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they have little inducement to enterprise. Under such condi-
tions there will be little wealth produced for the government
to tax, and things are likely to go on from bad to worse.

In case there are undesirable businesses which the govern-
ment does not care to prohibit, or undesirable habits which
the government does not care to suppress, the repressive
power of taxation may be used. Men may then be made to
pay for their folly, or to give up their folly to avoid taxation.
In extreme cases complete suppression is doubtless better
than mild repression ; in milder cases, such as luxurious con-
sumption, ostentatious dressing, etc., the mildly repressive
effect of a tax is desirable.



CHAPTER XLIV
THE FINANCING OF A WAR

What is meant by the financing of a war. By the financing
of a war is meant the keeping of the National Treasury sup-
plied with money with which to purchase military supplies and
pay other war expenses. This problem should be kept distinct
from the physical problem of producing supplies and war
materials. The latter is a problem not for the financial expert
but rather for the industrial engineer, the business manager,
or some other expert in the organization and coordination of
the factors of physical production. While the financial prob-
lem is one of tremendous importance, it is not only less
important but also very much less difficult than that of pro-
ducing the supplies themselves.

Financial problems less difficult than problems of production.
Difficult as is the financial problem, all the factors are within
the control of the government, or at least of the people behind
the government. Consequently, if they fail in their attempts
to handle the problem, they have only themselves to blame ;
their failure cannot be laid to the physical difficulties or to
factors which lie beyond their own control. In short, the fail-
ure will be due to the stupidity of their rulers or of the people
who refuse to support a sound financial policy on the part of
the rulers. The problem of producing supplies, on the other
hand, especially on the part of a beleaguered country, may
depend upon factors which lie beyond the control of either
government or people. For example, the difficulties of the
South during the Civil War were on the physical side insuper-
able ; they were hemmed in by blockading fleets and invading
armies. On the financial side, however, their difficulties were



THE FINANCING OF A WAR 515

of their own creation. In other words, the difficulties in the
way of supplying themselves with horses, salt, nitrogen, and
a number of other necessaries were insuperable, but the diffi-
culties which they, as well as the Northern people, had in find-
ing money with which to pay for such supplies as they could
get were within their own control.

In most of our discussions of the problems of war finance,
too little attention is given to certain large elementary princi-
ples. The practical financiers are fully absorbed with the details
of the problem, and the financial writers in the ephemeral press
are more concerned with finding out what the people want them
to say, and then saying it, than they are in getting at the root
of the problem.

Speeding up the circulation of money. One large economic
fact which greatly simplifies the financing of a war is that an
increase in the rapidity of the circulation of money has, in all
essential particulars, the same effect as an increase in the
physical quantity of money. To double the speed of circula-
tion, for example, enables a given quantity of money to do
twice as much work. Analogies, though often dangerous, are
sometimes useful. A useful one is found between the circula-
tion of blood in the human system and the circulation of money
in the country. When increased muscular exertion calls for
increased supplies of blood in the limbs, it is not necessary
to increase the total volume of blood ; the need is met by in-
creasing the rapidity of the circulation. But in order that the
heart may send increasing quantities of blood per unit of time
to those parts where it is demanded, it must have means of
getting increased quantities per unit of time back again from
tne extremities ; in other words, the problem of getting the
blood back again is obviously as important as that of pumping
it out to the places where it is needed. The National Treasury
is confronted by a similar problem in time of war. It is called
upon to send out money in increasing quantities to pay the
enormously increased expenses of the government. In order



516 PRINCIPLES OF POLITICAL ECONOMY

that it may always have sufficient money to pay out for war
supplies at an extraordinary rate, it must find means of getting
it back again at the same extraordinary rate. Since all the
money not actually in the Treasury is in the hands of the peo-
ple, it is they who must be induced to return it to the Treasury
at this extraordinary rate. If the rulers can devise a plan for
doing this, and if the people are sufficiently wise, devoted, and
loyal to support the plan, there will be no difficulty in the
financing of a war. These are two very large " ifs."

More money not absolutely necessary. Another large fact
of even greater importance is that the country, as distinct from
its government, does not need very much more money in time
of war than in time of peace, except for the purchase of for-
eign supplies. So far as its domestic economy is concerned,
it needs only a little more. There are not many more men to
be hired ; there is not much more work which can be done,
because there are not many more men to do it ; and there are
not many more goods to be bought in time of war than in time
of peace. The difference is that the government, instead of
private individuals, must hire the men and buy the goods.
This makes it physically necessary that private individuals
should hire fewer men and buy fewer goods.

