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 War Finance 
 
 BY 
 
 J. SHIELD NICHOLSON, 
 
 M.A.. SCO.. LL.D.. F.B.A. 
 
 Professor of Political Economy in the University of Edinburgh 
 
 SECOND EDITION 
 
 WITH THREE ADDITIONAL CHAPTERS 
 
 LONDON : 
 
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 ORCHARD HOUSE, WESTMINSTER 
 1918
 
 
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 «2 DcDicate& 
 
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 •^ TO THE MEMORY OF 
 
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 < GEOFFREY, 
 
 QQ 
 
 J MY ONLY AND DEARLY BELOVED SON, 
 
 2ND LIEUT. ROYAL FLYING CORPS, 
 
 WHO DIED ON THE 22ND AUGUST, I917, 
 
 AGED TWENTY-THREE, 
 
 OF WOUNDS RECEIVED ON THE PREVIOUS DAY 
 
 5 WHEN FLYING OVER THE GERMAN LINES 
 
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 'iv^. 
 
 )79G
 
 PREFACE TO THE SECOND 
 EDITION 
 
 Since the publication of the First Edition of this 
 book in the beginning of this year no changes have 
 occurred in the general financial situation which call 
 for a corresponding revision of the main argument 
 and conclusions. 
 
 The old economic warnings have been confirmed 
 more abundantly as shown in three new chapters.* 
 
 The first of these (Part II., Chap. XLIV.) deals 
 with Bolshevism. There has never been in the his- 
 tory of the world a more striking example of the 
 dangers of disregarding fundamental economic prin- 
 ciples. Occurrife morho. 
 
 The " Abandonment of the Gold Standard " 
 (Part I., Chap. II.) has become more pronounced. 
 The second new chapter (Part II., Chap. XLV.) 
 describes the continued abnormal increase in the 
 various forms of token money, notes and credit. In 
 Appendix B to this chapter the latest returns are 
 given of the issues of bronze and of silver. Quite 
 recently (August, 1918) the rate of increase in the 
 issues of Bank of England notes and currency notes 
 has become much more marked. The known export 
 of a large amount of these notes is causing concern, 
 as the ultimate destination is probably Germany for 
 use in a future peace offensive. 
 
 This continued inflation of British currency and 
 
 * Some of the materials have been pubUshcd in the Scotsman, and I am 
 obliged for the privilege of republication.
 
 viii PREFACE TO THE SECOND EDITION 
 
 credit has been associated with further specific 
 depreciation. In the beginnings of the inflation the 
 sceptical banker asked, Where is the premium on 
 gold ? After many attempts at concealment the 
 premium has come into the open. It was authorita- 
 tively reported in the Times (June i8, 1918) that 
 South African gold for trade uses commands a 
 premium of some 35 per cent, as compared with the 
 British standard official price. In technical language 
 the market price is so much above the mint price. 
 The premium on g( Id as a commodity is one recog- 
 nised measure of specific depreciation. (See Appen- 
 dix A, Part II., Chap. XLV.) 
 
 Specific depreciation of any national currency is 
 also shown by its relation to other national currencies 
 which have retained their normal convertibility with 
 gold. Compared with Holland and Spain the British 
 currency has made new records in depreciation 
 during the present year. A similar fall in relation 
 to the United States has only been prevented by 
 special loans. 
 
 Specific depreciation is of direct practical interest 
 only to those concerned in foreign trade and finance 
 or in the industrial uses of gold. Every one, how- 
 ever, is concerned with the general depreciation of 
 the pound stc rling or the fall in its purchasing power 
 as shown by the general rise in prices. 
 
 It is true that the rise in prices has been somewhat 
 retarded by the Ciovcrnmcntal control of important 
 commodities. J^>ut it is difiicult to see how this 
 control is to be maintained and extended in face of 
 the continued growth of war bonuses to labour of 
 all kinds, accompanied by a continued increase of 
 currency. 
 
 It was declared long ago by represenlali\e leaders 
 of labour that if the cost of living were controlled 
 the demand for bonuses would cease. In spite, 
 however, of the great work of Lord Rhondda and
 
 PREFACE TO THIl SECOND EDITION ix 
 
 the Food Ministr}^ war bonuses have increased 
 rapidly. 
 
 It was also said that the control of profits would 
 at once control the bonuses. But here again the 
 Government has itself taken over important indus- 
 tries, and yet the demand for bonuses seems rather 
 to have been stimulated. ^> . 
 
 Wlien the State takes over industrial capital it / 
 takes over also its burdens — and one of the greatest I 
 of its burdens is the distrust with which labour 
 regards capital. In political theory Government is 
 omnipotent, but in the actual management of labour 
 it is much more feeble than the private employer. 
 Government in this country yields much more easily 
 to economic pressure, and labour seems to regard 
 every bonus extracted from the State as so much 
 taken from the old enemy capital. 
 
 The recent history of the coal industry is instruc- 
 tive. The Government took over the coal mines 
 in February, 1917. A scale of prices was fixed to 
 meet the necessary capital charges and to give fair 
 wages to labour. In October, 1917, and again in 
 June, 1918, the price of coal was raised in order 
 to give war bonuses to labour. 
 
 The real meaning of this rise in price is that the 
 British Government imposes a tax on coal to benefit 
 a favoured class of workers. 
 
 An infernal tax on coal is one of the worst. Coal 
 is a necessary not only to consumers, but to producers. 
 Adam Smith even approved of a bounty on coal 
 (instead of a tax) so as to lower the price in places 
 distant from the pits. 
 
 An export duty on coal was indeed approved of by 
 the same Adam Smith because he thought the home 
 consumer should have a preference ! 
 
 But in the present War who would approve of an 
 export duty on the coal sent to France and Italy ? 
 Germany has seized the best of the French coal
 
 X PREFACE TO THE SECOND EDITION 
 
 regions. Are we to celebrate the entry of the 
 fifth year of war by an export duty on coal to 
 France ? 
 
 In Italy the German propagandism against this 
 country was fostered largely by the high prices of 
 British goods, especially coal. The British Govern- 
 ment has started recently in Italy a literary counter- 
 propagandism. How can it prosper if the price of 
 British coal is again to be raised ? 
 
 Coal is only one example. Other favoured classes 
 of the workers have been allowed to assume the right 
 of private taxation. Recently the bakers in Scot- 
 land have asked for a rise in the price of bread to 
 cover a rise in wages. 
 
 It is of the highest importance that the effect of 
 rationing and the control of prices should not be 
 dissipated by bonuses. 
 
 Such as it is, control of prices is the only remedy 
 or palliative of inflation. 
 
 The war bonus has been spreading both upwards 
 and downwards. The civil servants, both national 
 and municipal, have had their bonuses ; so have the 
 little boys and girls who are making hay before they 
 are caught by the new education. 
 
 The worst of the war bonuses is that the head of 
 the queue gets a second dole before the tail reaches 
 the shop door. The inequity of the war bonus is 
 well shown by the case of the National Ship3^aids. 
 If labour is released from the army it will only be 
 allowed by the Unions to work at civilian rates of 
 pay. At first sight a most just proviso, but what 
 can we think of a system of wages in which it is taken 
 for granted that civilians must always be paid at 
 higher rates than the military on active service ? 
 
 ThrGugh(.ut the volume it has been constantly 
 maintained that capital has had its bonuses no less 
 than labour. In a period of inflation c apital actively 
 employed first feels the benefit of the rising prices just
 
 PREFACE TO THE SECOND EDITION xi 
 
 as the consumer feels the burden. Apart from this 
 general prosperity of capital the public has been 
 startled by the exposure of some of the particular 
 bonuses to capital by the Committee on National Ex- 
 penditure. Compared, however, with the aggregate 
 war expenditure the total losses through these parti- 
 cular "errors" of all kinds are relatively small and 
 most of them will be written off under allowances 
 for " the sanctity of contracts " and the customs of 
 trade. 
 
 The cumulative effect of the over-payment of 
 capital (over-payment, that is to say, having regard 
 to the sacrifices demanded from all in a war for 
 national existence) is best realised by the growth of 
 the burden of the national debt. The aggregate 
 amount of debt has been largely increased by the 
 over-payment of the services of capital, and the 
 interest payable on this sum total is far higher than 
 it ought to have been. 
 
 These topics have been handled in various chapters 
 of this book * and in this place it is only necessary 
 to refer to the present situation. At last the growth 
 of the national debt (with the interest on it) is 
 beginning to cause grave concern to all who realise 
 the meaning in terms of taxation. 
 
 Unfortunately the number is still relatively small, 
 and that big baby, the general public, is still kept 
 from crying by two kinds of soothing syrup both very 
 well advertised. 
 
 First, the probable amount of the debt is greatly 
 under-estimated. It is assumed that when fighting 
 stops borrowing will stop. In the face of German 
 disrespect for treaties how long must we allow before 
 our naval and military expenditure is reduced to 
 peace level ? How are all the unknown elements 
 in demobilisation to be met ? How are we to recon- 
 
 * Pp. 97, 313, 37^-^ 402.
 
 xii PREFACE TO THE SECOND EDITION 
 
 struct the lost industries and tlie devastated lands 
 of our allies ? When can our allies repay our loans ? 
 How are we to fulfil the promises to labour of general 
 advancement after the War ? When will exports 
 again balance imports ? 
 
 Until the normal expenditure is covered by normal 
 revenue there must be an increase of debt. 
 
 Secondly, just as the debt is under-estimated, the 
 means of payment are over-estimated. 
 
 Vague talk of the unlimited resources of the British 
 Empire must be translated into terms of taxes. 
 Taxation is the process by which these resources 
 are utilised for Governmental purposes. It is clear 
 that our old peace taxation will fall far short of normal 
 expenses after the War. The increase in peace 
 charges and the charges for the new war debt can 
 only be met by heavily increased taxation. 
 
 What are the new taxes to be ? 
 
 Any great increase of indirect taxation is at once 
 ruled out because indirect taxes, to be productive, 
 must fall on the masses of the people, and to tax 
 the masses in the " new world " after the War is 
 " unthinkable." 
 
 Direct taxation means taxation of income or 
 capital. The rise in the income tax during the War 
 has magnified its inequities. There is a general agree- 
 ment that the present high rates ought not to be 
 continued (still less increased) without drastic reform. 
 The kind of reform, however, that is most pressed 
 is the steepening of graduation until at the limit the 
 millionaire becomes his own book-keeper with a 
 reasonable living wage. 
 
 Unfortunately, taxation of this kind anel elegree 
 will tend to destroy the sources of the higher incomes 
 and eventually the yield to the tax itself. In order to 
 prevent a chronic wasting disease of this character 
 some of our tax-reformers advise a surgical opera- 
 tion. They suggest a direct levy on capital to
 
 PREFACE TO THE SECOND EDITION xiii 
 
 reduce the national debt to an amount manageable 
 by ordinary, though heavy, taxation. 
 
 A new chapter (Part II., Chap. XLVI.) has been 
 introduced under the title " The Payment of War 
 Debt by the Taxation of Capital," showing some of 
 the dangers and difficulties of the proposed " levy 
 on capital." 
 
 The dangers of the proposal are of two kinds : both 
 of the gravest importance as affecting the War 
 
 itself. 
 
 The first danger is the support given to the 
 popular delusion that the war debt, however great 
 it may be, can be easily met from the wealth of the 
 wealthy, that it is for the wealthy to choose between 
 taxation of their income or of their capital, and that 
 the masses of the people can go on comfortably with 
 their war bonuses. 
 
 One of the persistent aims of this book has been to 
 expose this delusion. The war bonuses to labour 
 and to capital have probably more than doubled the 
 real burden of the war debt. This war debt, after a 
 certain point is reached, becomes an increasing source 
 of weakness in the effective conduct of the War. 
 
 The second danger of the proposed levy on capital 
 is that the owners of capital, especially of large 
 capitals, will see in it — however carefully it may 
 be guarded by declarations — the beginnings of 
 national repudiation and of the confiscation of 
 private property, the end of which things is Bol- 
 shevism. The root idea at the basis of the prema- 
 ture peace such as is adumbrated by Lord Lans- 
 downe seems to be the fear of social revolution. 
 
 If some parts of this book have seemed pessimistic 
 regarding the accumulation of public debt and the 
 estimates of national resources, the excuse is the 
 haunting dread lest money interests and money 
 mismanagement may prevail over moral duty in the 
 last stages of the struggle.
 
 xiv PREFACE TO THE SECOND EDITION 
 
 The material ravages of the War can be restored — 
 not easily, it is true, but with a great united effort. 
 Premature peace with the crimes of Germany and 
 its rulers unpunished will cause irreparable moral 
 loss. 
 
 J. S. Nicholson. 
 
 University of Edinburgh, 
 August, 1918. 
 
 Postscript. — Since the above was written all the 
 financial signs of inflation are increasingly adverse : 
 — The Economist index number, th^ excess of 
 imports over exports, the currency notes, the notes 
 of the Bank of England — all have made new records. 
 
 The supply of all kinds of commodities and of 
 services is still falling. Coal is severely rationed. 
 Passenger trains are more restricted. The list of 
 the shortages of the necessaries and conveniences of 
 life might be indefinitely extended. 
 
 The only thing that steadily increases is money 
 in all its forms. The latest sign is a threat of the 
 issue of five-shilling notes. 
 
 There is a constant struggle to get hold of the 
 new money. The great victory of Marshal Fochhas 
 been celebrated in this country by a portentous 
 outbreak of strikes and threats of strikes in employ- 
 ments of the greatest national importance. 
 
 The latest official remedy is to make the wages of 
 the most favoured and troublesome classes rise 
 automatically with the rise of prices. If the unrest 
 in all the other classes is not to be increased it is to 
 be hoped that effective means will be taken to check 
 the rise in prices. 
 
 J. S. N. 
 
 22 September, 191 8.
 
 PREFACE 
 
 In September, 1914, Mr. Lloyd George, then 
 Chancellor of the Exchequer, stated that, as in the 
 Napoleonic war, we should win in the end by our 
 financial strength. Germany might get the first 
 hundred millions as easily as Britain, but Britain 
 had far greater staying power. It is not (he said) 
 the first hundred millions that count, but the last. 
 
 In September, 1917 — just three years later — 
 Mr. Bonar Law, Chancellor of the Exchequer, stated 
 in a public speech that without the aid of the United 
 States the financial position of the Allies would 
 to-day be very disastrous. 
 
 Did Mr. Lloyd George mean that the British 
 Empire could hold on until the intervention of the 
 United States ? Certainly not. 
 
 Perhaps it may be thought that Mr. Bonar Law 
 exaggerated. Where, it may be asked, are the signs 
 in this country of financial disaster or of the need 
 of American support ? 
 
 The recognised test of national financial strength 
 is national income. The imposing figures — too often 
 paraded at the beginning of the War — of the capital 
 value of the United Kingdom or of the British 
 Empire are all based on estimates of national or 
 imperial income. 
 
 Does the national income of the LTnited Kingdom 
 show any signs of falling off owing to the exhaustion 
 of the War ? Are the signs (such as they are) 
 suggestive of coming disaster ? 
 
 On July 26, 1917, the Financial Secretary to the 
 Treasury stated in the House of Commons that the 
 gross income brought under the notice of the Inland
 
 xvi PREFACE 
 
 Revenue for the year 1913-14 was ;£i, 167, 184, 289, 
 whilst for the year 1916-17 the gross mcome (esti- 
 mated) was ;fi, 670,000, 000. Of course the estimate 
 is not on quite the same basis, but roughly it means 
 that the income of the richer classes has increased 
 by about 50 per cent. 
 
 Incidentally, it may be observed that the total 
 revenue from taxation for the last financial year 
 (1916-17) was about the same as this increase since 
 the War in the gross income of the richer classes. 
 
 Unfortunately the Labour Department of the 
 Board of Trade has not given a similar estimate of 
 the remaining gross income of the nation, but it is 
 probable that the increase in family earnings of the 
 working classes is over 50 per cent. Since February, 
 1915, there have been published every month in 
 the Labour Gazette records of increases in wages. 
 Here is the latest available : " The changes reported 
 as taking place in August, 1917, affected nearly 
 1,400,000 workpeople and resulted in a net increase 
 of nearly ^180,000 per week." * This gives more 
 than 2s. 6d. per head per week. 
 
 The increases in earnings not recorded in the 
 Labour Gazette, but revealed incidentally in the 
 police courts in proceedings against women and 
 children, show still greater signs of prosperity. A 
 soldier's wife, with over £400 a year from allow^- 
 ances and family earnings, cannot control a child 
 of fourteen, who earns £2 a week. A munition maker 
 of twenty, whose earnings average £S per week and 
 sometimes reach £12, is fined a week's wages for 
 not paying his income tax. 
 
 The director of the economy campaign asserts 
 that his greatest difficulty is found in the high money 
 wages and family earnings of the workers in muni- 
 tions and other industries favoured by the War. 
 
 The truth is that the growth (measured in money) 
 
 * Labour Ga:ette, September, 191 7, p. 312. 
 
 /■
 
 PREFACE xvii 
 
 of the national income during the three years of 
 War has greatly surpassed all the records of peace. 
 
 Nor when we turn to the Governmental expendi- 
 ture do we discover any signs of national distress. 
 Quite the contrary. Every day we read of increases 
 in public expenditure, not only for the conduct of 
 the War, but for the benefit or comfort of the people. 
 The bureaucracy grows apace. New offices of all 
 kinds are multiplied and manned (or womanned) 
 by increasing staffs with increasing wages. Where 
 are the signs of a depleted Exchequer or of coming 
 disaster (but for the support of the United States) ? 
 
 Those who are callous to generalities may perhaps 
 be pricked by a particular instance. The four-pound 
 loaf nearly touched a shilling. (In the Napoleonic 
 wars it nearly touched two shillings.) A benevolent 
 Government became concerned for the standard of 
 comfort of the working classes and for the efficiency 
 of their labour. A great effort was made to reduce 
 the price of the loaf to gd. The cost of the necessary 
 subsidy to the nation is estimated at anything from 
 £20,000,000 to £40,000,000 a year. We may be 
 sure that, as usual, the maximum will be the mini- 
 mum. Forty million pounds a year is about one 
 quarter of the whole revenue from taxes before the 
 War. 
 
 This example of Governmental economy is full 
 of lessons in simple arithmetic. Here is another. 
 According to the Food Controller's reckoning a 
 family of five is supposed to consume five four-pound 
 loaves per week. According to the figures quoted 
 above, about a million and a-half of the workers 
 received per head, in August, bonuses of more than 
 2s. 6d. a week. The loaf has risen sixpence from the 
 pre-War figure, or for a family of five the cost of 
 bread is 2s. 6d. greater — that is, just about the bonus 
 per head of the workers mentioned.* 
 
 * Cf., Part II., Chap. XL., on " Gluttony in War-Time," p. 446.
 
 xviii PREFACE 
 
 It is perfectly plain that an allowance in aid of 
 old-age pensioners and others who really feel the 
 rise in the price of bread could have been obtained 
 at a fraction of the cost. As it is, the subsidy given 
 where it is not needed encourages the waste of bread 
 when more than ever economy is necessary. 
 
 In the outpouring of the public money everyone 
 has regretted that the men actually doing the 
 fighting got nothing. An official calculation, given 
 recently in the House of Commons, put the pay of 
 the common soldier at about 30s. a week. Of this 
 sum 20s. per week was for board and lodging ! The 
 true joke is no joke. Board and lodging in the 
 trenches — 20s. ! When the War is costing us eight 
 millions a day, no one would grudge spending a 
 million a week more on raising the pay of the fight- 
 ing men. But again the Government made no 
 discrimination between active and passive service 
 in the distribution of £50,000,000 (for the first 
 
 Coincidentally with the belated rise in the Navy 
 and Army, the munitioners receive not only an 
 increase of pay shading down from 2s. 6d. a day 
 (against the Tommies' 6d.), but are relieved of the 
 discipline that curbed their freedom of movement, 
 and are encouraged to move by free railway passes. 
 This at the very time when Sir W. Robertson is 
 saying that we can only win the W^ar with the 
 greatest effort of economy and efficiency behind the 
 lines. 
 
 But to return to the main question — Can we 
 suppose that we really need financial assistance from 
 the United States when the national income has 
 been growing by leaps and bounds, and we are 
 throwing away millions of public money without 
 taking the trouble to do a few simple sums ? Is 
 it not plain that we are still a very wealthy nation ? 
 
 If we can still afford to spend eight millions a day
 
 PREFACE xix 
 
 wh}^ should all our cheerfulness be spoiled by talk 
 of American assistance ? Last year we raised a 
 thousand millions in a big loan. Why not raise 
 another thousand this year ? A thousand millions 
 (we are assured) is less than one year's income of 
 the richer classes. Most of the money borrowed is 
 poured out within the country and can be mopped 
 up again by another loan, and so on. After the 
 War boom we may look forward to a peace boom. 
 Borrowing for reconstruction will follow the borrowing 
 for destruction. Still more abounding prosperity 
 may be expected. We shall show to a wondering 
 world that the glories of the fabulous Golden Age 
 are as nothing to the real glories of our actual Age 
 of Paper. Such is the optimist's picture of the 
 present and future state of the nation. 
 
 Why, then, should the Chancellor of the Exchequer 
 be so gloomy when all the signs are so favourable ? 
 
 The answer is that these apparent signs of financial 
 strength — the increase in national income, the rise 
 in wages and in profits, the growth in public expen- 
 diture of all kinds— -these signs of prosperity, when 
 properly interpreted, are not signs of vigour and 
 strength, but of weakness. The glow is not the 
 glow of health, but of fever. The old name for the 
 old malady is inflation. The beginnings of it, as with 
 many other diseases, are pleasant — the end, if it is 
 not checked in time, is industrial anarchy, such as 
 we see in these last days in Russia. 
 
 A disease is none the less a disease if called by 
 another name. Inflation is a word with unpleasing 
 associations — it suggests contributory negligence on 
 the part of the sufferer. It is much nicer to say that 
 the malady (if it is a malady) is caused by the 
 expenditure of borrowed money and that the extra- 
 vagant expenditure of loans is the necessary out- 
 come of war. But where does the borrowed mone}^ 
 come from ? If it is not old money, it must be new
 
 1^^ _o^' PREFACE 
 
 ^-^'i- money — new money manufactured to m^eet the 
 expenses of the War. So we come back again to 
 inflation. 
 
 In other words a pubhc loan can only be expended 
 on the multitudinous forms of labour and capital 
 by being pulverised into the different kinds of cur- 
 rency required — cheques for the contractors and 
 notes and silver for the men. (See Part I., Chap. V., 
 on the Statistical Aspects of Inflation.) Those who 
 deny inflation must explain how else the money, 
 i.e., the spending power of the State, is obtained. 
 If it is not got from taxes, or from real savings and 
 economies, or from sales of exports, or returns from 
 foreign investments, and the other resources of 
 peace, where does it come from ? 
 
 The financial question of the most vital importance 
 at the present time is the great and continuous rise 
 in prices. 
 
 A rise in prices reall}^ due to scarcity, even of 
 necessaries, might be submitted to as part of the 
 evils of war. Such a rise might be beneficial if wages 
 were not raised by enforcing general economies. 
 But when the rise in prices is universal, and the 
 workers see (or say) that the first and biggest share 
 is taken by the sellers of the things — whether makers 
 or distributors — they clamour for their own fair 
 share. The stronger the Trade Union the greater 
 and the quicker is the rise in wages. Only after a 
 long period of hope deferred does the rise extend 
 to the weaker classes — weaker, that is to say, econo- 
 mically — the soldiers and sailors, the old-age pen- 
 sioners, and the like. The widows and children who 
 depend on the insurances made by the lifelong 
 efforts of fathers and husbands instead of any 
 compensation, suffer further loss by the fall in the 
 capital value when the trust funds are realised. 
 
 The worst of it is that those of the working classes 
 who get most of the bonuses are also/^the most dis~
 
 PREFACE XXI 
 
 contented. They ask for more long before the 
 weaker members have got any share at all. 
 
 Rising prices due to inflation move in a vicious 
 circle of increasing evils — increasing inequalities of 
 sacrifice and increasing inequalities of unearned 
 increments. Inflation is one of the worst forms of 
 indirect taxation. Such are the commonplaces of 
 economic theory confirmed by the financial history 
 of every country. (See Part 11., Chap. XLIL, p. 458.) 
 
 Not only is the rise in prices the root cause of 
 industrial unrest through overpayments and under- 
 payments, but it brings other evils in its train more 
 alarming to the Chancellor of the Exchequer and 
 the great financial interests. There is, in particular, 
 the growth of the adverse balance of indebtedness 
 to foreign countries. Hitherto, we have struggled 
 along by the export of securities — the fruits of real 
 savings and enterprise — and by borrowing abroad 
 at high rates of interest. 
 
 The warning of Sir R. M. Kindersley — the 
 Director of War Savings — can no longer be dis- 
 regarded : " These sales " [i.e., of American securi- 
 ties) " are now practically at an end and we are 
 brought face to face with our own shortcomings in 
 regard to economy. The only sound method of 
 financing war is from savings of expenditure on 
 unnecessary goods and services by the individuals 
 of the nation. The raising of money by any other 
 means must of necessity lead to inflation of the 
 currency." 
 
 The seriousness of the foreign trade position is 
 now made more clear by the publication of the full 
 returns. Up to last July most of the expenditure 
 on Governmental account had been omitted. By 
 the latest returns (August, 1917) the adverse balance 
 works out for the year at the rate of about £550,000,000 
 as compared with £120,000,000 in normal peace 
 times. Lord Rhondda has stated recently that for
 
 xxii PREFACE 
 
 ourselves and our Allies we shall have to purchase 
 this coming year from America ^^250, 000,000 worth 
 of food. 
 
 Let us not be deceived by the unlimited resources 
 of the United States. It is only ten years since the 
 United States passed through a severe crisis which 
 was the culmination of a period of prosperity (and 
 inflation) far less in degree, and far less artificial 
 in kind, than that of the present War. It is only 
 three years since we were boasting of the unlimited 
 resources of the British Empire. These resources 
 are still unlimited from the standpoint of economic 
 geography/, but not from the standpoint of meeting 
 an unlimited adverse balance of trade. 
 
 Hi ^ si; Hj * * 
 
 These prefatory considerations may serve to 
 explain why so much of the present book is occupied 
 with questions connected with prices. 
 
 The book is divided into two parts. In Part I. 
 are discussed some of the most difficult questions 
 regarding inflation, e.g., the meanings of the terms 
 (Chap. IV.) and the statistical aspects (Chap. V.). 
 The chapter on John Law (VI.) and that on the 
 Napoleonic war period (X.) are intended to give 
 historical support to the treatment of the present- 
 day problem of inflation. The chapter on Indian 
 Currency and Finance (HI.) was included at first 
 on account of the importance of the development 
 of the gold-exchange standard, of which it is the 
 leading example. The recent rise in the price of 
 silver to 55 pence per ounce (September, 1917), and 
 the proposal to replace the rupee by small notes, 
 make the problem of Indian currency one of the 
 most difficult and pressing with which the Govern- 
 ment has to deal.* 
 
 In Part I. are also chapters dealing with some of 
 the more general questions of economic policy. 
 
 * Within a month silver had again fallen to 42 pence.
 
 PREFACE xxiii 
 
 Herr Naumann's famous book on Central Europe 
 is examined (Chap. VIII), and an account is given 
 of the tardy recognition by Germany of the greatest 
 of her economic prophets, Friedrich List. The 
 chapter on Trade after the War (IX.) has for the 
 leading idea that the difficulties of Britain will arise 
 more from the distribution than from the production 
 of wealth. 
 
 There will be great disturbances in the old relations 
 of labour and capital. During the War organised 
 labour has found the threat of a strike (even though 
 that strike was illegal) sufficient to enforce any 
 demand, and capital was able to give increasing 
 money wages because the prices of products were 
 constantly rising through the inflation. But when 
 prices begin to fall, how are the demands of labour 
 to be met even for the perm.anence of the War 
 bonuses ? How is the State to provide the funds for 
 all the social demands of labour, for the new houses, 
 for the education of the children to higher ages — the 
 very children who are now earning more than their 
 fathers did in peace-time — and for the fulfilment of 
 all the other dreams of after the War ? The con- 
 scription of wealth will receive new interpretation 
 and new encouragement. 
 
 There will also be a great disturbance in our 
 traditional policy of foreign trade. There can be 
 little doubt that the national sentiment of this 
 country will not admit the restoration of pre-War 
 relations until we are well assured that the repentance 
 of Germany for the breaking up of the laws of nations 
 and of the civilisation of centuries is not merely a 
 regret for failure, but a return to common humanity. 
 The duration and intensity of the economic boycott 
 — even if we also lose by it — will depend on the 
 evidences of the reality of the repentance. 
 
 Part II. is made up of a series of papers — extending 
 over the first three years of the War — which I was
 
 xxiv PREFACE 
 
 privileged to publish in the Scotsman. During a 
 period when complaints were common of the sup- 
 pression of the real freedom of the Press, I valued 
 highly the unfettered hospitality of the columns of 
 a leading journal. In return I tried to the best of 
 my ability to apply throughout the test of patriotic 
 duty. Many of the papers were re-written five or 
 six times in the search for the right combination of 
 judicial fairness with practical emphasis. In these 
 papers the main object was to point out the con- 
 sequences of the policy actually adopted. The 
 dangers foretold of the neglect of well-tried economic 
 principles have been only too fully realised. The 
 only hope for any real change in economic policy is 
 the realisation of the errors in the past. 
 
 In the actual conduct of the War we have acknow- 
 ledged and amended great mistakes : witness the 
 Dardanelles and Mesopotamia. In diplomacy also 
 we erred, repented, and reformed. In both war and 
 diplomacy we can now look back on three years of 
 striving with satisfaction at the broad results. We 
 have surpassed Germany in military power, and we 
 have won over to our side the greater part of the 
 world. 
 
 But in regard to our economic and financial 
 policy no mistakes are admitted. We speak with 
 the complacency of a heathenish Turk of war prices 
 and war extravagance and backsheesh as if they had 
 been inevitable. 
 
 Granted, that from a balancing of various causes 
 some rise in prices was probable and some extrava- 
 gance unavoidable, it is foolish to say that none of 
 the causes are under human control, and that we 
 must go on in the way we have begun. 
 
 In economic affairs everything turns on degree. 
 By insensible degrees we pass from laziness to 
 over-fatigue, from prodigality to penuriousness, from 
 dull routine to wild speculation — in the whole sphere
 
 PREFACE XXV 
 
 of economic activity, as in most of the concerns of 
 life, we have to steer between the too much and the 
 too httle. 
 
 Once on a time we were told that sickness in 
 Mesopotamia was inevitable and bloodshed in the 
 Dardanelles. Granted, but what we wanted to 
 know was — How much of the bloodshed and sickness 
 might have been avoided ? How could the evils 
 alread}^ incurred be remedied ? 
 
 The mistakes in our financial policy have arisen 
 because, instead of following any settled prin- 
 ciples, we have practised a careless opportunism. 
 Deluded b}^ glowing estimates of the money value 
 of the British Empire, we have neglected not only 
 economic principles, but elementary rules of sound 
 business. 
 
 Any satisfaction that might be felt in the accuracy 
 of the forecast in these papers is overwhelmed by 
 the fear that even now the warning from the past 
 will not be heeded. 
 
 There is no sign of any real check on our reckless 
 extravagance. To get one's bit of war bonus, not 
 to bear one's bit of war burden, is the great object. 
 The war bonus has spread like an ill weed over every 
 field of the nation's activity ; over the great fields 
 and the little fields — always excepting the fields 
 under military discipline. 
 
 In a war for national existence the rule ought to 
 have been that for every kind of service required 
 the State should pay less than in peace-time — the 
 difference being put down to patriotism. When we 
 relied, as at first we did, on the voluntary system, 
 an appeal should have been made to patriotism for 
 the pro\'ision of the materials of war as it was made 
 for the provision of the lives. Why should the best 
 of our young men be encouraged to enlist at a 
 beggarly rate of pay and those left behind be allowed 
 to take advantage of the depleted labour market to
 
 xxvi PREFACE 
 
 get extravagant \\'ages even for war work behind 
 the Hnes ? 
 
 When the voluntary system was replaced by 
 conscription for the Army, and the supply of labour 
 was still more contracted, why was the labour left 
 behind allowed to get higher and higher pay ? Why 
 should millions be put under the most severe military 
 discipline and other millions be bribed not to strike ? 
 There is no escape from the logical conclusion that 
 the compulsion of life includes morally all the lesser 
 industrial compulsions. Hitherto avoidance of indus- 
 trial compulsion in this country has only led to gross 
 extravagance — in itself a great national danger, 
 although (thanks to the intervention of the United 
 States) not so glaring and fateful as the anarchisms 
 of Russia. Let us beware lest we have to invent an 
 English word for Sovietism. 
 
 Capital in all its forms has had its bonuses and its 
 anarchic freedom no less than labour. In fact, 
 the wage bonuses were justified by their receivers 
 chiefly for two reasons — the rise in profits and the 
 consequent rise (so they say) of the cost of living. 
 It is true historically (as often pointed out in the 
 following pages) that in any inflation of prices as a 
 rule capital gains at the expense of labour. " If only 
 labour knew," labour itself has most to gain from 
 a general fall in prices. 
 
 Fortunately, in the course of the War capital has 
 been placed more and more under control. Excess 
 profits have been taxed, and profiteering has been 
 penalised. But with financial diseases prevention 
 is also better than cure. The excess profits are 
 calculated from a liberal estimate of the pre-War 
 rate. To leave the sources of revenue unimpaired — • 
 whether of capital or labour — is no doubt the wisest 
 maxim of finance. But to keep capital unimpaired is 
 one thing — to keep up the pre-W^ar rate of net profit 
 is another. To give a War bonus is still another.
 
 PREFACE xxvii 
 
 In spite of the assurance of the Chancellor of the 
 Exchequer on the eve of the issue of the last great 
 War Loan that never again would the British Govern- 
 ment offer such favourable terms, a new issue of 
 bonds is now being made (October, 1917), unlimited 
 in amount, with bonuses of a more attractive kind. 
 According to one calculator, the letter of Mr. Bonar 
 Law's promise is strictly kept because the yield to 
 the new bonds is actually id. per cent, below the 
 yield to the last loan — but even this calculator 
 admits there are other attractions, and presumably 
 they have some monetary value. Other calculators 
 make the terms of the present issue less favourable 
 to the State. From the beginning of the war our 
 public loans ha^^e been marred by complicated and 
 expensive War bonuses. The cumulative effect has 
 been to greatly raise the rate of interest paid by 
 the British Government. Not only was a higher 
 rate paid than was necessary or desirable, but the 
 pernicious bonus was thrown in of the right of 
 conversion into any higher rate.* Other Governments 
 have followed the example. Even the United States, 
 which began well, seems in danger of following our 
 unfortunate lead — which, by the way, was only 
 justified by its promoters by the supposed need for 
 attracting foreign money. 
 
 The strange thing is that at the beginning of the 
 War the Government took the very wise precaution 
 of controlling both speculation and the issue of 
 new capital — and yet, having made for itself a 
 buyer's monopoly of loanable capital, never made 
 the least use of it.f 
 
 * See on the Policy of Compulsory Borrowing, Part II.,Ch:ips. XXXII., 
 XXXVIL. XXXI., etc. 
 
 I •• There is no getting away from the fact that speculation in the Stock 
 Exchange is increasing every week. The gambling — for it scarcely 
 deserves any other name— is fostered largely by the .'ame buyers, who 
 for months past have proved the prop ot Stock Exchange markets all 
 round, namely, the provinces, particularly those where large money us 
 being made in connection with war work of one kind or another. . . .
 
 xxviii PREFACE 
 
 At the end of the War these high rates paid on the 
 enormous pubUc debts may endanger the security 
 of property. A low rate of interest would have been 
 a kind of cheap insurance. 
 
 To summarise : — The root evil of our financial 
 policy has been the extravagant payments made by 
 the State for all the services required for the War, 
 whether of capital or labour — always excepting the 
 labour of the actual fighting. The extravagance has 
 only been made possible by inflation. The fruits of 
 the evil are the waste of national resources, the 
 increase in the inequities of distribution, and, worst 
 of all, a degradation of the soul of the nation. 
 
 We entered this War, not with the hope of economic 
 gain, but with the certainty of economic loss to the 
 people of this generation as a whole. Justice and 
 liberty at the beginning of the War were not names, 
 but things worth fighting for. In the course of the 
 War these high aims have been obscured by the 
 pursuit of gain. The greatest national effort ever 
 shown by this country has been the creation of a 
 national army surpassing in military power that of 
 Germany. The worst disgrace ever inscribed in our 
 annals would be far surpassed if in the end this 
 mighty effort and this unequalled sacrifice of our 
 best lives were rendered vain by the misuse and 
 the corrupting influence of that very money power 
 
 Although there is a new National War Loan before the public to-day 
 speculation is going on with increasing vigour."- — Economist, 13th October, 
 1917. It is explained that one stimulus to the speculation is the desire to 
 avoid the excess pioiits tax. In a letter (June, 191 6) to Mr. McKenna as 
 Chancellor of ivxcheqncr, I suggested that in making any kind of invest- 
 ment at the same time a pro rata amount of some kind of war loan should 
 be taken compul-orily. The rates might be varied indefinitely both 
 qualitati\cly and quantitatively. With compulsion all round — when 
 incidentally the conscripted small man lo es not only his liberty but his 
 business — why should the makers of war piofits not be guided in the way 
 of duty ? Instead they are privileged to put in Treasury Bills at high 
 rates of interest all the money they think tluy may require at short 
 notice, and they can gamble with the remainder instead of lending to the 
 State.
 
 PREFACE XX ix 
 
 on which at the beginning of the War we most relied 
 to outlast the enemy. 
 
 I am indebted to the editors and proprietors of 
 the Quarterly Review, the Economic Journal, the 
 Journal of the Royal Statistical Society, the Scottish 
 Historical Review, and the Annalist (New York) for 
 the previous publication of the materials of Part I., 
 and to the Scotsman for Part II. Miss M. T. 
 Rankin, M.A., at present acting as my assistant in 
 the University, has kindly looked over all the 
 proofs and made the Index. 
 
 J. S. Nicholson. 
 
 University of Edinburgh, 
 October, 1917.
 
 TABLE OF CONTENTS 
 
 CHAP. 
 I. 
 
 II. 
 III. 
 
 IV. 
 
 V. 
 
 VI. 
 VII. 
 
 VIII. 
 
 IX. 
 
 X. 
 
 PART I 
 
 Prices before the War, and the Quantity 
 
 Theory of Money ..... 
 The Abandonment of the Gold Standard . 
 Indian Currency and Finance in Relation to 
 
 THE Gold-exchange Standard 
 Inflation of the Currency and the Rise in 
 
 Prices ....... 
 
 Statistical Aspects of Inflation 
 
 A Chapter in the Life of John Law . 
 
 Friedrich List : The Prophet of the New 
 
 Germany ...... 
 
 Central Europe after the War . 
 
 After the War— What ? In Great Britain . 
 
 Trade after the Napoleonic War 
 
 I 
 28 
 
 47 
 
 62 
 
 81 
 
 122 
 130 
 142 
 1^6 
 
 PART II 
 
 I. The Effects of War on General Prices 
 
 II. War and Paper Money 
 
 III. The Sinews of War .... 
 
 IV. Germany's Economic INIiscalculation^ . 
 V. Ditto (continued) ..... 
 
 VI. British Credit and War Finance 
 VII. Economic Pressure and the Length of War 
 \TII. The Increase in the Circulation of INIoney in 
 War-time ..... 
 
 IX. Probable Effects of the War on Rate of 
 Interest. ..... 
 
 X. The First War Budget and After 
 XI. The Meaning of Economic Pressure 
 XII. The Economic Prosperity of War-time 
 
 XIII. The Influence of Demand on Food Prices 
 
 XIV. Depreciation of Currency and the Rise in 
 
 Prices ....... 
 
 167 
 
 173 
 I So 
 187 
 194 
 201 
 20S 
 
 216 
 
 222 
 228 
 
 234 
 241 
 248 
 
 ^55
 
 xxxn 
 
 TABLE OF CONTENTS 
 
 XXXVIII. 
 
 XXXIX. 
 
 XL. 
 
 XLI. 
 
 XLII. 
 
 XLIII. 
 
 XLIV. 
 
 XLV. 
 
 XLVI. 
 
 Labour and the War .... 
 Depreciation of the Currency 
 Compensation and Prohibition in War-time 
 The Drink Proposals of the Government 
 The Neutrality of the United States 
 Ditto [continued) ..... 
 The New War Loan and Economy 
 The Peril of Public Extravagance 
 The Depreciation of the Pound Sterling 
 The American Exchange and the Anglo 
 
 French Loan ..... 
 
 Liberty, Conscription and Economy 
 
 The Gravity of the Financial Situation 
 
 Equality of Sacrifice in War-time 
 
 The Turn of the Tide in Public Extravagance 
 
 The Budget ...... 
 
 The Rate of Interest on British War Loan: 
 The Paris Economic Conference . 
 Governmental Borrowing and Compulsion 
 The Rise in War Bonuses . 
 The Real Burden of a National Debt . 
 Reconciliation of Free Trade and Protection 
 Inflation and the Rise in Prices. 
 The Generosity of the War Loan and the 
 
 Alternative ..... 
 
 For and Against a Forced Loan. 
 The Food Shortage .... 
 
 Gluttony in War-time .... 
 
 Ditto {continued) ..... 
 
 The Inequities of Inflation 
 
 Prices after the War .... 
 
 Bolshevism ...... 
 
 Another Year of Inflation 
 The Payment of War Debt by Taxation of 
 Capital ...... 
 
 Index .......
 
 PART I
 
 WAR FINANCE 
 
 CHAPTER I 
 
 PRICES BEFORE THE WAR AND THE QUANTITY 
 THEORY OF MONEY* 
 
 Historical Introduction 
 
 [After the Franco-German War a great fall in prices 
 occurred (1873-96), According to Sauerbeck's index number 
 (average prices 1867-77 = 100) the level in 1873 was iii, 
 and had fallen in 1896 to 61. The fall had been more or less 
 continuous, with occasional upward movements {e.g., 1879-80 
 and 1887-89), and the minimum was reached in 1896. 
 
 By 1907 the index number had risen to 80, and in 1913 
 to 86, but for about a year before the war there v/as a fall 
 to 82. In less than three years of war, March, 1917, the 
 index number rose to 168. 
 
 These very great changes ought to throw light on the 
 causes affecting general prices. The following essay (written 
 in 1912) deals mainly with the pre-war rise in prices after 
 1896, but great light is thrown on this rise by a preliminary 
 study of the preceding fall in prices (1873-96). 
 
 Of this very remarkable fall in prices — practically to 
 one-half of the former level — -various explanations were 
 given at the time, and were much discussed in the great 
 bi-metallic controversy. 
 
 The causes then assigned for this fall may be divided into 
 two main groups : (i) Those connected with commodities ; 
 
 * First published in the Quarterly Review, October, 1912. The 
 Hibtorical Introduction written September, 191 7.
 
 4 WAR FINANCE 
 
 (2) monetary causes connected with the precious metals, 
 currency and credit. 
 
 In every great change of prices of historical importance — • 
 e.g., in the transition from the mediaeval to the modern 
 period in the sixteenth century — the controversy as to 
 causes is marked by a similar division. Attention is first 
 called to commodity, and later to monetary, causes. This 
 order of inquiry is quite natural, because any general rise 
 of prices is observed first of all in its particular manifesta- 
 tions. Each particular price is always affected also by its 
 own particular influences of demand and supply. In the 
 case of any particular fall in price the first cause usually 
 assigned is over-abundance of the commodity. As the fall 
 in prices is observed to become more and more general it 
 is ascribed to general over-production. Next in popularity 
 to over-production as a cause of low prices (on the com- 
 modity side) is the fall in the elements of cost of production, 
 including freights. These two causes are often combined. 
 After 1873 it was observed that there were great develop- 
 ments of production in new countries, and these excessive 
 supplies were dumped into Europe by improved transport. 
 The revolution in transport in the last quarter of the nine- 
 teenth century, according to Dr. Marshall, was more far- 
 reaching than the celebrated industrial revolution of the 
 end of the eighteenth. 
 
 Those who objected to over-production and improvements 
 as the main causes of the fall (1873-96) contended that the 
 course of industrial progress had been more or less con- 
 tinuous from the thirteenth century onwards, and that 
 progress had been marked both in periods of rising and of 
 falling prices.* Accordingly they sought for tlie principal 
 causes of the great fall in prices in monetary changes. In 
 particular they pointed to the demonetisation of silver by 
 Germany (with the substitution of gold) and to the falling 
 off in the production of gold. 
 
 In this argument the api)eal was generally made to the 
 
 * Nicholson's " rrincii)lcs of Political Economy," bk. iv., chap, iii., § 7, 
 vol. ii., p. O5.
 
 PRICES BEFORE THE WAR 5 
 
 quantity theory of money in a very simple form. The supply 
 of gold had fallen and the demand increased. Therefore 
 its value had risen. A rise in the value of gold means an 
 increase in its purchasing power. This again means a 
 general fall in prices. What could be more simple ? 
 
 This explanation of the fall in prices seemed to be con- 
 firmed when jn 1896 the reaction set in. Improvements in 
 production and transport still continued, but prices rose 
 instead of falling. On the other hand, there was a great 
 increase in the supplies of gold. in South Africa, North 
 America, and other places. With the increase in gold there 
 was also a great expansion of credit and representative 
 money. Again the quantity theory/ was applied and seemed 
 to fit the facts. 
 
 Corresponding to this practical controversy on the general 
 movements in prices there had arisen a theoretical con- 
 troversy on the quantity theory itself. In its simplest form, 
 in which it is supposed that general prices move upwards 
 and downwards exactly in proportion to the increase or 
 decrease in the quantity (and rapidity of circulation) of 
 money, it was observed that the theory v\'as only tenable 
 under simple conditions which were far removed from the 
 actual. 
 
 As was shown in my " Treatise on Money " (first pub- 
 lished in 1889), the simple quantity theory is only true in 
 what I called a hypothetical market which was utterl}- 
 unlike our modern markets. If, tlien, the quantity theory 
 was still to be used for the explanation of the actual course 
 of prices it must be in a modified or developed form. In 
 this developed form all the various causes affecting general 
 movements of prices must be subsumed, e.g., the volume 
 of trade, the extension of markets, and improvements in 
 the supplies of commodities on the one side, and on tlie 
 other side the supply of gold and of the various forms of 
 representative money and credit. 
 
 The quantity theory of money developed in this way 
 gives a basis of reconciliation to the conflicting explanations 
 resting on commodities and money respectivel3^ Both sets
 
 6 WAR FINANCE 
 
 of causes must be taken into account. Even in its simplest 
 form the supply of money must always be taken with the 
 demand for it as represented, for example, by the volume 
 of trade. The exchange value of money, like all other values, 
 must depend on demand and supply. 
 
 But what is the supply of money ? What is the demand 
 for it ? And what is the nature of the equilibrium estab- 
 lished between the two ? 
 
 Each of these questions on examination is found to 
 present great difficulties. Under the supply of money are 
 we to include only gold, or are all those things to be included 
 which in fact perform monetary functions ? In particular, 
 are cheques to be included in the quantit}^ of money when 
 we are appl3dng the quantity theory ? 
 
 Similar difficulties arise in the interpretation of demand. 
 Are we to look only to the mass of commodities and the 
 volume of trade ? Do not the payment of wages, the pay- 
 ment for stock exchange securities, and other payments 
 involve a demand for money ? ' 
 
 The difficulties in this developed quantity theory led 
 certain economists to its abandonment as a worn-out or 
 uselessly complex set of hypotheses- — like the cycles and 
 epicycles of the old astronomy. This view was represented 
 in the elaborate work of Professor J. Laurence Laughlin on 
 the " Principles of Money " (1903). 
 
 The importance of the development of the credit forms of 
 money was specially shown by Mr. Hartley Withers in his 
 " Meaning of Money " (1909). Mr. Withers himself (follow- 
 ing Bagehot) duly emphasised the importance of the gold 
 basis. But the structure of credit superimposed seemed 
 so large that most readers began to think the magnitude of 
 the foundations was of little importance. A certain amount 
 of gold was supposed to be necessary to meet the seasonal 
 demands for internal purposes and to meet occasional 
 foreign demands, but it was implied that there was no 
 assignable proportion between the quantity of gold money 
 and the level of prices (say) in England. 
 
 The rehabilitation of the quantity theory as applied to
 
 PRICES BEFORE THE WAR 7 
 
 gold was undertaken by Professor Irving Fisher in his work 
 on the " Purchasing Power of Money " (191 1). Here the 
 leading idea was that other forms of representative money, 
 notably bank deposits, were proportioned to the quantity 
 of gold held by the banks. The proportion varied in different 
 countries, and in the same country at different times, but 
 given the necessary statistics the proportion could be 
 ascertained. It was assumed that with every increase of 
 gold held by the banks there was a determinate increase in 
 the representative money. The total volume of money, 
 coin and credit compared with the volume of trade deter- 
 mined the level of prices in the particular country concerned. 
 The fundamental importance of gold in the determination 
 of world prices was emphasised by Sir David Barbour, the 
 well-known authority on the theory of bi-metallism and 
 on the practical application of the quantity theory to Indian 
 currency. 
 
 In the development of the quantity theory on the lines 
 of Professor Fisher fundamental difficulties are found in 
 the relation of national prices to international or world 
 prices. These difficulties became apparent both on the 
 side of theory and of practice in the development of the 
 gold-exchange standard. This system is noticed at the 
 end of the present essay, but is more fully considered later 
 on (Chap. III., p. 47). 
 
 To bring this short survey up to date I may add that the 
 ideas at the root of the gold-exchange standard in Evn"ope 
 have been well explained by Mr. J. M. Keynes in the intro- 
 duction to his book on " Indian Currency and Finance " 
 (1913). A complete history is given in Professor Kemmerer's 
 " Modern Currency Reforms " (1917).]
 
 8 WAR FINANCE 
 
 § I. Practical Importance of the Question 
 
 The recent rise in prices, especially in the articles that 
 enter into the consumption of the masses of the people, 
 has been so widespread and accompanied by snch symptoms 
 of social unrest that it has aroused the interest not only of 
 economists and statisticians, but of the general politician 
 and the general reader. What are the causes of the rise ? 
 How much longer will it continue ? What are the remedies 
 for the evils ? These are questions being asked on all sides. 
 Some of the consequences of a general rise in prices are 
 obvious, and none the less serious and difficult to adjust 
 because they are plain to view. Even in this age of legisla- 
 tion the greater part of all the business of the world is carried 
 on by means of voluntary contracts ; and these contracts 
 involve the element of time, and are expressed in terms of 
 money. If, then, in the course of time the " meaning of 
 money " changes, the real meaning of the contracts also 
 changes, unless such a change was contemplated and 
 allowed for. Apart from definite legal contracts there are 
 still, all the world over, numbers of agreements and customs 
 involving money payments that are only capable of gradual 
 and unequal change. The modern theory of wages asserts 
 that in the case of any definite vendible product wages are 
 paid out of the price of the product ; and various methods 
 are adopted in practice, by sliding scales and boards of 
 conciliation and the like, to make wages respond to move- 
 ments in the prices of the products. But wages are only 
 one element in the cost of production ; and the equitable 
 relation of wages to prices is always difficult of determina- 
 tion, even if the parties are agreed on the principles to be 
 applied. 
 
 § 2. Wages and Prices 
 
 The difficulty of adjustment is all the greater when the 
 rise in prices is not a rise in the relative prices of particular 
 commodities, but is more or less general. Any general rise 
 in prices must affect directly or indirectly all the factors 
 of production as well as labour. The difficulty in the
 
 PRICES BEFORE THE WAR 9 
 
 readjustment of wages, and the comparative immobility 
 of labom" as compared with capital in general, cause the 
 wages of labour, considered as the price of labour, to lag 
 behind the upward movement of prices. This result, which 
 is probable in theory, has been abundantly confirmed by 
 experience. Nearly every country has, at some time or 
 other, suffered from a general rise in its prices, caused by 
 the depreciation of its currency, whether metallic or paper, 
 and whether the depreciation is due to the act of the Govern- 
 ment or to the cumulative effect of natural causes. And it 
 has been observed in practically all cases that money wages 
 rise much more slowly than the articles on which the wages 
 are spent. The general consequence is that, so far, the 
 economic condition of the labouring classes is adversely 
 affected as compared with that of owners and employers of 
 capital. The relative prosperity of capital with rising prices 
 is shown by booming trade, and the relative depression of 
 labour is shown by strikes. The truth of the reasoning as 
 regards rising prices is confirmed by taking the converse 
 case of a fall. The Commission on the Depression of Trade 
 (Final Report, 1886), and that on Gold and Silver (Final 
 Report 1888), found that, with the general fall in prices 
 which marked the depression, wages had not fallen, and in 
 consequence that the relative economic position of labour 
 had improved ; while the indirect effects of the depression 
 of capital did not seriously affect the great mass of the 
 workers. 
 
 § 3. Rate of Interest and Prices 
 
 The recent rise in general prices has been associated with 
 a rise in the rate of interest. But in this case the causal 
 connection is not so easy to trace. With booming trade and 
 greater demand for capital, with new issues of shares of all 
 sorts of industrial undertakings competing for new accumu- 
 lations, and with the spending powers of the richer classes 
 increasing, the demand for capital is likely to rise faster than 
 the supply. The natural consequence is a rise in the rate of 
 interest. But there can be little doubt that the recent rise
 
 10 WAR FINANCE 
 
 in the rate of interest is to be ascribed largely to the general 
 increase of security all the world over. Capital is now sent 
 into places and employments which were formerly considered 
 too dangerous by the mass of ordinary investors ; they had 
 found too often that high interest meant bad security. But 
 in these days it has been discovered that relatively high 
 interest can be obtained with proper distribution in new 
 fields on practically as good security as low interest in the 
 older fields. And, if regard is had not only to the yields of 
 interest, but to stabihty in the capital value, the security of 
 the older kinds of investments, with their low interest, 
 seems less than that of the new with the high rate. As a 
 natural consequence, capital has been diverted from the 
 older modes of investment to the new ; and the yield of the 
 older securities has arisen with the fall in the capital value, 
 as in the notorious case of Consols. How much of the fall 
 in the price of Consols (or, what is the same thing, the rise in 
 the yield) is due to the general extension of security, and how 
 much to the rise in general prices, is a problem so difficult 
 that most financial authorities leave out, in their enumeration 
 of the causes of the fall in Consols, any consideration of the 
 rise in general prices. But, if the rise in prices is the cause 
 of the rise in the rate of interest, it is so far a cause of the fall 
 in Consols. As it happens, people who take a very mild 
 concern in changes in the cost of living, and would not feel 
 appreciably a rise in the cost of bread and butter of 20 or 
 even 100 per cent., are specially concerned with an}' move- 
 ments in the rate of interest ; for movements in the rate of 
 interest affect all kinds of investments, and affect them in 
 different ways. 
 
 § 4. A Common Explanation of the Rise is found in the 
 Quantity Theory of Money in its Simple Form 
 
 The position, then, is this : whether we look to social 
 unrest and labour troubles, or to the gains of investors, or 
 to the necessities of Governments in the way of borrowings, 
 the economic question of perhaps greatest importance at the 
 present time is the rise in prices and the associated (if not
 
 PRICES BEFORE THE WAR il 
 
 consequent) rise in tlic rate of interest. To provide remedies 
 for the social unrest and to reap the harvest of movements in 
 securities (so far as they depend on the rise in prices), it is 
 necessary to discover the causes ; and this brings us to the 
 " quantity theory " of money. The most common explana- 
 tion of the rise in prices is the increase in the supplies of gold 
 from the mines ; and the way in which the increase in gold 
 raises prices is supposed to be given by the " quantity 
 theory " of money. 
 
 J. S. Mill, who more than anyone gave popular authority 
 to the theories of Ricardo, wrote in the middle of the nine- 
 teenth century (" Pol. Ec." ii., 19) : " That an increase in 
 the quantity of money raises prices, and a diminution lowers 
 them, is the most elementary proposition in the theory of 
 currency, and without it we should have no key to any of the 
 others." In its simplest form, carefully guarded by hypo- 
 theses, which, however, lay down conditions for the most 
 part the reverse of those that prevail in the actual world, 
 this proposition is indeed elementary. It may be made as 
 simple as the proposition that if in a game you increase the 
 number of counters you diminish proportionately the value 
 of each. In its simplest form, also, the rise in prices conse- 
 quent on an increase in the supply of money is supposed to 
 be exactly proportioned to the increase in the quantity ; or, 
 put otherwise, the value (or the purchasing power) of each 
 piece of money falls in exact proportion with the increase of 
 supply. This exact fall in value as supply increases is, as 
 Mill says, true of no other commodity ; or, in modern 
 phrase, the effect on value of the increase of the supply of 
 other things will depend on the elasticity of the demand. 
 
 The quantity theory in its simple form has been associated 
 with other propositions equally simple under similarly 
 simple conditions, e.g., that money is merely a medium of 
 exchange ; that all exchange is ultimately barter ; and that 
 it makes no real difference to the economic forces by which 
 wealth is produced and distributed whether the range of 
 general prices is high or low. In the long run or ultimately, 
 it is said, whatever the movement in prices through the rise
 
 12 WAR FINANCE 
 
 or fall in the quantity of money, everything (including labour 
 and capital) will find its proper price-level. By the aid of 
 these and similar assumptions the quantity theory may be 
 reduced to a harmless and uninteresting truism. 
 
 § 5. Difficulties of this Simple Theory 
 
 But, as soon as we apply the quantity theory to practical 
 conditions and get rid of the h3'pothetical safeguards, the 
 simplicity vanishes. At the end of the chapter in which he 
 sets forth the quantity theory. Mill, after giving some of the 
 most important and obvious qualifications, remarks [op. cit. 
 p. 22) : 
 
 " The sequel of our investigation will point out many other 
 qualifications with which the proposition must be received, that 
 the value of the circulating medium depends on the demand and 
 supply, and is in the inverse ratio of the quantity ; qualifications 
 which, under a complex system of credit like that existing in 
 England, render the proposition an extremely incorrect expression 
 of the fact." 
 
 If the proposition was extremely incorrect as applied to 
 England seventy years ago, what are we to expect when the 
 theory is apphed to the determination of prices in England 
 at the present time, and to the still more complex problem 
 of the world prices of the great staples of international 
 trade ? 
 
 § 6. Historical Tests of Theory 
 
 At first sight it is true that recent monetary history seems 
 to show that, roughly, the quantity theory is true in the case 
 of an increase or diminution in the supply of gold. It is 
 commonly said that general prices rose after the discoveries 
 in theTifties in Australia and California ; that they fell with 
 the falling-off in production in the 'seventies ; while in the 
 first years of the new century, with a great increase in the 
 supplies of gold, we have the rise that is now attracting so 
 much attention. On closer examination this verfication of 
 IIh- theory docs not seem so satisfactory. 1 he estimated 
 annual production of gold during the twenty \\\c years 
 itS5i-75 was £25,000,000, as compared with an annual
 
 PRICES BEFORE THE WAR 13 
 
 piockiction of ;{24,50o,ooo for the twenty years 1876 to 1895. 
 The former period was a period of high prices, varying, 
 according to the usual estimates, from twenty to thirty per 
 cent, above the level of 1845-50 ; and the culminating point 
 in the rise was about 1875, although the supplies of gold had 
 already begun to fall off a little. In the next pf^riod (1876-95) 
 there was a very great fall in prices (measured by the same 
 index numbers), and the lowest point was reached about 
 1895. After 1895, for the ten years 1896-1905, the annual 
 production of gold rose to £58,100,000, and in the next five 
 3'ears to £84,800,000 ; but the response in prices was so 
 much retarded that people began to ask what had become 
 of the quantity theory. Now that the rise in prices has 
 become more marked, the popular idea is beginning to 
 prevail that the quantity theory has again been confirmed. 
 Tables of index numbers and of the estimated annual world's 
 production of gold are not easy to read, and the selection of 
 periods and averages is ahvays suspected ; but, when the 
 figures are translated into curves,* there can be no difficulty 
 in comparing the general trend of prices from the beginning 
 of the nineteenth century and the general trend of the 
 production of gold ; and the comparison shows that for 
 relatively long periods there may be no conformity even in 
 the general trend of a rise or fall. 
 
 § 7. Deeper Examination of the Theory 
 
 Moreover, deeper examination of the quantity theory 
 reveals such a number of qualifications that any close corre- 
 spondence of price movements with the annual production 
 cannot be expected. The quantity theory in the simple 
 form is always guarded by the expression " other things 
 being the same " ; but even in that very simple form, and 
 with that assumption, the theory does not refer to the 
 annual production of gold, but to the total mass in use for 
 monetary purposes. Only part of the anmial production 
 
 * See Chart of Wholesale Prices and World's Gold Production in W. T. 
 Layton's useful " Introduction to the Study of Prices."
 
 14 WAR FINANCE 
 
 is made into money ; and, compared with the total mass 
 in existence, the annual addition is always relatively small. 
 Again, even in the simplest statement, the volume of trade 
 is supposed to remain the same ; or (in other words) if the 
 increased gold has to do more work, then the rise in prices 
 may be neutralised. If the expression " volume of trade " 
 is to be taken as equivalent to " the work to be done by the 
 gold," its meaning must be extended to cover all the trans- 
 actions for which gold is used ; and it would be more 
 correct to say the " volume of exchanges." Fairly correct 
 estimates may be made of the volume of international trade 
 between the principal countries, but similar accuracy is not 
 obtainable for the internal trades of the respective countries, 
 which in volume are much greater. It is said, for example, 
 by Professor Irving Fisher [op. cit., p. 485) that the foreign 
 trade of the United States is less than one per cent, of the 
 total trade of that country.* 
 
 If we were to consider the most obvious marks of the 
 increase in "the work of gold" since the beginning of the 
 nineteenth century — e.g., the growth of population not 
 only in new countries but also in Europe, the immense 
 improvements in the means of communication, and with 
 this the increase in trade and the rise in the consuming 
 powers of the masses of the people^ — ^we should naturally 
 suppose that an enormous increase iii gold would be required 
 even to sustain the same level of prices. And if gold were 
 used for actua^ transactions always in the same proportion ; 
 if for a given value of exchanges the same amount of gold 
 was required ; and if also there had been no increase in the 
 use of substitutes for gold, as by the development of branch 
 banks and the extended use of cheques, then we should 
 expect, in spite of the increase in gold during the last 
 hundred years, a very great fall in prices. Under no other 
 conditions could the gold suffice to do the work. 
 
 * A great understatement. In a controversy on this point with Professor 
 B. M. Anderson, Professor Fisher admitted that eight per cent, was a 
 not unreasonable estimate {New York Annalist, March 6, 1916),
 
 PRICES BEFORE THE WAR 15 
 
 § 8. Rapidity of Circulation 
 
 It must be remembered that in the statement of the 
 quantity theory in its simple form it is only true that the 
 level of prices varies exactly with the increase or decrease 
 of the money in circulation if, as Mill observes, (i) the 
 rapidity of circulation is the same, and if (2) money passes 
 from hand to hand at every transaction, credit in any of 
 its shapes being unknown. If, in effecting a certain amount 
 of transactions, on the average every piece of money is used 
 ten times, the level of prices will be the same as if ten times 
 as much money were used, each piece being only used once. 
 This is what is meant by the rapidity of circulation. And 
 with improvements in communication and in organisation 
 of markets the rapidity of circulation is likely to increase 
 very much. We can get approximate figures for the total 
 mass of gold used for monetary purposes in the world, and 
 form some idea of the additions made from year to year, 
 but we cannot get even rough figures for estimating the 
 rapidity of circulation of all this gold spread over all the 
 gold-using world. 
 
