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: