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fURRENCY AND FINANCE 
 
 IN TIME OF WAR 
 
 A LECTURE 
 
 BY 
 
 F. Y. EDGEWORTH, M.A. 
 
 FELLOW OF ALL SOULS 
 PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF OXFORD 
 
 Price One Shilling net 
 
 OXFORD 
 AT THE CLARENDON PRESS 
 
 LONDON EDINBURGH GLASGOW NEW YORK 
 
 TORONTO MELBOURNE CAPETOWN BOMBAY 
 
 OXFORD UNIVERSITY PRESS 
 
 HUMPHREY MILFORD 
 
CURRENCY AND FINANCE 
 IN TIME OF WAR 
 
 A LECTURE 
 
 BY 
 
 F. Y. EDGEWORTH, M.A. 
 
 t s 
 FELLOW OF ALL SOULS 
 PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF OXFORD 
 
 I » * • 
 
 • *• ' 
 
 OXFORD 
 AT THE CLARENDON PRESS 
 
 LONDON EDINBURGH GLASGOW NEW YORK 
 
 TORONTO MELBOURNE CAPE TOWN BOMBAY 
 
 OXFORD UNIVERSITY PRESS 
 
 HUMPHREY MILFORD 
 
 1917 
 
ANALYSIS OF CONTENTS 
 
 I. Function of economic theory in time of war (pp. 3-4). 
 II. The quantity theory of money in the abstract (pp. 4-10). 
 
 III. The theory apphed to present conditions. Is the existence 
 
 of inflation proved ? (pp. 10-18). 
 
 IV. Loans a cause of inflation. Taxes versus Loans (pp. 18-20). 
 V. Some aspects of Taxation (pp. 20-4). 
 
 VI. Import duties imposed for purposes other than revenue. 
 Restrictions of trade as a sanction of regulations for the 
 maintenance of Peace (pp. 24-7). 
 
 
^. 
 
 CURRENCY AND FINANCE IN 
 TIME OF WAR 
 
 I. The obligation attached to the Chair of Political 
 Economy, to ' deliver from time to time a public lecture *, 
 seems onerous to the present occupant of the chair. To 
 one who has principally been employed in cultivating 
 the more abstract portions of the science it is not easy 
 to gather from that field fruits ready for consumption by 
 those who are generally more interested about results 
 than methods. 
 
 The difficulty is increased in time of war, partly 
 because more is then expected of the economist. In 
 quiet times the Art of Political Economy consists largely 
 in abnegating art ; playing the role of the wise physician 
 who when consulted by one who has nothing much the 
 matter with him has the courage to advise doing nothing. 
 But in the fever of war time the easy course of laisser 
 faire is evidently inadmissible. 
 
 In one respect, indeed, theory shows to advantage in 
 times of disturbance. It is prepared for occurrences 
 which appear paradoxical to the practical man. For 
 example, theorists had contemplated the possibility that, 
 if gold were extruded by the abundance of paper - 
 money in different countries, gold might fall below the 
 level of notes in some countries ; as is now the case in 
 Sweden. 
 
 But if in this respect theory comes to the front in 
 
 370318 
 
4 : CURRENCY AND FINANCE 
 
 troui)loais. titrie's, in aiit^her respect it is at a disadvan- 
 tage. A great part, perhaps the most useful part, of 
 economic truth requires time for its verification. It is 
 true only ' in the long run *. It is not available in 
 periods of emergency and crisis. Accordingly in such 
 times our study is more than usually below the ideal 
 standard of a deductive science. We have more than 
 usually to resort to mental processes which, as Aristotle 
 would say, do not involve general reasoning so much 
 as acquired insight and shrewd judgment. 
 
 But even if the practical syllogism were applicable in 
 all its perfection, it could not be applied by the academic 
 student, for this simple reason that he lacks the minor 
 premisses. The Government do not pubhsh the rele- 
 vant particulars. For instance, the nature of the trans- 
 actions through which Treasury notes pass out of the 
 hands of the Government is not, I believe, known out- 
 side official circles. 
 
 Altogether I cannot hope to realize the model of a 
 public lecture, at once interesting and instructive, set 
 by some of my colleagues. Perhaps the principal out- 
 come of the following observations will be to strengthen 
 the presumption that economic theory is a necessary 
 (though not a sufficient) quaUfication for the direction of 
 economic policy. With this somewhat humble hope 
 I proceed to consider certain parts of the economic 
 system which are prominent in war time, namely money, 
 those sinews of war which become strained and swollen 
 in the course of a severe struggle, and the much required 
 nutriment of those sinews — loans and taxes, 
 
 II. What is money? To answer this question Sidg- 
 wick would employ the Platonic method of searching 
 for a definition. One important result of the investiga- 
 tion is to bring out the distinction between money in 
 
IN TIME OF WAR 5 
 
 a general sense, including cheques and other instruments 
 of credit, and the species which is not onl}'' a medium 
 of exchange, but also has the property of finality in the 
 discharge of debts. ' Money proper' this pre-eminent 
 species may be called. 
 
 On the definition of money depends the significance 
 of the celebrated theory which connects the quantity of 
 money with the level of prices. This so-called ^ quantity 
 theory' is almost a truism if money is used in the 
 widest sense possible ; it is not always true if the term 
 is used in its narrowest sense. 
 
 Let us follow Professor Irving Fisher in stating the 
 theory in the form of an equation : 
 
 In this equation M and M' denote respectively the quan- 
 tity of ' money proper * in circulation and the amount of 
 credit money in existence, say with sufficient accuracy, 
 at least with respect to this country and America, 
 'deposits' in banks — that huge volume of ideal money 
 which is as it were circulated and made to effect pay- 
 ments by means of cheques. The interpretation of the 
 other symbols in the equation is not so simple. V and 
 V denote respectively the velocity of money proper and 
 that of credit money. But what does the velocity of 
 money mean? The two highest authorities on the 
 subject, J. S. Mill and Professor Irving Fisher, differ as 
 to the definition of this term. Following the latter, 
 I define velocity of money as the number of exchanges 
 effected by a unit of money — a particular dollar or pound 
 — in a unit of time, a week for instance. The velocity 
 of money is thus equivalent to the rate of its turnover. 
 We say a merchant turns over his stock in a week when 
 he parts with and replenishes his stock in that time. If 
 
6 CURRENCY AND FINANCE 
 
 on an average he has constantly seven bales of any 
 commodity in stock, while one is sold every day, he 
 turns over his stock in seven days. The expression is 
 applicable to any other kind of steady flow. The length 
 AB may equally well represent a refreshment bar at 
 which there are constantly seven customers refreshing 
 themselves. If (on an average) one enters at A and 
 one issues at B every five minutes, the personnel of the 
 customers will be entirely changed every thirty-five 
 minutes. The bar AB need not be a straight line ; it 
 may be curved in suchwise that the entrance A coin- 
 cides with the exit B. But indeed the customers are 
 not confined to one line (straight or curved) ; they may 
 flit about from table to table and feed in different storeys. 
 
 Pascuntur passim, as Virgil says of the bees. But Virgil 
 was mistaken in conceiving that the bees, after going 
 forth in the morning, do not return from their pasture 
 till the evening. They have a much more rapid turn- 
 over. Some statistics which I have obtained with 
 respect to an allied species may be used to illustrate 
 this statement. I trust that these entomological illus- 
 trations will not appear irrelevant. There is, indeed, 
 precedent for seeking economic edification from the 
 operations of the industrious bee. But I can hardly 
 expect an equally favourable reception for the predatory 
 wasp. The latter species, however, as it happens, 
 furnish a good illustration of the phenomenon now 
 under consideration. The working members of this 
 species present an image of monetary circulation as they 
 issue from their nest and, after having gone through 
 
IN TIME OF WAR 7 
 
 the operation of foraging, again enter into the nest. 
 For example, one fine morning I sat down before a nest 
 and observed that there was a steady flow outwards of 
 13-3 per minute — 200 per quarter of an hour ; and an 
 equal, and equally steady, flow inward. Now the point 
 which I wish to bring out is this : that, though it was 
 impossible to mark each yellow insect as it issued so as 
 to time the return of that individual — any more than you 
 would be able, having earmarked a sovereign, to ob- 
 serve how often after leaving your hands it effected a 
 purchase — still it is within the competence of statistics 
 to determine the average time which an individual takes 
 to perform an operation. In fact, in the example given 
 it was only necessary to ascertain the total number 
 permanently outside the nest, a number kept con- 
 stant by a steady addition and steady subtraction of 
 about 40 every three minutes, or 13-3 per minute. A 
 rude kind of census showed that number to be 740. 
 Accordingly for the time taken by an individual on 
 a voyage we have 740 divided by 13-3 = 56 minutes 
 nearly. Analogously Professor Irving Fisher requested 
 the members of his class to observe how many dollars 
 each kept on an average in his pockets ; and how many 
 he expended in the year. The former number being $10, 
 the latter $660, it followed that the turnover of the 
 dollar for the class under observation was effected in 
 the sixty-sixth part of the year, or in less than a week. 
 
