialism? The mortality from scurvy during this long period
  had exceeded the mortality by battles, wrecks, and all casualties of
  sea-life put together!”

Such an example of a waste of gallant lives by the imperviousness
of the official mind to new ideas goes a long way towards proving
Spencer’s contention that Governments, or some Governments, are not as
capable as private individuals or companies of doing anything which
can, on other grounds, be left to the latter. And we need not turn back
over the pages of ancient history to find such examples of departmental
fatuity. During this very war there have been plenty of them in England,
though we may hope that loss of the lives of her fighters has not been
thus criminally involved.

[Sidenote: THE OTHER SIDE]

But when all this is admitted, there are still several things to be
said on the other side of the question. A nation in which governmental
action has long been restricted and resented must not complain too
loudly if the Government, when it is suddenly told to do things, does
them badly. In countries where a trained bureaucracy has long been
encouraged to do much, its efforts are likely to compare better with
those of private enterprise. The efficiency of the German governmental
machine is probably much exaggerated; but any one who travelled on
the German State-owned railways had no reason to complain of their
comfort or of their punctuality. In those respects they seemed to
me, from a certainly very limited experience, to compare well with
England’s much-vaunted railway system, which, in some respects,
was unquestionably a disgrace to private enterprise. Any one who
travelled much on Sundays on the suburban lines of England’s leading
railways cannot have failed to marvel at the utter contempt for
public convenience with which they conducted their service. They
stimulated the public desire to travel by cheap tickets--I am speaking,
of course, of days before the war--but made no attempt to provide
accommodation for it; a few slow trains, disgracefully unpunctual
and more disgracefully overcrowded, were the only means afforded to
jaded Londoners who sought for a few hours of fresh air on the day of
rest. Why the public submitted to it was a mystery. If the railways
had then been in the hands of the Government there would have been a
clamorous outcry against mismanagement by jacks-in-office. As it was
companies--“with nobody to be kicked, or soul to be damned”--that
were at fault, there was never a murmur. In America, that other home
of individual enterprise, the unpunctuality of the railroads is often
astonishing. I once travelled--it is some years ago--from Pittsburg
to New York on Christmas Eve. The locomotive was attacked by a malady
called “hot box” and the train was four hours late. It was full of
unfortunate holiday-makers who had connections to make in New York, so
as to get home in time for the Christmas gathering, but they all seemed
to accept it as something in the nature of things, and not a matter
that called for protest or complaint.

We had better admit that in this half-baked world of ours, in which
progress is only at the beginning of its journey, and man is only just
beginning to learn the use of his powers over Nature, not many things
are yet very well done either by Governments or by private enterprise,
and the only way for them to get done better is by every one of us
trying to do his own little job just as well as ever he can. In some
countries Governments do things better than anybody else. In others, it
is otherwise. In England it is safe to say that Government has not yet
distinguished itself as a practical worker. It has done great things in
the war, but chiefly with the help of men who came in from outside; and
whether the public’s experience of governmental activity during the war
will, or will not, encourage it to give Government more to do when the
war is over, is a very open question.

[Sidenote: HUXLEY ON SPENCER]

Moreover, even if Herbert Spencer’s view of the ineptitude of
governmental action were as completely proved as he believed, there are
still some things which have to be done by a public authority, as even
he would probably have admitted if he had lived to this day. His notion
of private companies competing for the business of draining towns,
and only cleansing those neighborhoods in which they could get enough
customers to make it worth their while, is now commonly recognized as
a fantastic example of overdriving a principle. Huxley, in his great
_Essay on Administrative Nihilism_, attacks the Spencerian position in
the following well known passage:

  “Suppose, however, for the sake of argument, that we accept the
  proposition that the functions of the State may be properly summed
  up in the one great negative commandment, ‘Thou shalt not allow any
  man to interfere with the liberty of any other man’--I am unable
  to see that the logical consequence is any such restriction of the
  power of Government as its supporters imply. If my next-door-neighbor
  chooses to have his drains in such a state as to create a poisonous
  atmosphere, which I breathe at the risk of typhus and diphtheria, he
  restricts my just freedom to live just as much as if he went about
  with a pistol, threatening my life; if he is to be allowed to let
  his children go unvaccinated, he might as well be allowed to leave
  strychnine lozenges about in the way of mine; and if he brings them
  up untaught and untrained to earn their living, he is doing his best
  to restrict my freedom, by increasing the burden of taxation for the
  support of gaols and workhouses, which I have to pay.”[7]

Since the days when these two giants threw mountains of arguments at
one another, it need not be said that Huxley’s view has prevailed, and
more than prevailed. It has wiped out the Spencerian doctrine, and it
has been carried to lengths which Huxley himself might well consider
absurd if he were still alive. The popular cry in England is now for
the Government to do everything. An extraordinary example, as it
happens, is chronicled in the paper of this day on which I am writing,
Sunday, February 18th, 1917. To-day’s _Observer_ records how--

  “at a meeting of the Southend Townsmen’s Association it was
  suggested that the Minister of Labor should be asked to encourage the
  production of food by the closing of the churches on Sunday morning,
  and so enabling a greater amount of labor to be available. The
  suggestion had reference to the large number of Southend business men
  and clerks who are away from home all the week, and have only Sunday
  mornings on which to look after their gardens.”

[Sidenote: THE PREVALENT TENDENCY]

This astonishing paragraph was headed “Church-goers’ Neglected
Gardens,” and seems to indicate an extraordinary state of mind
prevalent in a suburb inhabited by people who may be taken as average
specimens of the dwellers in Greater London. Because people work all
through the week, and can only dig in their gardens on Sundays, it is
proposed, in order to enable them to do so, to get the Minister of
Labor to close the churches. In a land that calls itself free and is
engaged in a great battle for freedom, it is really astounding that
a body of Southend citizens should have seriously thought (1) that
as long as the churches were open, their frequenters had no freedom
of choice about staying in their gardens and growing food, and (2)
that it was the business of the Government to help them to do so by
depriving all the other members of the various congregations, who have
all the week to dig in, of their freedom to seek ghostly consolation by
attending divine worship.

It is easy to make too much of a wild example of this kind. Southend is
not England, and probably the Townsmen’s Association is not Southend.
In war-time the babbling busybody gets a chance, in associations and
on committees, such as he never enjoyed before. But it will hardly
be denied that this is only an extreme example of a tendency that is
rife. It is high time that the British public considered this tendency
seriously and reckoned its possible effects, if it goes unchecked, on
the Government’s spending in the future. It need hardly be pointed out
that the spread of governmental activity is bound to increase the cost
of government, since everything that the Government does costs money,
usually more than it would if it were done by private individuals or
bodies managed thereby. It is very evident that the present tendency
to leave everything to Government is due partly to the war, because
war on its present scale demands something like dictatorship, and when
it is necessary for victory that the whole resources of a nation shall
be made available for purposes of defense, individual freedom takes a
very different place in the scale of importance. So far, there is good
reason for this tendency. But it was also very rife before the war, and
was even then showing signs of running to extremes. This was natural
and inevitable, because it was only a reaction against the extreme
_laisser-faire_ or “leave-people-alone” policy, of which Herbert
Spencer was perhaps the doughtiest champion.

This policy had been dominant in England in the early part of the
nineteenth century. It was well summed up in the report of a Commission
appointed by the House of Commons in 1810, quoted in Mr. and Mrs.
Webb’s _History of Trade Unionism_, as follows:

  “No interference of the legislature with the freedom of trade, or
  with the perfect liberty of every individual to dispose of his time
  and of his labor in the way and on the terms which he may judge most
  conducive to his own interest, can take place without violating
  general principles of the first importance to the prosperity and
  happiness of the community.”

[Sidenote: THE THONG AS PRODUCER]

Such was the view that was maintained by the economists who followed
Adam Smith and carried much further than he did the revolt that he had
led against the excessive interference by Government with trade and
with the freedom of individual contract, which had marked the history
of the earlier centuries when, for example, justices of the peace fixed
wages, or tried to. Supporters of the extreme _laisser-faire_ school
based their doctrine on the assumption--so true in an ideal world
composed of ideally educated people, so pathetically untrue as things
are--that everybody is the best judge of his own interest, and that if
every one is left to pursue his own interest, the best interest of the
community as a whole will somehow be secured. The practical result of
the application of this doctrine, in a community in which employers
had been taught that they served the common good by pursuing their own
immediate interests, and the employed had often been taught nothing,
was that children of five years were sent to work in factories, and
in France, according to a report published in 1840 by Dr. Villermé,
“the thong used for the punishment of children in the spinners’ trade
appears as an instrument of production.”[8] The fact is, that very few
of us ever know what is best to do for our interest. Most people go
through life mechanically, and without thinking about it, choosing a
profession for some quite illogical reason, or being pitchforked into
a position without attempting to weigh it against other possibilities.
Moreover, we are obliged to make up our minds about the matter, in
most cases long before we have got a mind to make up. As for the
doctrine that each man by pursuing his own interest helps to secure
the common good, its truth is pleasantly illustrated by the millions
nowadays earned by sellers of worthless medicines and printed trash,
which rot the public stomach, bodily and mental. If the economists of
the nineteenth century had foreseen the activities and success of the
advertisers of the twentieth, they might have modified their optimism.

But there is no need to linger over the absurdities thought and written
by the extremists of the _laisser-faire_ school. Peace with their
ashes, for they did a great work in clearing away a mass of rubbish.
It was not their fault that thongs were laid in the name of liberty on
the backs of bairns who ought to have been playing hopscotch. Liberty
is a goddess with many shapes, looking quite different to different
observers. Abraham Lincoln observed that--

  “with some, the word liberty may mean for each man to do as he
  pleases with himself and the product of his labor; while with others,
  the same word may mean for some men to do as they please with other
  men, and the product of other men’s labor.... The shepherd drives the
  wolf from the sheep’s throat, for which the sheep thanks the shepherd
  as his liberator, while the wolf denounces him for the same act, as
  the destroyer of liberty, especially as the sheep was a black one.”[9]

[Sidenote: ADAM SMITH ON SPENDING]

It has already been noted that the extreme limits imposed on
Government activity and consequently on governmental expenditure, by
Herbert Spencer and the economists who followed Adam Smith, were an
exaggeration of the doctrine laid down by Adam Smith. He took a much
more level-headed view of the matter. In his examination (in Chapter I,
Book V, of the _Wealth of Nations_) of the expenses of the Sovereign or
Commonwealth, he lays stress on his or its duty--

  “of erecting and maintaining those public institutions, and those
  public works which, though they may be in the highest degree
  advantageous to a great society, are, however, of such a nature, that
  the profit could never repay the expense to any individual, or small
  number of individuals, and which it therefore cannot be expected
  that any individual, or small number of individuals, should erect or
  maintain.”

Thus, in effect, he gives a free hand to the State to spend money on
anything that will be advantageous to society, but will not yield a
profit.

With regard to education, Adam Smith arrives at conclusions which were
diametrically opposed to those of Herbert Spencer. He points out that
in cases in which the state of the society does not place--

  “the greater part of individuals in such situations as naturally
  form in them, without any attention of Government, almost all the
  abilities and virtues which that state requires, or perhaps can admit
  of,”

then--

  “some attention of Government is necessary in order to prevent the
  almost entire corruption and degeneracy of the great body of the
  people.”

He goes on to show that, owing to the division of labor--

  “the man whose whole life is spent in performing a few simple
  operations ... has no occasion to exert his understanding.... His
  dexterity at his own particular trade seems, in this manner, to be
  acquired at the expense of his intellectual, social, and martial
  virtues. But in every improved and civilized society, this is the
  state into which the laboring poor, that is, the great body of the
  people, must necessarily fall, unless Government takes some pains to
  prevent it.”

A little later he shows that--

  “the common people ... have little time to spare for education. The
  parents can scarce afford to maintain them even in infancy. As soon
  as they are able to work, they must apply themselves to some trade by
  which they can earn their subsistence. That trade too is generally so
  simple and uniform as to give little exercise to the understanding;
  while, at the same time, their labor is both so constant and so
  severe that it leaves them little leisure and less inclination to
  apply to, or even think of, anything else.... For a very small
  expense the public can facilitate, can encourage, and can even impose
  upon almost the whole body of the people, the necessity of acquiring
  those most essential parts of education.”

Here we have the Father of Economics, so often appealed to, by those
who do not read him, as an out-and-out champion of _laisser-faire_,
advocating compulsory education, at the public expense, nearly one
hundred years before it was introduced in England.

It is perhaps even more interesting in these war-like days to note that
Adam Smith thought that--

  “even though the martial spirit of the people were of no use towards
  the defense of the society, yet to prevent that sort of mental
  mutilation, deformity and wretchedness, which cowardice necessarily
  involves in it, from spreading themselves through the great body
  of the people, would still deserve the most serious attention of
  Government; in the same manner as it would deserve its most serious
  attention to prevent a leprosy or any other loathsome and offensive
  disease, though neither mortal nor dangerous, from spreading itself
  among them.... The same thing may be said of the gross ignorance
  and stupidity which, in a civilized society, seems so frequently to
  benumb the understandings of all the inferior ranks of people. [Only
  the “inferior” ranks, Doctor?] The more they are instructed, the
  less liable they are to the delusions of enthusiasm and superstition
  which, among ignorant nations, frequently occasion the most dreadful
  disorders.... In free countries where the safety of government
  depends very much upon the favorable judgment which the people may
  form of its conduct, it must surely be of the highest importance
  that they should not be disposed to judge rashly or capriciously
  concerning it.”

I have dwelt at some length on ancient controversies concerning the
limits of State action and consequently of State expenditure, because
the question is a very burning one to-day, and if we see what our
forbears thought about it, we may be helped to a right decision in our
present difficulties. We have seen the extreme view that the State
should do nothing but police and defense give way to a tendency--even
among those who do not profess to be Socialists and to want the State
to take over the whole business of production and distribution--to
call on the State to interfere constantly in the private affairs of
citizens; and looking back to the doctrine of Adam Smith, we find
that he was in favor of State expenditure on education for those who
could not afford it, on the cultivation of the martial spirit, on
checking disease, and on the enlightenment of those classes which, in
his opinion, especially needed it. I think it may fairly be claimed
that the formula adopted earlier in this chapter may be taken as
representing a safe compromise between the extreme views: that is, that
the State should spend our money on the defense of our property from
home and foreign enemies, on the defense of the national honor, on
the increase of the material resources of the country, and on public
health. At first sight, this formula would not appear to include
education, old-age pensions, or unemployment insurance. But it would be
very easy to show that all these objects of expenditure, in countries
in which they are necessary, help the increase of the material
resources of the country, to which nothing can be more important than a
well-taught community, and a working class with a feeling of security
and a knowledge that the State cares for its interests, and is prepared
to spend money on its welfare. In fact, all really effective measures
of social reform are directly beneficial to the whole community, on the
coldest business considerations. Every man and woman who is not fit in
mind and body to be self-supporting has to be supported, to a greater
or less extent, by his or her neighbors; and so government spending
that lessens the number of the unfit, by better care for the minds and
bodies of those who are born into conditions which do not give them a
fair chance, is a sound investment.