Private consumption must be cut down. For example, when
I am spending my income in time of peace, I am merely hiring
men to make things for my consumption and to wait upon
me. All the men in the country are presumably engaged in
producing things for consumers and in waiting upon them,
that is, upon one another. In time of war it is necessary that
a large number of men stop producing things for private con-
sumption and waiting upon one another as private consumers,
and begin to produce things for the government and to wait
upon the government and serve it as soldiers. It is physically
impossible for them to do this unless private consumers are
willing to consume less, and to wait upon themselves instead
of hiring others to do so. Moreover, it need not take any



THE FINANCING OF A WAR 517

more money to hire these men to work for the government
than to hire them to work for private consumers.

If, for example, I am spending so much on myself that it
takes, in the aggregate, ten men to make things for my con-
sumption and to wait upon me, it will be necessary in time of
war for me to live on less, because the government must have
some of those ten men. Another way of saying the same thing
would be to say that I need these ten men to work for me in
another capacity in time of war ; I need them to produce war
supplies and fight in my defense. The government is my
agent in hiring these men and directing the- fighting ; there-
fore I must turn a part of my income over to my agent, the
government, to hire some of those ten men, while I, with the
remainder of my income, may hire the rest to continue work-
ing for me. What has just been said in the first person singu-
lar can be repeated in the first person plural, and thus it will
include us all.

The private consumer bids against the government for man
power. If we are all left undisturbed in the enjoyment of our
income, and continue spending it in such a way as to require
as many men as before to produce for and to wait upon each
of us, while our agent, the government, without taxing us,
undertakes to find means to hire the men whom it needs, we
shall, each and every one, be competing for these men against
our own agent, the government. If the government opens a war
chest, or gets its money from another source than our incomes,
it will have to bid against us to get men to work and to fight
for it. Literally, the government will be trying with a lot of
new money to hire them away from us, while we are trying with
our full income to hire them away from the government and
keep them working for us. Aside from the obvious futility
and stupidity of this process, it results in inflation of prices, no
matter what the source of the government's money may be.

Taxation enforces economy in private consumption. Here is
the first great mistake which almost every government has



Si8 PRINCIPLES OF POLITICAL ECONOMY

made, up to the present time, in its efforts to finance a war :
it has hesitated to tax its people. The only sound method of
financing a war is to tax the people, and tax them to the bone.
Unless it has a war chest which it can open, or unless it issues
a lot of new currency, it must get its money from its citizens,
in the form either of loans or of taxes. If it does not do one
of these things, there is no possibility of avoiding that conflict
which has just been described. Leaving the people with their
incomes and purchasing power unimpaired will permit them
to continue spending their incomes as before, and that spend-
ing of income is a demand for men to produce supplies for
private consumption and to wait upon the consumers. The
only way, then, in which the government can get these men
is to outbid the private consumers with its new money. This
competition between the private consumers and the govern-
ment for men and supplies cannot by any possibility result in
anything else than an inflation of prices.

Issuing new money a mistake. Even when the government
has accumulated a war chest of specie, this money will be used
to outbid private consumers for men and supplies, which will
result in an inflation of prices. Where the government issues,
or causes to be issued, a lot of new credit currency, in order to
avoid taxation, the difficulty is exaggerated, for there is not
only an inflation but a grave danger of depreciation.

Contrary to a very widely accepted theory, there may be an
inflation without any use whatever of credit currency, though
this is possible only where a large quantity of standard coin,
or metallic money, is injected into the circulation after having
been hoarded in the public treasury. The way it gets into cir-
culation in the beginning of a war is through its use by the
government in purchasing supplies and hiring men ; all the
private individuals, with their incomes unaffected, continue pur-
chasing supplies and hiring men as before ; and it is this com-
petition of the government, with its new money, against private
consumers, with their old money, that starts prices upward and



THE FINANCING OF A WAR 519

causes inflation. It makes very little difference whether the
new money which the government uses in these purchases is
coin which has been hoarded or credit currency which is issued
for a special purpose, except where the latter becomes so ex-
cessive in quantity as to cause it to depreciate in terms of coin.

Individuals must purchase less if the government is to pur-
chase more. The first and fundamental conclusion, therefore,
is that in order to avoid inflation the people must purchase less
in proportion as the government purchases more. The only
way to force them to purchase less is to get their money away
from them. This may be done by several methods as follows :

The first method is that of voluntary loans. People who
have been spending their money for other things may be in-
duced to spend it for government bonds. They must then cut
down their purchases of supplies. This reduces the demand
for men to produce supplies for private individuals. These
men who are released from general industry are then available
to be hired by the money which is now in the hands of the
government. This cannot result in inflation.

Another method is that of forced loans, the comman-
deering of the supplies of money in savings banks and other
places of deposit. This is virtually the system of conscription
as applied to money. Whatever else may be said against this
method, it cannot be said to result in inflation, because the
people whose money is taken away have less to spend, and
therefore they do not compete with the government in hiring
men and buying supplies.

