Chapter II. Money Taken By Borrowing

CHAPTER II MONEY TAKEN BY BORROWING I 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 carryon 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 ser vices have to be supplied out of current production at horne 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 suffi1 Since this chapter was written I have been fortified by seeing its main contention endorsed by Professor Sprague, of Harvard, in an article in The Economic Journal for April 1917, which embodied an address given by him to the Alnerican Economic Association.

3 26 1iIONEY TAKEN BY BORROWING [CHAP. ciently 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 tb at k:bour and energy rnay be set free to work for it ; -and this it does by taking money from individuals in taxes, which it can only im pose on its own citizens, or in loans, or by reducing the buying power of individllals through the pro cess known as inflation, which consists of unduly increasing the volume of the currency and so debasing: its value and raising prices. 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 pro mises 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 tha t 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 taxa tion, used to write to people of property and / II] LOANS WITHOUT INTEREST 27 demand a sum from them· on loan; the latest ex ample 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, I604, were sent to the principal noblemen and gentlemen.in all the counties of England, and excited great and general dis.. satisfaction.Their form was as follows: it By THE KING: It 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 avoide it in the whole course of our Government: Yet such is our estate at this time in regarde of great and urgent occasions faIne 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 pro vide 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 28 MONEY TAKEN BY BORROWING [CHAP.

H The loan whereof we do desire to be untill the Faure and Twenty day of March which shall be in the yeere of our Lord God r605, 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 suc cessors for the repaiment thereof ... upon the deliverie of this our Privie Seale unto our sayd receipt." 1 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 re'quisition, 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 l;1appen. A rate of interest is universal, and a definite promise of repayment is very usual. It is notably absent, however, in the case of our own Government's 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 r888 to 21% and in 1903 to zt%. 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.

When a Government raises money by borrowing t Chi~holm's Analysis ot,the :public Accounts, p. ~09..

II] ADVANTAGES OF 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 pro mising 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 moneyfrom the citizens of other countries. Let us leave this considera tion on one side for· the time and see \vhat 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 over 'Nhelming. To the public the advantages are equally clear and weighty, because the public thinks· tha t 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.

This view has been dinned into the public ear by economists, financial writers (among whom I must plead guilty to having done my sn1all share), and business men. 1 But it is largely a delusion. 1 A New York banker's circular, dated April 14th, 1917, says: II Posterity will chiefly benefit from the struggle for freedom and should pay its part." 3* 30 MONEY TAKEN BY ,BORROWING [CHAJ'. 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 con sumed 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 can not be produced by posterity. Our army cannot eat the bread that is going to be sown in t930, 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 \ve sell part of our accumulated wealth, in the form of securities, to Americans, in order to pay for goods wanted for the ,war, or when we borrow in America and contract to pay Americans interest in the meantime and their money back some day, 'we thereby arrange that a larger share of posterity's wealth will go to America and a lesser share to us; but the sum of posterity's wealth will not thereby be affected, and this only happens when we borrow from, or sell securities to, II] GILDING A PILL 31 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 Government wants money and offers us a beautiful security, with 5% interest, at 95, repayable in thirty years at par, and we calculate that these terms give us a net return of 5t%for our money. 'Vith 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 millions to the Govern ment, 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 we have thereby handed to posterity the business of paying for 1,000 million pounds' worth of the war. We have paid now by handing over those 1,000 millions. In return for them we re ceive from the Government securities, that is, promises to pay interest and repay capital, and the Government can only meet these promises out of our pockets. These securities are assets that we hold, in return for our money, but they are also liabilities that we as taxpayers have to meet; we shall only get interest on our money as the tax payers pay it, and we shall only get our money back in the same way; and we are taxpayers.

32 MONEY TAKEN BY BORROWING [CHAP. But what of the man who did not subscribe to the loan? . 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 favour of the borrowing system, for it would rilake patriotic people pay and leave the others free to spend money on themselves, or invest in other securities at higher rates. But, in fact, those who do not subscribe 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 s1lare 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, an9. after wards 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. \Vhen a Govern ment 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.

-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 win have ~othis money back~ alld somebody el~e II] THREE TIMES OVER 33 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 still pay interest on the debt, and perhaps money for its redemption, all of which will go into the pockets of the debt-holders, and none 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 a Govern ment sets up a process by which the war 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 Governlnent finally hands the money back (Plus, perhaps, a premium on redemption) 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 £300 a year. The Government offers a 5% loan and they each, being equally patriotic, subscribe £roo; this produces 1,000 millions, and each family has £100 less to spend that year, because its £100 has gone ipto the hal1g$ Qf the Government. They will have 34 J\fONEYTAKENBY BORROWING [CHAP. the interest to spend? By no means. In order to pay them their S% the Government will have to raise So millions in taxes (or in another loan), that is, take £5 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 Gov ernment fixes this Sinking Fund at 1%, it will have to take another £1 from the pocket of each citizen, and so they will pay themselves back their capital.