                               CHAPTER II

                      MONEY TAKEN BY BORROWING[10]

Whatever be the duties that a Government is asked to fulfil, it can
only perform them by taking to its own use such goods and services as
are needed for them. To keep order at home it must have the services
of policemen and the goods needed to feed, clothe, and equip them.
To build a railway it must have steel rails, rolling stock, and land
and the services of all the people who lay the railway out and get
it ready for working. To carry on war it must have all the goods
needed for the feeding and equipment of an army and the services of
the fighters and of those who organize and manage the campaign, the
transport service, and all the other items in the problem. These goods
and services have to be supplied out of current production at home and
abroad, and so current production has to be diverted, to the extent of
the Government’s demand, to supplying those needs, unless (which is
unlikely in time of war) it can be increased sufficiently to produce
them without this diversion. In order to bring about this diversion,
Government has to check the demand of individuals for goods and
services so that labor and energy may be set free to work for it; and
this it does by taking money from individuals in taxes, which it can
only impose on its own citizens, or in loans, or by reducing the buying
power of individuals through the process known as inflation, which
consists of increasing the volume of the currency and thereby debasing
its value and raising prices.

[Sidenote: LOANS WITHOUT INTEREST]

We will begin with the borrowing process. When a Government borrows, it
invites people to lend it money, and, as a rule, promises to pay them a
certain rate of interest for it, and sometimes promises to pay back the
money to them or their heirs and assigns at some more or less distant
date. Even when no such promise of repayment is given to the lenders,
the fact that the holder of the security, or promise to pay interest,
can always sell it at a price on the Stock Exchange, enables him to
rely on getting back at least part of the money that he has lent, if he
wishes to do so.

It was stated that when a Government borrows it promises, as a rule,
to pay interest. This is now so usual that a loan without interest
seems to a modern mind to be almost a contradiction in terms. But such
things have happened. In the good old days impecunious sovereigns who
could not get as much as they wanted out of their subjects by taxation,
used to write to people of property and demand a sum from them on
loan; the latest example, in England, of this form of finance occurred
in the early years of the reign of James I. A large number of these
letters--which were called Letters of Privy Seal--dated July 31st,
1604, were sent to the principal noblemen and gentlemen in all the
counties of England, and excited great and general dissatisfaction.
Their form was as follows:

  “BY THE KING:
  “Trustie and well beloved we greete you well. Although there be
  nothing more against our minde than to be drawne into any course
  that may breed in our subjects the least doubt of our unwillingness
  to throw any burthen upon them, having already published both by
  our speeches and writings, our great desire to avoid it in the
  whole course of our Government: Yet such is our estate at this
  time in regarde of great and urgent occasions falne and growing
  daily upon us, (in no sort to be eschewed) as wee shall be forced
  presently to disburse greater summes of money than it is possible
  for us to provide by any ordinary means, or to want without great
  prejudice, in which consideration ... we think it needless to use any
  more arguments from such a King to such subjects: But that as our
  necessitie is the only cause of our request, so your love and duety
  must be the chiefe motive of your ready performance of the same....
  That which we require, therefore, is that within twelve dayes after
  the receipt hereof, you will cause the summe of -------- to be
  delivered to -------- whom we have appointed to be our collector in
  our countie of --------

  “The loan whereof we do desire to be untill the Foure and Twenty
  day of March which shall be in the yeere of our Lord God 1605, for
  assurance whereof we have directed these our letters of Privie Seale
  unto you, which, with the hand of our sayd collector testyfying the
  receipt of the same summe of -------- shall bind us, our heirs, and successors
  for the repaiment thereof ... upon the deliverie of this our Privie
  Seale unto our sayd receipt.”[11]

Through all the rambling verbiage of this Letter of Privy Seal, a large
part of which has been left out, there is no whisper or hint of any
interest payment. The loan was for nearly eight months, and from its
terms was evidently a requisition, leaving the receiver of the letter
little or no choice about producing the sum required of him.

In modern times, however, these things do not happen. A rate of
interest is universal, and a definite promise of repayment is very
usual. It is notably absent, however, in the case of the British
Government Consols. The holder of Consols has no right to repayment
from the Government, only the right to a perpetual annuity of so much a
year, originally 3%, converted in 1888 to 2-3/4% and in 1903 to 2-1/2%.
A very large part of the French 3% Rentes are also what is called a
perpetual debt, with no obligation on the part of the debtor to repay.

[Sidenote: ADVANTAGES OF BORROWING]

When a Government raises money by borrowing it thus hires certain of
its citizens, or those of any other country who may like to subscribe
to the loan, to find money for it, and it does so by promising them a
rate of interest, varying according to the state of the money market,
its own credit, and the circumstances under which the loan is made.
Borrowing thus has this very tempting but always dangerous advantage
over taxation, that it enables a Government to get money from the
citizens of other countries. Let us leave this consideration on one
side for the time and see what are the advantages and disadvantages of
borrowing at home over taking money in taxes.

From the point of view of the practical and adroit politician, who
wants money for the State and does not want to make himself or his
policy unpopular by increasing the burden of taxation, the advantages
of borrowing are obvious and overwhelming. To the public the advantages
are equally clear and weighty, because the public thinks that by means
of the borrowing system it is able to avoid being taxed, and to hand
on to posterity the task of finding the money that is required for its
present needs.

[Sidenote: GILDING A PILL]

This view has been dinned into the public ear by economists, financial
writers (among whom I must plead guilty to having done my small share),
and business men.[12] But it is largely a delusion. Let us take the
example of the present war. We cannot hand its burden on to posterity.
It has to be paid for now by somebody, and all wars have always been
paid for during the time in which they were fought and finished up.
War cannot be carried on with goods produced or work done either by
our ancestors or by our posterity. The goods consumed in war--shot,
shells, rifles, food, clothes, horses, motor-lorries, wagons, ships,
and everything else--have to be new and up to date, and, apart from the
store of them with which the contending nations began, are made and
produced as the war goes on. As they clearly have to be in existence
before they can be used, it is obvious that they cannot be produced
by posterity. The British army cannot eat the bread that is going
to be sown in 1930, or wear boots made out of hides whose original
owners are yet unborn. Whatever posterity produces will belong to
posterity for its own use, and nothing that we do now can deprive
posterity of a single ear of wheat that it sows and grows. It is true
that when England sells part of her accumulated wealth, in the form
of securities, to Americans, in order to pay for goods wanted for the
war, or when she borrows in America and contracts to pay Americans
interest in the meantime and their money back some day, she thereby
arranges that a larger share of posterity’s wealth will go to America
and a lesser share to her; but the sum of posterity’s wealth will not
thereby be affected, and this only happens when a country borrows
from, or sells securities to, other countries, and this side of war
finance we are not at present considering. Confining ourselves to that
portion--by far the greater--of our war borrowings that are raised
at home, we see if we look at the matter steadily that the borrowing
policy is only a gilding that makes us swallow a pill and believe that
we are eating something good and nourishing. The British Government
wants money and offers its citizens a beautiful security, with 5%
interest, at 95, repayable in thirty years at par, and they calculate
that these terms give them a net return of 5-1/4% for their money.
With the help of a tremendous advertising campaign, and a very real
and patriotic effort on the part of a large number of good citizens,
the nation hands over 1,000 million pounds to the Government, and the
achievement is very justly hailed as the biggest financial success
ever won. It is a perfectly magnificent success. But it does not mean
that the citizens have thereby handed to posterity the business of
paying for 1,000 million pounds’ worth of the war. They have paid now
by handing over those 1,000 millions. In return for them they receive
from the Government securities, that is, promises to pay interest and
repay capital, and the Government can only meet these promises out of
their pockets. These securities are assets that they hold, in return
for their money, but they are also liabilities that they as taxpayers
have to meet; they will only get interest on their money as we pay it
ourselves, and they will only get their money back as debt-holders if
they pay it as taxpayers.

But what of the man who did not subscribe to the loan, having an income
large enough to let him do so? He, as far as this loan is concerned,
appears to have paid nothing towards the war. If this were really so
it would not be a good argument in favor of the borrowing system, for
it would make patriotic people pay and leave the others free to spend
money on themselves. But, in fact, those who do not subscribe to loans
probably pay more in the long run, because they have henceforward to
pay their share of taxation to meet the interest on the loan, and as
they do not hold any of it they get no share of interest payment back
into their own pockets. The borrowing system gives the citizen the
choice of (1) paying up his share of the war cost now by subscribing
to a loan, and afterwards being taxed to pay himself interest and to
pay himself back, or (2) paying nothing at the time when the loan
is issued, and being made to pay regularly hereafter interest and
redemption money to those who subscribed. When a Government loan is
issued, all the taxpayers on whom the loan charge will fall are,
forthwith and at once, jointly poorer by the amount of the loan. Those
who have found the money, and paid for the object needed by making a
sacrifice now, have an asset to set against the future increase in
taxation.

[Sidenote: THREE TIMES OVER]

But, it will be objected, a man who has subscribed for £1,000 of
the loan will be able to sell it, very likely at a profit, in a few
years’ time. Then he will have got his money back, and somebody else
will have paid it back to him. Quite true, but the result of his
selling will be that he will have got rid of his asset but not of his
liability. He will no longer receive interest on the stock that he has
sold, but he will continue to pay interest on it, and perhaps money
for its redemption, all of which will go into the pocket of the man to
whom he sold, instead of into his own. He and his estate after him,
in whosoever’s hands it be, will have to complete the repayment to
somebody else of the money which he thought he had got back again when
he sold his stock. By borrowing for war purposes a Government sets up
a roundabout process by which the war, in so far as it is paid for by
this means, is paid for three times over. First, it is paid for as it
goes on by the citizens who subscribe to the loans; then it is paid
for by the citizens as a whole, who provide the money needed for this
purpose, _plus_ interest, by taxation; and the Government finally hands
the money back to the original subscribers, or their estates.

The unwieldiness of the whole arrangement is seen best if we imagine
a nation composed of citizens all with the same income and taxed to
the same extent. Let us suppose that there are ten million heads of
families each with an income of $1,500 a year. The Government offers a
5% loan and they each, being equally patriotic, subscribe $500; this
produces 5,000 millions, and each family has $500 less to spend that
year, because its $500 has gone into the hands of the Government. They
will have the interest to spend? By no means. In order to pay them
their 5% the Government will have to raise 250 millions in taxes (or in
another loan), that is, take $25 each out of their pockets and pay it
back to them. And as soon as the war is over the Government will set a
Sinking Fund to work to pay the loan off. A Sinking Fund is money used
for paying off debt, and has to be provided by a balance of revenue
over expenditure. If the Government fixes this Sinking Fund at 1%, it
will have to take another $5 from the pocket of each citizen, and so
they will pay themselves back their capital. If, in the meantime, any
one of them sells his $500 bonds to a neighbor, he will have got his
money back, but he will still as a taxpayer have to pay his $30 a year
till the loan is extinguished, so that the effect of getting his money
back will be that he will be paying his neighbor interest and capital
instead of himself. When we clear the problem by this imaginary example
we see at once that the nation paid for the war when it happened, but
merely because it preferred to lend instead of being taxed it went
through an elaborate process of paying itself all over again, so that
it might feel happier about it. It is fairly safe to say that, under
such circumstances, an intelligent people would soon awake to the fact
that it would save itself and its rulers a good deal of trouble and
some bookkeeping expense, by submitting to taxation at the time when
the war is in progress and writing off the cost of the war at once.

[Sidenote: ELUSIVE POSTERITY]

But of course nations do not consist of citizens with equal incomes,
equally taxed, and they do not subscribe equal amounts to the loans
that are raised by their Governments. This inequality complicates
the problem, but does not alter the fact that the war has to be paid
for as it goes on, and in so far as it is paid for by raising loans
at home, is paid for out of the nation’s current income. If we try
to pay for it by selling our old investments to one another, those
who buy the old investments must have a balance available to pay for
them. The generation which lends the money either pays itself back
out of subsequent taxation, or is not paid back at all; it cannot
be paid back by posterity, because whatever posterity pays it pays
to itself. The whole notion that we can leave posterity the task of
paying for any part of the war, by borrowing at home, is a delusion.
Perhaps it is lucky that we cannot do so, for posterity is likely to
have plenty of problems of its own to face. But whatever it produces
it consumes. What we can do, and are doing, in England is to lessen
the power of posterity to produce, because we shall hand on to it a
less well-equipped industrial and agricultural organization, owing
to the fact that during the war we are not saving and putting into
capital improvements as much as we did in peace. Before the war England
was estimated to be saving and investing at home and abroad some
400 millions sterling a year, so increasing either her own power to
make and grow things, or the debt of other countries to her on which
they paid her interest in the form of goods and services. During
the war nearly all her savings go into furnishing victory for the
cause of liberty and progress and protecting her property against
external attack. On the other hand, she may fairly hope to hand on to
posterity a better organization and a better spirit than she would have
bequeathed to it, if she had not learnt many useful lessons from that
stern schoolmaster the God of Battles, who has birched her soundly for
her good.

But as incomes are unequal and taxation likewise, and as people
subscribe unequal amounts to loans levied by Governments, let us see
what is actually the effect of the borrowing policy. If we compare
first the case of two Englishmen with the same income lending unequal
amounts, we find two people with £1,000 a year, of whom Jones puts £50
into the loan and Smith £500. They will both have their taxes increased
to the same extent to pay interest on the loan and provide a Sinking
Fund to redeem it; but one will get £2 10s. a year (less income tax)
in interest, and the other £25. If the circumstances of both are the
same, this is quite just, because Smith is rewarded after the war for
the effort that he made during it by putting half his income at the
disposal of the Government when it called on the citizens to subscribe;
probably the interest that he gets will more than offset the higher
taxation that the existence of the war debt will necessitate. In the
case of Jones, who continued to spend most of his income on himself,
and only put in a small amount to be spent on powder and shot for the
army, he will only get a small sum in interest, which will almost
certainly be less than the extra taxes that he will pay. So that in
cases in which conditions are equal, the interest payment, by rewarding
patriotic effort in war-time, gives a just and well-earned guerdon to
those who saw their country’s need and made the right effort to meet it.

[Sidenote: AN EVIL AFTERMATH]

But if we find that Jones was educating five children, whereas Smith
was a bachelor, it becomes evident at once that Jones’s £50 that he
subscribed to the loan was a greater effort--cost him more in health
and comfort for himself and his youngsters--than Smith’s £500, so
that the after-effect of the borrowing system in penalizing Jones and
benefiting Smith is highly inequitable. And this is a very serious evil
in the aftermath of borrowing by Governments, that by its inability
to discriminate between the effort made by the various subscribers it
emphasizes the inequities of the system of taxation.

[Sidenote: ESCAPE BY DEATH]

If, then, borrowing has this merely stupid effect that the payment
for the object which is secured is carried out twice, first when the
lenders hand their money over to the Government to spend on the desired
purpose, and later and more gradually when they hand their money over
to the Government to be paid back again to themselves, what are the
advantages about it which make it so popular with practical politicians
and the public whom they have to keep in a good temper? It is simply
this, that the borrowing system makes us feel happier and keeps us in
a good temper because we see the security that we have received and
the interest that we get on it, and forget that the interest comes out
of our own pockets and that if the loan is paid back to us it will
be paid back out of our own pockets. When we subscribe to the loan
we either do so out of money that we borrow--a process that will be
considered in the next chapter when we come to deal with the question
of inflation--or out of money that we save, or by drawing down our
bank balances, in which case, unless we have been stupid enough to
keep unnecessarily big ones, we shall save to replenish them. If we
save we have so much less to spend on our own comforts and amusements,
or so much less to invest in other directions, from which we should
have received interest and repayment that would not have come out of
our pockets. So by subscribing we hand over our money to be spent on
the war and so pay for the war as it goes on. If we do not subscribe
but continue to spend as usual, then the taxation involved in order to
pay interest and redemption of the loan comes out of our pockets and
does not come back again. So that the borrowing system gives us this
choice, of postponing paying our full share of the war’s cost during
its course, and only meeting it over a period of years by paying taxes
needed for the debt charge and getting none of it back in interest or
repayment. If we exercise this choice and die immediately after the
loan has been brought out, we apparently escape paying for our share
of the war altogether, because we are never taxed to pay interest to
anybody. But, in fact, we die so much poorer because the estate that
we leave does not contain the amount of war loan to which, if we had
done our duty, we should have subscribed, and it does carry with it the
liability which will fall on our heirs and assigns to pay their share
of the debt charge in taxation. In other words, we have left the job of
paying for the war to our heirs, and is not this the same as leaving
it to posterity? Yes; but we can only perform this feat if we die at
once. If the Government offers a loan for war or any other purpose, all
the taxpayers immediately become liable to pay interest on it, and any
one who does not subscribe for such proportion of it as his income and
conditions indicate, will consequently be so much the poorer, as long
as he is alive, until the loan is redeemed, and will be so much the
poorer at his death, because his estate will be encumbered by the debt
charge and will hold no asset against it. If he subscribes his fair
share he has so much the less to spend when he does so, but afterwards,
if taxation is fairly apportioned, has his interest and his share of
the loan, as repaid, to set against the extra taxation.