 § 9. Credit 
 
 But the difficulties of rapidity of circulation are as nothing 
 compared with the allowance to be made when we introduce 
 into the quantity theory the condition (at first omitted) 
 of the influence of credit in all its shapes. As regards whole- 
 sale transactions, all but a mere fraction are now made 
 solely by some form of credit, and not by gold passing from 
 hand to hand. Even in international trade, gold only passes 
 from country to country to meet an occasional adverse 
 trade-balance ; and the passage of gold in general depends 
 much more on the state of the money markets and of the 
 markets for securities in the respective countries than on 
 the trade transactions. That is to say, the great bulk of 
 international trade is carried on by means of credit sub- 
 stitutes for gold, e.g., bills of exchange. And it is important 
 to notice, when we are considering the effects of credit- 
 substitutes on the level of prices, that the index numbers
 
 iG WAR FINANCE 
 
 most in use refer to wholesale transactions, and chiefly to 
 articles that bulk largely in international trade. It would 
 seem, then, that, if the quantity theory is to apply to whole- 
 sale prices, it leaves out of account in the first statement 
 the most important of all the conditions of actual commerce, 
 namely, the use of credit instruments. It seems something 
 like calculating the depth of water in a harbour by the 
 rainfall and the inflow of the river, and taking no account 
 of the flow of the tides. But it is old learning that the value 
 of any working hypothesis depends on the proportional 
 importance of the elements rejected to that of the elements 
 retained. It is very easy to avoid contradictions with a 
 sufficiency of hypothesis, or to prove anything from hypo- 
 thetical bases, " other tilings being the same," 
 
 What, then, becomes of the quantity theory when- we 
 take account of this condition at first supposed absent, 
 namely, that the bulk of wholesale transactions is not 
 effected by the money in circulation, passing from hand to 
 hand, but by means of credit ? If the credit-substitutes 
 act on prices as much as a corresponding amount of gold, 
 then it is plain that the variations in the annual production 
 of gold are of little importance compared with the changes 
 in the production of " representative " or credit money. 
 Since 1896 the total increase in the world's gold (for all 
 purposes) has been calculated as £1,000,000,000. In the 
 United States alone the deposits in banks operated on by 
 cheques have increased by at least double that amount. 
 The United States is only one country, and bank deposits 
 are only one form of credit. It would be superfluous to 
 show in detail that in modern developed countries, value 
 for value, the wholesale transactions effected by the direct 
 passing of gold are inconsiderable compared with those 
 effected by credit. In his book on the " Meaning of Money," 
 in which the treatment is as felicitous as the title, Mr. Withers 
 states (in a chapter with the significant heading " The 
 Manufacture of Money ") that " the money of modern 
 English commerce and finance is the cheque ; and the 
 credit dealt in in the London money market is the right
 
 PRICES BEFORE THE WAR 17 
 
 to draw a cheque." But the importance of the influence 
 of credit on prices is not a discovery of this century, as is 
 shown by Mill's chapter on the subject (" Principles of 
 Political Economy," book iii., chap, xii.), which might 
 still be read with advantage by the latest writers on the 
 quantity theory. 
 
 § 10. Gold and Prices. Professor Laughlin's 
 Abandonment of Quantity Theory 
 
 In view of the enormous increase in " manufactured " 
 money as compared with natural gold, can we say that there 
 is any connection between the recent increase in the output 
 of gold and the general rise in prices ? If there is a connection, 
 what is its nature ? How does the new gold affect prices ? 
 By what actual processes, for example, does the gold from 
 the Transvaal raise the price of living to Enghsh coal 
 miners ? It is quite clear that the quantity theory in its 
 simple form is not applicable, simply because the most 
 important conditions are not present. The new gold does 
 not " pass from hand to hand in effecting a certain amount 
 of transactions, credit in all its forms being unknown " ; 
 indeed, exactly the opposite is the case. If, then, the amount 
 of gold is still of great, even of supreme importance in the 
 determination of price-levels, it must be so by indirect 
 influences. 
 
 The difhculty of the subject is shown in the works of two 
 representative American writers. Professor Laughlin, in 
 his " Principles of Money," frankly confesses that he has 
 been forced to abandon the quantity theory ; indeed, the 
 main argument of his book is directed against that theory 
 with all the zeal of the convert against his old belief. It is 
 easy for the supporters of the old theory to reply that 
 Professor Laughlin has not put in the proper quantities and 
 qualities of h5'potheses ; that he has forgotten the condition 
 " other things remaining the same," the elimination of 
 credit, and all the other safeguards. Such a reply is, how- 
 ever, only formally or logically relevant. The real difficulty 
 is : What about the quantity theory if other things are not
 
 i8 WAR FINANCE 
 
 the same, and especially if we take account of credit ? 
 Professor Laughlin's own solution is analogous to that pro- 
 pounded by the late Lord Farrer in the days of the bimetallic 
 controversy, and is once more effectively disposed of by Sir 
 David Barbour in his chapter on " The relation between 
 Money, Credit and Prices " {op. cit., cap. vii.). 
 
 § II. Professor Irving Fisher's Rehabilitation 
 
 The more recent book by Professor Irving Fisher is 
 definitely designed to rehabilitate the old theory, and not 
 only to restore it to life, but to dress it out in the latest 
 scientific fashions. Both books are interesting, though both 
 are altogether too long and too diffuse for clearness in the 
 presentation of monetary theories. Professor Fisher ma}^ 
 plead in excuse, first, that he wished to make an inductive 
 proof, and that induction means a mass of facts ; and, 
 secondly, that he wishes to reach the practical man, and 
 therefore it was necessary to put in pictures of balances and 
 bags, and reservoirs and pipes. But the practical man is 
 not a child, and this appearance of simplicity is misleading. 
 The writer has also provided for the mathematical economist, 
 partly in the text and partly in the modern fashion in a 
 mathematical appendix ; but the practical man is not in 
 general a mathematical economist. The main conclusion 
 of Professor Fisher's book, put in ordinary language, is that 
 the most important factor in the recent rise in prices is the 
 increase of gold. And he is so much impressed by this 
 cause and its consequences that he makes a proposal for the 
 gradua.1 adoption by the world in general of a modification 
 of the '' gold-exchange " standard ; which would mean the 
 abandonment of the gold standard in its present form, and 
 the adoption of something like the method now in use in 
 India ; for example, the sovereign — like the rupee^ — would 
 receive an artificial value. 
 
 Sir David Barbour, to whom more than to anyone the 
 change of standard in India was due, has published most 
 opportunely a book on " The Standard of Value." This 
 book, unlike the two mentioned above, is extremely short,
 
 PRICES BEFORE THE WAR 19 
 
 and in some parts perhaps too short for the complexity of the 
 argument. It is also designed specially for the practical man, 
 and, as giving an account of the currency changes in India, and 
 their causes and effects, will always be a work of the first im- 
 portance to the student of monetary history. As showing the 
 importance of the quantity theory, from the practical point 
 of view, it was in firm reliance on that theory that Sir David 
 Barbour proceeded (so he tells us) to close the Indian mints 
 to silver, and to establish partially or indirectly the gold- 
 standard or in reality the " gold-exchange " standard. Sir 
 David implies rather than states the theory, and the theory 
 is apparently taken in a very simple form ; but incidentally 
 he refers to the " more scientific " form of the theory given 
 by Professor Fisher, and apparently looks with approval to 
 the ultimate adoption of some variation of the gold-exchange 
 standard by the world at large. 
 
 § 12. Critique of this Rehabilitation 
 
 It is doubtful, however, if this more " scientific " form will 
 stand the test of verification ; and the inductive proof offered 
 seems to be of the nature of illustrations guarded by hypo- 
 theses ; if, indeed, the fundamental position does not involve 
 a petitio principii. The proof of the extended quantity 
 theory is worked out mainly in the case of the United States. 
 Estimates are given of the amounts of " money " in use and 
 the changes in these amounts and the corresponding changes 
 in prices. Of the correspondence there can be no doubt, 
 any more than there can be any doubt of the proposition that 
 in any market the quantity bought must equal the quantity 
 sold. The monetary transactions of the United States must 
 be effected by means of " money " ; and, if the money is 
 made up of coins and cheques, there must be a correspondence 
 between the volume of the monetary transactions and the 
 volume of the money. If account is also taken of the efii- 
 ciency of the money or the rapidity of circulation we have 
 an identical proposition. The amount of "money" used 
 multiplied by the average of the times each unit is used 
 must equal the volume of monetar}- transactions ; and with
 
 / ^p . 
 
 S^^20 ^ \V^-'" o:?/ ;WAR FINANCE 
 
 a riso in prices^ inore money must be used for monetary 
 insat'tions.* 
 
 .^ytlio rral difficulties lie deeper. What we want to 
 k'nSwin connection with the new gold supplies is precisely 
 how they bring about the rise in prices in the United States 
 and other countries. It helps us very little to be told that 
 the quantity of money has increased if the greater part of 
 the increase is not in gold but in credit. Accordingly 
 Professor Fisher asserts that there is a definite proportion 
 between the amount of deposits (operated on by cheque) 
 and the amount of gold. Gold, he says, is used for certain 
 purposes and cheques for others ; and the prevailing custom 
 keeps the proportion very definite. This is a partial state- 
 ment of a very old truth as regards different forms of con- 
 vertible currency, namely, that if the forms are in reality 
 (as they profess to be) convertible, the proportions will 
 vary simply according to the convenience of people, as, for 
 example, the use in Scotland of one-pound notes and 
 sovereigns. If there is any difficulty in obtaining any one 
 form of currency for some special purpose, this form will 
 bear a premium. Cases are on record in which bank-notes 
 have been at a premium compared with the actual coin 
 which they are supposed to represent and which they 
 profess to pay on demand. 
 
 § 13. Difficulty of Exact Connection of Gold and 
 
 Credit 
 
 It may be taken for granted that " under the same 
 conditions " the proportion of cheques to coins in monetary 
 transactions will remain constant ; and it maj^ be of interest 
 to find out why the proportion varies under different con- 
 ditions and in different places — to compare, for example, 
 the use of cheques in England and in France. The next 
 step in Professor Fisher's argument is to use this definite 
 proportion between cheques and coin so as to extend the 
 quantity theory to gold together with the superstructure 
 
 * C/. Sir William J. Ashley in " Statistics and the Theory of Money," 
 in the Economic Review, April, 191 2.
 
 PRICES BEFORE THE WAR 21 
 
 of credit based on gold. And the argument really amounts 
 to saying that, if you increase the amount of gold in a 
 country, ipso facto you must increase the amount of credit ; 
 and, therefore, although most monetary transactions are 
 in forms of credit, the rise in prices is proportioned to the 
 increase in the gold. In other words, the new gold expands 
 credit, especially bank-deposits, in the same proportion ; 
 and the deposits and gold together raise the prices by the 
 simple quantity theory of money. 
 
 That all credit ultimately rests on a gold basis — that is 
 to say, in the gold-standard countries — has long been 
 admitted. Bagehot, in his " Lombard Street," showed how 
 the credit superstructure, and with that the solvency of 
 England, rested on the reserve of gold in the Bank of 
 England ; and his argument has been brought up to date 
 by Mr. Withers. From this point of view the real limits 
 to the expansion of prices under credit are found in the fact 
 that all these forms of credit are convertible into gold if 
 required. In ordinary times the conversion' is not asked 
 for ; in times of crisis, with a foreign drain of gold, the 
 conversion may be asked for to such an extent as to threaten 
 the ultimate reserve. It has long been recognised that, 
 besides the possible foreign drain, there may be, with an 
 inflation of credit-prices, an internal drain for wages and 
 other cash transactions. With a rise in money incomes 
 there is an increased demand for gold for use in the arts 
 and the like. These three drains — foreign, internal, and 
 industrial^ — impose very definite limits on the expansion 
 of credit, as is recognised in all the monetary text-books. 
 But it is quite a different thing to say that, if we increase 
 the amount of gold in the banks, credit will be increased in 
 the same proportion. The strengthening of the foundations 
 does not of itself raise the height of the superstructure, even 
 if the superstructure is credit. 
 
 § 14. Difficulty of International Price-levels 
 One flaw in Professor Fisher's argument is his failure to 
 appreciate the interaction of international price-levels. He
 
 22 WAR FINANCE 
 
 admits the interaction only in the simplest form of the 
 quantity theory. He seems to suppose that in every country 
 the level of prices is determined by the quantity of money 
 (cash and deposits) in that country, and that the levels of 
 the various countries are adjusted to the general level by 
 the flow of gold, the gold as it flows expanding or contracting 
 credit, and so moving prices. But this simple argument 
 gives us no idea how much or how little an increase in the 
 world's gold will raise prices. We never get beyond the 
 main position of Ricardo, that the gold will be so distributed 
 that the trade of the world will be carried on as before ; 
 or, to adopt a later setting of the same truth, that relative 
 prices will be so adjusted that the relative values as deter- 
 mined by economic forces will remain the same. Like all 
 other abstract propositions in political economy, this only 
 expresses a tendency liable to be counteracted by disturbing 
 causes. The proposition will remain true, or this tendency 
 will be revealed, other things being the same, whatever the 
 rise in prices happens to be. In some way or other the gold 
 will be distributed ; and, if there is a general rise in prices 
 in consequence, in the course of time the work and the 
 pleasures of the world will be measured on a new basis. 
 But besides the quantity of gold there are a number of 
 causes of the first importance affecting general prices ; and 
 for an indefinite period it is possible that gold may be 
 increasing and prices not rising, or even falling. 
 
 § 15. Proposed New Gold-exchange Standard 
 
 When we come to ai)ply Professor Fisher's argument to 
 the j^roblcm that is at i)resent exciting so much interest, 
 we have no means of telling how much of the rise is due to 
 the new gold, or how much further the rise may go. He 
 himself, indeed, seems to antici])ate so great a rise in j)rices 
 tJiat the nations of the world ought to agree to substitute 
 for tlie gold standard an artificial gold-exchange standard, 
 so that the sovereign, for example, would no longer corre- 
 spond to the gold of which it is made, but to some idea of 
 purchasing power. On this i)laii, if prices rise as measured
 
 PRICES BEFORE THE WAR 23 
 
 by the index numbers, tlien gold is to be withdrawn, and 
 with the contraction of the currency by the simple cjuantity 
 theory prices are to come down ; while, if prices fall, gold 
 is to be let loose and prices arc to go up. It is not necessary 
 to go into the working of the process of the manipulation of 
 the gold, but the basis of the whole scheme is the contraction 
 and expansion of the gold currency so as to operate against 
 movements in prices. " Therefore the currency will be 
 contracted and general prices will fall until no more gold is 
 called for, or until there is declared a new ofticial price for 
 gold " (Fisher, op. cit., p. 343). 
 
 § 16. Proposal Criticised 
 
 The difficulty of this plan may be seen by looking to the 
 recent movements of prices in England. By the latest 
 figures of the Economist,^ compared with the basis of 
 1901-5, prices rose in 191 1 some 17 per cent. ; and this year 
 there has been a further rise of some 8 per cent. In July, 
 1912, the index number was just 25 per cent, above the basis 
 of 1901 -5. If the sovereign was to have retained the same 
 purchasing power, its scarcity value must have been gradu- 
 ally enhanced (b}^ contraction of the currency) in the same 
 proportion as the rise of prices indicated b}^ the index 
 numbers. The sovereign at this time, if the plan had been 
 perfectly successful, would be one-quarter more valuable 
 than the corresponding amount of gold of which it is made ; 
 or, roughly, the mint price of gold, instead of being a little 
 under ^^4, would be a little under £3. But currency can only 
 obtain a scarcity value by being made scarce ; and the 
 effects of giving a scarcity value to the sovereign on the 
 London money market would altogether outweigh any 
 advantage to be obtained from greater stability in the 
 ]HU"chasing power of the sovereign. England might perhaps 
 look with equanimity on the adoption of this index number 
 gold standard by other countries, just as it would ha\'e done 
 if they had adopted bimetallism. The old tabular standard 
 
 * The Economist, September, 19 12.
 
 24 WAR FINANCE 
 
 seems much more simple, and would be, in theory, much more 
 effective. All that is needed is to pass a law that, if the index 
 number rises as recently, say, 25 per cent., then all creditors 
 are to get £125 instead. of £100, and nominal wages are to 
 rise in the same proportion. It is, however, generally agreed 
 that the practical difficulties of the tabular standard are so 
 great that it can be applied only in a very limited number of 
 cases. 
 
 § 17. Further Criticism 
 
 As regards this new gold-exchange standard based on 
 index numbers, it has not yet passed the preliminary 
 theoretical examination. It is true that the gold-exchange 
 standard of India has been successful in the attainment of 
 the object desired, namely, a fixed parity of exchange of 
 the rupee with gold, under normal conditions. Sir David 
 Barbour has given in his new book a clear and valuable 
 account of the way in which this has been effected. It is not 
 easy to specify to which class of currency the new rupee 
 belongs ; it has resemblances with the limping bimetallism 
 of France, with ordinary token coins, and with bank-notes of 
 which the convertibility is partially suspended or otherwise 
 impeded. However we class it, so long as the principle of 
 limitation is observed and an adequate reserve of gold is 
 available, the parity of the rupee can no doubt be maintained. 
 But to ensure the convertibility of various forms of currency 
 at fixed ratios is a problem totally different from the attain- 
 ment of stability in the purchasing power of the standard 
 on which these various currencies are based. The former 
 problem has been solved in different ways from the earliest 
 times ; there are many examples of currencies at fixed 
 ratios, and ratios different from the commodity-values of 
 the substances of which they are made. But there are no 
 cases on record in which any standard has attained stability 
 of purchasing power under changing conditions ; and such 
 a standard is generally held to be unattainable. The 
 working of a gold-exchange standard based on index 
 numbers is totally different from the working of such a
 
 PRICES BEFORE THE WAR 25 
 
 standard as that of India. Professor Fisher does not realise 
 this distinction. 
 
 " It is a little anomalous " (he says) " that these gold-exchange 
 standard countries now have a power to regulate their price-level 
 which is not possessed by the gold-standard countries themselves. 
 The latter are, by their present system, kept absolutely at the 
 mercy of the accidents of gold-mining and metallurgy, while the 
 former can keep or change the par of exchange with gold countries 
 at will " {op. ciL, p. 340). 
 
 Now, rupee prices in India during the last ten or twelve years 
 have risen about double, though the parity with gold has 
 been maintained. We should like to know by what methods 
 Sir David Barbour would have proceeded if he had been 
 asked to ensure the stability of the rupee in general pur- 
 chasing power. 
 
 § 18. Need for Further Inquiry 
 
 Before any serious manipulation of the world's currencies 
 can be expected with the view of attaining greater stability 
 of purchasing power, the causes which under modern condi- 
 tions bring about changes in general prices must be much 
 better understood and much more accurately measured. 
 The revised version of the quantity theory gives us no more 
 assistance in connecting the new gold supplies with the 
 recent rise in prices than was given by the theory in its older 
 forms. In some respects the revised version is retrograde. 
 The relations of credit to gold on the one side and to general 
 prices on the other, and the distinctions between incon- 
 vertible and convertible currencies, are not so clearly realised 
 by Professor Fisher as by Mill and Bagehot, not to mention 
 later writers. He tries to apply the quantity theory in a 
 simple form to actual problems, but his main results are 
 either hypothetical or illustrative of hypotheses. One 
 thing, however, his book has shown, and that is the necessity 
 of a much deeper and broader investigation of the causes that 
 affect general prices, and therefore the purchasing power of 
 money ; and, if the International Commission of which he
 
 26 WAR FINANCE 
 
 is the advocate is appointed, we may expect valuable results. 
 In the meantime, however, although it has been approved by 
 the President of the United States, the appointment has been 
 delayed, apparently for political reasons. It is said that the 
 opponents of the tariff in the United States are unwilhng to 
 admit that the rise in the cost of living in that country has 
 any other serious cause ; and they think the admission that, 
 perhaps, the new gold has something to do with it might 
 abate the popular resentment against the tariff. 
 
 § 19. Possible Fall in Prices 
 
 It is quite possible that, before the International Com- 
 mission is appointed, the rise in prices may have met its 
 reaction.* Even if the supplies of gold do not fall off, there 
 are other factors of at least equal importance to be taken 
 account of. The value of money {i.e., in the sense of its 
 purchasing power) depends, like other values, on demand 
 and supply. The price level must be so adjusted by the 
 play of demand and supply that the quantity of " money " 
 offered at that level will be equal to the quantity demanded. 
 Stated in this most general form, the theory is difficult to 
 grasp ; and the difficulties are increased when we consider 
 the various elements that enter into both the supply of 
 " money " and the demand for " money." The annual 
 production of gold is only one of the elements affecting the 
 supply of " money." The recent conference of bankers in 
 Germany has shown that the expansion of credit money has 
 been pushed to the extreme. The American crisis of 1907 
 is not yet forgotten. To judge by past history, the rapid 
 development of new countries seems likely to lead eventually 
 to a period of over-production and a consequent fall in 
 prices. The demands of India and possibly of China must 
 be considered. That there is some connection between the 
 quantity of gold available for monetary uses and the level of 
 prices may still be considered as plain a truth as that there 
 
 * As observed in the introduction to this essay, prices actually fell in 
 1913-14 (before the war).
 
 PRICES BEFORE THE WAR 27 
 
 is some connection between seasonal temperatures and the 
 apparent movements of the sun. But the meteorologists 
 have recently confessed in public their inability to forecast 
 the weather even for a season in advance, and the currency 
 prophets would do well to imitate their caution.
 
 CHAPTER II 
 
 THE ABANDONMENT OF THE GOLD STANDARD 
 
 Prefatory Note 
 
 [This essay was originally written for the December, 1914, 
 number of the Quarterly Review and was first published in 
 April, 1915. The justice of the diagnosis of the nature and 
 the causes of the abandonment of the gold standard has 
 been fully confirmed by subsequent events. So also has 
 the forecast of the coming troubles. The essence of the 
 abandonment is found in the restrictions on the converti- 
 bility of the various forms of credit. The immediate and 
 extensive adoption of inconvertibility (in varying degrees) 
 is accounted for by the changes in monetary policy conse- 
 quent on the demonetisation of silver by Germany after 
 the Franco-German War. The " scramble for gold " 
 (Goschen) was intensified by the great fall in its production. 
 The transition to the gold standard by the nations formerly 
 bimetallic and by the silver-standard countries was imper- 
 fect, and was accompanied by all kinds of "economies" in 
 the use of gold. The so-called economies were for the most 
 part restrictions on convertibility. The convertibility that 
 had always been fully interpreted by England was restricted 
 by these other countries to foreign payments. The result 
 was that throughout the greater part of the world some form 
 of the gold-exchange standard was adopted in place of the 
 gold standard in the traditional British interpretation. In 
 normal times the difference was not observed, since for 
 internal purposes convertibility was only required within 
 narrow limits. But before the outbreak of war it was 
 generally recognised that London was the only free market 
 for gold, that is to say, the only centre in which the various
 
 ABANDONMENT OF THE GOLD STANDARD 29 
 
 forms of credit supposed to rest on gold could actually be 
 converted into gold without any impediment or extra 
 payment. It is true that the great national banks held 
 large reserves of gold — far larger than the Bank of England — 
 but they were not held for actual use. 
 
 Before the war the idea had come to be generally accepted 
 that for internal purposes gold was a useless luxury and that 
 paper was in every way much better. The ideal was a gold 
 standard without gold. Even as regards foreign payments 
 economies in the use of gold had been carried to an extreme. 
 Reserves were held abroad or various provisions were made 
 for obtaining money at short notice in foreign parts. The 
 general consequence of this great economy of gold, coupled 
 with a great increase in production after 1896, was an 
 undue expansion of credit as shown specially in the United 
 States in 1907 and in Germany just before the war. On the 
 monetary side this economy of gold, coupled with the 
 increase in production, gave great apparent strength to the 
 national banks. The real strength of the world monetary 
 system was undermined by imperfect convertibihty. The 
 consequence was that as soon as war broke out the gold 
 standard was abandoned by all the belligerents to a greater 
 or less extent. In England the process of abandonment 
 was gradual and disguised. The new currency notes for 
 £1 and los. were nominally convertible into gold, but 
 they were issued just like inconvertible notes without 
 any definite legal limitations. The primary object of the 
 present essay was to point out the consequences of this 
 easy finance supported by paper money and the dangers 
 of inflation and a rise in prices. No attention whatever 
 seems to have been paid by our financial authorities to 
 this possibility of internal inflation. All their efforts were 
 directed from the beginning to preserving the stability of 
 the foreign exchanges, especially with the United States. 
 The interconnection between internal inflation and adverse 
 foreign exchanges, which had been recognised as vital by 
 the old masters {e.g., Goschen), was entirely disregarded. 
 At the end of the article it was pointed out that the rise in
 
 30 WAR FINANCE 
 
 prices due to inflation at home would increase the adverse 
 balance of trade and make the adjustment of the foreign 
 exchanges more difficult. For a long time the stability of 
 exchange with the United States has been kept up by loans 
 and sales of securities, but such procedure does not " correct " 
 the exchanges in Goschen's sense, but simply pays the 
 penalty. 
 
 It is now clear that our greatest labour troubles at home 
 are connected with the rise in prices largely due to the easy 
 finance of inflation, and the difficulties of our foreign pay- 
 ments have been intensified by the same cause.] 
 
 § I. Extent and Nature of the Abandonment — 
 Moratorium and Inconvertibility for Internal 
 Payments 
 
 The Great War will be long remembered for other things 
 besides the destruction of life and the reconstruction of the 
 map of Europe. On the financial side the most notable 
 event was the universal abandonment for the time being of 
 the gold standard. The abandonment varied in extent, was 
 effected by different devices in different countries, and was 
 described in the kind of language that is familiar from the 
 bulletins of defeated armies ; it was not an abandonment at 
 all, but only a temporary retirement under the guidance of 
 the higher financial command. 
 
 The two principal forms assumed by the abandonment 
 were the moratorium and inconvertibility. The two forms 
 are in essence the same. Inconvertibility is generally applied 
 to bank-notes ; it means that the bankers are authorised to 
 refuse to meet their promises to pay in gold on demand. A 
 moratorium means that all debtors (not specially excluded) 
 are authorised to postpone the fulfilment of their monetary 
 obligations. Germany adopted at once the method of 
 inconvertibihty, and prided itself on not being obhged to 
 adopt the moratorium. But inconvertible notes were issued 
 on such terms and to such an extent that a moratorium was 
 not needed. France adopted both methois The United
 
 ABANDONMENT OF THE GOLD STANDARD 31 
 
 Kingdom adopted openly the method of moratorium and in 
 a disguised manner the method of inconvertibihty. Enghsh 
 people will long remember the beginnings of the Great War 
 when some of the London banks refused to give gold for 
 Bank of England notes and people were forced (or delighted) 
 to receive postal orders as legal tender. They will long 
 remember also the advent of the new sin of hoarding gold 
 and the new virtue of turning it out of the pockets into the 
 banks. With the war the whole duty of the private man as 
 regards gold was declared to be total abstinence ; the proper 
 place for gold (so it was preached) was a bank ; and the 
 proper business of the bank was to hoard it. For a time the 
 banks were commanded by the Treasury not to pay out gold. 
 
 § 2. As REGARDS FOREIGN PAYMENTS 
 
 The abandonment of the gold standard by the respective 
 nations each within its own borders was still more marked as 
 regards foreign payments. England was a large creditor ; 
 and failing other modes of remittance large sums of gold 
 were due in London on the outbreak of the war. But the 
 foreign debtors with one consent hoarded their gold. The 
 essential idea of a banking reserve was lost sight of. A 
 reserve is intended to meet an exceptional strain. In 
 ordinary times it is useless ; it is never drawn upon to any 
 marked extent ; there is always an apparent over- abundance. 
 But on the outbreak of the war the great banks refused to 
 part with gold, especially for foreign payments. Six 
 months after the outbreak of the war the banks of France, 
 Germany and Russia retained their enormous stocks of gold 
 practically unaffected. Such a general abandonment of the 
 gold standard could not have taken place unless the mone- 
 tary evolution had long since been tending in that direction. 
 A short historical survey seems the best way to explain both 
 the nature and the extent of this abandonment and the 
 promptitude with which it was effected.
 
 32 WAR FINANCE 
 
 § 3. Historical Explanation, (a) Strain on Gold due 
 TO DISUSE OF Silver as Standard after Franco- 
 German War (1870-71) 
 
 Down to the conclusion of the Franco-German War of 
 1870-71, gold and silver were, generally speaking, on an 
 equal footing as standard money. In India and the Far 
 East silver was the sole standard and the principal metallic 
 money. In some of the most important Western countries 
 [e.g., France and the countries forming the Latin Union and 
 the United States) the double standard prevailed ; gold and 
 silver were legal tender to any extent at a ratio fixed by law, 
 and the mints were equally open to both metals. In the 
 United Kingdom gold was the standard, and silver was only 
 used for token coins. So long as this state of things lasted, 
 although there were no formal international agreements, 
 practically a certain amount of silver all the world over 
 would always command a certain amount of gold (within 
 very narrow limits), so that for ordinary purposes and for 
 banking and international trade the two metals were inter- 
 changeable to any extent. 
 
 This system, which de facto had great stability and great 
 advantages, was upset b}^ the action of Germany on the 
 conclusion of the Franco-German War. This action of 
 Germany was due, like all the main lines of her recent 
 economic policy, to the imitation of Britain. Germany 
 thought that British commercial supremacy and the pre- 
 dominant position of the London money market were largely 
 due to the gold standard. Therefore Germany determined 
 to have a gold standard, and set about what was called the 
 demonetisation of silver. This action of Germany upset the 
 balance of the two metals, and they were no longer inter- 
 changeable in the same way. A given amount of silver 
 would not obtain the usual amount of gold but a less amount. 
 Silver was depreciated, and the depreciation increased. 
 The consequence was that other nations found it necessary 
 or desirable to make gold the only standard. In order to do 
 this they put the silver (which they held in large quantities
 
 ABANDONMENT OF THE GOLD STANDARD 33 
 
 as standard money) in some kind of dependent relation to 
 gold, the natm'e of the relation varying in the different 
 countries. 
 
 § 4. {b) Practical Difficulties in the Readjustment 
 
 This process of readjustment took a very long time ; and 
 during that time there was a continuous fall in prices and a 
 great depression of trade, the fall of prices reaching its lowest 
 depth in 1896. The difficulties in the general adoption of 
 the single gold standard were greatly increased by the f alling- 
 off in the supply of gold. In course of time, however, 
 practically all the nations of the world put themselves on the 
 gold basis, and all the great financial and commercial trans- 
 actions of the world came to be conducted on this standard. 
 The actual monetary contracts were no doubt expressed in 
 terms of the various national currencies, but all of these were 
 ostensibly linked up with the gold standard. As it happened, 
 since 1896 this universal adoption of the gold standard was 
 greatly facilitated by the largely increased production from 
 the mines. Before the outbreak of the present war it seemed 
 as if the new gold was sufficient not only to provide for this 
 universal adoption of the gold standard, but also to cause 
 a general rise in prices. Certainly the common opinion in 
 financial circles is that, just as the fall in prices before 1896 
 was due to a decrease in the gold supplies, so after that date 
 the rise in prices has been due to their increase. 
 
 § 5. (c) Hazy Ideas on Nature of Monetary 
 Standard 
 
 Unfortunately, however, during the process of getting 
 rid of silver as an alternative standard and making gold the 
 sole standard, there grew up very hazy ideas on the nature 
 and the uses of a monetary standard. These hazy ideas 
 Vere made the basis of important changes in financial 
 practice. The ultimate effect was that, even before the 
 outbreak of the war, gold had in reahty become less effective 
 as a monetary standard than it was in the days when its
 
 34 WAR FINANCE 
 
 dominion was supposed to be shared equally with silver. 
 The reason is that in various forms and to various degrees 
 the pernicious principle has been adopted of deferred or 
 suspended or delocalised or denationalised convertibility. 
 Ostensibly, with the adoption of the gold standard all 
 monetary obligations were to be met in gold ; but practically 
 all sorts of expedients have been invented to " economise " 
 (as it is euphemistically called) the use of gold. 
 
 § 6. Laxity of New Interpretation 
 The degree of the change in opinion and practice may be 
 reahsed by reference to the bimetalhc controversy. Then 
 the great argument of the gold-standard purists was that in 
 the natural course of things silver would depreciate. There- 
 fore it was said that, if debtors (governmental or private) 
 could discharge their debts in silver, they would do so and 
 the British gold creditors would suffer. Bankers in parti- 
 cular were horrified at the idea that promises to pay in gold 
 could be made good by payments in silver, or in currency or 
 credit based on silver. The stability of the London money 
 market, and with it the stability of British trade, was 
 supposed to be dependent on the maintenance of the gold 
 standard in the strictest and most absolute form. The adop- 
 tion of the gold standard by Germany confirmed this view. 
 
 § 7. Practical Examples of Change in Standard. 
 
 France — India : Beginnings of Gold-Exchange 
 
 Standard 
 This strict maintenance before the present war of the gold 
 standard in the United Kingdom, where it had been effec- 
 tively established since the conclusion of the Napoleonic wars, 
 was an easy matter ; it was only necessary to observe the 
 old maxim — " quieta non movere." But in other countries, 
 where silver had been standard money, the real establish- 
 ment of gold as the sole standard was a matter of great 
 difficulty. In France, for example, silver was still full legal 
 tender, though the mintage was restricted ; and in that 
 country the double standard had given way to what was
 
 ABANDONMENT OF THE GOLD STANDARD 35 
 
 known as the limping standard {italon hoiteiix). In India, 
 although the dominant metallic money is still silver, silver 
 is not the standard, nor on the other hand has the gold 
 standard been effectively adopted, but only that modifica- 
 tion of it that in these latter days has come to be called the 
 gold-exchange standard. Its opponents call it the gold 
 standard without gold. The essence of this standard is 
 that, by the limitation of the coinage of rupees and by other 
 devices, fifteen silver rupees in India are interchangeable 
 with a gold sovereign in London (within narrow limits) . 
 This is no doubt, in normal times, a convenient arrangement 
 for the Governments of India and of England, though 
 whether it is advantageous to the people of India is another 
 question. The present point is that, although India is 
 supposed to have a gold standard, its principal metallic 
 money is only imperfectly convertible into gold. It is a case 
 of suspended or deferred convertibility. 
 
 The plan adopted by India in 1893 with the closure of the 
 mints to silver was not new. The Report of the Committee 
 on which action was taken after a comprehensive survey of 
 monetary systems concludes : 
 
 "It would thus appear that it has been found possible to 
 introduce a gold standard witlwut a gold circulation ; without 
 a large stock of gold currency ; and even without legal con- 
 vertibility of an existing silver currency into gold." 
 
 This method of imperfect convertibility * had been adopted 
 in different forms by the principal countries of Europe. 
 There was an appearance of monet'ary strength in the masses 
 of gold held in the central banks, but any exceptional 
 demand for this gold, especially for foreign remittance, was 
 met by making a special charge, or in some cases by actual 
 hmitation. The gold was in effect hoarded by the central 
 banks, and provision for foreign remittances was met by 
 foreign credits in various forms. 
 
 * Cf. " Money and Monetary Problems " (Essay on the Indian Currency 
 Experiment), by the present writer; J. M. Keynes, " Indian Currency 
 and Finance," chap, iiw
 
 36 WAR FINANCE 
 
 § 8. Imperfect Convertibility under New System and 
 ITS Consequences compared with the Old 
 
 In normal times this imperfect convertibility of credit 
 into gold was not even noticed and certainly caused no 
 apparent difficulties. In normal times most monetary 
 transactions are concluded without the actual passing of 
 gold. But the real meaning of effective absolute immediate 
 convertibility (no single word can convey the full meaning 
 of the old sj^stem) was not simply that people could always 
 get as much gold as they found convenient {e.g., for making 
 ornaments or for payments abroad), but that very real 
 effective limitations were imposed on the undue expansion 
 of credit. 
 
 The simplest credit substitute for gold is a bank-note, 
 which in essence is a promise to pay on demand the metallic 
 money that it is supposed to represent. Notes based on 
 gold are strictly convertible only so long as the demand for 
 conversion can be met under any conditions within the 
 range of practical possibility, as shown by the financial 
 experience of nations over long periods. The demand for 
 conversion into gold in ordinary times is one thing ; it is a 
 dem.and that is onl}^ exercised within very narrow and 
 customary hmits. But the demand for conversion in extra- 
 ordinary times is quite another thing, and it is only in 
 extraordinary times that the real stability of a monetary 
 system is tested. 
 
 It was the necessity for being ready for exceptional strain 
 that inditced nations to adopt very stringent measures as 
 regards the issues of bank-notes. The issues have been 
 limited in all sorts of ways, and special provisions have been 
 made for securing an adequate reserve against any emer- 
 gency. Curiously enough, the legal restrictions on the issues 
 of notes by the Bank of England are more severe than those 
 of any other great Bank. After a certain amount has been 
 issued (now some £i8;000,ooo), for every other note an equal 
 amount of gold must be kept in the Issue Department. The 
 consequence was tliat, in tlic week before the outbreak of
 
 ABANDONMENT OF THE GOLD STANDARD 37 
 
 war, against an issne of notes of £55,121,405 the Bank held 
 gold eoin and bullion to the extent of £36,671,405. After 
 six months of war the Bank of England held in the last week 
 of January gold coin and bullion in the Issue Department 
 £68,352,305 against an issue of notes £86,802,605. There 
 was also a sum of £813,512 of gold and silver coin in the 
 Banking Department. It would seem from the figures of the 
 Issue Department that the Bank of England notes were 
 secured to a ridiculous point of safety, namely, with about 
 80 per cent, of gold. 
 
 But it is most important to observe that all the other 
 forms of credit, just hke bank-notes, are ostensibly con- 
 vertible into gold on demand. Even if the date of payment 
 is deferred, as in bills of exchange, by the method of dis- 
 counting, the present value is convertible into gold on 
 demand. For the week quoted above the account of the 
 Banking Department of the Bank of England shows a 
 reserve against liabilities of 32 per cent, as against a pro- 
 portion of 51 per cent, a year before. As shown by Sir H. 
 Inglis Palgrave, in his standard Vv'ork on the Bank Rate 
 and the Money Market, it is not the absolute amount of the 
 reserve but the proportion that counts. The great argument 
 of Bagehot's " Lombard Street " is that the Bank of England 
 ought to keep a far larger reserve in proportion than other 
 banks, mainly owing to the uncertainty as regards the 
 magnitude and the times of foreign demands. This argument 
 has been strengthened by the course of events since that 
 foundational work was published. . 
 
 § 9. London before War kept up Strict Convertibility 
 
 Before the outbreak of the war London was more than 
 ever the centre of the financial world. The fact has been 
 repeatedly forced on public notice since the war began, 
 but it is doubtful if its importance has been adequately 
 realised by the public. So long as every promise to pay 
 means in the last resort a power given to the holder of the 
 promise to get gold from his bank, his bank is obliged to 
 have the command of gold. If his bank finds it convenient,
 
 38 WAR FINANCE 
 
 instead of keeping gold, to have a credit with the Bank of 
 England, then the Bank of England, " the bankers' bank," 
 must keep a stock of gold equal to any possible demands 
 not only of this particular banker, but of all the holders of 
 similar promises to pay gold. In this way the reserve of 
 the Bank of England imposes, or ought to impose, stringent 
 limits on the expansion of credit. The essence of the system 
 by which London became the central money market of the 
 world was the immediate convertibilit}^ of all credits into gold. 
 In other countries, especially after the depreciation of silver, 
 this convertibility of. credit into gold became imperfect, which 
 is onl}^ another way of saying that credit was imduly expanded. 
 
 § 10. Crisis of 1907 in United States. 
 The effects of this laxity in the interpretation of con- 
 vertibility into gold was shown in the great crisis in the 
 United States in the autumn of 1907. There had been 
 an undue inflation of credit and prices — over-banking and 
 over-trading. When the demand for real convertibility 
 set in, it could not be met. For a time the United States 
 had really an inconvertible currency consisting mainly of 
 cheques that could not be cashed. The effects of this crisis 
 were world-wide. Everywhere there was a great contraction 
 of credit for the time being, and a great fall in the prices of 
 securities. It might have been expected that the crisis of 
 1907 would have given the banking world a lesson, but the 
 only immediate effect in the country of origin seems to 
 have been the evolution of a new scheme for emergency 
 currenc}^ in case of another crisis. To save trouble the 
 emergency notes were at once printed and stored ready 
 for use. Such was the foresight of the United States ; and 
 it is now made a matter of complaint that this country was 
 not equally provident. But this is anticipating the course of 
 events. 
 
 § II. The Golden Calf Theory of Gold 
 Reserves before the War 
 The general position of the commercial and hnancial 
 world before the outbreak of the war may be expressed in
 
 ABANDONMENT OF THE GOLD STANDARD 39 
 
 two propositions. Firstly, gold had been nominally adopted 
 as the universal standard of value. In the countries in 
 which silver coins were still .unlimited legal tender {e.g., 
 France, India, etc.), they were supposed to be in the position 
 of bank-notes convertible into gold — they were " bank-notes 
 printed on silver." Secondly, this nominal adoption of the 
 gold standard had only been imperfectly realised in prac- 
 tice, because the different kinds of representative money — 
 not only the silver and the bank-notes, but all the various 
 forms of bankers' credits-^were only imperfectly convertible 
 into gold. In normal times — within customary narrow 
 limits- — they were convertible into gold ; but on the slightest 
 strain some kind of difficulty was put in the way of getting 
 the gold immediately. The only exception was London. 
 London was acknowledged to be the only free market for 
 gold — the only market that was likely to be open in times 
 of stress. It is no doubt quite true that in the other great 
 banking centres the greatest respect was shown to gold. 
 The other central banks piled up far larger reserves than 
 the Bank of England. But, for all the good it did, the 
 greater part of this gold might as well have been molten 
 into great golden calves, to be worshipped by the customers 
 of the banks. 
 
 § 12. Imperfect Convertibility of Credit 
 
 The principal effect of this system of imperfect converti- 
 bility was that credit was unduly extended, and that the 
 limit on its expansion, properly imposed by effective con- 
 vertibility into gold under even exceptional circumstances, 
 was broken down by the use of all kinds of " soft " sub- 
 stitutes^ — the time and plac-; of the actual convertibility 
 being apparently a matter c f no moment so long as the 
 promise to pay was not dehnitely repudiated. 
 
 This economy in the use of gold in practice was supported 
 by a corresponding development of theory. As generally 
 happens in economics, the theory was invented to explain 
 and justify the practice. We were told that paper was 
 much more convenient than gold for internal currency,
 
 40 WAR FINANCE 
 
 and that the actual circulation of gold was wasteful. 11 
 would be quite sufficient to keep a reserve in bulHon, and 
 the bullion itself would only be required for an occasional 
 balance in international payments. If a country held 
 enough gold for this occasional emergency, then the rest 
 of its gold could be left to fructify in Egypt or South America 
 instead of being subjected to useless wear and tear in the 
 pockets of the people. Even as regards these fitful inter- 
 national payments, every effort was made to minimise the 
 useless transmission of gold. 
 
 The natural consequence of this economy of gold was 
 that the outbreak of the greatest war in history found the 
 financial world with inflated credit and inflated prices, and 
 with an ordinary commercial crisis like that of 1907 looming 
 in the near future. The only difference was that in some 
 cases the emergency currency was ready ; and, if in other 
 cases the emergency measures to be taken had not been 
 regularised by far-seeing legislation, the minds of all men 
 were fully prepared for the suspension of any inconvenient 
 laws and the substitution of practical measures (and paper) 
 worthy of the occasion. 
 
 § 13. The War and the Low Bank of Englai^d Rate. 
 
 The consequence of this development of easy finance and 
 the substitution of a system of great elasticity for the old 
 cast-iron system was, as shown by the most extraordinary 
 results, almost too good to be true. All over the world, 
 under the old system of credit, the Bank of England rate 
 had been regarded as the best measure of the stability of 
 the world's credit system. In the great crises of the nine- 
 teenth century the bank rate rose to 10 per cent., and in 
 one year (1866) remained at 10 per cent, for ninety-six days 
 and over 7 per cent, for other ninety-six days. This great 
 crisis arose simply out of the failure of one great firm. But 
 within a week of the declaration of war by England, August, 
 1914, the bank rate was reduced to 5 per cent., and at 
 5 per cent, it has remained up to the time of writing, although 
 a kind of arithmetical deference was shown to old tradition
 
 ABANDONMENT OF THE GOLD STANDARD 41 
 
 by the adoption of a 10 per cent, rate during a five days' 
 Bank Holiday. It is remarkable that a year before, in the 
 midst of profound peace, the bank rate had also been 
 5 per cent., so that it looked as if the Great War had had 
 no real effect on the world's financial system. The news- 
 papers were full of congratulations on the ease and the speed 
 with which the crisis had been suppressed. The Chancellor 
 of the Exchequer became the most popular man in the City. 
 At the Lord Mayor's banquet it was announced that a 
 peerage was to be conferred on the Governor of the Bank 
 of England. All seemed for the best in the best possible 
 of worlds. 
 
 § 14. Other Signs not so Favourable 
 
 It is true that, even when we look only at the surface of 
 things, the situation does not seem quite so cheerful as is 
 suggested by the glut of money in the London money 
 market. The Stock Exchange was closed to the end of the 
 year ; and the premier security, the old Consols, which used 
 to be considered as good as gold and as the barometer of 
 public credit, was unsaleable at an ofticial minimum price 
 too high to attract buyers, and higher (value for value) 
 than the price of issue of the new War Loan. When, with 
 the new year, the Stock Exchange was opened, it was under 
 severe restrictions both as regards dealings in old securities 
 and the creation of new. The Bankers' Clearing Returns 
 show a reduction for January, 19 15, of 21 per cent, com- 
 pared with the first month of last year. It was remarked 
 by the chairman at the annual meeting of one of the great 
 joint stock banks that the primary object of a gold reserve 
 was to inspire confidence, and that it must above all things 
 be visible. But the Bank of England has put itself in line 
 with the new theories on the gold standard by keeping an 
 unknown part of its gold reserve in Canada, South Africa, 
 Australia, and (it is supposed) other places. It is true that 
 the Bank Act of 1844 has not been suspended, but^ 
 the enormous issues of Treasury notes, against every
 
 42 WAR FINANCE 
 
 principle of that Act, render this technical abstention 
 insignificant. 
 
 § 15. " Short Period " and " Long Period " Effects 
 OF Easy Finance 
 
 It may be admitted, however, that the aggregate effect 
 of the various measures taken by the Government in a 
 sudden and unexampled emergency has been for the time 
 very pleasing ; but, in judging of the full effects of any 
 economic disturbance, we must always distinguish between 
 what economists call the "short period" and the "long 
 period." With regard to the " short period," on the outbreak 
 of war everyone expected a series of earthquakes accom- 
 panied by the fall of financial houses great and small. It 
 appears, however, from a calculation in the Times, that the 
 insolvencies in England from August to December were 
 less in number and in magnitude than in the corresponding 
 period for the year before ; they were, indeed, below the 
 average, and there was no failure of any particular import- 
 ance. In the same way people expected a great increase in 
 unemployment ; and instead there has been a decrease, 
 just as in insolvency, except in Lancashire no great industry 
 seems to have been much afflicted, whilst many have 
 attained unusual prosperity. It is true that exports have 
 fallen off ; but imports have almost reached the normal, 
 and the ports are congested with undistributed cargoes. 
 After six months of war there is apparently no real economic 
 pressure so far as we are concerned, whilst we have the 
 gratification of observing all the symptoms of increasing 
 pressure in Germany. If these marvellous results and this 
 astonishing contrast are to be ascribed to the financial 
 measures adopted in England and Germany respectively, 
 then the clamour of self-congratulation is at least pardon- 
 able, if excessive. But are they to be so ascribed ? Is 
 there not something of the simplicity of the post hoc ergo 
 propter hoc in the conclusion ? And are the " long period " 
 effects likely to be equally satisfactory ?
 
 ABANDONMENT OF THE GOLD STANDARD 43 
 
 § 16. The Restoration of the Foreign Exchanges by 
 Governmental Guarantees of Bills on London 
 
 First of all, attention may be directed to the effects of 
 the emergency measures on the foreign trade of the country. 
 Unfortunately an adequate appreciation of this side of the 
 question depends on understanding the working of the 
 foreign exchanges, and this is a matter to which in this 
 country very few people, even bankers, pay any regard in 
 the ordinary course of their business. The ordinary man 
 does not know even the meaning of the foreign exchanges. 
 When he was told that the foreign exchanges were dislo- 
 cated, he probably thought that it was part of the business 
 of the navy to put them right. He never imagined that the 
 proper remedy was for the Bank of England to give extended 
 credit to certain London financial houses and in return to 
 receive a guarantee from the Government against any 
 ultimate loss. It was explained that the welfare of the 
 nation and the continuance of our foreign trade were 
 inseparably mixed up with the stability of these financial 
 houses. The bill on London had come to be recognised as 
 the world's international currency. In its essence the bill 
 on London was a promise to pay gold on demand or some- 
 thing that would be as readily accepted. The actual gold 
 was, in fact, seldom demanded, and the bill was not always 
 payable on demand ; but the essence of the system was 
 that the bill was as much hnked up with the gold standard 
 as is a note of the Bank of England. The bill on London 
 was made good most effectively for the time. How much 
 eventually will be added to the national debt in consequence 
 is looked on as negligible in the midst of the flood of the 
 other governmental expenditure necessary for the war. 
 
 § 17. Exaggerated View of the Immediate Benefits 
 
 In judging of this restoration of the foreign exchanges, 
 two points ought to be borne in mind, one retrospective, 
 the other prospective. The dislocation of the foreign 
 exchanges was not due to any probability of a run on the
 
 44 WAR FINANCE 
 
 Bank of England in what is called a foreign drain of gold. 
 On the contrary, the real difficulty was that other countries 
 owed to London so much gold that they were unable, or 
 thought they were unable, to pay. They thought they 
 were unable to pay because they were afraid of the effect 
 of appearing to lessen their gold reserves. They were all 
 dominated by the golden-calf theory of banking reserves. 
 The principal offender (be it said with all respect) was the 
 United States of America. As the event showed, only time 
 was necessary for the exchanges to be restored in the usual 
 way ; but, as time was of importance, the action of the 
 Government was generally approved. The difficulty, 
 however, of that action ought not to be exaggerated. 
 
 The prospective point is of more practical importance. 
 Is the restoration likely to be enduring, or are the measures 
 adopted in an emergency liable to have a set-back later 
 on ? To answer this question the measures must be con- 
 sidered which were taken, apparently not in the interests 
 of foreign trade, but of home trade and industry. 
 
 § i8. Continued Excessive Issues of So-called 
 Emergency Currency Causes Inflation 
 
 Here it is difficult to understand on what principles, if 
 any, the country was flooded by emergency currency. 
 Notes for one pound and for ten shillings were issued as 
 fast as possible, and at first were supposed to be intended 
 to support the banks. The banks Were to be allowed to 
 borrow these notes from the Bank of England up to 20 per 
 cent, of their habilities. If the banks had acted on this 
 privilege they could have borrowed and issued over two 
 hundred millions of these notes, which, having regard to 
 the banking system of this country, was an absurdly extrava- 
 gant amount. Fortunately the banks scarcely made any 
 use of the privilege. But long after the banking system 
 of the country had settled down — and it was never much 
 upset for internal purposes- — the Government continued to 
 issue millions of these notes. By the end of the year the 
 amount had exceeded thirty-eight millions ; up to January,
 
 ABANDONMENT OF THE GOLD STANDARD 45 
 
 1915, every week had seen an increase. Besides this, 
 postal orders were made legal tender and were issued free 
 of charge ; that is to say, they were exactly like bank-notes 
 of small denomination, that could be issued by any private 
 person who chose to give coin for them, and in general the 
 coin was silver. They were convertible into any legal coin 
 at the Bank of England. The Treasury notes proper were 
 convertible into gold, but the provision for convertibility 
 was practically non-effective. The notes were by the Act 
 to be convertible at the Bank of England, but, in order to 
 assist the Government and the Bank of England, the 
 country banks were encouraged to use the notes as much 
 as possible and to send any surplus gold to the Bank. An 
 ominous foresight was shown even in the superscription of 
 the Treasury notes ; they bore no promise to pay in gold. 
 In case of complete inconvertibility being adopted- subse- 
 quently, they would be all ready and would not need to be 
 reprinted. Even this flood of postal orders and Treasury 
 notes does not complete the sum of the governmental 
 assistance to the country in the way of providing " money," 
 since in other ways there has been a great extension of 
 bankers' credit, the chief form of modern money. 
 
 § 19. The Rise in Prices ascribed to other 
 Causes 
 
 That such and so great an inflation of currency and 
 credit should raise prices, including the prices of food and 
 other necessaries, seems never to have entered into the 
 minds of anyone in authorit}^ The Cabinet Committee 
 appointed to inquire into the rise of prices issued a statement 
 in which eleven points were put down for investigation, 
 but the inflation of the currency was not even mentioned. 
 The check to the issues of the notes from January is the 
 only sign that this old way of paying new debts is not to 
 be indefinitely continued. The worst of it is, as all expe- 
 rience shows, that a rise in prices due to currency causes is 
 never detected until it is so marked and general that the
 
 46 WAR FINANCE 
 
 ordinary abuse of the speculator and the shippers and the 
 railways and all the other brigands seems unequal to the 
 situation. 
 
 V} 20. Inflation Increases the Adverse Balance 
 OF Trade. 
 
 There is, however, one way in which an inflation of 
 prices is forced on the attention of the great financial 
 authorities. If the rise in prices encourages imports and 
 checks exports, then there will in time be a difficulty in 
 meeting the foreign payments, and the foreign exchanges 
 will again be dislocated in a way that the Government will 
 find not so easy to correct. Germany has apparently already 
 begun to feel this effect, which is of course so far a comfort 
 to us, but it recalls the old proverb about the house of one's 
 neighbour being on fire : " proximus ardet Ucalegon."
 
 CHAPTER III 
 
 INDIAN CURRENCY AND FINANCE IN RELATION 
 TO THE GOLD-EXCHANGE STANDARD* 
 
 Prefatory Note 
 
 [As indicated above (p. 34), the Gold-Exchange Standard 
 is one of the principal monetary developments of modern 
 times. It is not, however, so new as is generally supposed. 
 My old pupil. Professor Robert Leslie, has published in the 
 South African Journal of Science, November, 1916, an 
 interesting account of the adoption of the method in Cape 
 Colony in 1825. 
 
 The best recent example of the gold-exchange standard is 
 that of India. Since the closure of the Indian mints to 
 private coinage of silver in 1893 Indian currency has been 
 managed with the object of keeping up the gold exchange 
 value of the rupee to sixteen pence. Before the war this 
 parity was more than 30 per cent, above the metallic 
 value of the rupee, and though it took some time to establish 
 it survived the shock of the American crisis 1907-8. It is 
 now more seriously threatened by the great rise in the price 
 of silver. On 14th Sept., 1917, silver touched $id. per oz. as 
 compared with 26^, in August, 1914. As a consequence, it 
 is proposed to issue notes for one rupee and two and two and 
 a half rupees. If the rupee (in Mr. Harrison's phrase) is 
 only a note printed on silver, why not print it on paper ? 
 In my opinion such a substitution of paper for silver is 
 extremely injudicious and possibly even dangerous from the 
 political stand-point.] 
 
 * First published in the Economic Journal, June, 19 14.
 
 48 WAR FINANCE 
 
 The reports by various commissions of inquiry appointed 
 at various times by the British Government contain some of 
 the most valuable materials for economic study in existence. 
 The value to the economists is not diminished, even if the 
 final conclusions of the reports may not be adopted. The 
 Report of the Royal Commission on Indian Finance and 
 Currency * is a very able document and, with the corre- 
 sponding evidence, gives materials of the highest interest at 
 the present time for the student of the principles of monetary 
 theory and their practical illustrations in the most modern 
 forms. A large part of the Report is substantially in accord 
 with the treatment by Mr. J. M. Keynes in his recent book 
 on Indian Currency and Finance, and the reader of either 
 may be strongly recommended to read the other. 
 
 In my opinion, however, there are omissions both in the 
 book and in the Report which are of the first importance in 
 theory and in the future may be of vital importance in practice. 
 The practical side of the issues I wish to raise is dealt with in 
 Sir James Begbie's note of dissent, and I shall treat of the 
 same difficulties with reference to the relative economic 
 principles and former cases of practical importance. 
 
 This paper is mainly concerned with the ulterior and 
 cumulative effects which seem probable if the present system, 
 even as modified in the Report, is continued. 
 
 The admirable history of Indian currency since 1893 given 
 in the general report shows at once that in all the various 
 changes the dominant force, whether in initiation or modifica- 
 tion, has been the stability of the foreign exchange value of 
 the rupee in relation to gold. From the beginnings of the 
 depreciation of silver after 1S73 the Indian Government was 
 troubled with the instability of the gold-exchange value of 
 the rupee, and British trade with India was also troubled 
 with it. One of the principal arguments of the bimetallists 
 was that the fixity of the ratio of silver to gold would also 
 fix the gold value of the rupee, with consequent general 
 advantage to trade, to the investment of capital in India, 
 
 * " Final Report of the Royal Commission on Indian Finance and 
 Currency." 1914. L^d, 723O.] Price grf.
 
 INDIAN CURRENCY AND FINANCE 49 
 
 and to banking as well as to the Government. By 1893 the 
 attainment of stability of exchange (or at least a check to a 
 further fall) to the Indian Government seemed necessary, 
 and to the British trader very desirable. The Indian mints 
 were closed to the coinage of silver, and since 1898 the 
 policy pursued has been successful in maintaining the 
 normal gold value of the rupee at is. ^d. 
 
 The Report, in its final summary of conclusions, sec. 76 
 (p. 20), says that " the cardinal feature of the whole system 
 is the absolute security for the convertibility into sterling of 
 so much of the internal currency as may at any moment be 
 required for the settlement of India's external obhgations." 
 
 No one will dispute that this fixity of exchange is in itself 
 advantageous and especially advantageous to the Indian 
 Government. But the question arises : Does it follow, 
 because the stability of the gold price of the rupee has been 
 established for the purposes of foreign exchange, that there- 
 fore it may be taken for granted that all the other functions 
 of good money are fulfilled by the rupee as so " managed " ? 
 
 What are the primary functions of a good system of 
 money ? The first is to provide a medium of exchange, not 
 mainly for foreign payments, but for the purposes of internal 
 trade and industry. The first requisite from this point of 
 view is that the mone}^ shall be universally accepted, hence 
 the importance in the early stages of development of the 
 commodity value of money. Even in the latest stages any 
 difiiculty in testing or any want of confidence at once so far 
 limits the acceptability. We have numberless instances of 
 imperfect acceptability in the incubation period of the depre- 
 ciation or debasement of different forms of currency. In the 
 extreme case of the depreciation of inconvertible notes the 
 acceptability may vanish. Between this extreme of non- 
 acceptability and the other extreme of instant universal 
 acceptability there are infinite gradations, and we have an 
 excellent example of the economic principle of continuity. 
 
 The question, then, is this : Is this artificial rupee as 
 acceptable to the people of India as was the old rupee, which 
 was of the same value as the metal of which it was composed ?
 
 50 WAR FINANCE 
 
 Have the masses of the people of India reached the stage at 
 which the commodity vahie of the money is of no importance ? 
 The answer of Sir James Begbie is definitely to the contrary : 
 "... the recent demands for gold in India show a loss of 
 confidence on the part of the public in the token rupee. . . . 
 The need for confidence to secure the exchange value of the 
 rupee is recognised, but not the need for confidence in the 
 currency in other respects." (Report : note by Sir James 
 Begbie, p. 88, par. 5.) 
 
 The next requisite of a good medium of exchange is that it 
 should be readily adapted to the demands of trade : the 
 volume of the actual currency should be capable of automatic 
 increase or decrease. Such automatic adjustment is most 
 nearly attained when the principal currency is interchange- 
 able at once with the corresponding metal. Such was the 
 old system of the rupee under the silver standard. Such is 
 the system of the currency of the United Kingdom as regards 
 gold, notes, and cheques. But even in the United Kingdom 
 there are occasionally difficulties. At one extreme, for 
 example, as regards the small token coins, we hear sometimes 
 of the scarcity of farthings. At the other extreme, before 
 Goschen's Act for the gold recoinage (1890) the banks had 
 begun to feel the difficulty of getting rid of the light-weight 
 gold coin. The preliminary stages of depreciation had' 
 begun, and even in England the automatic adjustment of the 
 gold coins was threatened. 
 
 In the case of India this point is best taken in connection 
 with another of the principal functions of good money, 
 namely, that it should provide a store of value. The earliest 
 form of saving is in hoarding the precious metals. India, as 
 regards a large part of its population, is still dominated by 
 primitive ideas of hoarding. " The hoarding habit in India 
 is no doubt a difficult problem. Its recent rapid develop- 
 ment in increased demands for gold and the possibility of its 
 further expansion make it a question of the highest import- 
 ance." (Note by Sir James Begbie, Report, p. 89, par. 10.) 
 Under the old system the metallic value of the rupee was the 
 same as its nominal value. A native would hoard rupees
 
 INDIAN CURRENCY AND FINANCE 51 
 
 or turn his rupees into ornaments, as it suited his conveni- 
 ence. Under the present system, if a native hoards silver he 
 does not know what the value may be later on in rupees. If 
 he hoards gold he beheves he will get the fixed amount of 
 rupees. Therefore he prefers gold to silver. He also 
 prefers it to token rupees. There is an alternative use for 
 gold, and according to Gresham's law it is withdrawn from 
 circulation and absorbed in hoards in preference to rupees. 
 In the opinion of Sir James Begbie, this hoarded gold is not 
 so readily released as was the silver formerly. The con- 
 fidence in the rupee has been partly lost. " Statistics 
 show this later reversion to hoarding on an extended scale 
 is a retrograde movement." 
 
 It must be remembered that the rupee, like any other 
 form of token money, can only be kept at a fixed value as 
 regards gold by the use in some form of the principle of 
 limitation.* For the first seven years after the closure of 
 the mints to silver for private coinage there were practically 
 no new issues. The deficiency was in part supplied by the 
 release of rupees from hoards and by importation from out- 
 side. So long as these sources of supply were available, the 
 principle of limitation did not have its full effect. In 
 consequence the rupee failed to maintain the is. ^d. value, 
 and fell at one time to is. id.'f After stability had been 
 attained in 1898, the needs of more currency, as shown by 
 the difficulties of moving trade and the stringency of the 
 Indian money markets, led to the issue of new rupees by the 
 Government, Since 1900 these issues have been very largely 
 increased, but not so as to threaten (except, perhaps, in the 
 crisis years of 1907-8) the gold price of the rupee. 
 
 The point is that the amount of rupees coined depends 
 partly on the demands for remittance in London, partly on 
 the offer of gold in India to be converted into rupees, and 
 
 * This principle of limitation was clearly stated by Ricardo with impor- 
 tant historical illustrations in his " Reply to Mr. Bosanquet's Observations 
 on the Report of the Bullion Committee " (McCulIcch's edition, p. 347). 
 
 t This possibility was foreseen by the present writer in an article en- 
 titled " The Indian Currency Experiment " in the Contemporary Review, 
 September, 1893. Republished in "Money and Monetary Problems."
 
 52 WAR FINANCE 
 
 partly on the estimates of the Government as regards Indian 
 requirements for trade or banking. 
 
 But the amount issued is not automatic, as under the old 
 system. The vast volume of the Indian currency is now a 
 " managed " currency. 
 
 The Report notices this objection that without gold in 
 active circulation India's currency must remain a managed 
 system, with the implication that a managed system is a bad 
 system (sec. 66, p. i8). The passage may be quoted in full : 
 
 " The ideal with which this managed system is contrasted 
 seems to be the system of the United Kingdom, where fresh 
 supplies of the only unlimited legal tender coins, the sovereign 
 or half-sovereign, can be obtained by anyone who takes gold to the 
 mint for coinage. In our opinion this contrast is of no value. 
 There does not appear to us to be any essential difference between 
 the power to import sovereigns at will and the power to have gold 
 coined into sovereigns in India. The only [the italics are mine] 
 point of the criticism that India's currency system is managed in 
 a sense that is not true of the currency of the United Kingdom 
 lies in the fact that the rupee is a token passing at a value above 
 its intrinsic value, and at the same time is unlimited legal tender. 
 It is true that it is not practicable even to consider the limitation 
 of the amount for which the rupee is legal tender. In this sense, 
 therefore, the system must remain a managed one. But we 
 demur altogether to the idea that because it is to this extent a 
 managed system it must be a bad system. It is not, in fact, 
 possible for the Government of India to manipulate the currency 
 for their own ends, and they cannot add to the active circulation, 
 except in response to public demands." 
 
 The difference between the power to have sovereigns coined 
 and the power to import them is not always quite so negli- 
 gible as is shown by the famous case of Australia after the 
 discovery of gold (in the absence of a mint). The market 
 price of gold in South Australia is said to have fallen to 45s., 
 and in Victoria to 60s., as against the Mint price in London 
 of £3 17s. 10^. But at present this side of the management 
 is of comparatively small importance compared with the 
 " only point of criticism " noticed immediately after. The 
 rupee is a token of unlimited legal tender, and not only so, 
 but, taking the country as a whole, it is the principal medium 
 of exchange, as well as being in effect the standard of value.
 
 INDIAN CURRENCY AND FINANCE 53 
 
 Gold is used and notes are used to a certain extent, but the 
 rupee is still king, though his monarchy is more limited than 
 it was. 
 
 The answer of the Report to this objection is singularly 
 meagre. We are told first that the Government cannot 
 manipulate the currency for their own ends. But the basis 
 of the whole system, as shown in the historical introduction, 
 is that the Government adapts the system so as to secure 
 stability of exchange for its own convenience. The mints 
 were closed to raise and maintain the exchange, and the 
 complex arrangements for keeping a reserve, and the nature 
 and the locale of that reserve, have all been guided by the 
 ends of the Government. So long as the rupee maintained 
 its value in gold payable in London, the rest of its monetary 
 functions were either not considered at all, or were supposed 
 to follow, by some kind of pre-established harmon}^ inherent 
 in the gold-exchange standard. 
 
 Next, it is assumed in the Report that so long as the rupees 
 are issued not for the immediate profits of the mintage, but 
 in response to public demands, there can be no difiiculty in the 
 management. The central difficulty is that at any particular 
 time the public demand may seem well founded and the new 
 issue may seem desirable, but the method of new issues is 
 only one side of the question of management. There 
 remains the management of withdrawals or of contraction 
 in case of need. If rupees in India could be converted into 
 gold in India without any difficulty or postponement, then 
 the contraction of the currency would be automatic. In 
 fact, the rupee would be, -like a bank-note, convertible 
 immediately into gold. But the very essence of the gold- 
 exchange standard is in showing " some degree of unwilling- 
 ness to supply gold locally in exchange for the local currency, 
 but a high degree of wilhngness to sell foreign exchange for 
 payment in local currency at a certain maximum rate." 
 (Keynes, op. ciL, p. 6.) This difficulty of the conversion of 
 the local currency into gold makes the rupee correspond, so 
 far, to an inconvertible, and not to a convertible, note. It 
 is true it is not absolutely inconvertible, but, as already
 
 54 WAR FINANCE 
 
 observed, there are all degrees of inconvertibility. In the 
 development of Scottish banking there were some interesting 
 cases of deferred or suspended convertibility which helped to 
 make Adam Smith a non-free trader in banking. In the 
 case of India there may be a considerable cumulative 
 increase in the circulation before the method of partial 
 convertibility adopted comes into effective operation. In 
 general the balance of trade is in favour of India, and so long 
 as this favourable balance exists the volume of rupees can be 
 increased. 
 
 In a very able critique of the Report by Mr. F, C. Harrison 
 {Quarterly Revieiii), April, 1914), which appeared after this 
 paper was written, it is said : " At present there is no real 
 distinction between the rupee and the note. Both are 
 liabihties of the Government to be kept at a parity with gold. 
 One is a note printed on silver, the other a note printed on 
 paper." This identification of the rupee with a convertible 
 note leads to curious consequences. In India the lowest 
 denomination of the note is five rupees^ — why not one rupee ? 
 Why go to the expense of printing the one rupee note in 
 silver ? Why in most countries is the lowest denomination 
 of note so high relatively to the highest tokens ? The 
 answer to these questions involves inter alia an answer to the 
 old questions : Is an over issue of convertible notes possible ? 
 And is the danger specially great if the notes are of very low 
 denomination ? 
 
 As the result of prolonged controversy, it became clear 
 that over issue might mean relatively to the reserve, or over 
 issue so as to promote or aggravate an inflation of prices on 
 account of the de facto suspended convertibility of small notes. 
 What is the amount of the reserve held in India against the 
 rupees actually in circulation, apart from what is supposed 
 to be necessary to support the notes and the foreign 
 exchange ? In the proposal for a central bank, submitted 
 by Mr. Keynes (Annexe to the Report, p. 69), it is laid down 
 that only up to 40 per cent, of the gross circulation should 
 be held in a fiduciary form without tax, the balance being 
 held in cash (gold or rupees). Obviously, if the rupee is
 
 INDIAN CURRENCY AND FINANCE 55 
 
 itself a note printed on silver, it cannot form a reserve for the 
 conversion of rupees, and if a corresponding proportion of 
 gold is to be held against these notes printed on silver, that 
 would mean over sixty million pounds of gold for this purpose 
 (taking the circulation of rupees as 160 millions of crores 
 [Mr. Harrison]). Mr. Harrison faces the difficulty, though 
 he thinks 30 per cent, in gold against the notes (whether 
 printed on silver or paper) would suffice, but he remarks : 
 " The India Office has never appreciated the fundamental 
 difference between holding gold and holding securities." In 
 Mr. Keynes' scheme the fiduciary issues of notes may be 
 increased up to 60 per cent, on the payment of a tax — but 
 not beyond — but in the excessive issue of rupees there is 
 actually a profit of most of the difference between tenpence 
 and sixteen pence. 
 
 Again, the Government is not legally bound to give gold 
 for rupees in India, though in practice it has made the offer 
 in recent years, and in the case of recognised specific deprecia- 
 tion and the presentation of large quantities it could not do 
 so. The suspension of the English Bank Charter Act does 
 not mean that the notes become inconvertible, but simply 
 that the fiduciary issues of the Bank may be increased 
 beyond the cast-iron limit. The suspension of the offer of th"e 
 Indian Government to give gold for rupees in India when 
 asked for would make the rupees de facto inconvertible in the 
 strict sense of the term. 
 
 At this point it is convenient to bring in another function 
 of money, namely, as a standard measure of values. As 
 already observed, in India as a whole the rupee is still king, 
 and all prices are estimated in rupees, and not in gold. The 
 ordinary native of India knows no more about the gold- 
 exchange standard than the ordinary Englishman knows 
 about the mint price of gold or the possible differences 
 between the mint and the market price. If a monetary 
 system is sound, this is the ignorance of the healthy man 
 who knows nothing of the anatomy or physiology of his own 
 body. It is a bad thing for a country when the masses of the 
 people begin, to feel that something is wrong with the currency.
 
 56 WAR FINANCE 
 
 As regards the possible effect of the gold-exchange 
 standard on general prices in India, the Report seems to be 
 absolutely silent. And yet it is precisely this aspect of the 
 monetary standard that has lately attracted attention all the 
 world over. Everywhere there is an outcry against the rise 
 in the cost of living. The rise is complained of in all the 
 countries with the gold standard. The gold standard is no 
 security, as the last forty years have shown, against general 
 movements of prices, down or up. 
 
 Since 1900 there has no doubt been a great rise in general 
 prices in India, and if India had had in every respect pre- 
 cisely the same standard and currency as in this country, a 
 rise of prices must have been expected. 
 
 But the question of importance is whether the present 
 system in India (which'is not that of the United Kingdom) 
 is likely to aggravate the rise in prices. 
 
 As already shown, the rupee has only an imperfect or 
 impeded convertibihty. Accordingly, the connection of the 
 rupee with general prices is best seen by taking the case of 
 inconvertible notes. Such notes have been issued some- 
 times for a considerable period without any depreciation, 
 but in most cases (owing to this very difficulty of manage- 
 ment) depreciation, to a greater or less extent, has taken 
 place eventually, and there is always the fear of depreciation. 
 
 It is important to distinguish between the specific deprecia- 
 tion of notes as regards gold, and their general depreciation as 
 regards commodities. The premium on gold is not always 
 the exact measure of the depreciation of the notes as regards 
 commodities.* That is to say, the purchasing power of the 
 notes qua commodities ma}^ be greater or less than is indi- 
 cated by the depreciation as regards gold. There is no 
 doubt a connection between the specific and the general 
 depreciation, but sometimes the divergence is considerable. 
 
 In the same way, though the rupee remains at the par of 
 the gold-exchange standard, its general purchasing power 
 may have fallen. Prices in terms of the local currency will 
 
 * The general argument is too long for treatment here. Cf. Nicholson's 
 " Principles of PoUtical Economy," vol. ii., p. 128, bk. iii., chap. xv.,sec. 4.
 
 INDIAN CURRENCY AND FINANCE 57 
 
 depend (other things being the same) on the quantity of that 
 currency. If the quantity is only slowly increased (in 
 proportion to the work to be done), the" cumulative effect of 
 new additions will be so much longer postponed. But if the 
 means of contraction or withdrawal are inadequate ; if the 
 convertibility is only partial or suspended, then in time, if 
 new additions are continued, the cumulative effect must 
 operate. General rupee prices will rise, and after a certain 
 point is reached this general depreciation may lead to 
 specific depreciation, in spite of the large reserves held to 
 support the foreign exchange (especially if a great part of 
 these reserves is documentary and not in gold) . 
 
 In such a country as India, with very imperfect credit and 
 banking, and with an immense area and population, it is 
 plain that additions to the cuiTcncy operate more directly 
 on prices than in modern Western countries. No doubt 
 an increase in quantity will take longer to work out its 
 general effect, and conversely any contraction such as will 
 effect general prices will also take longer. Says Mr. Keynes : 
 " So long as the rupee is worth is. ^d. in gold no merchant 
 or manufacturer considers of what material it is made when 
 he fixes the price of his product " {op. cit., p. 12). True : 
 but suppose that the method of keeping up this price of the 
 rupee leads to a great and continuous increase in the quan- 
 tity. The method may be quite successful, at any rate for 
 a time, as regards the is. ^d., but if the quantity of the rupee 
 is increased general prices, so far, will rise. 
 
 In this connection a reference may be made to the period 
 of the Bank Restriction in England (1797-1823), when the 
 Bank of England was restricted from giving gold for its 
 notes on demand. The principles of the case have been well 
 brought out by Bagehot in his " Lombard Street." The 
 essence of the history is simply this :• — For the first ten 
 years the notes, though inconvertible, remained unde- 
 preciated as regards gold. Apparently the directors had 
 acted in the soundest manner. Yet, says Bagehot, when 
 they came to give the reasons for their action they have 
 become classical by their nonsense. They applied, it is true,
 
 58 WAR FINANCE 
 
 a principle of limitation that seems natural enough. They 
 only made advances in terms of notes for the bond fide demands 
 of trade, and at a high rate of discount. They thought in 
 this way the demands for currency were fairly indicated, 
 and that, therefore, there could be no depreciation. But 
 they forgot the cumulative effect. None of the notes being 
 withdrawn or sent abroad, in time the quantity became 
 too great, prices rose, and, inteF alia, the price of gold. 
 Whether the rise was in both cases exactly the same is an 
 old and interesting question, precisely that old question of 
 the measure of depreciation. 
 
 In effect it would appear that the method of hmitation 
 now adopted as regards the issues of the token rupee is the 
 same as that adopted by the Bank of England in the Restric- 
 tion. So long as the rupees are issued only in response to 
 a supposed real effective demand, it is thought that there 
 can be no depreciation (see Report, p. ig). The specific 
 depreciation as regards gold may be guarded against or 
 provided for by the devices used for the maintenance of 
 parity, but in the course of time the rupees in circulation 
 will accumulate, and after a certain point a rise in price 
 must follow. In the case of India, with its favourable 
 balance of trade, the rise in prices must no doubt be con- 
 siderable before the parity of the rupee will be affected for 
 foreign exchange, but in the meantime India suffers from 
 the beginnings of a general depreciation. And in the end, 
 as already observed, even specific depreciation may take 
 place, especially if the reserves held are in the main docu- 
 mentary and not actually in gold. 
 
 This paper began with the statement that the Report 
 failed to give adequate consideration to certain aspects of 
 Indian currency that in the course of time might prove to 
 be of grave concern. In conclusion, the omissions and the 
 possible evils may be briefly summarised. 
 
 The leading idea in the criticism offered was to refer to 
 the primary functions of money. Owing to the necessary 
 interconnection of these functions, a treatment of any one 
 involves a reference to the rest.
 
 INDIAN CURRENCY AND FINANCE 59 
 
 As regards the function of money as a medium of exchange, 
 the Report, following the practice of the Government of 
 India for the last twenty years, considers the rupee mainly 
 from the point of view of foreign exchange. It considers 
 the means by which the stability of the gold-exchange value 
 of the rupee may be safely and most economically secured. 
 It seems to be taken for granted that if only this stability 
 is maintained it makes no difference to the people of India 
 if their principal metallic currency is token money. The 
 opinion of the 1898 Committee that the gold standard 
 should be gradually made effective by the use of more gold 
 as currency is discarded ; it is argued that to support the 
 stabiUty of foreign exchange the gold would be much more 
 useful massed in some banking centre, the preference being 
 given to London. The ready interchangeability of the coins 
 with the corresponding metal within the country (which, 
 under the old system, was so convenient) is passed over as 
 of no importance. 
 
 The function of money as a store of value is emphasised in 
 connection with the accumulation of gold to be used in case 
 of need to support the gold-exchange value of the rupee, 
 but the more primitive form of the store of value in the native 
 hoarding is neglected. The native can no longer hoard silver ; 
 he has not the same confidence in the rupee as a token ; 
 therefore he hoards gold, and he is less willing to part with 
 this gold when there is a difficulty placed in the way of 
 getting it back. With regard to the function of money as 
 a standard measure of value (including deferred payments), 
 it seems to be taken for granted in the Report that if the 
 rupee is only linked to gold for foreign exchange, its value 
 or general purchasing power must conform to that of gold 
 as determined by the world's markets and the world's 
 banking. It seems to be thought that it can make no differ- 
 ence what the " intrinsic " value of the rupee may be. If, 
 however, the rupee ought to be regarded as partaking of 
 the nature of an inconvertible note, this simple relation will 
 not hold good. 
 
 But so far as the rupee is like an inconvertible note, so
 
 6o WAR FINANCE 
 
 far it is subject to the same limitations or liable to the same 
 dangers. In particular there is the danger (unless the 
 volume is strictly limited) of a general rise in prices. If 
 water flows into a reservoir in greater amount than to 
 the extent of all the withdrawals, the level will rise, though, 
 of course, it would rise more quickly if there were no means 
 of withdrawal. As a matter of fact, there has already taken 
 place in India a great rise in rupee prices. The extent and 
 the nature and the causes of the rise are open to contro- 
 versy, but, roughly, since 1900 the rise in prices seems to 
 have been associated with the increase in the volume of 
 the rupees. If the inflation of the rupee currency has already 
 begun to operate, we may expect that in the near future 
 the rise will be still more marked. This possibility is serious ; 
 already some of the highest authorities have given this rise 
 in prices as one of the chief causes of Indian unrest. We 
 know by theory, with abundant historical verification, that 
 in a rise of prices due to inconvertible paper or any analogous 
 cause the mercantile and trading classes gain at the expense 
 of the masses. Even if the rise in prices is due to an increase 
 of gold, until the period of transition is over the same rule 
 seems to apply. In the case of gold, however, there are 
 natural economic forces which in time must limit the 
 monetary supply, and so far the level of prices, but in a 
 managed currency such as the rupee these natural forces 
 are absent or weakened. No one, for example, would melt 
 down rupees to make ornaments, but gold coins are con- 
 stantly so melted. Even the Government is not likely to 
 contract the currency by melting down rupees, unless the 
 evil of inflation has become intolerable. But after a certain 
 point is reached in the inflation, the general depreciation 
 in the purchasing power of the rupee must be followed by 
 a specific depreciation as regards gold ; and if this is the 
 case, then the main object of the whole policy is defeated. 
 
 To prevent misapprehension, two supplementary obser- 
 vations may be made. The Report does, no doubt, pay 
 considerable attention to possible development of banking 
 and the use of bank-notes, and so far considers the medium
 
 INDIAN CURRENCY AND FINANCE 6i 
 
 of exchange from the point of view of internal requirements. 
 But when we are told that 90 per cent, of the Indian people 
 cannot read, and when we know they are very poor, this 
 development of credit is only likely to increase the rapidity 
 of the inflation of rupee prices. The Report seems to think 
 it an evil if gold replaces notes in the circulation, though 
 the notes are only convertible into rupees. 
 
 The other observation is of a more general character. It 
 may be said that the criticism here offered would apply to 
 any form of the gold-exchange standard. So far as the 
 conditions are essentially the same, this is quite true ; but 
 the general argument is too large to be considered in this 
 place. 
 
 Note. — In a review in the Quarterly Journal of Economics, May, 191 7, 
 Mr. H. Parker Willis, of the Federal Reserve Board, expresses the 
 opinion, with which I entirely concur : " . . . the gold exchange 
 standard system is available only for dependent countries. In short, it 
 is not a monetary system, but a connecting link between an isolated 
 market and the broader market to which it looks for support."
 
 CHAPTER IV 
 
 INFLATION OF THE CURRENCY AND THE RISE 
 
 IN PRICES 
 
 Prefatory Note 
 
 [This essay was first published in the Economic Journal 
 for December, 1916.] 
 
 Inflation is one of those terms so common in economics 
 which can only be defined by reference to the proper correla- 
 tive. An old word for inflation of the currency is redundancy. 
 Redundancy means an overflow — an overflow of the channels 
 of circulation. 
 
 In the case of paper money the term generally used for 
 inflation is over-issue. Inflation in this sense is not synony- 
 mous with increase in volume. An increase in the currency 
 in accordance with the growth of wealth, trade, popula- 
 tion, etc., is regarded as normal. Inflation means an 
 abnormal increase. 
 
 It may well be thought, prima facie, that a great war 
 such as this would call for an increase in all the forms of 
 currency in the same way as an increase in the volume of 
 trade or population. And in this case it may be said that 
 account must be taken of this extra monetary work before 
 estimating the inflation (if any) of the currency. 
 
 The question then arises : What is the test of over-issue 
 or inflation if we cannot take merely the pre-war average ? 
 
 The usual practical test of over-abundance or redundancy 
 of inflation of any form of currency is its depreciation. 
 
 But the term " depreciation " itself is also a relative term, 
 and the meaning depends on the correlative. 
 
 In the case of notes there are two distinct meanings of
 
 INFLATION OF THE CURRENCY 63 
 
 depreciation according to the correlative taken, namely, 
 (i) specific, and (2) general, depreciation.* 
 
 (i) In specific depreciation the notes are compared with 
 the metaUic standard on which they are based (say), gold. 
 This was the meaning always attached to depreciation by 
 the old masters, Tooke and Ricardo. Depreciation in this 
 sense is measured by the premium on gold, i.e., by the 
 extent to which the price of gold measured in notes rises 
 above the mint price. " During the years 1803-8, for 
 example, the difference in the value of Bank of England 
 notes and gold estimated at the Mint price was no more 
 than £2 13s. 2d. per cent. In 1813 the depreciation measured 
 m this way was £29 4s. id. per cent." (Porter's " Progress 
 of the Nation," 1847 edition, p. 429). 
 
 If the notes are immediately convertible into gold 
 without any delay or hindrance of any kind whatever, 
 obviously they cannot become depreciated in this specific 
 sense. 
 
 Under such conditions, however, the notes might become 
 appreciated relatively to gold. 
 
 For a time in the eighteenth century Scottish one pound 
 notes in some places were of higher value than the metallic 
 money they were supposed to represent, mainly owing 'to 
 their convenience for transmission. 
 
 It is quite possible that the present restriction of gold 
 imports by Sweden may cause a specific appreciation of 
 the Swedish notes relatively to gold. 
 
 During the period of the Bank Restriction in England 
 it was maintained that the notes were not depreciated 
 relatively to the- gold, but that the gold was appreciated, 
 owing to the exceptional war demands for gold, relatively 
 to the notes. 
 
 Inconvertibility (absolute) of the notes does not of itself 
 involve depreciation. Sometimes the mere fact of the 
 announcement of inconvertibility causes depreciation by 
 discredit, but, in general, as shown by Ricardo, due regard 
 
 * Cf. article on " Depreciation " by Professor F. Y. Edgeworth in 
 Palgrave's " Dictionary of Political Economy."
 
 64 WAR FINANCE 
 
 to the principle of limitation will prevent specific deprecia- 
 tion of any form of currency. 
 
 Between absolute inconvertibility and immediate con- 
 vertibility there are all degrees of deferred or suspended or 
 limited convertibility. Any hindrance of any kind in time 
 or place to the immediate conversion of the notes into 
 gold so far means imperfect convertibility. The history of 
 banking is full of examples of optional or deferred or 
 restricted convertibility. 
 
 In the present war, whilst France, Germany, and Russia 
 at once adopted inconvertibility, in Britain only certain 
 restrictions were imposed on the conversion of notes. The 
 Treasury notes since their first issues have been convertible 
 into gold at the Bank of England. At the same time, very 
 early in the war restrictions were imposed on the ordinary 
 banks paying out gold, and people were requested to use 
 the notes. 
 
 The Treasury notes are de facto inconvertible (except at 
 the Bank of England), but so far as is generally known they 
 have suffered no specific depreciation within the country. 
 We have not come to the pass of having a gold price and a 
 paper price in the shops. Any small hoarder of sovereigns 
 who released his hoard would not receive more than the 
 nominal value in notes. 
 
 Specific depreciation is measured not only by the price 
 of gold, but more generally by reference to foreign currency, 
 as shown by the foreign exchanges. The principal practical 
 problems arising out of the specific depreciation of Bank of 
 England notes in the Restriction were connected with the 
 foreign exchanges. 
 
 In the present war the principal efforts of the English 
 financial authorities have been directed to preserving the 
 stability of the foreign exchanges. Except for a short 
 period in the autumn of 1915, there has so far been little 
 or no specific depreciation of the English currency measured 
 by the foreign exchanges, having regard to the new gold 
 export point. 
 
 (2) There is, however, a second meaning of depreciation
 
 INFLATION OF THE CURRENCY 65 
 
 which, from the point of view of the general pubHc, is often of 
 more importance, a general depreciation, namely, in the sense 
 of a fall in purchasing power. To ordinary people who know 
 nothing of the foreign exchanges it is this kind of depreciation 
 that is suggested by an inflation of the currency. The 
 inflation of the currency is supposed to be shown by the 
 inflation of prices. 
 
 The term depreciation (in this general sense) came to be 
 applied to gold itself after the alteration in the level of prices 
 consequent on the great gold discoveries of the 'fifties. 
 After 1875 the correlative term appreciation of gold came 
 into common use as equivalent to a general fall in prices in 
 the gold-standard countries. 
 
 Nothing can be more distinct than a fall in the value of one 
 form of currency compared with the standard (or with any 
 other form of currency, e.g., foreign) and a fall in the pur- 
 chasing power indicated by a general rise in prices. Yet it 
 is very commonly assumed that so long as there is no specific 
 depreciation of the English notes, the issues of such notes 
 cannot have caused any general depreciation. That 
 there has been a great fall in the purchasing power of 
 the pound sterhng cannot be denied. It is also clear 
 that gold has been displaced from circulation, and that its 
 place has been taken by notes, and in this sense the 
 notes have less purchasing power than at the first issue. 
 But by most people the fall in the purchasing power is 
 assigned to causes affecting the particular commodities, 
 e.g., to war scarcity or to war demands, and not to the 
 over-issue of the notes. 
 
 Whether the general rise in prices in this country is to be 
 attributed at least in part to an over-issue of notes is a 
 matter for argument, and in the last resort the verification ■ 
 involves a series of difficult statistical inquiries. But it is 
 important to make clear at the outset that the mere absence 
 of specific depreciation (as shown by the foreign exchanges) 
 does not of itself disprove general depreciation due (so far) 
 to over-issues. 
 
 It is true that the same causes tend to bring about both
 
 66 WAR FINANCE 
 
 specific and general depreciation, but there are also special 
 causes at work in the two cases, and the two kinds of 
 depreciation may move at different rates or even in different 
 directions. 
 
 In an extreme case no doubt an enormous issue of notes 
 will at the same time lower the value of the notes in terms of 
 foreign currency and also lower their purchasing power 
 within the country of issue. 
 
 But even in this case whether the specific depreciation 
 shown in the foreign exchanges is the exact measure of the 
 general depreciation in purchasing power depends on various 
 conditions. As was remarked by F. A. Walker in his book 
 on "Money," this question is perhaps the most difficult in 
 the tl:>eory of money.* 
 
 Since the standard work of Goschen, the theory of the 
 foreign exchanges has been treated by many able writers, 
 and in our own times has received special attention from the 
 advocates of the gold-exchange standard. It is sufficient 
 here to remark that movements in the foreign exchanges are 
 the resultant of a number of variable causes, and the move- 
 ments may be " corrected " by various special expedients 
 which have for the time little effect on the general level of 
 prices in the " correcting " country. 
 
 The principal cause of any movement in the foreign 
 exchanges is a change in the international indebtedness. If, 
 however, the adverse balance of indebtedness is restored by 
 the export of securities or the creation of foreign credits, the 
 fall in the exchanges is stopped. But coincidently there 
 may be a continued rise in prices within the country, and it 
 is possible that this rise may be due to continued excessive 
 issues of notes. 
 
 It may also be observed in passing that the credit of an}^ 
 country is only one of the causes affecting the foreign 
 exchanges, and accordingly movements in the foreign 
 
 * Cf. my " Principles of Political Economy," bk. iii., chap, xv., sec. 4, 
 vol. ii., p. 128. I once complimented General Walker on his clear treatment 
 of this matter, and he said to me : " Do you know I was never clear in my 
 own mind on that question,"
 
 INFLATION OF THE CURRENCY 67 
 
 exchanges do not necessarily reflect or measure changes in 
 national credit. 
 
 It is commonly admitted, for example, that the general 
 rise of prices in Russia is partly due to the excessive issues of 
 paper money, and that these issues are also partly account- 
 able for the fall in the foreign exchange. But it is plain 
 that for every movement in the Russian foreign exchange 
 or of the value of the rouble in terms of the pound there 
 cannot be a movement in the general level of prices in Russia. 
 Russia is too big. Nor does Russian credit fluctuate simply 
 with the changes in the sterling value of the rouble. 
 
 Digression on the Effects of Depreciation on 
 Foreign Trade. 
 
 The difference between specific and general depreciation is 
 of great practical importance in estimating the effect of the 
 depreciation of inconvertible notes on the course of foreign 
 trade. It is very commonly taken for granted that deprecia- 
 tion of the notes will stimulate exports from the country 
 concerned. Take, for example, the following statements : — 
 " So long as the mark is at a discount there will be a pro 
 tanto advantage to export trade, and although the mark 
 may eventually regain its par value, a few months, or even 
 weeks, will have an appreciable influence on reopening 
 foreign business." * Or, again, this : — " Man sagt daher 
 mit Recht : eine entwertete Valuta wirkt wie eine Erleich- 
 terung der Ausfiihr." "j* 
 
 In the same way it is held that a corresponding check will 
 be placed on imports by the depreciation. Thus Diehl : 
 " Die entwertete Valuta wirkt wie eine erhohter Schiitzzoll." 
 And Mr. Clare writes : " On the trade of a country deprecia- 
 tion and an unfavourable exchange generally has much the 
 same effect as a protective duty. It stimulates exports and 
 checks imports." ;|; On the other hand, Goschen writes : 
 " It will be easily seen why it is possible to assume that a 
 
 * Professor Kirkaldy : Address to British Association, 1916. 
 t Karl Diehl : " Zur Frage eines Zohbundnisses zwischen Deutschland 
 und Oesterreich-Ungarn," p. 36. 
 
 + " The A B C of the Foreign Exchanges," p. 153.
 
 68 WAR FINANCE 
 
 country in which a depreciated currency and a prohibition 
 to export bulhon exist is hkely to be importing more than 
 it is exporting.* In explaining the position, Goschen says : 
 " Sometimes Governments simply, for their own purposes, 
 issue a quantity of paper money ; the natural consequence 
 will be over-importation ; prices will rise in consequence of 
 the increase in circulation, and accordingly attract commo- 
 dities from other markets, while the exports, having risen 
 also (in price), will be less easy of sale abroad." 
 
 The question was much discussed at the time of the 
 bimetallic controversy with reference to the effects of the 
 depreciation of silver. Mr. J. M. Keynes "j* in his book on 
 Indian currency supports the view that depreciation as such 
 has little or no effect either by way of stimulus to exports 
 or check to imports (and presumably the same reasoning 
 would apply to paper as to silver). 
 
 The solution of this curious conflict of opinion amongst 
 authorities who have given special attention to the question 
 is to be found by distinguishing between the two kinds of 
 depreciation. The truth is that specific depreciation will 
 tend to stimulate exports or imports or have no special effect 
 on either, according to the degree of the general depreciation 
 (if any) which has taken place within the country concerned. 
 Take the first case. The exporter, owing to the specific 
 depreciation, is supposed to get more notes than before to 
 spend in his own country after converting the foreign money 
 into his depreciated paper. If, however, there has been a 
 greater general depreciation, these extra notes will have less 
 purchasing power than before. He will have to pay more in 
 expenses of production, the expected gain will turn to loss, 
 and exports will be checked. (Goschen's case.) 
 
 Take the second case. With a general depreciation 
 greater than the specific the importer will obtain more notes 
 and on conversion more gold than before in the country of 
 origin. J 
 
 * Goschen's " Foreign Exchanges," p. 72. 
 t "Indian Cnrrency and Finance," p. 3 and note. 
 
 X The general argument on the effects of the two kinds of depreciation 
 with application to silver and to inconvertible paper was given in a
 
 INFLATION OF TME CURRENCY 69 
 
 The particular case of England during the present war is 
 of special interest. There has been a continuous rise in 
 prices or a general depreciation of the currency, with little 
 or no specific depreciation. The natural consequence would 
 be (so far) a stimulus to imports and a check to exports, 
 (Goschen's case.) If this interpretation is correct, the efforts 
 made to keep up the exchange or check the specific deprecia- 
 tion without at the same time checking the general deprecia- 
 tion have (so far) stimulated importation, and thereby 
 increased the balance of indebtedness which has to be met 
 by the export of securities. The large importation, apart 
 from Governmental imports of war materials, seems (so far) 
 to confirm this view. 
 
 This digression, however, is only intended by way of 
 illustration of the distinction between general and specific 
 depreciation, and is not meant to anticipate a priori the test 
 of a statistical inquiry. 
 
 (End of the Digression.) 
 
 To return to the general a.rgument, v/e have next to con- 
 sider the causes which under normal conditions, i.e., with 
 absolute convertibility in full working order, may bring about 
 a general rise in prices in some particular country as compared 
 v/ith the general world level, and the hmitations imposed on 
 that rise by the conditions of convertibility. 
 
 Before the present war England maintained the gold 
 standard in the most effective form. Every credit-substitute 
 for gold was convertible into gold as required. The position 
 was sometimes explained by saying that London was the 
 only really free market for gold. The ultimate converti- 
 bility of the notes was not only secured by cast-iron restraints 
 on over-issue and by a gold reserve that seemed ridiculously 
 large, but in every bank in the kingdom convertibility was 
 a matter of common routine. The proportion of gold to 
 notes in circulation, even in Scotland, with its one-pound 
 
 paper to the Royal Society of Edinburgh in 1888. Republished in my 
 "Money and Monetary I^roblems," in the Essay entitled "Causes of 
 Movements in General Prices."
 
 70 WAR FINANCE 
 
 notes well established, depended simply on the convenience 
 of the people concerned. Some people preferred to carry 
 gold — some notes. Anyone who cashed a cheque could 
 state his preference. For internal purposes no restraints 
 were imposed on the use of gold, and the notes in use were 
 strictly limited by the Acts of 1844 and 1845. Silver and 
 bronze were also coined simply to suit the convenience of the 
 people. Though their legal tender was limited and their 
 metalHc value not half the nominal value, they were always 
 convertible, and the chief complaint was of occasional local 
 scarcity of some kind of these tokens, e.g., farthings. 
 
 In any expansion of trade after a depression there was an 
 expansion of the currency, i.e., of gold notes, and token coins, 
 to provide for wages, retail trade, etc., under rising prices. 
 Seeing that the issues of notes were strictly limited and in 
 England none under £$ were allowed, a continuance of the 
 rise in prices — from whatever cause it may have originated, 
 e.g., speculation, foreign demand, etc. — was only possible 
 with an increase in the gold available. 
 
 Of the monetary transactions of England under normal 
 conditions the part actually effected by cash payments in the 
 strict sense, that is to say, by coins or notes passing from 
 hand to hand, is relatively so small that its importance is apt 
 to be overlooked. The Bankers' Clearing Returns in 1913 
 amounted to over £16,400,000,000. The gold circulation 
 probably did not exceed ;^i6o,ooo,ooo, of which about half 
 was in the hands of the public and half in the banks, includ- 
 ing the Bank of England.* 
 
 The amount of gold in the country compared with the 
 work to be done seemed so insignificant as to be negligible. 
 We were told that the real currency of the country was not 
 the sovereign (and its metallic submultiples) , but the cheque. 
 
 As a further consequence it was maintained that so far as 
 the level of prices in any country depended on the quantit}' 
 of the money, the gold was of little importance. The opinion 
 
 * Cf. Report of the Currency and Finance Committee of the British 
 Association, 191 6, in Professor Kirkaldy's " Labour Finance and the 
 War," p. 231.
 
 INFLATION OF THE CURRENCY 71 
 
 was confirmed by observing that the seasonal demands for 
 currency passed almost unnoticed, and from year to year 
 there might be great changes in trade and consequent 
 changes in the demand for currency with little effect on the 
 monetary system. The gold seemed to be the ornamental 
 survival of an old system of about as much use as the buttons 
 on a tail coat. The real thing was the cheque-book in the 
 pocket. 
 
 The falsity of this idea, that the importance of gold and 
 notes based on gold is to be estimated simply by the propor- 
 tion to the mass of the actual currency (in which the cheque 
 is altogether predominant), may be made clear both by 
 reference to the meaning of the gold standard and the methods 
 by which it is maintained. Did anyone ever hear of a cheque 
 standard ? Can anyone even explain how a currency of 
 cheques can be maintained unless the cheques are con- 
 vertible into cash as required ? The American crisis of 
 1907 illustrates the difficulty. 
 
 The outbreak of the present war gave a vivid illustration 
 of the vital importance of currency as distinct from credit. 
 The suspension of the Bank Act — the old remedy for the 
 increase of cash in times of crisis — was permitted, but was 
 not acted on.* It was not acted on, not from any fantastical 
 reason that our currency was a cheque currency, but simply 
 because it was supposed that the provision of cash in this 
 way was too feeble. As fast as possible, Treasury notes for 
 one pound and ten shillings were printed and at the same 
 time legal tender was assigned to postal orders. Any bank 
 was to be allowed to get notes to the extent of 20 per 
 cent, of its total liabilities on deposit and current accounts 
 as shown in the monthly statement last issued before 
 
 * " The insufficient supply of Treasury notes made it necessary to issue 
 to bankers on August yth and 8th, T914, a part of the advances to which 
 they were entitled under the Currency and Bank Notes Act, in the form 
 of Bank of England notes instead of Treasury notes . . . the excess 
 issue reached at its highest point £3,043,000." (Economic Journal, 
 December, 191 5, p. 566.) This fact was not made known till about a 
 year later, and as the Bank of England notes were only used because the 
 Treasury notes were not printed fast enough, it is practically true to say 
 that the suspension was not taken advantage of.
 
 72 WAR FINANCE 
 
 August 6th, 1914. [Cd. 7836.] Not a voice was raised 
 against this creation of cash for the emergency^ — the only 
 criticism was to the effect that the notes ought to have been 
 already printed beforehand. 
 
 In the face of a monetary panic of this kind it is absurd 
 to reckon the relative importance of the notes simply by the 
 proportion to the bankers' clearings. It would be as reason- 
 able to estimate the relative importance of the bodily organs 
 by their weight. Nor is this insistent demand for cash to 
 be explained as altogether exceptional owing to the sudden 
 outbreak of war. The need for currency as the basis of 
 internal credit was quite as forcibly illustrated by the 1907 
 crisis in the United States, of which one of the sequels has 
 been a change in the banking law. 
 
 The best way to understand the effect of the war on credit 
 and currency is to look first of all at the essence of the rela,- 
 tions between cash and credit under normal conditions 
 before the war. Before the war there were three very real 
 limitations imposed on the rise of prices by an expansion 
 of credit. There were three great drain-pipes which allowed 
 the monetary cistern (to recall the metaphor which Jevons 
 made popular) only to be filled up to a certain height. 
 
 (i) The Internal Drain. — There was first the drain to 
 provide cash for payments within the country itself — the 
 internal drain limitation. Every banker knew that in case 
 of need he must meet his cheques in cash. His creation of 
 bank money was limited by the necessary provision of, or 
 command over, a due proportion of metaUic money or its 
 legal tender representative in notes. Cash was required 
 for wages and various retail transactions. 
 
 As a matter of fact, the stringent regulation of notes as 
 compared with other forms of bankers' credit [e.g., cheques) 
 has been recognised in every country, and in no country 
 was the regulation more stringent than in England before 
 the war. Whether the regulation was too stringent is not 
 now the question. The point is that, under normal con- 
 ditions, the limitation of the notes made it necessary, after 
 a certain point was reached, to provide gold, and the pro-
 
 INFLATION OF THE CURRENCY 73 
 
 vision of gold in a country that does not produce gold is a 
 very different thing from handing out cheque-books or 
 printing off notes. 
 
 (2) The Foreign Drain. — This necessity for the provision 
 of gold in case of need — which is the real meaning in a 
 practical form of a gold standard — is still more imperious 
 when we look to foreign payments and the possibility of 
 a foreign drain. 
 
 It is true that before the war to a greater and greater 
 extent the use of gold was economised in international 
 payments. This economy reached its most advanced stage 
 in the development of the gold-exchange standard. But 
 in all these economies the gold foundation was still necessary. 
 When the proportion of gold fell below a certain point in 
 the central bank steps were taken which directly or indirectly 
 led to a contraction of credit. 
 
 The methods by which the stock of gold was replenished 
 in the case of a threatened foreign drain have been explained 
 by a succession of authorities on banking. The central 
 point to seize is that, with all the economies of gold we 
 never get away from the fundamental necessity of every 
 monetary centre having a sufficient amount of gold binder 
 its control to ensure the absolute convertibility of its credit- 
 substitutes. Were it not so already before the war the 
 gold standard would have been effectively abandoned. In 
 London the gold standard was most effectively maintained 
 because the principle of immediate convertibility was 
 most strictly observed. It is true that the store or 
 fund of gold held in London was far less than in other 
 great centres, but the flow was greater and more steady. 
 And, as in wages, it is the flow and not the fund, that 
 counts. 
 
 Under the conditions that prevailed before the war gold 
 had come to be recognised as the one standard (luoughout 
 the commercial world. All the other currencies and credits 
 were expressible in terms of gold and their values were 
 deteimined in reference to gold. It followed that a very 
 close connection subsisted between the general prices in
 
 74 WAR FINANCE 
 
 any one country (reckoned in gold) and general world prices 
 in the same standard. 
 
 That the levels of prices in gold-standard countries tend 
 to equality is sometimes taken as axiomatic, and is shortly 
 expressed by saying that gold being the standard must have 
 the same value all the world over. 
 
 The simplicity of this assumption disappears when we 
 look into the meaning of the value of gold. To begin with, 
 there are all the difficulties of index numbers, of which a 
 very able and interesting resume has just been furnished b}^ 
 the United States Bureau of Labour Statistics.* The danger 
 of applying general index numbers to particular problems 
 has long been familiar. For most practical purposes we 
 need special index numbers. It is true that in any very 
 marked movement of prices the various index numbers 
 tend to move in the same direction, but thev move at 
 different rates. 
 
 With regard to the tendency to equality of international 
 prices [e.g., of English prices with world prices), it can only 
 subsist in the first place in ai tides capable of eas}^ and 
 prompt transfer in international trade. There is, for 
 example, no direct and immediate tendency to equality in 
 the prices of lands and houses, which are the largest values 
 in the national inventories. The same is true of the price 
 of labour and of the diffeient kinds of labour. The price 
 of labour (of a typical kind) may vary greatly when we 
 compare England with the United States, or India, or 
 Australia. Even as regards the great staples of international 
 trade, prices vary with freights, and freights are subject, 
 even in normal times, to varying influences. Indirectly, 
 no doubt, the tendency to equality of international staples 
 reacts on other things. The price of agricultural land in 
 England depends largely on the world prices of agricultural 
 produce, as was well shown in the depression that set in 
 in the 'seventies. The international article affects the price 
 of the home alternative. The price of labour itself depends 
 
 * Bulletin Nos. 173 and 181. Cf. Quarterly Journal of Economics, p. 796, 
 August, 191 6.
 
 INFLATION OF THE CURRENCY 75 
 
 partly on the cost of food, etc., and partly on the prices of 
 the products of labour, and both are subject to international 
 influences. 
 
 After these and similar allowances have been made for 
 the differences between national and international prices, 
 it still remains true that under normal conditions national 
 prices (measured in gold) must be adjusted to the inter- 
 national level. With a rise in national prices (from any 
 cause) imports will be stimulated and things formerly on 
 the margin of doubt will come rolling in. Conversely, as 
 regards exports, the marginals will be retained or not asked 
 for at the rising prices. In this way the balance of indebted- 
 ness will rise against the high-priced country. This growth 
 of the adverse balance must in the end cause a contraction 
 of credit, unless it is met by the export of securities or the 
 creation of foreign credits, or some other expedient. Failing 
 some such adjustment, there must be a drain of gold, and 
 if the gold standard is to be maintained, the reaction on 
 prices is inevitable, though long delayed. The long post- 
 ponement may culminate in a financial crisis. 
 
 Under normal conditions the more effective the main- 
 tenance of the gold standard by absolute convertibihty 
 the sooner the restraining influence will be felt on any 
 national expansion of prices of the external drain. 
 
 (3) The Consumption Drain. — -There is one other drain — 
 the third drain — in which may be seen the fundamental 
 dependence of credit-prices on gold apart from the internal 
 and external drains just noticed. After a point, rising 
 prices and rising incomes will cause a rise in demand for 
 the use of gold in the arts. The mint price of gold is fixed, 
 i.e., so much gold is coined into so many pounds. Con- 
 versely, if gold is wanted for the arts it may be obtained 
 by melting down the sovereigns (this time perhaps in spite 
 of the law). 
 
 If, however, prices could rise indefinitely with an expan- 
 sion of credit the drain for consumption would absorb all 
 the gold in circulation or in the banks if convertibihty were 
 maintained. The recent publication in this country of the
 
 76 WAR FINANCE 
 
 prohibition of melting down gold coins seems to show that 
 this kind of drain is being felt or feared. 
 
 The conclusion of this part of the argument is, that so 
 long as the principle of convertibiHty is strictly maintained, 
 any national depreciation of the currency, whether specific 
 or general, tends to bring into play with increasing force 
 one or all of these three drains. 
 
 In general, however, under normal conditions, any 
 tendency to depreciation is checked long before any one 
 of the three drains becomes noticeable, even to the ordinary 
 banker . 
 
 The chief reason for this restatement of the principles of 
 the limitation of the expansion of credit-prices is to make 
 clear by contrast the changes introduced in England through 
 the war. The general result of our financial policy has been 
 to replace the old brakes on the expansion of credit by new 
 brakes on the convertibility of credit-substitutes into gold. 
 The old regulations on the issue of bank-notes have been 
 annulled, both as regards quantity and denomination. The 
 issue of Treasury notes for one pound and ten shillings of 
 full legal tender makes it possible to dispense altogether 
 with gold for internal circulation. The removal of limits 
 to the quantity of the issues of the notes has enabled the 
 Government or the banks to provide against any internal 
 drain, simply by printing off more notes or certificates.* 
 The old check of the internal drain is no longer operative. 
 
 With regard to the foreign drain limitation, it is true that 
 the principle of convertibility has been maintained by the 
 Bank of England, but not by the pre-war methods. A great 
 effort has been made to prevent specific depreciation by 
 Governmental provision of foreign credits, so as to neutralise 
 the fall in the exchange consequent on the increasing adverse 
 balance of indebtedness. The specific depreciation has been 
 counteracted or prevented without aii}^ regard being paid 
 to the possibility of general depreciation within the country. 
 
 * The notes outstanding have risen from ;^43,5i9,oi9 on May 12, 1915, 
 to /i39,07i,885 on November 8, 1916, with coin and bullion unaltered 
 in the redemption account at ^28, 500,000.
 
 INFLATION OF THE CURRENCY ^'j 
 
 The restraints imposed by the war on international trade 
 have rendered the readjustment of national to international 
 prices more difficult. Accordingly, under war conditions, 
 it is possible that the level of prices in England may rise 
 owing to causes affecting English credits and currency apart 
 from any general rise in world prices. Having regard to 
 the enormous demand by Britain and her AlMes, the rise 
 in British prices may be the chief cause in the rise in world 
 prices of international staples. At the same time, the 
 substitution in all the belligerent countries of notes for gold 
 and the adoption of imperfect convertibility allows gold 
 to overflow in the neutral countries, e.g., the United States, 
 and gold so far suffers a general depreciation. 
 
 The third limitation, the drain for consumption, is prac- 
 tically inoperative when the circulation has been reduced 
 to notes. The efforts of the Government, however, have 
 been directed so far to prevent the use of gold within the 
 country either for the arts or for hoarding, so as to put more 
 under their control for stabilising the foreign exchanges 
 and preventing specific depreciation. The third limitation 
 on the expansion of prices by an expansion of currency and 
 credit is thus removed or weakened. 
 
 It appears then that the three great limitations which in 
 normal times were imposed on the expansion of prices in 
 the United Kingdom have been de facto removed. 
 
 It does not follow, however, that as a necessary conse- 
 quence prices must have risen abnormally — so far only the 
 possibility of an abnormal rise has been established. 
 
 As the history of the Bank Restriction (1797-1819) shows, 
 it is possible that a rule of thumb, not founded on any 
 recognised monetary principle, may suffice for a time to 
 check both specific and general depreciation. As already 
 shown, inconvertibility of itself does not mean depreciation. 
 The essential thing is that the principle of hmitation must 
 be applied in some effective form. Bagehot said that the 
 reasons given by the Bank of England directors (in the 
 Restriction) for their rules regarding their note issues had 
 become " almost classical by their nonsense." Yet for a
 
 78 WAR FINANCE 
 
 long time the rules were practically sufficient. The founda- 
 tion of the principle of these rules of thumb was the belief 
 that a bank rate of 5 per cent, (with the usual hrst-class 
 banking securities) would sufifice to check an}^ undue issue 
 of notes. The maintenance by the Bank of England during 
 nearly two years of the present war of the same rate seemed 
 to suggest a survival of the same simple faith. The recent 
 resort, however, to a 6 per cent, rate is so far a reversion to 
 normal methods, though it is probably due simply to the 
 desire to support our foreign credits. It can hardly be 
 regarded as a recognition of any inflation of the British 
 currency — for the belief still prevails apparently that a 
 general depreciation due to inflation is not possible without 
 specific depreciation, and that (by the simple quantity 
 theory), in any general depreciation the amount of notes is 
 negligible compared with the mass of cheques. 
 
 The main contention of the present argument is that the 
 influence of note issues on prices is not to be measured by 
 the proportion of the notes to the cheques, but by their 
 function in supplying a necessary part of the currency for 
 cash transactions, and, indirectly, a necessary basis of 
 credit. The validity of this argument under normal con- 
 ditions has been admitted by all countries, as shown by 
 their banking regulations. In all countries stringent limits 
 are imposed on the issues of notes. Germany, in the third 
 year of the war, in the midst of an effort to float the " last " 
 great war loan, has made frantic efforts to make the gold 
 in reserve bear the legal proportion to the notes in circula- 
 tion. In this country we have preserved nominally the 
 convertibility of the notes, but we have imposed restrictions 
 on the actual process of conversion. As regards the Bank 
 of England notes, we have kept the Act of 1844, but as 
 regards the Treasury notes, every principle of that Act has 
 been disregarded. What other limitations have been 
 adopted (beyond the original 20 per cent, of banking deposits) 
 is not known. 
 
 Conclusion. — The general conclusion of the foregoing 
 argument is that the conditions affecting note issues and
 
 INFLATION OF THE CURRENCY 79 
 
 bankers' credits based on these notes during the war have 
 rendered possible a general depreciation of the British 
 currency in spite of the fact that there has been httle or 
 no specific depreciation. 
 
 The extent of this general depreciation (or alteration in 
 the value of the whole currency, as the old writers called it) 
 is roughly measured by the usual index numbers {Economist, 
 Sauerbeck, etc.). How much (if any) of this depreciation 
 (or alteration) is to be ascribed to the relaxation of the 
 Hmitations formerly imposed on the expansion of currency 
 and credit can only be determined by careful statistical 
 inquiry. The index numbers are founded on the prices 
 of particular representative commodities, and it is possible 
 that in each particular case special causes may be assigned 
 (in the manner of Tooke) for the exceptional rise. The 
 magnitude, however, and the apparent universaHty of the 
 rise in the opinion of the writer seem to show that it is due 
 to a considerable extent to inflation of credit and currency. 
 
 In support of this view, the first approximate results of a 
 statistical verification may be indicated. There has been 
 a general conformity between the increases of our note 
 issues and the rise in prices in the United Kingdom. The 
 increase in prices as shown by the index numbers has 
 followed the increases of the notes. The issues of Treasury 
 notes and certificates have exceeded the gold displaced from 
 actual circulation. The notes of the Scottish banks (with 
 Governmental paper reserve in place of gold) have largely 
 increased. In spite of the ten shilling notes, more silver 
 coins have gone into circulation. There has been a con- 
 tinuous rise in wages (taking the family as the wage-earning 
 unit) and in retail prices of all kinds. In general, the move- 
 ment in prices is of the character associated with over-issues 
 of inconvertible paper, such as has taken place in the other 
 belligerent countries. 
 
 The rise in prices in the United States was for a time 
 hardly appreciable, and is still very much less than in the 
 United Kingdom. 
 
 The bankers' clearing returns also point to inflation. The
 
 8o WAR FINANCE 
 
 fall in the Town Clearing is accounted for by the fall in 
 Stock Exchange and financial business in London. The 
 Country Clearings from December, 1914, show a continued 
 increase over the corresponding pre-war figures. The 
 increase in the first six months of 1916 over 1915 is greater 
 than that of 1915 over 1914. The increase in banking 
 deposits in connection with bankers' loans to Government 
 points to an inflation of credit.* The profitable nature of 
 banking business (after allowance for depreciation of old 
 investments) and incidentally, the great strength of bank 
 shares, indicates credit expansion.! Having regard to war 
 conditions, the rates of interest have suggested inflation 
 rather than stringency, though the high rates paid by the 
 Government, apparently for political reasons, tend to 
 obscure this part of the evidence. The continued export 
 of securities to support the foreign exchanges (coupled with 
 the recent rise in the bank rate to 6 per cent.) suggests the 
 artificial prevention of specific depreciation which might 
 otherwise have accompanied the general depreciation. The 
 course of foreign trade (as already indicated) points to the 
 artificial stimulation of imports. 
 
 In the following chapter (V.) are given the results of 
 the statistical verification here only broadly indicated. In 
 attempting to determine how much of the rise in prices may 
 be ascribed to inflation of the currency, it is important to 
 trace the progress of this rise in prices in order of time, 
 which is much more difficult than to make a mere comparison 
 of present (November, 1916) conditions with pre-war (July, 
 1914) conditions. 
 
 * Economist, October 21, 19 16. 
 t Ibid., October 28, 191 6,
 
 CHAPTER V 
 STATISTICAL ASPECTS OF INFLATION 
 
 Prefatory Note 
 
 [This paper was designed to give the statistical verification 
 alluded to at the end of the previous paper on inflation. It 
 was read before the Royal Statistical Society, on June 19, 
 1917, and is published in the July number of the Society's 
 journal, with the discussion, which it was decided to adjourn 
 to a second meeting owing to the interest in the subject. I 
 think it was Addison who said that the critics of a book 
 always complain most of what is omitted. Certainly this 
 happened with my paper. The truth is that hhe whole 
 subject is far too large for one paper, and most of the points 
 raised had been treated in other papers now published in this 
 book. Not much attention was directed in the discussion 
 to the point emphasised in the paper of the order in time of 
 the inflation of the currency and the rise in prices. In a 
 paper just received (August, 1917) from Professor Irving 
 Fisher on the " Ratio " Chart (reprinted from Quarterly 
 PubHcations of the American Statistical Association, June, 
 1917), in a figure giving " ratio " curves of Dun's index 
 numbers and the circulation of money in the United States 
 it is observed that " since the war there has been a close 
 correspondence, changes in the price level following changes 
 in money by two or three months." Readers of Tooke will 
 remember that his main argument against the currency 
 theory of high prices in the Napoleonic war period was that 
 the issues of notes followed the rise in prices. In the present 
 war the increases of our currency notes have preceded the 
 rise in prices.]
 
 83 WAR FINANCE 
 
 Guidance from Tooke's Treatment of Prices in the Napoleonic 
 
 War Period 
 
 The subject of this inquiry may be introduced by a refer- 
 ence to the Napoleonic war period. In that period also there 
 was a great rise in prices and a prolonged controversy arose 
 as to the causes. Tooke's great work on the " History of 
 Prices " originated in the attempt to test by the appeal to 
 facts the validity and relative importance of the causes 
 assigned. The same causes are brought forward in our 
 present war. We may begin by following Tooke's methods. 
 By way of preliminary he gets rid of the popular notion that 
 of itself war causes high prices. " On reference to former 
 periods of our history," he writes, " it will appear that there 
 is no observable coincidence of a rise of prices during war 
 and a fall during peace." He gives a table of war periods 
 and peace periods and compares the prices. He deals with 
 the objection common in his day that the war was so vast 
 that any comparison with former wars was misleading. 
 With regard to the currency and especially the notes of the 
 Restriction period his first concern was to find out the facts — 
 and in particular to find out the order of time in which they 
 occurred. He showed that the volume of note issues was 
 over-estimated and that the issues were not correlated to 
 prices in order of time in the way supposed. His own con- 
 clusion was that the dominating influences were the course 
 of the seasons and the obstructions to supply caused by the 
 state of war. He attributes little weight to the currency. 
 Tooke's guidance is valuable by way of suggestions and 
 cautions. But it is prima facie probable that the causes 
 noticed by him have operated in the present war in different 
 ways and proportions. 
 
 It is never safe to apply the results of the historical 
 method without special regard to changes of conditions. 
 Tooke himself admitted that his own presentation of facts 
 might lead others to different conclusions. The object of 
 the present paper is to outline some of the statistical aspects
 
 STATISTICAL ASPECTS OF INFLATION 83 
 
 of inflation. It is not meant to illustrate or prove precon- 
 ceived theories. 
 
 In the previous chapter * I have examined the principal 
 meanings of inflation, and especially the consequential dis- 
 tinction between general and specific depreciation. For the 
 present purpose we may take inflation to mean an abnormal 
 increase of the currency. What then is the normal from 
 which an inflated currency deviates ? 
 
 The simplest and most natural answer is to take the aver- 
 age increase of the currency or different forms of currency 
 over preceding periods, and compare the increase in the 
 period of the supposed inflation. 
 
 From this point of view I have compared first of all the 
 increases of the different forms of currency in the period of 
 the war with such pre-war periods as may be supposed tc 
 give the normal increase. 
 
 Postal Orders 
 
 I begin with a form of legal tender which as such was 
 unrepresented before the war, namely, postal orders. By 
 the Currency and Bank Notes Act, 1914, (4 & 5 Geo. 5, c. 14), 
 it was provided, s. 6, that for " the purpose of meeting 
 immediate exigencies all postal orders issued either before or 
 after the passing of this Act (August 6, 1914) shall tem- 
 porarily be current and legal tender in the United Kingdom 
 in the same manner and to the same extent and as fully as 
 current coins, and shall be legal tender in the United King- 
 dom for the payment of any amount." It is to be noted 
 that the postal orders were not limited as legal tender like 
 the silver or bronze, but were like gold or Bank of England 
 notes. This section of the Act was only revoked by pro- 
 clamation dated February 3, 1915. The extent and nature 
 of the issues of this new currency are given in the Mint Report 
 for 1914 (published in 1916). During the fortnight ending 
 August 20, postal orders over 13 millions in number of the 
 value of 4*6 million pounds were issued compared with 
 
 * " Inflation of the Currency and the Rise in Prices," Economic Journal 
 December, 191 6. 
 
 G 2
 
 84 WAR FINANCE 
 
 5 millions in number and 2 millions in value of the corre- 
 sponding fortnight in 1913. 
 
 Early in September, however, it is stated that the number 
 of currency notes in circulation allowed of a reduction of the 
 number of the postal orders in the hands of the public. 
 
 So far then the postal orders may be considered as the 
 beginnings of Treasury notes or the germ of the inflation. 
 
 By the end of October the value in the hands of the public 
 did not exceed the normal amount, viz., £1,500,000, though 
 the number was considerably larger owing to the prepon- 
 derance of orders of the lower denominations. This situa- 
 tion, it is explained, was due to the shortage of silver coin in 
 some districts, particularly in Ireland and in military centres. 
 
 The Silver Coinage 
 
 I take next the increase in the silver coinage. As the basis 
 for comparison we must find the normal rate of increase 
 before the war. A table is given in the Mint Report for 1914 
 of the issues of silver and the withdrawals in the United 
 Kingdom from 1872-1914 [cf. infra, p. 109). A glance at the 
 final column of net issues shows very striking variations 
 from year to year. Omitting 1914, on four occasions the 
 net issues were above one million in value, but in no less than 
 ten separate years the withdrawals exceeded the new issues 
 so that on balance there was a decrease. The average for the 
 forty-two years (omitting 1914) was about £350,000. The 
 year 1909 showed a net loss, but for 1910-13 there was an 
 average increase of nearly £875,000 per annum. 
 
 The Deputy-Master of the Mint has kindly given me the 
 figures for the period of the war in quarterly returns {cf. 
 infra, p. 108). The net issues for the five months of 
 war in 1914 were £5,327,899. This compares with £318,000 
 of the first seven months before the war, that is about 
 seventeen times as great. The monthly increase for the 
 five months is about thirty-five times the normal monthly 
 increase of the forty- two years, and fourteen times the 
 monthly average of the four preceding years (19 10-13) of 
 very high issues.
 
 STATISTICAL ASPECTS OF INFLATION 85 
 
 The net increase in silver in 1915 and in 1916 was in each 
 year about eight times the annual average of the four 
 pre-war years. 
 
 Bronze 
 
 It might be supposed that bronze being small change 
 for silver, there would be a very close conformity between 
 their net issues. On the contrary, there are some remarkable 
 divergencies. 
 
 From 1901-09, for example, there was in bronze a net 
 increase of over one million in value, whilst in silver there 
 was a net decrease of about £300,000 for the nine years. In 
 1910-11 the issues of bronze were below the average of the 
 period 1900-13, whilst the issues of silver were more than 
 double of the average. 
 
 In bronze the annual average of issues 1900-13 (Mint 
 Report for 1914) was £173,947. Allowing for Colonies, etc., 
 and withdrawals the annual average may be put roughly 
 as £150,000. The annual average for the two years before 
 the war was more than double of the average for the period, 
 and in this case coincided with a corresponding increase in 
 silver. 
 
 The period of the war shows the same absence of precise 
 conformity of bronze with silver. The issues of bronze 
 from August to December, 1914 (£132,000), did not exceed 
 the average of 1912-13. In silver, on the other hand, as 
 already shown, there was an enormous increase. 
 
 The increase in bronze in 1915 was again below that of 
 1912-13, whilst the issues of silver were far above. In 1916, 
 however, bronze rapidly increased to £450,000, and for the 
 period of the war to the end of March, 1917, the net increase 
 was £951,689 (c/. infra, pp. no, in). 
 
 Gold 
 
 In the Report of the Committee of the British Association 
 on Credit and Currency (1916) an estimate is given, founded 
 on Mint Returns, of the pre-war amount of gold * in the 
 
 * The Mint Returns refer to Iiiiperial gold coin. The Bank of England 
 especially held bullion and foreign coin.
 
 86 WAR FINANCE 
 
 United Kingdom. The estimated amount June 30, 1914, 
 was i6i-i million pounds, of which 82-8 million pounds were 
 held by the banks and 78-3 million pounds by the public.* 
 
 According to this estimate the gold coin in the United 
 Kingdom increased from 100 million pounds in 1903 to 
 113 million pounds in 1910, or less than 2 million pounds 
 per annum. From December 31, 1910, to June 30, 1914, 
 the estimated increase was 48-1 million pounds, or just under 
 14 million pounds per annum. 
 
 From figures given in the Mint Report for 1914 (p. 10), 
 it appears that for the year ending June 30, 1914, the net 
 increase of gold coin for the United Kingdom, after allowing 
 for withdrawals and export (but not for other sources of 
 wastage), was 15-3 million pounds. It is noticeable that 
 the returns of the gold f held by the United Kingdom banks 
 on the same date were the largest on record, being 827 mil- 
 lion pounds, i.e., 13 million pounds above 1913 and 37 million 
 pounds above 1910. The issues by the mint during the six- 
 years ending June 30, 1914, were 146-5 million pounds and 
 the withdrawals in the United Kingdom 17-1 million pounds. 
 The balance of exports for the same period was 76-2 million 
 pounds. The net amount taken abroad by travellers or 
 lost was not known. This gives a net increase in the six 
 years of about 9 million pounds per annum. It will be seen 
 that of the large increase from June 30, 1913, to June 30, 
 1914, namely, 15-3 million pounds, 13-3 million pounds was 
 taken by the banks, leaving only 2 million pounds for the 
 general public. 
 
 In the Circular dated December 31, 1914, of Messrs. 
 Mocatta and Goldsmid (Mint Report, p. 89), it is stated 
 that since the outbreak of war the Bank of England received 
 the enormous addition of 64 million pounds in bars and 
 coin, considerable amounts being purchased and left in 
 South Africa, Canada, and other parts of the Empire. The 
 withdrawals for the same period were only 2 million pounds 
 
 * Jevons' " Money," p. 165, gives the gold in circulation in 1873 as /lOO 
 million pounds, gold bullion in the Bank of England 15 million pounds, 
 silver 15 million pounds and bronze ig million pounds. 
 
 f See note on p. 85.
 
 STATISTICAL ASPECTS OF INFLATION 87 
 
 in addition to 18^ million pounds set aside for the redemption 
 of the Treasury notes. 
 
 Treasury Notes 
 
 In spite of this strong gold position one of the chief con- 
 cerns of the Government in the first five months of the war 
 was to issue currency notes for one pound and ten shillings 
 ostensibly to take the place of the gold. The amounts of 
 these issues are recorded week by week and the outstanding 
 amounts give the quarterly increases. The general results 
 are that at the end of December, 1914, the amount out- 
 standing was 38-5 million pounds ; in December, 1915, it 
 was 103-1 million pounds ; in December, 1916, 150 million 
 pounds. 
 
 As in this case we start from a zero issue the five months' 
 issues of 38-5 million pounds are net additions at the rate 
 of 91 million pounds a year. The average for the years 
 1915-16 is 55 million pounds. 
 
 Other features in the growth of the currency notes are 
 considered in later sections. Here, as we are dealing with 
 increase of currency, we have to notice the effect of gold 
 withdrawals. It is sometimes said that Treasury notes have 
 simply displaced so much gold from circulation, and so far 
 cannot have caused any inflation of the currency. 
 
 If the gold had been definitely withdrawn or called in 
 this contention would be valid. But, in fact, the Treasury 
 notes were issued before there was any limitation of the 
 gold in circulation. The gold was only gradually displaced 
 from circulation, and even as it was being displaced it still 
 formed part of the monetary power of the country. It was 
 not (to any appreciable extent) either hoarded or made into 
 ornaments. It is possible that for a time larger amounts 
 than usual were held by the banks, but with the very object 
 of strengthening their monetary position. 
 
 Except then as regards the gold held against the currency 
 notes the new notes for internal purposes were, to begin 
 with, exactly the same as an addition of so much gold. 
 
 Accordingly, in estimating the increase of different forms
 
 88 WAR FINANCE 
 
 of currency we ought to compare the Treasury notes with 
 the gold formerly issued. The net amount issued the year 
 before the war was fifteen millions, which was a good deal 
 above the average. 
 
 But in the first five months of the war to December, 1914, 
 we have 38-5 million notes — less gold for redemption 
 18-5 million pounds — i.e., a net addition of 20 million pounds 
 in five months. The additions to the outstanding amount 
 by December, 1916, were iii-6 million pounds. The gold 
 held against the notes was increased by 10 million pounds 
 to 28-5 million pounds, but this gold (it is said) was not 
 originally displaced from the currency but obtained from 
 abroad. The rate of increase of the notes 55 million pounds 
 per annum, 1915-16, as compared with gold, is nearly six 
 times the normal, 1908-14, and over 3I times the highest 
 year (1913) before the war — 15-3 milhon pounds. If w^e 
 deduct the additional 10 million pounds of gold the rate of 
 increase is 50 million pounds per annum. 
 