If, in the meantime, anyone of them sells his £100 stock to a neighbour, he will have got his money back, but he will still as a taxpayer have to pay his £6 a year till the loan is e;xtinguished, so that the effect of getting his money back will be that he will be paying his neighbour 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 book-keeping expense, by submitting to taxa tion at the time when the war is in progress and writing off the cost of the war at once.

II] ELUSIVE POSTERITY 35 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 gerieration 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 borrow ing 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 what ever it produces it consumes. What we can do, and are doing, is to lessen the power of posterity to produce,because we shall hand on to it a less well-equipped industrial and agricultural organIza tion, 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 we were estimated to be saving and investing at home and abroad some 400 millions a year, so increasing either the power of our own country to make and grow things for us, or the debt of other countries 36 l\!-ONEY TAKEN BY BORROWING [CHAP.

to US on which they paid us jllterest in the form of goods and services. During the war' nearly all oursavi1!gs ,go into furnishing victory for the cause of liberty and progress and protecting our property against external attack. On _the oth~r hand l we Jnay fairly hope to hand on to posterity a better organiza tion 'and a better spirit than we should h~ve bequeathed to it, if we had nbt learnt many useful lessons from that stern schoolm'aster the God of Battles, who has chastened and chastised us for our 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 oJ the borrowing policy. If we compare first the case of t)yo people with the same income lending unequal amounts, we find two people with fr,ooo a year, of whom Jones puts £50 into the loan and Sm~th £soo.They will both have their taxes increased to the same extent 'to pay interest on the loan and provide a. Sinkin~j Fund to redeem it; but one will get £2 IDS. a year (less income tax) in interest, and theotheJ; £25. If the circumstances of both are the same, this is quite just, because Smith is :t:ewarded after the war faT the effort \ that he m~q.e 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 taxa tion th%t the existence of the war debt will neces ~itate. In the case bf Jones, who continued to II] AN EVIL AFTERMATH 37 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 th2.n the extra taxes that he will pay. So that in cases in which conditions are equal, the interest payment, by j"ewarding 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.

But if we find that Jones was educating eight 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 bene fi ting 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 etnphasizes the inequities of our system of taxation. If, then, borrowing has this merely stupid effect that the payment for the object which is secured is carried out thrice, 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 Govern ment to be paid back again to themselves, what are the advantages about it which make it so popular with practical politicians and the public \yhQm they have to keep in a good temper? It 38 :NIONEY TAKEN BY BORROWING [CHAP.

is simply this, that the borrowIng system makes us feel happier and keeps us in a good temper because \ve. see the security that we :g,ave received and the interest that we get on it, and forget that the interest comes, wholly Or ·.partly, out of our pockets and that-·if the loan is paid back it will be paid in the same way. When we subscribe to the loan we either do so out of money that we borrdw~a process· that will be considered in the next chapter when we corne to deal with the ques tion 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 un necessarily 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 )Var and so pay for the war as it goes on.

If we do not subscribe but continue to spend as usual, tpen the taxation involved in order to pay interest and redempt~on of the loan comes out 6f our pockets and none at it comes back. So tha t 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 get~ing none of it back in interest or repayment. If we e;xercise tbis choice and die irnmediately II] ESCAPE BY DEATH 39 after th,e loan has been brought out, we apparen t1y 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 }oan for war or any other purpose, all the taxpayers immediately become liable to pay interest on it, and anyone 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 we are still! as a nation, paying for the cost of the war that our ancestors waged against Napoleon more than a hundred years ago. But this is not so. As taxpayers we 40 MONEY TAKEN BY BORROWING [CHAP.

pay interest on the debt then raised. But we pay that interest to those of us who hQld the debt by inheritance or otherwise. As a nation we enjoy now all that we produce, and the vagaries of our ancestors only affect the manner in which our pro duction 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. 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 q. loan instead of by taxation the Govern ment escapes the unpopularity which a great in erease 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 com..

munity, have to find by paying taxes. The system thus has this advantage in a com..

II] DEBT AND WEALTH 41 munity 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 Govern ment. But here comes in a great 'difficulty, as ~ "ve shall see when we come to the question of taxa tion. 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 sy'stem of financing Government spending by loan tends to accumulate more and more wealth in the hands of those who are well off. The subsequent exist ence of a national debt, held by the citizens, 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 there are some big ledgers at the Bank of England in which are inscribed the 4 42 MONEY TAKEN BY BORROWING [CHAP. names of certain citizens who have to receive part 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 de~t-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 f,ound 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 \vork 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.

tyhatever posterity produces it will consume ~ but the fact that certain members of posterity, descen dants of those who paid on our account, will thereby have a prior lien on posterity's produce might have awkward results.