It is commonly said that England is still, as a nation, paying for the
cost of the war that her ancestors waged against Napoleon more than a
hundred years ago. But this is not so. As taxpayers Englishmen pay
interest on the debt then raised. But they pay that interest to those
Englishmen who hold the debt by inheritance or otherwise. As a nation
England enjoys now all that she produces, and the vagaries of her
ancestors only affect the manner in which her production is distributed.

But what happens in the case of loans that are never repaid? Never is a
long word, but if we can really conceive that as long as mankind lasts
the existing national debts will be outstanding, then the interest
charge will continue to be a burden to the citizens as a whole, and an
income to the heirs of those who originally subscribed.

[Sidenote: DEBT AND WEALTH]

Borrowing at home, then, for war purposes or any other, does not, as
is usually supposed, shift the burden of payment on to the shoulders
of posterity. Whatever it is that the Government is buying, whether
it be the services and equipment of an army in the field, or a system
of sanitation, or a railway, has to be paid for by somebody at the
time when it is provided. By raising the money by a loan instead of by
taxation the Government escapes the unpopularity which a great increase
in taxation might produce, and hires some of the citizens to pay now,
and then taxes them all to pay interest and redeem the debt. Those who
have subscribed receive a security which they can sell, and as long as
they hold it receive interest which they, in common with the rest of
the community, have to find by paying taxes.

[Sidenote: BORROWING FOR WAR]

The system thus has this advantage in a community in which wealth
is unequally distributed, that it enables those who have a margin of
income above the necessaries of life to pay for whatever be the object
that the Government wants without at the time feeling any poorer,
because they get a security that makes them think they are actually
richer. If taxation is equitably imposed they will afterwards be taxed
to pay themselves interest in proportion to the amount that they
ought to have put into the loan when appealed to by the Government.
But here comes in a great difficulty, as we shall see when we come
to the question of taxation. If those with a margin, who can save
without serious discomfort, take up all or the greater part of the
loan, and then taxes are imposed on all, whether they have a margin or
no, then the system of financing Government spending by loan tends to
accumulate more and more wealth in the hands of those who are well off.
The existence of a national debt, held by the citizens of the nation,
does not affect the wealth of the nation as a whole. The wealth of a
nation consists of its material assets in the way of industrial plant,
agricultural estates and stock, houses, roads, railways, canals, and
so on, and its holding, if any, of foreign investments, and its income
consists of the annual produce of these material assets as organized
and worked as a going concern by the nation’s brains and sinews. These
assets and this working power are no less productive because, owing
to existence of a national debt, certain people have to be paid out
of the taxes levied on this national produce. But the distribution of
the national produce is seriously affected, because it means that the
debt-holders, without making any further effort, get for all time, as
long as the loan is outstanding, a large slice of the nation’s revenue,
which has to be found out of its annual produce: and if this debt
charge is heavy and any large part of the nation thinks itself to be
overtaxed, there is only too likely to be discontent and resentment
on the part of those who pay interest to the holders of war debt and
forget that these holders are the people who found the money to pay for
the war, or their representatives. If this grievance were acutely felt,
it might endanger the stability of property. A system based on property
is not, of course, the only conceivable system under which mankind need
work for its living. But so far it is the only one that has been found
to work, and it would be dangerous to imperil it before we are ready
with a substitute. So that, though we cannot by any ingenuity make
posterity pay for war or anything else on which we or our Government
spend money now, we may by the adoption of the borrowing system leave
some very awkward problems to it. Whatever posterity produces it will
consume; but the fact that certain members of posterity, descendants
of those who paid on our account, will thereby have a prior lien on
posterity’s produce might have awkward results.

Since, then, the view that borrowing at home puts the burden on to
posterity is a delusion, since the goods and services needed for war or
for anything else on which a Government is spending have to be found
and paid for, by somebody, at the time when the thing is done, and
since the system of hiring certain of the citizens to do the paying
at that time, and giving them a claim on part of the nation’s income
in return, may have dangerous consequences when carried far, does it
follow that borrowing at home is a policy that is never justified on
economic grounds, though it may be necessitated by the exigencies of
politics and the need for keeping the public in a good temper at a
time of crisis? I think it does, from the purely theoretical point
of view, except when the object on which the money is to be spent is
an enterprise like a railway, from which a profit may be expected at
least sufficient to cover the interest on, and redemption of, the debt
put into it. But perhaps a case might be made out for borrowing for
purposes, such as education and health, which, if the money is well
spent on them, may be expected to improve the country’s productive
power.

War is certainly the worst purpose for which the borrowing system can
be used, because in war-time, especially when war is on a stupendous
scale as now, taxation (1) is easily raised, (2) is little if any
hindrance to industry, and (3) produces a beneficial effect on the
consumption of the community. Moreover war, especially when on a
stupendous scale, is certain to be followed by a period of dislocation
and uncertainty in which industry should be as free as possible to
contend with the difficulties that face it, and should therefore
be as little as possible burdened by taxes that have to be paid to
debt-holders. Let us consider these assertions.

[Sidenote: TAXATION’S ADVANTAGES]

(1) Taxation is more easily raised in war than in peace, for the
obvious reason that, the nation being patriotically stirred by some
cause affecting its honor or its existence, or both, its citizens are
readier to hand over their money to Government. In an ideally educated
nation with an ideal system of taxation and an ideal Government that
could be trusted not to waste its money, this difference would perhaps
not appear, because under these circumstances the citizens would always
be ready and willing to pay by taxation for objects that the nation had
decided to be desirable. But as things are, many people in ordinary
times grudge the money that they have to pay in taxes, partly because
they have not been taught to see that the common good is their good and
that they ought to contribute to it gladly, partly because they often
have a suspicion that they are being taxed too much and their neighbors
too little, and partly because, in England, there is a general
suspicion, not to say conviction, that a large part of any money which
the Government spends is wasted, owing to the excessive cost of its
cumbrous machinery. In war-time these considerations have much less
weight, and Englishmen when they pay an extra price for their tobacco
or tea, or draw a bigger cheque for the King’s taxes, feel that they
are putting something into the Treasury for a great cause, or for the
national honor, or to “keep the old flag flying,” or to “help the boys
at the front” who are fighting for them, or just that “it’s war-time,”
and there’s an end of it. At such a time a Government confident in
its cause, and in the readiness of the citizens to back it, could, I
believe, take a much greater part of the nation’s income in taxes than
has been attempted yet.

(2) Taxation is less hindrance to industry in time of war, because
war in many ways simplifies the task of industry. Industry knows more
exactly what it has to produce, and has a better and more certain
market. Its difficulty is to get enough men to do the work, and
stuff to put into it. At home there is the Government wanting more
war material than can be turned out. Abroad there are neutrals full
of money that they are making out of selling things to the warring
Governments, wanting to buy stuff that they used to get from us and our
trade competitors--now busy on war work--and unable to supply their
wants. The manufacturer has more certainty that he will be able to
sell at a good profit whatever he can turn out, and he is consequently
less likely to have his enterprise checked by the existence of high
taxation. He is so certain to be able to take his taxes out of his
customers that taxation, under such conditions, hardly weighs with him.

(3) Taxation in war-time is twice blessed. It gives the Government
revenue and it checks the consumption of the individual, and this
is, at such a time, an equally important economic advantage. Because
owing to the enormous demands of the Government on the available
supply of goods and services there are not enough to go round, and
if the citizens try to enjoy their usual allowance of comforts and
amusements--none of which can be provided without using up a certain
amount of labor and of stuff, and probably of coal in transport--the
result is that the Government and the individual citizens compete
against one another in a limited market and force up the price of
everything to their mutual disadvantage, and, what is worse, to the
great disadvantage of all whose wages or incomes have not risen as fast
as the rise in prices has moved. It may be objected that borrowing
checks consumption just as efficiently as taxation, since people cannot
spend what they lend. This is true if all the money lent is saved, and
is not produced by borrowing or inflation, a subject to be dealt with
in the next chapter. But even so, when money is taken in taxes and not
in loans, people are likely to be thereby stimulated to save something
besides. As we have seen, if a man puts $5,000 into a Government loan,
he thinks he has got an asset and forgets that it also involves a
liability. If $5,000 is taken from him in taxes, he is likely, if at
all thriftily inclined, to try to put something away besides.

[Sidenote: PENALIZING PATRIOTISM]

Further, borrowing in war-time has this great disadvantage, that it
penalizes those who go to the front. Doctors who give up fine practices
and take a pittance as military surgeons, business men, mechanics and
miners who forsake big profits and high wages for the pay of officers
and privates, come back when the war is over and find that the comrades
and competitors whom they left behind have made big investments in
war loans, and that they, whose pay has enabled them to do little or
nothing in this direction, will be subject to higher taxation to pay
them interest. The system thus directly fines those who do the most
important war work.

For all these reasons taxation in time of war is greatly preferable
to borrowing, and this is still more so when we consider war’s
aftermath. Every million that we pay in taxes in war-time means that
there is a million less of debt to be dealt with when peace comes,
and consequently so much more taxation to be taken off, just at the
very time when taxation will be the greatest nuisance. Because when
peace brings the tremendous problem of putting our industry back on
to peace work, with uncertain markets and all kinds of queer problems
that are certain to arise, it is above all necessary that our producers
and merchants shall feel bold and confident and ready to set the
whole machine going in the good hope of bigger production and readier
consumption than ever have been seen before in peace time. High taxes,
due to a big debt charge produced by home borrowing, will only go out
of one pocket into another, but the taxpayers will not all recognize
this, and if they are not also debt-holders it will not console them if
they do. So that if taxes have to be kept on at the war level, or even
raised, in peace time, the great recovery in trade with which I hope
that England may astonish the world even more than by anything that she
has done during the war, may be seriously impeded, especially if there
is discontent and bad feeling in the country about the manner in which
the burden of taxation is imposed. The Germans, who have raised, so
far, a quite contemptible part of the war cost by taxation, are likely
to find themselves seriously hampered when peace comes by the problem
that they are thus creating for themselves.

For these reasons borrowing at home in war-time is not a policy
that commends itself on economic grounds. The extent to which it is
practised may be taken as a measure of the want of confidence of
the Government in itself or in the readiness of the people to make
sacrifices for the war, or of its mere thoughtless following of a bad
habit handed down by its predecessors.

[Sidenote: THE BENEVOLENT DESPOT]

A well-informed and benevolent despot, with a perfectly docile people,
would see that if there is money in the country that he can get by
borrowing he can also get it by taxing if he sets about it in the right
way, and that by doing so he not only cheapens the war by reducing
his subjects’ demand for goods which competes with that of his War
Minister, but also makes industrial recovery in peace more rapid and
hearty, by the absence of after-war taxation. All the money that he
wanted for war he would just take from his people in taxes as the war
went on, without going through the cumbrous process of borrowing it
from them and afterwards taxing them to pay themselves back. But in
order to do so he would have to be able to rely on a truly equitable
system of taxation, which would curtail the power even of the richest
to waste money on things that are not really needed at a time of
national crisis, without taking food out of the mouths and clothes off
the backs of those who are hungry and ill-clad.

Borrowing at home in time of peace for some purpose that is, as Adam
Smith said, of great national advantage, but not likely to pay, is
less objectionable than war borrowing, since the special advantages,
set out above, of taxation over borrowing that prevail in war-time are
then absent. But it is always dangerous, because it encourages the
delusion that a nation can have things now and pay for them some day,
whereas whatever it has now it pays for now if it raises the money at
home, and the simplest, cleanest, and most honest way of paying for it
is by taxation. In the case of revenue-earning enterprises there is
very little objection to borrowing for their cost if the revenue is
likely to cover the debt charge; but since it is generally admitted
that such enterprises are more costly, in most countries, when managed
by Government, the economic argument against their being so managed is
strong.

[Sidenote: BORROWING ABROAD]

Borrowing abroad, except for reproductive purposes such as railway
building, is so evidently “bad business” that it is only done by
Governments of economically backward countries, or by Governments which
are impelled into this course, against their will, by the force of
circumstances, as happened to England’s in the present war. The volume
of munitions and war goods required for her and for her Allies was so
great that she had not the plant ready to provide them fast enough,
so she had to buy them from neutrals. As her industry was depleted
of its best men and had more work to do than it could manage, it was
not possible to pay for these war imports by increasing the volume
of goods and services that she exported. So she was obliged to make
these payments by drawing on her accumulated capital and by pledging
her future production. Some of her accumulated capital was in the form
of the bonds and shares of American railroads and of Government and
municipal bonds of many neutral countries, which had been acquired by
her through the process of investment abroad, that is by providing
goods and services in the past and taking securities in exchange for
them. These foreign investments stood her in good stead since she was
able to ship them back to the country of origin, or to others that
would take them, in exchange for war imports. By this means she, as a
nation, paid for part of the war’s cost out of work done in former
years, by using it to induce foreigners who bought the securities to
pay, during the war, other foreigners who were supplying her with goods
and services needed for it. By so doing she deprived herself for the
future of the stream of goods and services that she used to receive
from foreign countries to meet the interest on and redemption of these
securities that she had acquired in former years. This process has
very much the same effect as borrowing abroad, which was another means
employed by the British Government for financing the war. For example,
when it raised a loan of 250 millions in America it, in effect, hired
certain American investors to pay now for the munitions, etc., that
it was importing, promising to pay them in future so much a year in
interest. This interest England will have to provide out of her annual
production of goods and services. So that both these processes of
financing, by selling securities and by borrowing abroad, mean that she
will have to work harder in future to provide for her own wants, for
one reduces the payments that folk abroad have to make to her and the
other increases the payments that she has to make to them. But it may
be noted that the extent to which she has made use of these methods of
paying for war is, so far,[13] roughly balanced by the loans that she
has made to her Allies and Dominions.




                              CHAPTER III

                       MONEY WATERED BY INFLATION


In the good old medieval days rulers who wanted more money than they
could squeeze out of their subjects by taxing used often to solve the
problem by debasing the coinage. This was most easily and effectively
done by putting less precious metal and more alloy into coins and then
issuing them in payment with all the appearance of having the same
value as before. By this process the monarch was able to make a given
amount of gold or silver go so much further in turning it into pieces
that their unsuspecting subjects would take in exchange for goods,
until the fraud was discovered and prices adjusted themselves, more or
less.

