ENGLISH WAR FINANCE
Protecting Trade and the Trader--How German Banks Paid--The English
Loan--England's Wealth--The Income Tax--More Taxes.
A giant Atlas bearing the civilized world on its financial shoulders
has arisen between the North and the Irish seas. That is the picture
that stands at the opening of 1915, where before Germany had endeavored
to stamp the label "Perfidious and degraded nation of shopkeepers."
Only the pencil of a Doré could sketch this giant and put him in
figures of proper relief as, aroused from his pastime of trade and the
acquisition of shillings, he summons with one hand the resources of the
empire and with the other passes them out to needy warring nations,
taking care all the while that the necessary dealing of exchange and
commerce have the least possible disturbance.
Kitchener says the war may last for two years, but he is making
preparations for three years, and must do this job so thoroughly that
no repetition will be required.
If it is war for three years, then this mighty financial Atlas of
England is preparing to write its name on promises to pay more gold
than all the money-gold on the surface of the earth today. And England
won't hesitate to do it if necessary--not for one moment.
How can she advance money to Russia, Belgium, France, and other
countries at war or just going into the war, and ask no foreign
assistance, no overseas help,--except to be let alone,--expand her home
trade and wages, pay with a lavish hand, and still pile up real gold
both at home and over the ocean?
The first answer is because she does expand trade; because she does pay
and pay promptly; and because she does protect her own trade.
The United States does not protect its trade or its citizens anywhere
in the world to-day. It shivers in war-time, and borrows of everybody
else when it has a panic of its own.
There is only one way to make trade, and that is to pay and protect.
England, through centuries of fighting to protect both trade and the
trader, has learned the way to the highest freedom in both trade and
finance.
Therefore, before this most Audacious War was set afoot England had a
very small stock of coin gold but a very large stock of gold
credit-bills.
For years England has held in her cash box from $1,800,000,000 to
$2,500,000,000 of the commercial credits of the world. With goods and
trade-honor behind these promises to pay gold, she had no need of the
metal but only of command of the seas, that her gold might come in when
needed. When the war broke out, $600,000,000 of these gold promises to
pay were of German and Austrian origin. The big London bankers who had
their names on the back of such acceptances could not in honor
underwrite any more commercial bills. They knew their capital was
involved in collection of those already out.
But Britain said the commerce of England must go on as well as the war.
The people who held these acceptances were promptly invited to turn
them into the Bank of England, which held the guaranty of Great Britain
behind it, and receive the money therefor; the discount rate after
maturity to have 2 per cent added thereto, 1 per cent to go to the Bank
for expenses and 1 per cent to the government for reserve fund to cover
any losses. Of such bills $600,000,000 were promptly discounted.
I hear that two banks, the London City & Midland with its $525,000,000
of deposits, and Lloyds' Bank, both refused to rediscount. They
believed the investments in commercial paper they had made were
perfectly good, and that they were as well able as the Bank to wait for
payment until one year after the war if necessary.
But to date more than half of these rediscounted bills have been paid.
It may be of financial interest to narrate how payments could be
accomplished when by the King's orders there could not be any "dealings
with the enemy" and payment to either side was forbidden by both. Yet
the Dresdner Bank and other big German and Austrian banks have to date
met fully one half their London obligations.
They were enabled to do this because their London branches were
independent institutions whose independence was recognized by the
British government. The London branches were thus liquidated,
collecting in and meeting their obligations at maturity, so far as
possible.
Liquidation in acceptances is one of the keys to the success of the
English loan. While England had the ability before the war to discount
$2,500,000,000 of acceptances, and with the present expanded base of
the Bank would, without war, have the ability to discount
$3,000,000,000, or three times our national debt, there is now no large
business offering. The discount credits can therefore be measurably
turned to the war-loan account. One of the biggest acceptance houses
in London told me that the post-moratorium bills, or the new
acceptances made after the moratorium, could not amount to more than
80,000,000 pounds, or $400,000,000.
With the liquidation on account of pre-moratorium bills and the absence
of new business I should estimate that the London money market was able
to take care of the 350,000,000 pounds loan put forth in November by
the government without much regard to the investing community.
With expanding trade and confidence, English investment interests can
absorb the major part of this huge loan before next summer, when
another loan of about equal size must be put forth, according to
present calculations. This second loan will probably be for three or
four hundred millions pounds sterling, bear 4 per cent, and issue at
par. The November loan was issued at 95 per cent and it was announced
in Parliament that the Bank of England would loan the issue price at
one per cent under the Bank rate.
That the loan was fully subscribed is not contradicted by the small
fraction of discount soon quoted on the full-paid loan. One could
fully pay the loan, taking the discounts on undue maturities and sell
at a fraction under 95 and still make a profit.