 That pretty study was only a prolusion to Professor 
 Fisher's more important investigations. I need mention 
 only his calculations respecting the dotted symbols. He 
 estimates M\ the amount of deposits in American banks, 
 as (the equivalent in dollars of) some ;6" 1,300,000,000 ; a 
 sum comparable with the aggregate deposits in our prin- 
 cipal banks before the war, since the outbreak of which 
 
8 CURRENCY AND FINANCE 
 
 they have increased by some fifty per cent. M' V was 
 given by the number of cheques drawn on the banks 
 and, as we may say, paid out of their deposits. That 
 amount was ;^20o,ooo,ooo daily — a sum not accurately 
 representing a quantity of commodities purchased, but 
 swollen by the speculative re-sale of some commodities 
 and other Stock Exchange practices. There results for 
 the time of turnover a little less than seven days. Our 
 diagram will serve equally well to represent seven 
 batches of entomological units, each batch numbering 
 • about loo individuals, turning over in less than an hour ; 
 or seven batches of monetary units, each batch num- 
 bering 200,000,000 pounds, turning over in about a week. 
 So much as to the numerator of the fraction on the 
 right side of the above-written equation. It might be 
 called for short Fy representing t\iQ.flow of money : 
 
 Turning now to the denominator T^ we should have 
 
 no difficulty in defining it if there were only one kind 
 
 of commodity sold by one kind of measure, say a pound 
 
 avoirdupois or a ton. Then T would mean the number 
 
 of pounds or tons sold per year (or other unit of time) 
 
 multiplied by the number of times that each unit of 
 
 commodity on an average changes hands by sale and 
 
 F 
 re-sale. Thus P, — -=,^ would be the price of a ton (or 
 
 other unit) of commodity. But, commodities not being 
 all of one kind, how can we sum up, in order to form T, 
 tons of hay, and pounds of beef, acreage of estates, and 
 tickets to concerts! We can only do so adequately 
 through the use of an instrument furnished by the 
 Calculus of Probabilities — an Index-number. * Index- 
 numbers \^ well says Dr. Bowley, ' are used to measure 
 
IN TIME OF WAR 9 
 
 the change in some quantit}'- which we cannot observe 
 directly, which we know to have a definite influence on 
 many other quantities which we can so observe, tending 
 to increase all or diminish all. . . .' There is a mysticism 
 proper to the subject in this description of the quantity 
 behind the index-number. It is like the idea of sub- 
 stance according to Locke. A ' supposed but unknown 
 support ' of our sensations is postulated. But ' of this 
 supposed something we have no clear distinct idea at 
 all ' ; only an * obscure and relative idea '. 
 
 The obscurity of the conception with which we have 
 to do may be somewhat relieved by considering its 
 relativity. Let it be noticed that the principal use of an 
 index-number is to ' measure the change in some quan- 
 tity — *, as Dr. Bowley says. What we seek is not so 
 much P, the average price or price-level at a given time, 
 as the relation or ratio between what P is at one time, 
 say P^ at time t^ to what it was at another time, say P^ 
 
 at time t^. 
 
 We have then 
 
 
 
 -w = y,- divided by 
 
 F, 
 T, 
 
 Whence 
 
 P F 
 
 7^ = -^ divided by 
 
 To 
 
 T 
 
 Now the ratio -— depends upon a great number of 
 
 ■* 
 different ratios, each expressing the relation between 
 the quantities of an article sold at the times 4 and t^ . Let 
 qo be the number of tons of hay sold at the time t^, q^ the 
 number at the time t^ ; q^ the number of concert tickets 
 sold at the first epoch, q' at the second; and so on, 
 through a whole range of commodities and services. 
 We have thus a set of ratios 
 
 qo q^ <""' 
 
 aioi B 
 
lo CURRENCY AND FINANCE 
 
 by striking an average of which we obtain the approxi- 
 mate value of ^. The average should be of the kind 
 
 called ' weighted ' ; the weights being proportioned to 
 the number of times that each commodity changes hands 
 by purchase, and to its importance in other respects for 
 the purpose intended. The calculation is analogous to 
 that by which Giffen measured the volume— 2iS distin- 
 guished from the value— of foreign trade. 
 
 III. I am not concerned with the details of Professor 
 Fisher's calculation. I employ the beautiful method 
 which he has constructed only to test the accuracy of 
 the statements which attribute inflation to the state of 
 our currency at present. Inflation has been well defined 
 (in the Economist) as 'an increase ot currency more 
 rapid than the increase in the production of goods * ; in 
 the words of Tooke an increase in ' the quantity of the 
 circulating medium in its relation to the ordinary amount 
 of revenue and trade of commodities and labour to be 
 circulated'. Accordingly, in order to prove the exis- 
 tence of inflation, it seems necessary to prove an increase 
 in M and M' in our formula, or at least in one of them, 
 out of proportion to that of T. But this has not been, 
 perhaps cannot be, done. The quantity M is unknown, 
 or at least unpublished. For though the total of Treasury 
 notes in circulation is published, yet it is not stated 
 what proportion of them enters into the circulation as 
 distinguished from use as the reserve of banks. And 
 very little, I think, is known about the coefficients V 
 and V\ What if the increase in general prices should 
 be partly due to an -increase in the velocity of money 
 consequent on changed methods of business. The 
 hypothesis of some increase of velocity has the coun- 
 tenance of Professor FoxwelFs authority. In his impor- 
 
IN TIME OF WAR ii 
 
 tant address to the Institute of Actuaries last May he 
 said that he was ' inclined to think the pressure caused 
 by war did make the sixpence more nimble than it 
 otherwise would be * ; that there was ^ even in notes 
 a more rapid circulation '. Thus the ratio of F^ to Fq 
 is imperfectly ascertained. The ratio of 7\ to T^^ is 
 even more indeterminate. With the enormous change 
 in the character of goods, the immense increase m 
 munitions ordered by Government, there must have 
 occurred great change in that velocity, or circulation of 
 goods, which enters into T. Apart from this circum- 
 stance the mere changes in the quantity and quality of 
 the goods produced are unfavourable to the computation 
 of T. There has occurred an enormous increase in the 
 products required for war ; some diminution in the pro- 
 ducts consumed by the civil population. Thus the ratio 
 
 T 
 
 j^ is probably made up of two sets of ratios, the one 
 
 greatly above unity, the other below it. But the use of 
 an average formed from constituents which are separ- 
 able into two distinct groups with widely different means 
 is precarious. There is wanting the character of Pro- 
 babilities which attaches to numerous homogeneous 
 independently varying elements. Altogether it seems 
 that inflation in the strict and scientific sense of the 
 term is not established. We must be content with 
 the fact, without assigning the reason, of the rise of 
 prices. 
 
 The fact is evidenced by the accompanying statistics, 
 which I adduce not only on account of their intrinsic 
 interest, but also in illustration of the principles of Pro- 
 babilities which I have employed or implied in the 
 preceding paragraphs. In the first aspect it will be 
 noticed that prices by the end of last year had almost 
 
12 CURRENCY AND FINANCE 
 
 risen to the double of what they were just before the 
 war; as evidenced by the index-numbers both of the 
 Economist and the Statist. That of the Economist alone 
 is available for the end of October 1917, showing a rise 
 in the general price-level to 259-1, more than twice the 
 figure for the end of June 1914. The close correspon- 
 dence of the different index-numbers is remarkable, 
 considering how discrepant are the data employed to 
 measure the change in the value of money. For example, 
 in the compilation of the Statist no account is taken of 
 an article so important as TobaccOy which figures among 
 the items on which the other two index-numbers are 
 based. Again, the Board of Trade index-number takes 
 account of the quantity of each article used, whereas 
 the other two are content with taking averages of the 
 various prices. 
 
 The claim to have gone below the facts so as to decide 
 whether money is responsible rather than goods for the 
 separation between them which has occurred involves 
 a finer issue than is commonly discerned. If money and 
 goods have been advancing together, as it were moving 
 abreast for a time, and then one distances the other, it 
 is a nice question whether the occurrence of the interval 
 is due to the acceleration of the one or the retardation 
 of the other. If they have been running evenly neck 
 and neck, the data may exist for the decision of the 
 issue. But suppose that at a certain stage, the course 
 changing its character, the two begin to flounder among 
 craters and quagmires. The distinction between velo- 
 city and acceleration becoming obliterated, it might be 
 difficult to affirm more than the fact of precedence. 
 However, if we observe the rider who is in advance to 
 apply spur and whip, and a start forward always to 
 follow that application, it is reasonable to regard that 
 
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14 CURRENCY AND FINANCE 
 
 action of his as the cause of his advance. But it may 
 not be the only or the principal cause. 
 
 These allegorically hinted doubts are to be borne in 
 mind when it is argued that the increase of prices since 
 the outbreak of the war has been caused by the con- 
 tinually increased issue of Treasury notes. A particu- 
 larly brilliant argument has lately been put forward by 
 Professor J. S. Nicholson at the last meeting of the 
 Statistical Society. Tabulating the issues of Treasury 
 notes during each quarter of a year since the beginning 
 of the war, he shows that each such issue is followed 
 by a corresponding — correspondingly great or small — 
 increase in the index-numbers which represent the level 
 of prices. I exhibit the series of note issues, with their 
 dates, on the left side of the first table here presented ; 
 and on the right side an index-number for e2ich. following 
 quarter. These index-numbers are not exactly those 
 given by Professor Nicholson, but are calculated by 
 combining the two index-numbers which he has em- 
 ployed, namely, that of the Economist and that of the 
 Statist (Sauerbeck's continued), after first pushing up the 
 latter so as to bring it to the same base as the Economist's 
 index-number, viz. 1901-5. In the second table I exhibit 
 the increments from quarter to quarter of the two com- 
 pared magnitudes : the amount of Treasury notes in 
 each quarter, and index-numbers for the following 
 quarter. For example, the increment of the notes in 
 the last quarter of 1914 over the amount existing in the 
 preceding quarter was ;^8,ooo,ooo ; the corresponding 
 increment in the index-number for the first quarter of 
 1915 was 16 per cent., and so forth. There is observable 
 a certain consilience between the magnitude of the 
 former increment and that of the latter. The same 
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i6 CURRENCY AND FINANCE 
 
 contrary there would appear a certain repugnance— 
 between the two series if we altered the table by push- 
 ing up the column on the left so as to compare the 
 respective increments for the same quarter. This table, 
 which should be considered in connexion with the 
 diagrams presented by Professor Nicholson, points to 
 the increase of Treasury notes as a cause of the increase 
 of general prices. Or perhaps it is safer to employ 
 a category which modern statisticians prefer to that of 
 causation, and to conclude that there is a correlation 
 between the issue of currency-notes in one quarter and 
 the rise of general prices in the next quarter. That 
 conclusion is not at variance with the judgment of 
 other monetary experts that the rise of prices is largely 
 due to causes other than monetary, such as the obstruc- 
 tion of supply ; provided that they consent to add that 
 the rise could not well have occurred without a corre- 
 sponding increase in ' F * (if ^ T ' has not decreased). 
 