 The increases in the note issues of the banks of the United 
 Kingdom are for the present purpose of little importance, 
 as after a point they are normally in effect a kind of deposit 
 receipt against gold, the authorised fiduciary issue being 
 fixed. The new Treasury notes are supposed to take the 
 place of gold for this purpose. 
 
 In July, 1915, {Bankers' Magazine, August, 1915), com- 
 pared with July, 1 9 14, there was an increase in bank-notes 
 of the United Kingdom of 127 million pounds. Of this 
 increase the Bank of England held 4-8 million pounds 
 against gold, and the Scotch and Irish banks y-8 million 
 pounds against gold and silver coin (the gold presumably 
 being largely currency notes).* 
 
 Cheques 
 
 In recent years people have become accustomed to 
 speaking of the cheque as the principal form of our currency. 
 In 1913, the aggregate London Bankers' Clearing House 
 
 * The later figures have not been extracted for the reason given in the 
 preceding paragraph.
 
 STATISTICAL ASPECTS OF INFLATION 89 
 
 Returns were 16,400 million pounds. And these returns 
 by no means include all the cheques in the kingdom. Still 
 sixteen thousand millions of cheques is two hundred times 
 the 78 million pounds which was supposed to be the amount 
 of gold in the hands of the public before the war. 
 
 Passing over for the present the question whether in 
 considering inflation cheques are properly described as 
 currency, it is interesting to notice that taking the Clearing 
 House totals from August, 1914, to December, 1914, there 
 was a decrease of 33-8 per cent, as compared with the same 
 period in 1913. The total for 1915 was 13,407 milUon pounds 
 as against 16,400 million pounds of 1913, a decrease of 
 22 per cent. The total for 1916 still shows a decrease of 
 over 1,100 million pounds compared with 191 3. The first 
 monthly increase is shown in November, 1916, and was 
 followed by a decrease the next month. Even the first 
 quarter in 1917 still shows a small decrease in the total 
 clearings. 
 
 From these figures alone it would seem that in what is 
 now called the most important form of our currency, instead 
 of an abnormal increase as in the other forms, we have a 
 remarkable decrease. 
 
 Even in normal times, however, as explained in the 
 annual reports by Mr. R. Martin Holland, we must separate 
 the different clearings. The metropolitan, country and 
 provincial cheque clearings give a much better indication 
 of the volume of the trade of the country as distinct from 
 the finance which can be obtained from the town clearing. 
 The various restrictions imposed on financial dealings in 
 the war have intensified these differences. In the Report 
 of 1915 it is said that the fall in the total is altogether 
 financial as distinct from commercial, and is due to the 
 absence of Stock Exchange settlements, foreign loans, etc., 
 and the reduction in the daily turnover of short money. 
 
 When we look to the country clearings alone we find the 
 increase in the war period begins almost at once. The total 
 country clearings for 1915 were 1,567 million pounds com- 
 pared with 1,389 million pounds for 1913, an increase of
 
 90 WAR FINANCE 
 
 178 million pounds or 13 per cent. The j^ear 1916 showed 
 an increase of 483 million pounds over 1913, which was 
 itself a record year. This is an increase of 35 per cent, as 
 compared with 6 per cent., the highest increase for any 
 previous year. 
 
 Here, then, we seem back again to the more common type 
 of our war increases — the increase being more than five times 
 the pre-war rate of increase. 
 
 With the same level of prices the increase in the country 
 clearings may be said to measure roughly the increase in 
 the volume of trade. If we take account of the fact that 
 the index number {Statist) for 1913 was only 85 and had 
 risen in 1916 to 136, it follows that there must have been 
 some decrease in the volume of trade. A rise of prices of 
 60 per cent., if the volume of trade* had remained the same, 
 would so far have raised the country clearing returns in the 
 same proportion. The figure for 1913, namely, 1,389 million 
 pounds, would have become 2,222 million pounds, but in 
 fact it came only to 1,872 million pounds, an increase of 
 35 per cent. only. 
 
 Deposits 
 
 Cheques are drawn against bank credits, and it is therefore 
 more satisfactory in estimating any general inflation to go 
 back to the funds on which the cheques are drawn. 
 
 The growth of bank deposits is given in the Economist 
 banking numbers. In 1913 the aggregate was 1,104 million 
 pounds, including 61 million pounds for the Bank of England. 
 In 1914 the aggregate had increased to 1,290 million pounds 
 (including the Bank of England), i.e., by 186 million pounds. 
 Before the war the increase in deposits for the last ten years 
 had been on the average 30 million pounds a year, so that 
 in the first five months of the war the rate of increase was 
 about six times the annual normal. 
 
 In 1915 the Bank of England showed an increase of only 
 5 million pounds over 1914, and in 1916 the increase was 
 
 * Mr. Kitchin has made the following note : Volume of trade on Statist 
 figures with 1913 = 100, for 1914 = 86i, 1915 := S6J, 1916 = 81.
 
 STATISTICAL ASPECTS OF INFLATION 91 
 
 only 9 million pounds, but the other banks gave increase 
 of 118 and 201 million pounds respectively. The increase 
 in 1916 was like that of 1914 — at about six times the annual 
 normal rate. In two and a-half years of war there was an 
 absolute increase of about 50 per cent, on the pre-war total. 
 
 General View of the Abnormal Increase of Currency 
 
 Before proceeding to the abnormal rise in prices it will be 
 convenient to summarise the results of the inquiry into the 
 abnormal increase in currency. 
 
 The method adopted has been to compare the pre-war 
 rates of increase with the rates of increase in the period of 
 the war of the various forms of currency. In the case of 
 new forms, e.g., postal orders and currency notes, the com- 
 parison has been made with the forms of currency which 
 they were intended to supplement or displace. 
 
 The increase in the rate of expansion has not been uniform. 
 It might be supposed, d priori, that the different forms of 
 currency being interchangeable according to the convenience 
 of people, there would be no serious alteration in the relative 
 proportions, as there would be no important changes in the 
 monetary habits of people. The shock to credit and the 
 demand for the conversion of notes into gold only lasted 
 a few days. People soon resumed their usual habits as 
 regards the use, for example, of cheques, notes, and coin. 
 The new Treasury notes gradually took the place of gold 
 without any disturbance. 
 
 It is also often supposed that if for any reason there is 
 a general rise in prices there must be a corresponding and 
 proportionate increase in the various forms of currency to 
 do the money work at this higher level. At present we are 
 not concerned with the causes of the change in the level or 
 the nature of the connection between the money and the 
 work to be done by it ; we are only considering the fact of 
 the increase in general prices and the effects on the par- 
 ticular forms of currency. 
 
 I remember when I was giving evidence before the Gold 
 and Silver Commission of 1888, Lord Herschell, the chairman,
 
 92 WAR FINANCE 
 
 expressed a doubt whether a rise in prices of necessity 
 involved the use of more token currency. With a highly 
 developed cheque system the doubt may be carried on even 
 to standard money and the notes based on it. With a rise 
 in prices cheques may be used for transactions which at a 
 lower range required coin or notes. In this way less money 
 so far would be required with a rise in prices. In his Budget 
 speech Mr. Bonar Law called attention to the greatly 
 increased revenue from the penny stamp on cheques. Again, 
 with a twofold rise in prices it does not follow that double 
 the amount of small change is required. I will leave the 
 mathematical reasoning to Professor Edgeworth, but an 
 example may serve for illustration. If a thing before the 
 rise cost fifteen shillings, that could be paid for with half a 
 sovereign and five shillings silver. After the rise to thirty 
 shillings, three half-sovereigns (or ten shilling notes) would 
 suffice.* 
 
 In the present war expansion of currency the increase 
 has certainly not been uniform in every kind. For a con- 
 siderable time the total amount of cheques actually decreased 
 in aggregate value, and at the other end of the scale up to 
 the end of 1915 the increase in bronze was below the increase 
 in 1912-13, though it is true that by the end of 1916 bronze 
 also had caught on to the general expansion. 
 
 Different forms of currency are adapted to different uses, 
 and the amounts used will \'ary with any great change in 
 these uses. The fall in the aggregate total of cheques is 
 accounted for by the closure for a time of the Stock Exchange 
 and the continued suppression of speculation in securities 
 and in new companies. The tardiness in the expansion of 
 
 * I put the problem to Professor Whittaker and he brought it before the 
 Edinburgh Mathematical Society. A paper was read by Dr. Lester L. Ford 
 on " The Effect of a Rise in Prices upon the Amount of Small Money used," 
 published in the Proceedings, Vol. XXXV. (Part 2), Session 1916-17. Two 
 conclusions may be quoted : (i) " When the transactions involving small 
 sums are sufficiently predominating the amount of small money used 
 varies with the prices." (2) " The chief effect of an increase in prices on 
 small money is the greater use of the larger denominations of small coins." 
 These results seem to be confirmed by the great increase of token coins 
 with the rise in prices in the war and by the relative increase of silver as 
 compared with bronze.
 
 STATISTICAL ASPECTS OF INFLATION 93 
 
 bronze perhaps indicates that the very poorest, e.g., the 
 old-age pensioners, were the last to feel the rise in money 
 incomes. Possibly the great increase in minute currency 
 in the other belligerents may be due to the poverty of the 
 people in view of the great rise in the cost of living. They 
 need very small change to get very small amounts of con- 
 sumable things. 
 
 With these cautions in mind we may now attempt a 
 general summary of the rates of increase. The rise in the 
 rate of increase is greatest in silver. The issues have increased 
 by more than 7 million pounds a year, which is about twenty 
 times the average of the forty-two years 1872-1913, and 
 about eight times the average of the four years preceding 
 the war. As will appear later on, this increase in silver is 
 closely connected with the increase in wages and earnings. 
 
 The increase in cheques of a commercial character as 
 shown in the country clearings is about fivefold the pre-war 
 rate of increase. 
 
 In the bank deposits the increase has been about six times 
 the normal rate. 
 
 In bronze the increase was below the pre-war rate up to 
 1916, but during that year rose to more than threefold the 
 average. The aggregate clearings of cheques (for the 
 reasons given above) only began to exceed the pre-war total 
 at the end of 1916, so that in this case the normal rate of 
 increase had not been kept up, but, in fact, had been turned 
 into a considerable decrease. 
 
 The chief difficulty is as regards the Treasury notes, and 
 the extent to which they have been substituted for gold. 
 To estimate properly their share in the general progress of 
 the inflation we ought to put the withdrawals of gold from 
 time to time against the increases in the outstanding amounts 
 of the notes. The manner, extent, and times of the with- 
 drawals of the gold and the monetary uses of the gold with- 
 drawn are not known. It appears, however, that the notes 
 were issued much faster than the gold was withdrawn. As 
 these notes were ostensibly intended to take the place of 
 gold the increase of issues should be properly compared
 
 94 WAR FINANCE 
 
 with the pre-war increases of gold. At the end of 1916 the 
 gold in the Bank of England had increased by about 18 
 million pounds, and there was also held 28^ million pounds 
 against the Treasury notes. If we deduct these amounts 
 from the 82 J million pounds held by the banks before the 
 war and suppose that the remaining 36 million pounds 
 together with the 78 million pounds in the hands of the 
 public, has been entirely displaced by the notes, the out- 
 standing amount at the end of 1916, viz., 150 million pounds, 
 is only 36 million pounds above the pre-war amount of 
 gold coins. This increase would be only about the same as 
 the rate of increase in gold from December, 1910, to June, 
 1914.* 
 
 From another point of view, however, if we look to the 
 increase in bank deposits of about 50 per cent, on the 
 pre-war aggregate and suppose (as above) that notes have 
 been substituted for nearly half the amount of gold formerly 
 held by the banks, and that the banks have the power of 
 increasing this paper reserve practically as much as they 
 think fit, this aspect of inflation demands special con- 
 sideration. 
 
 Bank of England notes have increased in circulation by 
 about 10 million pounds, and Scotch notes by 16 million 
 pounds, but these and other note issues under our system 
 must keep either gold or currency notes against the excess 
 
 * How far the currency notes have actually displaced gold either in 
 active circulation or in the banks can only be conjectured. The point 
 I wish to emphasise is that the displaced gold (except so far as hoarded by 
 private people or melted or smuggled abroad) has still been a part of the 
 monetary power of the country. In other words, if the gold had not been 
 displaced by the currency notes the inflation must have been contracted 
 by the drain on the banks. Mr. Kitchin has furnished the following 
 comment : " According to a statement by Mr. McKenna the best estimate 
 the Mint was able to make for gold in the hands of the public was 75 
 million £ at June 30, 19 15. The figure seems astonishing as gold had prac- 
 tically disappeared from circulation in London though in the North, I- 
 beUeve, clung to. The amount has presumably largely fallen since. As 
 the estimate for 1914 was 78 million £ the figures for 1915 show that 
 46,600,000/. of Currency notes had only displaced 3,000,000/. of gold. I dis- 
 trust the official figures (for gold) and in any case the amount must have 
 largely ceased to be circulating and have become hoarded." A good many 
 contributions were made in gold to the 19 17 War Loan. Just before 
 reading my paper I was told in an Edinburgh branch bank that /40 had 
 been paid in that day by a commercial traveller.
 
 STATISTICAL ASPECTS OF INFLATION 95 
 
 over the authorised issues. Accordingly, we cannot properly 
 add these notes to the currency notes. 
 
 From the importance assigned to silver in the latter part 
 of this paper it would be interesting to know the absolute 
 amount before the war. I know of no official return. We 
 know, however, that from 1872-1913 the total of new 
 issues was 28-9 million pounds and of withdrawals of worn 
 coin of 14-1 million pounds. If we suppose that the with- 
 drawals had practically got rid of the old silver the pre-war 
 amount would be about 29 million pounds. The increase 
 of nearly 21 million pounds in the war would be about 
 70 per cent. It is quite possible, however, that the pre-war 
 amount of silver, owing to various wastages, was much less 
 than 29 million pounds, and the amount of silver may well 
 have been doubled in the war. 
 
 The Abnormal Rise in Prices 
 
 The index numbers of the Economist and Statist and the 
 Board of Trade are so well known that for the present purpose 
 a brief sketch of the general trend of prices as thereby shown 
 will suffice. 
 
 In the first six months of 1914 there had been a slight 
 set-back to the rise in prices that was in progress more or 
 less since 1896, though there was some recovery in July. 
 
 After the outbreak of war to the end of September there 
 was a sharp rise of nearly ten in the Economist index number. 
 In the last quarter, however, of 1914 the index number was 
 practically stationary. The rise in food was more than 
 counterbalanced by the fall in textiles and minerals. 
 
 By the end of 1915 a considerable rise had been effected 
 in all the groups on the pre-war figures, the figures being 
 165-1 for December, 191 5, compared with 127-3 for December, 
 1914. The rise continued in 1916 in every group — the figure 
 for December, 1916, being 222. The latest Eco7iomist index 
 number available for April, 1917 gives 244-5, as compared 
 with 1 16-6 at the end ol July, 1914. The Statist figures are 
 82*4 for July, 1914, and 168-4 ^''-'^ March, 1917.
 
 96 WAR FINANCE 
 
 The doubling of these index numbers in less than three 
 years compared with previous records is altogether abnormal. 
 The abnormality of the rise is perhaps best shown by the 
 fact that the percentage rise in the war period has been 
 more than twice as great as in the whole period 1896-1914. 
 The Statist numbers, for example, are, for 1896, 1914, and 
 March, 1917, 61, 85, 168. 
 
 The advance in retail prices that enter into workmen's 
 budgets are too well known to require any comment. 
 
 The difficulty, indeed, is to find any exception of import- 
 ance to the universality in the rise in prices of commodities. 
 Even in luxuries, in which a fall might have been antici- 
 pated, a rise has occurred — e.g., in the sales of pictures. It 
 was stated in connection with the restrictions on racing 
 that blood-stock horses have greatly fallen in price. It is 
 probable also that some forms of house property have also 
 fallen, though this is partly due to the rise in the rate of 
 interest — and movements in interest-bearing securities of 
 all kinds do not follow the same laws as prices of commodities. 
 
 The Abnormal Rise in Money Wages 
 
 The Labour Gazette records the changes in the rates of 
 money wages (including war bonuses) in important indus- 
 tries, and compared with pre-war periods there can be no 
 doubt as to the abnormality of the rise. The net effect of 
 all the changes in wages during the twenty-one years 
 1896-1916 is an increase of £2,000,000 on the weekly rates. 
 The greatest increases in any single year were £677,700 in 
 1915, and £595,000 in 1916. Previous to the war the 
 greatest increases were £208,588 in 1900 and £200,912 in 
 1907. The total increase in the two years of war is nearly 
 double the total increase for the nineteen years before the war. 
 
 A complete account cannot be given of all the changes in 
 the rates of wages since the beginning of the war (as many 
 of the unorganised employments escape observation), " but 
 up to December, 1916, nearly 6 million workpeople had 
 received some advance. The amount varied, but the average
 
 STATISTICAL ASPECTS OF INFLATION 97 
 
 was about 6s. per head per week, and in some of the war 
 industries los. to 12s." * 
 
 These calculations take no account of increased earnings 
 of overtime. We know also that there has been a great 
 shifting upward of labour from stratum to stratum, and that 
 many women and children have entered the ranks of the 
 wage-earners, and older men have re-enlisted. It would 
 appear, then, that the rise in family earnings has been 
 greater than in rates of wages. Account must also be taken 
 of allowances to war dependants, which on balance have 
 probably more than compensated the absence of the men. 
 I will only add that taking the last figures available — April, 
 1917 — the changes in the rates of wages affected over 
 1,470,000 people, and gave a net increase of £300,000 per 
 week. This is the largest monthly increase ever recorded. 
 
 How far this rise in money wages or in family earnings 
 has been accompanied by a corresponding advance in real 
 wages or earnings is, of course, quite another question. 
 
 The Abnormal Rise in Profits 
 
 The abnormal rise in profits is made clear from the 
 returns to the excess profits' tax and the income tax.f There 
 are certain difficulties in the calculations of the rise in 
 profits — there are no returns J of any Capital Gazette — but 
 there can be no doubt that the rise has been altogether 
 abnormal. It has also been general — as shown by the 
 profits of the great distributing firms. 
 
 It is clear that the abnormal rise in prices of commodities 
 must be reflected in a rise in wages or profits, or both — the 
 prices obtained from the products of labour and capital 
 give their rewards. 
 
 As already shown, in the present war both have risen. 
 It is generally found that in a period of rising prices the rise 
 
 * Labour Gazette, p. 3, January, 1917. 
 
 t In 19 1 4 income and property tax (with super-tax) yielded 47 
 million pounds, and in 19 17 205 million pounds. Excess profits' duty, 
 nil in 1914, in 1917 yielded 140 million pounds. 
 
 X The Economist publishes figures for the profits of trading companies, 
 but points out that they are imperfectly represented, e.g., as regards 
 shipping.
 
 98 WAR FINANCE 
 
 in wages lags behind the rise in profits. The recurring labour 
 unrest is largely due to the belief of labour that such has 
 been the case in the present rise of prices. The extension of 
 Governmental control also points to the same result. The 
 controlis largely a remedy for the high profits. 
 
 Connection of the Abnormal Increase of Currency 
 WITH THE Abnormal Rise in Prices 
 
 At first sight we are tempted to look simply to the final 
 results, and to apply the quantity theory in the simplest 
 form, and to say that obviously the increase in currency is 
 the cause of the increase in prices. 
 
 The quantity theory, however, cannot be accepted in 
 this simple form, even after allowing for rapidity of circu- 
 lation. An alternative explanation of the relation between 
 the two increases is that the rise in prices is due in the first 
 place to obstruction of supply and intensification of demand, 
 and that with rising prices more currency has been called for 
 to do the monetary work. This order of events was illus- 
 trated by Tooke in important test cases, and admits of an 
 adequate theoretical explanation. Prices may rise, first of 
 all, through speculation, and it is only when the inflated 
 prices have to be translated into money wages and other 
 incomes that the real demand for more currency arises. If 
 the country concerned has an effective metallic standard 
 eventually the demand for gold checks the speculation. 
 If, however, the effective reserve is paper, which can be 
 increased indefinitely, the rise in prices so far may continue 
 indefinitely. In this case, however, we may still sa}^ that 
 the causa causans is the speculation. 
 
 There are, however, cases in which it is clear that the 
 rise in prices is to be ascribed to the increase in currency 
 and not the converse. Take, for example, the increase in 
 silver in the sixteenth century and of gold in the nineteenth. 
 Again, there are the great historical examples of the issues 
 of inconvertible notes, as in John Law's Bank and the 
 assignats of the French Revolution. 
 
 In this connection it may well be argued that in the
 
 STATISTICAL ASPECTS OF INFLATION 99 
 
 course of time our currency notes have become de facto 
 inconvertible for internal purposes. Accordingly, we should 
 expect on this analogy that so far the prices would rise in 
 response to the issues, and not the converse. 
 
 It often happens that the rise of prices begins with a rise 
 in demand for important commodities, the rise being 
 accelerated by speculation. Such a rise, however, cannot 
 be maintained or advanced beyond certain limits unless 
 there is an increase in the currency required for cash pay- 
 ments. In this sense, then, the continued rise in prices may 
 be attributed to the inflation of the currency, although the 
 excess of issues may follow the original rise in prices. 
 
 In the present case there was no doubt a sudden war 
 demand for certain things. During the first five months, 
 however, general prices did not rise much. There is no 
 doubt also that in spite of the efforts of Government at 
 control, as soon as prices began to move speculation was 
 stimulated. Through the excessive provision of emergency 
 currency, followed by continued increases, no effective 
 monetary restraints were imposed on the rise in prices. 
 
 It is also possible that a rise in prices may begin with 
 an increase of currency, e.g., inconvertible notes, and then 
 at a later stage the rise in prices, aided by speculation, may 
 call for more currency. 
 
 The limits of this paper do not admit of any discussion 
 of these theories, which go back to the Napoleonic period. 
 It is interesting to recall the fact that the late Sir Robert 
 Giffen discussed the alternative connections of currency 
 and prices in the old bimetallic controversy in a paper in 
 the Nineteenth Century for November, 1889, in an article to 
 which I made a reply in the next number.* 
 
 The proper test to apply in any particular case in con 
 sidering the relations between the two increases is the order 
 in time. This was the test applied by Tooke with such 
 effect in the old controversy arising out of the Napoleonic 
 bank restriction. 
 
 * My paper is reprinted in my " Money and Monetary Problems," 
 p. 381.
 
 100 WAR FINANCE 
 
 What we ought to do is to trace the growth month by 
 month, or quarter by quarter, of the two phenomena, and 
 not merely to look at the hnal results, as in comparing June, 
 1917, with July, 1914. 
 
 Unfortunately figures are not available for the quarterly 
 increases of bank deposits. It is to be hoped they will be 
 forthcoming after the war. 
 
 In the meantime, however, as explained in connection 
 with cheques, it is sufficient to notice that the bank deposits 
 are left in the air unless connected with cash in the form 
 of coin or notes. 
 
 We may then apply the order in time test in the case of 
 the Treasury notes and of silver — as gold is no longer an 
 effective part of the circulation. 
 
 Treasury Notes and Prices 
 
 Seeing that the Treasury notes have taken the place of 
 gold internally, they may be said to form the most important 
 part of the legal tender currency. Fortunately also con- 
 tinuous records are given of the Treasury notes outstanding, 
 and comparisons may be made with the monthly index 
 numbers. By way of preliminary I took quarterly periods 
 and compared the two sets of increases. 
 
 The object in view was simply to discover the general 
 bearing of the connection, and not in any way to establish 
 any proportion, even if such a problem were soluble. 
 
 The general result of the first rough comparison is indi- 
 cated in the tables of difference of index numbers and 
 outstanding notes (see p. 107). 
 
 If we compare the same periods quarter by quarter, there 
 does not seem to be any connection. In the last quarter of 
 1914 the notes increased by over 10 milHons (or 35 per cent, 
 on the amount outstanding at the end of September), but 
 the index number remained practically stationary. In the 
 first quarter of 1915 the Treasury notes only increased by 
 little over one million or less than 3 per cent., but the 
 Economist index number rose 22-9. Again, in the quarter 
 ending September, 191 5, whilst the Treasury notes were
 
 STATISTICAL ASPECTS OF INFLATION loi 
 
 increased by over 25 millions — a percentage rise in the 
 quarter of over 50 per cent. — the Econotnist index number 
 rose less than 4 per cent. The general result is that there 
 ssems to be no connection discoverable between the notes 
 and prices, taking the same quarters. 
 
 If, however, the comparison is made of the note increases in 
 one quarter with the index number increases in the follow- 
 ing quarter, then there is a remarkable correspondence.* 
 For example, the large note increase in the December 
 quarter, 1914, is followed by the large index number increase 
 in the next quarter — March, 1915. The slight increases of 
 notes in the next two quarters are followed by slight increases 
 only in index numbers. The very large increase in notes in 
 the September and December quarters of 1915 are followed 
 by large increase in the next two quarters in index numbers. 
 
 For the remainder of the war period up to the present 
 time the correspondence in quarters is not so striking, but the 
 general trends of expansion are the same (see pp. 112-114). 
 
 It must always be remembered that there are other 
 currency influences that have to be taken account of, espe- 
 cially silver and bank deposits. There are also all the 
 causes affecting commodities.! 
 
 With regard to bank deposits, I regret that I have not 
 been able to get quarterly periods. The comparison with 
 the note issues and with prices would be ol great interest. 
 
 Silver and Prices 
 
 We are apt to be so overwhelmed with the magnitude 
 of our cheque system and our gold resources that we are 
 inclined to pay no attention whatever to the silver part of 
 our currency. A little reflection, however, shows that when 
 we follow out any market demand into its elements we are 
 
 * In his paper entitled the " Ratio " Chart in the publications of the 
 American ^Statistical Association for June, 1917, Professor Irving Fisher 
 draws attention to a similar sequence in the United States. 
 
 t In the general quantity theory the volume of trade and transactions 
 must always be taken account of. Disturbances in relative prices, owing 
 to changes in demand and supply, indirectly affect general prices (as in 
 index numbers). Cf. my "Money and Monetary Problems" — ^Essay on 
 " Causes of Movements in General Prices."
 
 102 WAR FINANCE 
 
 always brought back to the wants and the means of the 
 individual consumers. But the great mass of the consumers 
 of the great staples are the wage-earners, and a great part 
 of their purchases are made with silver. 
 
 Although in dealing with silver and prices, as in the case 
 of the other forms of currency, reference is made only to 
 the quantity, it may be noted that especially under modern 
 conditions silver has great rapidity of circulation. The 
 nimble sixpence is more nimble than ever. A cheque is 
 extinguished after one transaction, but in the course of a 
 year silver might very well change hands fifty times, and 
 in that way an addition of twenty millions would be equal 
 to a thousand millions used once. 
 
 For the period of the war Quarterly Mint Returns are 
 fortunately available (see p. io8). But before coming 
 to the period of the war attention must be directed to 
 the connection between silver and prices in the pre-war 
 period. 
 
 The records of the net issues of silver from 1872— 1914, 
 and the Very striking variations in the annual amounts, 
 have been referred to in a former section (p. 84, and 
 for table of silver issues, see p. 109). I tried to find 
 some correlation between the general movements of prices 
 as indicated by the index numbers and the increases and 
 decreases in silver.* From 1872— 1896, there was a great 
 and continuous fall in prices, and tnereafter a great and 
 continuous rise. In a very general way, if we look to the 
 beginning and the end of the period, we find a conformity. 
 In 1872 silver issues were over a million pounds (being more 
 than three times the average of the forty- two years), and 
 again from 1910-13 the issues of silver were double the 
 annual average. Between these two extremes the issues of 
 silver on ten occasions showed a net decrease. But I could 
 
 * Mr. Kitchin notes : " Net silver issues showed maxima and minima 
 with prices, trade and other factors. Compare maxima (trade factors in 
 brackets) : —1872 (1873), 1883 (1881-83), 1889 (1889-90), 1896 (no 
 correspondence), 1900 (1900), 1906 (1906-07), 1912 (1912-13). But the 
 curves nevertheless, as you say, compare badly. They are better in trade 
 than in prices."
 
 STATISTICAL ASPECTS OF INFLATION 103 
 
 find no discoverable connection between the fluctuations 
 from year to year, or even in short periods of several years. 
 Two examples may be given. The years 1874-75 were years 
 of rapidly falling prices, but the net issues of silver were 
 a good deal above the normal. Again, from 1889-96 the 
 fall in prices was most marked, and, indeed, 1896 is the 
 minimum of the long depression from 1873. But the net 
 issues of silver were very greatly above the normal. In 
 fact, 1889 is the year of the maximum net issue of silver 
 over the whole period of forty-two years, and the average 
 of the short period 1889-96 was more than double of the 
 normal. Again, though from 1 897-1 900 prices were rising 
 and the silver net issues were a little above the normal, 
 there followed a period of nine years (1901-09) in which 
 prices were rising, and yet on balance the withdrawals of 
 silver exceeded the new issues. From 1910-13 silver net 
 issues were more than double the normal, and prices rose. 
 Over the whole period, however, the want of conformity 
 is much more striking than the converse. From 1873-1910 
 the net issues of silver were much larger during the period 
 of falling prices to 1896 than during the period of rising 
 prices 1896-1910. 
 
 But when I made the comparison of the silver issues with 
 the movements in money wages, the result was surprising. 
 
 Silver and Wages 
 The comparison of the net issues of silver 1872-1913 with 
 money wages, unlike the comparison with prices, shows a 
 close conformity. With 1900 as the basis of 100, wages 
 rose 1871-75 from 77 to 86. The net issue of silver for 1872 
 was over one million pounds, and for the four years 1872-75 
 the average was £600,000, as compared with the yearly 
 average for the whole period of forty-two years of £350,000. 
 From 1876-1880 wages fell from 86 to 82, and the with- 
 drawals of silver exceeded the issues by £50,000 per annum. 
 From 1881-84 the net issues of silver were about the average, 
 and wages rose slightly. In the next two years, 1885-86, 
 the issues of silver fell below the average with a slight fall
 
 104 WAR FINANCE 
 
 in wages. In 1887-91 there was a great increase in the 
 
 issues of silver, being for the five years more than double 
 
 of the average, 1889 being the maximum of the whole 
 
 period. Wages (1887-91) rose from 83-1 to 91-6. From 
 
 1892-95 the net issues of silver fell as compared with the 
 
 high level of the previous five years, but were still above 
 
 the average. Wages fell slightly from 90-2 to 89-3. From 
 
 1896— 1900 wages rose very much — from 90-2 to 100. The 
 
 issues of silver were about the same as in the previous four 
 
 years, i.e., 24 per cent, above the average. There was, 
 
 however, a great rise in wages — from 90-2 to 100. In this 
 
 case the rise in silver was not so marked as in the other 
 
 periods — probably;- owing to the exceptionally large issues 
 
 of the nine years preceding. For the whole period 1887-1900 
 
 the net issues per annum of silver were £200,000 above the 
 
 average, or about 57 per cent., and wages rose from 83-1 
 
 to 100. 
 
 From 1901-05 the issues of silver were a good deal below 
 the withdrawals, and wages fell from 99 to 97-3. With 
 increasing silver, 1906—08, wages again rose, but fell again 
 in 1909 with a fall of silver to a net loss. From 1910-14 
 wages rose from 100-7 to 106-5, with very large issues of 
 silver — more than double the average. 
 
 The comparison is made closer if the employment curve 
 is combined with the money wages curve.* 
 
 The closeness of the conformity of increases in the net 
 issues of silver with rises in money wages and earnings 
 suggests a causal relation, which is found in the fact that 
 wages are largely paid or expended in silver. Conversely, 
 if we find large increases in silver we may expect to find 
 rising wages or increased earnings. Of course, silver is 
 used by other people as well as by the wage-earning classes, 
 and wages are paid partly in gold (or under present war 
 conditions in currency notes). 
 
 Coming now to the war period, in the first five months of 
 
 * In making these and other comparisons I have been much indebted 
 to the excellent set of curves by Mr. Joseph Kitchin, who has also kindly 
 looked over tjie proofs and given the notes indicated.
 
 STATISTICAL ASPECTS OF INFLAT*[ON 105 
 
 the war, as already shown, there was an increase in the net 
 issues of silver of over £5,200,000. There were besides over 
 two million pounds of postal orders (above the normal) 
 used as legal tender. There were also the 38^ million pounds 
 of Treasury notes which in that period had certainly not 
 displaced gold. There was, in fact, a very large increase 
 in the currency to provide for an emergency which had 
 rapidly passed away. 
 
 In these first five months, however, there was no corre- 
 sponding increase either in prices or in wages. Wages were 
 on the whole practically stationary, and yet in the first 
 quarter of 191 5 a net issue of silver was again made of nearly 
 i|- million pounds — i.e., more than the maximum of any 
 single year in pre-war times. 
 
 The rise in wages began in February, and there was far 
 more than enough of currency to support it. A fall took 
 place in the net issues of silver in the next quarter ending 
 June, but the million was again passed in the September 
 quarter, and in the December quarter there was the enor- 
 mous increase of over £4,000,000. This unprecedented 
 increase in silver was accompanied by an unprecedented 
 increase in the rate of wages. The increase in family earnings 
 must have been much greater. Over seven millions of new 
 silver were issued in 1916, and the rise in earnings continued. 
 Of course, I do not mean that the increase in silver of 
 itself raised wages. The increase in silver was part of the 
 general inflation which rendered possible the continued rise 
 of wages. Notes are also used in the payment of wages, 
 and some kinds of wages follow prices. 
 
 The connection of wages and prices in order of time varies 
 in different cases. At the beginning of the war the special 
 war demand, backed by Governmental funds, raised some 
 kinds of wages. vSubstitution and sympathy raised others. 
 With the expenditure of the new earnings prices rose in 
 response to the fresh demands. Then came the demand for 
 war bonuses to meet the increased cost of living. The 
 special war bonus was followed by the general sympathetic 
 war bonus.
 
 io6 WAR FINANCE 
 
 Such a rise in wages and in earnings was only possible 
 with an increase of currency — silver and notes. If the 
 restraints of peace time on the issues of currency had been 
 in force a monetary crisis must have put an end to the rise. 
 
 Other evidence, e.g., the relative stability of prices in the 
 United States of America, which can here be only alluded 
 to, confirms the conclusion that the rise of prices in the 
 United Kingdom is greatly due to the relaxation of the 
 normal restraints on the issues of currency. 
 
 Whether this inflation was necessary or desirable, either 
 politically or economically, involves another series of ques- 
 tions too large for this paper. There is, for example, the 
 question of loans and taxes. As arising out of the present 
 argument, it is clear that loans, which are based on credit, 
 before they can be effectively used or expended internally 
 they must be pulverised into common currency. We were 
 often told before the war that 90 per cent, of the value of 
 coal was wages. The Census of Production has given us 
 full evidence of the universal importance of the wages bill. 
 The Government may pay its contractors by cheque, they 
 again may pay their sub-contractors and all the business 
 people they employ also by cheque, but in the last resort 
 somebody has to pay all the wages bills in cash. 
 
 Conclusion 
 
 In conclusion, the broad results may be stated in the 
 simplest form. There has been an abnormal growth in the 
 various kinds of currency as compared with the pre-war 
 rates of increase. 
 
 There has been also an abnormal rise in the prices of all 
 the groups of commodities used for index numbers. The 
 aggregate index numbers have doubled. There has been 
 a similar abnormal rise in money wages. 
 
 In order of time the abnormal increase of currency pre- 
 ceded the abnormal rise in prices and in wages. The period 
 of incubation lasted about five months, and, at any rate, 
 for the first two years of the war, the rise in prices lagged 
 behind the increase of currency.
 
 STATISTICAL ASPECTS OF INFLATION 107 
 
 The root cause of the inflation of the currency has no 
 doubt been the great expansion of Governmental credit, 
 which has only been made effective by being pulverised 
 into the varied forms of currency required for different 
 purposes. The growth of bank deposits does not mean 
 increased savings but increased credit advances. The neces- 
 sary proportion of cash for wages and retail trade, etc., is 
 provided by notes and silver. 
 
 It is not convenient in a statistical paper to point the 
 moral as if it were a sermon. Perhaps, however, it may be 
 said without prejudice or offence that even in war time the 
 same causes are likely to produce the same effects. If the 
 inflation of the currency continues, the rise of prices will 
 also continue. 
 
 Appendix. 
 
 Table showing in quarters of years 1914-17 : I. Currency notes outstanding ; 
 II. " Economist " index numbers ; III. " Statist " index numbers ; 
 IV. Differences in " Economist " numbers ; V. Differences in currency 
 outstanding ; VI. Differences in " Statist " numbers ; VII. Mean of 
 index numbers differences. 
 
 
 
 
 
 
 
 Differences. 
 
 
 
 ar. 
 
 I. ' 
 
 Currency 
 
 11. 
 
 Eiono- 
 
 ni. 
 
 
 
 
 
 Quarters of Ye 
 
 IV. 
 
 V. 
 
 VI., 
 
 VII. 
 
 
 
 Notes 
 
 niiit 
 
 Stalisl 
 
 
 
 
 Mean of 
 
 
 
 Out- 
 
 Index 
 
 Index 
 
 Eiono- 
 
 Cur- 
 
 Statui. 
 
 Stalisl and 
 
 
 
 standing. 
 
 Numbers. 
 
 Numbers. 
 
 mist. 
 
 rency. 
 
 Economist. 
 
 1914 •• ■ 
 
 I 
 
 
 ii8-o 
 
 83-4 
 
 
 
 
 
 
 II 
 
 
 115-9 
 
 82-0 
 
 2-1 
 
 
 — 1-4 
 
 — V-8 
 
 Five months 
 
 III 
 
 28-4 
 
 126-4 
 
 88-1 
 
 10-5 
 
 28-4 
 
 + 61 
 
 8-3 
 
 of war 
 
 IV 
 
 38-5 
 
 127-3 
 
 90-1 
 
 0-9 
 
 lO-I 
 
 2-1 
 
 1-5 
 
 1915 •• • 
 
 . I 
 
 39-8 
 
 150-2 
 
 IOO-3 
 
 22-9 
 
 1-3 
 
 IO-2 
 
 16-6 
 
 
 II 
 
 46-6 
 
 147-7 
 
 106-5 
 
 —2-5 
 
 6-8 
 
 6-2 
 
 1-9 
 
 
 HI 
 
 72-0 
 
 151-6 
 
 107-1 
 
 3-9 
 
 25-4 
 
 0-6 
 
 2-3 
 
 
 IV 
 
 103-1 
 
 165-1 
 
 II3-8 
 
 13-5 
 
 31-1 
 
 6-7 
 
 10- 1 
 
 1916 
 
 . I 
 
 106-7 
 
 182-4 
 
 127-0 
 
 17-3 
 
 3-6 
 
 13-2 
 
 15-3 
 
 
 II 
 
 I22-0 
 
 191-5 
 
 133-3 
 
 9-1 
 
 16-7 
 
 6-3 
 
 7-7 
 
 
 III 
 
 131-5 
 
 201-0 
 
 I33-I 
 
 9-5 
 
 9-5 
 
 0-2 
 
 4-7 
 
 
 IV 
 
 1 50- 1 
 
 222-0 
 
 148-8 
 
 21-0 
 
 i8-6 
 
 15-7 
 
 i8-4 
 
 1917 .. . 
 
 . I 
 
 144-6 
 
 240-9 
 
 168-4 
 
 18-9 
 
 —5-5 
 
 19-6 
 
 19-3
 
 io8 
 
 WAR FINANCE 
 
 Net Issues of Imperial Silver Coin in the United Kingdom during the 
 
 War. 
 
 Period. 
 
 New Silver 
 Issued. 
 
 Wdrii Silver 
 Withdrawn. 
 
 Net Issues. 
 
 
 £ 
 
 £ 
 
 / 
 
 August and September, 1914 . 
 December quarter, 19 14 
 
 
 2,395.074 
 2,996,950 
 
 3'), 800 
 27,325 
 
 2,358,274 
 2,969,625 
 
 March ,, 19 15 
 
 
 1. 536.9 1 3 
 
 40,000 
 
 1,496,913 
 
 June ,, ,, 
 
 September ,, ,, 
 
 December 
 
 March ,, 19 16 
 
 
 312,075 
 1,125,200 
 4,240,910 
 2,394,841 
 
 27.332 
 37,000 
 
 14.145 
 13,000 
 
 284,743 
 1,088,200 
 4,226 765 
 2,381,841 
 
 June 
 
 September ,, 
 December ,, ., • . 
 
 
 2,190,050 
 1,530,800 
 1,302,600 
 
 30,000 
 34,400 
 39,795 
 
 2,1(0,050 
 1,507.400 
 1,262,805 
 
 March ,, I9i7-- 
 
 
 1,199,407 
 
 29,900 
 
 1,169,507 
 
 Total . . . 
 
 
 21,232,820 
 
 326,697 
 
 20,906,123 
 
 Net Issues of Imperial Bronze Coin in the United Kingdom during 
 the War. 
 
 Period . 
 
 New Coi;i 
 Issued. 
 
 Worn Coin 
 Withdrawn. 
 
 Net Issues. 
 
 
 £ 
 
 £ 
 
 £ 
 
 August and September, 19 14. 
 
 
 42,510 
 
 1,073 
 
 41,437 
 
 December quarter, 1914.. 
 
 
 91,875 
 
 1,440 
 
 90,435 
 
 March ,, 1915.. 
 
 
 53,955 
 
 1,400 
 
 52,555 
 
 June 
 
 , ,, • • • 
 
 
 35,855 
 
 1,452 
 
 34,403 
 
 September 
 
 , ,, • • • 
 
 
 93.615 
 
 1,260 
 
 92,355 
 
 December 
 
 , ,» • • 
 
 
 57,175 
 
 845 
 
 56.330 
 
 March 
 
 1910.. 
 
 
 117,880 
 
 858 
 
 117,022 
 
 June 
 
 , ,, • • . 
 
 
 45,110 
 
 818 
 
 44,292 
 
 September 
 
 , ,, • • • 
 
 
 117,975 
 
 605 
 
 117.370 
 
 December 
 
 , ,, . . 
 
 
 161,330 
 
 610 
 
 160,720 
 
 March 
 
 I9I7-- 
 
 
 145,240 
 
 551 
 
 144,689 
 
 Total 
 
 962,520 
 
 10,912 
 
 951,608
 
 STATISTICAL ASPECTS OF INFLATION 109 
 
 New Silver Coin Issued and Worn Silver Coin Withdrawn from Circulation in 
 the United Kingdom from 1872-1914 and Index Numbers of Money 
 Wages. 
 
 
 
 
 
 Index Numbers of 
 
 
 
 
 
 Money Wages. 
 
 Year. 
 
 New Coin 
 Issued.* 
 
 Worn Coin 
 Withdrawn. 
 
 Net Issue. 
 
 Board of 
 Trade. 
 
 Mr. G. H. 
 
 Wood's 
 Figures. 
 
 
 £ 
 
 £ 
 
 £ 
 
 
 
 1871. 
 
 
 
 
 
 
 77 
 
 1872. 
 
 
 1,152,000 
 
 106,510 
 
 1,045,490 
 
 
 82 
 
 1873. 
 
 
 734.500 
 
 168,263 
 
 566,237 
 
 
 ^7 
 
 1874. 
 
 
 505,000 
 
 151,300 
 
 353,700 
 
 
 87 
 
 1875- 
 
 
 598,550 
 
 154,000 
 
 444,550 
 
 
 86 
 
 1876. 
 
 
 107,300 
 
 275,000 
 
 — 167,700 
 
 
 84 
 
 1877. 
 
 
 290,300 
 
 207,280 
 
 83,020 
 
 
 84 
 
 1878. 
 
 
 412,700 
 
 398.135 
 
 14.565 
 
 
 83 
 
 1879. 
 
 
 283,430 
 
 456,200 
 
 — 172,770 
 
 
 82 
 
 1880. 
 
 
 386,200 
 
 399,390 
 
 — 13.190 
 
 83 -I 
 
 82 
 
 1881. 
 
 
 570,000 
 
 ■340,286 
 
 229,714 
 
 84-6 
 
 82 
 
 1882. 
 
 
 157,900 
 
 44,750 
 
 113.150 
 
 85-8 
 
 82 
 
 1883. 
 
 
 969,100 
 
 348.770 
 
 620,330 
 
 857 
 
 83 
 
 1884. 
 
 
 506,900 
 
 183,000 
 
 323,900 
 
 85-0 
 
 84 
 
 1885. 
 
 
 342,100 
 
 249,998 
 
 92,102 
 
 83-7 
 
 83 
 
 1886. 
 
 
 294,000 
 
 151,000 
 
 143,000 
 
 83-0 
 
 83 
 
 1887. 
 
 
 656,040 
 
 330.670 
 
 325,370 
 
 83-1 
 
 83 
 
 1888. 
 
 
 490.425 
 
 226,000 
 
 264,425 
 
 84-9 
 
 84 
 
 1889. 
 
 
 1,791,000 
 
 213,000 
 
 1,578.000 
 
 87-7 
 
 87 
 
 1890. 
 
 
 1,330,000 
 
 269,700 
 
 1,060,300 
 
 90-5 
 
 91 
 
 1891. 
 
 
 749,000 
 
 195,400 
 
 553,600 
 
 91-6 
 
 91 
 
 1892. 
 
 
 737.750 
 
 217.525 
 
 520,225 
 
 90-2 
 
 91 
 
 1893. 
 
 
 777,100 
 
 276,000 
 
 501,100 
 
 go- 3 
 
 91 
 
 1894. 
 
 
 707,400 
 
 374.145 
 
 333,255 
 
 89-6 
 
 91 
 
 1895. 
 
 
 819,600 
 
 432,940 
 
 386,660 
 
 89-3 
 
 91 
 
 1896. 
 
 
 868,000 
 
 209,903 
 
 658,097 
 
 90- 2 
 
 91 
 
 1897. 
 
 
 721,700 
 
 338,200 
 
 283,500 
 
 91-1 
 
 93 
 
 1898. 
 
 
 716,700 
 
 346,097 
 
 370,603 
 
 93*4 
 
 94 
 
 1899. 
 
 
 755.500 
 
 386,499 
 
 369,301 
 
 95-6 
 
 96 
 
 1900. 
 
 
 918,600 
 
 325,700 
 
 592,900 
 
 loo-o 
 
 100 
 
 1901 . 
 
 
 331,750 
 
 220,590 
 
 111,160 
 
 99-0 
 
 98 
 
 1902. 
 
 
 248,115 
 
 390.195 
 
 • — ■ 142,080 
 
 97-8 
 
 
 
 1903. 
 
 
 127,000 
 
 260,000 
 
 — 133,000 
 
 97-3 
 
 
 
 1904. 
 
 
 193.300 
 
 630.388 
 
 — 437,088 
 
 96-8 
 
 
 
 1905. 
 
 
 223,000 
 
 436.000 
 
 — 213,000 
 
 97-3 
 
 
 
 1906. 
 
 
 805,200 
 
 623,016 
 
 182,084 
 
 98-7 
 
 
 
 1907. 
 
 
 888,325 
 
 709,700 
 
 178,625 
 
 I02-1 
 
 
 
 1908. 
 
 
 422.880 
 
 261,613 
 
 126,267 
 
 101-5 
 
 
 
 1909. 
 
 
 655.099 
 
 717,590 
 
 — 62,491 
 
 100-3 
 
 
 
 1910. 
 
 
 1,119.951 
 
 529,839 
 
 589,752 
 
 100-7 
 
 
 
 1911 . 
 
 
 1,219,766 
 
 547,675 
 
 672,091 
 
 100-9 
 
 
 
 1912 . 
 
 
 1,750,828 
 
 496,890 
 
 1,253,938 
 
 103-4 
 
 
 
 * Exclusive of Maundy money.
 
 no 
 
 WAR FINANCE 
 
 New Silver Coin Issued and Worn Silver Coin Withdrawn — Contd. 
 
 
 New Coin 
 Issued.* 
 
 Worn Coin 
 Withiliawn. 
 
 Net Issue. 
 
 Index Numbers of 
 Money Wages. 
 
 Year. 
 
 Board of 
 Trade. 
 
 Mr. G. H. 
 
 Wood's 
 Figures. 
 
 I9I3-- •• 
 I9I4-- •• 
 I9I5-- •• 
 1916. . 
 
 £ 
 1.523.979 
 6,092,569 
 
 541,695 ; 982,284 
 452,125 i 5,640,444 
 
 io6-5t 
 
 •• 
 
 Total .. 
 
 34,950,097 
 
 14.592,677 
 
 20,357,420 
 
 
 
 * Exclusive of Maundy money. 
 
 11915. Net issue of silver 
 1916. ,, ,, 
 
 1914. Wages 
 
 1915- 
 1916. „ 
 
 £ 
 7,096,621 
 7,312,096 
 
 107 1 
 
 117 [Estimated.:!: 
 137J 
 
 % Mr. Kitchin writes : " I estimate the Board of Trade Course of Wages 
 (if still published) would show 106-5, 107, 117, and 126 for 1913, 1914, 
 1915, and 1916." 
 
 Returns relating to the Imperial Bronze Currency. 
 TABLE A. — Issues of Bronze Coin to December 31, 1914. 
 
 
 Bronze 
 
 Coin 
 
 Issued in 
 
 1914- 
 
 Bronze Coin Issued from December 17, i860, to 
 December 31, 1914. 
 
 Donoiuinatinn. 
 
 i860 
 Design. 
 
 1895 
 
 Design. 
 
 1902 
 
 Design. 
 
 1911 
 
 Disign. 
 
 Total. 
 
 Pence 
 
 Halfpence 
 
 Farthings 
 
 £ 
 212,759 
 
 42,265 
 
 6,110 
 
 £ 
 1,493,490 
 626,270 
 127,953 
 
 £ 
 605,312 
 138,687 
 33,810 
 
 £ 
 1,021,013 
 222,790 
 45,429 
 
 „ £ 
 
 853,163 
 
 149,109 
 
 23,743 
 
 £ „ 
 3,972,978 
 1,136,856 
 
 230,935 
 
 Total . . 
 
 261,134 
 
 2,247,713 
 
 777,809 
 
 1,289,232 
 
 1,026,015 
 
 5,340,769
 
 STATISTICAL ASPECTS OF INFLATION iii 
 
 Table B. — Imperial Bronze Coin Issued Annually from 1900-1914 
 Inclusive. 
 
 
 
 Bronze Co 
 
 in Issued. 
 
 
 Distribution of Bro 
 Issued. 
 
 ize Coin 
 
 Year. 
 
 
 
 
 
 
 
 
 
 
 Half- 
 pence. 
 
 
 
 
 Rest of the 
 
 Colonies, 
 
 
 Pence. 
 
 things. 
 
 Total. 
 
 London. 
 
 United 
 Kingdom. 
 
 Treasury 
 Chests, etc. 
 
 
 £ 
 
 £ 
 
 £ 
 
 £ 
 
 £ 
 
 £ 
 
 £ 
 
 1900 . . 
 
 133,385 
 
 28,930 
 
 5.980 
 
 168,295 
 
 37.350 
 
 118,740 
 
 12,205 
 
 190 1 .. 
 
 89,100 
 
 23.785 
 
 7.395 
 
 120,280 
 
 26,405 
 
 79,090 
 
 14,785 
 
 1902 . . 
 
 114,317 
 
 27,767 
 
 6.315 
 
 148,399 
 
 28,784 
 
 108,675 
 
 10,940* 
 
 1903 . . 
 
 85,480 
 
 24.155 
 
 4,260 
 
 113.895 
 
 14.365 
 
 83.175 
 
 16,355 
 
 1904 .. 
 
 56,495 
 
 16,465 
 
 4.935 
 
 77.895 
 
 12.875 
 
 57.935 
 
 7.085 
 
 1905 .. 
 
 76,920 
 
 19.285 
 
 4,120 
 
 100,325 
 
 15.450 
 
 79,360 
 
 5.515 
 
 1906 . . 
 
 154.365 
 
 25.330 
 
 4.825 
 
 184,520 
 
 43.110 
 
 127,340 
 
 14.070 
 
 1907 .. 
 
 188,885 
 
 34.070 
 
 4.595 
 
 227,550 
 
 55,185 
 
 145,050 
 
 27.315 
 
 1908 . . 
 
 126,440 
 
 24,260 
 
 4,880 
 
 155.580 
 
 46,055 
 
 92,080 
 
 17.445 
 
 1909 .. 
 
 88,567 
 
 25.964 
 
 7,280 
 
 121,811 
 
 30,869 
 
 71,532 
 
 19,410 
 
 191O . . 
 
 121,970 
 
 24.530 
 
 4-952 
 
 151.452 
 
 38,025 
 
 85,032 
 
 28,395 
 
 1911 .. 
 
 107,750 
 
 26,755 
 
 5,800 
 
 140.305 
 
 28,680 
 
 106,710 
 
 4.915 
 
 I912 .. 
 
 271,480 
 
 44.425 
 
 7.330 
 
 323.235 
 
 84,810 
 
 224,105 
 
 14.320 
 
 I913 •• 
 
 272,925 
 
 36,630 
 
 4.970 
 
 314.525 
 
 92,475 
 
 213.875 
 
 8,175* 
 
 1914 •• 
 
 212,759 
 
 42.265 
 
 6,110 
 
 261,134 
 
 68,314 
 
 188,920 
 
 3.900 
 
 Total. 
 
 2,100,838 
 
 424,616 
 
 83.747 
 
 2,609,201 
 
 622,752 
 
 1,781,619 
 
 204,830 
 
 Annual | 
 average] 
 
 140,056 
 
 28,308 
 
 5.583 
 
 173.947 
 
 41,517 
 
 118,775 
 
 13.655 
 
 * Exclusive of ;^ioo in one-third farthings issued to Malta. 
 
 Table C. — Imperial Worn Bronze Coin Withdrawn from Circulation. 
 
 
 United Kingdom. 
 
 Colonies. 
 
 Total. 
 
 Year. 
 
 Pence. 
 
 Half- 
 pence. 
 
 Total. 
 
 Pence. 
 
 Half- 
 pence. 
 
 Total. 
 
 Pence. 
 
 Half- 
 pence. 
 
 Total. 
 
 1908 
 1909 
 I910 
 I911 
 I912 
 I913 
 I914 
 
 £ 
 
 4.471 
 
 17.483 
 
 18,697 
 
 17.151 
 13.096 
 11,877 
 
 8,277 
 
 / 
 
 789 
 2,792 
 2,477 
 2,534 
 2,118 
 1,816 
 1. 391 
 
 £ 
 5.260 
 
 20,275 
 
 21,174 
 19,685 
 15,214 
 13.693 
 
 9,668 
 
 £ 
 160 
 
 505 
 883 
 408 
 398 
 77 
 151 
 
 £ 
 40 
 
 95 
 376 
 392 
 94 
 13 
 44 
 
 £ 
 
 200 
 600 
 1.259 
 800 
 492 
 90 
 
 195 
 
 £ 
 
 4,631 
 17,988 
 19.580 
 17.559 
 13.494 
 11.954 
 
 8,428 
 
 £ 
 
 829 
 2,887 
 
 2,853 
 2,926 
 2,212 
 1,829 
 
 1.435 
 
 £ 
 
 5.460 
 20,875 
 
 22,433 
 20,485 
 15.706 
 
 13.783 
 9,863 
 
 Total 
 
 91,052 
 
 13,917 
 
 104,969 
 
 2,582 
 
 1.054 
 
 3,636 
 
 93,634 
 
 14,971 
 
 108,605
 
 112 
 
 WAR FINANCE 
 
 Table D.- 
 
 -Wholesale Prices, Index Numbers, and Currency Note 
 Circulation. 
 
 Dates. 
 
 Economist Index Numbers. 
 
 Quarterly 
 Average. 
 
 1914- 
 
 Aug., Sept. 
 
 
 1 1 
 I22'6 126-4 
 
 125 
 
 
 Oct., Nov., Dec. 
 
 
 124-2 
 
 125-5 
 
 127-3 
 
 126 
 
 1915- 
 
 Jan., Feb., Mar. 
 
 
 136-5 
 
 142-3 
 
 150-2 
 
 143 
 
 
 Apr., May, June 
 
 
 151-2 
 
 151-2 
 
 147-7 
 
 150 
 
 
 ]uly, Aug., Sept. 
 
 
 I49-I 
 
 149-8 
 
 151-6 
 
 150 
 
 
 Oct., Nov., Dec. 
 
 
 153-2 
 
 1 59- 1 
 
 165-1 
 
 159 
 
 1916. 
 
 Jan., Feb., Mar. 
 
 
 174-5 
 
 182-2 
 
 182-4 
 
 180 
 
 
 April. May, June 
 
 
 190-5 
 
 196-3 
 
 191-5 
 
 193 
 
 
 July, Aug., Sept. 
 
 
 191-1 
 
 198-7 
 
 20 1 -o 
 
 197 
 
 
 Oct., Nov., Dec. 
 
 
 208-7 
 
 217-2 
 
 223-0 
 
 216 
 
 1917- 
 
 Jan., Feb., Mar. 
 
 
 225-1 
 
 230-5 
 
 240-9 
 
 232 
 
 
 April, May, June 
 
 
 244-5 
 
 246-0 
 
 
 
 Dates. 
 
 Statist Index Numbers. 
 
 Quarterly 
 Averfg?. 
 
 1914. 
 
 Aug., Sept. 
 
 
 8/ 
 
 •9 8c 
 
 1 
 -3 
 
 s. 
 
 
 Oct., Nov., Dec. 
 
 
 89-8 
 
 88-8 
 
 91-6 
 
 90 
 
 1915- 
 
 Jan., Feb., Mar. 
 
 
 96-4 
 
 100-9 
 
 103-7 
 
 100 
 
 
 April, May, June 
 
 
 105-9 
 
 107-2 
 
 106-4 
 
 107 
 
 
 July, Aug., Sept. 
 
 
 106-4 
 
 107-0 
 
 107-8 
 
 107 
 
 
 Oct., Nov., Dec. 
 
 
 iio-o 
 
 113-1 
 
 1 1 8-4 
 
 114 
 
 1916. 
 
 Jan.. Feb., Mar. 
 
 
 123-6 
 
 127-0 
 
 130-4 
 
 127 
 
 
 April, May, June 
 
 
 134-2 
 
 135-4 
 
 131-0 
 
 134 
 
 
 July, Aug., Sept. 
 
 
 130-5 
 
 134-5 
 
 134-4 
 
 133 
 
 
 Oct., Nov., Dec. 
 
 
 I4I-5 
 
 150-8 
 
 154-3 
 
 149 
 
 1917. 
 
 Jan., Feb., Mar. 
 
 
 159-3 
 
 164-0 
 
 169-0 
 
 164 
 
 
 April, May, June 
 
 
 I73-0 
 
 174-0 
 
 
 
 
 
 Dates. 
 
 Cu-rency Notes 
 (millions). 
 
 Aver- 
 age. 
 
 Quarterly Averr gos. 
 
 
 EcOKO- 
 
 miit 
 Index 
 
 Statist 
 Index 
 
 Aver- 
 
 Currer.cy 
 
 Notes 
 with three 
 
 
 
 
 
 Aver- 
 
 months' 
 
 
 
 
 
 ages. 
 
 ages. 
 
 lag. 
 
 I914. 
 
 Aug., Sept. 
 
 1 1 
 25-2 28-4 
 
 27 
 
 125 
 
 89 
 
 35 
 
 
 Oct., Nov., Dec. 
 
 31-4 
 
 34-5 
 
 38-5 
 
 35 
 
 126 
 
 90 
 
 37 
 
 1915- 
 
 Jan., Feb., Mar. 
 
 35-8 
 
 36-7 
 
 39-8 
 
 37 
 
 143 
 
 100 
 
 45 
 
 
 April, May, June 
 
 42-1 
 
 45-7 
 
 46-6 
 
 45 
 
 150 
 
 107 
 
 58 
 
 
 July, Aug., Sept. 
 
 45-4 
 
 57-7 
 
 72-0 
 
 58 
 
 150 
 
 107 
 
 93 
 
 
 Oct., Nov., Dec. 
 
 84-9 
 
 91-9 
 
 103- 1 
 
 93 
 
 159 
 
 114 
 
 102 
 
 I916. 
 
 Jan., Feb., Mar. 
 
 89-8 
 
 IOO-9 
 
 106-7 
 
 102 
 
 180 
 
 127 
 
 119 
 
 
 April, May, June 
 
 117-2 
 
 ii8-6 
 
 I22-I 
 
 119 
 
 193 
 
 134 
 
 129 
 
 
 July, Aug., Sept. 
 
 127-6 
 
 129-6 
 
 131-5 
 
 129 
 
 197 
 
 133 
 
 141 
 
 
 Oct., Nov., Dec. 
 
 137-2 
 
 136-6 
 
 148-8 
 
 141 
 
 216 
 
 149 
 
 144 
 
 I917. 
 
 Jan., Feb., Mar. 
 
 143-6 
 
 144-4 
 
 144-7 
 
 144 
 
 232 
 
 164 
 
 
 
 April, May, June 
 
 154-4 
 
 I59-I 
 
 ~ 
 
 7 
 
 
 
 
 [Note. — The currency note values are taken at the date that is nearest to 
 the end of a month and include currency certificates outstanding.]
 
 STATISTICAL ASPECTS OF INFLATION 113 
 
 ^ 
 
 .^^ 
 
 'Cv-i 
 
 
 a <^ 
 
 -) s 
 
 
 J:^ 
 
 <o 
 
 
 
 s ^ 
 
 
 
 S-w 
 
 Iz, 
 
 s s 
 
 >i 
 
 ^'"H 
 
 
 
 ^ 
 
 C (L> 
 
 
 t-. 
 
 3 
 u 
 
 
 
 <o 
 
 
 
 :;■!. 
 
 
 ^ Hi 
 
 
 i^ 
 
 "s^ 
 
 
 
 q2^ 
 
 
 . 
 
 
 \ 
 
 
 
 
 
 1 i 
 
 
 
 
 / 
 
 u 
 
 
 \ 
 
 \. 
 
 
 . 
 
 
 
 \ 
 
 c \ ■• ' 
 
 \ 
 
 
 
 A 
 
 , : 1 
 
 
 
 
 A 
 
 
 > 
 
 V 
 
 
 
 *v 
 
 '■■, 
 
 
 
 
 
 ^' 
 
 
 
 
 ..-'' 
 
 ;/ 
 
 
 g as 
 
 •S8DU8JfajJIQ 
 
 13 m 
 
 :'^ " 
 
 U 13 
 u 
 
 Q 
 
 hJ 2 
 
 Q
 
 114 
 
 WAR FINANCE 
 
 :^ 
 
 o 
 ^ 
 
 
 
 ^Q 
 
 fe;-S ^ui 
 
 tq 
 
 ?N 
 
 O? 
 
 
 m 
 
 •(suoiiimi) o 
 S3JON ][i' 
 
 •fstuiouojg \^ 
 
 ^^\ I' ^- 
 
 \ '*■ 
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 I \ 
 
 9 1 
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 •/i-i/w/S
 
 CHAPTER VI 
 
 A CHAPTER IN THE LIFE OF JOHN LAW * 
 
 Un Capitolo delta Vita di Giovanni Law. Da documenti 
 inediti. Memoria di Giuseppe Prato. (Torino: Fratelli 
 Bocca, 1914.) 
 
 Prefatory Note 
 
 [Hitherto the most celebrated inflationist in history has 
 been John Law — a financial genius of the first rank, who 
 anticipated two centuries ago the most modern ideas of 
 banking and credit, but against his own principles gave way 
 to inflation in his System. For a time he was in power 
 and reputation the greatest man in Europe. The man and 
 his works are worthy of special consideration in the present 
 age of inflation.] 
 
 This is not the place or the occasion to enter on the general 
 question of the neglect of Italian literature since the middle 
 of last century, when the German boom became marked. 
 On the plain question of fact there can be no doubt that at 
 present, as compared with the first quarter of last century, 
 in this country the study of (ierman and Italian have changed 
 places. In the former period every well-educated person 
 was supposed to know Italian as now he is supposed to know 
 German. " That laborious people," as Adam Smith called 
 the Germans, no doubt have their merits, but after all 
 " Hermann's a German," and has his defects. 
 
 Italian works that attain a certain popularity may no 
 doubt be read in French or English translations, but many 
 * First published in the Economic Journal, September, 1915-
 
 ii6 WAR FINANCE 
 
 valuable studies will not bear the cost of translation into 
 another tongue. 
 