I believe the estimate of an annual English surplus for investment of
$2,000,000,000 per annum is far too low. This figure is upon the basis
that only about 20 per cent of the river of interest, dividends, and
profits flowing annually to British pocket-books is available for
reinvestment.
In the present war stress and with economy practised to-day more by the
capitalist classes than the laboring classes, the amount of money for
reinvestment should be far greater than this.
English finance will cut its cloth according to the pattern. If there
is only $2,000,000,000 per annum of surplus earnings to put into the
war, that money will be spent; and if England has 50 or 100 per cent
more, that money likewise will be spent, but spent so judiciously that
the largest possible sum from it is kept in channels of English trade.
The British Empire will work and finance the fight thus within a
circle, and right on its own base.
The surprising thing is that it can be called upon to extend financial
help to its allies. But everybody except Germany was caught absolutely
unprepared. The war was early on French soil, tying up the resources
of some of the richest provinces of France. Russia had so little
thought of war that, as I have previously explained, she had deposited
from her great gold reserve so that it had been loaned out on time and
therefore was not available for the start of the war. Hence we have
the spectacle of Russia gathering up 8,000,000 pounds sterling in gold
and sending it to the Bank of England and, on this basis, borrowing of
the Bank 20,000,000 pounds sterling.
Of course, this is good banking and good business and a good alliance.
The Allies are bunching their war orders and credits, and England is
entitled to hold the bag since she is carrying the financial burden.
England's war finance is not wholly measured in her expenses or loans
to other countries. In a single issue of a London paper you can count
daily reports of more than a dozen charitable funds connected with the
war-work. These funds range all the way from "Aid to the
Mine-Sweepers," "Gloves for the Soldiers," and the "Servian Relief and
Montenegrin Red Cross Funds" up to the "Prince of Wales's Fund."
This last was over $20,000,000 before Christmas. The suddenness of
this war may be illustrated by this fact: A friend of mine, who is
managing director of a big English concern, has assumed the
responsibility for seven years past of keeping in England one year's
supply of everything that his company was likely to require from the
Continent. This was at a cost to his company of many thousands of
dollars. With dogged determination he stuck to the same policy for
1914, although in January of that year it was clear to him that Germany
could not afford to go to war. While he was happy over his judgment,
he admitted in conversation with me in December, 1914, that in January,
1914, the outlook was less indicative of a general European war than it
had been for many years.
Thirty per cent of the workmen of his factory had gone to the war and
his company was providing 250,000 pounds sterling a year to maintain
the wages of the workmen at war up to the same amount as they would
receive if they had stayed at home. He said that in one of his
offices, of 80 men eligible for the work, 78 had enlisted, and, what
was wonderful, the women were glad to take up the heavy work abandoned
by the men,--something they would have refused to do in all ordinary
times. On the whole, the output of this concern and its efficiency
were materially increased, not diminished, by the war.
It is figured that troops at the front mean an expenditure of one pound
per man per day, and that English troops in training mean an
expenditure of not less than ten shillings per man per day.
The war expenses of Great Britain must thus be above one million pounds
per day and steadily increasing. Indeed, the best economic estimate I
have of the cost of the war to England is 500,000,000 pounds the first
year.
While the English declare that they are fighting for their children and
their grandchildren, they are not willing to leave to them the full
load of the war-cost, and gladly do they assume all possible burdens in
the present time.
The income tax, which began in 1842 at two pence in the pound, has now
been doubled from one shilling and three pence to two shillings and six
pence in the pound. This is on the average, and takes nearly one
eighth of a man's income. There are very great variations in this tax.
The rate I have given is the rate on dividends. Upon wages and
salaries the tax is somewhat less.
The income tax is also apportioned over a three years' average. The
supertax raises the contribution of the wealthy to one fourth of their
incomes, although on the average it is figured to take only an eighth.
It is expected that the income tax may be further increased, possibly
doubled, next year. I was not surprised therefore to find American
millionaires with houses in London returning to New York and making
sure of their American citizenship.
Every penny in the pound in the tax rate produces 2,500,000 pounds
sterling, or $12,500,000, nearly one half the national income tax of
the United States for 1913. Indeed, the English income tax for the
year ending March 31,1915, is estimated to produce 75,000,000 pounds
sterling, or about twelve times the income tax of the United States and
from less than half the number of people. In other words, the income
tax of Great Britain per capita is this year twenty-five times that of
the United States.
But still the United States is really in no need either of income tax
or of war-machinery. It is too late for the United States to prepare
for any contest with the one nation that goes to war over
tariffs--Germany.
After this war and a settlement of the Mexican situation, warships will
be for sale at fifty cents on the dollar. Germany will have no navy of
consequence, and England will reduce her present navy by at least one
half, since her expansion of late years has been forced entirely by
Germany.