[Sidenote: MULTIPLYING PAPER]

Nowadays most commercial transactions, except the retail purchases on
which we spend our pocket-money, are carried out by means of various
forms of paper money, the most important of which, in England, is the
cheque currency with which our banking system provides us. Before the
war, we used to carry gold and silver coins for retail purposes, but
even then all big payments were made by cheque. Since the war, gold
has practically vanished from circulation, and its place has been
taken by Treasury notes, issued under the Currency and Bank Notes Act
of 1914, and convertible on demand into gold at the Bank of England.
This power, that a modern community has gained, of multiplying its
currency by means of the printing press and of banking machinery, makes
it easy for Governments when they want money and are shy of taking
it directly and openly out of the pockets of the citizens, to debase
the currency, not by fraudulently tampering with it in the medieval
manner, but by merely multiplying the amount of the paper instruments
that will be taken by the public in exchange for goods. The buying
power of the public is thus watered down by inflation, if this mixture
of metaphors may be permitted. This is a very tempting and attractive
method of financing any expensive enterprise, especially a war, because
it does not, at first sight, call upon any one for any such sacrifice
as is involved when taxes are raised or when the citizens are called
upon to limit their spending, save their money and lend it to the
State. By increasing the currency a Government does not take money out
of anybody’s pocket, but puts new money into the pockets of those to
whom it has to make payments. It seems to be a delightfully easy and
simple way of paying for things, just to manufacture new money for the
purpose, and this device is in fact the basis for all kinds of schemes
by which well-meaning currency reformers often believe that they can
make mankind rich, by increasing the volume of the medium by which
payments are effected; whereas the only way by which we can be made
really better off is by increasing the supply of things that we need
and improving the system by which they are distributed among us. In
fact the effect of an increase of currency, unless it is accompanied
by an increase in the output of goods, is just the same as that of the
medieval debasement. It tends to produce a rise in the prices of all
commodities in general use, and so throws the burden of paying for war,
or providing whatever be the object that the Government is trying to
secure, on the shoulders of the people least able to bear it--namely,
ill-paid workers and salary earners and people with small fixed
incomes. It is a devious, unscientific, and round-the-corner dodge,
and can only be excused on the ground that Governments make use of it
without realizing what they are doing, and then continue it because,
when once it is started, it is very difficult to stop it, or even to
check its growth.

[Sidenote: DR. JOHNSON ON CURRENCY]

It is simply finance by inflation. The subject is difficult and
technical, and to enter into all its intricacies would involve us all
in much confusion and weariness of mind, and would also fill out a
portly volume. But if we keep to the broad outlines of the matter, it
seems to me that the case against it is plain to the understanding
and convincing to common sense. Professor Foxwell, in the course of a
lecture on Inflation, lately gave an excellent illustration of the
effect of the quantity of currency on prices from a remark of Dr.
Johnson’s. When told that in Skye twenty eggs might be bought for a
penny, Johnson observed: “Sir, I do not gather from this that eggs
are plenty in your miserable island, but that pence are few.” There
it is in a nutshell. If currency is scarce, prices are low. If it is
plentiful, prices are high. By inflation I mean an increase in the
currency more rapid than in the volume of commodities and services
that the community is producing. When this takes place, if at the same
time what is called the velocity of the circulation--that is, the pace
at which money is turned over--remains the same, it is impossible to
avoid the conclusion that a rise in prices must happen. Let us see the
process at work in an imaginary example.

If we all woke up one morning to find that some well-meaning fairy had
doubled the amount of money in our pockets and in our banking accounts,
and if at the same time no more stuff and services were being produced,
we should all, probably, feel nice and rich until we found out that
everybody else’s money had also been doubled; then if at the same time
there were no increase in the things that money is used to buy, the
stress of competition would make the price of everything shoot up like
a rocket. If the price of everything, including labor, services and
capital, were exactly doubled, then we should all be exactly as we had
been before, with regard to our power to buy; but in fact there would
be a painful process of adjustment in which those who were strongest
in bargaining power would do best out of the scramble and the weakest
would fare worst. Moreover, those who had made investments in house
property, mortgages or securities, entitling them to so many dollars a
year for a term of years or for all time, would find that the buying
power of their so many dollars had been greatly lessened, but that
they had no right to make their tenants or their debtors pay them more
than was stipulated in the original contract. The result, then, of
such an increase in the currency as we have imagined would be a great
upsetting of the community’s economic relations, with a rise in prices
followed by a rise in wages for those who were strong enough to secure
it, probably much friction and many strikes before this adjustment was
secured, a good deal of injustice to unorganized workers and people
like clerks and typists who are too respectable to strike, and a very
unfair advantage to debtors, who would be able to pay interest and
repay capital to creditors in currency that had been debased to the
extent of about half its value.

[Sidenote: THE GUERNSEY MARKET]

If inflation took place on this wholesale scale, we should all see at
once what was happening, but of course it does not. It is usually done,
even in times of acute crisis, so gradually that its effect is not
observed until it is too late to remedy the evil by drastic measures,
without raising a fresh crop of awkward problems. In normal times
inflation is, as a rule, only practiced on a very modest scale, though
it is said that there have been examples of economically backward
States that worked the printing press so hard that at last their paper
became so worthless that it did not even pay to print it. If inflation
really has the excuse, like the unauthorized baby, of being “only a
very little one,” its effect is hardly noticeable, and it appears to
work a very comfortable miracle. There is the famous example, referred
to in Jevons’s book on _Money_, Chapter XVI, of the Guernsey market,
which was “built without apparent cost.” The Governor of the island
wanted to build a market, and, not having the wherewithal, “issued
under the seal of the island four thousand market notes for one pound
each, with which he paid the artificers. When the market was finished
and the rents came in, the notes were thereby canceled.” The whole
transaction was completed, and the market had seemingly been built out
of nothing. In fact it had been built by means of temporary inflation,
the effect of which would tend to raise the prices of all the goods
that the community was consuming. Jevons indeed considers that the
infusion of those notes into the currency drove out so much gold. If
that really happened, then there would be no inflation, because paper
would have taken the place of gold in circulation and there would have
been no increase in the total currency in the hands of the Guernsey
folk. But Jevons does not state that gold was, in fact, actually driven
out; and with all deference to his authority, the explanation of the
miracle given above seems to me more probable.

In order to avoid misunderstanding, I think it is better to make it
clear that by inflation I mean any increase in any form of currency,
whether metallic, legal tender, or other--coins, bank notes, postal
orders, or cheques--that is accepted in payment by the community. It
is quite possible to have inflation by too great an inrush of gold,
as several neutral countries have found in the course of the present
war. But when it is a matter of too much gold, then equilibrium can
be restored in ordinary times by the export of the gold, because it
will be taken in payment elsewhere; but a country’s paper money is not
available as an article of export.

In normal times, such inflation as we are liable to is usually
corrected by gold exports and the operation of other economic
processes. If a country’s currency system is sound, the inflation
process should thus carry its own remedy with it. In England’s case, if
we get in too much gold, or our banks create too much cheque currency,
the consequent rise in prices tends to check our exports and increase
our imports of goods. Thereby in the first place the volume of goods
offered in our home markets increases and so the relation between
goods and currency is helped to return to the former level, and in the
second, as we are importing more goods and exporting less, there is a
tendency for gold to be shipped to pay for some of the extra imports.
So that if we are suffering from too much gold, the cure begins to
work; or if it is a case of too much banking credit, the export of gold
calls attention to the diminished basis of this credit and so helps to
cure it.

[Sidenote: UNCHECKED IN WAR-TIME]

In war-time, if the war is big and obtrusive enough, these nice and
pretty checks and balances do not work to keep inflation down. Shipping
gold is made expensive by high rates of freight and insurance, and
the people who usually handle the business of shipping gold, and do
so, in peace time, whenever they can see a profit in it and sometimes
merely to get the advertisement that gold shipments usually bring
with them, are checked by patriotic motives and the desire to avoid
exporting a financial weapon which has to be kept for special uses. And
so inflation can proceed merrily without setting to work the automatic
mechanism that usually produces the antidote for the disease.

How merrily inflation can work, when it is thus given its head, the
experience of the present war has well shown. All the warring countries
in Europe have been calling in gold from circulation and replacing it
with a much larger quantity of paper. Much of the gold that they have
called in they have shipped to neutral countries to pay for goods, and
so all over the world there is this common experience of an increase
in currency over and above the supply of goods, and a more or less
universal rise in prices. The thing has gone to such a pitch that the
Scandinavian countries have in effect closed their ports against the
entry of gold, and in America the danger of the inflation produced
by the great mass of gold imported has long been a commonplace among
economic writers.

The method of inflation differs in each country according to the
arrangements of its currency system. During the present war England is
doing it in three or perhaps four ways. The Government has done it by
printing paper currency, much greater in extent than the gold which it
has replaced in circulation, and by minting a great quantity of silver.
The Bank of England has done it by lending money to the Government, to
Allies, to Colonial Governments, and to private individuals; and the
other banks have done it by increasing their investments in Government
securities and by making advances to customers in order to enable them
to take up Government securities. In other words, most of the inflation
has been due chiefly to the action of the Government in either directly
increasing the currency itself by printing or coining it, or in
borrowing money from the Bank of England and the other banks instead of
getting it out of the pockets of the public by taxing it or borrowing
its savings. It is entirely natural that the British Government should
have done this, because in peace time it does so habitually and as part
of its regular scheme of finance. It borrows from the Bank of England
on Deficiency or Ways and Means advances to tide it over a time when
taxes are coming in sluggishly, and on the other hand big payments
have to be made, and for like reasons it sells Treasury bills, or
temporary promises to pay, to the Bank of England, or to other banks.
These devices are, usually, on so small a scale, as compared with the
vast sum of our monetary turnover, that the consequent addition to our
currency has no noticeable effect. But the huge scale on which they
have been used in this war has had bad results for all parties.

[Sidenote: CURRENCY MADE BY BANKS]

As many people may be puzzled by the assertion that the Government
increases the currency by borrowing from banks, it is better to explain
the process briefly here, though in another book I have already shown
how loans made by banks produce manufactured money by adding to the
banks’ deposits, which embody the right of their customers to draw the
cheques which are the chief form of currency that we now use.[14]

When the Bank of England makes a loan to the Government or subscribes
to any issue of Government security, it increases its holding of
Government securities as shown in its weekly return. When it makes
advances to any less august borrower, it increases its holding of what
it calls Other Securities. In either case it increases, on the other
side of its return, the amount of its deposits, which, as the appended
specimen shows, are divided into Public and Other, the former being the
balances of the various departments of the British Government, and the
latter those of all other depositors, including the other banks:

                            BANK OF ENGLAND

                           BANKING DEPARTMENT

                            _July 1st, 1914_

                    Million £ |                         Million £
  Capital              14-1/2 | Government Securities      11
  Rest                  3-1/4 | Other Securities           49-1/2
  Public Deposits      17     | Reserve                    28-3/4
  Other  Deposits      54-1/2 |
                       ------ |                            ------
                       89-1/4 |                            89-1/4
                       ====== |                             ======

Any one to whom the Bank of England makes an advance thereby gets a
credit in its books, and so the amount of the deposits at the Bank is
increased by the amount of the advance. If the British Government is
the borrower, the advance is added both to the Government Securities
among the assets and to the Public Deposits among the liabilities; but
as the Government does not borrow money in order to have the pleasure
of contemplating a large balance at its banker’s, it sooner or later
makes payments, out of this deposit, to contractors or other folk to
whom it owes money, by means of cheques on the Bank of England; the
contractors pay these cheques into their own banking accounts, and so
the money originally lent by the Bank of England to the Government is
transferred from the Public to the Other Deposits, to the credit of
the other banks to whom it has been distributed, and henceforward it
figures as cash at the Bank of England in their balance sheets. If
the Bank of England makes an advance to any other borrower, he is
credited with a corresponding deposit. He draws on it and transfers it
to any one to whom he has to make payments, but the deposit remains to
the credit of some one as long as the advance is outstanding. How far
this process has been carried we see from the figures of the Bank of
England’s returns published at the end of last year, comparing with
those at the end of June 1914,[15] given on a previous page:


                           BANKING DEPARTMENT

                         _December 27th, 1916_

                     Million £ |                          Million £
  Capital               14-1/2 | Government Securities       57
  Rest                   3-1/4 | Other Securities           106-1/2
  Public Deposits       52     | Reserve                     33
  Other  Deposits      126-3/4 |
                       ------- |                            -------
                       196-1/2 |                            196-1/2
                       ======= |                            =======

Here we see an addition of more than 100 millions to both sides of the
balance sheet, by increases in the securities on one hand and in the
deposits on the other. These deposits are potential currency and more,
for being “cash at the Bank of England,” in the hands of the other
banks they are regarded as just as good a reserve for them as gold or
legal tender. Let us see the effect on the other banks of this increase
in the currency which may be called, in a sense, part of the basis
of their credit operations. I append an aggregate balance sheet of
nineteen of the biggest English banks, showing their position first on
June 30th, 1914, the last date on which they were published before the
war, and then on December 31st, 1916:


      AGGREGATE BALANCE SHEETS OF NINETEEN PRINCIPAL ENGLISH BANKS

                           _June 30th, 1914_

                              £                                  £
  Capital and Reserves    69,864,000  | Cash in hand and
                                      |   at bank            115,242,000
  Acceptances and                     | Investments          114,583,000
    Endorsements          37,646,000  | Discounts and Advances
  Deposits (including                 |   (including
    undivided                         |   Money at
    profits, etc.)       747,243,000  |   Call, etc.)        571,451,000
                                      | Cover for Acceptances,
                                      |   Premises,
                                      |   and Sundries        53,477,000
                        ------------  |                     ------------
                        £854,753,000  |                     £854,753,000
                        ============  |                     ============


                         _December 31st, 1916_

                               £                                  £
  Capital and Reserves    72,497,000 | Cash in hand and
                                     |   at bank             251,875,000
  Acceptances and                    | Investments           303,461,000
    Endorsements          57,498,000 | Discounts and
  Deposits (including                |   Advances (including
    undivided                        |   Money
    profits,                         |   at Call, etc.)      592,056,000
    etc.)              1,095,574,000 | Cover for Acceptances,
                                     |   Premises, and
                                     |   Sundries             78,177,000
                      -------------- |                    --------------
                      £1,225,569,000 |                    £1,225,569,000
                      ============== |                    ==============

[Sidenote: POTENTIAL CURRENCY]

The most notable features in this very instructive comparison are the
increases in the deposits on the liabilities side and in the cash and
investments among the assets, that has taken place during the period.
It will be observed that the deposits, which are potential currency in
the hands of the public, since they give the banks’ customers the power
to draw cheques against them, have risen by 348 millions, while the
cash held by the banks has risen by 136 millions, their investments by
189 millions, and their loans and discounts by 21 millions. How much
of the addition to the cash is due to the Bank of England’s lending
activities, as described above, how much to the issue of Treasury
notes, of which 150 millions sterling were outstanding on December
31st last, and how much to gold paid in by customers, it is impossible
to guess, but it is safe to assume that these three processes between
them have done most of it. But a still larger movement is the increase
in investments, the whole of which, it is safe to guess, has been
due to the big subscriptions made by the banks to the two first War
Loans, and to Exchequer bonds and Treasury bills, by means of which
they increase on the one hand their investments and, on the other, the
deposits of their customers,--by this process. When they subscribe to
War Loans or buy Treasury bills from the Government, the banks pay
for the securities so taken by a draft on their balance at the Bank
of England, and so, for the time being, hold so much less cash at the
Bank of England and so much more investments; but as the Government
uses its increased balances to pay debts, by drawing cheques on them,
and the contractors who get the cheques pay them into their banks, the
banks get back their balances at the Bank of England and also have
their deposits increased, by the cheques on the Bank of England, which
their customers pay in; and so when the transaction is all complete
the banks find themselves with their deposits increased by the amount
that they have subscribed to the new loan, or whatever the security
may be. In other words, they and the Government between them, by this
credit operation, have increased the amount of currency in the hands
of the public, and if at the same time there has been no corresponding
increase in the volume of goods, inflation is thereby produced. The
figures given above are complicated by the addition, during the period,
of two small banks by amalgamation; but if banking figures of the
whole of the United Kingdom could be compared, the total increase in
deposits, that is in potential currency, would be over 400 millions.