Still another method, and the one which ought always to be
followed as far as possible, is that of taxation. This is likewise
a system of conscription, the conscription of incomes as dis-
tinguished from the conscription of men. It is better than
the forced loan because it applies to all incomes and does
not penalize those who have shown sufficient frugality and
thrift to save and deposit a part of their income instead of
consuming it all.



520 PRINCIPLES OF POLITICAL ECONOMY

The most futile of all methods is that of issuing temporary
credit currency, to be repaid out of war indemnities after a
victory. There is, however, one condition under which it may
be necessary for the government to have available, in the form
either of a war chest or of a credit currency, a new supply of
money. It usually takes some months to get the taxing machin-
ery going so as to increase the government's income mate-
rially. It may be necessary, in order to tide over these few
months, to make use of some extraordinary reservoir of cur-
rency. Usually, however, and always if the credit of the gov-
ernment is good, the large sums needed at the beginning of
a war can be secured quickly by means of voluntary loans.
This is the first and greatest argument in favor of raising
money by loans rather than by taxation.

Another argument is that by borrowing the money the finan-
cial burdens of the war may be distributed over a longer period
than if the money is raised by taxation. It is sometimes said,
rather shamelessly it is true, that the people have burdens
enough in time of war without having to pay extraordinary
taxes. The fact is, however, that those who do not go as sol-
diers, or give their services directly to the government, bear
no burdens whatever except taxes. Most of them, in fact,
prosper in time of war. Many a respectable family is still
living on wealth accumulated out of the profits of business
during our Civil War, while their neighbors were spending
their time in the unremunerative work of the soldier. War is
not, in fact, a burden upon the whole generation. It is a bur-
den only upon those who do the work of war and those who
pay the expenses of war. If war taxes are not increased,
many will absolutely escape all war burdens. The question is
not, therefore, that of distributing the burden over several gen-
erations but of distributing it over all the individuals of
each generation.

A third reason for borrowing is found in the necessity of
purchasing foreign supplies. In time of war the national



THE FINANCING OF A WAR 521

production of articles for private consumption must necessarily
be reduced in order that the country may recruit its armies and
produce military supplies. Consequently it cannot send so much
produce abroad ; at the same time it will, in all probability,
need to increase its imports from foreign countries. These
imports, therefore, must be paid for largely with money. In
order to meet these foreign payments, extraordinary sources of
monetary supply must be tapped ; literally, the money which
is sent abroad for the purchase of supplies must be got back
again. Since the foreign countries cannot be taxed, it must be
borrowed back, perhaps over and over again, in order to make
continual purchases. Here is where the credit of the country
may be strained. In this case, however, the country's finan-
cial failure would be due primarily to its inability to produce
its own supplies, rather than to anything inherent in the prob-
lem of war finance. The country must either be able to pro-
duce its own supplies or else have credit enough to buy them
from abroad.

Production of war supplies must be vastly increased. In
considering the relative merits of taxing and borrowing as
means of financing a war, we must never lose sight of certain
basic and incontrovertible facts. One is that if we are to put
several million men into the army and navy, it will be neces-
sary to put several million others into the munition factories,
shipyards, and other establishments for the production of war
supplies. We must even increase the output of our mines
and especially of our farms, in order to provide the raw
materials and the food supplies. All this will require a good
many millions of men. These men cannot be created out
of nothing.

Sources of additional man power. There are three sources
from which this additional man power can be drawn. In the
first place, those who are now at work may work a little harder,
either by speeding up or by working longer hours. In the
second place, those who are not now at work may be put tq



522 PRINCIPLES OF POLITICAL ECONOMY

work. In the third place, those who are at work in the indus-
tries which are not indispensable may be withdrawn from them
in order to expand the industries that are indispensable to the
prosecution of a war.

The first two of these sources of man power may be suf-
ficient if the war is to prove a trivial affair ; but if it is to be
a serious affair, we shall have to draw upon all three, and
particularly upon the third. It will be absolutely impossible
to continue running the luxury-producing industries or the
industries which produce superfluities at the rate which is
possible in times of peace. If the government needs the man
power which has been engaged in producing luxuries and
superfluities, individuals must perforce cut down their con-
sumption of such things. There is no alternative.

Enforced economy. It will not always be necessary, however,
for the government by authority directly to forbid us to con-
sume these things. This enforced economy will come about
in other ways. The government must have money with which
to pay its soldiers and sailors and to buy its munitions and
supplies. We citizens of the Republic shall be called upon to
supply the government with this money. The money will
be taken either in the form of taxation or in the form of
voluntary loans. .

