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.