 These reflections were caused by the perusal of a study by 
 Professor Prato, reprinted from the Transactions of the 
 Royal Academy of Sciences of Turin. This memoir on John 
 Law, although written purely as a study in economic history, 
 is opportune in calling attention to certain fundamental 
 monetary principles which seem to be in danger of being 
 overlooked in the present war even in this country. 
 
 Altogether apart from the suggested application (about 
 which there may be some difference of opinion) A Chapter in 
 the Life of fohii Law is an excellent piece of work. As 
 Professor Prato observes by way of introduction, there was 
 shown in the character and actions of John Law a marked 
 contrast of qualities. The man and his system {the System 
 as it used to be called) can only be understood and appre- 
 ciated when account is taken of this contrast, or series of 
 contrasts, in the life of its maker. The life of John Law was 
 a romance of that order of magniiicence and dramatic action 
 that appealed to the imagination of Alexander Dumas. 
 John Law was born in Edinburgh in 1671, of good family on 
 both sides. His father, a goldsmith (something of the old 
 George Heriot kind of banker) , amassed a large fortune and 
 acquired a considerable landed estate — Lauriston, near 
 Edinburgh. He died when his son was only fourteen and 
 left him his wealth and the estate, from which he is always 
 spoken of as John Law of Lauriston. At the age of twenty- 
 three John Law killed his man in a duel, for which he was 
 sentenced to death but pardoned by the Crown. 
 
 Steps were taken to upset the pardon by the family of the 
 dead man, and John Law found it convenient to bribe his 
 keepers (he had again been thrown into gaol) and flee to 
 Holland. This was in the year of the foundation of the Bank 
 of England (1694). He was appointed Secretary to the 
 British. Resident and some time after married a daughter of 
 the Earl of Banbury. These facts are recalled to show that 
 John Law was by no means a needy adventurer, but from 
 his youth a man of substance and a man of fashion. In an
 
 A CHAPTER IN THE LIFE OF JOHN LAW 117 
 
 age of gamblers he was also a prince of gamblers, accustomed 
 to play for very high stakes and to keep his head. From his 
 gambling he gained a first-hand practical knowledge of the 
 theory of probability that is the foundation of modern 
 banking. In Holland he became familiar with the primitive 
 system of the Bank of Amsterdam, which in its origin pre- 
 ferred the method of certainty to the method of probability. 
 John Law was much struck by the benefits conferred on 
 Holland by its banking system. He compared Scotland and 
 England with Holland and found that in all the usual 
 elements of economic strength Holland was inferior, and yet 
 in the accomplished fact of accumulated wealth greatly 
 superior. This difference was accounted for first of all by the 
 banking system. The Dutch had discovered the proper use 
 of paper money and the superiority of paper to metallic 
 currency. On this point John Law was as keen as the latest 
 advocate of the gold-exchange standard. The second basis 
 of the economic prosperity of Holland he fjound in the fact 
 that Holland knew better than any other country the art 
 of government, including the art of non-government. In 
 Holland trade and industry were allowed much more freedom 
 for development than in Britain. 
 
 Such were the elements that came to the making of John 
 Law's great System : a first-hand knowledge of banking and 
 trade as practised in the richest country in Europe, and a 
 first-hand knowledge of gambling and speculation as 
 practised amongst people of fashion. 
 
 John Law returned to Scotland when about thirty and 
 tried his 'prentice hand in his own country by publishing a 
 proposal for a Council of Trade, based on the Dutch example, 
 with his own improvements. This scheme was, however, 
 too magnificent for the Scotch, and about five years later he 
 published his notable work on " Money and Trade," with the 
 view of promoting a less ambitious scheme, the leading idea 
 in which was the issue of bank-notes based on landed 
 security. This scheme was also found too advanced for his 
 native country, and John Law resumed his old life on the 
 Continent. He gambled his way through Europe, indulging
 
 ii8 WAR FINANCE 
 
 in all kinds of speculation, and making a special study of the 
 conditions of banking and finance in all the capitals he 
 visited. In his gambling, in the narrow sense, he played for 
 such high stakes that he used counters to represent the gold 
 in the heavy money bags which he took with him to the 
 tables. As the result of these transactions John Law gained 
 a large fortune, and was well known in many of the Courts 
 of Europe. 
 
 In the course of his wanderings John Law came to the 
 Court of Vittorio Amedeo II. in Turin and propounded for 
 the benefit of this Prince a project for a bank. This is the 
 chapter of his life (1711-12) that is the subject of the mono- 
 graph under review. Professor Prato has brought to light 
 some documents bearing on this project which are of the 
 first importance in tracing the development of the System 
 and also in throwing light on the character of the man. Some 
 of the John Law documents from the Tmin Archives had 
 been published by Domenico Perrero as far back as 1874, 
 but by an oversight he had omitted to take account of the 
 most important. It is these documents which are now 
 brought to notice in the learned monograph of Professor Prato. 
 
 It is impossible in this place to do more than indicate the 
 chief results, but before doing so reference may be made to 
 the popular opinions on John Law that are still current in 
 the usual accounts of the System. This persistence in the 
 popular errors concerning John Law is easily explained. The 
 System, as actually developed in France in connection with 
 the Bank and the Mississippi scheme, gave rise (1720-21) 
 to the greatest speculative mania on record. For a time 
 France lived in what seemed to be a golden age of prosperity 
 — a veritable orgy of paper money and peace bonuses. Not 
 only was there a nominal increase in the fortunes of indi- 
 viduals, but all over the country, under the stimulus of the 
 new money, there was a great outburst of industrial activity. 
 At the same time as John Law became the most powerful 
 man in France (and perhaps in Europe) he used his power 
 for the improvement of taxation and administration, apply- 
 ing the ideas he had learned in Holland. Of the actual
 
 A CHAPTER IN THE LIFE OF JOHN LAW 119 
 
 prosperity of France during the first stages of the inflation 
 there can be no doubt. 
 
 Unfortunately, though in the first beginnings (1716) the 
 finance of the System was on a sound basis, it soon degene- 
 rated, and in its final stages the issues of paper money were 
 in such excess that after the catastrophe the notes became 
 quite valueless. After a time of the most buoyant delusive 
 prosperity France was plunged in the depths of depression. 
 No terms were too hard for John Law, and it was readily 
 believed that from the beginning he had been an unscrupu- 
 lous adventurer only bent on his own interests. The most 
 favourable view taken was that he did not understand the 
 difference between real money and paper, and that he 
 laboured under the delusion that an increase of money 
 meant an increase of wealth, and that paper money was 
 better for the purpose than metallic money. In fact, John 
 Law was supposed to have believed that an abundance of 
 paper money was the secret of national wealth. It is true 
 that soon after the catastrophe attempts were made to 
 justify John Law, but they were swept away by the virulent 
 invective of Duvernay.* Unfortunately, Adam Smith 
 accepted this version without any reference to the original 
 evidence. " The different operations of this scheme {i.e., 
 the Mississippi) are explained so fully, so clearly, and with 
 so much order and distinctness by Mr. Du Vernay, in his 
 examinations of the political reflections upon the commerce 
 and finance of Mr. Du Tot, that I shall not give any account 
 of them" ("Wealth of Nations," bk. ii., chap, ii.) 
 Adam Smith goes on to speak of the splendid but visionary 
 ideas set forth in John Law's writings, and visionary if not 
 splendid they have been considered ever since in the popular 
 text-books. 
 
 In his excellent introduction Professor Prato gives a 
 critical account of the vast literature which has grown up 
 round John Law and his schemes. The nineteenth century 
 saw some notable cases of a revulsion in his favour by 
 
 * As Professor Prato shows, the brothers Duvernay had been deprived 
 Of their lucrative offices by John Law in his financial reforms.
 
 120 WAR FINANCE 
 
 competent investigators and enthusiasts. -The social effects 
 of the disaster of 1721 were glorified by Louis Blanc and 
 Proudhon, because in the end the people gained at the 
 expense of the parasitical classes. Michelet noticed the 
 enlargement of ideas induced by John Law's industrial and 
 colonial schemes, and praised his love of humanity and of 
 the working classes, and looked upon him as the forerunner 
 of the Republic. 
 
 But in spite of these and other defenders John Law is 
 still generally looked upon as the typical inflationist, who 
 was ignorant of the elements of sound banking. 
 
 The documents now brought to light by Professor Prato 
 dispose for ever of the myth of the ingorancc of John Law. 
 They show conclusively that he submitted to the Prince 
 of Piedmont a scheme for a bank which in its final form 
 was of the soundest and simplest order. It was specially 
 sound as regards the convertibility of the notes. In the 
 first scheme (171 1) a provision had been inserted providing 
 that in case any note was not cashed on demand, then all 
 the notes, whether presented or not, should bear interest 
 at 8 per cent. This was a method of deferred or suspended 
 convertibility which was later adopted in Scotland with 
 lamentable results. In the final scheme, however (1712), 
 the specie held against the notes was to amount to no less 
 than 75 per cent. 
 
 In support of his schemes for establishing a bank in 
 Tvuun John Law submitted reasoned memoirs on the nature 
 of money and credit with important historical instances. 
 In these documents passages are reproduced verbatim from 
 his former writings, but there are several new ideas and 
 facts. In one document an interesting account is given of 
 the failure in France in 1707 of a system of notes which had 
 been issued without ])roper provisions for convertibility. 
 
 There can be no doubt whatever that Jcjlm Law, at the 
 time of his banking piojects in Turin, had a thorough 
 knowledge of the real meaning of convertibility of notes, 
 and had tested the theory by well known instances, positive 
 and negative.
 
 A CHAPTER IN THE LIFE OF JOHN LAW 121 
 
 He believed, no doubt, that paper money was better 
 than metalhc money — and riot only as a medium of exchange. 
 In particular, influenced by the origin of the Bank of 
 Amsterdam, he showed that paper money might be more 
 stable in value than the actual circulating currency. 
 
 The interesting question remains : If John Law knew so 
 well what was right, why did he consent to the abandonment 
 of all his principles in the great inflation of his Paris bank ? 
 If John Law was a sound economist, what about the sound- 
 ness of his morality ? 
 
 Professor Prato has done me the honour of referring in 
 most appreciative terms to my study of John Law published 
 in 1888.* One can read an essay nearly thirty years old 
 with the sangfroid of the impartial spectator. I am still 
 of opinion that John Law was more sinned against than 
 sinning. He was rushed along too quicklj^ by the greedy, 
 ignorant, unscrupulous Regent. He believed in his System, 
 and no doubt he thought that given time the storm might 
 be weathered. With the greatest courage he stayed on in 
 Paris to the end, and he left there the whole of his great 
 private fortune. Professor Prato brings out very clearly 
 the fact that there were combined in John Law at least two 
 different characters, who led different lives. There is John 
 Law the writer, a man of mark in the development of 
 monetary theory. There is John Law, the practical man 
 of affairs, who tried to persuade first his own country and 
 then others to put in practice his theory of credit. His 
 scheme offered to Turin was in effect, as Professor Prato 
 shows, the same as the scheme of his Paris bank on its 
 foundation. Had John Law the banker rigidly confined his 
 bank within these limits and restrained the too rapid growth 
 of his vast colonial schemes, no doubt he would now rank 
 as the greatest financier of history. But the other John Law 
 was a gambler, and as a gambler he took chances which 
 ought never to have been taken by John Law the banker 
 and de facto ruler of France. 
 
 * " Money and Monetary Problems," pp. 165 et seq.
 
 CHAPTER VII 
 
 FRIEDRICH LIST: THE PROPHET OF THE NEW 
 
 GERMANY * 
 
 Friedrich List als Prophet des neuen DeutscJiland. By 
 Karl Kumpmann. (Tubingen : J. C. B. Mohr (Paul 
 Siebeck.) 1915. Pp. iii + 52. 
 
 Prefatory Note 
 
 [The influence of List on German economic ideals and 
 practice is also discussed in the articles on Germany's 
 Economic Miscalculations (see below, pp. 187, 194).] 
 
 " A prophet is not without honour, but in his own 
 country, and among his own kin, and in his own house " 
 (Mark vi. 4) would have been a good text for Dr. Kump- 
 mann's sermon, had not the fashion for quoting Scripture 
 gone out in Germany in these latter days. In a biblio- 
 graphical note at the end of his pamphlet the author remarks 
 that the List literature is amazingly poor, and (we might 
 add) especially considering the vast amount of labour spent 
 by German writers on economists many classes below List 
 in reputation. His friend, Ludwig Hiuisser, published 
 (1850-51) his principal works in three volumes with Life, 
 but the promised supplement of the smaller works of List 
 never materialised. An occasional essay in an economic 
 journal or dictionary and a place in histories of political 
 economy only served to show how little the prophet was 
 honoured in his own Fatherland. There is no work, says 
 Dr. Kumpmann, which does justice to the higher claims 
 of List. " The best critical estimate of his work is by the 
 
 * First publishel in the Economic Journal, March, 1916
 
 FRIEDRICH List 123 
 
 Frenchman, Rist " (in the " History of Economic Doctrines," 
 by Gide and Rist). Dr. Kumpmann does not refer to the 
 appreciation of the work of List in America and in England, 
 though the excellent work of Miss Margaret Hirst (" Life 
 of List, with Selections from his Writings ") ought to have 
 appealed to him if only for the very full bibliography. 
 
 Dr. Kumpmann himself has no doubt regarding the 
 greatness of his prophet. In the very first sentence he 
 declares that Friedrich List is the most important political 
 economist that Germany has produced, and in the last 
 sentence he expresses the fervent hope that his study may 
 help to call attention to the great master. List showed 
 real original power of the first order on two sides. In the 
 first place, he put in proper perspective the importance of 
 the mental capital of the race as contrasted with the accumu- 
 lation of material values. The following sentence is one 
 of his key-positions and is of special interest at the present 
 time : — " The power of producing z^-'f^^/Z/i is therefore infinitely 
 more important than wealth itself ; it ensures not only the 
 possession of what has been gained, but also the replacement 
 of what has been lost." What is the organisation of which 
 we now hear so much as the foundation of Germany's 
 strength but a striking illustration of this foundational 
 idea of List ? It is from this standpoint that List treated 
 the controversy between Protection and Free Trade. 
 According to List, neither system is an end in itself, but 
 simply a means to achieve a certain end, namely, the 
 greatest development of productive power. Protective duties 
 were only justifiable as educative taxes. It is this part of 
 the teaching of List which has attracted most attention in 
 English-speaking countries, partly owing to the similarity 
 of the thought to that developed by Henry Carey.* 
 
 It is, however, to another side of the genius of List that 
 Dr. Kumpmann has devoted his inquiry. List was not 
 
 * The present reviewer has dealt mainly with this side of List's writings 
 m the introductory essay to the new edition of Lloyd's translation of the 
 "National System " (Longmans, 1904). Cf. also " The Neutrality of the 
 United States " (1915), ch. iv., on the Commercial Policy of Germany) on 
 List's wider views on the expansion of Germany.
 
 124 WAR FINANCE 
 
 only an economist, but a political economist, and the 
 principal application that he made of his economic principles 
 was to the case of the development of Greater Germany. 
 Of tliis development he was the great prophet and, up to a 
 point, the true prophet. The keenness of his vision can 
 only be realised by calhng to mind the old Germany of 
 the many states and the many tax systems, and comparing 
 with it the Germany of July, 1914. It was in 18 19 that 
 List adumbrated his scheme for a Zollverein between the 
 various German taxing powers. At that time Prussia alone 
 had within its boundaries sixty-seven tariffs, levied according 
 to districts, some on persons and some on things. Taxes 
 on 2,775 articles were collected by an army of 8,000 officials.* 
 The other states and cities were equally afflicted. No wonder 
 that in those days List was a Free Trader, The wonder is 
 that he did not regard as Utopian the establishment of 
 internal Free Trade in Germany- — as Adam Smith himself 
 looked on the like case in England. 
 
 But the internal economic development of Germany was 
 only the beginning of the vision. List set up a political 
 programme which was partly realised by Bismarck— the 
 practical statesman, as Dr. Kumpmann observes, who was 
 the fulfiller of so much of List's ideal. At the same time, we 
 must recognise that with List the internal and the external 
 development of Germany were inseparably joined together. 
 
 In the far-off days before the war it was always an unex- 
 pected pleasure to find a German work in which clearness, 
 proportion, and, above all, brevity were preferred to their 
 opposites. Perhaps the highest praise we can offer to 
 Dr. Kumpmann is that his pamphlet might have been 
 thought out and written in French, such are its merits- 
 such is its freedom from the besetting faults of his country- 
 men. In a note of apology at the end he simply says that 
 he has given no references, but that the reader will easily 
 find the significant passages in the index to Hirasser ! It 
 is to be hoped so excellent an introduction without incum- 
 brances to the real List ma}' be translated into English. 
 * " Life of List," by Miss Hirst, p. 11. 
 
 I
 
 FRIEDRICH LIST 125 
 
 The first section of the pamphlet declares in no uncertain 
 voice that List was a political thinker of the first rank born 
 before his time — a prophet who knew that he was writing 
 and agitating for the future. His ideas were so large that 
 at first he was looked on merely as the maker of the project 
 of an Empire, until the war of 1870-71 showed that the 
 project was in process of becoming a reality. 
 
 In a few fines a contrast is drawn between the old Germany 
 into which List was born and the new Germany of which 
 he was the forerunner. List was the great path-breaker 
 in two directions which vitally affected the internal develop- 
 ment of Germany. His scheme (18 19) for a Zollverein 
 became a reality in 1834, and the next year is given as the 
 date of the beginnings of the German railway system. 
 List looked on the construction of railways and the further- 
 ance of internal free trade as parts of the same economic 
 policy. The Zollverein and railways have made modern 
 Germany, and in both the chief builder was List. 
 
 In the second section are brought out the leading ideas 
 of List's economic system. It is admitted that in his zeal 
 for the exposure of the fallacies of " the school " he failed 
 to distinguish between the real Adam Smith and the scholars 
 who had reduced the teachings of the master to a few simple 
 dogmas. As the present writer has shown elsewhere, most 
 of the criticism of List as applied to the real Adam Smith 
 is irrelevant. But even to-day, how many English people 
 know more of the real Adam Smith than is contained in 
 h's saying that defence is of more importance than opulence ? 
 List, however, did not know or remember that Adam Smith 
 had made this utterance. He looked on Adam Smith as 
 a cosmopolitan, and he set up against him the National 
 System of Pohtical Economy. Nationalit}/ was the first 
 ground-thought of the new master. The second was the 
 displacement of material capital (" fast-frozen labour- 
 time," as the German Socialists came to call it) by living 
 productive labour as the chief requisite of national power. 
 Again, List forgot, if he ever knew, all that Adam Smith 
 had written of the hving instrument as compared with the
 
 126 WAR FINANCE 
 
 dead machine. But the attack of List on " the school " 
 was just and opportune, and his teaching was as much 
 needed in England as in Germany. In the former country 
 there were philosophers who looked for the natural dis- 
 integration of the British Empire, just as in the latter there 
 were philosophers who could not imagine the integration 
 of the German Empire. The nationality that List had in 
 view was of the kind that has since come to be called Pan- 
 German. The German race, in his opinion, was eminently 
 fitted by its natural qualities — a large number are enume- 
 rated, including a great fund of " natural morality " — for 
 entering the front rank as a world-power in the economic 
 sense. 
 
 In the third section the internal economic pohcy of List 
 is sketched in " a couple of sentences because to-day it is 
 common ground for all political parties in Germany." And 
 the first requisite — strange as it may seem to us- — is, of all 
 things, more freedom, and freedom in our English sense of 
 the term, freedom of thought, freedom of the Press, freedom 
 from the Government, etc., " for without freedom there is 
 no true Kultur- — no well-founded polity." Here it may be 
 observed that List himself was an ardent admirer of the 
 British constitution (notably, by the way, of trial by jury), 
 and he looked forward to the growth of a German constitu- 
 tion on similar hnes. 
 
 The fourth section ostensibly deals with the Zollverein 
 and the political unification of Germany, but always with 
 the understanding that United Germany is to take her 
 proper place amongst the nations. Internal union is only 
 the first step to the assertion of (jcrman national power in 
 the outer world. The prophet, in spite of his long residence 
 in the United States of America, never thought of Germany 
 as a republic, nor, on the other hand, as a despotism of the 
 Russian kind — a constitutional monarchy was his ideal, 
 but [unfortunately], as he showed, this new birth of Germany 
 was only to be expected from Prussia. The Prussian part of 
 the prophecy was true enough, but in the meantime German 
 constitutional freedom became an example of Incus a non.
 
 FRIEDRICH LIST 127 
 
 The fifth and sixth sections, which deal with the ideas of 
 List on Germany as a world-power, are of the greatest 
 interest at the present time ; but on so large a subject 
 it is impossible to attempt further condensation than is 
 effected by Dr. Kumpmann. 
 
 The ground-thoughts are three, and the first is the develop- 
 ment of the consular service. How much of the growth of 
 German foreign trade has been due to the consular service 
 we are only just beginning to realise. We are just beginning 
 to learn that, even in war-time when we rule the seas, the 
 capture of German trade means a far more effective consular 
 service. One of the most important functions assigned by 
 List to the consuls was to direct the stream of emigration 
 from Germany, and the management of what we now call 
 the peaceful penetration of every continent. His second 
 ground-thought was precisely this peaceful penetration. 
 Incidentally, List does not approve of the principal emigra- 
 tion of Germans being to the United States. The absorbing 
 power of the States is too effective. " There is not a German 
 in the States whose grandson does not far prefer the English 
 language to the German." The third requisite for German 
 world-power is a great fleet. This is a text that needs no 
 comment. 
 
 One of the most interesting parts of the work of List, and 
 also of his latest expositor, is the consideration of the 
 relations of Germany to other world-powers. List looked 
 on France and Russia as the natural enemies of Germany — 
 France on account of her restless militarism, and Russia 
 through her instinctive striving for expansion. In fact. 
 List saw in France and Russia separately what we now 
 think M^e see combined in Germany. 
 
 In the vision of List, as in the history of which it is a 
 reflex, it is always England that plays the chief part. Eng- 
 land, he thought, had gained the commercial supremacy 
 of the world by that monopoly which Adam Smith called 
 the great engine of the ]\Iercantile System. England was 
 ready to throw away the ladder of Protection when she 
 no longer needed it, but she did not mean other nations to
 
 128 WAR FINANCE 
 
 follow in her steps. Universal Free Trade had become the 
 English ideal only because at the stage she had reached it 
 best suited her interests. List maintained that the other 
 nations, and notably Germany, must follow the path of 
 Protection until the}^ were strong enough to roam at large 
 under Free Trade. So far, German interests were econo- 
 mically opposed to those of England. England was looked 
 on as always striving to keep down a rising rival. This 
 idea of English policy is still dominant in Germany, and is 
 the main reason why the Germans think we manoeuvred to 
 encircle them with hostile warring nations. 
 
 But List the prophet looked to a more distant future. In 
 the last scene of his vision he sees Germany and England 
 as allies in world expansion. Germany will assume the 
 protectorate of Turkey, but will thereby act as guardian 
 of British communications with the East. The south- 
 eastern expansion of Germany was not approved by Bismarck, 
 but has been approved by the man who dropped Bismarck 
 as pilot. At this point the vision of List — with our present 
 outlook — soars into the unreal or the ideal. The last scene 
 is a great confederation of all the European nations — a 
 great United States of Europe — under the hegemony of 
 England, England content to be an equal amongst equals. 
 And for what end ? What is to be the binding force of the 
 union ? The answer is startling, having regard to present 
 conditions. The United States of Europe was to be founded 
 and maintained to keep in check the United States of 
 America. When, relatively to the gigantic American nation, 
 England had become, so to speak, a little Holland, in her 
 own interest she must strive to lead the United States of 
 Europe against the Marinismus of America. 
 
 In his last days the idea of an alliance between England 
 and Germany became the dominant thought with List. 
 His last work was a tractate " On the Value and the Con- 
 ditions of an Alliance between England and Germany." 
 For the furtherance of this object he came to England, 
 where he witnessed the final stages of the repeal of the 
 Corn Laws, and saw face to face the leaders of English
 
 FRIEDRICH LIST 129 
 
 politics. His project of an alliance was received coldly. 
 The advantages seemed too far off to the practical imagina- 
 tion of the English statesmen. In the opinion of Dr. Kump- 
 mann the chagrin caused by the failure of this cherished 
 scheme was the immediate cause of the tragedy by which 
 he put an end to his life. A fitting omen for the greater 
 tragedy of to-day ! " Back to List " is the moral which 
 Dr. Kumpmann commends to his countrymen, but what 
 a gulf must be bridged over before the passage can be made !
 
 CHAPTER VTIL 
 
 CENTRAL EUROPE AFTER THE WAR* 
 
 " Mitteleiiropa." B}^ Friedrich Naumann. (Berlin : Georg 
 Reimer, 191 5. Pp. viii + 299.) 
 
 Prefatory Note 
 
 [Since this review was written Herr Naumann's book has 
 been translated into English, with an introduction by 
 Sir W. J. Ashley. It has given rise to great discussions in 
 Germany and all over the world.] 
 
 To be unprepared for peace is almost as dangerous as to 
 be unprepared for war. With the British Empire it is 
 perhaps even more dangerous. The extent of our Empire 
 and of our sea-power and the strength of our alliances gave 
 us time to put on our armour after the war had broken out. 
 Once, however, effective negotiations for peace have begun 
 they ought to be perfected as quickly as possible. Unless 
 the nations concerned have made up their uiinds on the 
 principles and limits of possible peace, the peace will be 
 no better than a mere cessation of war by exhaustion — 
 more like the peace of death than the peace of God. Even 
 supposing that it is a fight to a finish, and that one side 
 (our own side) is completely victorious, we cannot simply 
 lay waste Central Europe and sow its lands v/ith salt. We 
 cannot even dictate terms of peace altogether regardless of 
 the opinion and the hopes of our adversaries. The British 
 Empire is by long tradition tolerant and generous. Its 
 structure is as composite as that of the world itself, and its 
 sympathies are in conseciuencc world-wide. We desire to 
 
 * First published June, 1916, in the Economic Journal
 
 CENTRAL EUROPE AFTER IHE WAR i^.i 
 
 J" 
 
 fulfil the reasonable expectations of all other nations. 
 Everything turns on what is reasonable in the circum- 
 stances. We want to know what are the real aims of our 
 present enemies, and what, in the light of the present war, 
 will be the main lines of their policy after the war. We want 
 to look at the questions that must be answered before the 
 great peace from all points of view, including that of our 
 enemies. We must take account of the fact that the war 
 itself, whatever the military results, must change many 
 fundamental ideas of national policy. The inter-relations 
 of the States of the British Empire will be different, so will 
 the inter-relations of the Central European States. Inter- 
 national policies must be modified by these changes in 
 national policies. 
 
 In this work we are only concerned with economic 
 policy, but the economic problems of the coming peace are 
 of the kind and breadth that were discussed by Adam Smith, 
 whose large ideas of future progress were always conditioned 
 by " the circumstances of the society," by " the prejudices 
 and the interests of the times," and other disturbing causes 
 which lie beyond the domain of any pure theory of economics. 
 Even J. S. Mill, the great exponent of the deductive method, 
 was obliged to admit that in one great group of economic 
 problems it was not possible to confine the attention to 
 economical considerations alone. A similar breadth of view 
 is desirable in discussing the economic problems of the 
 coming peace. And such is the breadth of view in the work 
 recently published by Herr Friedrich Naumann on Central 
 Europe, a work which is said to have had a phenomenal 
 success in Germany, and to be there regarded as quasi- 
 semi-official in its suggestions of after-the-war policy. 
 
 Apart from any kind of hyphenated authority, the book 
 provides, in a very convenient form, a conspectus of the 
 facts and the circumstances, the opinions and the prejudices, 
 of the principal enemy countries, such as they were before the 
 war, such as they are in the war, and such as they are likely 
 to be after the war. " Reading makelh a full man," and 
 the repast offered in ' ' Mitteleuropa " is a very filling repast .
 
 132 WAR FINANCE 
 
 But it is much more than a mere array of substantial facts. 
 The success of the book in Germany is not in itself a guarantee 
 of its success with the English reader. There have been 
 since the war many successful books in Germany which, 
 to recall a Dantesque expression, are worthy of silence. 
 We have been so deluged in this country with extracts from 
 prose versions of songs of hate and the like that at first 
 sight the invitation to read through Herr Naumann's three 
 hundred closely printed pages (in German character) in 
 search of the reasonable expectations of the Germans does 
 not seem very attractive. Be it said, then, at once that 
 the work is quite different from the typical war literature 
 of Germany. There is nothing in it from beginning to 
 end — not even in tone or insinuation — that could give 
 offence to any nationalist of any country. It is also quite 
 different from the typical German work of peace-time. It 
 is eminently readable. The learning and the labour are 
 hidden away in the foundations or stored for reference in 
 an appendix. The yle is lively and well garnished with 
 similes and humour. The argument is genial and (from 
 the German standpoint, sweetly reasonable, but by no 
 means sickly sweet. There are some bitter home truths — 
 for the Germans. The Utopian is eschewed. There is no 
 dream of universal peace. On the contrary, the main trend 
 of the argument is that wars must come in the future and 
 that the first duty of the new Central Europe is to be pre- 
 pared for war. The pleasing literary style should not delude 
 the reader into supposing that the argument is not solid 
 and well-balanced. It is, indeed, so solid and far-reaching 
 that a short resume is impossible. Instead of trying to 
 outline the general treatment section by section, it seems 
 more profitable to call attention to some of the foundational 
 ideas and to some of the most significant results and pro- 
 posals. 
 
 The book was planned, so the author tells us, in April of 
 last year, when the Russians were being driven back from 
 the Carpathians. Throughout it is implied that Germany 
 will be victorious in the end, although the estimate of
 
 CENTRAL EUROPE AFTER THE WAR 133 
 
 victory is what in business circles would be called conser- 
 vative. There may be some bending of the international 
 boundaries on the East or the West, but the extent of the 
 bending does not much affect the main argument. What 
 would become of the main argument if Germany were 
 defeated is not conjectured. Victory is relied on to get 
 rid of minor jealousies and to smooth away national friction. 
 As one result of the war there is to be a kind of blood brother- 
 hood. Mutatis mutandis, it might be thought that defeat 
 would lead to mutual recrimination , and insistence on 
 national interests, but that is another argument. 
 
 One of the most remarkable of the foundational ideas is 
 that even if the Central Powers are completely victorious 
 neither Germany nor Austria-Hungary can stand alone. 
 " Klein and allcm " will mean destruction to Germany 
 whatever the result of the war. This is not the cry of the 
 eagle that we have become familiar with. But there is no 
 doubt about the contention. The possibility of various 
 alliances with other Great Powers is discussed in the most 
 detached way. France, Greater Britain, and Russia are 
 all weighed, and all are found wanting as allies, though the 
 two former are said to be in theory quite possible. A similar 
 argument is applied to Austria-Hungary. Still less than 
 Germany can the Dual Monarchy stand alone. Isolation 
 means partition. Therefore for both Central Empires the 
 absolutely necessary solution must be a combination closer 
 than any ordinary alliance — closer even than that main- 
 tained during the war. Germany and Austria-Hungary 
 must be bound together so as to attain the maximum of 
 military power, and, as an essential foundation, the maxi- 
 mum of economic power. This close union of the two 
 Empires is the necessary foundation of the new Central 
 Europe. To begin with, it would be useless to try to gather 
 in the other outlying nations which it is hoped in the future 
 will be added to the new Great Power. The Northern 
 nations and the Southern nations are for the present left 
 out. First of all, the foundations must be well and truly 
 laid before the full structure can be raised. The complete
 
 134 WAR FINANCE 
 
 designs of the architect are not wanting in grandeur. " Some- 
 time " he hopes that both France and Italy will find that 
 then- destiny is Central-European. Belgium is not men- 
 tioned by name — Herr Naumann is a great master of the 
 art of silence — and Bulgaria, Serbia, and Turkey are put 
 on the general waiting list for future admission to the 
 Central-European State. Eventually it would seem that 
 Central Europe is to embrace all Europe that is not Russian. 
 But to begin with the author insists that the Union must 
 not extend beyond Germany and Austria-Hungary. This 
 is the maximum for a beginning, but also it is the minimum. 
 Most of the argument for conversion is directed to Hungary. 
 Hungary is absolutely necessary for the new Central Europe. 
 The vanity of the Magyars ought to be flattered. Germany 
 cannot stand alone, and the chief prop is to be Hungary. 
 But there are difficulties. Somehow we are reminded of 
 the Athanasian Creed. Each of the three Unities of the 
 future Trinity — which is not three States, but one Super- 
 State — will have its own difficulties of give and take in the 
 process of super-absorption. The new Central Union is to 
 be a union passing the expression of treaties, but it is not 
 to be a merely sentimental bond of affection, though there 
 is some pretty writing — not quite so convincing as usual — 
 from the brotherhood standpoint. Herr Naumann's reflec- 
 tions on the imperfections of treaties and the impossibility 
 of taking into account all the possible changes of circum- 
 stances are noteworthy. He seems to think that treaties 
 are made to be broken, or, at the least, are liable to be 
 misunderstood and misinterpreted. The view is supported 
 by the very latest of practical illustrations. The result is 
 that the new Central Europe must be bound together by 
 something stronger^ — far stronger^ — than any treaties or 
 written covenants. But there are difficulties. Even the 
 Germans — and especially the Prussians, and more par- 
 ticularly the little Prussians (Herr Naumann dehghts in 
 the adaptation of English modes of thought and expression) 
 — must give up the old habits of thought and of practice 
 and take on the new. The case of Hungary is the most
 
 CENTRAL EUROPE AFTER THE WAR 135 
 
 difficult, but the admission of Hungary as a full partner in 
 the new political business is absolutely necessary. 
 
 There is a masterly account of the divergent interests of 
 the three great nations (with their sub-nationalities), and 
 the case against union is put so strongly that the appeal to 
 necessity is, in the end, the real solvent of the difficulties. 
 To each of the Powers isolation means destruction — even 
 to Germany. That is the whole burden of the argument. 
 The demonstration is ruthless. It must be Central Europe 
 or nothing. A most luminous account of the development 
 of present conditions out of the past is an excellent example 
 of that historical method which throughout has dominated 
 the thought of the writer. His object, it is true, is to outline 
 the project of a new Central Europe, but it is not to be 
 made de novo. It must grow up in the manner beloved of 
 our own Burke. Each of the three Unities is to surrender 
 to the indissoluble Trinity what is necessary to the common 
 good — military and economic — but is to retain all the 
 national characteristics and functions that are not essential 
 to the new State. Great stress is laid on the retention of 
 original independence in all non-essentials. The old dis- 
 tinction beloved of the examiner between the Bundesstaat 
 and the Staatcnhund is brought in to clear up the ideas. 
 The new Central Europe can never be a Bundesstaat — the 
 Staaten must retain too much. At the same time, the dis- 
 tinction is shown to be rather one of words than of facts. 
 The distribution of the appellation depends on the estimation 
 of the value of the elements retained compared with the 
 elements rejected. The real difference will depend on the 
 nature of the binding. 
 
 Two points call for notice at this stage. If Germany 
 cannot stand alone, a fortiori no smaller nation can stand 
 alone. Herr Naumann takes it for granted that the day 
 of the little nation is over. Every little nation must be, 
 so to speak, a client or a dependant of a big World-Power. 
 No little nation can ever again take any real independent 
 part in the decision of peace and war. It must do as its 
 dominant Super-State may direct. Sovereignty in the
 
 136 WAR FINANCE 
 
 proper sense is reserved for the Super-States. Germany 
 itself is too small for a Super-State — hence the need for 
 a Central Europe. The new Central Europe must be big 
 enough to balance Greater Britain, or Russia, or the United 
 States of America — the other three Super-States. Herr 
 Naumann seems specially impressed by the absorbent 
 capacity of the British Empire. Why should the new Central 
 Europe not show in the course of time a similar power ? 
 This leads to the second point of interest in connection with 
 the disappearance of the sovereignties of the little nations. 
 Herr Naumann has been greatly influenced in his project 
 of a Central Europe by the course of British history and 
 by the ideas under which the British Empire has been built 
 up. He condemns the old Germanisation by suppression — 
 suppression of language and of race character- — and he 
 looks forward to diversity in unity. German toleration in 
 religion after the style of the ancient Roman precedent is 
 not to be wondered at, but toleration in education is also 
 preached. Variation from the Prussian type is to be per- 
 mitted and even commended. The difference between the 
 old British Empire and the new Central Europe is that in 
 the latter from the beginning in all essentials organisation 
 is to be supreme. Organisation back from the eighteenth 
 century has been the strength of Germany — that also is 
 one of Herr Naumann's foundational ideas. A curious 
 proof of Germany's superiority in organisation is given by 
 Herr Naumann's answer to the very pertinent and in- 
 teresting question : Why are we Germans not beloved by 
 other nations ? The Germans all the world over have been 
 frankl3/ astonished by the absence of love, not to say the 
 presence in most cases of the other thing. Herr Naumann 
 hnds the solution in the jealousy in other peoples of the 
 superior German organisation. Probably he is right. 
 Organisation is a word of very wide import. It includes 
 many forms of peaceful penetration which are distasteful 
 to the people penetrated, especiall}'' when the full conse- 
 quences are revealed in a state of war. 
 
 In the dctcrminalion between essentials and non-cssentials
 
 CENTRAL EUROPE AFTER THE WAR 137 
 
 in the new State — how much is to be left to the Unities and 
 how much taken up in the Trinity — a considerable debatable 
 margin is left. In fact, in spite of the wealth of facts and 
 history, the argument is in the main simply a reiteration 
 of certain leading ideas. The precise application is left to 
 the march of events — solvitur anihulando is the practical 
 answer to most of the practical difficulties. 
 
 At the same time these leading ideas are by no means 
 nebulous. They are made perfectly plain, and their prac- 
 ticability is shown in detail. The details may be changed, 
 but they sufhce to show how the thing may be done. Perhaps 
 some better way may be found ; perhaps not. The point 
 is that the ideas are real working ideas, and not emotional 
 sentiments. 
 
 The root idea of all is power- — Central European power — • 
 power in war and power in trade. The discussion of power 
 in war is limited partly by the present existence of a state 
 of war and the consequent censorship, and partly by the 
 fact that Herr Naumann is a civilian. The treatment is 
 certainly up-to-date — with one exception. The defence of 
 the future, he thinks, will consist first in thousands of miles 
 of trenches and barbed wire, and, secondl}^ in the accumula- 
 tion of stores of all the materials necessary for national 
 existence — e.g., food, raw materials, and munitions. Above 
 all, there must be organisation — Teutonic organisation — to 
 pile up and distribute the stores and to man the trenches 
 and ensure the mobility of the Super-State forces behind. 
 There is one omission. No mention is made of the air 
 services. In the next forty years, however, warfare in the 
 earth beneath may give pride of place to warfare in the 
 air above. Perhaps the silence of Herr Naumann in this 
 matter is due to the German censCr. Herr Naumann, with 
 his British ideas of toleration and humanity, could hardly 
 have mentioned the air services without a condemnation 
 of the sporadic bombing in the dark of the island of Great 
 Britain. Incidentally, he may be pleased to hear that his 
 present reviewer was privileged to witness a zeppelin display 
 in what the British censor calls the south-east of Scotland.
 
 138 WAR FINANCE 
 
 It was not magnificent and it was not war ; it was more 
 like a railway accident than a military operation. The 
 reviewer can well understand Herr Naumann's censored 
 reflections. Perhaps, after the war, his views on this method 
 of preparing for the new Central Europe ma}^ be published 
 unrestrained in our Economic Journal. 
 
 One thing certain about the new Central Europe is that 
 it is to be a first-class military State. There are dark hints 
 that all did not work so well as outsiders were led to believe 
 in the Central Powers' organisation in the present war. The 
 defects are to be remedied by a thorough Prussification. 
 Other nationalities may retain their war-trappings, etc., 
 but the new Central-European army must be one. Not 
 once, but repeatedly, it is asserted that tlie future is certain 
 to bring forth more wars, and therefore the first duty of 
 Central Europe is to provide for war. The new State is, 
 above all things, to be a military State. 
 
 At the same time it is recognised that military power 
 is inseparable from economic power. Accordingly, the 
 economic arrangements of the new Union must, first of all, 
 have regard to defence. Defence is of more importance 
 than opulence. But opulence is necessary to defence, and 
 opulence is the short name for " material interests." The 
 new Union must be strong economically. It must, theielore, 
 be so constructed as to secure to the component parts various 
 forms of economic equality, including equalit}/ of oppor- 
 tunity. With this object in view an analysis is given — in 
 itself most excellent — of the economic possibilities of each 
 of the three great nations and of their sub-nations. The 
 principal industries are classified, and so are the principal 
 kinds of foreign trade. An equitable distribution is to be 
 made of national resources, and account is to be taken of 
 the different stages of economic development. The details 
 are liable to change according to experience, and must be 
 read in the book itself. But the ideas that are here applied 
 arc of the utmost consequence as regards the after-the-war 
 policy of other nations. ' They are of special importance to 
 the States of the British Empire.
 
 CENTRAL EUROPE AFTER THE WAR 139 
 
 One of these provocative ideas is that in itself a customs 
 union is not sufficient as the basis of an economic union, and 
 its importance is Hable to be exaggerated. In the main a 
 customs union as regards the outside world is a thing to be 
 desired, but such a union would affect very differently the 
 different parts of the new Central Europe. The sudden and 
 complete abolition of the present fiscal restrictions between 
 Germany and Austria and Hungary would lead to disturb- 
 ances of a ruinous character to important industries. The 
 two latter countries could not withstand the full blast of 
 German competition. In the same way, if the distribution 
 of foreign trade were to be left to the survival of the fittest, 
 Austria and Hungary could not compete with Germany in 
 many branches which from the national standpoint it is 
 important that they should still maintain. 
 
 The remedy for the possible evils of such competition is to 
 be found in regulation, and the principal kind of regulation 
 is the regulation by combination. Organisation by syndi- 
 cates of various kinds is the recognised basis of the produc- 
 tion and distribution of the new State. In some cases 
 bounties and in others preferential duties may suffice, but 
 for the most part a much more developed control is contem- 
 plated. Spheres of influence are to be assigned both in the 
 home and in the foreign trade. In all the great industries 
 and trades there is no place for unregulated competition. 
 Its place as the primal force is taken by monopoly of varying 
 degrees. 
 
 In this syndicating of industry and trade the interests of 
 labour are not forgotten. Professedly quite as much atten- 
 tion is given to labour as to capital, and the profession is not 
 merely verbal, but real. The author recognises that the 
 basis of Central Europe must be democratic. It is true that 
 in a sentence he disclaims the possibility of a republican 
 form of government as non-historical, but it is always implied 
 that the rulers must rule in accordance with the sentiments 
 and the interests of the ruled. During the present war 
 evidences have accumulated that it is not a war imposed on 
 a reluctant people by a military caste, but a war backed by
 
 140 WAR FINANCE 
 
 the full power of national opinion. Recent reports on the 
 guiding ideas of the German trade unions seem to show that 
 the German masses look on the war as necessary to promote 
 their material interests, and they frankly disbelieve that 
 England is actuated by any other motives — e.g., regard for 
 treaties, the rights of smaller nations, etc. 
 
 The close connection between military and economic 
 power in Herr Naumann's argument is perhaps responsible 
 for the fact that in dealing with foreign trade he has dis- 
 carded the old ideas of reciprocal advantage in favour of 
 the still older ideas of mutual exploitation. Peace is war 
 deferred or suppressed. There is no room in Herr Naumann's 
 philosophy for Adam Smith's contention that the richer the 
 neighbours of any State so much the better for that State. 
 The economic policy of the new Central Europe is to be an 
 aggressive policy, directed in every case to the end that in 
 the distribution of the advantages of foreign trade Central 
 Europe should secure the greater share. 
 
 There are many side issues of great interest and importance 
 in Herr Naumann's book. Such, for example, is the probable 
 effect of the war on the development of State Socialism. 
 From this point of view the recent advances of the Kaiser 
 to the Socialists, as reported in the Press, are not so much 
 dynastic as evolutionary. Industrial feudalism with the 
 Kaiser as First Industrial is an old idea. Herr Naumann 
 is of opinion that already the present war has shown that 
 Central Europe is prepared to become a great Socialist State. 
 The German defeat of the British blockade is ascribed to the 
 adoption of Socialistic methods. 
 
 There can be little doubt that the policy foreshadowed in 
 this book of Herr Naumann represents a large body of 
 opinion both of the ruling official classes and of the masses. 
 In case of a Central Powers' victory, or even of a drawn 
 battle, the policy seems likely to be realised — that is to say, 
 that a great Socialist Military State will be established in 
 Central Europe which, in the course of time, will endeavour 
 to absorb the remainder of non- Russian Europe cither by 
 peaceful methods or by war. France, for example, is told
 
 CENTRAL EUROPE AFTER THE WAR 141 
 
 that she will have to choose between playing the part of a 
 somewhat bigger Portugal to England or taking her place 
 with the Central European State. Germany cannot stand 
 alone ; still less can France, and still less can Italy. 
 
 Herr Naumann, it is true, writes very much under the 
 influence of English ideas as opposed to the old Prussian 
 ideas. One would suppose from his argument that already 
 the Government of Germany is constitutional, as we under- 
 stand it, and that the Government of the new Central 
 Europe will be still more constitutional. The little nations 
 are to be left full national independence — except as regards 
 military and economic power. Except — the saving clause is 
 a wide one. Government by consent is to be the new watch- 
 word. But when all allowances are made for the influence 
 of English ideas, the Central-European ideal is not the ideal 
 of the British Empire. We cannot think of that Empire 
 growing into a Socialist Military State. Our natural policy, 
 however, must be modified by the policy of a neighbouring 
 Super-State. We must be prepared for the possibility of a 
 still stronger Central Europe.
 
 CHAPTER IX 
 AFTER THE WAR--WHAT ? IN. GREAT BRITAIN 
 
 Social Unrest ; Enforced Economy ; Protection ; 
 Imperial Solidarity 
 
 Prefatory Note 
 
 [This paper was written for the New York Annalist 
 (March 6, 1916), as one of a series by different economists 
 dealing with the principal countries after the war.] 
 
 The subject of the probable economic position of Great 
 Britain and the British Empire after the war naturally falls 
 into two main divisions. First, what will be the effect of the 
 war on the actual condition of the people ? and, secondly, 
 what will be the effect on the general industrial and economic 
 policy of the State ? 
 
 The most fruitful method of inquiry is to consider sepa- 
 rately the principal economic changes introduced by the war 
 and to estimate how far they will be modified by the advent 
 of peace. We certainly cannot take it for granted that after 
 the war there will be an easy and rapid resumption of pre- 
 war conditions, and that after an interval for transition 
 things will go on much the same as before the war. 
 
 Not much is to be gained by taking a general historical 
 survey of the endings of former great wars because the 
 conditions are so different. As a matter of history some 
 wars have been followed by a great outburst of economic 
 activity and others by a prolonged period of depression. 
 The Germans say that the effects of the Thirty Years' War 
 (i6i8-4(S) lasted down to the nineteenth century. On the
 
 AFTER THE WAR -WHAT ? 143 
 
 other hand, France made a very rapid recovery from the 
 war of 1870-71. 
 
 With regard to the present war there are prophets of 
 both kinds ah-eady busy with general forecasts. There are 
 prophets of evil and prophets of business as usual. The 
 value of all such forecasts depends entirely on the reasons 
 by which they are supported and by the correctness of the 
 estimate of the particular forces at work. 
 
 The Agents of Production^Land 
 
 Economic science ought to enable us to give a fairly 
 accurate analysis of the situation, and to suggest the 
 principal lines of inquiry. Let us look at the question first 
 from the point of view of Production as if the nation were a 
 great organisation for turning out the streams of things of 
 . all kinds that supply the wants of the people. From this 
 point of view we say that there are three great agents of 
 Production — Land (typical of natural powers and resources), 
 Labour and Capital. 
 
 Take first Land in this extended meaning. The other 
 belHgerents have had large parts of their lands wasted and 
 put out of condition. Even Germany has suffered in East 
 Prussia. In the United Kingdom, on the other hand, the 
 land as such has probably benefited by the war. There has 
 been no hostile invasion, and the rise in prices has encouraged 
 the farmers to keep the land in the best condition possible. 
 The State has given its assistance in providing the means of 
 fertilisation. Agriculture in all its branches has experienced 
 exceptional prosperity. On the conclusion of the war it will 
 probably be in a stronger position than for many generations. 
 
 Labour and Material Capital 
 
 In the same way there has been no destruction of mineral 
 wealth or of the means of transport by which the natural 
 resources of the country are utilised. In brief, so far as the 
 first great agent of national production is concerned, the 
 United Kingdom and the British Empire will be as strong as
 
 144 WAR FINANCE 
 
 ever and ready lor the resumption of the old extractive 
 industries in full play. 
 
 With regard to Labour, although compulsory military 
 service has been adopted, exemptions have been made ol 
 important industries and of important classes of labour. 
 The general complaint is that too many men have been 
 " starred " rather than too few. The governing idea has 
 been to keep the industrial position of the country in a 
 satisfactory condition. 
 
 Unfortunately, there will be an actual loss of many 
 thousands of men by the wastage of war, but, on the other 
 hand, the war has called into industrial activity large numbers 
 of women and children. There will certainly be no difficulty 
 after the war in the supply of labour. On the contrary, 
 there may be some trouble in finding occupation for the 
 disbanded soldiers and in displacing the women. 
 
 The case of the third great agent in Production, namely. 
 Capital, is not so simple. The various forms of fixed capital 
 will no doubt remain with us practically unimpaired. In 
 some cases there may be deterioration, e.g., through the want 
 of renewal of railway plant, but from the national point of 
 view the actual wastage of fixed capital cannot be very 
 great. There has been, on the other hand, a considerable 
 creation of a mass of fixed capital for war purposes, and some 
 of this may be converted to the arts of peace without very 
 great loss, e.g., some of the great engineering works con- 
 structed by the State. In many cases the needs of war have 
 been met by the conversion of peace industries, and the 
 reconversion will not be difficult. On the whole, there will 
 be some loss of fixed capital through the war, but hardly 
 enough to seriously affect the national productivity 
 
 Immaterial Capital 
 
 With regard to the forms of productive capital, whicn 
 economists class as immaterial, the loss will also be incon- 
 siderable. In some respects there may be a positive gain. 
 The war has awakened the people generally to the recogni- 
 tion of the uses of science in all its branches and the need for
 
 AFTER THE WAR— WHAT ? 145 
 
 greater organisation. Even the Government and the 
 immediate advisers of the Government have begun to see 
 that the Hving immaterial capital is of greater importance 
 than the accumulated dead capital in material forms. We 
 may learn from our enemies some things in this direction, 
 and through all its history the British people has imitated 
 foreign methods whenever it seemed desirable. 
 
 Contrary to what was expected after the first few days the 
 banking system of the country resumed its normal working. 
 The published results of the year 1915, the first complete year 
 of the war, are surprising. Banking business has increased 
 except in one direction, namely, through the restrictions 
 placed on Stock Exchange dealings and on the creation of 
 new companies and the issues of new capital. Except in 
 London — through the restriction of financial business of this 
 kind — there has been a large increase in bankers' clearings 
 and in the gross profits of banking business. 
 
 The absorption of a large part of the gross profits in writing 
 off depreciation of securities, though lessening dividends for 
 the time, will so far put the banks in a very strong position 
 after the war. There will no doubt be difficulties when the 
 inevitable contraction of Governmental credit operations 
 begins to operate, but so far as national production is con- 
 cerned our banking system has remained in lull working 
 order. If any fault is to be found it is that the credit system 
 of the country has worked too easily and is partly account- 
 able for the inflation of prices that has certainly taken 
 place. 
 
 Surpassing Records of Peace 
 
 The general result of this broad survey of Production is 
 that in the middle of the second year of the war the economic 
 prosperity of the United Kingdom has surpassed the records 
 of peace. Ofiicial unemployment is a fraction of i per cent. 
 Never were the records of pauperism so low. All the figures 
 point to an increase in the consuming power of the people. 
 No doubt a large part of this consumption is of imported 
 commodities, but from the production point of view tliis
 
 146 WAR FINANCE 
 
 importation has only been possible by our credit organisation 
 and by our former accumulations of money power. 
 
 So far as Production is concerned, there is no reason to 
 suppose that the United Kingdom or the British Empire has 
 suffered up to the present any serious impairment of its 
 powers. Even if the national debt before the end of the war 
 should amount to the colossal sum of four thousand millions, 
 which is quite possible, we must remember that the chief real 
 burden for the future consists in the payment of the interest, 
 (say) some two hundred millions. A good deal of this money 
 will be in the nature of a redistribution of national wealth, 
 as the greater part of the loans are internal. The necessary 
 taxes will in part check consumption, and the check from any 
 point of view except the pleasures of the moment may be 
 beneficial to the nation at large. Production, however, is 
 only one of the great economic departments, and is inex- 
 tricably intertwined with Distribution and Exchange. The 
 end of the war may bring dislocations in these departments. 
 
 Effect on Wealth Distribution 
 
 The war has had much more serious effects on the distribu- 
 tion of wealth than on the aggregate amount available for 
 consumption. In normal times the distribution of the 
 " earnings-and-interest " fund depends in the main on an 
 endless series of contracts made by the various owners or 
 controllers of the great productive agents. From year to 
 year there are only moderate changes in the proportions of 
 wages, profits, and rents in their various forms. Again, as 
 regards the part taken by the State for public purposes, the 
 expenditure is for the most part determined, under normal 
 peace conditions, by the policy of former years. There are 
 fixed charges for the old debt and for the public services, 
 military and civil. In short, a very small proportion of the 
 public revenue is at the disposal of the Government (with 
 the approval of Parliament) for new purposes. 
 
 The sudden advent of a great war changed altogether the 
 immediate powers of the Govcri)ment over the actual distri-
 
 AFTER THE WAR— WHAT ? 147 
 
 biition of the wealth of the nation. And the indirect effects 
 of ("rovernmental action were equally serious. The Govern- 
 ment, instead of having to dispose of an -almost negligible 
 amount of new revenues in any one year, has had at its 
 disposal (say) fifteen hundred millions of new money. 
 Almost the whole of this new money is raised by loans, and 
 almost the whole of it is ostensibly de\'oted to the conduct 
 of the war. The reduction of civil expenditure, whether 
 national or local, has been insignificant. Equally negligible 
 has been the economy effected by the people in general, 
 since the indirect taxation imposed has been altogether 
 inadequate. 
 
 Spending the Money : Labour and Wages 
 
 The first consequence of this plan of new money under 
 State control has been a sudden and great increase in the 
 demand for all kinds of labour and capital that could be used 
 for war. This rise in demand was accompanied by a corre- 
 sponding rise in wages and profits. Under our voluntary 
 system it was thought just or advisable to offer large allow- 
 ances to the dependants of our soldiers. The money wages 
 paid to the soldiers was ten or twenty times as great as with 
 the other belhgerents, and yet apart from patriotic motives 
 was not sufficient to draw all the labour required. Partly 
 with the view of attracting men the real wages of the soldiers 
 reached a very high standard. Rations were most liberal, 
 both in quantity and in qualit3^ No doubt under patriotic 
 impulses a good many men joined the army at a loss of 
 material comfort (apart from the risks of life and hmb), but, 
 on the other hand, there were large numbers of ordinary'' 
 workers who benefited by enlistment. This is especially 
 true if we take as the unit the family. Many working-class 
 families received more money than before the war and had 
 not the bread-winner to keep. 
 
 The result was that the Governmental expenditure on the 
 war raised the general rate of wages. As the demand for 
 munitions became more urgent the wages of labour were 
 raised more and more in the war industries. The ine^■itable
 
 148 WAR FINANCE 
 
 consequence was a sympathetic rise in all other forms of 
 labour. A general demand sprang up all over the country 
 for advances in wages in the name of war bonuses. On the 
 whole the advances in wages were more than sufficient to 
 balance the rise in the cost of living. 
 
 A rise in the general standard of comfort of the labouring 
 classes seems a paradoxical outcome from the greatest war 
 on record, especially when we look at the state of labour in 
 the other belligerent countries. The reason is, first, that 
 our Government obtained its loans more easily and, owing to 
 our voluntary system, gave full play to the consequences of 
 a rise in the demand for labour. Other countries had less 
 money and, being organised for war under the compulsory 
 system, were able to exercise a buyers' monopoly for all sorts 
 of services. Instead of giving labour more than the ordinary 
 peace rates, in many cases they gave less. 
 
 Capital Profits and Rent of Land 
 
 The case of capital was practically on all fours with that 
 of labour, but with an even greater advantage in bargaining 
 against the Government. In this country it had come to be 
 recognised as a secondary law of nature that the Government, 
 in the making of war contracts, must pay extravagant 
 prices. This war being the greatest of all our wars, it was 
 taken for granted that the extravagance must also be the 
 greatest. In the course of time some of the war contracts 
 have been revised ; some of the war industries have been 
 controlled, and some of the excess profits have been seized 
 by the tax-gatherer, but the general result has been a great 
 rise in the profits of all industries connected with the war. 
 There has been a sympathetic reaction on other employments 
 of cai:)ital. The money profits and the money wages in the 
 favoured industries had to be spent. It is not part of British 
 human nature to save extra earnings in any parsimonious 
 manner. And again we are brought face to face with the 
 extraordinary fictitious prosperity of the war ! 
 
 In the foregoing account of the movement in profits no
 
 AFTER THE WAR— WHAT ? 149 
 
 attention has been paid to the different elements into which 
 gross profits may be analysed. In every element there has 
 been a rise. Even as regards insurance against risk the 
 Government took over some of the risks or provided cheap 
 insurance. Monopolies were permitted to emerge and 
 flourish. Unearned increments abounded. E\en the rate 
 of interest on first-class securities was promptly raised by the 
 Governmental demand. The British Government, after 
 about a year of war, had to give 5 per cent, with indirect 
 bonuses. 
 
 With regard to the rent ol agricultural land the land- 
 owners have not so far benefited very much, if at all. The 
 land is let in general to tenant farmers on such customary 
 or contractual conditions that rents cannot at once be raised. 
 It is the farmers who have got the unearned increments in 
 the meantime. The estates of many landowners are mort- 
 gaged heavily and the rise in the rate of interest has been 
 taken advantage of by the mortgagees. But the rise in 
 rents must come about in due season if prices and farmers' 
 profits remain high. 
 
 General Result of Survey 
 
 Tlie general result of this rapid survey of distribution is 
 that the earnings of labour and of capital have increased 
 greatly through the vast Governmental expenditure. That 
 the rise has not been merel}^ a nominal or money rise is 
 shown by the great increase in consuming power from beer up 
 to costly furs. As a nation we have been spending capital 
 with profusion. Certain classes have suffered severely, 
 especially the professional classes with fixed or lowered 
 incomes, who have to bear the increase in income tax. 
 
 With regard to the third great department of economic 
 activity, namely, Exchange, the chief effects have already 
 been noticed in connection with Production and Distribution, 
 for exchange is fundamental in both. There are, however, 
 certain forms of the organisation of exchange which call for 
 some special notice, notably the rnonctar}' system and 
 foreign trade.
 
 150 WAR FINANCE 
 
 Banking 
 
 With regard to money and banking on the outbreak of war 
 in the expectation of a crisis various emergency measures 
 were taken, some of which v/ere unduly prolonged. Before 
 the end of 1915 the Government had issued more than a 
 hundred millions of Treasury notes for ten shillings and one 
 pound. Having regard to the enormous development of 
 our cheque system, this great amount of new paper money 
 seemed unnecessary. Coincidently, there was an expansion 
 of bankers' credits owing to Governmental guarantees of 
 various kinds. The natural result was a general inflation 
 of prices. Of the fact of the general rise in prices there is 
 no doubt, and the great increase in money and credit is, to 
 say the least, a contributory cause. But for the Treasury 
 notes the banks must have contracted their advances. The 
 rise in prices (whatever be the cause assigned) reacted on 
 public expenditure. The loans were sooner expended and 
 new money had to be raised. Much would have more. 
 Prices followed money and money prices in a vicious circle. 
 
 So far importation was increased and exportation was 
 diminished. The adverse balance of trade consequent on the 
 war was aggravated. Attempts were made to correct the 
 foreign exchanges, especially with the United States, by 
 public and private loans, and when these proved insufficient, 
 by the export under Governmental control of securities. 
 The ulterior effects of these loans and sales of securities must 
 be to diminish our power of importation after the war. 
 Instead of receiving interest from abroad in the way of 
 imports, we shall be imposing taxes in the home country to 
 pay interest. 
 
 Adverse Trade Balance 
 
 The adverse balance of trade is due in the first place to the 
 exceptional war demands, but with lower prices in this 
 country the deficit would have been less. One of the most 
 notable advances in price was in freights. Much mercantile 
 shipping was swept from the seas and much was com- 
 mandeered by the British (lovernment. The shortness of
 
 AFTER THE WAR— WHAT ? 151 
 
 supply and the rise in demand in some cases raised freights 
 ten or twenty fold. The rise in freights would not have been 
 so great but for the general rise in prices and the consequent 
 encouragement to importation. Even in such a staple as 
 wheat the difference in price in England and the United 
 States is not wholly accounted for by the difference in freight. 
 The rise in freights in one way was equivalent to an increase 
 in one of our invisible exports, but, on the other hand, it 
 checked visible exports and also operated against us so far 
 as neutral shipping was concerned. Some of our shipping 
 was also diverted to the carrying trade for neutrals. 
 
 After the War 
 
 We are now in a position in the light of this broad survey 
 to estimate the probable course of economic development 
 after the war. 
 
 The change of the greatest immediate importance will be 
 the cessation of public borrowing and of excessive Govern- 
 mental expenditure and the substitution therefore of a great 
 increase in the burden of taxation compared with the former 
 peace level. The fictitious prosperity of the war with all 
 that it implies must come to an end. The change will be so 
 severe that in all probability under various excuses Govern- 
 mental borrowing will not cease altogether, but it will be 
 increasingly difficult and must be very greatly contracted. 
 
 In the same way all the varied emergency measures for 
 supporting credit must be much lessened and in the end 
 disappear. Here again, no doubt, there will be an outcry 
 for more money, and for more assistance to the banks. It 
 will be very difficult to manage the transition from the 
 inflation of war to the natural level of peace. The attempt 
 to take away the war bonuses on wages will no doubt be 
 resisted by labour. To revert to a lower standard of comfort 
 on the return of peace will seem unnatural and unendurable. 
 Possibly some grave social disturbances may arise. Every- 
 thing points to a fall in wages. The price of labour must 
 share in the general fall of prices with the reduction of 
 paper money and war credits. There is likely to be an
 
 152 WAR FINANCE 
 
 over-supply of labour, while the special war demands will 
 have ceased. The expansion of exports can hardly be 
 enough to replace the fall in the war demands for labour. 
 
 Similar reasoning applies to profits. During the war the 
 rise in profits has been due to public expenditure, and the 
 revival in the trades and industries of peace will not give 
 at once ^n adequate compensation. 
 
 Under these circumstances, on the return of peace there 
 will no doubt be a great outcry for Governmental assistance 
 to industry. The wisest policy, no doubt, will be to refuse 
 all such assistance as may demand more new money. 
 Whether our statesmen Mali be strong enough to make the 
 refusal and to insist on real and effective economy remains 
 to be seen. The moral effect of our war extravagance will 
 be hard to eradicate. The people are not likely to take 
 kindly to the more simple life and to the repayment of old 
 debts. They are more likely to expect with the return of 
 peace an increase in the social benefits which were being 
 provided in an increasing degree before the war. They will 
 suppose that the war simply stopped for the time the 
 advance in social improvement and that the march toward 
 State Socialism will be resumed where it was left off. 
 
 Governmental Management 
 
 On the other hand, the Governmental management of 
 industry during the war has not been such as to encourage 
 its further extension. All the old complaints against the 
 substitution of State management for private enterprise 
 have been revived during the war. It is true that more 
 and more State management was asked for, but, as it was 
 given, the complaints increased. The most persistent of 
 all complaints has been that the Government did not take 
 sufficient advantage of the business powers of the community. 
 
 Everybody has been crying out for business men to 
 replace incompetent State officials. Such has been the 
 outcry that the popular disbelief in the benefits of red 
 tape has been greatly strengthened. When the inevitable 
 commissions of inquiry have revealed to some extent the
 
 AFTER THE WAR— WHAT ? 153 
 
 details of Governmental mismanagement and extravagance, 
 a healthy reaction in favour of self-help may set in. In any 
 case, the extension of socialistic interference will meet the 
 insuperable obstacle, in the course of a very short time, of 
 the provision of the necessary money. As the war will 
 probably double our taxes, to pay for interest, pensions, 
 etc., new revenue for social experiments will be difficult to 
 obtain. 
 