 If this proviso is granted, it may be left to the meta- 
 physicians to determine to what extent a conditio sine 
 qua non forms part of the cause of a phenomenon. The 
 question of practical interest is whether it was wise of 
 the Government to issue currency-notes in such quan- 
 tities as they have done. The debate on this question 
 is perhaps destined to be as interminable as the contro- 
 versy regarding the management of the Bank of England 
 during the Napoleonic war ; about which Tooke, writ- 
 ing in the late 'forties of last century, could say : * After 
 all the discussion the topic has undergone during the 
 half century which has elapsed ... it presents as wide 
 a field as ever of debateable ground.' 
 
 But there is this great difference between our case 
 and that which our ancestors had to deal with, that our 
 currency is not depreciated with respect to gold. If, as 
 
IN TIME OF WAR 17 
 
 Ricardo insisted, that kind of depreciation is the test of 
 over-issue, how are we guilty of excess ? To restrict 
 our currency would tend to raise its value above that of 
 gold. This kind of appreciation has actually been 
 effected in Denmark by the refusal to give notes in 
 exchange for gold. But such a refusal is unthinkable 
 in this country. As Professor Foxwell told the Actua- 
 ries, ' Unless they were prepared to resort to what he 
 might call Scandinavian methods and bring about a 
 local appreciation of gold in their own country (which 
 was impossible and undesirable), the rise of prices was 
 beyond the control of any one country ; they could only 
 check it by cutting themselves off from the gold stan- 
 dard, which was just what they did not want to do.* 
 
 In these circumstances, what would have been the 
 effect of not assisting our currency to expand ? It is 
 dangerous to draw inferences when one is imperfectly 
 acquainted with the relevant facts; for instance, the 
 degree in which gold is marketable in different parts of 
 the world. Theoretically at least it is tenable that— on 
 suppositions as to the relation between gold and our 
 currency not known to be false — the advantage accruing 
 to us from a certain check to the rise of prices would 
 not be counterbalanced by the disadvantage which we 
 would have incurred by withholding from our Govern- 
 ment the means of making necessary purchases without 
 hitch. 
 
 While asking those who follow these observations to 
 think it possible that our Government have not been 
 much mistaken in their dealings with Treasury notes, 
 I desire to avoid misconstruction by expressing complete 
 agreement with Professor Nicholson and other high 
 authorities as to the evils and dangers of paper-money 
 issued without limit. The cautious extension of the 
 
i8 CURRENCY AND FINANCE 
 
 currency, for special reasons shown, in certain supposed 
 circumstances, is to be emphatically distinguished from 
 the drastic simplicity of the Inflationist's recipe. The 
 protest is the more necessary in that we have still with 
 us those whose sovereign remedy is the unlimited issue 
 of ' soft ' money. There still survive currency-doctors 
 whose science is on a par with that of the practitioner 
 under whom Gil Bias served; except that while he 
 invariably bled the patient, the panacea of the modern 
 Sangrado is to add to the circulation, 
 y IV. From inflation it is an easy transition to national 
 loans, since these if not carefully managed lead to 
 inflation. A clear, but somewhat trenchant writer, 
 Mr. Pethwick Lawrence, lays it down that * Inflation is in- 
 herent in the flotation of a loan for purposes other than 
 the construction of material reproductive capital '. Upon 
 this it may be obsei-ved that the alternative of defraying 
 the entire expenses of war by taxation would probably 
 {a) involve much borrowing on the part of some tax- 
 payers from fellow-citizens in order to meet the sudden 
 enormous demands of the tax-collector. And (3) the 
 existence of these debts would lead to that artificial 
 increase of deposits, that ' inflation of credit \ which 
 Mr. Pethwick Lawrence has described so clearly. It 
 may be observed that the first of these premisses (a) is 
 conceded by Macculloch when supporting a thesis 
 similar to that of Mr. Pethwick Lawrence ; the second 
 premiss (^]^is conceded by Mr. Pethwick Lawrence 
 himself. 
 
 The inflation consequent on private borrowing might, 
 indeed, not be so extensive as in the case of national 
 loans. But there are other evils besides inflation to be 
 taken into account when in a more general view we 
 consider, the issue Loans versus Taxes, It is well said 
 
IN TIME OF WAR 19 
 
 by one who inclines to the side of taxation, who recom- 
 mends beginning with loans and getting on to taxes : 
 *A tax so excessive in amount [27 per cent, of the 
 national income] precipitated without warning upon 
 established industries, would have encroached upon 
 working profit, weakened the incentive to labour, broken 
 the mainspring of activity, and disorganized the mecha- 
 nism of production/ 
 
 The just mean between the extremes which are 
 described as 'Taxes only' and * Loans only' is to be 
 determined by a comparison of conflicting authorities 
 and considerations. The authority of Adam Smith and 
 the other classical economists who denounced Loans 
 would count for much, but that their judgment is based 
 upon a disputable conception as to the nature of a 
 public loan. As I have argued in a former Lecture, 
 there is no close analogy between the danger and detri- 
 ment in which private debts are apt to involve the indi- 
 vidual debtor and the burden to the nation of a debt 
 contracted by the nation as a whole to one section 
 thereof. The conception which negatives this analogy 
 is generally, I think, but by no means universally, 
 regarded as the correct view by contemporary econo- 
 mists. But this correction of the older writers does not 
 carry us far in the direction of Loans. The modern 
 view is held by contemporary experts consistently with 
 strong recommendations of taxation in preference to 
 borrowing. The decision seems to turn largely on a 
 matter about which the academic student cannot speak 
 with authority, namely, what has been called ' the psy- 
 chology of taxation ', the temperament of the people on 
 whom the financier is operating. Doubtless different 
 prescriptions — different proportions in which the two 
 doses enter into the mixture— are adapted to the tem- 
 
20 CURRENCY AND FINANCE 
 
 peraments of different nationalities. The Editor of the 
 Economist may be quite right in urging that a larger 
 share than now of our expenditure on the war should 
 be defrayed by taxes ; while Professor Seligman quite 
 rightly moderates the self-denying zeal of Congress and 
 gravitates to a mean position distant from that extreme 
 which he calls ' Taxation only '. A popular American 
 writer with some plausibility explains French Finance 
 by the reluctance of the thrifty Frenchman to part with 
 his money in the way of taxation ; more ready to give 
 his life than his money in the cause of his country. In 
 fine Dietzel, acutest of German economists, may not have 
 been far wrong when, writing in 1812, he took up the 
 extreme position of Loans only ; if we suppose that the 
 dangers of that position are at a minimum in Germany. 
 The citizens might be so docile that the Government 
 could go on borrowing without loss of credit, without 
 having to offer extravagant interest; and the Govern- 
 ment might be so economical as not to part lightly with 
 the resources which it obtained easily. But in judging 
 of German Finance it must be remembered that the 
 condition above attributed to a war loan, namely, 'for 
 purposes other than the construction of material capital', 
 is not in general accepted by the German financiers. 
 They are — or were till lately — apt to regard war as an 
 investment, an outlay to be more than compensated by 
 an indemnity or other material acquisition. 
 
 V. Taxes may be considered as both complementary 
 and supplementary to loans ; an alternative in the pre- 
 sent, and a consequence in the future when interest has 
 to be met. It would be interesting, if time permitted, to 
 enumerate the particular new or revived taxes which 
 the exigencies of war — or of neutrality — are evoking. 
 For instance, there has been proposed in Holland an 
 
IN TIME OF WAR 21 
 
 impost which as far as I know is quite new, a tax on 
 Christian names (I presume, not retrospective). The tax 
 on hats proposed by Mr. McKenna (and subsequently 
 withdrawn), being a customs duty, is not identical with 
 the tax imposed by Pitt and administered by the depart- 
 ment in which Wordsworth held an office. ' I shall 
 think of him oft when I buy a new hat', wrote Lord 
 Byron. Another of Pitt's taxes, that on maidservants, 
 has recently been suggested by a very eminent English 
 economist. The tax, if limited, as he proposes, to families 
 with more than one servant, would not be open to 
 objection on the score of discouraging matrimonial 
 estabhshments, as Pitt's opponents pretended. We read 
 (in the Parliamentary Report for 1785) that * Mr. Drake 
 considered the tax on females in a serious light as 
 tending to increase the profligacy of the times '. 
 
 Mr. Drake went on to propose as an alternative a tax 
 on ' men-miUiners ' ; upon a principle which in these 
 days might perhaps be employed to defend the tax 
 against which he protested. I mean the diversion from 
 civil uses of commodities and services which are specially 
 useful for the purposes of war. The rules for the appli- 
 cation of this principle are presumably much the same 
 as those which Professor Pigou has illustrated with 
 respect to private economy in relation to war finance. 
 As relevant to the matter in hand may be instanced his 
 advice : * If our nursery-maid is an indifferent nursery- 
 maid, but likely to prove a genius in making munitions, 
 we should dismiss her.' 
 
 This principle may act as a slight set-back to the 
 tendency which has been in operation for many years 
 towards a smaller proportion of indirect, as compared 
 with direct, taxation. It is long since Gladstone avowed 
 himself 'perfectly impartial' between the two forms. 
 
22 CURRENCY AND FINANCE 
 
 In a somewhat flippant metaphor he represented the 
 Chancellor of the Exchequer as paying addresses to 
 * two attractive sisters . . . differing only as sisters may 
 differ ... as where there is some agreeable variety of 
 manner, the one being more free and open, the other 
 somewhat more shy and retiring '—presumably 'free 
 and open ' corresponding to ' direct '. The Chancellor's 
 state of feeling may be compared to that of the youth in 
 Scott's Pirate who was for long equally attracted by the 
 two beautiful and beautifully contrasted sisters, one of 
 whom is described as of a ' retiring disposition '. The 
 affections of the Chancellor of the Exchequer, like those 
 of Mordaunt, ultimately settled on the less retiring, the 
 more free and open, of the sisters. 
 
 This change in the character of taxation was promoted 
 by the conversion of financiers to the doctrine of pro- 
 gressive taxation from the old simple creed of taxation 
 in proportion to income. The conversion has followed 
 from first principles according to which the rule for 
 distributing the burden of taxation is to be sought in the 
 subjective feeling, the ' sacrifice ', of the tax-payer. This 
 is not the occasion on which to examine the subtle 
 schisms into which this doctrine splits. Suffice it to point 
 out that the controversy countenances the view of those 
 who think that welfare or utility in a subjective sense is 
 amenable to laws of quantity. Common sense must be 
 impressed by observing that two of the most sensible 
 and practical — as well able and distinguished— econo- 
 mists that have adorned their respective countries, 
 Pierson and Professor Seligman, have accepted the 
 principle that taxation is ideally distributed when each 
 tax- payer forgoes — not an equal amount oi satisfaction — 
 but an equal percentage of the total utility which he 
 derives f^om his possessions. 
 