[Sidenote: BORROWING FOR WAR LOAN]

A similar process is set to work when a bank makes an advance to a
customer to enable him to take up War Loan, or any other security, or
for any other purpose. As I have shown elsewhere,[16] as long as the
loan is outstanding there is almost certain to be a deposit in some
bank or other against it. The English banks had not, up to the date
of the balance sheet shown above, done much of this business since
the war. In fact, owing to the extent to which industry is now on a
cash basis and owing to the decrease in Stock Exchange speculation,
the increase in loans and discounts of the banks was quite small.
But during the first quarter of 1917 they must have made very large
advances to customers, since every one was urged to anticipate future
savings, borrow from his bank and subscribe to War Loan, and we know
that the public responded very practically to this appeal. This was
quite as it should be, since it was by only anticipating savings that
the huge amount required could be got; but, as was pointed out at the
time by Professor Pigou, in a letter to the London _Times_ of January
19th, 1917, unless the money so subscribed was saved and paid back to
the banks, so canceling the increased credits, as fast as it was spent
by the Government, this system of subscribing out of bank advances
could only lead to inflation.

The banks are, among other things, manufacturers of currency, and as
long as their manufacture does not outstrip the pace at which goods
are being produced, the general level of prices will remain fairly
level. Or if new currency that they create is used by producers to set
to work and make more goods, then by creating it they are helping the
production of goods and so maintaining the equilibrium between goods
and currency. It is when they manufacture currency that is handed
straight over to a great consumer like a Government in war-time, that
inflation can almost be seen getting to work. A new buyer comes into
the markets, with a great mass of currency to draw on, competing with
all other buyers and probably, from what we (in England at least) know
of Government departments, with itself,[17] and up go prices. It is a
subtle, insidious, but very effective way of getting money out of us,
not by taking it from us, but by watering down the value of all the
money that we possess. As the prices of goods rise our buying power
over them declines, and so we have to put up with less of them. This is
right and reasonable if they are wanted for the nation’s needs, but the
inflation process does the job in the worst possible way by throwing
the burden of going without on those who are least able to bear it.

Inflation, however, does not only hit the poorest members of the
community. It is bad finance for the Government that indulges in it
to any extent that suffices to cause any serious rise in prices and
depreciation in the currency. In the first place, the Government drives
prices up against itself and so makes the war, or whatever else be the
object of its spending, more costly. In the second, the Government,
being not only an inflater but a borrower, since it is by the borrowing
process that much of the inflation is done, borrows at a time when the
currency is depreciated by its own action and engages to pay interest
and pay the debt back in years hereafter, when we may fairly hope that
prices will have gone back from their present level. Consequently the
British Government borrows millions of depreciated pounds with a fair
prospect of having to pay back its debtors later on with pounds that
will be much more valuable. Unlike the quality of mercy which blesseth
him that gives and him that takes, the system of financing by inflation
curses both the inflater and the inflatee.

[Sidenote: IS INFLATION INEVITABLE?]

“But,” it is argued, “you cannot possibly get away from inflation in
time of war. It is inevitable. The rise in prices makes a larger amount
of currency necessary.” But could there be a general rise in prices
without an increase in the volume of currency? There could, of course,
if there had been a decrease in the production of goods. But if the
production of goods had remained fairly constant, as it probably did if
we include war material as goods, and if there had been no increase in
the volume of currency, then, I think, though certain prices must have
risen, others must have fallen.

The price of carriage by sea could not help rising, owing to the
demands on the merchant fleets of the world by the warring Governments,
the shutting up of Germany’s ships in neutral harbors, and the
destruction of Allied and neutral tonnage by German submarines. This
would have meant that everything that came by sea would be dearer, so
that in England food prices must have risen. At the same time, the
more generous diet required by the fighter and the war worker would
have had a like effect. War materials would also have inevitably been
dearer. But if there had been no increase in the currency, the greater
volume of it required for purchases of food and war material would
surely have lessened the amount available for buying other things and
their prices would have fallen, and the decreased demand for them
might have set free labor employed in producing them and so helped to
increase the production of food and war material and checked the rise
in their prices. Without inflation private extravagance in England
would have been much less general. If, for example, the higher prices
paid by the British Government for the petrol which it was using in
such huge amounts had diminished by their full extent the supply of
money that other people could pay for it and for other things, we might
have heard less about English race meetings thronged with private cars
in the third year of the war. But as long as the British Government
and the banks kept ladling out fresh supplies of currency, competition
between the State and the citizen for the goods and services available
became ever keener, to the detriment of both parties. As more money
went into buying potatoes, owing to the rise in their price, less, if
it had not been for inflation, might have gone into buying flowers,
and so ground and labor used for growing flowers, would much more
rapidly have been used for growing potatoes, and the rise in the price
of potatoes would have been checked. As more money was needed for
ocean-carried food, less would have been in buyers’ pockets, if there
had been no inflation, for ocean-carried furs and feathers and wine and
silk dresses, and so more ship space would have been set free for food,
and the rise in its price would have been checked. In other words, if
all the money required by the British Government for the war had been
taken out of the pockets of the public in taxes and loans paid for out
of savings, instead of much of it being manufactured by the Government
and the banks between them, then the public’s buying power would have
been reduced by the full amount spent on the war; and the reduction of
consumption, by which alone war’s needs can be met, would have been
brought about with much less friction and economic disturbance.

[Sidenote: GOODS AND SERVICES]

For, as has been said over and over again in the course of the British
War Savings campaign, the Government makes war with goods and services.
Those that it needs for war can only be handed over to it if somebody
goes without. It cannot by any possibility, or by any financial sleight
of hand, get more than the country can produce, either by its own
labor and energy or by selling goods abroad in exchange for war goods
made abroad, _plus_ the amount that it can get abroad by borrowing
and selling securities. As a warring country’s power to borrow and
sell securities abroad is obviously limited, it is clear that after a
certain point the war demand for goods and services can only be met
by the reduction, enforced or voluntary, of the buying power of the
civilian population. Inflation helps to effect this in an insidious,
roundabout, and inequitable manner, laying much of the war burden
on the wrong shoulders. It is not the sole cause of all the rise in
prices, but by encouraging extravagance it helps to raise the prices of
goods that need not necessarily rise at all, and it increases the rise
in prices in which a rise is inevitable.

As has been said, inflation does not “cut much ice” in normal times.
But it is like one of those diseases that demoralize the patient into
enjoying them, and war’s experience shows that England will have to be
careful to get cured of it as quickly as she can without starting some
other ailment, and then keep it out of her system.




                               CHAPTER IV

                          MONEY TAKEN BY TAXES


Given a free people with real control over the conduct of its affairs,
a genuine confidence in the justice of the system by which money is
taken from it and in the wisdom and care with which the money is spent,
and the citizen would no more object to paying taxes than he objects to
paying a bill for a book, or a suit of clothes, or a set of golf clubs
that he has ordered for himself. The prevalent spirit on the subject
shows how very far we are from having attained these ideals.

“All taxes are confiscation,” said Mr. Joseph Hume as already quoted,
so expressing the common view that the State takes our money in an
arbitrary and unjust manner and spends it on purposes which may be
necessary but are only submitted to reluctantly on that ground, the
said expenditure being necessarily and inevitably a cause of the
impoverishment of the people. In England in the last century, in the
heydey of the simple and satisfactory theory that every man knew his
own interest best and could be trusted to secure it if left alone, and
that by this pleasant process the interest of the whole community would
certainly be attained, it was a favorite phrase with politicians and
political writers that such money as was saved from taxation would
“fructify in the pockets of the people.”

How much truth is there in this view? It is surely a very large
assumption to suppose that all the money which Government takes
would, if left in the people’s pockets, have been spent on some good
and useful purpose and have increased the productive power of the
community. This theory takes it for granted that the Government’s
revenue is derived entirely from money which would otherwise have been
saved and well invested in reproductive enterprise. Whereas we know
that, owing to various defects in the machinery of the laws governing
joint stock companies and the ingrained craving in the hearts of most
of us for short-cuts to fortune, a good deal of the money that is
invested gets into the pockets of unsavory company promoters and the
evil brood employed by them, or is sunk in enterprises that never had
a chance of yielding a profit to their shareholders; and further, it
by no means follows that what the Government takes comes out of what
the citizens would have saved. Very probably it comes out of what
they would have spent on themselves; and only the most incorrigible
optimist, or the most ignorant theorist, could maintain that whatever
people spend on themselves is spent well. The vulgarity and absurdity
and ugliness of many of the objects on which the rich and middle
classes spend their money are apparent to all: lavish entertainments
at which everybody is bored, theatrical shows which are a scarifying
criticism of the intelligence of those who pay money to be amused by
them, clothes and gewgaws in which no really civilized people would
consent to be found dead,--these are a few of the more innocent
examples of the manner in which hundreds of millions of money that the
State does not take “fructifies” in the pockets of its more fortunate
citizens. Bad spending among the poor is perhaps even commoner, owing
to their ignorance of the uses of money, and is much more tragical in
its effects owing to the fact that, even if they spent well, they would
seldom have enough to give them a reasonable chance of full development
of their faculties and capacities.

[Sidenote: “FRUCTIFYING”?]

Since, then, there is much bad spending in all classes, we have no
right to assume, as is often done, that all the money taken by the
State and spent, well or ill, by it, would have been well spent if left
to “fructify in the pockets of the people.” It might have gone in race
meetings, Tango teas, picture palaces, fashionable fripperies, strong
drink, or trashy “literature,” all of which things have their uses in
amusing people who do not know how to amuse themselves better, but do
not lead to much “fructification.”

It may also be mentioned here that money taken by Government does
not vanish. It is spent by the Government on something, and thereby
provides a large number of people with a living. When it is spent on
the debt charge, it is handed straight over to the debt-holders, in
interest or redemption of debt. Spent on education, it pays those
who build schools and on the army of patient workers who teach the
rising generation--if spent well, no money could be better invested, or
fructify more fruitfully. Even when spent on public defense it provides
wages for those who build our navy and make our guns, and feeds and
clothes those who fight for us. It is true that if we had universal
peace all those good workers might be building merchant ships instead
of battleships, or making and growing useful things instead of learning
and practicing the art of destruction. But as things are at present,
national security is a thing that most of us are very willing to pay
for, and with private spending what it is, we cannot be sure that by
any means all the work of these workers, if set free from military and
naval objects, would be put to good and fruitful use. It is of course
absurd to go to the other extreme and contend that taxation creates
employment. It only transfers the power of giving employment from
individuals, who might or might not have used it well, to the State,
which may or may not use it well.

[Sidenote: SMITH’S MAXIMS]

No chapter on taxation can be complete that does not quote Adam Smith’s
famous four maxims on the subject:

  “(1) The subjects of every State ought to contribute towards the
  support of the Government, as nearly as possible, in proportion to
  their respective abilities; that is, in proportion to the revenue
  which they respectively enjoy under the protection of the State.

  (2) The tax which each individual is bound to pay ought to be certain
  and not arbitrary. The time of payment, the manner of payment,
  the quantity to be paid, ought all to be clear and plain to the
  contributor and to every other person.

  (3) Every tax ought to be levied at the time, or in the manner, in
  which it is most likely to be convenient for the contributor to pay
  it.... Taxes upon such consumable goods as are articles of luxury
  are all finally paid by the consumer, and generally in a manner that
  is very convenient for him. He pays them little by little, as he has
  occasion to buy the goods. As he is at liberty, too, either to buy or
  not to buy as he pleases, it must be his own fault if he ever suffers
  any considerable inconveniency from such taxes.

  (4) Every tax ought to be so contrived as both to take out and keep
  out of the pockets of the people as little as possible, over and
  above what it brings into the public treasury of the State.”[18]

These maxims have been generally accepted by later economists as a
summary of the principles on which taxation should be based, except
the very lucid and sensible American writer General F. A. Walker, who
decided that “the first and most famous of them cannot be subjected
to the slightest test without going all to pieces.” As to the other
three, their equity and sound sense can hardly be disputed (though
Walker thought them “at the best, trivial”), and it is also pleasant
to observe that the British system of taxation is not far from securing
them. If Englishmen fail in the matter of No. 2, it is their fault
rather than the State’s; if they chose they could all know how much
they were paying for government when they buy a glass of beer or a
pound of tea or a packet of cigarettes, and if many of them buy these
things every day without even knowing that they are paying taxes, that
is only because they have not troubled to think about it. As to No. 3,
the convenience of the contributor might be still further consulted in
England if income tax could be paid by installments, instead of in one
lump as it was before the war, or in two as now arranged. A system of
monthly installments would be much more convenient to a large number of
taxpayers, and, though it might involve a good deal of bookkeeping, it
would, on the other hand, help to keep the State’s income even, whereas
the present system leaves long periods during which it has to borrow in
anticipation of taxes to be received later.

But it is in Maxim No. 1 that the whole question of the equitable
apportionment of taxation is really locked up; and, if we examine the
great American economist’s severe criticism of his great Scottish
predecessor, it will help to a clearer understanding of the whole
matter.

  “This maxim [says Walker], though it sounds fairly, will not bear
  examination. What mean those last words ‘under the protection of
  the State’? They are either irrelevant, or else they mean that the
  protection enjoyed affords the measure of the duty to contribute. But
  the doctrine that the members of the community ought to contribute
  in proportion to the benefits that they derive from the protection
  of the State, or according as the services performed in their behalf
  cost more to the State, involves the grossest practical absurdities.
  Those who derive the greatest benefit from the protection of the
  State are the poor and weak--women and children and the aged; the
  infirm, the ignorant, the indigent. Even as among the well-to-do and
  wealthy classes of the community, does the protection enjoyed furnish
  a measure of the duty to contribute? If so, the richer the subject or
  citizen is, the less, proportionately, should he pay. A man who buys
  protection in large quantities should get it at wholesale prices,
  like the man who buys flour and meat by the carload. Moreover, it
  costs the State less to collect a given amount from one taxpayer than
  from many.”[19]

[Sidenote: WALKER ON SMITH]

Walker’s admirable lucidity endears him to economic students, so often
baffled by the obscurity in which the masters of the science enfold
their utterances, but, I think, these criticisms of Adam Smith only
serve to bring out the truth of the principles that lay behind his
famous first maxim. For Walker implies that the poor and weak, women
and children and the aged, enjoy most revenue under the protection
of the State, which they obviously do not. It is very true that the
poor need protection, but they do not need it in respect of any
property that they own or of revenue that they enjoy. The protection
of property, which, as we saw in Chapter I, is the original and still
a most important function of the State, has to be given in increasing
measure as the extent of the property owned, and the revenue derived
from it, increases. A junior clerk whose property consists of the
balance in his pocket of his last week’s wages needs little protection
from the State or anybody else. “_Cantabit vacuus coram latrone
viator._” His employer, with some furniture in a rented suburban house,
a few hundreds invested, and a policy on his life, has little that a
burglar could get at, though his investments and his business make his
revenue depend on the general stability of society, such as is provided
by Government. A great English landed proprietor with an agricultural
rent-roll and a square mile or two of house property in cities enjoys
his revenues only because the State is there to protect his property
and enable him to enjoy it in peace and safety. As Adam Smith says in
another passage:

  “It is only under the shelter of the civil magistrate that the owner
  of that valuable property which is acquired by the labor of many
  years, or perhaps of many successive generations, can sleep a single
  night in security.”[20]

Walker’s contention that those with least property require most
protection for it almost looks as if it had been dictated by a desire
to pick holes in the work of his illustrious predecessor. And his
argument that the physically weak, women and children and the aged,
need more protection for their property is very little sounder. For if
we went back to a state of anarchy and everybody took what he could
get, the strong man would certainly have an advantage, but he would not
long enjoy much revenue under such conditions, because production would
promptly be brought to a standstill. As to the “reduction on taking
a quantity” argument--the view that the rich should buy protection
more cheaply because they need more of it, on the same principle that
enables a man to buy bread and meat more cheaply by the carload--here
Walker is surely quoting the principles of the market-place in a
sphere to which they cannot be applied. The merchant with a big stock
of an article, which he may or may not be able to sell, is naturally
willing to make a concession in price to a buyer who will take a line
off his hands, though even in the market-place this principle, or
rule of thumb, does not work always, or beyond a certain point. But
a Government providing its people with protection for their property
works under quite other conditions. It knows exactly how much it means
to provide, and it ought to be able to find out which of its citizens
will be most benefited by this protection and apportion the cost upon
them accordingly by taxation.