 The dangers of social disturbances ought not to be exag- 
 gerated. The British people are not inclined by nature or 
 tradition to social revolution. In case of need they are 
 capable of great endurance. If only they realise that the 
 taxation is necessary they will shoulder the burden without 
 destroying the system by which the national wealth has 
 been built up. It is quite possible that a strong reaction 
 in favour of individualism may take the place of any further 
 extension of socialism. Socialism when it has to be paid 
 for by taxes is too expensive a luxury after a great war. 
 
 But with regard to our external trade and generally our 
 relations with foreign countries, a strong demand has already 
 arisen for the abandonment after the war of our former 
 easy-going free trade. Debates in Parliament and resolu- 
 tions by chambers of commerce all over the country show 
 unmistakably the trend of public opinion. The conclusion 
 of war will not be marked by the pre-war conditions of 
 foreign trade. 
 
 Restraints and Preferences 
 
 Already definite proposals are being discussed for par- 
 ticular restraints and preferences. Even if the British 
 people were persuaded that the adoption of a restrictive 
 policy toward our present enemies would involve a monetary 
 loss they would accept the loss. In particular, they are not 
 likely to look again with complacency on the growth of 
 German navigation and the expulsion of our ships from 
 old trade routes. Some revival of our old navigation policy 
 seems very likely. And for the very same reasons for which 
 Adam Smith approved of the old Navigation Acts. These
 
 154 WAR FINANCE 
 
 old regulations, he allowed, were not favourable to the 
 growth of national opulence, and they were the outcome 
 of national animosity (against the Dutch), but for all that he 
 considered that they were the wisest of the commercial 
 regulations of England. His pithy summary, " Defence 
 is of more importance than opulence," is being quoted by 
 every chairman at the annual meeting of his company. 
 
 Coincidentally with restraints on our enemies there will 
 be, no doubt, an extension of the system of preferences to 
 our allies, and especially there will be a closer union between 
 all the States of the British Empire. Before the war a closer 
 commercial union was rendered difftcult by the divergence 
 of interests and the difficulty of the initial cost. The feeling 
 of solidarity created by the war will induce every part of 
 the Empire to look more to the power of the whole rather 
 than to its own particular interests. 
 
 German Methods 
 
 This is not the occasion to discuss the German methods 
 of waging war. From the German point of view they may 
 be capable of defence in the eyes of the German people and 
 their friends. But, such as they are, they have aroused in 
 the British people such a degree of national animosity as 
 can only be effaced by length of time and a complete repudia- 
 tion by the German people of the morality of militarism. 
 So long as the present national feeling endures it is safe to 
 predict that on the return of peace German ships will not 
 fmd tlie ports of the British Empire so free of access. Nor 
 will llu- same easy entrance be admitted of (lerman subjects 
 into our industries, and still less will they be permitted to 
 exploit monopolies under the shadow of our law. 
 
 It is quite possible that this anti-German policy and the 
 attempts to capture German trade by scientific tariffs may 
 break down owing to the difficulties involved. In spite of 
 the strong praise of Adam Smith and the national worship 
 of the power of the sea, the Navigation Acts were the first 
 part of the old system to give way owing to the immense 
 practical difficulties of making the necessary reciprocity
 
 AFTER THE V;.\R— WHAT ? 155 
 
 treaties with other nations. But within practical Hmits a 
 considerable change in our foreign trade policy and in our 
 inter-imperial policy may be made with every prospect of 
 success. 
 
 There can be no question that the attempt will be made 
 after the war to advance British commercial power at the 
 expense of German power, especially by a closer union of 
 the British Empire. Before the war we had no more jealousy 
 of the advance of German trade than we had of the advance 
 of the trade of the United States. For a considerable time, 
 however, we shall not look with such an easy mind on 
 German advancement. 
 
 Unfortunately, one of the results of the w^ar will be to 
 bring into favour military modes of thought in dealing with 
 the commerce of nations. For a time there will be a rever- 
 sion to the old ^belief that the gain of one nation means the 
 loss of another, especially if one nation is German and the 
 other British.
 
 CHAPTER X 
 
 TRADE AFTER THE NAPOLEONIC WAR * 
 
 with some comparison between present conditions 
 and those of a hundred years ago 
 
 Prefatory Note 
 
 [Far too little attention has been given by economists in 
 recent times to the great work of Tooke on the Napoleonic 
 war period and after. The historical part of the present 
 paper is drawn largely from Tooke.] 
 
 Next to the war itself the subject that is perhaps most 
 discussed at the present time is trade after the war. Trade 
 is taken in its largest sense as covering practically all the 
 economic activities of the nation : e.g., agricultural and 
 manufacturing production, transport and markets — both 
 home and foreign — employment and wages of labour, employ- 
 ment and profits of capital, the burden of war debt and 
 taxation, credit and banking, and the effects on prices. All 
 these topics are closely inter-connected, and all and more 
 must be drawn in due proportion for a proper picture of 
 " trade after the war." When the picture has to be drawn 
 largely from conjecture the general effect will vary according 
 to the stress laid on the different elements. From the same 
 facts and conjectures the economic forecast may be black 
 or bright according to variations in stress. 
 
 The application of the historical method to what occurred 
 after the great Napoleonic wars ought to be useful in suggest- 
 ing lines of inquiry and in realising the complexity of the 
 
 * First published in the Scottish Historical Review, Julj^, 191 7.
 
 TRADE AFTER THE NAPOLEONIC WAR 157 
 
 subject. There are points of resemblance and of difference 
 well worthy of consideration, both in general and in par- 
 ticular. 
 
 A point of general interest may be first noticed. It was 
 commonly believed in the Napoleonic period that the return 
 of peace would create an immense foreign demand for the 
 goods of this country and its colonies. Accordingly as 
 soon as peace seemed probable there was an outburst of 
 speculation in all kinds of exportable commodities. It may 
 be said to have reached its height just after the abdication 
 of Napoleon in the spring of 1814. The extravagant specu- 
 lation for British manufactures caused an unusual demand 
 for labour with rising wages. Incidentally there happened 
 to be a fall in the prices of provisions, so that the manu- 
 facturing workers were much better off. 
 
 So far the first general comparison is favourable to our 
 optimistic prophets who foresee a great peace boom both 
 for capital and for labour. It soon turned out, however, 
 that as regards trade the prosperity was artificial and 
 ephemeral. The shippers found that the effective demand 
 for British goods and colonial produce had been greatly 
 over-rated. The desire element in the demand was strong 
 enough. The foreigners intensely wanted our goods, both 
 home-made and colonial — there was a great demand in 
 the sense of desire to possess, but the means of purchase 
 were proportionately limited. Accordingly great losses 
 were incurred on goods shipped to the Continent in 1814, 
 and towards the close of the year numerous failures took 
 place, which continued in increasing numbers in 1815 and 
 the early part of 1816. 
 
 The popular belief of that time in a peace boom is well 
 brought out in the evidence of a hand-loom weaver before 
 a Select Committee of the House of Commons in 1833, 
 quoted by Tooke.* " Can you remember what was the 
 reason that the price of weaving sixty-reed cambrics was 
 so high in 1814 ? " Answered, " It was in consequence of 
 the battles of Leipzic and Dresden. A general opinion pre- 
 
 * Vol. ii., p. 6, n.
 
 158 WAR FINANCE 
 
 vailed that if we could succeed in destroying the power of 
 Buonaparte, wages would get up and prices would be 
 confirmed to this country for ever ; and prices got up to 
 an enormous height, and they came down as fast." 
 
 The fall in the prices of produce from the highest in 
 1813-14 to the lowest in 1815-16 was remarkable. Raw 
 cotton fell to just one-half, sugar to less than one-half, 
 logwood and pepper to one-third of the highest points. 
 Copper fell from £140 per ton in 1813-14 to £85, lead from 
 £33 fo ;^i8, and tin from £174 to £102. 
 
 The fall in the prices of produce was irregular, but the 
 lowest point of depression between 1814-17 was in general 
 touched at the end of 1816 and the beginning of 1817. 
 
 In this p>eriod there was also a considerable depression 
 in the shipping interest. There was indeed a more extended 
 field for tonnage, but voyages were quicker through the 
 removal of the impediments of war, a large mass of shipping 
 was liberated from transport, and the cost of shipbuilding 
 fell with the cost of materials, and with it the price of ships. 
 
 The general conclusion of Tooke * is well worth quoting 
 in full :— 
 
 " Thus there was from 1814-16 a very general depression in 
 the prices of nearly all productions, and in the value of fixed 
 property, entailing a convergence of losses and failures among 
 the agricultural, and commercial, and manufacturing, and mining, 
 and shipping and building interests which marked that period as 
 one of the most extensive suffering and distress. Of that great 
 and memorable fall in prices the principal part beyond what was 
 the effect of the seasons and a recoil from the extravagant specu- 
 lations in exportable commodities is clearly attributable to the 
 transition from war to peace ; not from war as having caused 
 extra demand, but as having obstructed supply and increased the 
 cost of production ; nor to peace as having been attended with 
 diminished consumption but as having extended the sources of 
 supply, and reduced the cost of production," 
 
 When it is stated in the foregoing passage that the period 
 1814-16 was one of most extensive suffering and distress, 
 the reference is to the employers' capital and profits, and 
 
 * Vol. ii., p. I.:.
 
 TRADE AFTER THE NAPOLEONIC WAR 159 
 
 not to the general conditions of the masses of the people. As 
 regards the labouring classes, Tooke goes on to say that in 
 
 " 1814-15 and until the renewed rise in the price of provisions 
 they were in a comparatively satisfactory state ; as the price of 
 labour had not fallen in anything like the proportion of the fall of 
 the prices of necessaries . . . the great bulk of the working 
 population were in an improved state compared with that which 
 they experienced in 1812." 
 
 One of the most important results of the application of 
 the historical method to economics is the observation that 
 with a general rise in prices from whatever cause as a rule 
 the working classes suffer more as consumers and gain less 
 as producers than the employing classes. Conversely, in 
 the case of a general fall in prices the working classes benefit 
 relatively to the employers — money wages do not fall so 
 rapidly as prices, and in some cases do not fall at all, e.g., from 
 1876-96. Like all other empirical laws, however, this 
 law of prices must not be rashly extended in time or place 
 without full consideration of the attendant circumstances. 
 Accordingly, before any application can be made of the 
 effects of the changes in the price-level of the Napoleonic 
 period regard must be paid to the causes of the changes. 
 
 On this subject a very keen controversy arose which has 
 been prolonged down to our own times. The origin and the 
 progress of the controversy are displayed in full detail in 
 Tooke's great " History of Prices," and indeed this work 
 itself was undertaken in the first place with special reference 
 to this controversy. The magnum opus, the first two 
 volumes of which were published in 1838, was founded on 
 earlier essays which arose directly out of the controversy. 
 
 As is observed by Tooke in his Introduction, in the publica- 
 tions without number on the subject of the high range of 
 prices during the great wars and the low range in the follow- 
 ing period, the explanations offered fall into two great 
 classes, or are concerned with two great causes, namely, the 
 War and the Currency. 
 
 During the first two years of our present great war people 
 were content to ascribe the continuous rise in prices to the
 
 i6o WAR FINANCE 
 
 war simply, but in the beginning of 1917, with the issue of 
 the great consohdating loan, more attention was directed to 
 the rise in prices as consequent on the inflation of currency 
 and credit. 
 
 It seems probable that in the near future the old con- 
 troversy between War and Currency will be revived with 
 reference to price movements in and after the present war. 
 The analogies and contracts with the former period cannot 
 fail to be instructive. 
 
 Tooke himself began with a preliminary inquiry into the 
 effects of war and currency on prices in former epochs of 
 English history. He proved, as regards war, that the 
 popular idea that war always raised prices was not well 
 founded historically, inasmuch as ranges of high and low 
 prices were about evenly divided between periods of war and 
 peace. In the same way he showed that the nature and 
 extent of the effects of variations in the quantity of money 
 had been too easily taken for granted even by Adam Smith 
 himself. 
 
 War is a very short word, but a state of war involves a 
 multitude of causes and conditions acting in different ways 
 on the economic state of the nation. Similarly as regards 
 currency, there is no simple connection between the aggregate 
 of the various forms of currency and of credit on the one side 
 and prices on the other. Just as the state of war must be 
 analysed so must the state of the circulation of money and 
 its representatives. 
 
 In this short paper no more can be attempted than a state- 
 ment of the principal results of the former controversy, with 
 a brief indication of some of the points of contrast with 
 present conditions. 
 
 First of all, Tooke himself called attention to a cause of 
 high and low prices which, in his opinion, often altogether 
 outweighed the effect of war or currency, namely, the state 
 of the seasons. One of the most valuable parts of his work 
 is the detailed examination of the effects of the seasons on 
 prices. England during the Napoleonic war period was 
 practically dependent on its own food supplies. A shortage
 
 TRADE AFTER THE NAPOLEONIC WAR i6r 
 
 due to bad weather raised prices out of all pioportion to the 
 deficiency. As a consequence, a period of bad seasons was 
 the very best for the farmers, and also for the landlords, if 
 it was long enough to allow for an adjustment of rents. The 
 Corn Laws * were practically inoperative in the whole 
 Napoleonic period. The great cause affecting corn prices 
 was the weather. People were too much struck by the rise 
 in prices to observe that even in this period there were years 
 of low prices. Tooke showed in general and in particular 
 that just as scarcity unduly raises, so abundance unduly 
 lowers, prices. Part of the excess supply of one or two good 
 years may be stored, but a continuance of good seasons will 
 cause prices to fall still more by the release of the stored 
 grain. 
 
 The best way to see the full effect of the seasons in this 
 Napoleonic period is to take account not only of the average 
 prices of the year but of the fluctuations. The average 
 price of wheat in 1801 is given in the usual tables as 115s. iid. 
 Certainly a high price, but " before the harvest of 1801 was 
 secured the price of wheat in the London market reached 
 180s. and the price of the quartern loaf was for four weeks 
 IS. lo^d." t In 1812 the average is given as 122s. 8^., but 
 the price in August reached 155s. J By December, 18J3, the 
 price had fallen to 73s. 6d., less than half of August, 1812, 
 but the average for 1813 was io6s. 6d. 
 
 It is quite clear from Tooke's " History " that the average 
 high prices of corn were due to the bad seasons. A single 
 good season was sufficient to break the prices, and with two 
 good seasons prices fell greatly. Between March, 1801, and 
 March, 1804, wheat fell from 155s. to 49s. 6d., the sharpest 
 fall on record. 
 
 - Before the present war the influence of British weather had 
 ceased to be of any practical importance as regards the 
 price of grain, as was shown by the great agricultural depres- 
 sion in the early 'seventies, in which bad seasons received 
 
 * Cf. my " History of the English Corn Laws " (Social Science Series), 
 t Porter's " Progress of the Nation," p. 452. 
 + Tooke, vol. ii., p. 342. 
 
 W.F. M
 
 i62 WAR FINANCE 
 
 no compensation from liigli prices, which indeed made a low 
 record for modern times. Even during the course of the 
 present war it cannot be said that British weather has been 
 the chief cause of the rise in food prices. The world harvest 
 of 1916 was deficient, and the destruction of tonnage and 
 the demand for transport had increased. In 1917 the 
 submarine menace has been intensified, and the available 
 supply of cereals depends most upon importation. Steps 
 have been taken in this country to enlarge greatly the area 
 of tillage and restore our food independence. If the new 
 cultivation were protected by import duties the price of 
 British wheat would again be governed by British weather. 
 It seems probable, however, that minimum prices will be 
 maintained by bounties (direct or indirect) and not by import 
 duties. After the war it is hardly likely that world harvests 
 will be deficient. It is more probable that the recent great 
 advance in agricultural scientific work will rapidly bear 
 fruit under the stimulus of exceptional demand. Hitherto 
 agricultural practice on a large scale has lagged behind 
 scientific discovery, especially in the United States. 
 
 It seems probable also that after the war the relative 
 shortage of ships will soon be made good, partly by new 
 construction and partly by the liberation of tonnage from 
 naval requirements. 
 
 So far as the conditions of supply are concerned, the cause 
 of most importance in the time of Tooke, namely, the seasons, 
 will take a second or much lower place. It is also possible 
 that the foreign peace demand for our goods may not be so 
 ephemeral or defective as in the earlier peace period. 
 
 But there remains for comparison one point of vital 
 importance, namely, the currency. Tooke showed very 
 clearly that the effects on prices of the Bank Restriction (that 
 is to say, the adoption of inconvertible notes) during the war 
 were exaggerated. Very often a rise in prices occurred, due 
 to bad seasons or other obstructions of supply, which was 
 ascribed to excessive issues of notes when, in fact, no excess 
 had occurred. Tooke's examination of the actual conditions 
 of the circulation is a model of judicial inquiry. All the
 
 TRADE AFTER THE NAPOLEONIC WAR 163 
 
 same it is now generally agreed that the Restriction (or the 
 inconvertibility) had more influence than he supposed. 
 
 An impartial investigation of monetary conditions in the 
 present war shows that there has been considerable inflation 
 I have written at length elsewhere on this matter.* Here it 
 need only be said that inflation is now so generally admitted 
 that the main concern of financial authorities is to discover 
 the best means of deflation. 
 
 Granted present inflation, it follows of necessity that if the 
 gold standard is restored to its pre-war simpUcity and 
 efficiency, there must be a great fall in prices. The present 
 high level is largely due to the dc facto abandonment of the 
 gold standard. 
 
 After the Napoleonic wars the principal feature in the 
 economic situation was the falling prices. There was some 
 recovery from the fall already described (1814-16), but from 
 1818-22 there was another great fall — according to the index 
 numbers of Sauerbeck — a fall from 142 in 1818 to 100 in 
 1822. There was a reaction up to 1815, and then the 
 depression of prices was renewed. The general result was 
 that the cessation of war was followed by a long period of 
 falling prices. 
 
 This fall in prices was ascribed by many to the re- establish- 
 ment of the gold standard, and the resumption of specie 
 payments by the Bank of England, in accordance with the 
 Report of the famous Bullion Committee of 1810. All the 
 well-known arguments in favour of inflation were brought 
 forward in opposition to the reversion to the gold standard 
 in its old form. Many argued that in effect the war had 
 established a new level of prices and that it would be most 
 unjust to resort to the old level. Contracts, it was urged, 
 had been entered into which would be vitiated by being 
 interpreted in terms of the old standard. The results of 
 this old controversy were incorporated in all the text-books 
 on political economy. The rugged arithmetic of Ricardo 
 
 * Cf. " Inflation and the Rise in Prices," Economic Journal, December, 
 1916, and the " Statistical Aspects of Inflation " in the Journal of the Royal 
 Statistical Society, July, 1917. See above, Chapters IV., V.
 
 1 64 WAR FINANCE 
 
 was transmuted into the thin hicidity of Mill (in Mr. Balfour's 
 unhappy phrase). All this learning, however, had been 
 forgotten before the present war, or rather it was branded 
 as academic and therefore non-practical. It was forgotten 
 that Ricardo made a fortune in business, that Tooke was a 
 great merchant, and that the old controversy on inflation 
 and deflation was waged by practical men interested in 
 practical results. There can be little doubt, howe^'er, that 
 the old controversy will again break out after the war, and no 
 better preparation could be made than a careful study of the 
 great war and the great peace a hundred years ago.
 
 PART II
 
 Prefatory Note to Part II. 
 
 The following papers (with the addition of a few notes) 
 are printed exactly as they appeared in the Scotsman at the 
 dates pre-fixed. Apart from any critical or constructive 
 value they may possess, it is hoped that they maybe useful 
 as a record of British economic war policy and of the 
 opinions by which it was guided. As explained in the 
 General Introduction, the writer alone was responsible for 
 the papers as published. 
 
 J. S. N. 
 
 September, 1917.
 
 CHAPTER I 
 
 THE EFFECTS OF WAR ON GENERAL PRICES 
 
 [August 3, 19 1 4) 
 Prefatory Note 
 
 [This article was published the clay before the declaration 
 of war by Britain. In view of the rise of prices that has 
 actually taken place we are now inclined to suppose that in 
 war-time a great rise in prices is inevitable. Historically this 
 is not true. Even in the present war up to the end of 1914 
 there was no great rise in prices — the Econotnist index 
 number rose less than 10 per cent, up to the end of Sep- 
 tember, and for the last quarter of the year remained 
 stationary. In the United States in September, 1913, the 
 index number was 103 ; in September, 1914, it rose to 104, 
 but fell back to 103 in September, 1915. As shown in a later 
 article (" Economic Prosperity of War Time," see below, 
 p. 241) , during the first five months of war trade in the United 
 States was depressed. As the war was prolonged and ex- 
 tended each of three great causes here examined contributed 
 with increasing force to a rise in prices. Openly or tacitly 
 the beUigerents resorted to inconvertibihty. The gold 
 extruded into the neutral countries raised prices there in 
 terms of gold. In the belligerents besides inconvertibility 
 there was an extraordinary inflation of credit. Especially 
 with the extension of submarine activity the war assumed 
 more and more an anti-commercial character and prices 
 rose by the impediments to supply. If the war had been as 
 short as the Franco-Gemian war of 1870-71 and Britain had 
 kept out of it, the course of prices would probably ha\'e been 
 the same as in 1870-71, i.e., a moderate rise in the war and a 
 boom afterwards.]
 
 i68 WAR FINANCE 
 
 There has always been a popular idea that war raises 
 prices. In the first volume of his great work on the " History 
 of Prices," Tooke examined the idea with special reference to 
 prices in England in the Napoleonic wars. By way of intro- 
 duction, he shows that in the eighteenth century wars with 
 high prices and wars with low prices were about equally 
 divided. He accounts for the very high prices of the 
 Napoleonic wars by their specially anti-commercial character 
 coupled with very bad seasons. If we look to the course of 
 prices in England during the later wars of the nineteenth 
 century, we find that in the Crimean War (1854-55) prices fell 
 slightly, in the American Civil War there was a considerable 
 rise in prices, but prices had begun to fall before its conclusion. 
 In the Franco-German War (1870-71) there was a slight rise 
 during the war, followed by a very great rise after the peace 
 culminating in 1873. In the South African War prices fell, 
 and in the Russo-Japanese War there was a rise. It is quite 
 clear from this rapid survey of the wars of the past two 
 centuries that we can make no simple appeal to experience ; 
 we must follow the method adopted by Tooke, and look to the 
 different ways in which wars may affect prices, and consider 
 which of these modes is of the greatest importance at the 
 present time. Of course, by prices we mean general prices, 
 such as are indicated by the averages of prices as given by 
 the index numbers of the Economist or Mr. vSauerbeck. 
 Everyone knows that, estimated in this way, general prices 
 in England suffered an enormous fall from 1873-95, in 
 Sauerbeck's figures from in to 61 — that is to sa^^ general 
 prices fell about 45 per cent. Since 1895, there has been a 
 continuous rise (with fluctuations) , especially marked during 
 the last ten years. From the figures of the last year it seemed 
 as if the rise had been checked. The question is — What 
 will be the effect of a great European war on general 
 prices ? 
 
 It is found by economic analysis (confirmed by reference 
 to experience) that general prices depend on a number of 
 forces acting in different directions. The difficulty in any 
 particular case is to select the most important and to balance
 
 THE EFFECTS OF WAR ON GENERAL PRICES 169 
 
 the effects. In the present paper three great causes only 
 will be considered, which are always of fundamental import- 
 ance, and at present seem to dominate the situation — namely 
 gold, credit, and the volume of trade. 
 
 Since the great discoveries of gold in Australia and 
 California in the 'hfties movements in general prices have 
 always been associated with the gold supplies. The fall 
 after 1873 was ascribed to the fall in the production of gold, 
 and the rise after 1895 has been also ascribed to the enormous 
 increase in the output. At first sight it looks as if general 
 prices moved simply in response to the decrease or increase 
 in the supplies from the mines. It is easy to show, however, 
 that the connection between the supply of gold and the 
 movement in prices is by no means simple. The change in 
 the supplies of new gold is only one, and not always the 
 most important influence. Many observers, for example, 
 have been so much struck by the growth of credit that they 
 seem to think that an increase or decrease of gold is now of 
 no more importance than that of any other staple of com- 
 merce. Any form of wealth, they suppose, can be made the 
 basis of credit, and credit means purchasing power. 
 
 It is no doubt true that credit-substitutes for metallic 
 money are used for the great mass of commercial trans- 
 actions, but, as the events of the last week have shown in a 
 startling manner, gold is still the basis of the credit structure. 
 Even before the war crisis there were signs that credit had 
 been pushed to the extreme, especially in new countries, e.g., 
 Canada, which had been borrowing largely from Europe for 
 the development of their resources. 
 
 Whether we consider gold or credit, or both, as the main 
 cause in affecting the amount of " money " in circulation, 
 we must also take account of the work to be done. If there 
 are more things to be exchanged then more money is 
 required. Or, putting it otherwise, expanding trade could 
 not be carried on except at a lower level of prices, unless 
 there were a corresponding increase in " money " and its 
 effective substitutes. 
 
 With these general ideas as guides the effects of a great war
 
 170 WAR FINANCE 
 
 on prices may be considered from throe points of view — 
 namely, as affecting gold, credit, and trade. 
 
 As regards gold the general effect of war is to cause an 
 exceptional demand, and at the same time to withdraw large 
 amounts from effective monetary uses, the gold being 
 hoarded in different forms, e.g., in the reserves of banks, in 
 war chests, in the coffers of private persons. Probably last 
 week the demand for gold was unprecedented, whilst on the 
 Continent at any rate a good deal vanished from effective 
 monetary use. The relative scarcity of gold, coupled with 
 this exceptional demand, must (other things being the same) 
 tend to pull down general prices. With regard to credit, it 
 is obvious that the outbreak of war, or even the fear of war, 
 is the most powerful of all causes in putting a check on the 
 expansion of credit and in causing a great contraction. The 
 rise of the Bank rate to lo per cent, is the surest sign of the 
 strain imposed on credit. Credit is now international, and 
 a collapse of credit cannot occur on a large scale in any one 
 country without affecting all other countries. The crisis 
 in credit has been felt as severely in New York as in Paris — 
 more severely, indeed, because in New York credit is more 
 highly (and rashly) developed. Here again, then, a great 
 war is likely to cause a great contraction of credit, and so far 
 a fall in prices such as usually occurs after any great commer- 
 cial crisis. 
 
 It may, of course, be argued that if credit is lessened in 
 one form it will be increased in others, especially by the issue 
 of bank-notes. If, however, these notes are convertible 
 into gold on demand, the increase of issues, compared with 
 the destruction of ordinary forms of credit, must be very 
 small. If, for example, the Bank Act of 1844 is suspended 
 in this country, that only means that the Bank of England 
 may issue more than the statutory amount of notes without 
 gO'ld being offered for them. It does not mean that the notes 
 are inconvertible, or that the Bank will not give gold on 
 their presentation. 
 
 If the notes issued are really inconvertible — that is to say, 
 if the banks concerned do not give gold on demand, then
 
 THE EFFECTS OF WAR. ON GENERAL PRICES 171 
 
 there is no limit to the rise in prices in terms of these notes 
 except in the Umitation of the issues. But under these 
 conditions gold itself would also rise in price, or would bear 
 a premium, and in estimating the true movement in prices 
 the depreciation of the notes must be allowed for. In 
 general the issue of inconvertible notes leads to a contraction 
 of the credit of the issuing country. 
 
 There remains the effect of war upon trade, or more 
 generally on the volume of commodities to be circulated by 
 means of the money, whether metallic or credit-substitutes. 
 Here the effect is not so obvious. If the war is widespread 
 enough to seriously check production, then so far the ten- 
 denc}^ of prices is to rise. But how far does a great war 
 check the world's production ? In the parts devastated no 
 doubt the effect is clear, but what about the parts of the 
 world which are not in a state of war ? Are we not told even 
 now that Europe's misfortune is America's opportunity — 
 that there will be an enormous boom in American trade ? 
 This complacent prophecy does not seem on general grounds 
 likely to be fulfilled. If America pours goods into Europe, 
 how is she to be paid ? Not in goods, for the very idea is that 
 less are produced ; and not in credit, for again there is less 
 to draw on. 
 
 The general effect of war on the volume of trade would 
 seem to be a considerable reduction. There will, therefore, 
 be less work to be clone by money and money substitutes, 
 and therefore so far prices would tend to rise — meaning, of 
 course, general prices. 
 
 If now we try to make an estimate of the resultant effect 
 of these three great influences operating on general prices, 
 there seems to be no doubt that the loss in money power 
 (gold and credit) will more than counter-balance the check 
 to production. Production will only be directly checked in 
 the area of disturbance — in the rest of the world that remains 
 at peace things will go on much as before, except for the 
 foreign trade, and all the world over the foreign trade is of 
 relatively small importance compared with the home trade. 
 
 The general conclusion, then, seems to be that as the
 
 172 WAR FINANCE 
 
 result of a great European war we may expect a general fall 
 in prices on the average. There will, of course, be a great 
 disturbance of relative prices inter se : some things will rise 
 greatly and others will suffer a very great fall, but on balance 
 the trend will be downward. If such a general fall of prices 
 does occur, the sequel must be a fall in profit and an increase 
 of unemployment, even if the British Empire keeps out of 
 the war. If we are involved it is possible that, as in the 
 Napoleonic wars, the war may assume an anti-commercial 
 character, and the consequent increase in cost of production 
 and check on the volume of trade may become the dominating 
 influences and cause a rise in prices.
 
 CHAPTER 11 
 WAR AND PAPER MONEY 
 
 [August i8, 1914) 
 
 In a recent article in the Times it was stated amongst 
 other signs of encouragement that the country is full of 
 money. The question at once arises — What is money ? 
 The standard money of this country is gold, and the total 
 amount of gold in the banks and in circulation is generally 
 reckoned at a little over one hundred millions sterling. In 
 Germany, it may be noted, the amount is nearly two hundred 
 millions. Besides the gold we have also a certain amount of 
 token coins made of silver and bronze. But as the metallic 
 value of the silver coins is at present not half the nominal 
 value, the silver in the shilling being perhaps worth fivepence, 
 silver token coins are not full legal tender, but only to the 
 extent of forty shillings. 
 
 Besides the gold and silver there are also bank-notes. By 
 the latest return the notes issued by the Bank of England 
 are about fifty millions, of which nearly fifteen millions are 
 held by the Bank itself. In normal times the notes of the 
 Bank of England are also legal tender except by the Bank 
 itself. The Bank must on demand give gold for its notes. 
 There are also other bank-notes, issued by other banks, 
 but all these notes also are merely promises to pay gold on 
 demand. Gold is the foundation of the whole system. 
 
 In ordinary times bank-notes, silver, and bronze circulate 
 side by side with gold at their full nominal value, and there 
 is never any hesitation in accepting any of them. The 
 proportion of gold, silver, and notes in circulation simply 
 depends on the convenience of the people. People prefer 
 a bank-note to a large sum of gold, and, on the other hand,
 
 174 WAR FINANCE 
 
 for certain payments the small change of token money is 
 required. No one thinks of the fact that the silver in twenty 
 shillings is not worth the gold in half-a-sovereign, or that 
 the material value of the bank-note is that of the paper on 
 which it is printed. 
 
 It may perhaps be thought that the bank-notes simply 
 represent so much gold retained in the banks, but even of 
 the Bank of England this is not true. The notes issued are 
 in excess of the total gold held by the Bank, and this gold 
 has a very much heavier burden to bear than simply securing 
 the convertibility of the notes on demand. 
 
 But before looking at this other burden it may be well to 
 state how it comes that coins and notes can for an indefinite 
 period, if issued under proper conditions, maintain a value 
 so much above their material value. The answer is simply 
 that the value is a scarcity value. In other words, every- 
 thing depends on the principle of limitation. If silver were 
 coined in unlimited quantities, the metallic and the nominal 
 value would coincide. Accordingly, the coinage of silver 
 is limited. The printing of bank-notes is also placed under 
 stringent limitations. Although in essence a bank-note is 
 simply a promise to pay, bankers are not allowed to make 
 as many of such promises as they please. In every country 
 the issue of bank-notes is placed under very stringent limi- 
 tations, though the nature of these limitations varies. In 
 the normal case all these methods of limitation in practice 
 reduce to securing the immediate convertioility of the note. 
 So long as the holder of a note can get from the bank 
 the corresponding gold, the note must keep its nominal 
 value. 
 
 It is, however, quite clear that when we say the country 
 is full of " money " we cannot refer to these two hundred 
 millions or so of gold and silver coins and bank-notes. And 
 if we mean that we have plenty of money to carry on a great 
 war in foreign parts, and by money we mean gold, w^hich 
 is the only true international money, all the rhoney that is 
 really available is the gold in the Bank of England, which 
 by the latest return is about thirty two millions sterling.
 
 WAR AND PAPER MONEY 175 
 
 The truth, of course, is not only that there is not enough 
 money to carry on a war, but that there is not enough to 
 carry on the trade of the country on a strictly cash basis. 
 Under present conditions the principal means of payment 
 is not money (whether gold or bank-notes), but cheques. 
 Cheques are balanced against one another, and the gross 
 total cleared at the Bankers' Clearing House for last year 
 was over sixteen thousand millions sterling. It would have 
 been utterly impossible for the business represented by 
 these figures to have been carried on by means of cash 
 (including notes). 
 
 In this country the curious thing is that whilst bank-notes 
 are limited by a cast-iron system, with regard to cheques 
 there is practically absolute freedom. A banker may give 
 a cheque-book to anyone he likes, and may make any pro- 
 vision he thinks fit for meeting the cheques. But there is 
 in fact a very serious limitation. In the last resort the 
 receiver of any cheque is entitled to ask for the corresponding 
 gold. If at any moment all the holders made such a request 
 and insisted on payment in cash they could not get a 
 penny in the pound. But banking, like insurance, depends 
 on the average demands that have to be met. 
 
 In normal times the proportion of business carried on by 
 means of cheques, as compared with actual cash, depends 
 simply on the convenience of people. Gradually people 
 acquire the habit of making certain kinds of payments by 
 cheque, others by bank-notes, others by gold and token 
 coins. They take it for granted that these different kinds 
 of " currency " are always exchangeable at their nominal 
 value, and not one man in a million could estimate even 
 roughly the value of any cheque he had received if all the 
 banks were in liquidation. Such extreme illustrations are 
 only of service in showing how the whole of our monetary 
 system depends on the convertibility of the different kinds. 
 For certain cheques, e.g., for the payment of wages, actual 
 cash must be obtained — gold, silver, or bank-notes. Simi- 
 larly of many retail payments. When trade is very active, 
 a greater amount of cash is put in circulation for these
 
 176 WAR FINANCE 
 
 purposes. The banks must keep enough to meet these 
 demands. So far as the home country is concerned, there 
 ought never to be any difficulty in keeping enough of cash 
 to meet the greatest activity in the demand. 
 
 In times of crisis, however, there is a disturbance of the 
 normal proportions in the use of different forms of credit 
 and different kinds of " money " (gold, notes, and tokens). 
 In the greatest crises of the nineteenth century the notes 
 of the Bank of England were above suspicion, and there 
 was no run on the Bank to exchange notes for gold. On 
 the contrary, people wanted to get more of these notes 
 issued. It must never be forgotten that the suspension of 
 the Bank Act simply meant that the Bank could issue more 
 riotes, and not that it ceased to give gold on demand for 
 its notes. Suspension of the Bank Act is a matter of infinitely 
 less importance than the stoppage of cash payment for the 
 notes or the institution of a moratorium as regards cheques, 
 which is in essence the same thing. 
 
 The unexampled severity of the crisis caused by the 
 outbreak of the present war is shown by the extraordinary 
 measures adopted to get over the immediate financial 
 dangers. Without banking, the business of the country 
 cannot be carried on. Barter is impossible. Universal cash 
 transactions are equally impossible. The latest returns 
 for the Bankers' Clearing House show that during the last 
 two weeks the amount of the business has fallen to nearly 
 one-half the usual amount. And yet even in these weeks 
 the business was about £175,000,000 — that is to say, settle- 
 ments of monetary transactions were effected by bankers' 
 credit to that amount. It was only natural that the out- 
 break of war should put a stop to a great deal of business, 
 and some falling off in the business of banks was inevitable. 
 And no doubt a contributory cause has been the mora- 
 torium. People who are accustomed to receive certain 
 dividends with regularity will realise how the moratorium 
 has diminished the number of cheques passing through the 
 banks. 
 
 What, then, arc the practical conclusions to be drawn
 
 WAR AND PAPER MONEY 177 
 
 from this examination of the foundations of our present 
 system ? The first is that every effort should be made to 
 preserve the convertibiHty of the different forms of currency. 
 In magnitude by far the most important is the cheque. So 
 long as the banking system remains in effective working order 
 there is no difficulty in the interchange of the different 
 cheques, but so long as the moratorium is taken advantage 
 of by the banks the convertibility of the cheque into gold 
 is partially suspended. But the essence of good banking 
 is to be able to meet all claims on demand. That is the 
 reason why bankers' funds must not be locked up. According 
 to the old saying, the banker must know the difference 
 between a bill and a mortgage. It is no use saying that if 
 time is allowed a bank can fulfil its engagements. Invest- 
 ment for long periods is not banking. In banking the time 
 of payment is the very essence of the whole business. The 
 real meaning of a moratorium in banking is partial or 
 temporary insolvency in the literal sense of the term. The 
 less advantage is taken of the moratorium so much the 
 better. It is only justifiable as a temporary measure under 
 urgent necessity. It is injurious to the whole credit system 
 of the country. Bank-notes are not so important as cheques, 
 so far as the volume of monetary transactions is concerned 
 under normal conditions, but they are of increasing import- 
 ance in times of difiiculty. For internal purposes they can 
 be made compulsory legal tender, and by the mere decree 
 of the Government they can be made inconvertible. In 
 the great Napoleonic wars Bank of England notes were made 
 inconvertible. The Bank was not allowed to give out gold 
 for its notes. So long as the notes do not become depre- 
 ciated — that is to say, as long as a one pound note has the 
 same power of purchase as a sovereign — no harm is done. 
 But all history shows that inconvertible notes do in general 
 become depreciated. And the worst of it is that, like an 
 insidious disease, the evil becomes deeply seated before it 
 is discovered. 
 
 The only way of prevention of the depreciation of bank- 
 notes is strict limitation of the issues. The surest and
 
 178 WAR FINANCE 
 
 safest method of limitation is immediate and easy converti- 
 bilit}^ The new issues of one pound and ten shiUing notes 
 are made convertible at the Bank of England, but they 
 are issued by the Treasury. It is reported that the ten 
 shining notes are to be issued by the Post Office. If this 
 is the case, the provision for convertibility at the Bank ol 
 England does not seem very effective. A great mass might 
 be scattered up and down the country before any effective 
 demand arose for conversion at the Bank of England. But 
 if too many are issued, in time they will be presented for 
 conversion ; and if the Bank finds it inconvenient, and 
 is authorised by the Government, it may refuse gold, and 
 the notes become at once in the strict sense inconvertible. 
 In Scotland and in Ireland we have already one pound 
 notes. In England we cannot expect tliat all at once people 
 will begin to take the new notes in preference to gold. If 
 the banking system remains sound, the same proportion 
 of business will be done by cheques, and except by the 
 displacement of gold in circulation there is no room for a 
 great issue of the new notes. If too many are issued, they 
 will be exchanged for gold or become inconvertible. No 
 indication has been given by the Government of any prin- 
 ciple of limitation of the new issues, or of their immediate 
 uses. If they are used for the necessary cash payments by 
 the State, the need for limitation is all the more pressing. 
 It is not the immediate effect that is to be feared, but the 
 cumulative effect of successive issues. 
 
 Fortunately in this country, since the conclusion of the 
 Napoleonic wars, we have had no experience of the evils of 
 depreciated currency. If people only understood that 
 depreciation means a rise in prices, and the greater the 
 depreciation the greater the rise in prices, they would think 
 that depreciation ought to be avoided even at the risk of 
 considerable inconvenience. Once the safeguard of con- 
 vertibility in the strictest sense is abandoned, it is difficult 
 to observe any effective principle of limitation. If the 
 new notes are taken up readily in England, and if they dis- 
 place gold from circulation, a large part of this gold ought 
 
 I
 
 WAR AND PAPER MONEY 179 
 
 to be kept as a reserve to ensure convettibility. The Govern- 
 ment has undertaken in these days altogether exceptional 
 functions by way of guarantees to commerce. The first of 
 Governmental guarantees ought to be against the deprecia- 
 tion of the currency. If prices are kept on the gold standard, 
 it looks as if there would be no very excessive rise , but if 
 prices come to be measured in inconvertible notes, there is 
 no limit to the rise except in the limitation of the issues.* 
 
 * As shown in Chapter V., p. 95, for the first five months of war prices 
 rose very Httle, but with the continued inflation of currency and credit 
 there was a progressive rise in prices.
 
 CHAPTER III 
 THE SINEWS OF WAR 
 
 {August 27, 1914) 
 
 Everybody knows the saying that money is the sinews 
 of war. Everybody knows that in war a nation spends its 
 blood and its treasure. They have a horribly clear idea of 
 the meaning of the blood, but what do they mean by the 
 money or the treasure ? 
 
 In old times treasure meant literally gold and silver — • 
 more especially silver — which was universally the principal 
 money before gold. The discovery was soon made that the 
 greater the treasure so much a greater amount of the blood 
 of the enemy could be shed. Soldiers had to be paid, and 
 war materials purchased. Every feudal Baron knew the 
 value of treasure as a means of shedding blood. So did every 
 free trading city. In time, as the idea of nationality was 
 developed, treasure came to be considered as one of the 
 principal supports of national power. During the seven- 
 teenth and eighteenth centuries the policy of Europe was 
 dominated by what is called the mercantile system. The 
 real original aim of this policy was not the increase of com- 
 merce, but the increase of national power. It was taken for 
 granted that the more money the greater the power. If any 
 country did not itself produce the precious metals, the only 
 way to get them was by trade. And the only way to keep 
 them was by a favourable balance of trade. That is to say, 
 the exports must always have a greater money value than 
 the imports, so that this favourable balance might be paid 
 in money. In the course ot time the original end of national 
 power was lost sight of in the means. By a confusion 
 between wealth and money a favourable balance of trade
 
 THE SINEWS OF WAR i8i 
 
 came to be regarded as the measure of the advantage of the 
 foreign trade of the country. All our commercial policy was 
 directed with this object in view. Trade with France was 
 crippled because the balance was unfavourable ; with 
 Portugal, trade was encouraged because the balance was 
 favourable. The original aim, however, was never lost sight 
 of altogether. People thought that a plentiful supply of 
 money was necessary for war. The less money the enemy 
 could get so much the better. To keep money out of France 
 was to weaken our traditional enemy. Adam Smith, 
 although himself one of the strongest upholders of nation- 
 alism (and even of imperialism), shattered the idea that 
 national power was to be obtained by a set of favourable 
 money balances with all sorts of countries. Inter alia, he 
 destroyed the notion that treasure ought to be accumulated 
 in times of peace for purposes of war. He confirmed his 
 reasoning by reference to the wars of his own country — the 
 eighteenth century was full of wars — and he showed in 
 particular that all the treasure in England, including the 
 private plate, could not have sufficed to carry on even one 
 of these great wars. 
 
 But if in the eighteenth century wars could not be carried 
 on on a simple cash basis, still less is it possible in the twen- 
 tieth. For certain payments gold may be necessary, hence 
 the use of the Continental war chests , but of the total 
 expenses only a small part can be met in gold. Are we, then, 
 to say that money is no longer the sinews of war, just as 
 flint-locks and smooth-bore cannon are no longer the 
 weapons ? 
 
 On the contrary, we know that at present money is looked 
 on more and more as the sinews of war, and that the expendi- 
 ture of money is a necessary preliminary and accompani- 
 ment of the spending of blood. The great national debts of 
 the world have for the most part been accumulated in times 
 of war. In this country we are still paying for the wars that 
 saved Europe from Napoleon, not to mention the wars of the 
 eighteenth century which gained (and sometimes lost) 
 colonies and dependencies. In their origins these national
 
 i82 WAR FINANCE 
 
 debts meant the provision of money for the actual carrying 
 on of the wars. 
 
 In the present war everybody knows that we shall have to 
 raise " money " by taxes and borrow " money " by loans. 
 We are also encouraged to believe that our' money power is 
 stronger than that of the enemy, and that finance will play 
 a great part in securing victory. But we are always thrown 
 back on the question, " What is the money ? Where is it to 
 come from ? " Probably some people have still the idea 
 that by money we mean gold and silver, especially gold, and 
 that hoarding gold is specially unpatriotic, because the 
 Government wants all the gold it can lay hands on. But as 
 a matter of fact, gold forms only a small part of modern 
 money. The great commerce of the country is carried on. 
 not by means of metallic money, but by means of credit in 
 various forms, especially bankers' credit that is operated on 
 by cheques. 
 
 The term bankers' credit suggests a delightful elasticity 
 compared with treasure in the old sense. It costs as much 
 in labovu- and capital to get out of the earth an ounce of gold 
 as it costs to get five or six tons of the best steam coal. But 
 the banker, it seems, has only to make a judicious use of the 
 three " R's " to make as much money as he thinks fit, and to 
 lend it to other people just as if it were the real thing. All 
 that is needed, it seems, is confidence. The word credit 
 itself means belief. If people believe in the bank and the 
 bank believes in the people the thing is done. On the out- 
 break of the present war the Chancellor of the Exchequer 
 appealed to the Press to appeal to the people to keep calm, 
 to go on trusting the banks, and the banks would pull them 
 (and him) through. Nor was the appeal unnecessary or 
 unreasonable. The belief side of credit is always of import- 
 ance. Sometimes there is too much of it, and the awakening 
 from the confidence is a commercial crisis. Sometimes, as 
 on our declaration of war, there is too little, and people go to 
 sleep and dream nightmares. Without metaphors, the out- 
 break of war made everybody uncertain of the future, 
 and uncertain even of the past. New contracts were
 
 THE SINEWS OF WAR 183 
 
 checked, and the old were put under a moratorium. 
 There can be httle doubt that part of this uncertainty 
 was ill-founded, as in the case of the people who began to 
 hoard gold and food. But no doubt also, confidence 
 was rightly shaken, and with it the credit system, and 
 especially the banking system of the country. 
 
 But in any case, belief or confidence is only one element 
 in bankers' credit. All this bankers' credit must rest on real 
 wealth if it is sound. The simplest form of bankers' credit 
 is the bank-note, and the banker must be able to meet on 
 demand the claim for gold. The notes are based on gold. 
 But almost any form of wealth can be melted down into 
 bank money as an old writer has it, or can be made directly 
 or indirectly the basis of bankers' credit. In Berlin, on the 
 outbreak of the war, the State apparently became a kind of 
 gigantic pawnbroker, and allowed people to get a kind of 
 notes to half the value of almost any kind of property which 
 they liked to pledge. Even in normal times, the banks in 
 Germany are directly mixed up with industrial concerns, 
 just as were the Scottish banks in their origins, e.g., the 
 British Linen. In this country, however, bankers' credit has 
 come to be confined within more narrow limits so far as the 
 banking proper is concerned. Yet even in this country, 
 what is good enough banking security in times of peace is 
 not good enough or to the same degree in time of war. 
 Accordingly, on the outbreak of war, there is naturally and 
 inevitably a contraction of bankers' credit. Here is the 
 disadvantage compared with the old kind of treasure, which 
 was .real metal and not fairy gold. 
 
 But we must not rush to the extreme of supposing that all 
 or even a considerable part of the bankers' money is fairy 
 gold and will disappear. Bank money, like gold money, is 
 properly a means of exchange. The banking system is part 
 and a most essential part, of the mechanism of exchange. 
 Production in the narrow sense cannot be carried on without 
 exchanges of all kinds. Trade proper is part of production 
 proper. The thing is not finally produced until it is in the 
 hands of the consumer. Without banking in a modern
 
 i84 WAR FINANCE 
 
 industrial country trade and production must come to a 
 standstill — if there is a partial stoppage of the banking there 
 is a partial stoppage of industry. 
 
 When we say that bank money, like gold, is only a medium 
 of exchange we must remember that exchange covers 
 practically the whole of the economic activities of the nation. 
 We get, for example, exchanges of present values against 
 future values, which brings under exchange all the vast fields 
 of the investments of capital. We have the exchange of 
 distant goods with near goods, which brings in the vast fields 
 of foreign trade. As regards foreign trade, London is the 
 clearing house of the world. The bill on London is the chief 
 form of international currency. 
 
 The same economic principle applies to all kinds of money 
 considered as media of exchange, whether they are made of 
 bronze or silver, or gold or bits of paper. They fulfil their 
 functions perfectly if the exchanges of services and com- 
 modities of all kinds, present and future, are effected without 
 friction or delay. If people once begin to bargain and chaffer 
 over the kind of money they are paid in, if they find one sort 
 is not so easy to pass on compared with the other sorts, this 
 means that the first sort is partially inconvertible, and as a 
 medium of exchange has lost so much of its virtue. 
 
 The great safeguard against monetary friction is to hold 
 fast to the principle of convertibility into gold. The London 
 money market has gained its supremacy because, as the say- 
 ing is, it is the only free market for gold. 
 
 All the world over, however, there has recently been a 
 growth of laxity in the observance of this principle. Bank- 
 notes with us, so long as the law is kept, are absolutely secure. 
 It is to be hoped the law will still be kept in spite of the 
 temptations in time of war to resort to inconvertible paper 
 as the simplest means of getting so called emergency 
 currency. 
 
 The other forms of bankers' credit are of the same nature 
 as the notes, but instead of excessive regulation there is 
 exccssi\'e freedom. The consequence is that in this coimtry 
 esperjallyllic economyof gold has been pushed toan extreme.
 
 THE SINEWS OF WAR 185 
 
 Ever since Bagehot wrote his " Lombard Street," nearly 
 forty years ago, eminent financiers, e.g., Lord Goscfien, have 
 given solemn warnings of the inadequacy of the gold reserves. 
 It is from the banking point of view that the accumulation 
 of treasure is still said to be of national importance. Accord- 
 ing to a recent calculation the total deposits in the British 
 great joint-stock banks is about one thousand million 
 pounds sterling, and against this on the most liberal estimate 
 there is about 10 per cent, of gold. If the amount of gold 
 were doubled it does not follow that the security of the 
 bankers' credit would be doubled. The mere piling up of 
 gold in the vaults of a bank is not enough. What is really 
 wanted is the provision of means by which as the fund is 
 depleted it is renewed. We do not want a cistern full of 
 gold money, but a never-failing stream to draw upon. 
 Germany in ordinary times has a much larger amount of 
 gold in its banks than is the case in this country. Yet the 
 deposits in the German credit banks are only about half the 
 deposits in our joint-stock banks and the Bank of England. 
 But if we look to the record of the imports and exports of 
 gold we find in general that if our cistern is not half so full 
 our flow of gold is very much stronger. In 1912, for example, 
 to take the latest return that happens to be at hand, Cxermany 
 exported some ^^7, 000, 000 of the precious metals whilst our 
 figure was some £65,000,000. Similarly, as regards imports, 
 Germany had some £16,000,000 to our £76,000,000. People 
 often forget that the object of a gold reserve is to be used as 
 occasion requires. 
 
 It is time to return to the main position. Money is still 
 the sinews of war, because even in war, although there is 
 much seizure of property and much enforced labour, still for 
 the most part we have to rely on the payment for services 
 and commodities. The money by which these payments 
 are effected is to a great extent credit. The country with 
 the most efficient system of credit can conduct the business 
 side of the war in the best manner. 
 
 If there is any breakdown in the credit system, there is so 
 far a stoppage in the exchange of real things and real services.
 
 i86 WAR FINANCE 
 
 The process is revealed in every commercial crisis. If 
 employers cannot as usual discount their bills or get advances 
 from the banks they cannot pay their labour, and they 
 cannot get their raw materials. So far as production is 
 lessened the real power of the country is lessened. Trade 
 is an exchange of real things ; the credit is only the means. 
 Bankers' credit that does not circulate is as useless as little 
 sous in a big stocking. So far as industry is contracted, so 
 far the taxpaying power of the country is contracted. The 
 sinews of war are directly weakened. The longer the con- 
 traction of industry lasts, so much the more crippled also is 
 the future. The issue of a Government loan simply means 
 that the capital value .oi future revenues from taxation is 
 anticipated. 
 
 The nation with the best system of credit can most readily 
 carry on its trade and adapt its trade to new conditions. In 
 this country there is no need that, with the command of the 
 sea, our trade should be diminished to anything like the 
 same degree as German trade, if the credit sj^stem is made 
 to do its work properly. Adam Smith, after showing that 
 the expenses of a great war could not be met out of accumu- 
 lated treasure, showed also that they must be met out of 
 real production. And in that way he arrived at his famous 
 paradox — In the midst of a great war the greater part of 
 manufactures may flourish greatly. The sinews of war will 
 also be strengthened by the strengthening of industry.
 
 CHAPTER IV 
 GERMANY'S ECONOMIC MISCALCULATIONS 
 
 [September 5, 1914) 
 
 Since the outbreak of war we have heard a good deal of 
 Germany's miscalculations regarding the moral and the 
 military strength of other nations. Germany never imagined 
 that this country, which seemed to worship wealth, would 
 go to war for a scrap of paper, and never imagined that 
 Russia would strike hard and strike quickly. But the 
 greatest of all the miscalculations of Germany, because the 
 most far-reaching and fundamental, have been the economic. 
 The real ultimate aim of German economic policy is now 
 perfectly clear to the most peace loving Briton. The 
 " infamous " proposal to take the colonies of France and 
 the actual invasion of Belgium show clearly enough that 
 if occasion had offered the British Empire would have been 
 open to a similar attack. We may go further, and say that 
 the absorption of Holland and Belgium and the weakening 
 of France are only steps on the way to the break-up and 
 appropriation of the British Empire, or at least of all such 
 parts as could be comfortably swallowed. 
 
 Fortunately Germany has revealed her policy too soon, 
 probably driven by dynastic and military influences. There 
 can be little doubt that after this warning^ — if only disaster 
 is escaped this time — the enormous resources of the British 
 Empire will be so organised as to make any future attack 
 by Germany ridiculous. Consequent on the exhaustion of 
 the war, and the increase of national antipathies, the 
 economic development of Germany must be arrested, whilst 
 that of the British Empire will be placed on a higher stage. 
 That is the fatal economic mistake of Germany.
 
 i88 WAR FINANCE 
 
 The nature and the consequences of this mistake may 
 be made clear by looking at the general trend of German 
 economic progress for the last hundred years, and especially 
 since the great Franco-German war. The dominating ideas 
 of this policy have been forcibly expressed in the great 
 work by Friedrich List on the " National System of Political 
 Economy," of which there is happily an excellent English 
 translation. Seeing that List died in the year of the repeal 
 of our Corn Laws (1846), and that his book was completed 
 about two years earlier, it may be thought tliat the policy 
 of the " National System " must by this time be out of 
 date. But in fact the policy laid down by List for the 
 development of the German Empire is the policy which in 
 all essentials has dominated, and still dominates, German 
 statesmanship. After all, the great ideas by v/hich nations 
 are ruled cannot be changed like the fashions of a garment, 
 and a world-policy to be effective must be of slow growth. 
 And above all other nations, as List observed, the Germans 
 are subject to the rule of theories. " Germany developed 
 herself in a totally different way from other nations. Else- 
 where high mental culture grew out of the evolution of the 
 material powers of production, whilst in Germany the 
 growth of the material powers of production was the outcome 
 chiefly of an antecedent intellectual development." Even 
 in the eighteenth century he shows that the lead was taken 
 by the German State Governments in the application of 
 ideas. " Hence at the present day (1844)," concludes List, 
 " the whole culture of the Germans is theoretical. . . . For 
 the moment the Germans are in the position of an individual 
 who, having been formerly deprived of the use of his limbs, 
 first learned theoretically the arts of standing and walking, 
 eating and drinking, of laughing and weeping, and then only 
 proceeded to put them into practice." Not that the Germans 
 have been governed by ideas to the exclusion of the teach- 
 ings of history and experience. On the contrary, especially 
 in economics, they emphasised the fundamental importance 
 of the liistorical method. Their economists supposed that 
 they had replaced the theoretical system of Adam Smith
 
 GERMANY'S ECONOMIC MISCALCULATIONS 189 
 
 (which they called by the awfiil name of " Smitianismus ") 
 by a positive science founded on history and facts. They 
 were wrong about Adam Smith, who more than any writer 
 (German or other) referred all his theories to the test of 
 experience ; but this is a digression. 
 
 The first part of List's book is entitled the " History," 
 and deals with the economic development of the principal 
 nations. The final chapter of this part (" The Teachings 
 of History ") makes a fitting transition to the leading ideas 
 of the remainder. The main conclusions are that unde- 
 veloped nations begin wdth free trade with the more de- 
 veloped ; in the second stage they themselves promote the 
 growth of manufactures, fisheries, and foreign trade by 
 means of commercial restrictions. In the last stage, after 
 reaching the highest degree of wealth and power, they 
 gradually revert to the principles of free trade and of 
 unrestricted competition in the home as well as in foreign 
 markets, so that their manufacturers may be preserved 
 from indolence and stimulated to retain the supremacy 
 they have acquired. In the first stage (he says) are Spain 
 and others ; in the second, Germany and the United States ; 
 France is on the border between the second and the final 
 stage of development ; but Great Britain alone at the 
 present time (1844) has reached it. List boldly carried 
 these historical ideas to their logical conclusion. He agreed 
 with Cobden and the Manchester school that the adoption 
 of free trade by England would be of advantage to her 
 manufacturers. He went so far as to say that England in 
 her own interest should have adopted free trade and repealed 
 the Corn Laws after 1815. England had a monopoly of 
 manufactures, and needed no protection. 
 
 If other nations desired to diminish or share the unques- 
 tioned commercial supremacy of Britain they must adopt 
 the same methods — that is to say, the methods which 
 England had adopted at a similar stage of development. 
 They must remember that they were only at the second 
 stage, and they must encourage the development of self- 
 sufficing industries by a national protective system. They
 
 190 WAR FINANCE 
 
 must follow ill the footsteps of England. England had only 
 reached the final independent stage after a long period of 
 development under a very strong protective system of a 
 very elaborate kind. England had aimed at the establish- 
 ment of a monopoly for her manufactures over the widest 
 possible area, and with this object in view all her great 
 wars had been waged — i.e., for the acquisition of new 
 markets and the retention of the old. 
 
 In the application of these ideas to the case of Germany. 
 List came to some very practical conclusions that are of 
 special interest at the present time. The last book in the 
 " National System " (the " PoHtics ") lays down the lines 
 which have been followed, and are being followed, in the 
 actual development of German commercial policy. No 
 doubt there are some differences in detail owing to changes 
 in conditions, but anyone who reads List will be astonished 
 at the way in which his ideas have actually been realised 
 by Germany, and are still the basis of the German forward 
 policy. The guiding clue is imitation of England — that is 
 to say, England in her protectionist stage. " England owes 
 her immense colonial possessions solely to her surpassing 
 manufacturing power. If the other European nations wish 
 also to partake of the profitable business of cultivating 
 waste territories, and civilising barbarous nations, or 
 nations once civilised that have again been sunk in bar- 
 barism, they must commence with the development of 
 their own internal manufacturing powers, of their mercantile 
 marine, and of their naval power." This advice is tendered 
 specially to Germany. " If any nation whatever is qualified 
 for the establishment of a national manufacturing power 
 it is Germany." Seventy years ago List pointed to German 
 superiority in education and in administration, to the 
 aptitudes of her people for industry and trade, to her skill 
 in inventions, and to the vast natural resources of her 
 territories in agricultural and mineral wealth. To give 
 full scope to these mental and material productive forces, 
 and become a great manufacturing power with all its conse- 
 quences, Germany must adopt, as England had done, a
 
 GERMANY'S ECONOMIC MISCALCULATIONS 191 
 
 protective system. She must learn to make for herself all 
 important manufactures, and not be content to receive 
 them, in exchange for grain and timber, from Britain. But 
 this was only the beginning. Germany must directly import 
 from tropical countries the produce she requires, and pay 
 for it with her own goods. She must carry on this trade in 
 her own ships ; she must protect these ships with her own 
 flag and her own navy. The first step is to make Germany 
 strong in itself by manufactures, railways, waterways, and 
 the scientific organisation of industry. She must improve 
 on the English example with greater knowledge, and profit 
 by England's experience. 
 
 Within the German Zollverein — the great Customs Union 
 of which List himself (1818) was the chief originator, with 
 its internal free trade and its external protection — within 
 this great confederation must be included all German 
 maritime territories, and also Holland and Belgium. The 
 greater Germany is also to include Switzerland. In fact, 
 we have in List all the ideas of Pan-Germanism with a wide 
 interpretation of the word " German." The views of List 
 on Holland are of special interest at the present time. 
 
 " From a national point of view we say and maintain that 
 Holland is in reference to its geographical position, as well as in 
 respect to its commercial and industrial circumstances, and to 
 the origin and language of its inhabitants, a German province, 
 which has been separated from Germany at a period of German 
 national disunion, without whose reincorporation in the German 
 Union, Germany may be compared to a house the door of which 
 belongs to a stranger. Holland belongs as much to Germany 
 as Brittany and Normandy belong to France, and so long as 
 Holland is determined to constitute an independent kingdom of 
 her own, Germany can as little attain independence and power 
 as France would have been enabled to attain these if those 
 provinces had remained in the hands of the English." 
 
 If we look to the development of German economic policy, 
 and to the actual condition of Germany before the outbreak 
 of the war, we see at once a remarkable realisation of List's 
 ideas. In Europe, Germany has become second only to 
 Britain in manufacturing power and in shipping, and at
 
 192 WAR FINANCE 
 
 least equal in the organisation of the internal means of 
 communication and of industry generally. By all the usual 
 tests of material prosperity Germany has made astonishing 
 progress since the last great war. This progress in wealth 
 has been accompanied with similar progress in national 
 power. In fact, the production of wealth and its distribu- 
 tion have been so organised as to promote the military and 
 naval power of the country. The railways are largely 
 strategic, and agriculture has been fostered with the definite 
 aim of independence as regards the main food supplies. The 
 export of capital to foreign States has been discouraged so 
 that the national industries might first be strengthened. 
 A check has been imposed on the emigration of the living 
 capital, and the population has shown a remarkable increase. 
 
 But, after all, these are only the preliminary stages in the 
 advance to world power. From the Germanic point of 
 view the complete ideal of List has not yet been realised. 
 Further growth of power is conditioned by an extension 
 of territory or of dominant political influence. Seventy 
 years ago List compared Turkey to a corpse that might be 
 held up by the support of the living, and he put in the same 
 class the Persians, the Chinese and Hindoos, and all other 
 Asiatic peoples. What fields could be more suitable for the 
 application of the German powers of expansion ? The great 
 obstacle was the British Empire. 
 
 List also contended that Germany " should try whether 
 and how German colonies can be founded in Australia, New 
 Zealand, or in other islands of Australasia. German emi- 
 grants to the United States and other countries in the next 
 generation were lost for ever to the mother country. For 
 the extension of national power Germany must have her 
 own Germanic settlements. The right of the English to 
 the Continent of Australia on the principle of first occupancy 
 was as absurd as the right claimed by the Popes over the 
 partition of the New World. 
 
 Can there be any doubt that these ideas of List have been 
 and are the ruling ideas in German economic policy ? 
 Germany aims at being a world Power- — the greatest of
 
 GERMANY'S ECONOMIC MISCALCULATIONS 193 
 
 world Powers. But everywhere her territorial expansion 
 is checked by Britain. In Africa, Asia, South-Eastern 
 Europe, and Australasia, Britain bars the way to German 
 aspirations. Even in Northern Europe, Britain stands in 
 the way of the Germanic absorption of Holland and Belgium. 
 The galling thing to Germany is that she considers herself 
 in all the essentials of national power superior to Britain. 
 Britain obtained her world Empire by war followed by the 
 monopoly of trade. If, then, Germany is stronger in war 
 and more capable in trade, why should she not imitate 
 Britain and displace Britain from her supremacy ? 
 