IN TIME OF WAR 
 
 23 
 
 Among the most recent contributions to this inquiry 
 should be noticed Dr. Marshall's employment with 
 reference to war finance of the principle that ' the hurt 
 [the "personal hurt"] caused by obtaining ;^i,ooo of 
 additional revenue by means of levies of £2.0 from each 
 of fifty incomes of ;^20o is unquestionably greater than 
 that caused by taking it from a single income of £\o,qoo \ 
 Dr. Marshall is of course aware of and guards against 
 the discouragement of saving by a too drastic impost 
 upon wealth. 
 
 That danger is perhaps less than ordinarily to be 
 apprehended in the case of some kinds of war-tax for 
 a reason which Professor Pigou has thus pointed out : 
 ' The expectation of a regular tax of fifteen shillings in 
 the pound on incomes of above ^5,000 would go far to 
 prevent people from bringing such incomes into exis- 
 tence. But the objection is not vaHd as regards special 
 taxes levied on an exceptional occasion for the purpose 
 of financing an unprecedented war. Such taxes do not 
 carry an expectation of continuance, and do not there- 
 fore react upon saving and work in the way that taxes 
 levied in the ordinary course might be expected to do.' 
 Here once more the ' psychology of taxation ' must be 
 taken into account. The exception to the normal action 
 of a tax as a deterrent seems most likely to occur in the 
 case of an impost that is really unique, not only unprece- 
 dented, but unHkely to occur within a hfetime ; such as 
 the project of Ricardo to extinguish the national debt 
 by one heroic act of abnegation. But in a long war 
 requiring repeated levies of taxation it is to be expected 
 that the normal motives of the economic man will recur; 
 * modis inolescere miris' is the character of his habits. It 
 is noteworthy that MaccuUoch has defended the plan of 
 paying for war altogether out of present taxation — 
 
24 CURRENCY AND FINANCE 
 
 against the objection that it would be unfair to the pro- 
 fessional classes-on the very ground that it would be 
 foreseen and would act normally on economic motives. 
 ' Wars are calamities to which every people must always 
 be liable ; and if it were once known that the suppHes 
 required' to defray their expense were to be raised 
 within the year, by an equal income-tax, the chances of 
 being subjected to this tax would most certainly enter 
 into the calculations of professional men ; and the rate 
 of their natural or necessary wages would be regulated 
 accordingly/ Macculloch's argument as to the shifting 
 of the tax is no doubt extravagantly deductive ; but 
 there may well be a portion of truth in his premiss that 
 the war-tax would be foreseen and act upon motives. 
 
 VI. Separate treatment is required for a particular 
 
 kind of tax, import duties imposed for purposes other 
 
 than revenue. Here our thesis that training in economic 
 
 theory is a necessary qualification for the direction of 
 
 economic policy is peculiarly valid. So fallacious are 
 
 appearances in this matter ; so subtle the influence of 
 
 interests other than that of the community. As Dr. 
 
 Marshall has lately written, ' a policy which will confer 
 
 a considerable benefit on each of a compact group of 
 
 traders or producers will often be made to appear in 
 
 the interest of the nation ; because the hurt wrought by 
 
 it, though very much greater in the aggregate than the 
 
 gain resulting from it, is so widely diffused that no set 
 
 of people are moved to devote mind, time, and energy 
 
 to making a special study of it' If the advocates of 
 
 such a policy are perfectly sincere and pubhc spirited,— 
 
 if ' a policy that makes for their peculiar profit is invested 
 
 in their eyes with a deceptive glamour'— so much more 
 
 dangerous is their subtle influence. Could not the 
 
 educated pubUc see to it that a voice in such matters 
 
IN TIME OF WAR 25 
 
 should be exercised by those who are likely to be free 
 from fallacy and deceptive glamour and are otherwise 
 qualified ; in particular some of the younger economists 
 who have taken part in administration during the war ? 
 Expert guidance will be all the more required if it 
 should be necessary to resort to some degree of 
 Protection — in the technical sense — in order to obtain 
 protection — in a true and reasonable sense — from hostile 
 manoeuvres, organized malignant 'dumping', and so- 
 called ' peaceful penetration \ How should we like to 
 have our war policy directed by those who in the phrase 
 of a leading German Professor regarded war as ' a holy 
 thing — the holiest thing on earth ' ? To have our trade 
 policy directed by those who regard an import duty as a 
 holy thing would be similarly objectionable. The illustra- 
 tion, however, suggests that there is an opposite evil— in- 
 transigeant free trade analogous to unseasonable pacifi- 
 cism. But the withers of economists, as distinct from 
 politicians, are I think unwrung in this respect. ' It is 
 not by trained economists ', said Professor Marshall (in 
 1901), * that the defence of free trade is based on absolute 
 a priori reasoning. On the contrary it is based on a 
 study of details.' He has admitted that in the early part 
 of the nineteenth century Protection might have been 
 beneficial to the young industries of America. There 
 are free traders who think that during the period of 
 reconstruction after the war some protection may be 
 required. They do not shrink from cautiously adminis- 
 tering a dangerous drug to a convalescent, though they 
 are not prepared to make the medicine of the repubhc 
 its daily food. If, as Dr. Marshall now admits, some 
 measure of protective policy to secure necessary food 
 supplies may have to be accepted by way of insurance, 
 that admission is quite of a piece with the principles 
 
26 CURRENCY AND FINANCE 
 
 which he and those who think with him have all along 
 professed. To have resorted to the said protective 
 policy before there was need of such insurance would 
 have been as unreasonable as to burden merchant ships 
 with appliances against submarines in the peaceful days 
 of Queen Victoria. The cost to which the economist 
 has continually pointed does not cease to be a cost 
 because it is incurred as an insurance. With regard to 
 preferences and commercial treaties it is not to be denied 
 that the monopohstic combination of some countries to 
 the exclusion of others may, under certain circumstances, 
 enure to the material gain of the combining parties. 
 But how far it is politic to seek this gain — with the 
 consequences of possibly promoting amity among the 
 countries included, and probably provoking the hostility 
 of those excluded— this question hes in the domain of 
 politics rather than in that of economics. It is not as an 
 economist, but in the spirit of a soldier, that the heroic 
 Professor Kettle speaks when he protests against sacri- 
 ficing honour to trade — when in the last chapter of his 
 remarkable book, and so to speak with his dying words, 
 he denounces 'the attempt ... to encumber purely military 
 issues with a whole new economic regime,' to trans- 
 form what began as a war for honour into a war for 
 trade. I may without irrelevance quote also as a model 
 for our conduct the exhortation which the eminent 
 American economist. Professor Taussig, has addressed 
 to the Tariff Commission of which he is Chairman, 
 the Commission appointed by the Government of the 
 United States. His weighty words are: 'We enter 
 the war in no spirit of exploitation for ourselves or for 
 others; and we shall join at its close in no policy of 
 exploitation. We shall not devise for ourselves dis- 
 crimination or unequal commercial privileges. We shall 
 
IN TIME OF WAR 27 
 
 regret the grant of unequal privilege to other nations, 
 not merely because such grants may be injurious to 
 ourselves, but because they are inconsistent with that 
 lasting peace which we hope to promote between the 
 nations. If we adopt defensive commercial legislation 
 of our own it will be with the design of maintaining it 
 strictly as defensive, not as a means of aggression or 
 control/ 
 
 An equally high note is struck by another distin- 
 guished American economist. Professor J. B. Clark, 
 when he shows that restrictions upon trade might be 
 employed for the purpose of promoting international 
 peace. Embargo would be part of the ' economic force ' 
 which the League to enforce peace is pledged to bring 
 to bear upon recalcitrant members. The ^Greater 
 Entente ', in the just phrase of Professor Clark, which 
 is formed by the conjunction of his country with the 
 European Allies, is already employing action of the 
 kind contemplated. I regret that I cannot pursue this 
 subject further now. For no topic connected with 
 Political Economy better deserves the attention of the 
 ■educated public than the methods which the study may 
 :suggest for the promotion of international peace. 
 
NOTES 
 
 Section I 
 
 Page 4. I suppose Political Economy to have in general 
 the character of the Aristotelian <pp6p7j(ris, of the kind which 
 deals with public interests (cp.Nicomachean Ethics, Bk. vi, ch. 8, 
 par. 1-3, and ch. v, UepiKXia kol rovs toiovtov? (j)povLHov^ 
 OLOfieOa eluai . . . €Lvai 8e tolovtovs riyov/jLeda tovs olkovo- 
 jiiKovs). Perhaps the more abstract theory of economics, that 
 which involves mathematical conceptions, has features con- 
 genial to the Aristotelian a-ocpia (rrepLTTcc [ikv kol Oavfiaa-ra 
 KOL xaXena kol Saifiovia clSivai avTovs \rov^ <to(I>ovs\ (Paa-iu, 
 dxpr}(TTa Si, ibid. ch. 7). The practical science of Political 
 Economy sometimes employs explicit reasoning from general 
 principles (ibid., ch. 8, par. 7); often commands assent ta 
 'undemonstrated judgments' in virtue of a certain acquired 
 insight (Sia to ex^iv e/c r^y efiTreipias ojijia, ibid. ch. 11, 
 par. 6). In times of emergency and crisis I think that resort 
 must be had more than usually to .mental processes which do 
 not involve reasoning from general propositions; such as 
 dyxLvoLa, which is a kind of eva-TOX^oo (dvev re yap \6yov koI 
 Ta^y Ti 7] €vcrro\ia, ibid. ch. 9, par. 2). But I maintain, and 
 the consideration of some problems presented by Currency 
 and Finance in war time will I hope confirm the thesis, that 
 the mere Setvorrj^ [ibid.) of the clever politician is not adequate 
 to deal with such problems. There is required the insight 
 acquired by economic discipline. 
 