II] BORH.O\VINGFOR WAR 43 Since, then, the view that borrovving at hOlne 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 keep ing the public in a good temper at a time of crisis? I think it does, f~om 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 leasf suffi cient 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 (r) is easily raised, (2) is little if any hindrance to ind-qstry, and (3) produces a bene ficial effect on the consumption of the community. Moreover war" especially when on a stupendous 44 MONEY TAKEN BY BORROWING [CHAP. scale, is certain to be followed by a period of dis Iocation 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. (r) Taxation is more easily raised in war than in peace, for the obvious reason that, the nation being patrio~ally stirred by some cause affecting its honour 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 circum stances 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 be cause 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 neighbours too little, and partly because 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 the citizens, when they pay an extra price for II] TAXATION'S ADVANTAGES 45 their tobacco or tea, or draw a bigger cheque for the King's taxes, feel that they are putting some thing into the Treasury for a great cause, or for the national honour, or to C4 keep the old flag fly ing," or to (t help-the boys at the front II who are fighting for them, or just that q it's war-time,"

and there's an end of it. At such a time a Govern ment 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) Taxationis 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 horne 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 conse quently less likely to have his enterprise checked by the existence of high taxation. He is so likely to be able to take most of his taxes out of his cus tomers that, under such conditions, taxation weighs on him much less heavily.

4* 46 MONEY TAKEN BY BORROWING [CHAP. (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 labour and of stuff, and probably of coal in trans port-the result is that the Government and the indi vidual citizens compete against one another in a limited market and force up the price of every thing 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 borrow ing checks consumption just as efficiently as taxa tion, 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 f1,000 into a Government loan, he thinks he has got an asset and forgets that it also involves a liability. If f1,000 is taken from him in taxes, he is likely, if at all thriftily inclined, to try to put something away besides.

II] PENALIZING PATRIOTISM 47 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 R.A.M.C. officers, business n1en, mechanics and miners who forsake big profits and high wages for the pq.y of officers and pri vates, come back when the war is over and find that the comrades al1d competi tors whom they left behind ha~e made big investments in war loans, and that they, whose pay has enabled them to do little or nothing in this direction, will be subj ect 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 confi...

dent 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 48 ¥ONEY TAKEN BY BORROWING [CHAP. produced by home borrowing, will only go out of one pocket into another, but t~e 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 tin1e-as is quite likely if our rulers do not tax vigorously now-the great recovery in trade with which I hope that we niayastonish the world even more than by anything that we have done during the war, may be seriously impeded, especially if there is discontent and bad feeling in the co~ntry about the manner in which the burden of taxation is imposed. The Germans, who have raised,so far, a q-qite contemptible part of the war cost by taxa tion, are likely to find themselves seriously ha.-mperedwhen 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 nlake sacrifices for the war, or of its mere thoughtless following of a bad habit handed down by its predecessors. A well-informed' and benevolept despot, with a perfectly docile people, would s~e 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 n] THE BENEVOLENT DESPOT 49 which competes with that of his War ~v1inister, but also makes industrial recovery in peace more rapid and hearty, by the absence of afterwar 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 aftenvards 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 borrow ing 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 i t 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 ad... mitted that such enterprises are more costly, in most countries, when managed by Government, the 50 MONEY TAKEN BY BORROWING [CHAP. economic argument against their being so managed is strong.

Borrowing abroad, except for reproductive pur poses such as railway building, is so evidently Ie 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 ours in the present war. The volume of munitions and war goods required for us and for our Allies was so great that we had not the plant ready to provide them fast enough, so we had to buy them from neutrals. As our 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 we exported. So we were obliged to make these payments by drawing on our accumu lated capital and by pleclging our .future production. Some of our 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 us and by our fathers through the process ofinvestment abroad, that is by providing goods and services in the past and taking securities in exchange for them. These foreign investments stood us in good .stead since we were 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 we, as a nation, paid for part of the war's cost Qut of work done in II) BORROWING ABROAD 51 former years, by using it to induce foreigners who bought the securities to pay, during the war, other foreigners who were supplying us with goods and services needed for it. By so doing we deprived ourselves for the future of the stream of goods and services that we used to receive from foreign coun tries to meet the interest all, and redemption of, these securities that we had acquired in former years.

This process has very much the same effect as borrow ing abroad, which was another means employed by our Government for financing the war. For exalnple, when it raised a loan of 50 millions in America it, in effect, hired certain American investors to pay now for the munitions, etc., that we were importing; promising to pay them in future so much a year in interest. This interest we shall have to provide out of our annual production of goods and services. So that both these processes of financing, by selling secnri ties and by borrowing abroad, mean that we shall have to work harder in future to provide· for our own wants, for one reduces the payments that folk abroad have to make to us and the other increases the payments that we have to make to them. But it may be noted that the extent to which we have made use of these methods of paying for war is,sofar,1 roughly balanced by the loans that we have made to our Allies and Dominions.

1 Written in March 1917.