 But in the endeavour to take this last step towards world 
 power at the expense of the British Empire, Germany has 
 made the fatal miscalculation of striking too soon. She 
 ought to have pursued longer the methods of peaceful 
 penetration, and worn longer the mask of the love of peace. 
 Now that it is made plain to every inhabitant of the British 
 Empire what is the real aim of German policy, it will be only 
 natural if every method is adopted to thwart that policy. 
 Already we hear of the war on German trade, and this policy, 
 once begun, cannot be broken off on the conclusion of peace. 
 The economic development of Germany will be arrested 
 and even thrown back.
 
 CHAPTER V 
 GERMANY'S ECONOMIC MISCALCULATIONS 
 
 [September 12, 1914) 
 II 
 
 We have become so accustomed in recent years to be 
 referred to Germany for the latest word in all the sciences 
 and in all the business of life, that we can hardly believe our 
 eyes when we see Germany making mistakes of the first 
 magnitude. Even now (such is our habit)we find complaints 
 in some of our own journals that our banks do not follow the 
 German methods in the present crisis. The object of this 
 second article is to supplement the ancient history of the first 
 by the corresponding history of the present generation, and 
 the corresponding application to the immediate future. In 
 the current number of the Royal Statistical Journal is pub- 
 lished a paper, read by Mr. Edgar Crammond last June, on 
 the " Economic Relations of the British and German 
 Empires," with the discussion that followed, in which the 
 leading experts in London took part. Throughout we find 
 the saving clause recurring — " in the absence of war." It 
 is interesting to compare this probable forecast, made a few 
 weeks before the outbreak of hostilities, under the expecta- 
 tion of a long continuance of peace, with the actual and 
 probable results of the disturbance caused by the war. The 
 contrast brings out very clearly the fatal economic mis- 
 calculations made by Germany in her policy of aggression. 
 
 To begin with, we may compare Germany with the United 
 Kingdom, which of course is a very different thing from com- 
 paring Empire with Empire. With this limitation, since 
 the great war of 1870-71, and especially since the accession of 
 the Kaiser in 1888, the comparison of economic progress by
 
 GERMANY'S ECONOMIC MISCALCULATIONS 195 
 
 the method of percentages seems greaMy in favour of Ger- 
 many, and even the absolute returns for important tests are 
 also favourable. 
 
 Take first the growth in population. Germany since 1872 
 has increased by 57 per cent, as compared with our 
 own 42 per cent. The absolute result is that Germany 
 by the census of 1910 had about sixty-five millions against 
 our forty-five millions in 1911. The birth-rate in Germany 
 in 1911 was 295 per thousand against our24'4. Emigration 
 from Germany had on balance almost vanished whilst oiirs 
 was increasing. It is, however, noteworth}^ that the death- 
 rate is considerably lower in the United Kingdom, which is 
 the more remarkable inasmuch as Germany has proportion- 
 ately a much larger non-urban population. It may be 
 observed, in passing, that the death-rate is one of the best 
 summary tests of the economic welfare of the people. On 
 balance the population of Germany is at present some 
 twenty millions larger than ours, and the disparity would 
 increase every year if the present rates had been maintained. 
 
 The distribution of the employments of the people 
 between agricultural and non-agricultural is of special 
 importance. In recent years in Germany agriculture (in 
 the widest sense) has been fostered both by the exclusion of 
 foreign competition, and by the adoption of scientific 
 methods and more intensive cultivation. And yet, in spite 
 of all this encouragement and the corresponding increase in 
 agricultural production, there has been a steady increase in 
 the importation of food stuffs. Since 1887 the increase in 
 the imports of foods, beverages, animals, etc., has been more 
 than threefold, and in 191 2 the absolute amount was about 
 ;^i6o,ooo,ooo. There has been a corresponding steady 
 increase in the percentage of the non-agricultural popula- 
 tion. Germany has, in fact, become a great manufacturing 
 Power, and she can only maintain her increasing population 
 by increasing importation of food. In the United Kingdom, 
 on the other hand, a point has now been reached at which it 
 will probably be more advantageous to devote more capital 
 and labour to the land. Even as it is, Mr. Rew has estimated
 
 196 WAR FINANCE 
 
 we raise (apart from sugar and beverages) more than half 
 our total food requirements. The room for agricultural 
 expansion in Germany is not so great as it was, or conversely 
 Germany has more need of manufacturing expansion. 
 
 The increase in the manufacturing power of Germany is 
 also shown by the great increase in the production of coal 
 and steel, and in the growth of particular industries, e.g., the 
 textiles. Germany has a mileage of railways about 50 per 
 cent, more than the United Kingdom constructed at a capital 
 cost of nearly 30 per cent. less. During the last twenty 
 years the gross receipts of the German railways have 
 increased by 150 per cent, as compared with an increase in 
 the United Kingdom of some 75 per cent. In Germany 
 the inland waterways are nearly double the mileage of 
 the navigable waterways of the United Kingdom, though 
 it should be remembered that our coastwise traffic is 
 very much greater. In Germany the development of the 
 internal means of communication (notably railways) has 
 been under the direction of the State. As a consequence 
 not only have military requirements always been considered, 
 but attention has been paid to the general distribution of 
 industry. Raihvays and their branches have been con- 
 structed so as to put the agricultural East more on a footing 
 with the manufacturing West. It is possible that with less 
 favour to agriculture Germany would by this time have been 
 even to a greater extent a manufacturing Power. 
 
 The principal result of this comparison, not to mention 
 the development of shipbuilding and navigation, is that 
 Germany has become more and more dependent on foreign 
 trade for her future expansion. No possible development 
 of her agricultural industries could suffice to carry off her 
 increasing manufactures. Even if the agriculturists could 
 manage to support the increasing city population this could 
 only be done at a greatly increasing cost, which of itself 
 would check the manuf picturing expansion. At her present 
 stage of development foreign trade has become as \dtal to 
 Germany as to the United Kingdom. 
 
 That this is no theoretical conclusion may be shown by the
 
 GERMANY'S ECONOMIC MISCALCULATIONS 197 
 
 actual increase in recent years of German foreign trade. 
 From the accession of the Kaiser (1888) to 1912 the imports 
 into Germany for home consumption increased absohitely 
 by some ;^370,ooo,ooo, whilst in the United Kingdom the 
 increase in the corresponding imports was only some 
 £300,000,000. A similar increase (though relatively not so 
 great) is shown in the German exports of home products. 
 The result of the comparisons as regards foreign trade 
 is that, taking imports and exports together (and ex- 
 cluding re-exports), Germany has already nearly caught 
 up the United Kingdom, and threatened, had peace con- 
 tinued, to get in front in the course of the next five or six 
 years. 
 
 This general dependence of Germany on foreign trade 
 acquires still greater significance if we look to the trade with 
 the principal countries. Nearly 40 per cent, of the 
 foreign trade of Germany before the war was with her present 
 enemies — Russia, France, and the British Empire. Since 
 the beginning of the present century the amount of the 
 foreign trade of Germany with Russia and with France has 
 about doubled. These two countries now account for about 
 a fifth of Germany's foreign trade. 
 
 The trade of Germany with the British Empire is nearly 
 as great as her trade with Russia and France combined. 
 Some features of the trade relations of Germany with the 
 British Empire are of special interest. In the first place the 
 United Kingdom is a more important market to Germany 
 than the latter is to the United Kingdom. That is to say, 
 Germany sells to us more than we sell to Germany. This 
 apparently unfavourable balance is settled largely by the 
 indirect trade of Germany and by her imports from the rest 
 of the British Empire. 
 
 The economic importance of the British Empire to 
 Germany becomes still more clear if we look to the nature of 
 the trade. Germany obtains from the British Empire an 
 increasing amount of food and raw materials that are vital 
 to her industries. Even this enumeration does not complete 
 the advantages that Germany derived until the outbreak of
 
 igS WAR FINANCE 
 
 the war from the British Empire. The new countries of the 
 world, both in the British Empire and elsewhere, have been 
 largely developed by British capital. Germany in com- 
 parison nas used her capital to a much greater extent at 
 home. But German}^ has shared with the rest of the world 
 the advantages of the development of these new countries. 
 The growth of German manufacturing power has been largely 
 dependent on the external investments of British capital. 
 If as the result of a prolonged war the foreign investments of 
 British capital are much lessened, the indirect loss of 
 Germany will be very great. 
 
 The general result is that at the present stage of her 
 economic development peace was of special importance to 
 Germany, and most of all peace with the British Empire. 
 Every year of peace increased the economic and the military 
 power of Germany. On the other hand, with the continu- 
 ance of peace the effective organisation of the British Empire 
 was being deferred from year to year. The chief result to 
 Germany of the great Franco-German war was the consolida- 
 tion of the States that now form the German Empire. It 
 is quite possible that one of the principal results of the 
 present war will be a corresponding consolidation of the 
 British Empire. 
 
 Before the war Germany had already acquired a Colonial 
 Empire of over a million square miles in area, or about six 
 times the area of Continental Germany. It is true the 
 European population of these colonies was only about one- 
 fortieth of a million, but there were about twelve millions 
 of natives. It is said that Togoland (already lost) was the 
 only unit that was self-supporting. Germany had quite 
 enough of territory to practise the art of colonial govern- 
 ment and development. It is obvious that as regards colonial 
 expansion the waiting policy was the best for Germany. 
 Time also might have enabled Germany to realise that her 
 military morality was not suited to the extension of overseas 
 dominion. What State in the British Empire, if the free 
 choice were offered to-morrow, would put itself under 
 German militarism ? Not one, as the present crisis shows,
 
 GERMANY'S FXONOMir MISCALCULATIONS 199 
 
 but would resist the transfer to" the utmost. Not one would 
 kill Britain to make (jermany king. 
 
 The German military morality is indeed altogether unsuit- 
 able for any sound economic, system, as Germany will find 
 to her cost. The wages of nations, like the wages of workers, 
 are higher in proportion to the trust imposed in them. Good 
 faith is an essential to economic as good discipline is to 
 mihtary efficiency. National discredit spreads to the indi- 
 viduals that make up a nation. The German statesmen 
 appear not only to have paid no regard to the far-off interest 
 that will be exacted by the civilised world for their barbarism 
 in Belgium, but they do not appear to have realised the 
 immediate burdens that the war will throw on the German 
 people and the reaction of the economic depression on their 
 military power. 
 
 We do not obtain from German sources much information, 
 decorated or undecorated, on the economic effects of the 
 war in Germany itself. But enough has leaked through to 
 show, as might tiave been anticipated, that the stoppage of 
 foreign trade has been associated with a large increase in 
 unemployment in spite of the mass of labour diverted to the 
 war. It is of course the poor who are already suffering most 
 severely. A gigantic scheme of State insurance against 
 unemployment is now being organised, says the Socialist 
 Vomdyts, under the spur of necessity. Under present con- 
 ditions insurance is hardly the rignt word. But the fact 
 remains that the unemployed and their dependants and the 
 non-combatants and their dependants must be supported, 
 and if wages cease the State must step in. In the meantime 
 the stoppage of food imports must also raise prices. The 
 Government has adopted the usual and simple plan of fixing 
 prices, but it is difficult to see how the rates can be main- 
 tained in the face of the enormous issues of inconvertible 
 notes, which it is reported in the Economist are already 
 depreciated over 20 per cent, even in Holland. It is said 
 that the various municipalities are to advance loans on all 
 kinds of securities. These advances must also be made in 
 paper. To meet the scarcity of money notes are to be issued
 
 200 WAR FINANCE 
 
 of the nominal value of a mark and half mark (shilling and 
 sixpence). The only possible effect of these measures must 
 be a further rise in prices. We used to be asked to admire 
 the mass of the deposits in the German savings banks, which 
 before the war were estimated at about a thousand millions 
 sterling. A time of war is a time of need. How are the 
 sa\'ings to be withdrawn ? The funds are very generally 
 invested in mortgages on lands and houses, mostly lor long 
 periods. The only alternative is more inconvertible notes, 
 and the savings must be paid out in depreciated paper. Hov>^ 
 long can the German people be brought to bear the sufferings 
 that underlie this contraction of employment and expansion 
 in prices ? Adam Smith said that in his day, amongst the 
 civilised peoples of Europe, it was commonly computed that 
 a nation could not support more than one-hundredth part of 
 its inhabitants as soldiers without being ruined. Since his 
 day the powers of production have increased, and no doubt 
 a greater surplus is available for the luxury or the necessity 
 of war. But the percentage of those employed in war has 
 also risen sevenfold, the expense is many times greater, and 
 economic exhaustion must come all the sooner, and far 
 sooner in Germany than in the British Empire.
 
 CHAPTER VI 
 
 BRITISH CREDIT AND WAR FINANCE 
 
 {September 28, 1914) 
 
 The Chancellor of the Exchequer called attention recently 
 to the importance of the financial strength of this country 
 as affecting the conduct and the final result of the war. He 
 said that in this matter of finance it is not the first hundred 
 millions, but the last, that counts. (Germany might get the 
 first hundred as easily as Britain, but Britain had far greater 
 staying power. Even in war finance it is better to think in 
 millions rather than in hundreds of millions. Germany is 
 finding at this very time that even the first hundred millions 
 is not an easy matter, and we are still proceeding with ten- 
 tative borrowings for short periods. As regards the last 
 hundred millions, the facility with which it may be obtained 
 will be conditioned by the numbers of the previous millions, 
 and by the methods by which they have been obtained. 
 
 The Chancellor illustrated his point by reference to the 
 great Napoleonic wars. He said that the strongest of the 
 allied forces against Napoleon was the power of British 
 finance. He did not say that the management of British 
 finance during that period was, to put it shortly, very bad. 
 Such was the opinion of Ricardo, who was the leading 
 authority of the time both in the theory and in the practice 
 of finance. In business ability and in the amassing of a 
 large fortune he left his contemporaries of the Stock Exchange 
 far behind ; as an economist in money taxation and finance 
 his reputation is second to none. Such also was the opinion 
 of Mr. Gladstone, as expressed in his great Budget speech 
 of 1853. Mr. Gladstone's opinion is of peculiar interest at 
 the present time. The year after the end of the war (1816)
 
 202 WAR FINANCE 
 
 the amount of the National Debt was 8i6 milHons, and 
 Mr. Gladstone emphatically stated that " our debt need 
 not at this moment (1853) have existed if there had been 
 resolution enough to submit to the Income-tax at an earlier 
 period of the war." He showed that from 1806 to 1815, 
 during'which period the income-tax was in force, the country 
 actually raised seven millions sterling a year more than the 
 charge of the Government and the charge of the war to 
 boot ! This yearly surplus (apart from the interest on debt) 
 of revenue over expenditure was ascribed to the produc- 
 tivity of the income-tax. Mr. Gladstone went on to show 
 that a fiscal reserve is not one whit less important than an 
 Army Reserve or a Navy Reserve, and he found such a 
 fiscal reserve in the income-tax, " with which, judiciously 
 employed," he said, " you may again, if need be, defy the 
 world." Unfortunately, the income-tax has been raised 
 recently in times of peace to what used to be regarded as a 
 war level, and its productivity has been diminished by 
 abatements which Mr. Gladstone would never have admitted 
 on the ground that they would destroy the " efficacy of this 
 great engine." 
 
 This extraordinary misadventure of the accumulation of 
 a great addition to the National Debt when the revenues 
 (thanks to the income-tax) were so much in excess of expen- 
 diture was due to popular delusions shared by the Govern- 
 ment about the necessity of keeping up the credit of the 
 country. It is not necessary to tell again the story of the 
 mismanagement of the public credit. In the Napoleonic 
 wars the tax-paying power of the country was not increased 
 by the Government's attempts to bolster up its credit by 
 a ridiculous sinking fund. It was cotton, not credit, that 
 saved the situation ; or more generally the manufacturing 
 and trading power of the country. 
 
 The present financial position is certainly the most ciuious 
 that was ever experienced in this country. It may be worth 
 while to try to explain the essential features of the situation 
 with a minimum of technical phraseology, but it is impossible 
 to write of any monetary crisis witliout some reference to
 
 BRITISH CREDIT AND WAR FINANCE 203 
 
 tlie Bank of England rate. To tell the full meaning of the 
 Bank rate, and the causes and the interpretation of its 
 movements, would require a book and a Bagehot to write 
 it. The Bank rate may be taken as representative of the 
 rate of interest charged for money for short periods on 
 approved banking security. Of course there are endless 
 variations in the kinds and conditions of loans of money, 
 but as a rule with a low Bank rate other forms of interest 
 are lower than they would be otherwise, and conversely. 
 Apart from Governmental intervention, the rate of interest 
 depends on the demand and supply of loanable money. In 
 the prolonged depression due to falling prices that reached 
 their lowest twenty years ago, the Bank rate remained at 
 2 per cent, for two years, 1894-95. On the other hand, 
 we find that in years of crisis, when everyone wants money, 
 the rate rises, it may be, even to 10 per cent. Ten per cent, 
 may be said to mark a very high financial fever. In the 
 great crisis of 1866, which- began through the failure of one 
 great financial house, the Bank rate was actually 10 per cent, 
 for ninety-six days, and it was 7 or 8 per cent, for 
 another ninety-six days. In the Baring difiiculty (1890), 
 in which a crisis was evaded by combined action on the 
 part of the banks, the Bank rate only reached 6 per cent., 
 but in the American crisis of 1907 the rate rose to 7 per 
 cent. Generally it may be said that a high Bank rate is 
 a sure sign of a great disturbance of credit. The Bank of 
 England rate is regarded as one of the best signs of the 
 state of credit, not only in London, but all the world over. 
 If there is no great rise in the Bank rate (as in 1890) most 
 people think that any threat of financial difiiculty has been 
 neutralised by being taken in tune. 
 
 On the outbreak of the present war the Bank rate promptly 
 rose to the occasion. For the first time since 1866 it rose 
 to 10 per cent. It rose to 10 per cent, on Saturday, August i. 
 But there the analogy with 1866 broke down. It only 
 remained at 10 per cent, during the prolonged Bank Holiday. 
 On Thursday it was down to 6 per cent., and on Saturday, 
 August 8, to 5 per cent., and in spite of the war it has
 
 204 WAR FINANCE 
 
 remained at 5 per cent, ever since, and a reduction is 
 expected. And yet last year, in the height of peace, the 
 rate was 4 J per cent., and 5 per cent, is nothing 
 unusual. 
 
 How then was the crisis got over so quickly ? Or is the 
 Bank rate no longer the measure of the state of credit ? The 
 answer is that the crisis is not over, but that the Bank rate 
 has ceased to be a register of the crisis. The reason is that 
 in former crises there was a minimum of Governmental 
 assistance and intervention, whilst in the present crisis the 
 influence of the Government has been overpowering. 
 
 According to the old explanation, a crisis arises when a 
 number of merchants have, or expect they may have, a 
 difficulty in meeting their engagements. It is this difficulty 
 that makes the strain on credit, and causes the exceptional 
 demand for money. But last August the crisis was promptly 
 stifled by the Government simply saying in the extended 
 language of the moratorium, " Don't meet your engage- 
 ments." Postponement, of course, was the word, but in a 
 crisis postponement is everything. 
 
 This measure did not exhaust the prudent benevolence 
 of the Government. Money was wanted, therefore the 
 Government printed more money. One pound notes and 
 ten shilling notes were issued by the Treasury, and postal 
 orders for much smaller sums were made legal tender. By 
 the moratorium any bank that liked need not pay out money 
 on deposit or current account, but if it wished it could 
 borrow some of the new paper. By a later device the banks 
 need not even take a loan of the notes, but could obtain 
 a certificate to the amount they required, and only pay when 
 the money was really used. 
 
 Nor was this all. The Government directed the Bank 
 of England to discount approved pre-moratorium bills, and 
 guaranteed any loss. And here also by a later amendment 
 the guarantee was made more effective. Not content with 
 these encouragements to trade, the Government undertook 
 a scheme of marine insurance. When the Government had 
 shown the way, and the Navy had shown that it was a Fleet
 
 BRITISH CREDIT AND WAR FINANCE 205 
 
 very much in being, the ordinary insurance people began 
 to take war risks. 
 
 When so much was done for banking and 'for the high 
 finance of trade, no wonder that other interests began to 
 think they ought to have a share in Governmental assist- 
 ance, especially if they could show that public credit was 
 apparently involved with their particular interests. A 
 demand has been made on behalf of the Stock Exchange 
 that the Government should guarantee the banks against 
 any loss by their loans on Stock Exchange securities. In 
 the meantime it appears the banks cannot legally force 
 sales of securities till after the war. As yet this demand 
 for public assistance has not been granted, and it is to be 
 hoped that the banks are not so much committed that they 
 cannot help themselves. Banking business ought not to 
 have been conducted on the supposition that European 
 peace would never be broken after all the warnings of recent 
 years. The London Stock Exchange is itself trying to save 
 the situation by fixing prices for trustee and similar securi- 
 ties. This action is to be commended if it is intended to 
 be an emergency measure, taken to facilitate the resumption 
 later on of ordinary business. If, however, the intention is 
 to keep up the price of Consols so as to facilitate new issues 
 it may be good form, but it is not good business even for 
 the Government. The price of Consols must be governed 
 by the rate of interest, and the rate of interest cannot be 
 fixed by any recommendation of the Stock Exchange. 
 Suppose, however, that for the time the price of Consols 
 is kept up, or even rises, and that the Government is able 
 to borrow the first hundred millions at 70, when the natural 
 market price would be perhaps 65. In time the market 
 price must prevail, and the next hundred millions in com- 
 petition with other investments may have to be made at 
 the market rate for similar securities. When the Chancellor 
 of the Exchequer comes to that last hundred millions he 
 may find that the continued fall in Consols has created a 
 prejudice against that form of security, and the issue may 
 be made even below the true market rate. The continuous
 
 2o6 WAR FINANCE 
 
 fall in Consols during recent years has shown that the 
 premier security is subject to the action of general economic 
 forces. 
 
 The credit of the British Government is no doubt greater 
 than the credit of Germany, but it is not unlimited. If it 
 is used for any one purpose there is so much less for other 
 purposes. The ultimate basis of Governmental credit is 
 the power of taxation. The borrowing power of the Govern- 
 ment would be so much the greater but for the. heavy 
 increases in taxation for social reforms. How much will 
 the recent guarantees given to the Bank of England cost 
 the nation ? In other words, how much will they add to 
 the National Debt ? The last calculation of the Economist 
 is thirty millions. The interest on this sum will be at least 
 a million. That is to say, the country will have to pay 
 a million a year in taxation in perpetuity. 
 
 The issue of Treasury notes, of which by the latest return 
 over twenty-seven millions are outstanding, is also another 
 drain on the national credit. Like other notes, they are 
 promises to pay gold on demand. The convertibility of 
 these notes depends on the adequacy of the gold reserve 
 that is kept for the purpose. Yet, because the Government 
 has earmarked some lo per cent, of gold as a reserve, com- 
 plaints are made that the resources of the Bank of England 
 are so far lessened, and that the credit of the Government 
 is in itself sufficient security. The credit of the Government 
 can no more provide gold than it can provide steam coal 
 if the mineral is not there. The odd thing about these 
 emergency notes is tnat, though money is said to be abun- 
 dant, as shown by the low discount rates, the issue of these 
 notes goes on increasing. 
 
 This inflation of the currency will raise prices or keep 
 prices above the level they would otherwise attain. But 
 so far as prices are unduly raised the expenditure on war 
 is raised, and more debt must be incurred. When the 
 inevitable fall in prices comes the burden of the debt will 
 be so much the greater. Again the Napoleonic period is 
 instructive. Prices rose through the excessive issues of
 
 BRITISH CREDIT AND WAR FINANCE 207 
 
 Bank of England notes ; no doubt prices rose from other 
 causes also, but this cause added so much more to the rise. 
 The high prices increased the nominal amount of the debt 
 at the time and its real burden after. 
 
 The object of this survey is not to dispute the necessity 
 of emergency action to support the banking system of the 
 country, or to criticise the measures actually taken. The 
 crisis was altogether unprecedented, and even to grasp all 
 the essential facts would have taxed the powers of Goschen 
 and Gladstone combined. But it needs no great financial 
 genius to show that emergency measures should be limited 
 as much as possible.
 
 CHAPTER VII 
 
 ECONOMIC PRESSURE AND THE LENGTH OF THE 
 
 WAR 
 
 (Octohcr 10, 1914) 
 
 Prefatory Note 
 
 [In the first sentence of this article it is carefully stated that 
 the forecast is founded on economic consideration's alone and 
 also under certain assumptions as regards the military and 
 political situation that at the time seemed reasonable in the 
 way of probability. These conditions, however, were not 
 realised. The British Navy no doubt kept command of the 
 sea as regards naval power, but even after three years the 
 blockade of Germany has not been made completely effective. 
 There can be little doubt that if we had made our blockade 
 as ruthless as Germany would have done in like case the 
 economic pressure would have succeeded. Not only, how- 
 ever, were many open doors left through neutral territories, 
 but Germany over-ran and exploited new areas of supply. 
 Germany left the barest minimum of subsistence to her 
 conquered provinces and exacted also the maximum of 
 economic work from their labour and capital. The economic 
 pressure of Britain and her allies was never fully applied — 
 far from it. And yet, imperfect as was the application of the 
 pressure and after making all allowances for neutrality and 
 ])lunder, it is astonishing how the Central Powers have 
 endured. As Mr. Gerard has forcibly reminded us, the 
 German is naturally a gross feeder — a seven meals a day 
 gormandiser. He is also a lover of beer and skittles, and 
 modern music and other pleasures. Before the war even 
 his own Jeremiahs lamented the materialisation of the old 
 German spirit. And yet the Germans have fasted from all
 
 ECONOMIC PRESSURE AND LENGTIT OF WAR 209 
 
 but sin, and lived on substitutes during three winters. If 
 their ph3/sical endurance has been wonderful, their psycho- 
 logical endurance from the British standpoint has been still 
 more wonderful. The best educated race in the world has 
 continued to tolerate a military despotism long after the 
 hope of a short and glorious war had vanished. I^ussia 
 made a revolution — though the Russian peasant was sup- 
 posed to be a Tsar worshipper far more than the German 
 is a Kaiser worshipper. Even Greece at last expelled 
 her Graeculus esttriens Constantine. But Germany has 
 remained loyal to the Emperor and even to the Crown 
 Prince, and has kept alive the spirit of loyalty even in the 
 varied races of the other Central Powers. Not only has 
 Germany resisted the economic pressure of semi-starvation, 
 but has made good the loss of raw materials which we were 
 assured were absolutely essential both for industry and for 
 war. The record is extraordinary. Perhaps in the end the 
 reaction also may be as extraordinary as a geological catas- 
 trophe due to the cumulative effect of prolonged pressure.] 
 
 The following estimate of the probable length of the war 
 is based on economic considerations only, and in order to see 
 their full force and to get rid of compHcations it is necessary 
 to make certain assumptions as regards the general situation, 
 military and political. Let it be assumed first that the 
 British Navy continues to keep the command of the sea ; 
 and, next, that the general result of the military operations 
 during the winter is what the Kaiser might condescend to 
 call a draw. That is to say, let it be assumed that the Allies 
 are able in the East and the West to drive the Germans 
 within their own borders, but no more. Such a supposition 
 does not seem too optimistic. As regards France, the 
 German apology for the invasion of Belgium was the alleged 
 necessity of speed. On their own showing, Paris was not to 
 be taken except with a rush. An invasion of Russia in 
 winter need not be considered. The chance of the occupa- 
 tion of the rest of Belgium may be balanced by the chance of
 
 210 WAR FINANCE 
 
 the intervention of Italy or Denmark. On the whole, if the 
 Kaiser in the course of the winter can claim a draw he will 
 do well, so far as the mihtary situation is concerned. It 
 might be supposed that such a concentration of the forces of 
 Germany would lead to a defensive war that might be pro- 
 longed indefinitely, and that in this way the military draw 
 would end practically in apolitical draw and the re-establish- 
 inent of the status quo ante helium. A political draw of this 
 kind would, of course, to the Allies be a severe defeat. But 
 before such a defeat can be accepted economic pressure will 
 come in with increasing force. 
 
 Under the assumption of a military draw, and Germany 
 for the Germans being the order of the day, let us look at the 
 effects of this economic pressure. The first rough estimate 
 seems favourable to Germany. For a long time Germany 
 has set herself to become self-supporting as regards food 
 supplies and the necessaries of life. Agriculture has been 
 encouraged, and the production from the soil has been 
 greatly increased. Since the last great war the arable land 
 has increased, and the yield per acre has increased much 
 inore. There is also great variety in the products. In 
 potatoes and sugar Germany produces more than any other 
 nation, and her production of rye and of oats is more than 
 double her production of wheat, and of barley is nearly as 
 great. But in spite of this great increase in production 
 German agriculture cannot in normal times satisfy the home 
 demands, and there has been a steady increase in the import 
 of cereals. As regards animals for food, the growth has not 
 kept pace with that of population, and the imports would be 
 much larger but for restrictive legislation. Large quantities 
 of fish, both salt and fresh, are also imported. In 1912 the 
 total value imported of foods, beverages, animals, etc., was 
 over 160 million pounds, which was three times the amount 
 imported a quarter of a century before. As also indicating 
 the importance of the food, etc., imports, it may be observed 
 that this aggregate is about 30 per cent, of the total 
 imjjorts. 
 
 After making all allowances for importation through
 
 ECONOMIC PRESSURE AND LENGTH OF WAR 211 
 
 neutral countries, it is plain that this foreign supply must be 
 seriously checked. Some falling off in the production of 
 foods is also likely to take place in Germany itself. Owing 
 to the check on the import of food stuffs for animals (bran, 
 etc.), the stock must be reduced, and already it was insuffi- 
 cient. More and more in recent years agricultural industry 
 (in the widest sense) has been conducted on intensive and 
 scientific methods. If a large part of the skilled labour is 
 withdrawn for the war, the effect must be felt in the net 
 product. Old men, women, and children cannot keep up to 
 the same extent the agricultural product. That is one of the 
 first penalties of a nation in arms. As with labour, so with 
 capital. Transport, a vital requirement in agriculture, is 
 crippled by the demands made by war on the railways and 
 horses. Credit is dislocated, and the land banks, with other 
 institutions, must suffer. 
 
 Not only will the aggregate food supply be less, but in 
 times of war there is a much greater wastage, so that there 
 is a less real surplus available for the non-combatant popula- 
 tion. But even the non-combatants must be supplied with 
 a sufficiency of the necessaries of life. This term " neces- 
 saries " is, however, one of the most elastic in economics. 
 Besides the foods necessary to keep body and soul together, 
 there are other so-called " conventional " necessaries that 
 are required to make life endurable — e.g., fuel, clothing, tea 
 and coffee, and in Germany beer. A certain amount of 
 substitution inter se is no doubt possible even in absolute 
 necessaries — e.g., potato flour for wheaten or rye flour, and 
 so on — but from the very meaning of the term there is no 
 substitute for a general shortage of " necessaries." With 
 regard to the conventional necessaries, it is also a well- 
 established fact in statistics that people, if left to themselves, 
 curtail the real necessaries before they curtail the conven- 
 tional secondary necessaries to which they have become 
 accustomed, not to say enslaved. Tea will be preferred to 
 bread, and in some cases tobacco to either. 
 
 The general conclusion is that the shortage of " necessaries " 
 (in both senses of the term) must be accompanied in Germany
 
 212 WAR FINANCE 
 
 by increasing discomfort or strain, even if, as in a besieged 
 fortress, all the supplies were distributed in rations adjusted 
 by military authority on an equitable basis. It is, however, 
 quite clear that no Government could at once undertake to 
 dole out rations to a population of over sixty-five millions. 
 The unemployed and their dependants must, of course, in 
 some way be provided for, but even in their case the relief 
 may be given in the form of money, and not in actual food, 
 etc. And in ordmary cases, as regards the great mass of 
 consumable commodities, the distribution of the supplies 
 within this huge fortress will take place simply according to 
 the money power possessed by the different individuals, 
 families, and classes. 
 
 This reliance on money as the great agent in distribution 
 brings in very great difficulties that are not apparent in times 
 of peace. It is not so much the absolute shortage that has to 
 be taken account of as the distribution of the lessened supplies 
 according to the money power of the consumers. This 
 distinction is of vital importance. To say that Germany has 
 a sufficiency per head of population is one thing ; it is quite 
 another thing if the distribution is effected by means of 
 purchase and sale. 
 
 The natural result of a shortage in any necessary is a rise 
 in price altogether out of proportion to the deficiency. In 
 his " History of Prices," Tooke showed that a deficiency of 
 one-sixth in the production of corn in this country, even if 
 somewhat relieved by imports, has sometimes raised the 
 price to double the average ; and he said that a deficiency in 
 the crops of one-third, without any surplus from former 
 years or any chance of imports, might raise the price five, 
 six, or even ten fold. As a matter of fact, in this country in 
 the Napoleonic wars the price of wheat rose to over £6 per 
 quarter. In Germany the rise in the prices of food stuffs has 
 already begun to excite alarm, and a demand is made that 
 prices should be fixed by authority where this has not already 
 been done. But simple as this method seems, it is difficult 
 to carry out in practice, and can only be applied at all in a 
 few cases. If the prices are kept low, then there is no check
 
 ECONOMIC PRESSURE AND LENGTH OF WAR 213 
 
 so far on ordinary consumption; and there is no effective 
 means of preventing re-sales by individuals above the 
 Governmental price, if limits are placed on the amounts 
 given to each applicant. Again, the Governmental low 
 prices would check supplies, by home production or imports, 
 just when the supplies ought to be stimulated. History 
 shows that, except in very simple cases, the attempt to 
 regulate prices by the State has broken down. But so long 
 as the use of money is the main agent in the distribution of 
 most forms of wealth, there may be serious want in the lower 
 strata, and not even discomfort in the richer classes. 
 
 At this point account must be taken of the fact that the 
 greater part of the incomes of the people are earnings in 
 return for varied economic services ; services of labour of all 
 kinds and of capital of all kinds. But the dislocation of war, 
 in which millions of the best manhood of the nation are 
 engaged, means also a corresponding dislocation of incomes. 
 In all occupations not directly concerned with the war there 
 is a rapid increase in unemployment and a corresponding 
 decrease in income. Here again we see the importance of the 
 check to the foreign trade of Germany both as regards the 
 import of new materials and the export of products. Apart 
 from this there is the natural contraction in expenditure on 
 all kinds of luxuries, but on the making and sale of these 
 luxuries the incomes of vast numbers of the people depend. 
 Whilst in many cases there is a falling off in incomes, in some 
 of the industries stimulated by the war there may be over- 
 time and overpay. In the crippled industries, on the other 
 hand, unscrupulous employers may take advantage of the 
 labour market to reduce the rate of wages. The general 
 conclusion is that in a system of money exchanges the 
 inequalities in the distribution of wealth, which even in 
 times of peace cause social unrest, are very greatly 
 aggravated in a war, with nations in arms. 
 
 But the evils of the money method of distribution become 
 much worse if by the financial action of the State there is 
 a general rise in prices. Many people profess not to under- 
 stand what is meant by a general rise in prices, and still less
 
 214 WAR FINANCE 
 
 to understand the causes. But every one knows in his own 
 particular expenditure of income if it goes as far as it used — 
 if it does not, then so far he suffers from a rise in prices ; and 
 if all other people on the average are in the same case, the 
 rise may be said to be general. If the Government in time 
 of war issues a great mass of paper money which is legal 
 tender, and cannot be exchanged for gold, then there is no 
 limit to the rise in general prices that may occur except in 
 the limitation of the issues by the State. In proportion to 
 the rise in prices the paper money is said to be depreciated. 
 In the extreme case the depreciation is glaringly obvious, 
 and everybody understands it in practice only too well. But 
 the beginnings of depreciation are generally overlooked. 
 People think that a rise of prices in war is part of the nature 
 of things, instead of being due largely to emergency finance. 
 Passing over the general difficulties it may be said that the 
 measures adopted by Germany on the outbreak of war are 
 certain to raise prices. The masses of inconvertible notes 
 issued only need time to produce that well-known effect. 
 
 In addition to this difficulty there is the further difficulty 
 that arises from the system of banking that in Germany has 
 been carried to an extreme. Everybody knows that the 
 German bankers pride themselves on the assistance given to 
 trade. Even now in this country we hear complaints that 
 similar assistance is not given by our. banks to all sorts of 
 trade. This German plan may work well enough when 
 trade is expanding, but even in peace it proves to a be danger- 
 ous system in the reverse case of contraction and depression. 
 The difference between the German and the British banking 
 systems is shown by the rates at which the two Governments 
 have been able to issue their loans, the German rate being 
 very much higher than the British. Not only is this the 
 case, but the German loan, being received in depreciated 
 paper, adds so much to the real cost. Taking everything 
 into account, it seems likely that the money borrowed by 
 Germany during the first six months of the war will require 
 double the rate of interest paid by the British Government. 
 This high rate of interest in Germany means so far a relative
 
 ECONOMIC PRESSURE AND LENGTH OF WAR 215 
 
 breakdown in public and banking credit. As the war pro- 
 gresses the higher command of the money power will begin 
 to be alarmed, and the lower commands of the money power 
 will begin to feel the pressure of diminished resources. 
 
 By following out the consequences of the natural shortage 
 of food supplies, etc., and the artificial excess of paper money, 
 we see that with the advancement of winter the economic 
 pressure will be felt more and more severely. The question 
 then arises — -Is the ultimate aim and object of the war such as 
 to induce the people to submit to its prolongation ? Are 
 the Germans devoted to their Kaiser as the old Highlanders 
 to their chiefs or the Russians to their Tsar ? Does the idea 
 of a greater Germany, that shall displace a greater Britain, 
 appeal to the German masses ? If Germany is confined 
 within her own borders in the winter, what will be the pros- 
 pect of the dream of Empire in the spring ? These and a 
 mass of similar questions are sure to be asked by all the little 
 Peterkins of Germany, and the Kaiser will be hard put to it, 
 in the face of his former boastings, to explain what good will 
 come of it at last. Taking one consideration with another, 
 the end of the war ought to be in sight with the advent of 
 spring, and, at any rate, the prolongation over a second 
 winter is extremely improbable.
 
 CHAPTER VIII 
 
 THE INCREASE IN THE CIRCULATION OF MONEY 
 IN WAR-TIME 
 
 [NovcDihcr 7, 1914) 
 
 The proper definition of " money " has long been a 
 matter of controversy, and very few people would be able 
 to answer off-hand Sir Robert Peel's famous question^ — 
 What is a pound ? or the other question of the text-books^ — 
 Are bank-notes money. ? I3ut in all these controversies, as 
 well as in actual practice, it came to be acknowledged that 
 a distinction must always be drawn between standard 
 metaUic money (in this country the gold sovereign) and the 
 other forms of " representative " money that in actual 
 business take its place. The most important in volume of 
 these forms of " representative " money is the cheque, or 
 in the words of the latest authority — " Money in England, 
 as we have long ago recognised, chiefly means a credit with 
 a bank carrying the right to draw a cheque." 
 
 But in quahty, as distinct from volume, the bank-note is 
 still the most important form of " representative " money. 
 The reason is that it may be made legal tender, though the 
 privilege of legal tender is not accorded to all bank-notes. 
 Before the outbreak of the war the Bank of England notes 
 were legal tender except at the Bank itself and its branches 
 " so long as the Bank continues to pay on demand its notes 
 in legal coin " (3 & 4 Will. IV., c. 98, s. 6). But they were 
 not legal tender in Scotland or Ireland, nor were the notes 
 of the English country banks or of the Scottish or Irish 
 banks legal tender anywhere. Of course, a tender of pay- 
 ment in money other than legal tender {e.g., bank-notes, 
 cheques, silver above 40s.), if not objected to, would fulfil
 
 INCREASE IN THE CIRCULATION OF MONEY 217 
 
 the monetary obligation, and in practice the great mass of 
 monetary transactions are effected, not by means of legal 
 tender, but by the different forms of credit. 
 
 It is obvious from the nature of the bank-note itself and 
 the form it bears that it is not strictly money, but a promise 
 to pay money on demand. If a bank-note ceases to be 
 either in law or in fact a promise to pay on demand it becomes 
 inconvertible (legally or actually). The difference between 
 convertible and inconvertible notes is one of the most vital 
 importance, as has been shown over and over again in the 
 history of almost ever}^ country in the world. One of the 
 greatest evils that can befall a country is the depreciation 
 of inconvertible paper, and the greater and the more fluc- 
 tuating the depreciation the greater the evil. The worst of 
 it is that depreciation only begins very gradually, and at first 
 it is not generally recognised. Once, however, the evil has 
 begun and is recognised, it is only to be remedied by the 
 simple but drastic measure of cancelling a sufiicient mass 
 of notes, which means a corresponding loss to the Govern- 
 ment, for people will only give up even depreciated paper 
 for its value in some other form. 
 
 The mere declaration that notes are to be made incon- 
 vertible (or that the obligation to pay gold is no longer 
 binding on the bank of issue) is not in itself enough to cause 
 depreciation. In spite of such a declaration the notes may 
 for a time be accepted at their full face value. But when 
 the volume has been swelled beyond a certain point depre- 
 ciation is certain to set in, and there will be a difference 
 between prices measured in gold and measured in paper. 
 Anyone who has been in a country with inconvertible paper 
 that is depreciated knows that he can obtain more than 
 the nominal amount of paper money for a certain amount 
 of gold. 
 
 The beginnings of inconvertibility may be sudden and 
 publicly declared, as on the outbreak of the present war, in 
 both Germany and France, where the notes were at once 
 made inconvertible. But in other cases the beginnings may 
 be gradual and insidious, and there may be de /ado incon-
 
 2i8 WAR FINANCE 
 
 vertibility before legal inconvertibility is declared or even 
 generally recognised. In this country, on the outbreak of 
 war the Government did not think it necessary to make 
 the notes of the Bank of England inconvertible, and the 
 Bank was obhged to meet its notes with gold on demand, 
 and for a time there was actually a run on the Bank for 
 this purpose. It was stated, however, in the Economist at 
 the time that even at the outset the Government were 
 advised by some people of financial importance to make the 
 notes inconvertible. As the event showed, such a procedure 
 would have been quite unjustified, and the note of the Bank 
 of England remained what it professed to be- — a promise 
 to pay gold on demand. 
 
 But although the Government did not adopt the method 
 of inconvertibility, it took several steps in the direction of 
 lessening the actual power of convertibility. It did not 
 say bankers need no longer pay their notes in gold on 
 demand, but it put difiiculties in the way of the demand 
 being made. It extended the privilege of legal tender, for 
 example, to the notes of the Scottish banks, and the notes 
 could only be presented for gold at the head offices of the 
 banks. But the longest step towards de facto inconverti- 
 bility was taken by the issue of Treasury notes for £i and 
 los. These notes were declared to be legal tender, and they 
 could only be presented for gold at the Bank of England 
 in London. As these notes are legal tender, it is obvious 
 that there is no inducement for people to present them for 
 gold unless they become of less value than the gold ; they 
 cannot take the trouble to send the notes to London and 
 get the gold, and the banks all over the country are not 
 likely to assist them in what they would call hoarding. Even 
 before the new Treasury notes were issued the Chancellor 
 of the Exchequer implored people not to ask their bankers 
 for gold. He assured them the Government was printing 
 sovereign and half-sovereign notes as fast as possible. Once 
 these notes were ready, it seemed to be a public duty to 
 use them in preference to gold. Some patriots wrote to 
 the papers stating that they had sent in all tlic gold they
 
 INCREASE IN THE CIRCULATION OF MONEY 219 
 
 could to the banks, and for a time to ask for gold was 
 considered as sinful, as in former times to ask for usury on 
 lending gold. But, apart from this appeal to the public 
 conscience, the banks were encouraged or commanded not 
 to pay out gold, even if unconscionable people asked for it. 
 
 At the same time the Government declared a moratorium 
 by which people were allowed to postpone the payments of 
 debts incurred before the war, and this privilege was to a 
 great extent taken advantage of by the banks. Even money 
 on deposit or current account could not be legally demanded 
 by the creditors, and any advances to them out of their own 
 money was at the discretion of the bankers. The curious 
 thing was that at the same time people were admonished to 
 use cheques as much as possible for all kinds of payments, 
 which, of course, meant that, as in the United States in the 
 panic of 1907, cheques became a kind of inconvertible 
 currency. The use of " representative " money was further 
 extended by making postal orders legal tender even for 
 small amounts. The amount of silver money was increased, 
 and silver is "representative" money inasmuch as the 
 metallic value of a shilling is less than fivepence. 
 
 Attention has been called recently by the Treasurer of 
 the Bank of Scotland to the increase of "money " in circula- 
 tion in Scotland. The increase is said to be some two mil- 
 lions sterling, and it is observed that, " considering the 
 population, this is a very large increase." But at the same 
 time it may be pointed out that, considering the population, 
 the increase in Scotland must be less than in the rest of the 
 United Kingdom. The population of Scotland is, roughly 
 some 10 per cent, of the population of the United Kingdom. 
 The new Treasury notes outstanding by the last return 
 amount to over thirty-one millions sterling, and if Scotland 
 had its proportionate share of this increase it would amount 
 to over three millions. But the Treasury notes are only 
 one form of " representative " money. In Scotland their 
 place has been taken to a great extent by the notes of the 
 Scottish banks, which, of course, means so much more of 
 the Treasury notes for the rest of the Kingdom.
 
 220 WAR FINANCE 
 
 This great increase in legal tenders with imperfect con- 
 vertibihty, unless checked and remedied, can only have 
 in time the usual consequences^ — namely, a rise in prices, 
 and eventually inconvertibility and depreciation that must 
 be acknowledged. On the outbreak of the war there was 
 no doubt room for a considerable increase in legal tenders, 
 simply because there was so great a destruction of ordinary 
 bankers' credit. In the same way, for the time being, it 
 was natural for the Bank of England to be anxious about 
 an adequate reserve of gold. But once the first shock of 
 the declaration of war had passed there was no need as 
 regards the internal circulation for flooding the country 
 with " representative " money. In spite of the extra- 
 ordinary application of the moratorium to banking accounts, 
 the banking system of the country has contrived to settle 
 down to ordinary business. The latest Clearing House 
 returns show only lo per cent, diminution as compared 
 with the corresponding week of last year. The rates for 
 money in the London money market are, considering the 
 war, surprisingly low. And yet every week the issue of 
 Treasury notes is increased, and the increase last week is 
 greater than ever. 
 
 It is true that for some time an increasing amount of gold 
 has been set aside, supposed to be ear-marked for the 
 redemption of these notes ; but, as already explained, the 
 notes are not likely to be presented for conversion until 
 depreciation is actually observed, which especially for notes 
 of low denomination, such as los., is always a matter of 
 t'mc. 
 
 The people of this country had become so accustomed to 
 the smooth working of the currency, and the effective main- 
 tenance of the gold standard, that th(\y were prepared to 
 accept loyally any emergency measures that might be 
 recommended without much scrutiny. They even accepted 
 the position that though a bank-note was simj)ly a promise 
 to ])ay gold on demand, it would be bad form to ask for the 
 ])aynu'nt. But if greater evils arc to be avo'ded it is time 
 that the increase in the currency should be stopped and
 
 INCREASE IN THE CIRCULATION OF MONEY 221 
 
 the dc facto convertibility renewed. If masses of legal 
 tenders are thrown into circulation with no efficient means 
 for withdrawal, in the course of time prices will rise and 
 more currency will be needed to effect exchanges on this 
 higher level. The more money is issued the more will be 
 demanded. The simple and effective way to prevent an 
 increase in the circulation is to put the issues on the old 
 basis, or on some other definite basis of limitation. The 
 new Treasury notes are in direct contravention of the system 
 that has governed the issues of notes in this country since 
 1844 (and 1845 for Scotland). The old principles have been 
 abandoned, and so far as the public is concerned no one 
 knows by what principles, if any, the new issues are governed. 
 If the ultimate object is that in England the Treasury notes 
 should take the place of gold under the idea that the gold 
 displaced would flow into the Bank of England, the methods 
 adopted do not seem to be successful to any extent.
 
 CHAPTER IX 
 
 PROBABLE EFFECTS OF THE WAR ON RATE OF 
 
 INTEREST 
 
 {November 20, 1914) 
 
 As the result of the war there will probably be a consider- 
 able rise in the rate of interest. The consequential effects 
 on the values of securities of all kinds are of the highest 
 practical importance. 
 
 In general, as is shown by reference to history, and 
 especially to the history of the last twenty years, it is very 
 difficult to forecast the movements in the rate of interest. 
 Twenty years ago no one foresaw the great rise that was to 
 take place, with the consequential fall in the price of Consols 
 and other first-class securities. It is easy to give the general 
 reason why it is so difficult to forecast movements in the rate 
 of interest. The rate of interest depends on the demand and 
 supply of loanable capital, and both the demand and the 
 supply depend on a number of different factors, varying in 
 force and in direction. The calculation of the resultant 
 effect of all these influences is rendered more difficult in 
 recent years by the increasing extension in the field for in- 
 vestment and in the demands for capital all the world over. 
 
 Since the difficulty of forecasting is in general so great, it 
 may seem pure guesswork to tr}^ to foretell at this stage the 
 probable effect of the war on the rate of interest. Yet the 
 general argument in favour of a probable rise seems quite 
 convincing, and may be put in two propositions. 
 
 The first is that as the result of the various causes affecting 
 the demand and supply of loanable capital there has been a 
 rise during the past ten years in the yield to first-class 
 securities with fixed interest — e.g., Consols and railway 
 debentures. Before the outbreak of the present war there
 
 EFFECTS OF THE WAR ON RATE OF INTEREST 223 
 
 was no sign of any reaction, though new issues were waiting 
 for a favourable change. We must suppose, then, that the 
 causes of the rise in the rate were still operative this summer, 
 and that the general resultant was the same in spite of 
 changes in the particular elements of demand and supply. 
 
 The second proposition is that in consequence of the war 
 the demand for capital will greatly increase, whilst the 
 supply in general will be greatly diminished. An examina- 
 tion of some of the principal causes affecting the demand 
 and the supply will make this statement quite reasonable. 
 
 Take first demand. Demand for loanable capital is 
 broadly of two kinds — namely, for productive and for 
 unproductive consumption. The greatest of unproductive 
 demands is for war. The chief cause of the growth of 
 national debts in the past has been war. The present war 
 will accumulate debt more rapidly and to a greater extent 
 than any previous war. 
 
 The next great unproductive demand is on the part of 
 Governments for social reforms of all kinds. The war, 
 instead of diverting this kind of expenditure to miHtary 
 requirements, tends to increase it. Let any one consider 
 the proposals made for the soldiers and their dependants on 
 the return of peace. If any considerable part of these 
 proposals are carried into effect, the country will be burdened 
 with many millions of extra expense. If this expense is met 
 out of revenue, less of the actual military expenditure can be 
 so met. Indirectly, if not directly, the demand for social 
 benefits must increase the indebtedness of the country. The 
 growth of debt will be facilitated by the increased laxity in 
 public opinion as regards debt and economy. Before the 
 war the increase in social expenditure involving fixed (or 
 increasing) charges had been advancing without any serious 
 protest from any responsible statesman. After a successful 
 war and the salvation of Europe from German militarism, 
 no reward will seem too great for any who took part. Other 
 generations must be expected to bear some of the burden, 
 just as we are still bearing the burden of crushing the great
 
 224 WAR FINANCE 
 
 Napoleon a century ago. Judging by recent modes of 
 measuring national achievement, the greater the debt that 
 is piled up so much greater will be the glory. What is true 
 of this country is true of all the countries in the world. We 
 have no monopoly of social reform. In many expensive 
 reforms we have not even taken the lead ; we have tried to 
 make up for lost time regardless of expense. There can be 
 no doubt that on the side of the demand for capital there will 
 be a great increase on the part of the greatest of unproductive 
 consumers — namely, the Governments of the world. 
 
 The demand for productive purposes is also likely to be 
 greater than before the outbreak of the war. The experi- 
 ence of the Franco-German War in the 'seventies is instruc- 
 tive. The conclusion of peace was followed by a great out- 
 burst of industrial activity.- All the destruction and all the 
 deferred expenditure caused by the war had to be made 
 good. But the war in question was in the magnitude of the 
 strain not to be compared with this war. If the world on the 
 conclusion of the war is to try to resume its former produc- 
 tive activities there must be a great demand for capital. 
 
 The case seems equally clear if we look to supply. War 
 involves a great actual destruction of old capital (witness 
 Belgium) and an almost complete check to accumulation of 
 new capital in the countries directly affected. Indirectly 
 other countries feel the depression in trade and industry. 
 Even in the United States a check must be placed on 
 accumulation of capital during the war. It is true that 
 certain kinds of industry are stimulated by the war expen- 
 diture — those providing, for example, war materials and 
 soldiers' necessaries, such as boots and uniforms. This 
 country, in particular, is suffering much less as regards 
 employment than might have been expected. But after all 
 allowances are made, it is not probable that there will be 
 any real surplus of new capital created during the war. On 
 balance the consumption will probably exceed the savings. 
 
 The general conclusion that the war will increase 
 the demand and lessen the supply of loanable capital is 
 strengthened rather than weakened when we look into the
 
 EFFECTS OF THE WAR ON RATE OF INTEREST 225 
 
 more particular influences. In spite of the large increase in 
 debt there will also no doubt be a great increase in 
 taxation. We cannot transfer all the burden to future 
 generations. Recent experience tends to show that the 
 increase in taxation will be made to press most heavily on 
 the classes which, whatever their other defects may be, are 
 the chief providers of new capital. But in any case the 
 heavier the taxation so much less is the power of accumula- 
 tion. 
 
 On the side of demand one of the chief causes of the recent 
 rise in the rate of interest has certainly been the growth of 
 security all the world over. New and undeveloped countries 
 have been trusted to a greater extent than ever before. The 
 area of the demand for the loanable capital of old countries 
 has enormously increased. The conclusion of the present 
 war in which half the world is engaged seems likely to be 
 followed by a period of forced repose. The break-up of the 
 military power of Germany will in the end strengthen the 
 general security of the world at large, and thereby increase 
 the demand for capital. 
 
 There is, however, one apparent exception to this general 
 array of forces leading to a probable rise in the rate of 
 interest after the war — an exception that is of special 
 importance at the present time. A reference to the money 
 articles in the papers seems to show that after the first week 
 or so of the war there has been in the London money market 
 an apparent glut of money. After three months of war the 
 market rates for money for short loans are remarkably easy. 
 The Treasury has been able to float loans for six or even 
 twelve months at about 3^ per cent. It is true that the 
 Bank of England rate has been 5 per cent, for the last 
 three months, but tnis high rate as compared with the 
 market rate is due to the exceptional character of the 
 Governmental demands on the Bank for its various guaran- 
 tees. And after all, the rate of the Bank of England in 
 spite of the penal character of some of its charges on behalf 
 of the State is no higher than it was a year ago in the midst 
 of profound peace.
 
 226 WAR FINANCE 
 
 It may then, perhaps, be thought that if the Bank and the 
 Government have got over the first disturbances of credit so. 
 easily, in the course of time their difficulties will become less 
 and that the rate of interest in the London money market 
 may fall even lower as the war progresses towards its inevi- 
 table conclusion. 
 
 It must be remembered, however, that the present 
 apparent ease in the London money market is largely due to 
 the artificial creation of legal tenders and bank credits by 
 the action of the Government. It is hardly likely that this 
 easy method of increasing the supply of money can continue 
 " for three years or until the end of the war," whichever 
 happens to be the more distant. 
 
 But the point is that the rate of interest on the investment 
 of capital for long periods depends on more wide reaching 
 and more fundamental causes than the abundance or the 
 reverse of legal tenders and Governmental guarantees in 
 London. London is the great Clearing House of the world, 
 but London only creates a small part of the capital in which 
 it deals. The demand and the supply of the loanable 
 capital depend on real causes beyond the power of Govern- 
 mental control. A recent estimate by Sir George Paish put 
 the interest on British capital invested abroad at about two 
 hundred million sterling, and the corresponding capital 
 would perhaps be some three thousand millions. This 
 again is only a small part of the world's capital, and more 
 and more the rates of interest on capital all the world over 
 tend to be influenced by the same causes. The present war 
 will probabl}^ raise the rate of interest not only in the 
 belligerent countries but in all countries. The influence of 
 the London money market on the final result will be very 
 small. 
 
 There is, indeed, one way in which the manipulation of 
 credit in London and the other great financial centres may 
 affect the rate of interest, and that is by raising prices of 
 commodities to a greater height than otherwise would be 
 the case. The partial abandonment of the gold standard, 
 and the various checks imposed on convertibility into gold,
 
 EFFECTS OF THE WAR ON RATE OF INTEREST 227 
 
 have the same general effect as an increase of inconvertible 
 paper. In the process of the inflation of credit (that is 
 relatively to the contraction which would naturally take 
 place in time of war) prices rise. If at the conclusion of the 
 war the same outcry is persisted in for Governmental 
 monetary assistance, and the actual use of gold is still further 
 restricted, the rise of prices will continue. But the general 
 effect of such an artificial abundance of money and a conse- 
 quent rise of prices is to stimulate industry for the time and 
 intensify the demand for capital ; just as in recent years the 
 continuous rise in prices has partly caused the rise in the 
 rate of interest. The only influence in favour of a fall in the 
 rate of interest after the war is the possibility of a far- 
 reaching financial crisis forcing a real return to the gold basis, 
 with a consequent fall in prices and a check on speculation 
 of all kinds. 
 
 In the meantime, however, these rather obscure influences 
 of gold on prices may be left out of account, and the general 
 conclusion seems to be that after the war the rate of interest 
 will be higher for corresponding securities than before the 
 war. This, of course, means a corresponding fall in the 
 capital value of securities with fixed interest, and indirectly 
 all other securities v.dll be so far also affected. The conse- 
 quences of such a readjustment of the values of investments 
 are of the highest importance, not only to all classes of 
 investors, but to the various Governmental borrowers of the 
 world.
 
 CHAPTER X 
 THE FIRST WAR BUDGET— AND AFTER 
 
 {December 12, 1914) 
 
 The Budget has been received with a chorus of resignation. 
 Practically no discussion has taken place either in Parliament 
 or in the Press. Any suggestion of any slight modification 
 has been couched in terms of apology. The reticence enforced 
 in matters of war has been self-imposed in matters of finance. 
 This benevolent silence is extended even to the past^ — the 
 very near past. The reason is simple. Everybody wishes 
 to support to the best of his ability the credit of the nation, 
 meaning in this connection the financial credit. Everybody 
 knows that the war is costing a million a day, and everybody 
 thinks that the money power of the nation rests on the 
 national credit, and that in time of war the national credit 
 rests on the credit of the Government. It has been often 
 pointed out in these papers that the credit of the nation 
 must rest on real foundations, and that national financial 
 credit is a very different thing from mere confidence. The 
 constant references to the credit of this country being so 
 superior to that of others are generally associated with new 
 demands for Governmental expenditure, or, at least. 
 Governmental guarantees. If the real foundations of the 
 national credit are alluded to at all, it is generally in the 
 form of vague estimates of the national wealth. We are 
 told that this country has wealth to the extent of some 
 eighteen thousand millions. What is three hundred and 
 fifty millions of debt in the face of such assets ? It is 
 forgotten that the greater part of this national wealth 
 consists of lands, houses, railways, and all kinds of fixed 
 and specialised capital that cannot possibly be converted
 
 THE FIRST WAR BUDGET— AND AFTER 229 
 
 into war materials or necessaries for the dependants of 
 soldiers, or even into the gold that is supposed to be the 
 foundation of our banking system. The Chancellor of the 
 Exchequer in his last speech said that if the banks had 
 attempted to reahse some fifty millions of vStock Exchange 
 securities^ — presumably as they were the basis of bankers' 
 loans, they were, if not first-class, at any rate good second- 
 class stocks — they would have knocked the bottom out of 
 the market, and apparently precipitated the long-deferred 
 financial crisis. But if such holdings cannot be reahsed to 
 the extent of less than a paltry fifty milHons, what is the 
 use of talking of the national assets being worth eighteen 
 thousand millions ? 
 
 As a matter of fact, national income is a much better 
 test of national financial strength than the supposed corre- 
 sponding capital, the value of which varies with every 
 change in the rate of interest and with the number of years 
 taken as the basis of the conversion of income into capital. 
 
 In the final report to the first Census of Production, 
 Mr. A. W. Flux estimated the aggregate income of the 
 United Kingdom as about two thousand millions. Of this 
 amount less than three hundred and fifty millions is set 
 aside to be added to savings and investments. The remainder 
 consists of the values calculated for the goods and services 
 consumed by the people engaged in providing the various 
 goods and services. 
 
 A good deal of this income must be used in keeping up 
 the " living capital " in the form of human brains and 
 muscles. A large amount is already assigned to various 
 forms of expenditure, and cannot be diverted without 
 serious unemployment. Already in times of peace large 
 slices are taken in national and local taxation. When all 
 the necessary deductions have been made and all the prior 
 claims satisfied, the amount of taxable income available 
 for the demands of war becomes a very modest figure com- 
 pared with the " stupendous " figures of national wealth. 
 
 It may, of course, be said that the Government has the 
 first claim, but even a Government must take care not to
 
 230 WAR FINANCE 
 
 trench on the sources of the taxable income or injure the 
 productive power of the nation. Taxation beyond a certain 
 point is suicidal. And if taxation in the present is avoided 
 by resorting to debt, debt is only deferred taxation. The 
 present increase in the national debt by the War Loan 
 means over twelve millions extra taxation simply to pay 
 the interest, and the next instalment of debt is likely to be 
 at a higher rate. 
 
 There can be no doubt that the people of this country 
 will have to face a great increase of taxation, both present 
 and deferred, and the present Budget is only a beginning. 
 In a national emergency nobody expects any nice attention 
 to the details of the methods adopted. Adam Smith learned 
 from the wisdom and the unwisdom of his predecessors in 
 theory and practice four great rules or canons of taxation, 
 and his successors also, warned b}' experience, have added 
 a good man}^ more, not by any means mere counsels of 
 perfection, but good, honest working maxims. The text- 
 book writers also point out that in the case of any conflict 
 the less important rule must give way to the more important, 
 just the same maxim that the great Clausewitz gave as the 
 first maxim of war. 
 
 In the present great emergency there is no doubt that 
 the other rules of taxation must give place to the fundamental 
 rule of productiveness, and the productiveness must be 
 immediate. Simple as it seems, this rule cuts awaj^ a number 
 of proposals. Taxes are often imposed, not simply or mainly 
 for present revenue, but for various political or social 
 objects. Taxes on alcohol are supposed to be partly, at 
 least, preventive or penal. The method of enforcing sobriety 
 by taxation may or may not be effectual (Adam Smith 
 thought it was not), but unless we are prepared to follow 
 the example of Russia the increased tax on beer ought to 
 be regarded simph^ as a means of raising revenue. In the 
 same way, all the taxes that are constantly proposed for 
 improving the morals or manners or health of the people 
 must at this time be considered from their revenue-producing 
 power.
 
 THE FIRST WAR BUDGET— AND AFTER 231 
 
 If it is admitted that the object of war taxation ought to 
 be revenue, then that mode of taxation is best which gets 
 most cheaply at the revenues of the people. There is a 
 principle of taxation which has important consequences to 
 the effect that all taxes fall on persons and not on things. 
 We talk of taxing tea — what we mean is taking part of the 
 incomes of people who drink tea. On a strict analysis, all 
 taxes are disguised income taxes. Local rates on property 
 are a very rough method of getting at the incomes of people. 
 Adam Smith, the greatest of masters of finance, classified 
 all taxes according to the incomes on which they fell- — 
 e.g., rents, wages, profits^ — and he put taxes on commodities 
 in line with them by saying that they fell indifferently on 
 all species of revenue. All the intricate machinery of indirect 
 taxation is only intended to get at the real incomes of people 
 so far as the taxes are revenue-producing. In principle a 
 universal income tax which took directly the due share of 
 the State from the revenue of everyone would be the best 
 system of taxation. The first great rule of taxation laid 
 down by Adam Smith is that the subjects ought to con- 
 tribute in proportion to the revenues which they enjoy 
 under the protection of the State. And the simplest method 
 of all would be to make everyone pay his share directly. 
 