 Section II 
 
 Page 4. Sidgwick suggests the use of the Platonic method 
 in the chapter on the definition and measure of value in his 
 Principles of Political Economy (Book I, ch. ii, § i) ; and 
 applies it to the definition of money in a later chapter (Book II, 
 ch. iv). His nomenclature is not the same as that of Professor 
 
IN TIME OF WAR 
 
 29 
 
 Irving Fisher. But they agree in distinguishing on much 
 the same grounds (Sidgwick, loc, cit, ; Irving Fisher, Pur- 
 chasing Power of Money ^ ch. ii, § i), within the genus 'money' 
 in the wide sense, or ' currency ' ; a nucleus which I have 
 called 'money proper' in agreement with Professor Pigou 
 {Wealth and Welfare, Part IV, ch. iv, § 4). 
 
 If money is understood in the widest possible sense, in- 
 cluding possibly bills of exchange (Sidgwick, loc. cit., § 3, 
 paragraph last but one ; Anderson, Value of Money, p. 289), 
 the quantity theory of money would become almost an identical 
 proposition, as is sometimes said disparagingly; yet not 
 altogether, since an inferential element and the hazard of 
 induction would still be involved in the comparison of the 
 'volume of trade' at different epochs (cp. below, note to page 
 9). To explain and account for the observed rise of prices 
 in the early years of this century by the equation of exchange 
 would be a legitimate, interesting, and important achievement 
 of induction aided by the calculus of probabilities; even 
 though the theory could not be employed for the purpose of 
 prediction, for instance as to the consequences of an increase 
 in the world's supply of gold. 
 
 Inferences of the latter kind are, I admit, more hazardous. 
 The presumption that, if we increase the amount of gold in 
 the banks, credit will be increased in the same proportion is 
 open to Professor Nicholson's remark that 'the strengthening 
 of the foundations does not of itself raise the superstructure ' 
 (The Rise of Prices, Quarterly Review, 1912). His polemic 
 and that of Professor Anderson (loc. cit.) against the assumed 
 stability of ratios have force. But 1 think that much of 
 Professor Fisher's construction will be found to remain stand- 
 ing when it is considered that the stability of the coefficients 
 V the velocity of money, and k the ratio of M' (deposits) to M 
 (money proper in circulation) and of other ratios is not postu- 
 lated as to ' transitional ' short periods, nor yet, if I rightly 
 interpret, as against secular changes — in very long, as opposed 
 to merely normal, periods (cp. Irving Fisher, op. cit., p. 166, 
 ' if a nation grows richer per capita, the velocity of circulation 
 will increase ' ; p. 162 — referring to ch. xii — 'statistically. . . 
 the ratio M^/M has changed from 3-1 to 4-1 in fourteen years ')► 
 
30 CURRENCY AND FINANCE 
 
 The quantity theory in the narrow primitive sense in which 
 change of P is predicated of change in M only (abstracting 
 or ignoring M') retains some probability for normal periods 
 such as I suppose Professor Pigou to have in view when he 
 says : ' For the most part . . . such variations as occur in the 
 supply of money arise out of variations in the supply of money 
 proper. Furthermore they are in general proportioned to 
 these variations. For, when the quantity of money proper 
 available for bank reserves and circulation together is halved, 
 both the quantity of money proper and the quantity of bank 
 money that is called into circulation by a given demand price 
 will also be halved ' {Wealth and Welfare, Part V, ch. iv, § ii). 
 This statement does not apply to ^ temporary ' variations as 
 pointed out in a subsequent passage (§ 13) ; nor, as I presume, 
 to very long periods. Even as to normal periods in an 
 ordinary sense the statement just quoted must be admitted, 
 I think, to be somewhat bold and trenchant. We may say of it 
 what Mill says with regard to a statement of Ricardo's, that 
 'it contains sufficient truth to render it admissible for the 
 purposes of abstract science \ The statement has, I think, 
 the kind of Probability for which Professor Pigou has 
 accepted the designation ' unverified *, the most probable 
 statement that we can make, yet not necessarily very 
 probable (cp. Wealth and Welfare, pp. 47, 61, 454). 
 
 Page 5. With reference to 'rapidity of circulation*. Mill 
 says : * The essential point is not how often the same money 
 changes hands in a given time, but how often it changes in 
 order to perform a given amount of traffic. We must com- 
 pare the number of purchases made by the money in a given 
 time not with the time itself, but with the goods sold in that 
 time.' As I interpret. Mill's rapidity , or efficiency as he 
 
 V 
 suggests calling it, say E^ = f^i, where [7] is the unit in 
 
 which (our) T is measured, that is the number of times that 
 a unit of money changes hands in order to purchase a unit of 
 goods during a unit of time. Say T = N\T\ 
 MV_MV_ _M 
 T ~N\T^ ~ N\ ' 
 
IN TIME OF WAR 31 
 
 This definition is consonant with Mill's propositions concern- 
 ing his coefficient. Thus he says, that ' the quantity of money 
 in circulation is equal to the money value of all the goods 
 sold, divided by the number which expresses the rapidity 
 of circulation* (loc. cit.^ par. i). That is, in our notation, 
 M=TxN'^E, which follows from the proposition stated 
 above. Again, Mill says (loc. at.) : * The amount of goods and 
 transactions being the same, the value of money is inversely 
 as its quantity multiplied by what is called the rapidity of 
 circulation.* This proposition, too, holds good if we under- 
 stand the hypothesis to signify that T and E remain the same 
 while the quantity of money is changed. Take, for example. 
 Mill's illustration : * If the money in circulation is 100,000/. 
 and each piece changes hands by the purchase of goods ten 
 times in a month, the sales of goods for money which take 
 place every month must amount on the average to 1,000,000/.* 
 Let that be the state of things at an initial epoch (loc. ct'L, 
 par. 2). Then E = 10, whatever the unit of goods may be. 
 Suppose, for instance, that the unit of goods is a ton, worth 
 at the initial epoch £2. Then N = 500,000. And E the 
 number of times that a unit of money changes hands by the 
 sale of a ton = 10. For it takes two pounds to effect the sale 
 of a ton. And 500,000 such sales are effected with 100,000 
 pieces ; 2x500,000-^100,000 = 10. If now at a later epoch 
 the quantity of money becomes doubled, while T and E remain 
 the same, according to the theory the price of a ton becomes 
 £4, which is consistent with the data. For, since it now 
 takes four pounds to effect the sale of a ton, and since as 
 before there are 500,000 tons sold, while there are now 
 200,000 pounds in circulation, by parity of reasoning 
 £= 4x500, 000 -f 200, 000 = 10, as before. But in the case 
 supposed an interpretation clause is necessary to render 
 appropriate the 'circumlocution' which Mill gives in the 
 context as the definition of rapidity or efficiency, namely ' the 
 average number of purchases made by each piece in order to 
 effect a given pecuniary amount of transactions ' (loc. ctt, end 
 of par. 3). When we are considering changed quantity of 
 money attended with change of price, we must understand by 
 ' a given pecuniary amount of transactions ' not a constant 
 
32 CURRENCY AND FINANCE 
 
 amount of money employed in purchases (e.g. 1,000,000 in 
 the example given), but constancy in the amount of goods 
 which would have been sold for that sum at the initial epoch. 
 The use of the ' old prices ' to measure change in quantity is 
 a familiar feature of the index-numbers invented by Bourne 
 and Giffen, which will be referred to in a subsequent note. 
 There is much to be said for Mill's definition. But its use 
 requires great care, and I am not sure that it has an advan- 
 tage over Professor Fisher's familiar and easily understood 
 nomenclature. 
 
 Jevons too seems not to have made an improvement by his 
 use of the term efficiency. ' By the efficiency of the currency ', 
 he says (Money , p. 336), ' we mean the average number of ex- 
 changes effected by each piece of money in a unit of time such 
 as a year.' The term ' velocity ' seems more proper to denote 
 number per unit of time. 
 
 Page 7. The entomological statistics which have been 
 adduced to illustrate monetary circulation will be found among 
 the Supplementary Notes in the Journal of the Royal Statistical 
 Society for 1896, p. 529. Statistics in eodem genere are given 
 in an earlier article in the same volume of that journal on 
 Unprogressive Communities, p. 258 ; among Miscellaneous 
 applications to the Calculus of Possibilities in the said journal 
 for 1897, p. 696 ; and in a paper on Statistical Observations 
 on Wasps and Bees in Biometrika, vol. v. 
 
 Let us in the spirit of the preceding note represent the 
 rapidity of the circulation as the relation between a certain 
 unit of work done (the analogue of goods sold) and the number 
 of journeys made (the analogue of purchases made by a mone- 
 tary unit) in the performance of that work. The quantity of 
 work may be considered as varying with the weight of the 
 load brought home, and the degree of resistance or other kind 
 of trouble required in collecting a load (for instance a load of 
 liquid honey is procured with much less effort than a fragment 
 hewn from a block of dried sweets. Cp. loc. cit, 1896, p. 259). 
 The variations in the quantities which correspond to the 
 monetary coefficients V, 7", P, il/— say v, t, p, m — are suited 
 to illustrate the changes in the Equation of Exchange which 
 
IN TIME OF WAR 33 
 
 probably takes place in the course of a long war during which 
 different economic equilibria are set up and last each for a 
 short period. It is observed that v, the rate of turnover, is 
 markedly higher in the early morning and late evening than 
 in the middle of the day. It was 56 minutes in the instance 
 adduced (relating to hours after 10 a.m.), 36 minutes in another 
 instance, and so on. Whereas in the midday instance, periods 
 near sunrise or sunset, about 15 minutes was the usual time. 
 If we make the tenable assumption that the work done at all 
 hours is proportioned to the time occupied by a journey, then 
 the efficiency is greater at the very early and the very late 
 hours. The awkwardness of using the term efficiency where, 
 from the point of view of mechanics, we might expect the 
 predication of inefficiency (more journeys being required to 
 produce the same result), is paralleled by the infelicity of 
 attributing greater ' efficiency * to money when its purchasing 
 power is diminished. The entomological allegory is not 
 adapted to illustrate the ' passiveness ' of P, the location of 
 the cause of change with some other of the coefficients, in 
 particular M, rather than P. It has been suggested to me 
 by a distinguished entomologist that the shortness of the late 
 evening excursions may be accounted for by an instinct which 
 forbids going far from home, or entering on a job which 
 requires a long time for its execution, at an hour when the 
 coming on of night may be apprehended. If so the causa 
 causans of the change in p is to be sought in p itself, or v^ 
 rather in m relative to /, a ratio which we have supposed to 
 be constant. 
 