So when Walker goes on:

  “Returning to the maxim of Dr. Smith, I ask, does it put forward
  ability to contribute, or protection enjoyed, as affording the true
  basis of taxation? Which? If both, on what principles and by what
  means are the two to be combined in practice?”--

when he puts these posers we have an easy answer. Ability to
contribute, since it depends on revenue enjoyed (when we have got at
the right meaning of that ambiguous phrase), involves also protection
enjoyed, so that both principles lead us to the same end. And the two
can be combined in practice and are, in a halting manner that needs
improvement and expansion, in the system of taxation that has been
painfully evolved in English-speaking countries. Logically applied,
Adam Smith’s first maxim would confine taxation to direct taxation,
that is taxation paid directly by the taxpayer to the State, assessed
on a graduated scale according to the taxpayer’s net income and
differentiated according to the source from which it is derived. In
other words, by laying down this maxim he anticipated the beauties of
the income tax and death duties, and of the principles of graduation
and differentiation that have been so slowly and tentatively introduced
into our fiscal systems. All these things are implied in the prophetic
musings of the great Scottish thinker.

Graduation is clearly implied, as was shown by Walker’s criticizing
Adam Smith for having apparently forgotten it, because he did not
actually mention it. We cannot put the proof better than in Walker’s
words:

  “Is the ability [he asks] of two persons to contribute necessarily in
  proportion to their respective revenues? Take the case of the head of
  a family having an income of $500 a year, of which $400 is absolutely
  essential to the maintenance of himself and wife and children in
  health and strength to labor. Is the ability of such a person who has
  only $100 which could possibly be taken for public uses, one-half
  as great as that of another head of a family similarly situated in
  all respects except that his income amounts to $1,000, and who has
  therefore $600 which could conceivably be brought under contribution?
  Manifestly not.”

Most true, but there is nothing to show that Adam Smith thought that
it was. Any one who has only $500 a year, of which $400 is needed for
the bare necessaries of “health and strength to labor,” can hardly be
said to enjoy a revenue at all, for the whole of his margin is needed
for the decencies and comforts that must be had before he and his
children can be provided for in such a manner as is necessary to make
them efficient citizens of a civilized state, with their intelligence
cultivated to a point that will enable them to exercise judgment
concerning public questions. Those only can be said to enjoy a revenue
who have a margin over what is needed to maintain them and their
dependents in health and efficiency. To tax anybody below that line is
bad business from the State’s point of view, because by injuring their
health and efficiency the State promotes the growth of a class that is
compelled to live, more or less, either on private charity or public
support, and by its lack of efficiency impairs that of the nation at a
time of crisis.

This principle is recognized by the terms on which an income tax is
assessed. It would not be imposed on a man with $400 a year at all.
Graduation, the system by which no income tax is imposed below a
certain limit, and varies afterwards according to the size of the
income, is the great advantage that income tax carries with it. The
release of small incomes has always, necessarily, been part of it.
When it was first introduced in Britain in 1798 it was only imposed on
incomes of $300 and upwards, was graduated between $300 and $1,000 and
was 10% above that line[21]; in 1806 the limit of exemption was reduced
to $250. Its medieval predecessor, the poll tax, was first raised in
1377, and was graduated. Beggars paid nothing, ordinary folks 4_d._ a
head, and the rate varied from this level up to 10 marks (£6 13_s._
4_d._) on dukes.[22] The income tax was, most unwisely, taken off after
the Napoleonic wars, and when it was reintroduced in 1842 by Peel, it
was imposed on incomes of $750 and upwards.[23] This level was later
raised to $800, and was reduced in Mr. McKenna’s first War Budget in
1915 and brought down to $650, which seems to be low enough as it is
at present assessed, but by no means as low as it should go if and when
the tax is rid of a great anomaly that at present mars it, namely, its
great unfairness to those who have families to educate. But before we
look further into this and other drawbacks that at present clog an
otherwise excellent tax, let us consider its other beauty, that of
being differentiated according to the source of income, whether “earned
or unearned.”


[Sidenote: DIFFERENTIATION]

This, again, is a principle that has only fought its way with the
utmost difficulty into England’s system of taxation, though the logical
soundness of it is obvious. It is clear that two men, each with $5,000
a year, do not “enjoy” a revenue of this amount in the same sense if
one of them earns it as a salary by hard work, which will cease at
any time if, owing to bad health or advancing years, he has to give
his work up, while the other receives it in dividends on Government
securities which he has inherited or bought out of his own savings, and
is therefore certain of enjoying it as long as he lives and of being
able to hand it on when he dies to his children or any one else whom he
may choose. It has not yet been possible to differentiate still further
and impose a different rate of tax on the income that a man receives
from investments which he has saved himself from that which is paid on
an inherited income. When a taxpayer has created, by saving, his own
“unearned” income, it is at first sight unfair that it should be so
called and so taxed. But, even so, his enjoyment of it is clearly so
much the more secure, and moreover the principle of differentiation
is also at work through the British death duties, which take a large
and well-graduated slice out of estates when the demise of their owner
gives the State its periodical opportunity. So that the income of those
who live on inherited wealth, besides paying income tax, is either
diminished every time an owner of it dies and the State takes toll of
the capital, or is lessened each year by the provision that the owner
makes, through insurance or otherwise, in order to provide against the
death duties, and maintain the capital of the estate intact.

[Sidenote: TAXING CAPITAL]

It is commonly objected to the death duties that they are a tax on
accumulated capital and that, as the State uses their proceeds for
purposes of ordinary expenditure, it is paying for current needs out
of capital and so doing a thing that is vicious in the case of an
individual or company. But is this necessarily true? The tax, it is
true, is assessed on capital, but I think it is paid, and that all
taxes have to be paid, out of current income, either of the previous
owner of the estate, if he insured in order to provide for it, or of
its inheritors, if they do not realize any portion of the estate to
meet it, or of those who buy, with saved money, any part of the estate
that is sold to meet the tax. In the last-mentioned case, the saved
money that is handed over to Government to spend would otherwise have
gone into some other investment which would perhaps have increased the
community’s productive power, but this possibility is attached to all
money that the Government takes out of our pockets and is one of the
reasons why we have to be careful to see that the Government spends it
well. A graver objection to the death duties is that they may tend to
check the incentive to accumulation by the individual, a point that
will be dealt with later.

All taxation comes out of somebody’s income. If we try to tax capital,
we can only do so if the owner can pay the tax out of income or can
sell a bit of his capital to some one else who pays for it out of his
income. A tax on capital is thus only a way of assessing income tax
according to the amount of capital possessed, and is a questionable
way of doing so because of the difficulty of knowing what anybody’s
possessions are really worth until they are offered for sale in a free
market, and also because of the great expense and delay involved by
making any such valuation. Moreover, the mistakes made by Government
valuers, when estates have to be valued for purposes of taxation,
are astonishing. In a certain British colony a man once died who had
picked up, in the course of several visits to England, a collection of
beautiful and very valuable Turners and other water-colors. The local
official valuer remarked to his heir, “I see from the dates on these
pictures that they’re all second-hand, so I’ve put them in at half a
crown[24] each.”

But since all taxation falls on income, and since the amount of the
income, with due regard to its source, is the obvious test of ability
to pay, and since this ability clearly grows with each increase in the
income above the sum required for the bare necessaries of life, it is
evident that the income tax, if we could get it into an ideal shape, is
the most equitable form in which taxation can be imposed. Regard to the
amount of the income involves graduation, and regard to the source of
the income involves differentiation, because it is easier to pay, and
more protection by the State is involved, in the case of income from
saved money than in the case of earned money; and still more protection
from the State is involved in the case of income from money that is
inherited or received by gift, since the secure transfer of wealth by
legacy or otherwise is one of the most obvious of the material benefits
granted by stable government.

The ideal form of an income tax would thus be thrice differentiated,
according to whether it was imposed on--

  (1) An income now being in the technical sense earned, that is a wage
  or salary or professional or business profits;

  (2) An income that is produced by savings made by its owner;

  (3) An income that is produced by inherited wealth or wealth received
  by gift.

If this triple differentiation could be made, then England would be
able to do away with the death duties, with the great unfairness that
they involve, for example, when one estate changes hands frequently
owing to the accident of death, and another escapes by being held
for eighty or ninety years by a specially tough owner who happened
to inherit it when an infant. If the death duties were thus commuted
into the shape of a higher annual income tax on those who got income
from inherited wealth, there would be a much greater chance, amounting
almost to certainty, that they would be met by saving on the part of
the holder of the income.

[Sidenote: THE IDEAL TAX]

Thus differentiated, the ideal income tax would be graduated logically
and steadily up to the highest range of incomes, not as it is now in
England with a series of capricious jerks, and with the super-tax as an
excrescence on the top. It would also be purged of the inequity which
at present in England lumps together the income of husband and wife
as one for assessment purposes, and of the still worse vice that it
now possesses of taking little or no account of the children whom the
taxpayer may have to educate. The unfairness of an income tax which is
the same in the case of two brothers who each earn $5,000 a year, but
one of whom has eight children and the other has none, is glaringly
apparent, if we apply Adam Smith’s test of ability to pay. Allowances
for children were introduced during the Napoleonic war, but were given
up in 1806, as they had “led to an astounding official increase of
large families.”[25] Mr. Lloyd George made a small beginning in his
Budget of 1909 towards remedying this great blot on this tax by giving
an abatement of $50 (from the income assessed) for each child under
sixteen in the case of incomes under $2,500. Since then the amount of
the abatement has been raised to $125 for each child, and this relief
is given to incomes up to $3,500. Even so it is pitifully inadequate.
The proposal made by Mr. Sidney Webb and his fellow-Fabians in their
book on _How to Pay for the War_ is much more efficacious, if it could
be put into practice. They suggest that the basis of assessment in the
case of families dependent on one income should be the income divided
by the number of those dependent on it; that is to say, that if a man
had $5,000 a year and a wife and eight children, he would be assessed
on ten incomes of $500 each, and, as incomes of $500 each are at
present exempt, he would be free of all income tax, while his bachelor
brother would pay the full amount on his $5,000.[26]


“But wait a minute,” says the bachelor. “I don’t quite see why I
should be penalized for choosing, or perhaps being obliged by a
hopeless passion, to live in single blessedness. If you let my brother
off, it is clear that I shall have to be taxed higher. But why? He
chooses to spend his income on the joys of bringing up a family and the
delights of an uproarious nursery. Why should he therefore be let off
while I, because I prefer keeping a yacht, and collecting blue china,
and living a life of peace and comfort, or perhaps, if you knew all,
giving up my spare cash to good works, am to pay more to encourage his
philoprogenitive proceedings?”

The answer is obvious to all but confirmed bachelors, and it lies in
the fact that the State wants citizens and wants them brought up under
the best possible conditions. To penalize income tax payers who are
bringing up families, promotes that tendency to small families, or
none, among the professional classes, which leaves the business of
bringing up the heirs of the race to those who are least likely to give
them the good air, good food, good clothes, and good teaching in their
early years that are all-important to their efficiency when they are
grown up. Economically and in every other respect, a nation can only
thrive if it is composed of citizens sound in mind and body, and any
taxation that makes the middle class sterile is a bad economic blunder.

And since we are only chasing the rainbow of the ideal, we may also
add that, in order to make the income tax perfect, it would, though
assessed on the whole income, only be imposed on that part of a
man’s income which he spends, and he would be allowed abatement in
consideration of any part of it that he invested and not only, as now
in England, on that part invested (within certain limits) in life
insurance. This further exemption would be made, under an ideal system,
because a State cannot make economic progress unless its citizens
continually produce more than they consume on immediate enjoyment, so
that there may be a margin of savings continually available for capital
purposes, that is, for increasing future production by putting labor
and energy into new equipment instead of into luxuries and amusements.
This can only be done if we save, and it is therefore obvious that no
tax can be called ideal which does not encourage investment. In time of
war, however, this abatement might have to be modified.

An income tax adorned by the improvements above suggested would be so
evidently equitable that it might be imposed on wage-earners’ incomes
considerably below the limit which it touches at present, and might
be used for raising the greater part of the national revenue, however
great the extent of the revenue required. There would be no need then
to talk about widening the basis of taxation, for taxation would be
based on the widest possible foundation, the aggregate income of all
citizens above the poverty line. Under ideal conditions it would
be collected, no longer “at the source,” but from the individual
citizen, on his declaration of all the particulars required. It would
not be payable by companies and firms, but only by their creditors,
shareholders, and partners as they received interest due and profits
distributed. Thereby all the evil effects on company finance that
are now produced by the close watch that the British Inland Revenue
authorities keep on their interpretation of profit would be abolished.
Any company or firm that preferred the strait path of good finance
and took a generous view of the claims of depreciation and upkeep
would no longer be deterred by the consideration that it would have
to pay income tax on some of the money that it was putting into
the maintenance and improvement of its business. Moreover, British
companies with a large number of foreign shareholders, and whose
profits are earned abroad, would no longer be impelled, as they are by
the present high rate of income tax, to shift their seat of domicile
to a foreign clime, because only that portion of their profits would
be taxed which is paid into the pockets of British creditors and
shareholders. So devised, taxation would not fall directly upon
industry at all, but only on those who spent the proceeds of industry.
We need not pretend that it would not affect and hamper industry, since
all taxation must do so more or less; but, I think, we can claim that
it would do so less than any other.

Such a tax would meet and fulfill all the requirements laid down by
Adam Smith or added to them by the light of modern experience. We
should all know exactly what we were paying for the maintenance of the
State; graduation and differentiation would do all that can be done by
human fallibility to make the tax work according to the ability of the
taxpayer with due regard to the degree of protection that the State has
to give to secure him the enjoyment of his revenue; if the tax were
payable in monthly installments it would cause no inconvenience to the
man with a small income; every penny of it would go straight into the
coffers of the State, less the cost of collection; and the monthly
collection of it would ensure a comparatively regular revenue against
the nation’s outlay.

How far is all this mere rainbow chasing and straining our eyes after
an impossible ideal? Not so far as it looks, perhaps, though the
acceptance of such a tax in its entirety requires a degree of economic
education and of common honesty in the community that we may not yet
have attained. In England it has long been an argument against all
schemes of graduation and differentiation of the income tax that we
thereby lose the great hold over the would-be evader which is given
to the tax-gatherer by collection at the source. And yet graduation
and differentiation have been introduced without any sign of loss to
the revenue, and during the war the British Treasury has gone a step
further and issued a loan the interest on which, so far as it is held
by registered or inscribed holders, is to be paid without deduction of
the tax, the holder being left to include it in his own declaration of
the extent of his liability.