This, in short, is exactly what we are called upon to do by
any system of war finance, whether it be the slacker's system
or the patriot's system. Under the slacker's system it is pro-
posed that we shall not make a strenuous effort to pay a large
proportion of the war's expenses as we go along, but that the
government shall borrow the money in order to avoid dis-
turbing us who stay at home, and in order that the young
fellows who go to the front may help pay for the war after
they return home if they do return home. The patriot's
system is the proposal that we make strenuous efforts to pay
as large a proportion as possible of the war's expenses as we
go along, in order that we who stay at home may bear at least



THE FINANCING OF A WAR 523

a reasonable fraction of the burden which will be borne by
those who go to the front, and not ask those who return home,
having borne the real burden of the war, then to help pay
back to us the money which we loaned to the government.

Characteristic fallacies. It is necessary, however, to clear
away certain confusions which arise. The sources of this con-
fusion are mainly embodied in the following statements: (i)
Excessive taxation upon consumption will cause popular re-
sentment. (2) Excessive taxes on industry will disarrange busi-
ness, dampen enthusiasm, and restrict the spirit of enterprise
at the very time when the opposite is needed. (3) Exces-
sive taxes on incomes will deplete the surplus available for
investments and interfere with the placing of the enormous
loans which will be necessary in any event. (4) Excessive
taxes on wealth will cause a serious diminution of the incomes
which are at present largely drawn upon for the support of
educational and philanthropic enterprises. (5) Excessive taxa-
tion at the outset of the war will reduce the elasticity available
for the increasing demands that are soon to come.

As to the first of these objections, it is political rather than
economic. Such a tax as is proposed will cause popular resent-
ment only on condition that the people are crudely ignorant
or unpatriotic, that they are ignorant enough to imagine that
the expenses of the war can be paid out of nothing or unpa-
triotic enough to be unwilling to bear the necessary burdens
of the war. Even though it should cause popular resentment,
it would not affect in one way or another the economic wisdom
of such a policy. It is one thing to say that a policy is
economically sound ; it is quite a different thing to say that
the people know enough about economics to understand its
soundness. An autocrat who was trying to determine just how
much his people would stand might well consider this ques-
tion. In a democracy, however, the people need not stop to ask
themselves how much they themselves will stand, or whether
their own voluntary acts would cause resentment in themselves.



524 PRINCIPLES OF POLITICAL ECONOMY

As to the second proposition, it is only necessary to point
out that a great war, absorbing several millions of men of pro-
ductive age either in the actual fighting or in the production
of supplies for those who do the fighting, cannot possibly be
carried on without a good deal of disarrangement of business.
Moreover, there will be the same disarrangement of business
whether we turn our money over to the government voluntarily,
and thus voluntarily cut down our ability to purchase supplies
for private consumption, or whether we turn the same amount
of money over to the government in the form of taxes. As
to the suggestion that heavy taxes will dampen enthusiasm and
restrict the spirit of enterprise, that is a question of national
psychology. It is hardly probable that citizens will restrict
enterprise and have their enthusiasm dampened by taxes the
reason for which they understand and approve. In fact,
reasonably heavy taxes, for a purpose which they understand
and approve, will probably spur them on to greater effort and
enterprise, will cause them to work longer hours and take
shorter vacations in order to be able to pay them.

The third proposition is absurd. The money which is raised
by taxation will not have to be raised by loans. The only
possible way in which heavy taxes can interfere with the plac-
ing of enormous loans is by making the enormous loans
unnecessary. Even with the proposed tax, loans will be neces-
sary, but the less there is raised by taxation, obviously the
more there must be raised by loans.

The fourth proposition has some merit, but it may well be
asked whether, in a time of great national crisis, even phil-
anthropic work which is not connected with the war should
not be somewhat curtailed. A great deal depends upon how
desperate the crisis is. All needless luxuries and every form
of consumption except those which are indispensable should
of course be cut off first. If this is done, most of the
philanthropic work can still be carried on.

The fifth proposition can mean nothing more than that if we



THE FINANCING OF A WAR 525

tax ourselves to the limit at the start, we cannot later on increase
taxes by as large a percentage as we could if we taxed ourselves
lightly at the start. True enough ; but it would not be necessary.

One of the nai've objections to the policy of paying a large
proportion of the expenses of the war by taxes is that when
expenditures approach the gigantic sums of present-day war-
fare such a tax policy would require more than the total sur-
plus of social income. If by social income is meant money
income, it will apply to loans as well as to taxes. The people
cannot turn over to Ihe government, either by loans or by taxes,
more money than they have or can lay their hands upon.
They have just as much money to pay to the government in
the form of taxes as they have in the form of loans. The
possibilities are exactly equal in either case. It is only a ques-
tion as to which is the better policy or the better method of
getting that money into the government treasury.

If, however, by social income is meant the products of indus-
try and enterprise, the proposition becomes an absurdity. No



Online LibraryThomas Nixon CarverPrinciples of political economy → online text (page 42 of 48)