 Page 9. Dr. Rowley's definition of index-number is given 
 in his Elements of Statistics. For the suggested metaphysical 
 parallel see Locke, Essay on the Human Understanding, 
 Book I, ch. xiii. 
 
 Page 9. Let ^0, q^t <1^'-- be the quantities sold (including 
 re-sales) per unit of time at one epoch and q^y q{, q(\.. the 
 corresponding quantities at another epoch. Then the ratios 
 qjq^, q(lq^,>., are to be combined in a weighted average as 
 
 ^' "- 1" 1" 
 
 r„ a+^+y+... 
 
 «m E 
 
34 CURRENCY AND FINANCE 
 
 If, to begin with, we put for the weight of each commodity 
 the value of the quantity sold per unit of time at the initial 
 (or some other basic) epoch, p^, p^ y p^' being the prices at 
 that epoch, we have 
 
 T, q,po+q:p:-^q:'p"' 
 
 the ratio between the value of the new quantities at the old 
 prices and the old quantities at the old prices. The first 
 three of the constituents employed by Professor Fisher in his 
 calculation of T are thus weighted. But as this weighting 
 does not take account of the frequency with which com- 
 modities are resold, it may be proper to multiply each weight 
 by a new coefficient. The set of weights will thus become 
 ^^oPo, bq,%^, cq:'p:\.,. Put ap, = A, bp^ = B,,.. Then TJT, 
 may be written 
 
 Aq,-\-Bq,'+... ' 
 
 This form is virtually the same as that used for the two 
 indicia, Tons and Letters carried by the Post Office to which 
 Professor Irving Fisher assigns weights not based on amount 
 of sales. It might be advisable to use this form for all the 
 constituents, treating the value of sales (qp) where ascer- 
 tainable as an important element for judging of the weights 
 (A, B, &c.). Also a larger number of indicia might be available, 
 perhaps as many as Professor Mortara has used to measure 
 progress (Giornale degli Economisti, Feb. 1914. Cp. Benini, 
 loc. cit.y Feb. 1892; and Julin, Journal of the Royal Statistical 
 Society, vol. Ixxiv, 191 1, p. 253 et seq.). 
 
 Page 10. Giffen's masterly estimates of the ' increase in 
 the quantity' of foreign trade are contained in the follow- 
 ing Parliamentary Papers : 1878-9, C. 2247 ; 1880, C. 2484 ; 
 1881, C. 3079; 1884, C. 445. His methods are discussed in 
 my memorandum on Measuring variations in the value of the 
 monetary standard, Report of the British Association for 1889, 
 p. 139. In the fourth section of the same memorandum 
 I notice Mr. S. Bourne's cognate method which has some 
 claims to priority. The fifth section introduces Sir Rawson 
 
IN TIME OF WAR 35 
 
 Rawson's conception of an average ton (of merchandise), 
 a conception which may assist us to understand the nature 
 
 T 
 
 of the index-number represented by -7^ . The ' tons ' speci- 
 
 fied in a former note might be conceived as averages of this 
 kind. 
 
 The quaesitum in this problem— the thing behind the index- 
 number — may be described as 'something mysterious and 
 almost metaphysical ', as I have put it when referring to this 
 problem in order to illustrate the method employed by 
 Mr. George Wood to measure increase in the consumption 
 of goods by the working classes (Journal of the Royal Statis- 
 tical Society, vol. Ixii, 1899, p. 670). Mr. Wood formed an 
 index-number out of fourteen ratios, each given by comparing 
 the quantity of a commodity consumed at one date with the 
 quantity of the same commodity consumed at another date. 
 This construction is of the general kind which I regard as 
 appropriate to the problem now before us. The validity of 
 the method is verified by observing that the results remain 
 approximately the same while very different systems oi weights 
 are employed for the purpose of averaging the ratios. 
 
 Page 10. Employing Professor Irving Fisher's Equation 
 of Exchange to test the current conclusions as to the existence 
 of monetary inflation, I am concerned here only with his 
 method, not with his results. I am not concerned to defend 
 him against all the criticisms of his work which have lately 
 been made by Professor Anderson in his highly polemical 
 treatise on The Value of Money. I am disposed to concede 
 that the numerator of the fraction used by Professor Fisher 
 to represent the level of prices in America is unduly affected 
 by cheques drawn in the course of speculative sales and loans 
 between brokers ; that even if such items are admissible in 
 the numerator, there ought to be items relating to correspond- 
 ing quantities in the denominator. As I have already admitted, 
 I regard an inference as to the change in the price-level from 
 observation in the change of M only as more precarious 
 than one that it is based also on the change of M\ Nor am 
 I prepared to deny Professor Anderson's thesis with respect 
 
36 CURRENCY AND FINANCE 
 
 to change in the price-level that ' the cause is with the prices ' 
 —sometimes (Value of Money, p. 310). In the pretty example 
 given by Professor Anderson (loc. at.) of the wages of maid- 
 servants reduced by a combination of employers, certainly 
 the lowering of the price-level by lowering the price of 
 maid-service while all other prices (and the quantity of money) 
 remain constant, seems to be caused proximately by the 
 reduction in the velocity of money, and ultimately by the 
 reduction of wages. 
 
 I only require the equation of exchanges for the purpose of 
 showing that sometimes the change in the price-level is attri- 
 butable to changes in the quantity (and velocity) of money. 
 1 am only concerned to rebut those criticisms which repre- 
 sent the method as so unsound or unworkable as not to be 
 available for that purpose. To this extent I dissent from 
 much of Professor Anderson's criticism on grounds which 
 may be distinguished as (a) Economic and [b) Statistical. 
 
 (a) Under the first head I submit that the critic has made 
 too much of the difficulty attending the distinction between 
 * transitional ' and ' normal * periods. It is a difficulty which, 
 as Dr. Marshall has shown, is presented in other branches of 
 economic science ; in particular wdth reference to the funda- 
 mental Ricardian theorem that value is proportioned to cost 
 of production. Again a protest is called for against the 
 defiance of received doctrine which Professor Anderson sums 
 up in the following statement : ^ The value-curve for the uses 
 of money is not described by the equation xy = c* (op. cit., 
 p. 149). I do not mean of course that the formula is fulfilled 
 exactly ; but that, broadly speaking, money is intermediate 
 between the two classes which Mill thus distinguished : ^ Some 
 things are usually affected in a greater ratio than that of the 
 excess or deficiency, others usually in a less ' (Book III, ch. 
 viii, § 2, last par.). For short periods and quaint instances 
 no doubt the proprium ascribed by Mill to money does not 
 hold good ; but broadly and normally is not Mill's statement 
 true, and for the reason lucidly explained by Mill in the 
 context (' there is always a demand for as much money as 
 can be got * . . . ' the demand consists of everything people 
 have to sell \ &c.) ? 
 
IN TIME OF WAR 
 
 37 
 
 (b) On statistical grounds I dissent altogether from Pro- 
 fessor Anderson's conception of the denominator T, which 
 represents the volume of trade. ' The contrast ', he says, 
 ' between the '^ money side and the goods side " of the equa- 
 tion is a false one. There is no goods side. Both sides of 
 the equation are money sides.' To Professor Anderson this 
 ' seems the only interpretation (of Professor Fisher's equa- 
 tion) which is intelligible ' (op. cit, pp. 161-2). To those who 
 have followed the interpretation above given it will seem 
 perfectly intelligible that there is a 'goods side '. For TJT^ is 
 compounded of elements each one of which is a ratio between 
 quantities of goods. In the light of that conception the diffi- 
 culties raised about adding 'a hundred papers of pins, a 
 hundred diamonds, a hundred tons of copper' (ibid.) dis- 
 appear. More generally it is a matter of complaint that the 
 author does not sufficiently utilize the Theory of Probabilities. 
 Many of the difficulties which he has raised are of a kind 
 which that Theory has surmounted in the parallel case of 
 index-numbers relative to prices. Thus the omission of large 
 tracts of data — or danda — the inclusion of which seems recog- 
 nized by the logic of the subject (op. cit., p. 170), has to be 
 faced and does not prove fatal in the construction of the 
 more familiar head of index-number (cp. Memorandum on 
 measuring changes in the value of money, Report of the British 
 Association, 1888, p. 193). The circumstance that we are 
 principally concerned with ratios such as PjP^y (above, p. 9) 
 renders the requirements of logic less exacting than Pro- 
 fessor Anderson would have us to believe. Again, the diffi- 
 culty caused by the continual change of weights in T (op. cit., 
 p. 165) is exactly of the kind which Professor Wesley Mitchell 
 has pointed out in his magisterial report on Index-numbers 
 (Bureau of Labour, No. 173, p. 79), and shown not to be fatal. 
 The index-numbers which I have presented on an earlier 
 page have been adduced not only on account of their intrinsic 
 interest but also illustrating the kind of roughness which 
 is smoothed over by the processes which are the object of 
 Probabilities. Those who are not conversant with that 
 science might make great play with objections founded on the 
 discrepancies in the construction of the said index-numbers. 
 
38 CURRENCY AND FINANCE 
 
 Commodities so important as Tobacco, Flax, Zinc, &c., are 
 inserted in one (or two) of the index-numbers and omitted 
 from another. Different varieties of the generic commodities 
 are used in the different computations. In one of the index- 
 numbers the items are weighted', in the other two not. And 
 yet the results seem fairly good ; consensus, that test of science, 
 is not wanting. 
 