The fact that if the income tax were worked on these lines everybody
who was believed to be within its scope would be obliged to make a
declaration of his income would be a drawback in the eyes of those who
still object to the “inquisitorial” requirement implied by it--that the
State should know the details of everybody’s income. This old-fashioned
objection is, I think, out of date. As it is, the majority of British
income tax payers have to declare details of their incomes, either
in order to secure abatement, or differentiation, or for super-tax
purposes. Seeing that the alleged “inquisition” is already applied to
so many, there would be little or no hardship in clapping it on in all
cases, as was actually done in 1798.[27] Like all the other suggestions
made above, it is only a further development of a principle already
recognized and acted on in England.

This is true even of the proposal, though it seems at first sight
revolutionary, that the tax should only be imposed on that part of the
income which is spent instead of on what is earned. This principle is
already recognized in England in the case of life insurance, and it is
hard to see why it should not be applied to all other forms of thrift
into which the taxpayer likes to put his savings. That income tax
should be so imposed was urged, over half a century ago, by John Stuart
Mill, and the suggestion also has the authority of Professor Pigou
behind it, though he admits that there are technical difficulties to
be overcome.[28] These difficulties are obvious enough, until the day
comes when every citizen can be trusted to make an honest declaration,
or when at least--as may be the case now--the general level of honesty
is high enough to ensure that the amount of evasion by tax-cheaters
would be small enough not to count. Such an arrangement would, of
course, carry with it its contrary; if the tax were not imposed on the
net amount invested, it would have to be imposed on the net amount of
any investments realized in those years in which the taxpayer sold out
more than he invested; because otherwise any one could escape the tax
by investing all his income in one year and selling the securities
in the next. If the thing could be worked, its effect in cheapening
capital, increasing the capital fund of the country, and so adding to
its power to produce the good things of the earth, would be excellent,
and it would be an equitable set-off to put against the high
taxation now imposed in England on what is called “unearned” income.
It might be possible to do it by means of evidence in the shape of
stockbrokers’ contracts, and certificates from lawyers in the case
of investments in mortgages. The thing is not necessarily a pedantic
aspiration on the part of academic dreamers, for I have heard it urged,
not only as a good thing if it could be done, but as a good thing
that could be done, by a very practical man of business; and if the
ingenious taxgathering experts were to decide that it was worth doing,
they could probably devise the ways and means.

The suggestion that the income tax should be paid by the individual
citizen and not by the companies which earn his income for him as
stockholder may be criticized, apart from its parting from the
principle of collecting at the source, as giving the power to companies
to escape taxation by refraining from paying dividends and putting
profits into improvement of their plant or into investments. This
criticism falls to the ground at once if the principle is admitted
that income tax should not be paid on saved money, because money that
companies put into depreciation is saved money in every sense of the
word. The economic progress of the community is helped by every dollar
that companies keep back from their stockholders and put into their
plant or invest well otherwise; and any encouragement that a fiscal
system can give to this process has something to be said for it, though
there may be countervailing drawbacks. If ever a time came when the
productive capacity of the whole world were fully equipped and there
were a real glut of capital, this need to encourage saving would no
longer exist. But we are not likely to see that happen just yet. There
would, perhaps, be a danger that some companies might try to distribute
profits by devious means--issues of bonus stock and so on--in order to
enable their stockholders to escape taxation. But the keen blades of
the Revenue Department could very well be trusted to deal faithfully
with any such buccaneering.

[Sidenote: INDIRECT TAXATION]

Still greater is the difficulty involved in making the range of the
income tax run lower and embrace all the wage-earners who are a
fit subject of taxation. In their case (in England, at least) the
precariousness of their earnings is much greater than in that of the
salary-earner or even of the more precarious professional workers,
such as the freelance journalist. Moreover, they cannot, thanks to the
education that has been given, or denied, them for many generations,
be expected to keep count of their earnings with any regularity, and
they would be likely to resent being pestered about them. It may take a
long time before they are ready to recognize that an income tax applied
more vigorously to wages would be fairer to them, if they would take
the necessary trouble to tackle it, than the heavy charge of indirect
taxation that they now bear. Economic education of all classes is the
only way in which the path of the tax-gatherer can be made smooth and
easy. The more this education grows, the faster will be the movement
towards graduated and differentiated direct taxation as the fairest way
by which the State can take our money.

It is sometimes said that the income tax punishes and fines the hard
and successful worker. This is so, but what system of taxation does
not? Whatever device you use, you can only tax those who are getting
and spending money. But a system which taxes more lightly those who
are earning than those who are getting interest on saved or inherited
money, which makes due allowance for family liabilities and taxes what
is spent and not what is saved, seems to give the hard and successful
worker a better chance than most others.

When once the beauty and fairness of graduation and differentiation
are seen and appreciated, it becomes clear that all indirect taxation
is to a certain extent unfair, because graduation and differentiation
cannot be applied to it. It might be possible, though very difficult,
to graduate indirect taxation by increasing its rate according to
the quantities of goods purchased; but this system, if applied to
necessaries of life, would evidently involve hardship by taking no
account of the taxpayer’s ability to pay. That the amount of taxation
paid by the buyer of a pound of tea should be the same (as it is
in England), whether the tea is to be consumed by one living on an
inherited million, or by a widowed charwoman with five children and
earning, with luck and when in good health, perhaps ten dollars a
week, is a gross fiscal blunder and a serious practical injustice. But
there is no way round it, and this unfairness is necessarily attached
to all forms of indirect taxation. It is true that, as Adam Smith
pointed out, taxes upon “such consumable goods as are articles of
luxury can be avoided by the taxpayer, as he is at liberty either to
buy or not to buy as he pleases.” But so many things, such as clothes,
are necessaries up to a point, and become luxuries when that point, so
difficult to decide on, has been passed, that taxing luxuries is not
nearly as easy as it is desirable. And even in the case of admitted
luxuries, such as alcoholic drink, the absence of graduation makes the
tax unfair. Why should I, if I drink a glass of beer in the course
of a country walk, pay no more taxation on it than a mechanic who
partakes of a similar indulgence after working eight hours in front of
a furnace? Ability to pay is quite different in these two cases, but
the amount paid is the same. And yet this inequity attached to indirect
taxation, that is so evident as soon as the principles of graduation
and differentiation are admitted, has been so slowly recognized, and is
still so much ignored, that it was once observed by the late Sir Robert
Giffen that “on the whole an equal amount of indirect taxation causes
perhaps only the half or the third of the privation and suffering
entailed by an equal amount of direct taxation.” Mr. Gladstone’s
ponderous joke, in which he compared the two forms of taxation to two
attractive damsels, to both of whom, “whether it be due to a lax sense
of moral obligation or not,” he paid his addresses impartially, is well
known to all students of the subject,[29] and only shows how little
the equities of taxation were studied in the days of that enlightened
fiscal reformer.

[Sidenote: STUPIDITY’S PRICE]

Nevertheless, if it be a fact that direct taxation hurts while indirect
does not, it is natural and inevitable that the practical politician
who has to raise revenue for the State should prefer the latter. If we
are really so stupid as to prefer to be bamboozled out of our money by
paying, on a necessarily inequitable basis, for government, while we
think we are paying for groceries or tobacco, instead of being assessed
directly according to our ability and the source of our income and
knowing exactly what we are paying, then we deserve what we get and get
what we deserve, which is unfair taxation. In a democratic country in
which all have political responsibility, it is clear that all, except
those who have only the barest necessaries of life, should pay taxes
and so have some share in fiscal responsibilities. To do this in a
manner which is specially designed to veil the fact that taxes are
being paid, is hardly facing the problem squarely; but until education
has gone far enough to make everybody ready to pay his fair share
by means of direct taxation, it is the only way that can be hit on.
The inequities connected with indirect taxes are manifold; not only
can they not be graduated or differentiated, but it is impossible to
impose them generally, in a country like England, because taxes on the
necessaries of life are clearly bad, from the national point of view,
in a community in which many people have not enough to eat. So that in
days before the war any Englishman who escaped income tax and did not
smoke or drink alcohol or tea contributed practically nothing to the
Government under whose protection he lived. Since the war, taxes on
cocoa, mineral waters, and entertainments have widened the fiscal net.
The proportion of British revenue contributed by indirect taxation has
steadily declined. In 1841-2 it was 73%; in 1912-13 it was 42.4%,[30]
and during the war it is generally assumed to have declined still
further, though it might be argued that the excess profits tax is an
indirect tax, since most of it has been ultimately paid by consumers
through the high prices that caused the excess profits.

Indirect taxation, being paid by those who buy certain articles for
consumption, has one great advantage, which justifies its position in
England’s fiscal system until such time as she is able to impose income
tax only on that part of the income which is spent. It hits us when
we spend and not when we earn or save. In time of war, when there is
not enough labor and energy to do all that is needed for the fighting
forces and for the export trade and for providing necessaries, any
tax that checks individual spending, or takes part of the sum spent
for the Government, is clearly useful and beneficial. And this is
almost equally true in time of peace, for then also wasteful spending
is economically unsound, checks the material progress of the nation,
makes the hard lot of the poor still harder, and lessens the demand
for labor.[31] So that if only we could graduate and differentiate
indirect taxation, it would have advantages over direct as the latter
is at present imposed. As we cannot, it has to be left in its present
unsatisfactory state, pressing heavily, in England, on the poorest
consumers of such articles as tea, tobacco, and alcohol, while
patriotic ladies who give $15,000 for a fur coat in time of war pay no
taxation in the process except the penny stamp on a cheque. A graduated
invoice stamp on all retail purchases of $2-1/2 and over is a way round
this problem, but there are many practical difficulties in the way of
it and if, as is likely, both shopkeepers and their customers united in
resenting and detesting the tax, it is highly probable that there would
be much evasion.

[Sidenote: IMPORT DUTIES]

Of all forms of indirect taxation, the worst, according to the pure
principles of taxation, is that imposed on imported goods of a kind
that is produced in the country, unless a home tax (or excise duty)
of the same amount is imposed on goods produced inland. Because the
effect of the import duty is to raise the price of the article and,
if the home producer is not similarly taxed, this means that part of
the higher price will go into his pocket instead of into the coffers
of the State. Nearly all nations, including the British colonies, make
free use of this method of taxation, because they think it pays them in
the long run, or think it necessary to the dignity or security of the
State, that certain industries should be thus protected at the expense
of the consumer; or because they hope thus to maintain the standard
of comfort of their wage-earners. Some people think that when the war
is over England also will adopt the system of a protective tariff. We
shall see. It is beyond the scope of this work to enter on this highly
controversial ground. Every one will admit that, if Protection is the
only or the best means of keeping alive in the country an industry that
is essential to national safety, then the most bigoted Free Trader
must agree to it. It must also be admitted that many great, rich
nations--including England’s richest enemy and her richest ally--have
flourished under Protection. On the other hand, it warps and hampers
trade, as a whole, and introduces an artificial complication into a
matter which is naturally quite complicated enough; but perhaps the
strongest argument against it is its tendency to make questions of
taxation, especially in a democratically governed country, an unclean
welter in which politics and business cover one another with dirt.




                               CHAPTER V

                  THE LIMITS OF GOVERNMENTAL SPENDING


So far we have considered the means by which the State takes our money
from us for public purposes--

  (1) By borrowing it, and then taxing us to pay the lenders;

  (2) By diminishing the buying power of our money by increasing its
  volume, with or without the help of bankers;

  (3) By taxes.

There is yet another way by which some very clever people who have
studied the question with great care and diligence think that the State
might earn a great revenue, and that is by gathering money from us that
we now pay to private undertakers of enterprise, and they believe that
the State would do us a great benefit at the same time by giving us
better service than these private undertakers. And many very earnest
and high-minded people, who hate the waste and ugliness involved by the
competitive system, have long believed that, if the work of growing,
making, and distributing the goods that we need were in the hands of
the State, all the miserable squalor that blots our economic system
might be washed away, man’s labor would be made much more effective,
and we should all of us, instead of wasting most of our lives in a
chaotic struggle to earn our livings which ends in ill-spent affluence
at the top with degraded destitution at the bottom, be free to live as
civilized human beings; with time and energy to bring out all that is
best in ourselves and others, and to enjoy the endless store of joy and
beauty that Nature ever spreads before us, often to be buried under
the mass of moral and physical ugliness that is heaped over it by our
misguided efforts to better our lot.

[Sidenote: WAR’S LESSONS]

If these views are right, they have now a better chance than ever
before of winning their way to action. War has shown us, first, how
astonishingly great is our power to make and do things if we really
want and mean to. Man has put all the prophets wrong who said that a
great war could not last more than a few months, by proving that he
could concentrate his energies on destruction with results that have
appalled and astounded us, while at the same time producing all that
was required for his material welfare; so much so that during the
first two years of the war the general level of well-being in England
was actually improved, owing to the more even distribution of the
output, which was an economic incident of the war; so great was her
margin of unused productive power and so great was the proportion of
her productive power that was put into turning out things that were
not necessary to the nation’s welfare. Secondly, the war has shown how
short-sighted it is for any great and rich nation to allow a large part
of its population to be stunted in mind and body. The voice of the
social reformer is now raised in harmony with that of the recruiting
sergeant, who wants sturdy men for the Army, of the employer, who wants
strong and intelligent workers and of the statesman, who wants a nation
behind him every member of which can understand the tremendous issues
for which we are fighting and see and act on the need for the measures
taken to secure victory. Never has there been a time when it has been
seen more clearly that a nation, to be strong, must be strong from top
to bottom. In other words, the war has shown us how much we can do and
how much needs to be done. But the question still remains, whether
what needs to be done can be best done by the development of the
individual’s sense of national duty in work and spending, or by handing
over to the State a continually growing share of the task of producing
and distributing.

At a time when a brighter era is undoubtedly dawning for mankind,
though it is only too possible that much turmoil and struggle may
yet lie between us and its achievement, there seems to be something
squalid in dwelling on the purely material side of the matter. After
all, the human soul is the only thing that really counts. If everybody
were pleasant to live with, all other things would be added unto us;
if we were all honest and kindly and courteous and fair-minded and
intelligent and unselfish, there would be no need to fash ourselves
about output and distribution, because we should all be doing our
best to make things better, and all these sordid problems would solve
themselves. But as things are, material considerations are of the
greatest possible importance, because it is so much easier for the
necessary qualities to be acquired by people who are not expected
to spend most of their lives in trying to get a better share of the
world’s goods than their neighbors. If we can produce plenty for all
and can prevent people from believing that getting more than plenty
for themselves is the chief object of life, then there would be some
chance for the rudimentary and atrophied human soul, which is now often
treated very like the vermiform appendix--ignored if possible, and if
not, cut out.

If, therefore, it is the fact that, by handing over great industries
to be worked by the State for profit, we can make the State a great
revenue earner, and at the same time do away with some of the
competition that is a source of much waste and mendacity, without
thereby producing a system of organized and hidebound efficiency that
would kill all freedom and initiative, it is clear that we shall be
relieving the taxpayer’s burden and perhaps clearing a way towards a
social system that will stand daylight better than our present one.