 Section III 
 
 Page io. Inflation is defined in the Economist for Sep- 
 tember I, 191 7. The parallel conception is enounced by 
 Tooke in the first volume of his History of Prices, p. 154. 
 Compare Nicholson, Economic Journal, vol. xxvi (1916), 
 p. 425 : ' An increase in the currency in accordance with the 
 growth of wealth, trade, population, &c. is regarded as normal. 
 Inflation means an abnormal increase.' So at the beginning 
 of the paper which he read before the Statistical Society this 
 year. Professor Nicholson briefly describes inflation as 
 ' inordinate '. For other definitions of ^ inflation ' see the 
 article by Professor Pigou in the Economic Journal for 
 December 191 7. 
 
 Page ii. The paper which Professor Foxwell read before 
 the Institute ot Actuaries last May is published in the Insur- 
 ance Record on March 30, April 6, and April 13 ; also in the 
 Port Magazine and Insurance Monitor for April 7 and 14, 
 1917- 
 Page II. After suggesting that the rise of prices during 
 the present war might be partly accounted for by a diminu- 
 tion in the ^ velocity * (the frequency of re-sale) of goods, 
 I found an equivalent suggestion made with more cogency 
 and circumstance by Professor Lehfeldt in a paper which 
 I have been privileged to see before its publication in the 
 Economic Journal. 
 
 Page ii. As to the need of the Calculus of Probabilities 
 in order to guarantee the use of a weighted average in cases 
 where the weights are not ascertainable accurately, I may be 
 permitted to cite some observations which I have made with 
 
IN TIME OF WAR 39 
 
 respect to an index-number for prices, based on consumption, 
 family budgets, and data of that kind. * This quaesitum, it 
 may be thought, does not involve the Calculus of Probabilities. 
 Nor would it if we knew the factors (the quantities of each 
 commodity to be multiplied on its price) accurately. But in 
 general our faculties attain only vague impressions as to the 
 proper relations. We are sensible that cotton is more impor- 
 tant than indigo ; but how much more important we cannot 
 discern accurately, especially if, as usual, different proportions 
 of family or national income are expended on the respective 
 commodities at the compared epochs. The Calculus of Pro- 
 babilities smooths over these gaps in our knowledge. In the 
 concatenation of averages the chain as a whole is stronger 
 than each link ' (On the application of the Calculus of Proba- 
 bilities to Statistics, by F. Y. Edgeworth, Bulletin xviii of the 
 International Statistical Institute, 1910, p. 122). I may also 
 refer to what I have said with reference to the absence of the 
 Probability-Calculus, which is conspicuous in Mr. Walsh's 
 ' Measure of Exchange ' (Economic Journal, vol. xi, 1901, 
 pp. 409, 413). Beside the primary average which he contem- 
 plates, constructed with weights supposed to be ascertained, 
 there is available a secondary average guaranteed by the 
 Calculus in case of the weights being far from accurate, as 
 when they are treated as equal, though the articles weighted 
 differ considerably in their importance. 
 
 In the case of T, the flow of trade, I think that the property 
 of Probabilities to hide a multitude of inaccuracies is par- 
 ticularly required, considering how uncertain is the relative 
 importance (for the purpose in hand) of the different items. 
 
 Page 13. In the first Table of Index-numbers relative to 
 prices the first row is taken straight from the Economist of 
 January 6. It may be well to remind the reader that each of 
 the totals is not a simple, but a weighted average of the five 
 preceding entries. The data for the second row are taken 
 from the index-number of the Statist (a continuation of 
 Sauerbeck's statistics), published in the Journal of the Royal 
 Statistical Society for March 191 7. The index-numbers 
 there given for six different classes of goods, and for the 
 
40 CURRENCY AND FINANCE 
 
 aggregate, with reference to the period 1868-77, have been 
 reshaped as follows for the sake of comparison with the 
 Economist's index-number, which refer to the period 1901-5. 
 First I have raised the given index-number for each class by 
 the following rule of three : As the index-number given for 
 1901-5 is to 100, so is the given index-number (referring to 
 1868-77) to th^ required index-number (referring to 1901-5). 
 For example, the given index-number for minerals at the 
 period 1901-5 is the average of the index-number given for 
 each year of that period. That is, 1 (89 + 82 + 82 + 81 + 87 = 
 84'2). Accordingly, to find the index-number for minerals 
 relative to the period 1901-5 at any assigned epoch, e.g. 
 June 30, 1914, it is proper to divide the given index-number, 
 viz. 96-7, by 84-2, and to multiply the quotient by 100. There 
 results 115, the number given in the table. Likewise the 
 given index-number relative to 1868-77 for the total, being 
 the average of the totals given for the five successive years, 
 is 70. Accordingly, in order to transform to the new base 
 the total number given for any assigned epoch, e.g. for 
 December 31, 1916, 154-3 C^^^- ^^^-y P- 294), it is proper to 
 divide the given number by 7. There results 220-5, ^^e 
 number given in the table. It should be noticed that the 
 number for the total thus formed is not the simple average of 
 the numbers formed for the several classes. When the 
 numbers pertaining to all the classes have been ascertained, 
 the two pertaining to Animal Food and Vegetable Food 
 have been combined into one (by taking their average) under 
 the new heading Cereals and Meat for the purpose of com- 
 parison with the index-number of the Economist. 
 
 In the second table the numbers in the first row relating 
 to the year 1916 are formed by taking averages of the (twelve) 
 numbers given by the Economist (January 191 7) for each 
 month in that year. The numbers for the totals given by 
 the Economist, it may be well to repeat, are weighted averages 
 of the numbers for the several classes. For the first half of 
 the year 1914 I have taken the average of the two numbers 
 given by the Economist under each head for the first and 
 second quarter respectively of 1914. For the purpose of 
 comparison with the Board of Trade index-number, I have 
 
IN TIME OF WAR 41 
 
 combined the numbers thus found for Cereals and Meat and 
 for Other Foods into one, under the new head Food and Drink, 
 For example, the number for Cereals and Meat is 112-5 for 
 the first half of 1914, and for the same period the number for 
 other foods is 1 16. Accordingly I have put for the aggregate 
 the simple average, viz. 114 (fractions less than 0-25 being 
 neglected). It would have been more proper to take the 
 weighted average of the two numbers, assigning the weight 5 
 to the first, and 3 to the second. But the result would not 
 be sensibly different. For the second row of Table II, I have 
 reshaped the numbers given by the Statist in the manner 
 already shown ; and I have thrown the three entries under 
 Animal Food, Vegetable Food, Tea, Coffee, and Sugar into 
 one under the Board of Trade heading, Food and Drink. 
 Food, Drink, and Tobacco, the heading in the Board of Trade 
 index-number, would be inappropriate, as Tobacco does not 
 enter into Sauerbeck's index-number. The numbers for the 
 third row are obtained from the Labour Gazette for January 
 1917, by adjustment to the base 1901-5. 
 
 Page 14. Table III is formed from the penultimate table 
 in the Appendix to Professor Nicholson's paper on Infla- 
 tion in the Journal of the Royal Statistical Society for July 
 1917. In the columns on the left and right of the central 
 (double) line there are placed respectively the average amount 
 of currency-notes in each quarter and the average index- 
 number for the following quarter. The latter entries are 
 obtained by combining the index-number of the Economist 
 with that of the Statist. For this purpose the Statist's 
 number is pushed up, as above explained, so as to refer to 
 the base 1901-5. For example, the Statist's average number 
 for 1 915, January, February, March (19151), given by Pro- 
 fessor Nicholson is 100, which divided by 0-7 gives 142-86. 
 The average of this number and that given by the Economist, 
 viz. 143, is 142-9. The next step is to tabulate the increase 
 of currency-notes — and likewise that of the index-number — 
 for each quarter as compared with what it was in the pre- 
 ceding quarter. Thus, whereas the average of the currency- 
 notes was 27 (million sterling) in August-September 1914, 
 
 aioi F 
 
42 CURRENCY AND FINANCE 
 
 and became 35 for the quarter October, November, Decem- 
 ber, the increase for that quarter, viz. 1915 iv, is 8. The 
 corresponding increase in the index-number for 1915 i is 16. 
 The next step is to find the mean of each of the two columns 
 showing increases, and the deviations from the respective 
 means, say x and y. These deviations are ranged in the 
 columns headed c and y. From these columns, with n = g, 
 we form the coefficients in round numbers 
 
 7? = *^^-^^ 19. 
 
 Whence r, the coefficient of correlation, = = 0-3 nearly. 
 
 There is thus evidence of positive correlation between the 
 phenomena under consideration — increase of currency-notes 
 and subsequent rise of prices — but not of a very close 
 correspondence; not yet very strong evidence since the 
 determination of the correlation coefficient is liable to a large 
 probable error (cp. Yule, Theory of Statistics, p. 352). The 
 hypothesis is at least more probable than that of a causal 
 connexion between the increase of the currency and that of 
 the index-number in the same quarter ; for which I find — 
 quite in accordance with Professor Nicholson's theory — a 
 negative correlation ! 
 
 Page 16. I do not preach ' State contenti, umana gente, 
 al quia *, but rather point to a position intermediate between 
 the oTL and the Slotl : correlation as understood by Professor 
 Karl Pearson {Grammar of Science, ed. 3, p. 177), a category 
 which includes causation as a limiting case. 
 
 Page 16. Professor Anderson raises a nice question when 
 he maintains that 'the first change in the situation may 
 appear in prices themselves ', rather than in the quantity and 
 velocity of money (op. cit., p. 126, etpassim). I should think 
 that the fact might be admitted as a transitional short period 
 phenomenon. I have been told that on a Sunday preceding 
 a certain fair to be held on Monday horse-dealers and their 
 customers get into touch with each other and that prices are 
 
IN TIME OF WAR 43 
 
 thus sometimes settled before the fair. There is no objection 
 to describing a phenomenon of this kind in the words just 
 quoted from Professor Anderson. The essential point is that 
 prices cannot be maintained at a new level without a change 
 in the coefficients of the equation of exchange. That is the 
 answer to be given in the case thus put by Professor 
 Anderson : 
 
 ' Assume an island, which produces a staple widely used, 
 whose chief centre of production is outside the island. 
 Assume that this staple, an agricultural product, rises greatly 
 in price, owing to a blight, which promises to be permanent, 
 in the main producing region. The blight does not affect 
 the island, however. Let this product be the main product 
 of our island, which we shall assume to be small. Let the 
 island have communication with the outside world by boat 
 only once in three months. Let it be, however, in constant 
 communication by cable. Word comes by cable of the rise 
 in the price in the staple. The staple at once rises in the 
 island. No new money has come in to cause it. Will this 
 be a rise in the price-level ? Will there be compensating 
 reductions in the prices of other things to leave the price-level 
 unchanged ? What prices can fall ? Not the prices of 
 goods that have been imported to the island, surely. They 
 will rather tend to rise, because everybody on the island will 
 feel richer than before, and will be disposed to buy more 
 freely. Meanwhile, merchants and bankers on the island 
 will be more ready to extend credits than before, so that they 
 will be able to buy more freely. What else can fall ? ' 
 
 The answer which I have given is I think substantially the 
 same as that which is given by the reviewer of Professor 
 Anderson's book in the Economist (September i); except 
 that he does not lay emphasis on changes in the velocity of 
 money, and of goods (abpve, p. 11 and note). 
 
 Section IV 
 
 Page 18. Mr. Pethwick Lawrence's statement as to the 
 relation of national borrowing to inflation occurs in his article 
 on War Economics in the Economic Journal for 1915 (cp. 
 
44 CURRENCY AND FINANCE 
 
 Sprague, Economic Journal, March 191 7, p. 5, and the 
 Economist, passim). Mr. Pethwick Lawrence's admission that 
 private debt would have the same effect occurs in the dis- 
 cussion on Professor Nicholson's paper reported in the 
 Journal of the Royal Statistical Society for July 191 7, p. 501. 
 Macculloch's cheerful anticipation of an increase of private 
 borrowing is expressed in the Edinburgh Review for October 
 1823. Leroy Beaulieu expects that consequence, but with 
 apprehension (Science des FinanceSy vol. ii, p. 288, ed. 7), 
 referring to the proposal to pay off the indemnity after the 
 Franco-German War by one huge impost. 
 
 Page 19. The views of Professor Seligman and of Pro- 
 fessor Henry Adams as to the issue between loans and taxes 
 are referred to in the Economic Journal for September 191 7. 
 See also the June number of that journal, p. 301. 
 
 Page 19. The doctrine of the older economists as to the 
 nature of an internal public loan is disputed in my Lecture 
 on the Cost of War (Oxford University Press, 19 15). An 
 important exception to the agreement of contemporary 
 economists on this matter is made by the judgments which 
 Mr. Henry Higgs has recently expressed in his National 
 Economy. He takes Mr. Hartley Withers to task for saying 
 with respect to Moans raised at home' that 'the interest on 
 them is raised from the taxpayers and paid back to the tax- 
 payers, and the nation as a whole is none the poorer *. He 
 dissents on similar grounds from the Economist, and likewise 
 from the Statist when it says : ' The effect of the great debt 
 the country was now creating would merely be to transfer 
 spending power from the whole community to the people who 
 subscribed the loans.' ' These arguments ', Mr. Higgs objects, 
 ' tacitly assume that if Government had not been compelled 
 to make the expenditure which has driven it into the loan 
 market, the home investor would have derived no profit 
 from his capital.' It is certainly very natural to attribute this 
 tacit assumption to the views in question, since they really 
 were associated with that assumption when first presented 
 by Melon 'and other paradoxical writers. And Mr. Higgs 
 
IN TIME OF WAR 
 
 45 
 
 is certainly right in denouncing that assumption and its prac- 
 tical consequences in the strongest terms. But perhaps he 
 is hasty in attributing that assumption to writers who use 
 expressions Hke those which he has quoted. I for one have 
 accepted the similar expressions of Macaulay and the first 
 Sir Robert Peel, upon the distinct understanding that they 
 imply no arriere-pensee of the kind now in question {Cost of 
 War, p. 12). ' \i\ I add, 'assent to old Sir Robert's dictum 
 [that the public debt is from ourselves to ourselves and so 
 forth] is taken to imply that there is no practical difference 
 between a loan contracted for the purpose of manufacturing 
 shells and a loan conducing to productive industry, by all 
 means let us avoid the Charybdis of bottomless extravagance 
 and incline rather to the not very monstrous Scylla of inexact 
 conceptions' {op, at., p. 13). 'To minimize the diminution of 
 capital*, this I have described as the criterion for determining 
 the proper balance between loans and taxes. My withers 
 certainly are unwrung; and I think the same may be said 
 of the Statist, and with a certain peculiar propriety of the 
 Economist ! 
 
 For further explanation of what is my own, and, I believe, 
 the prevalent view, I may refer to Professor De Viti-De 
 Marco's contribution to the Theory of Public Debt in his 
 Saggt di Economia e Finanza (1898); especially ch. i, § 4, 
 where he makes abstraction of the natura delV tmpiego, the 
 character of the business undertaken by the State, whether 
 productive or not, and ch. iv, § i, ' On the erroneous opinion 
 that loans are the cause or the necessary pre-requisite of 
 unproductive national expenditure.' I may also appeal to 
 Professor Pantaleoni's Imposta e dehito (Giornale degli Econo- 
 misti, July 1891 ; reprinted in the author's Scritti van). 
 1 have not followed the criticisms of these authors by Pro- 
 fessor Griziotti in the lengthy articles which he has con- 
 tributed to the Giornale of this year. 
 
 Page 20. Professor Seligman's views are further developed 
 in a privately printed pamphlet which I have been privileged 
 to see. Against his arguments and high authority are to be 
 set Professor O. Sprague's advocacy of the Conscription of 
 
46 CURRENCY AND FINANCE 
 
 Income, the plan of taxes only (in the Economic Journal for 
 March 191 7). He is at least right when he deprecates the 
 illusion that by borrowing the burden of war costs is shifted 
 from the present to future generations (loc, cit, p. 8), and other 
 misconceptions (p. 6) as to the nature of public loans. And 
 he no doubt strengthens his case by the suggestion — similar 
 to that which has been above cited from Professor Pigou — 
 that in war time taxation on an onerous scale would not have 
 its normal effect in checking production {}oc. cit., p. 9). 
 
 Page 20. Dietzel advocates the policy of loans only in 
 his Kriegssteuer oder Kriegsanleihe, 1912. There is a certain 
 similarity between his views and those of his namesake 
 (? relative) who wrote in the 'fifties on Staatsanleihen (referred 
 to by Bastable, Public Finance). 
 
 Section V. 
 
 Page 21. It may be just worth remarking that the quip 
 about Wordsworth's office, which appeared in Byron's farcical 
 piece The Blues (1823), was an anachronism in so far as the 
 hat-tax was withdrawn — on account of its unproductiveness — 
 by Percival in 191 1, some time before Wordsworth was 
 appointed Stamp-distributor. 
 
 Page 22. The purple passage about direct and indirect 
 taxation occurs in Gladstone's Budget Speech of 1861. 
 
 Page 22. The various species into which the generic 
 doctrine of sacrifice is divided are discussed by me in the 
 Economic Journal; vol. vii (1897), pp. 550 et seq., in the same 
 journal, vol. x (1900), pp. 173 et seq., and in the Quarterly 
 Journal of Economics for May 1910, pp. 459 et seq. 
 
 My authority for attributing the doctrine of like sacrifice 
 to Pierson is the treatise of Mr. Cohen Stuart, the leading 
 authority on this branch of the subject. As his Bijdrage tot . . 
 progressive Inkomstenbelasting is not very accessible, the 
 reader may like to be presented with a specimen showing the 
 
IN TIME OF WAR 47 
 
 significance o like or equi-proportional — as distinguished 
 from equal — sacrifice. Suppose that there are two persons 
 equally fond of music, but that music is the only recreation 
 of the one while the other has a variety of tastes and enjoy- 
 ments. Assume that the abstention from a particular concert 
 would occasion, the same amount of privation to each of these 
 individuals. Then abstention from the concert involves an 
 ^^?/«/ sacrifice to each, but not an equi-proportional sacrifice, 
 since the pleasure forgone is a smaller percentage of the total 
 amount of satisfaction [the subjective income so to speak] 
 enjoyed by the man who has other enjoyments (pp. cit.), 
 I suppose that in carrying out this principle the legislature 
 would presume that the man who had a larger income (with 
 no claim for exemption) would have more enjoyments. It 
 would not be necessary to obtain direct evidence, such as 
 was forthcoming in the case of a certain Roman magnate ot 
 whom Gibbon records : * twenty-two acknowledged concu- 
 bines and a library of sixty-two thousand volumes attested 
 the variety of his inclinations.' A variety of gratified inclina- 
 tions being presumed, like sacrifice, points more decidedly 
 to progression than equal sacrifice (Economic Journal, vol. vii 
 (1897), p. 561 note). 
 
 Page 23. The passages quoted from Professor Pigou's 
 Economy and Finance of the War occur at p. 32 and p. 81 of 
 that work. The property of first principles to come to the 
 front in unprecedented circumstances (cp. above, p. 3) is 
 strikingly exhibited by Professor Pigou's recourse in war 
 time to the principle of least sacrifice, which in ordinary times, 
 where normal motives act, is apt to be in abeyance. 
 
 Page 24. The writings of Dr. Marshall, to which reference 
 is made in this and the following section, are Presidential 
 Address to Section F of the British Association, 1890, 
 reprinted in the Journal of the Royal Statistical Society ; An 
 export duty on Coal, Economic Journal, vol. xi (1901), p. 266 ; 
 Taxation after the War, one of the Essays in After-war 
 Problems, 191 7. 
 
48 CURRENCY AND FINANCE 
 
 Section VI. 
 
 Page 26. Professor Taussig's address, from which an 
 extract is here quoted, is referred to in the Economic Journal 
 for September 191 7. In that context there are printed in 
 full Professor J. B. Clark's observations about a League of 
 Peace. 
 
 Page 27. In my Lecture on the Relations of Political 
 Economy to War (published by the Clarendon Press, Oxford, 
 1915) it is sought to derive some suggestions for the pro- 
 motion of international peace from a consideration of the 
 methods which have been employed for the promotion of 
 industrial peace. 
 
 PRINTED IN ENGLAND 
 AT THE OXFORD UNIVERSITY PRESS 
 

^