[Sidenote: A FABIAN SCHEME]

A great scheme of nationalization has been put before the British
public by Mr. Sidney Webb and his Fabian lieutenants, in a book,
already referred to, called _How to Pay for the War_, published in
1916. They propose to increase very greatly the scope of the activities
of the Post Office, making it do much of the work that is now done by
bankers, and to nationalize the railways, the coal industry, and life
insurance; and they urge, with a wealth of detail that is evidently
the result of laborious investigation, that, if these things are
done, the public will get a better and cheaper service, the workers
employed will get better treatment, and the State will earn a revenue
that will supply a mouth-filling number of millions for paying off the
war debt. This attractive argument, of course, is only a development
of the Socialist contention and an application of it to the needs of
the moment; and for this reason will be refused a hearing by many to
whom the mere name of Socialism is a terror. But a little later, as
if to show how widely and in what unexpected quarters the idea of
collectivist enterprise is being stimulated by war problems, there
arises a new portent in the British economic sky in the shape of a body
called the Empire Resources Development Committee, which also wants to
help to pay off the war debt by means of State enterprise in industry
and production, chiefly applied to overseas enterprise, though one of
its manifestos also includes the coal and light and power industries
at home among the means by which the after-war debt charge can be met
without anybody having to pay it; because the State will be able to do
business so cleverly that it will find the money out of net profits.
The really interesting thing about this Committee is that it bristles
with names that have been hitherto renowned for Imperialist rather than
for Socialist zeal, such as Mr. Rudyard Kipling, Sir Starr Jameson,
Lord Grey (not the late Secretary for Foreign Affairs), Lord Selborne,
Lord Desborough, and Mr. H. Wilson Fox, M.P., a distinguished officer
of the Chartered Company of British South Africa; and with them is Mr.
Vassar-Smith, the highly respected chairman of Lloyds Bank. That names
such as these should be found on a manifesto advocating what one used
to think was pure Socialism shows at least how people’s minds have been
shaken up by the war. The gist of their contention is that the immense
latent resources of the British Empire can be worked for State purposes
and under State auspices in such a way that we shall be able to “lift
from the peoples of the Empire the burdens caused by the war.” And
they, like Mr. Webb and his colleagues, think that the State can not
only perform this financial feat, but at the same time cheapen the cost
to consumers of articles that it provides and distributes.

[Sidenote: A LARGE ASSUMPTION]

It is a most alluring prospect and, if there is any chance of its
being realized, the most bigoted Individualist will hardly let his
dislike of State enterprise stand in its way. But is it not an enormous
assumption to suppose that the State can manage an enterprise with
so much more success than a private undertaker that it can afford to
buy him out, then provide a better service or a better article, pay
everybody better, and finally make a thumping net revenue? In the case
of new Imperial enterprises, there might be no one to be bought out,
though vested interests sometimes are discovered in the most unlikely
corners when a chance of compensation arises. The Imperial Development
Committee expressly states that the proposed enterprises should not be
managed by Civil Service Departments; but it does not explain how the
managers can help becoming civil servants and so being involved with
the attributes of those who work the State machine, so admirably within
certain limits, but not so admirably when it is a matter of conducting
business enterprise at a profit and with satisfaction to customers
and employees. They make a profit out of the Post Office? Yes; but
in discussing the tangled question whether what Englishmen pay for
postal service should be considered as taxation or payment for services
rendered, at least one distinguished economist has decided that postal
revenue is taxation only in so far as they pay more for this service
than we should if it were managed privately. Every one agrees that it
is impossible to gauge this amount, but no one seems to doubt that
it exists, and that postal facilities would be cheaper if they were
provided by private enterprise. Mr. Harold Cox, that stern, unbending
foe of State enterprise, dealt faithfully with the proposals of the
Imperial Development Committee in an editorial in the _Edinburgh
Review_ for April 1917, and incidentally gave two examples of cases in
which the State had taken over profitable enterprises and had totally
failed to work them at a profit:

[Sidenote: A DOUBTFUL POLICY]

  “In 1870 the State acquired possession of the electric telegraph
  system of the country, which had been built up by various private
  companies. The purchase was recommended to the House of Commons as a
  splendid bargain for the State. The permanent officials who prepared
  the scheme assured the House that the whole of the capital cost would
  be repaid in fifteen years out of profits and that after that period
  there would be an ever-increasing revenue to relieve the burdens of
  the taxpayer. That was the promise. What actually happened was that
  the whole of the profit disappeared after the second year of working
  by the State; that year by year the financial position has grown
  worse, till in the last years of peace the telegraphs were costing
  the taxpayer a sum which cannot be put at less than £1,400,000 per
  annum.

  “Meanwhile, the telephone had been invented. During many years the
  State, in order to protect its telegraph monopoly, did its utmost
  to stifle the development of the new invention. Finally, the State
  bought up the telephones, completing the purchase in the year 1911.
  Again there were the prophecies--though in a somewhat minor key--of
  a lucrative bargain. These prophecies have gone the way of the old
  ones. The whole of the handsome tribute of over £350,000 a year,
  which the National Telephone Company was gratuitously paying to the
  State, vanished at once, and within three years the income collected
  by the State barely covered outgoings.”

With these actual examples before them Englishmen may well hesitate
before embarking on a large policy of State enterprise, especially if
it is to be directed to the provision of necessaries of life such as
food and coal. Posts and telegraphs and telephones hardly touch the
life of the very poorest, and though if they are bad and dear they are
a hindrance and burden to business, their extra cost is a small item
in the expense of industry; but it would be a different matter if the
actual cost of living were raised through an attempt at revenue-earning
by State enterprise in a country in which the test of experience has
shown it to be dear and inefficient.

Nevertheless, we have no right to shut any door on a possibility
of economic reform. We know that there are countries in which the
State can manage some enterprises well and profitably, and even in
England certain municipalities have earned good profits for their
ratepayers and also served their customers well with comparatively
simple businesses, such as tramway transport. It may be that Government
departments, like the rest of us, have learnt much from the war and may
now be able to tackle problems of enterprise with a new freedom and
success. Strongly divergent views are expressed on this point, and no
one who has not been in touch with the facts has any right to be sure
about it. Some say that the British Munitions Department has been a
miracle of official competence and success; others that it was a costly
chaos, only saved by the efforts of the business men, trained in the
school of competitive enterprise, whom it called in to help it. But
since there is a doubt and a new atmosphere, and since imaginative folk
with big new ideas want to give England a lead, there seems to be no
reason why they should not be allowed to try an experiment on a small
scale, to be widened if the experiment succeeds. Freedom and individual
initiative have so long been the life-blood of her national development
that one is loth to see them encroached on even by the most efficient
form of machine-made bureaucratic enterprise; and the ideal of progress
through the improvement of the individual, and a widening and deepening
of his sense of national duty, seems to be a much higher and more
hopeful one than through the expansion of State regulation to a point
which implies the crippling of the soul of the citizen. Some of us hope
that when the war is over we shall get rid of Government control as far
and as fast as possible, except where previous experience had shown
it to be necessary in the interests of the weaker parties to economic
bargains.

  “My experience [said Sir Alfred Booth to the Cunard Company’s
  shareholders in April 1917] of Government control has only served to
  convince me more firmly than ever that individual enterprise is the
  only spirit which can quicken the dead bodies of capital and labor
  into life.... But I am not at all alarmed. When the war is over,
  commercial freedom will win in England just as political freedom has
  won in Russia, and we shall be quite content to leave the bureaucrats
  and the Romanoffs to cultivate their roses together in some suitable
  rural atmosphere.”

[Sidenote: THE DOUBTFUL FUTURE]

But with taxation what it will have to be, all is fish that comes into
the net, and if the State can learn to produce and distribute better
and more profitably than private enterprise, no prejudice should stand
in its way. But it ought to win its spurs, if it can, in a fair field
and not with the support of privileges and monopolies and subsidies,
still less with the help of tariffs.

[Sidenote: THE IMPORTANCE OF TEMPER]

Apart from this possible source of revenue, concerning which one is
justified in doubting whether it will ever be realized and in feeling
sure that in any case it will be slow in growth, taxation is the
means by which the State will have to divert from our use so much
of our annual output of stuff and work that has to be devoted to
national purposes. As to the extent to which it can do this, there are
conflicting opinions. Some say that, owing to the enormous weight of
the after-war debt charge and our impoverishment by war, it will not,
for years to come, be possible to find any money, that is divert any
part of our output, to purposes of social improvement. On the other
hand, there is the opinion, which the huge figures of our war spending
have helped to stimulate, that now that we have learnt to think in
millions and in hundreds of millions, the State will never again be
checked by any consideration of a few millions more or less in the cost
of any reform that is accepted as needing to be done; and that the
reformer will henceforward have a bottomless purse to draw on since he
will always, when the war is over, be able to say, “What I ask is only
the cost of one day, or one week, or one month--as the case may be--of
the late war, and just consider how much good it will do!”

As to the first and pessimistic view, we cannot know how far it will be
right until we know how much capital equipment will have been impaired
and how much is owed to foreign nations by the time the war is over.
If by the destruction of ships and the depreciation of industrial
plants and of the soil’s fertility, the State’s output is seriously
diminished, and if at the same time, owing to borrowings abroad and
sales of securities, the country has a much smaller sum to receive
every year on balance from foreigners in interest, which comes in the
form of imported goods; then the total income, in the shape of goods
produced at home and received from abroad, will be less, and any part
of it diverted to national needs will involve a greater sacrifice than
before. In so far as it is held at home debt involves no absorption of
the national output, but only a transfer of part of it, by taxation,
to the use of certain members of the nation who hold the debt. It is
therefore only necessary to be sure that the taxation involved by it is
imposed on the people who ought to have subscribed to the loans. Then
those who did their duty in subscribing will get their taxes back,
those who pinched themselves and did more than their duty will get more
than their taxes back, and those who did not do their duty will get
nothing back, which is just as it should be. This arrangement is easier
to describe as desirable than to put into practice, which is one of the
objections to finance by borrowing.

But even if the State’s total income, in goods produced at home and by
its debtors abroad, is materially less, which has yet to be proved, it
does not follow that the amount of it available for national purposes
will be less if we are resolved to make a greater sacrifice for them.
Everything will depend on the temper and state of mind with which we
set to work and turn out goods in the first place, and in the second,
regard the claim on our work that the State may make for purposes
of national development and improvement, such as health, education,
housing, and the dozens of other things that, in the opinion of some,
need to have work put into them. If we go to work in a bad temper and
have strikes, lock-outs, and quarrels about methods of production and
distribution of the output, then it is likely that our output will
give us little chance of drawing on it for social reform. And there is
also another enormous question to be answered. Shall we have to spend
in future a much greater amount on defense, or will swords be hammered
into plowshares? The hope, which was so strong in the early days of
the war, of secure peace and freedom from the burden of armaments
has lately looked sickly, but the intervention of the United States
has certainly revived it, and it seems now at least possible that the
League of Honor may ripen into a League of Peace that will rid mankind
of war’s nightmare.

[Sidenote: NO SHORT CUTS]

These considerations apply also to the optimistic view which holds that
we shall never again be stopped by lack of money. It is only true if
the taxpayers are persuaded that the objects for which they are asked
to make sacrifices are a national need and ought to be paid for out
of the national purse. If a people makes up its mind that a thing is
worth paying for, it can and will pay for it, up to the extent of half
its income and more, as the war has shown. But this cannot be done
if the burden of taxation is unfairly imposed, or if a considerable
minority--especially if they are those who are asked to pay most--are
opposed to the objects for which taxation is raised. “Taxing the rich”
looks easy, but it cannot be done indefinitely unless the rich pay
willingly. The taxpayer’s power to strike, referred to in Chapter I, is
still a real one. If the rate of taxation takes more from the producer
and from the owner of accumulated or inherited wealth than they believe
to be just, then the incentive to production and accumulation will be
checked, and the tree which bears the plums will have been killed, or
weakened in its fruitfulness. For national defense every one is ready
to have his money taken, and in war-time there is much less tendency
than usual to grumble about the manner in which the money is raised.
For national improvement and for what Mr. Lloyd George once called a
“War Budget against poverty and squalidness” there may some day be the
same cheerfulness and readiness on the part of those who pay. It may
be that war will have taught them this lesson. If so, in spite of all
its horrors, the war will have opened the way to a great stride forward
along the road of progress. But there are no short-cuts on this road,
and only by the education of the individual to a just view of his
duty as a producer and worker, and of the claim of the State upon his
product for national needs, can full use be made of wealth for purposes
worthy of any nation that intends to be a leader in human progress.




                               FOOTNOTES:

[1] _Public Finance_, p. 42.

[2] _A General History of Europe_ (350-1900), by Thatcher and Schwill,
pp. 9-10.

[3] Seligman, _The Income Tax_, p. 122.

[4] _Herbert Spencer_, by Hugh Elliot.

[5] _Money and the Mechanism of Exchange_, Jevons, p. 64.

[6] _Study of Sociology_, ch. vii, p. 160.

[7] _Critiques and Addresses_, p. 10.

[8] Quoted by Messrs. Gide and Rist, _History of Economic Doctrines_.

[9] Speech at Baltimore, April 18th, 1864.

[10] Since this chapter was written I have been fortified by seeing
its main contention endorsed by Professor Sprague, of Harvard, in an
article in _The Economic Journal_ for April 1917, which embodied an
address given by him to the American Economic Association.

[11] Chisholm’s _Analysis of the Public Accounts_, p. 509.

[12] A New York banker’s circular, dated April 14th, 1917, says:
“Posterity will chiefly benefit from the struggle for freedom and
should pay its part.”

[13] Written in March 1917.

[14] _Meaning of Money_, pp. 64 _et seq._

[15] These dates are chosen to fit those of the balance sheets of the
other banks, which are only published half-yearly.

[16] _Meaning of Money, loc. cit._

[17] A report of the Committee of Public Accounts quoted in the London
_Economist_ of August 26th, 1916, p. 357, shows that the British
Admiralty and the War Office were buying against one another.

[18] _Wealth of Nations_, Book V, Chap. II, Part 2.

[19] _Political Economy_, Part VI, §§ 588 _et seq._

[20] Book V, Chap. I, Part II, “Of the Expense of Justice.”

[21] Chisholm’s _Analysis_, p. 424.

[22] _Ibid._, p. 416.

[23] Seligman, _The Income Tax_, p. 132.

[24] About sixty cents.

[25] Seligman, _The Income Tax_, p. 103.

[26] The full text of the Fabian suggestion is as follows:

“What is suggested is that, so far as incomes not exceeding £2,500
a year are concerned, whether earned or unearned, it should be open
to any person assessed to ask that all the taxable receipts of all
the members of his family, living in the same household with him and
sharing in its expenses, or maintained elsewhere wholly or partially
at his expense, should be aggregated for assessment as a Family
Income; and that Family Incomes so arrived at should, for income tax
purposes, be divided by the number of members of the family (husband,
wife, children, stepchildren, father and mother, or grandparents only)
_actually maintained therefrom_. There could then be allowed from the
combined Family Income, in respect of each person maintained therefrom,
whatever Abatement each portion of such income would justify if it were
that of one person only.”--_How to Pay for the War_, pp. 237-8.

In order to prevent the suggested abatements and allowances from
exempting too many people altogether from income tax, these writers
suggest that “nothing in them should be allowed to reduce the tax
actually payable below the minimum of, say, a penny in the pound on the
income prior to the deduction of any abatement or allowance.”

[27] “All persons being required to make returns of the whole of their
income, from whatever source derived.”--Chisholm’s _Analysis_, p. 425.

[28] _Wealth and Welfare_, p. 371, 2.

[29] Seligman, _The Income Tax_, p. 165.

[30] _British Budgets_, by Sir B. Mallet, pp. 105 and 493.

[31] I have developed this platitude in a book called _Poverty and
Waste_, published in 1913.




                          Transcriber’s Notes

 Perceived typographical errors have been silently corrected.

 Odd-page headers have been rendered as sidenotes and moved to
 appropriate locations.

*** END OF THE PROJECT GUTENBERG EBOOK 79609 ***