 Unfortunately, however, as the history of the British 
 income tax shows, any attempt to put this apparently simple 
 rule into practice bristles with difficulties. What is the 
 meaning of income for taxable purposes ? How are the 
 true incomes of the trader, the manufacturer, the profes- 
 sional man, the farmer, to be ascertained, and so on of all 
 the occupied classes ? If we rely on self-assessment, most 
 people think the first rule of taxation is, if possible, to evade 
 it. Gladstone and John Stuart Mill were horrified at the 
 immorality of the old income tax. Gladstone always pro- 
 fessed to hope for its entire abolition. Are all incomes of 
 the same size to be taxed at the same rate independently of 
 their source ? — perpetual and terminable incomes, incomes 
 from land, and incomes from medical practice — or, more 
 generally, are the " industrious " incomes to be taxed at
 
 23^ WAR FINANCE 
 
 a lower rate than the " lazy " incomes, to recall Gladstone's 
 names for earned and unearned ? It is to be observed that 
 Gladstone always looked in the first place to the great 
 productive power of the income tax. He would not have 
 it nibbled at here and there on all sorts of grounds lest its 
 efficiency as a revenue-producer should be destroyed. Not 
 that he forgot the equity of the case, but even that side he 
 looked at first from the point of view of the productivity. 
 If you want to get a certain amount of revenue [e.g., for a 
 Crimean war), then ever}^ exemption you grant means so 
 much more taxation on the people not exempted. As for 
 the nicer adaptations of practice to theory in the collection 
 of income taxes, he thought (in i860) that they must be 
 left to the little legislators who were then in the nursery. 
 The little legislators have grown up, and the income tax 
 has grown with them. The exemptions also have grown, 
 with the consequent rise in the burden on the incomes not 
 exempted. 
 
 The doubling of the income tax in the present Budget can 
 only be approved of as an emergency measure, which is to 
 be followed by a corresponding increase in the taxation of 
 the classes who at present come within the range of exemp- 
 tion. Even on the bare principle of productiveness it is 
 hopeless to raise a war revenue solely at the expense of the 
 richer classes. Who are the richer classes ? In his speech 
 on the War Loan the Chancellor of the Exchequer rejoiced 
 that the small investor had come forward — there were 
 actually one hundred thousand applications. There must 
 be nine millions of families in the United Kingdom. It is 
 plain that the hundred thousand patriots cannot bear all 
 the burden of the war. In the next loan more patriots will 
 have to be attracted by a higher rate of interest and a lower 
 limit of subscription. But debt in any form is only deferred 
 taxation. The small minority of subscribers to the loan 
 will receive interest, but the vast majority of taxpaj'ers 
 must pay it. There is no escape from the position that the 
 revenues of the State even in peace cannot be raised only 
 from the idle rich.
 
 THE FIRST WAR BUDGET— AND AFTER 233 
 
 Even in times of war some regard must be paid to equity. 
 The first duty of any civilised Government is to secure 
 justice. The simple doubhng of the present income tax 
 has also more than doubled its^inequahties. The rise in the 
 taxes on tea and on beer has also increased the inequali- 
 ties of indirect taxation. The productivity has also been 
 lessened by the failure to tax possible substitutes. The 
 drinker of beer may be encouraged to take to spirits, and 
 incidentally destroy the supposed moral value of the new 
 tax. 
 
 In the next War Budget, both on the grounds of pro- 
 ductiveness and of equity, the basis of taxation must be 
 widened. It is probable that the difficulties (non-political) 
 of direct taxation on lower incomes have been exaggerated. 
 In the Napoleonic wars the limit of exemption of income 
 tax was lowered to £50, and abatements were only allowed 
 on incomes up to ;^i5o. This, too, was a period when the 
 range of prices was much higher, and everything and every 
 occasion was taxed. In Gladstone's great Budgets in time 
 of peace the limit of exemption was £100. Local rates are 
 now levied so as to fall on much lower incomes — so are 
 insurance taxes. But if it is feared that direct taxation 
 cannot be extended, then the only alternative is to broaden 
 the basis of taxation on commodities. Only in that way 
 will the great mass of consumers be made to contribute. 
 This widening of taxation will have the advantage of 
 bringing home to the masses of the people the burdens of 
 war. 
 
 It is of at least equal importance, in view of the enormous 
 expense of the present war, that more regard should be 
 pa^d to economy in every department of the State. Of 
 recent years, in times of peace, economy in the public expen- 
 diture has apparently become a matter of no concern to so 
 wealthy a nation and its stewards. " It is a characteristic 
 of the mischiefs that arise from financial prodigality that 
 they creep on with a noiseless and a stealthy step." So 
 said Gladstone in 1861. But the wisdom of economy is as 
 old as taxation, and generally as much disliked.
 
 CHAPTER XI 
 THE MEANING OF ECONOMIC PRESSURE 
 
 [Jamtayy 2, 1915) 
 
 In an earlier paper (see Part II., Chap. VII., p. 208) 
 reasons were given for the opinion that the war was not 
 likely to be of long duration, founded on the influence of 
 economic pressure on Germany. The argument advanced 
 was threefold. First, regard was paid to economic pressure 
 in the simplest sense of the term — ^namely, as involving a 
 real shortage of necessaries of the first order and of necessaries 
 of the second order, or so-called conventional necessaries. 
 In the last few days signs have become of increasing fre- 
 quency and importance that already this simple elementary 
 economic pressure has begun to be felt in Germany. For a 
 long time all the reports that reached this country of condi- 
 tions of life in Germany were to the effect that " life as 
 usual " was going on just as if there were no war. Restau- 
 rants and cafes were open, and there were no shortenings of 
 the menus or enlargements of prices. It was stated, 
 officially and unofficially, that Germany had enough supplies 
 for a year, with the further implication that a country so self- 
 contained and economically independent would be able to 
 replace the year's supply by another in the ordinary course 
 of the seasons. On the face of it, this optimism seemed as 
 ill-founded as the military optimism when the dependence 
 of Germany on foreign sources of supply — e.g., in wheat, 
 fodder for animals, etc. — was taken account of. The natural 
 conclusion seemed to be that if Germany was consuming as 
 much victuals and drink as usual at the usual prices, the 
 elementary economic pressure would begin to be felt in the 
 middle instead of at the end of the winter.
 
 THE MEANING OF ECONOMIC PR*ESSURE 235 
 
 The belated warning of the economic Professors in Berhn, 
 which has not been disavowed, and v/as perhaps suggested, 
 by the Government, is significant. The Professors are 
 obhged to fall back on the very rudimentary counsels of 
 prudence and thrift which used to be the commonplaces of 
 the old political economy. "Waste not, want not," has 
 been expanded in the Germanic manner into five good-sized 
 paragraphs, with illustrations. Not " hfe as usual," but 
 the simple life is to be followed — so simple that the only 
 bread is to be " war " bread, and more refuse than usual is to 
 be put into the sausages. 
 
 More significant still is the intimation in the Times of 
 December 23 that " about ten days ago the German Govern- 
 ment's own organ, the North German Gazette, and the chief 
 military journal in Berlin, the Krcuz Zeitimg, were confis- 
 cated. Their crime was that they had published certain 
 resolutions on economic subjects by the Chamber of 
 Agriculture of the Province of Brandenburg." One of the 
 offending resolutions urged the Government to organise 
 immediately a scheme of sale and purchase by the Empire 
 at fixed prices of the corn necessary for the German Customs 
 Union. This measure, it was said, must be taken " before 
 it is too late, and in order to avert dangerous evils as regards 
 the suppl3ang the German people with bread." Another 
 resolution called attention to the growing scarcity of salt- 
 petre, which villainous substance is as necessary for the 
 manure of agriculture as for the munitions of war. Atten- 
 tion has already been called to the shortage of copper and 
 other things of the nature of necessaries in war. 
 
 But shortage of the necessaries of life or of war is not the 
 only kind of economic pressure,* nor is it always the most 
 effective. There are more ways of dying both for nations and 
 individuals than by starvation, and starvation is a matter 
 of degree. Semi-starvation is in many cases good for body 
 and soul^ — the fasts of most religions have a foundation in 
 reason. Granted that Germany has been accustomed of late 
 years to import of one kind or other one-third of her food 
 and drink supplies, it is quite possible that on the average, if
 
 236 ' WAR FINANCE 
 
 the adult German reduced his consumption by one-third he 
 would be none the worse — even English people have been 
 seriously recommended by the doctors to eat and drink half 
 of their usual allowance. And even in the necessaries of war 
 a shortage of supplies may be beneficial, since the economy 
 of material may lead to an economy of men, as seems to be 
 evidenced by the recent change in German tactics in the 
 West. 
 
 But there is a second kind of economic pressure that may 
 be even more effective than shortage of necessaries. Before 
 the necessaries are consumed they must be distributed 
 amongst the people. And the means of distribution may 
 break down under the new economic pressure of war. 
 
 Suppose that on Christmas Eve a statistician were to 
 prove that in England there was abundance of meat and of 
 materials for plum puddings to provide a full Christmas 
 dinner for everyone in the kingdom, most people would feel 
 no surprise. They look on their country as a land over- 
 flowing with meat and pudding. But if the same calculator 
 were to say that therefore everyone on Christmas day would 
 have a good dinner, this conclusion would seem as obviously 
 false as the other was obviously true. The people would get 
 the dinners if they had the money, or if someone else with 
 the money paid for the dinners. But no money, no dinner. 
 Even Government ofticials must get their dinners out of 
 taxes, and the paupers out of poor-rates, and those who have 
 no money and cannot dig and are ashamed to beg must 
 remain unfed. 
 
 These commonplaces may be put in a more scientific form 
 by saying that in the modern State the mechanism of 
 distribution is a complicated system of exchange that is 
 worked entirely by money and the credit-substitutes that 
 take the place of money. This mechanism is extremely 
 intricate, and may be put out of gear and rendered partially 
 unvv'orkable by what seem to be very small causes. The 
 failure of some great financial house {e.g., in 1866) has been 
 sufficient to cause or occasion a severe and prolonged com- 
 mercial crisis. The crisis of 1907 induced by the bad
 
 THE MEANING OF ECONOMIC PRESSURE 237 
 
 banking of the United States had world-wide effects. When 
 the present war broke out the first concern of the British 
 Government was the state of money and of credit. The 
 Navy might keep the seas, but the food supphes would not 
 come in unless they could be paid for, and if they were to be 
 paid for the mechanism of exchange must be repaired in 
 some way or other. Everyone knew by experience or 
 report the evil effects of a breakdown of credit in a commer- 
 cial crisis, and everyone expected the war to be as dislocating 
 as ten commercial crises in one. These facts are only 
 alluded to in order to show the fundamental importance of 
 the money economj^ in the industrial life of the nation. 
 When people say that money is only a medium of exchange — 
 only a means of avoiding the inconveniences of barter — they 
 only express a half truth ; the other half is that in the 
 modern industrial State money is practically the only 
 medium of exchange. 
 
 In simpler forms of society, in mediaeval times for example, 
 a great part of the wealth of the country was distributed 
 without the intervention of money — the various village 
 communities and manors were more or less self-suflicing, and 
 the shares of each member were determined by conditions of 
 status. But the economic progress of society has been 
 coincident with the substitution more and more of a money 
 economy for what used to be called a " natural " economy. 
 A few years ago the extreme advocates of State Socialism 
 proposed in effect a reversion to a kind of "natural" 
 economy. They proposed that the State- — a kind of god 
 out of a machine — should distribute all the wealth made by 
 the society according to the dictates of natural or acquired 
 justice. The Socialist State was to be a State without 
 money. Money was the root of all evil. The money power 
 was the greatest curse from which the world had ever 
 suffered, tmd so weiter. But as soon as the difficulties in 
 carrying on the distribution of wealth without money were 
 pointed out, they were seen to be so formidable that the 
 moneyless ideal was abandoned. 
 
 It is hardly likely that the German Government, in the
 
 238 WAR FINANCE 
 
 midst of a war for existence, can think of undertaking the 
 complete distribution of suppHes in the same way as rations 
 might be distributed in a besieged fortress, in which no 
 account would be taken of the money each one might happen 
 to possess. 
 
 And yet already in Germany it is proposed that the State 
 should take over all the supplies of food, and regulate the 
 distribution. Such a resolution of the Chamber of Com- 
 merce of Stuttgart was reported in the Times of the 23rd ult. 
 
 Even if the central authority were to take command of the 
 food supplies for the whole of Germany in the way suggested, 
 it is doubtful if the distribution would or could be effected 
 without the intervention of money. The State might fix 
 maximum prices, and might ordain that no one should buy 
 more than a certain amount. But in times of scarcity it is 
 not only the state of prices but the means of purchase that 
 must be considered. How are the ordinary or usual incomes 
 of people to be secured if through the want of raw materials 
 manufactures are lessened, and if the providers of all kinds 
 of secondary luxuries find no demand for their services ? 
 A large part of the able-bodied men are actively engaged in 
 the war, and another large part in the industries and com- 
 munications subsidiary to the war. They cannot at the 
 same time produce the usual flow of consumable wealth. If 
 the German soldiers are paid at all, they are certainly paid 
 far less than our so-called " mercenaries," and their families 
 must be much less well provided with money. 
 
 It might be thought that if there was not enough money, 
 all that the Government need do is to print more money. A 
 writer in the current number of the Round Table asserts that 
 Germany can always print off plenty of money. Nothing, 
 indeed, is easier than to print bank-notes if you have the 
 paper and the machinery. But people cannot eat bank- 
 notes — they cannot even eat token silver coins or postal 
 orders. To him who has most money most of the real things 
 he is in need of will be given, unless the State doles out the 
 rations and sees that the rations are consumed on the official 
 premises. Otherwise the recipients may sell their shares.
 
 THE MEANING OF ECONOMIC PRESSURE 239 
 
 and deprive their own families and themselves of food in 
 order to get other things, for it is well known that if people 
 are left to themselves they prefer the conventional secondary 
 necessaries to the real healthy means of subsistence. 
 
 If we follow out this reasoning, it is easy to see that an 
 apparent sufficiency of supplies per head may in effect be 
 associated with semi-starvation at one end of the social 
 scale and repletion at the other. Besides, people do not live 
 by bread alone, and to those who have been accustomed to a 
 fair standard of comfort the enforced privations of ordinary 
 luxuries will be a constant reminder of the hardships of war. 
 
 The money side of economic pressure must be considered, 
 not only in the relatively sim.ple cases of the money incomes 
 of individuals, but as affecting the resources of businesses of 
 all kinds. More and more joint-stock enterprise has dis- 
 placed the private firm. As a rule, such companies borrow 
 to the full extent of their credit. Before the war there were 
 evident signs in Germany of over-trading and over-expansion 
 of credit. The liquidation may be postponed, but when it 
 comes it must be all the more severe on account of the war. 
 
 The German Government, with all its power, cannot get on 
 without money ; and it cannot get on simply by printing 
 money. It must impose taxes ; it must issue loans. Every 
 tax that is imposed or increased makes the next levy more 
 difficult ; every new loan that is issued is more diflicult to 
 place. With the present enormous expenditure the pressure 
 of new taxes and of new loans must be very severe in a short 
 time. But this means that the great financial houses will be 
 put in danger and they may be trusted to show the dangers 
 of the collapse of the credit system of the country. 
 
 When the economic pressure has begun to be felt in the 
 failure of consuming power and of money power, then these 
 two kinds of pressure will be increased by the third kind, 
 which is the psychological. People often write of economic 
 matters as if political economy had nothing to do with 
 feelings or mental things, but only with bodies and material 
 things. But in truth political economy deals with men 
 mainly from the psychological side. Wants and their
 
 240 . WAR FINANCE 
 
 satisfaction are the farrago of our little text-books. Take 
 it in the concrete, some of the greatest strikes on record 
 have been undertaken and continued in the face of certain 
 monetary loss, simply for some kind of sentiment. Nations 
 will endure great privations to secure something on which 
 they have set their hearts, and to the reader of history 
 nothing is more saddening than the everlasting succession 
 of great wars waged for purposes that to the next generation 
 may seem unreasonable. Can we suppose that the object 
 of the present war, as presented to the German people by 
 their own prophets, is such as to induce them to fight to the 
 bitter end ? When the dream of the world-empire has 
 vanished in the mist, what is there left to fight for ? 
 
 It may, perhaps, be thought that the general arguments 
 here advanced apply also to the Allies. That is true, but to 
 a much less extent. Russia, by its magnitude and by its 
 relatively primitive economy, cannot be wounded in the same 
 way as a modern industrial State such as Germany. France 
 and the British Empire have the command of the sea, and the 
 command also of foreign credit. Even in these countries the 
 economic pressure will be severe ; even in Britain there is 
 need for far more elementary economy and far less extrava- 
 gance than is being practised alike in low places and in high. 
 But we have a larger margin to draw on than Germany ; and 
 we have a cause that so appeals to our first instincts of hberty 
 that, whatever may happen, the third kind of pressure, the 
 psychological, will only harden our hearts.
 
 CHAPTER XII 
 THE ECONOMIC PROSPERITY OF WAR-TIME 
 
 {January 9, 1915) 
 
 The reviews of the financial and economic conditions of 
 the principal countries of the world, which have been 
 published as usual at the end of an old year, have revealed 
 some astonishing contrasts. If we compare, for example, 
 the United States of America with the United Kingdom, the 
 result of five months' war is exactly the opposite of what 
 was generally anticipated at the beginning of August. It 
 was supposed that the United States being at peace, whilst 
 all its great competitors were using all their resources in 
 the greatest war on record, the outcome must be a great 
 expansion of American trade and industry and a corre- 
 sponding economic depression in the belligerent countries. 
 In particular, it was thought that the United Kingdom 
 would suffer severely through the loss of trade, and at once 
 a great stimulus was given to the creation of a large fund 
 for national relief. But the annual reviews of the news- 
 papers have shown that the economic forecast for the two 
 countries has apparently been exactly falsified. It is America 
 that has been afflicted with the east wind that the angler's 
 verse tells us is good for neither man nor beast, whilst the 
 British Isles have had the west wind, which is the very 
 best. Consider the conditions of the masses of the people 
 as shown by the statistics of unemployment and pauperism 
 in the United Kingdom. We are told that in both respects 
 the figures are below the normal. In London there was 
 never a Christmas with so little flagrant destitution — a 
 docker can earn, if he pleases, a pound a day. But in the 
 United States unemployment is above the average, and the
 
 242 WAR FINANCE 
 
 belated Note of the United States Government ascribes the 
 depression of trade to the inquisition of the British Nav3^ 
 What is true of the United States seems to be true of other 
 neutral countries. Holland, Switzerland, and Italy — even 
 Spain and Portugal — are all complaining bitterly of the 
 effects of the war on their trade and industry. 
 
 As regards the British Empire, it seems to be only the 
 parts that are most removed from the seat of war and its 
 direct effects that are suffering. Emigrants are warned that 
 the Britains overseas have no vacancies — they have enough 
 to do to provide for their own sea-maws. Australia, New 
 Zealand, South Africa, and Canada all tell the same tale — 
 no room for emigrants owing to the war and the consequent 
 depression. In the meantime John Bull himself puts under 
 arms a couple of millions of his best workers and supphes 
 them with material comforts such as were never dreamed 
 of before in times of war. If we take the family as the unit, 
 many of the families of the soldiers are better off than in 
 times of peace, and some of the non-combatants are having 
 the time of their lives in the plenteousness of the separation 
 allowances. John Bull was told that with the advent of 
 a European war the London money jnarket would be 
 smashed and its glory be passed on to another. It is said 
 that the Germans (naturalised and other) laid mines for the 
 financial explosion which was to wreck the Bank of England 
 and shatter London's credit. What happened ? Apparently 
 a week's Bank Holiday was enough for John Bull to put 
 his house in order. The crisis was effectually suppressed. 
 The best proof is that, according to the Times, all over the 
 United Kingdom there has been a decrease in the volume 
 of insolvency during the war. Any part of the business of 
 the country that seemed imable to run itself was run by 
 the (iovernment. (jovernmental control was carried to 
 such an extent tliat the old presumption against Govern- 
 mental management of business was reversed, and just at 
 tlie very time when the extraordinary functions of the 
 State were enormously added to by the war, a demand was 
 made that the State sl'OiiM iiiulcM-take all sorts of tilings
 
 THE ECONOMIC PROSPERITY OF WAR-TIME 243 
 
 that were usually managed by private enterprise. Under 
 this new reliance on the State emergency measures have 
 been prolonged and increased in scope and variety. With 
 the new year the Stock Exchange has been made practically 
 into a Governmental department, so stringent are the rules 
 against freedom of contract and any form of speculation. 
 
 This extension of Governmental management has been 
 accompanied by a great increase of Governmental " money." 
 Not only have Treasury notes been issued to the extent of 
 over thirty-eight millions as legal tenders for £1 and 10s., 
 but banking credits have been still more increased by all 
 kinds of Governmental guarantees. The consequence is 
 that the end of the year found the London money market 
 in a state of ease that had not been paralleled for over 
 twenty years. London was apparently rolling in money. 
 And, as was often pointed out, this extraordinary abundance 
 of money and this buoyancy of credit had been attained in 
 spite of the issue of an enormous war loan. 
 
 Besides this our Allies and the other States of the British 
 Empire have all made calls on British credit and have all 
 received assistance. It was reported that even the United 
 States of America, in the early days of 'the war — long before 
 the Note on contraband was thought of — was accommodated 
 with a loan of British gold. British credit seemed and still 
 seems like the widow's cruse, with the Chancellor of the 
 Exchequer as prophet. 
 
 These exuberant signs of prosperity, especially as com- 
 pared with other countries that are at peace, admit of 
 explanation, and the explanation suggests some misgiving. 
 " The expense of government to the individuals of a great 
 nation is like the expense of management to the joint tenants 
 of a great estate " — so said Adam Smith in another connec- 
 tion, but the comparison is useful in dealing with war fmance 
 and its effects. The history of many great landed estates 
 is a history of the ruin of their original possessors by the 
 accumulation of debt. Every new mortgage is accompanied 
 by an abundance of ready money and corresponding extrava- 
 gance. The particular village or city in which the expendi-
 
 244 WAR FINANCE 
 
 ture is made enjoys ior the time exceptional prosperity. 
 The reaction comes when the loan has to be renewed — when 
 the capital has gone and the interest has to be paid. 
 
 The present War Loan and the various extensions of 
 Governmental credits are essentially the same as the bor- 
 rowings of the landowner, and the immediate effect is the 
 same, though the moral motive is different. It is not neces- 
 sary to press the analogy. The same argument may be 
 put in a more general form. " The moment in which war 
 begins ... an immediate and great expense must be 
 incurred, which will not wait for the gradual and slow 
 returns of new taxes. In this exigency the Government 
 can have no other resource than borrowing." Adam Smith 
 goes on to explain how in a country abounding in merchants 
 and manufacturers capital passes through their hands 
 rapidly, and can be to a great extent diverted to the needs 
 of the State. He points out also that by lending to the 
 Government they do not even for a moment diminish their 
 abihty to carry on their trade and manufactures ; on the 
 contrary, they commonly augment it. Certainly in the 
 present war the Government has taken pains that the 
 extension of public debt shall be accompanied with the 
 extension of private credit. The subscribers to the new 
 War Loan can borrow to the full extent at less than the 
 Bank rate — even at 2 per cent, below this official rate. 
 These great sums raised by the State are expended for the 
 most part within the country, and this increase of expendi- 
 ture is for the time associated with increased consuming 
 power on the part of the people. As it happens, this country 
 also enjoys the immediate effects of the expenditure of other 
 countries which have also been obliged to borrow either 
 for war or for safeguards against war. It is as if the village 
 was enriched not only by the borrowings of its own landlord, 
 but by the incursion into the festival of all his great spend- 
 thrift neighbours. 
 
 This explanation of our present prosperity is confirmed 
 by an a]:)peal to other examples of mortgaging the future. 
 The inflation that precedes a commercial crisis is marked
 
 THE ECONOMIC PROSPERITY OF WAR-TIME 245 
 
 by an undue expansion of spending power. The greater 
 the inflation of the credit so much greater is the apparent 
 prosperity. In essence the process is always the same. 
 Wealth that ought to be adapted for the supply of future 
 needs^ — which is the main function of capital— is converted 
 to present needs. The corn meant for seed is eaten up by 
 the soldiers, the seed corn being typical of all kinds of 
 capital, and the soldier typical of all kinds of unproductive 
 labour. In the provision for modern war masses of capital 
 must be sunk in speciahsed forms that cannot be used on 
 the recurrence of peace. Economically the greater part of 
 the expenditure is unproductive — that is to say, it does 
 not replace itself by new values. The modern economist 
 is apt to consider Adam Smith's distinction between pro- 
 ductive and unproductive labour unreal. In war the dis- 
 tinction is vital. Who cannot see the difference between 
 the labour spent on the trenches in Flanders and the labour 
 spent in the original reclamaticn of the Low Countries from 
 the sea ? The expenditure of war is partly for the destruc- 
 tion of wealth, partly for the perversion of capital into 
 forms incapable of use on the return of peace. 
 
 The immediate effects of the expenditure of new loans 
 and new taxes mu- 1 always be distinguished from the 
 ulterior effects. The immediate effect is an increase of 
 spending power — the ulterior effect is a diminution of 
 capital. If the savings of the year are invested in war 
 loans they cannot at the same time be invested in industrial 
 undertakings. If the taxes on income are dorb'ed, the 
 annual savings must be less. W^ar taxes do not cease with 
 the war, and the interest on war loans is practically per- 
 petual . 
 
 Some of the ulterior effects are not so obvious, but they 
 all point in the same direction. The British Government 
 has been universally applauded for the measures by which 
 it upheld the credit of the country and prevented the out- 
 break of a financial crisis. Similar action was taken in other 
 countries. All over the world there were a moratorium for 
 old debts and new issues of paper money and credits for
 
 246 WAR FINANCE 
 
 new expenditure. The natural result of this great increase 
 in emergency currency and in emergency credit, according 
 to economic theory, would be a rise in prices^ — unless it was 
 prevented by some superior counteracting cause. Such a 
 counteracting cause would be found in the needs of war for 
 greater amounts of currency and credits to carry on war 
 industries and war operations. So far as this country is 
 concerned, the supply of money and credits seems to have 
 altogether outstripped the effective demand. The Economist 
 of January 2 thus summarises the position : " To-day our 
 banking position rests upon the credit of the Government, 
 and the ease which rules in the short loan market is largely 
 due to the outcome of the huge addition which has been 
 made to the supply of funds by means of the issue of currency 
 notes and the guaranteeing of loans and discounts." It is 
 significant that in another article of the same journal it is 
 pointed out that " our index number for the last month 
 (December, 1914) shows a marked advance, and has reached 
 the highest level recorded for years." The rise is specially 
 marked in cereals. In spite of the command of the sea and 
 of free trade and of great accinnulations of wheat in London, 
 the price of flour and of bread continues to rise. The contrast 
 of the big loaf and the little loaf has found a new application. 
 We are told that before the war the prices of foods had begun 
 to fall, and that the indications were that prices generally 
 would have been lower at the close of 1914 than for many 
 years if peace had been maintained. As it is, prices are 
 higher than for many years ; or, in the concrete, the penny 
 loaf or the penny bun is smaller. 
 
 In considering the rise in any group of prices, it is always 
 difficult to say how much is to be set down to a general rise 
 of prices due to monetary influences and how much is due 
 to special causes. In the search for the present rise in the 
 price of wheat, attention has been mainly directed to the 
 supposed increase in the cost of the supply — the rise in 
 freights, insurance, etc. It is forgotten that in all cases 
 values depend not only on supply but on demand. By 
 demand is meant effective demand, and effective demand
 
 THE ECONOMIC PROSPERITY OF WAR-TIME 247 
 
 means a demand the desire element in which is backed by 
 the power to pay in money. A great increase in the distri- 
 bution of money in a country increases so far the immediate 
 means of purchase. The returns of the mint, just issued, 
 show that besides the great issues of Treasury notes for los. 
 there has been an actual increase in the coinage of half- 
 sovereigns, and in addition an enormous increase in the 
 coinage of silver. Everything points to the masses of the 
 people having more money to spend. This is, of course, 
 most pleasing, but the worst of it is that the benefits of 
 rising prices, due to expanding currency, are short-lived, 
 and in the end such expansions are in general prejudicial 
 to the masses of the people.
 
 CHAPTER XIII 
 THE INFLUENCE OF DEMAND ON FOOD PRICES 
 
 {January 27, 1915) 
 
 The price of English wheat in the week before the out- 
 break of the war was 37s. 3^'. per quarter, and the latest 
 quotation is over 56s. — that is a rise of 50 per cent. The 
 present price seems still higher if compared with the price in 
 ■January last year, when it ranged about 30s. The rise in 
 English oats is greater in proportion than in wheat, the 
 price having risen from i8s. 2d. last January to nearly 36s. 
 at present — that is, practically double. There have been 
 corresponding rises in most food prices except potatoes. 
 As regards meats, the greatest rise has been in the imported 
 kinds and in the inferior joints ; that is to say, the cheaper 
 kinds of meat have risen most. For a time the most marked 
 rise in price was in sugar, but tea, apart from the tax (which 
 is proportionately heavy on inferior qualities), has not risen 
 appreciably. Fish and eggs have become unusually dear. 
 
 In other important articles in ordinary household expendi- 
 ture a rise has taken place or is threatened. Coals have risen 
 and are rising. A recent report stated that in Cilasgow the 
 state of the market justified a rise in house rents, but 
 apparently the owners and the agents thought the time 
 unsuitable on sentimental grounds. Neither in Glasgow, nor 
 elsewhere probably, have house rents fallen owing to the war. 
 The general result is that all round an ordinary income of so 
 much a week or so much a year will obtain a good deal less 
 than it did before the war. And yet, in spite of the rise in 
 prices, which would naturally press most heavily on the poorer 
 classes, there dpes not seem to be any exceptional distress 
 for the middle of winter. On the contrary, many of the
 
 INFLUENCE OF DEMAND ON FOOD PRICES 249 
 
 signs of material comfort are above set fair on the national 
 barometer. 
 
 So great and general a rise in prices, however, has its 
 inconveniences and discomforts. People with fixed salaries, 
 especially if they come within the full blast of the income 
 tax, must perforce economise in something, if it is only in 
 dismissing their servants or cutting down subscriptions. 
 They have also the added discomfort of feeling that the rise 
 in prices is increasing the incomes of the fortunate people 
 who are interested as traders or carriers or speculators in the 
 dearer things. Even the working classes in many cases find 
 that their mone}^ wages do not rise so fast as their expenses, 
 and in certain cases even suffer a fall. On balance, the rise 
 in prices causes a shifting of burdens and of enjoyments that 
 does not necessarily mean a nearer approach to ideal justice. 
 
 Whether the evil (if it is an evil) is in bulk sufficient to call 
 for such a drastic remedy as an all-pervading and all-provid- 
 ing scheme of Governmental control is hardly worth dis- 
 cussing, because the difficulties in practice are far too great, 
 even for the Germans. And in any case, unless the causes 
 of the rise in prices are first of all made clear, any action of 
 the Government is just as likely to be prejudicial as beneficial. 
 Take by way of illustration one proposed practical remedy. 
 The rise in food is attributed to the rise in freights, and the 
 Government is entreated to increase the supply of ships in 
 various ways so as to lower freights by competition. But at 
 the same time we are told that the rise in freights is due to 
 the scarcity of labour to work the ships, including the 
 unloading. The port of London is so overcroM^ded that 
 cargoes cannot be put ashore — they must await their turn, 
 and that tiu-n is a long way off. London is said to be over- 
 flowing with goods that cannot be distributed ; and taking 
 wheat in particular, the supply afloat is said to be greater 
 than this time last year. If, then, the Government is to add 
 to the number and the activity of the ships, the labour will 
 become relatively more scarce, the ports more congested, and 
 the price of food higher. 
 
 Some people think that v/ar prices are always of necessity
 
 250 WAR FINANCE 
 
 high prices, and that there is no more to be said. But, as 
 pointed out in the first article of this series, history shows 
 that of itself war does not make prices high, and that during 
 the last two centuries there are about as many periods of war 
 with low or ordinary prices as with high prices. Even if 
 war does raise prices, the connection between war and 
 prices is by no means obvious. 
 
 Why in war-time do some prices rise more than others and 
 some refuse to rise at all, or even fall below the usual peace 
 level ? Why have English oats risen more than wheat ? 
 Why has the chilled and frozen beef of the Argentine risen 
 more than the roast beef of Old England ? Why are the 
 prices of Stock Exchange securities so low ? Why is cotton 
 so cheap that in Egypt the Government is asked to restrict 
 the area of cultivation, and the price of wheat so high in 
 Britain that the Government is asked to give some kind of a 
 bounty on production ? If it is of the nature of war to raise 
 prices, why should the State be called on to fix not only 
 maximum prices in some things but minimum prices in 
 others ? When the supporters of the war theory of high 
 prices are confronted by these conundrums, they reply that 
 it all depends on demand and supply, which is no doubt quite 
 true, but is equally true in times of the most profound 
 peace. 
 
 The most wide-reaching principle affecting the relative 
 values of all things that bear a price or are subject to mone- 
 tary bargains of any kind is that the prices depend on the 
 demand and the supply. There is only one general exception 
 which arises when the prices are fixed by some external 
 authority, as, for example, the Government or custom with 
 the power of law. Even in this exceptional case, consciously 
 or unconsciously, the external authority must pay regard to 
 the conditions affecting the demand and the supply — the 
 prices cannot be purely arbitrary. If the State fixes the 
 prices too low the supply will not be forthcoming, as we are 
 told is the case with the food prices in some parts of Germany. 
 If the price fixed is too high the demand is killed, as we see 
 in our own minimum prices for Consols.
 
 INFLUENCE OF DEMAND ON FOOD PRICES 251 
 
 The important point to notice is that in all cases we must 
 pay regard both to the demand and to the supply. In the 
 determination of all kinds of values both factors must always 
 be considered. This elementary truth is constantly forgotten 
 in cases of the highest practical importance. Even in theory 
 for a long time it was not properly appreciated. There is 
 always a tendency both in practice and in theory to hark 
 back to some idea of " natural " prices that depend on 
 something more fundamental than mere demand and supply. 
 It is admitted that temporary changes may occur through 
 sudden changes in demand or supply — e.g., the closure of 
 some great consumers' market, or conversely of some great 
 source of supply. But there is always the idea that in time 
 the prices will return to the " natural " level. If we ask, 
 On what does this natural level depend ? then we are told 
 on the cost of production — that in the last resort all values 
 must conform to their cost. If anything costs more to 
 produce it will no doubt sell at a higher price, provided 
 always that the demand is not checked or killed. But the 
 whole history of economic progress shows how the cheaper 
 thing has displaced the dearer, through the corresponding 
 changes in demand. All prices depend on demand as much 
 as on supply, and cost of production is only one of the 
 elements affecting supply. In important groups of prices we 
 cannot bring in the idea of cost at all. Take, for example, 
 building land or the stocks that represent national and 
 municipal debts. The idea of cost is in these cases quite 
 inappropriate, and yet in both cases values depend on 
 demand and supply. But even when the idea of natural cost 
 value is given up people seek for some other " natural " 
 foundation. They talk of intrinsic values. The chairman 
 of a trust company tells his shareholders that after the war 
 their securities will rise again to their " natural " level, and 
 assert once more their intrinsic value. He would admit no 
 doubt that a good deal would depend on the rate of interest ; 
 but what is the " natural " level of the rate of interest (say) 
 so as to get rid of the risk element for first-class securities ? 
 Who would venture to answer this question in the face of the
 
 252 WAR FINANCE 
 
 history of our own Consols during the last twenty years ? 
 We are always brought back to the fundamental position 
 that in every case of things that bear a price the relative 
 prices depend on demand as well as on supply. In a sense 
 wages are the price of labour. Who will say that the prices 
 of the varied forms of labour depend on their costs of produc- 
 tion ? You can no doubt calculate the cost of rearing a 
 child as you do the cost of rearing a calf, but when the child 
 comes to earn a living his wages will depend quite as much 
 on the demand for his labour as on the cost of his production. 
 Again, interest is the price paid for the use of capital for a 
 time. But who would assign the cost of production of 
 interest-bearing securities as the determining element in 
 their relative values ? And so it is through the whole range 
 of things that bear a price — we must always take account of 
 the demand as well as of the suppl^^ 
 
 When any sudden change of price is observed, the change 
 must be due either to some change in the demand or in the 
 supply, or in both. The outbreak of a great war is likely to 
 produce very great changes both in demand and in supply 
 as regards all kinds of things. But in all these cases both 
 elements must always be considered. Even if the most 
 noticeable change is a shortage of supply, still we have to 
 look to the demand. It may be that coincidentally with the 
 shortage of supply there is also an exceptional demand, as in 
 Germany for copper. On the other hand, it may be that 
 with a falling off in suppU' there may be a still greater check 
 to demand, as in the raw cotton in this country. 
 
 In the search for the recent movements in food prices all 
 the searchlights seem to have been turned on to the supply 
 and the costs of production of the supply. The demand side 
 has been overlooked. But there are several ways in which 
 a change in demand consccjuont on the war may have raised 
 prices. 
 
 Demand always depends on two elements — the desire to 
 possess, which is only limited by satiety, and the means of 
 purchase, which in most cases are limited by earnings. If 
 people want anything more earnestly or greedily, they will
 
 INFLUENCE OF DEMAND ON FOOD PRICES 
 
 •DJ 
 
 give more for it. If they have more money, equally they 
 will go nearer to the limits of satiety. Unless they have the 
 money, no increase of desire will raise prices. The late 
 Robertson Smith used to say that in the East great famines 
 were often accompanied by no particular rise in prices. The 
 people died of hunger, but their demand was not effective. 
 They had no more money than usual. 
 
 On both these sides of demand the outbreak of the present 
 war has tended to raise food prices. Take first the money 
 side generally, or the means of purchase. All the world over 
 there has been a great increase in the amount of money. All 
 the Governments have been making money and spending 
 money. They have made the money by printing notes or 
 postal orders, or by coining silver, or by creating bankers' 
 credits or giving guarantees for such credits. In this country 
 every kind of money has been increased. If bank-notes to 
 the extent of forty millions or more are thrown into circula- 
 tion, unless they simply displace some other form of money 
 they must increase the spending power of the classes who get 
 hold of them. The outbreak of war brings an excessive and 
 sudden demand for certain kinds of labour. This labour is 
 paid at higher rates, and in some cases works day and night. 
 The cost of the upkeep of this labour and its dependants is 
 more than in time of peace. The greater cost means that 
 more money is put into circulation. But the people who get 
 the new money spend it, and the increase in their demand 
 for things raises their price. The fortunate producers and 
 sellers of the things spend the extra wages and profits, and, 
 in the words of the old song, " that's the way the money 
 goes." When the new money has gone all round then there 
 is that mystery fulfilled that is called a general rise in prices. 
 
 It is of course possible that the increase of money in 
 different forms may have been counteracted by the contrac- 
 tion in other forms, or by the increased needs for circulating 
 a new mass of things. Both of these possibilities seem of 
 little importance in the present case. But apart from any 
 general rise in prices of tlie kind just described the other side 
 of demand — namely, the desire element- — also points to llie
 
 254 WAR FINANCE 
 
 probability of a rise in necessaries. If you send a million 
 young men on long route marches they will probably eat a 
 good deal more bread and meat, and they will wear out more 
 boots and shoes than usual. The armies at the front and at 
 home, under the British ideas of " necessaries," are no 
 doubt amply provided, and the extra demand is no doubt 
 allowed by the various middlemen concerned to have its 
 full effect on prices. The rise in the price of boots and shoes 
 can hardly be ascribed to congestion at the ports. The 
 demand for woollen cloth is probably unprecedented. 
 
 One of the compensations of the war in this country has 
 been the rise in the demand for unskilled and casual labour, 
 and for some forms of skilled labour that before the war were 
 earning wages below a reasonable standard of comfort. The 
 standard of comfort has been raised for the time by better 
 employment at higher rates, and the nominal money earnings 
 have been converted into real wages by a greater demand 
 for all kinds of necessaries. In the case of the very poorest, 
 the fluctuating margin that always feels the pinch of short 
 commons, a rise in the price of bread may, as Sir Robert 
 Giffen observed, actually lead them to increase their con- 
 sumption. The reason is that with the rise in bread they 
 have less money left over for other things. It may be more 
 satisfying to buy more bread with this little surplus than to 
 take a diminished supply of some food that is more of a 
 luxury. Changes in demand lead to all kinds of substitu- 
 tions, with corresponding variations in the prices of the 
 supplies demanded. 
 
 It is to be hoped that the Board of Trade will turn some of 
 its inquiries into the varied problems that arise in connection 
 with demand in war-time. It would certainly be surprising 
 if the greatest war on record only affected values through 
 disturbances in supply.
 
 CHAPTER XIV 
 
 DEPRECIATION OF CURRENCY AND THE RISE IN 
 
 PRICES 
 
 {February 17, 1915) 
 
 It was laid down by Machiavelli in his book on the art 
 of war that it is preferable to conquer the enemy by starva- 
 tion rather than by force of arms if the alternative is open, 
 the former method being much more sure and in general less 
 expensive in men and treasure. In modern times for starva- 
 tion we may read economic pressure, of which starvation 
 is the climax that is seldom reached in practice. Before it 
 comes to the starvation even of the prisoners of war and of 
 people of the occupied territories it is quite possible that 
 Germany may feel that the economic pressure outweighs 
 any possible gain from further resistance. One of the less 
 obvious forms of economic pressure is the monetary influence. 
 The facts bearing on the monetary situation can only be 
 appreciated if the meaning of the terms in which they are 
 expressed is understood. Depreciation naturall}^ suggests 
 something decadent and uncomfortable, and we are all 
 pleased to read in the papers from time to time that the 
 German currency is depreciating. On the other hand, the 
 depreciation of the Russian currency is put down as a point 
 against the Allies. If anyone should suggest that the cur- 
 rency of the United Kingdom is depreciating or in any 
 conceivable danger of depreciation either his patriotism or 
 his judgment would become suspect, the name of depreciation 
 being so very unpleasant. 
 
 The term depreciation, however, as applied to money has 
 two distinct meanings. One of these meanings is quite 
 harmless from the patriotic point of view. With this mean-
 
 ^56 WAR FINANCE 
 
 ing we may speak of depreciation of our currency without 
 fear of the censor. This is the kind of depreciation that with 
 another name is at present attracting the attention of the 
 pubhc in general and of a committee of the Cabinet in 
 particular. Our monetary standard on which all the other 
 forms of our currency are based is the pound sterling or the 
 golden sovereign. Everyone now knows that since the 
 outbreak of the war the pound sterling has lost in purchasing 
 power. The very meaning of a rise in prices is that a pound 
 or a shilling does not go so far as it did. Such a fall in the 
 purchasing power of the pound is the same thing as deprecia- 
 tion in the first of its meanings. It is the meaning of depre- 
 ciation that is applied by writers on finance not only to 
 particular national currencies, but to gold itself considered 
 as the basis of these currencies. When we speak of the 
 depreciation of gold we mean a general rise of prices in 
 terms of gold — that is, a given weight of gold gets less of 
 any representative group of things. It is always necessary 
 to keep in mind the distinction between general prices and 
 the particular prices of particular things. The distinction 
 may be made clear by an illustration from yacht-racing. 
 If all the yachts begin to show slackened speed we naturally 
 suppose it is due to some cause affecting all more or less in 
 the same way, such as the force of the wind or tide. If there 
 are changes in the relative positions, then we ascribe it to 
 the sails or the men or the build or the luck of getting some 
 special capful of wind, and so on. 
 
 In the same way with prices, if we find that on the average 
 all of them have gone up, then we ought to look for some 
 very general cause or causes that are likely to affect all the 
 things in the same direction. When all the yachts begin to 
 sail on the average about twice as fast as they did, nobody 
 supposes that all the crews have suddenly waked up or that 
 the art of the yacht-builder or of the skipper has at last 
 been revealed. But with a general rise in prices the invari- 
 able practice of the practical man is to look to the particular 
 causes affecting the particular things, taking each thing by 
 itself. In the debate on the rise in food prices in the House
 
 GENERAL DEPRECIATION 257 
 
 of Commons the attention was entirely devoted to the 
 special causes affecting the food. Some progress was made 
 towards a solution by the Prime Minister, who admitted 
 that we must look at demand as well as supply. Hitherto 
 most people had insisted on the shortage of supply as the 
 principal cause, with a special leaning to a shortage caused 
 by the nefarious practices of American corner-men or 
 British shippers. In face of the Board of Trade returns 
 no one can say that there is an actual shortage of supply ; 
 but the Leader of the Opposition suggested that the real 
 cause of the rise was the fear of a shortage, this fear being 
 taken hold of by the speculator so as to make the flesh 
 creep of the prospective consumer, who thinks of being 
 made to fast in the long days of June. 
 
 The Prime Minister made an advance on the shortage 
 theory by bringing in some of the influences of demand, 
 but he never got beyond the special influences of the special 
 demand. He never supposed or stated that the rise in food 
 prices is in any way part of a general rise due to general 
 causes. 
 
 That such a general rise has in fact taken place during 
 the period of the war is evidenced at once by a reference to 
 the Economist index numbers. These index numbers are 
 based on groups of forty-four representative commodities, 
 and some of them have gone down in price, e.g., cotton. It 
 is as if forty-four yachts had greatly increased their average 
 speed, though one or two had dropped out of the race and 
 one or two had gained on the rest. The Economist calls the 
 rise " portentous." The general rise on the average of last 
 July is 20 per cent., and the rise on the average of the basic 
 years of 1900-05 is as much as 36 per cent. No examination 
 of the special causes affecting particular things will account 
 for these general movements, though they will explain why 
 some things have felt the movement more and some less. 
 
 When people are forced to recognise that a general move- 
 ment has been in progress that must be ascribed to some 
 general cause, they are content to say that it is all due to 
 the war, but, as observed before (Chap. XI II.), they do not
 
 2,i8 WAR FINANCE 
 
 explain why it is that war raises some things and depresses 
 others, and still less do they recall the fact that wars are 
 not always characterised by rising prices on the average. 
 
 The Prime Minister compared present prices with the 
 prices that prevailed after the conclusion of the Franco - 
 German war, 1871-75, and showed that prices then (except 
 coal) were higher than at present. But he did not mention 
 that for twenty years thereafter there was a continual 
 decline, shown in the Economist by a fall from 126 in 1875 
 to 88 in 1895 (compared with the basic average of 100 in 
 1845-50). This tremendous fall was unquestionably con- 
 nected with causes affecting the monetary standard, that 
 is, gold itself, as, for example, the falling off in the supply 
 and the increase in the demand through the demonetisation 
 of silver. 
 
 In the same way the rise since 1895 has been naturally 
 ascribed partly to the very great increase in the supply of 
 gold and partly to a corresponding inflation of credit and 
 representative mone}^ all the world over. These monetary 
 causes are certainly what Bacon used to call vcrae causae, 
 that is to say, they are capable of producing the effect 
 assigned. They are not imaginary or negligible. 
 
 When we are confronted with the rapid and general rise 
 in prices since the beginning of the war, which is the more 
 remarkable as it set in in face of a continuous fall for the year 
 preceding the outbreak, we ought to consider if there has 
 been any change in the monetary position Hkely to assist 
 in bringing about such a state of things. 
 
 The first reference to the demand and the supply of gold 
 seems to suggest that with the war we ought to expect 
 rather a fall in prices than a rise. With regard to supply 
 all the great foreign banks have taken to hoarding their 
 gold, as if that were the height of fmancial wisdom. The 
 Bank of England has hitherto been in the fortunate position 
 of creditor for gold as colnpared with other countries, but 
 everyone remembers how, at the beginning of the war, we 
 were aU told it was our dut}/ to put all the gold we had in 
 the banks. If then, the outbreak of war was the signal
 
 GENERAL DEPRECIATION 259 
 
 for all the banks to get gold and keep it, it is not easy to see 
 how the rise in prices can be ascribed to any increase in gold 
 money in circulation. On the contrary, even if we neglect 
 altogether any idea of private hoarding, the action of the 
 banks alone would lead us to expect a fall rather than a 
 rise in prices. The gold hoarded in banks cannot affect 
 prices unless it is used in some way, and it is certainly not 
 used in circulation when it is hoarded. But when we look 
 to other monetary causes (apart from the actual circulation 
 of gold), then we find abundant reason for expectation of 
 a rise in prices. Any gold withdrawn from circulation has 
 been more than replaced by other forms of legal tender. In 
 the United Kingdom, especially when we look to our very 
 highly-developed banking system, the increase in the actual 
 amount of legal tenders has been enormous. The postal 
 orders were only withdrawn (or rather notice of withdrawal 
 only was given) last week. How much of this legal tender 
 was in use we have never been told. The Treasury notes 
 reached over £38,000,000, being regularly added to 
 ever}^ week until the end of the year. How the notes 
 were issued, or why they were issued, again we were never 
 told. 
 
 At first it was said they were to provide the banks with 
 emergency currency, but according to the accounts pub- 
 lished, the banks took only a very small amount at the 
 beginning. It looks as if the Government printed the money, 
 and spent it in meeting the cash expenses necessary for the 
 war. Perhaps such a course was inevitable — but that does 
 not get rid of the consequences. The notes were effectually 
 thrown into circulation side by side with the postal orders 
 and an abundance of new silver. At the same time once 
 the shock of the beginning of war had been neutralised, the 
 banking system of the country returned to its normal 
 health. It is not as if there was a general refusal of everyone 
 to take the cheque of anybod}^ else- — it was not as if we had 
 suddenly acquired the French habit of paying for most 
 things in bank-notes or coin. The fall in the Bankers' 
 Clearing Returns is probably accounted for by the closure
 
 26o WAR FINANCE 
 
 of the Stock Exchanges and the restriction on deahngs of 
 a speculative character. 
 
 All former experience shows that if in any country a 
 large addition is made to its legal tender it is followed or 
 accompanied by a rise in prices. A certain increase is no 
 doubt required with the growth of trade and population, 
 but any sudden great increase is quite different. 
 
 It may be objected that the Treasury notes and even 
 the postal orders were always convertible into gold on 
 demand (or to silver coin on a parity with gold). We are 
 not like the miserable Germans, who before the war (by 
 way of preparation) imported gold at a loss to hoard in the 
 Reichsbank, and when war was declared promptly made 
 their notes inconvertible. We, on the contrary, made a 
 declaration that anyone could take a postal order to the 
 Bank of England and get it changed, and so of the Treasury 
 notes. But as for giving faciUties to make the convertibility 
 effective all over the country, the very reverse was the 
 case — the banks were encouraged not to pay out gold. The 
 fact remains that six months after the declaration of war 
 the London money market was in a state of otiose repletion 
 and the channels of circulation were filled to the brim with 
 emergency currency. 
 
 Since the beginning of the year there has been some 
 contraction, but there is an old proverb that you do not 
 cure the wound of the arrow by unbending the bow, and it 
 will take time and discomfort before the contraction can 
 become effective. 
 
 The natural result that might be expected from such an 
 inflation of currency is confirmed by other recognised signs. 
 Inflated prices encourage imports and discourage exports. 
 A glance at the latest returns of the Board of Trade shows 
 that the values have risen largely, so that the aggregate for 
 January is practically the same as last year in spite of the 
 war. But the exports tell a very different story, their aggre- 
 gate value being 40 per cent, less as compared with a shrink- 
 age of imports of only o\S per cent. If this disproportion 
 continues, the London money market is likely to be enlivened
 
 GENERAL DEPRECIATION 261 
 
 by the exit of gold, though the gold at Ottawa (or elsewhere) 
 at the credit of the Bank of England may act as a buffer 
 for the time. But one thing is certain — a continued excess 
 of imports over exports, due to inflated prices, will lead to 
 a demand for gold. If the demand for gold is not met, the 
 notes become inconvertible. As compared with gold, they 
 suffer a specific depreciation — a pound note will not be 
 accepted as readily as gold. Which things, happily, have 
 already come to pass in Germany — the general depreciation 
 of the notes shown by the rise in prices has become marked 
 as compared with gold ; and the foreign exchanges show 
 a specific depreciation of German currency of over 10 per cent. 
 This second kind of depreciation is for the time of no interest 
 to anyone in this country, and it is to be hoped that the 
 dislocation of the foreign exchanges may never become 
 a matter of popular concern. 
 
 In conclusion, it may be said that so far as the present 
 rise in prices is due to an inflation of the currency, we cannot 
 expect any return to a " natural level " until there is a 
 corresponding effective contraction. During the last two 
 weeks there has again been an increase, and the reversing 
 process is always difficult, especially in time of war.
 
 CHAPTER XV 
 
 LABOUR AND THE WAR 
 
 {March 4, 1915) 
 
 "Die Lohnfrage ist eine Culturfrage." — Brentano. 
 
 It may, perhaps, seem ridiculous at the present time to take 
 as the text for an article on Labour a little bit of German, 
 which translated means — " The wages question is a question 
 of Culture." "The wages of Kultur is death" would seem 
 a more appropriate sentiment to most people. The choice 
 of the text admits of a personal explanation, and also serves 
 to throw light on the general question of the attitude of 
 British labour to the war. The first book I published on an 
 economic question, so far back as 1878, dealt with the 
 " Effects of Machinery on Wages," and I took this sentence 
 as a motto so as to indicate in my view the breadth of the 
 problem. The first difficulty that arose was one of interpre- 
 tation. Even the meaning of machinery is not obvious. 
 Are we to include the machinery of transport and communi- 
 cation — e.g., telegraph wires and railways ? But the proper 
 meaning to be given to wages is still more difficult. Are we 
 to mean by wages simply the price of labour, as if labour 
 were a commodity to be bought and sold just like any other 
 commodity ? And if this is the meaning, what is to be the 
 unit of measurement ? Are the wages to be reckoned by the 
 hour or the day or the year ? Or, again, are we rather to 
 take account of the work done or the task accomplished, and 
 then how are we to get any common measure of the " quan- 
 tity of labour " involved in these varied works and days ? 
 The i)ri(e of any ordinary thing- — e.g., a pint of beer — is 
 (juilc dcfiniti', l)ut the price of a " quantity of labour "
 
 LABOUR AND THE WAR 263 
 
 seems only to admit of indefinite interpretation in any com- 
 plex society. 
 
 The difficulty may be put in another form. Everyone now 
 is more or less familiar with the distinction between nominal 
 and real wages. By nominal wages we mean the amount of 
 money received in exchange for the labour, and by real 
 wages we mean in the first place what the money will fetch 
 in terms of necessaries, comforts, and luxuries. But when 
 we look into real wages more carefully, we soon see that the 
 meaning must be still more extended. Honour, said Adam 
 Smith, forms a great part of the reward of all honourable 
 professions. Anyone on the look-out for any kind of job 
 will take account not only of the money wages and the hours, 
 but of all the things — honour and the rest — which go to 
 make up the environment or the circumstances of the case. 
 The wages may be all right, and the hours, but if other things 
 are wrong the case is altered. It comes, then, to this, that 
 if by wages we are to mean the full reward of labour for the 
 sacrifices of labour, we must take account of all the things 
 that affect the conditions of labour. And that is what the 
 German professor meant by saying that the wages of labour 
 is a question of culture — not merely one of bread and butter 
 and money. The book of which this sentence was the con- 
 clusion was a study of the history of the origins of Trade 
 Unions in England, " the classic home of liberty," as he 
 called it. For many years this book was the standard work 
 on the subject both abroad and in Britain. 
 
 There still remains one other difficulty of interpretation 
 whether we are considering machinery or war. What is 
 labour ? In dealing with questions of labour, Adam Smifh, 
 who was by far the most practical and the broadest of econo- 
 mists, took his illustrations from all kinds of labour — lawyers, 
 churchmen, professors (he was one himself), and, in short, 
 from any kind of the gainful occupations of mankind. In 
 dealing with labour in relation to war there are advantages 
 in taking this wide interpretation. In war as in machinery 
 we see at once that ordinary manual labour is not the only 
 kind that must be considered, especially in the modern army.
 
 264 WAR FINANCE 
 
 Military organisation, if it is to be effective, demands the 
 highest forms of skill and endurance far more than in the 
 ordinary business of life. Probably that was what Adam 
 Smith had in view when he said that war is the noblest of all 
 arts. No one is likely to overlook the importance of the 
 higher grades of labour in war, and everyone would admit 
 that they furnish the best examples of the case where honour 
 forms the greatest part of the reward. But in war as in 
 machinery there are advantages in taking separately the 
 wages of labour in the sense in which wages are contrasted 
 with profits and with professional fees or salaries, and the 
 labour is manual labour of different qualities as regards 
 skill. What, then, is the effect of war, or more precisely of 
 the present war, on wages, and specially on the wages of 
 ordinary British labour ? 
 
 The letter recently sent out by the Parliamentary Recruit- 
 ing Committee to householders was accompanied by a very 
 detailed statement of the money wages and the compensa- 
 tions to be obtained by those who enlist for the period of the 
 war. The Germans will no doubt see in the comparative 
 generosity of the terms offered another proof that the British 
 Army is an army of mercenaries. If the recruiting should 
 in any way fall short of the requirements they will argue that 
 the price offered to labour was not high enough, and that in 
 the choice of a job the British working man only thought of 
 the money wages. They will comfort themselves with the 
 reflection that an army of mercenaries is not to be compared 
 with an army that is a nation in arms impelled only by the 
 sense of duty. 
 
 The question of "mercenaries" against conscripts — for 
 that is what it comes to — raises very interesting problems 
 both of morality and of military efficiency. The appeal to 
 liistory gives conflicting results according to circumstances. 
 \\'lien the Germans say we are mercenaries they use the term 
 of course as a t(>rm of abuse. It is easy to show that in our 
 case as a term of abuse it is inappro]:)iiate. Even the 
 Germans would admit that the Regulars, that is to sa3^ the 
 prof(>ssional mercenaries of the British Army, can be com-
 
 LABOUR AM) THE WAR 265 
 
 pared with any equal number of any conscript army with 
 advantage. They arc superior in efficiency and superior in 
 moral. The latest testimony is that of Viscount French. 
 It is a matter of history that Wellington's armies were made 
 up for the most part of the lowest ranks of the people — the 
 words used to describe them were much less polite — ^but under 
 liis command in morale they were models compared with the 
 conscripts of modern Germany. 
 
 The German is by nature a bookworm, and he gets his 
 ideas of mercenaries from books and bookish traditions. 
 From other evidences we know that the modern German has 
 been giving much study to his Machiavelh. He has used for 
 his purpose the writings of that eminent man even in the same 
 way as the Devil may quote Scripture. We know that the 
 great Frederick attached a high value to Machiavelli's treatise 
 on the art of war, and we know that German modern 
 diplomacy is based on the " Prince." Machiavelh, hke all 
 the great Italian writers, was a devoted lover of Italy, and 
 looked with horror on the way it was broken up into warring 
 little States, and lay open to the incursions of the hated 
 foreigners. The root of the evil he found in the system of 
 mercenaries that was universal at the time in that country'. 
 All the different States hired mercenaries when they wanted 
 them, just as they hired masons and otheis for public build- 
 ings. The leader of any bod}'' of mercenaries sold his services 
 frankly to the highest bidder. The various bands had a 
 kindly fellow-feeling for one another, and in the course of 
 time, under these kindly feelings, the game of war became 
 as much a game and much less dangerous than present-day 
 professional football. Your proper mediaeval mercenary was 
 a horse soldier, and so encased in armour that he was only in 
 danger of death by falling from his horse and being trampled 
 on. Machiavelh describes a battle for a bridge that was 
 several times taken and retaken, and at the end of the day 
 the total loss on both sides was one man crushed under the 
 horses' feet. But in those days the game of war was by no 
 means a game to the spectators, or even to those who paid 
 the professionals. When a mercenary army invaded any
 
 266 WAR FINANCE 
 
 territory it laid it waste exactly as the Germans had laid 
 waste Belgium. A large part of the real wages of these old 
 mercenaries was in plunder, and they took it ; a large part 
 of their pleasure in war was in what the Germans now call 
 frightfulness, and they murdered and ravished and burned 
 out of pure lust. But they never pretended they used the 
 frightfulness to bring the war to an end. There was nothing 
 they wanted less. As soon as one war was over they had to 
 look for another. A time of peace was a time of misery to 
 these professionals. Morally they were a poor lot. Yet 
 they had their qualities ; if not religious, they were at least 
 superstitious — they did not burn or plunder churches or kill 
 priests, though in the sack of a city such things might happen. 
 They honourably observed the unwritten laws and customs 
 of war. In other times there were other kinds of mercenaries 
 — Gibbon is full of examples. In his famous chapter on 
 Attila and the Huns he remarks on the imprudence and incom- 
 petence of the Roman Emperor who did not hire for his 
 defence against the Huns the mercenary hordes of Asia. 
 Incidentally he says that the cheapest of all things to buy 
 is the courage of the common soldier. 
 
 To what does all this tend ? What is the bearing on 
 present recruiting ? The bearing is this — If those who 
 enlist in the United Kingdom for this war are to be called 
 mercenaries, they are very difterent from the " mercenaries " 
 of recorded history. 
 
 With the British recruit for the period of the war the wages 
 part is the smallest part of the inducement. It is only the 
 decisive part when the wider self-interest that is centred in 
 the family relationships is aroused. He is more concerned 
 about his dependants than himself. If an intending recruit 
 were to sit down in a cool moment and balance up his 
 shilling a day (with the board and lodgings likely to be forth- 
 coming in the trenches) , if he were to take account of all the 
 hardships and all the chances of frost-bite and wounds and 
 death, to say nothing of the rigid discipline night and day, 
 he would certainly conclude that it was not good enough. 
 If he happened to be a real selfish person he might well con-
 
 LABOUR AND THE WAR 267 
 
 sider that the dearth ol labour caused by the enhstment of 
 others gave unequalled opportunities for having a good time 
 at home in almost any kind of man's work from that of a dock 
 labourer upwards. 
 
 And yet he moves, and he moves cheerfully towards the 
 front. Under the conditions the success of the voluntary 
 system has been amazing, and it has borne a strain which was 
 never contemplated with apparent ease. It is impossible to 
 put one million of men in their fullest vigour under arms 
 without drawing them for the most part from the masses of 
 ordinary wage-earners, and when the million grows from one 
 to two and three millions, still more does it represent the 
 better part of the manhood of a great working nation. 
 
 Ihis ready response to the call to arms on the part of the 
 groat masses of the people can only be ascribed to a sense ol 
 duty. " Mankind are capable of a far greater amount of 
 public spirit than the present age is accustomed to suppose 
 possible." So wrote J. S. Mill about the middle of last 
 century. And to the present age it has again come as a 
 discovery. 
 
 It is to be hoped that this recognition by the working 
 classes who have enlisted for the period of the war ol the 
 sense of public duty will not be counterbalanced by too great 
 regard to self-interest on the part of those who are left 
 behind. The situation is one of great difficulty. There is no 
 precedent. On the side of labour there is owing to the war in 
 many important industries a scarcity of labour, and at the 
 same time an exceptional demand. The prices of the things 
 of most importance in the workmen's budget have risen, and 
 the same money wages will not go so far. Directly or 
 indirectly the great paymaster is the Government, not only 
 of this country, but of almost every other country with 
 which we are not at war. And in war time every Govern- 
 ment is a spendthrift, and, according to all experience, the 
 British Government is the greatest of all spendthrifts. 
 When the working classes see the credit of the State pledged 
 for all kinds of business, and when they hear of the excep- 
 tional profits of fortunate contractors and agents and middle-
 
 268 WAR FINANCE 
 
 men, naturally they expect to have a share of the Govern- 
 ment bounty. It is in a case of this kind that any particular 
 incident in the way of profit — e.g., the unlucky timber 
 brokerage — is apt to be magnified, and what is exceptional 
 (it is to be hoped) is taken as an average. Naturally then 
 labour is inclined to ask for a rise in wages. On the other 
 side the employers of labour may point to a rise in the cost 
 of materials and of coal and of transport, to the loss of old 
 markets and the difhculty of adaptation to new, to the extra 
 risks and the actual delays and all the other causes that the 
 people most concerned have described in the most realistic 
 manner. 
 
 The situation is eminently one for the methods of concilia- 
 tion. The method of compulsory arbitration depends for its 
 efficacy entirely on the power of the compulsion. The real 
 force at the back of it must be public opinion as it cannot be 
 enforced under present conditions by imprisonment and still 
 less by martial law. On the other hand, an impartial in- 
 quiry by a Conciliation Board ad hoc with a simple recom- 
 mendation would probably suffice. An appeal to the 
 patriotism on both sides ought to be sufficient to accept this 
 solution. It is no use admiring the public spirit of those 
 who volunteer for the front if those left behind look only to 
 their own money interests. Any strike or lockout in the 
 period of the war is absolutely indefensible. 
 
 It should be remembered that the greatest strikes have 
 taken place for what is called matters of principle. The 
 sympathetic strike is in most cases undertaken with the idea 
 of immediate pecuniary loss. In civil hfe a great strike is 
 the nearest approach to war. The people of this country, 
 " the classic home of liberty," have struck against the 
 mihtarism and despotism of Germany. The root principle 
 of this great sympathetic strike is liberty. In a way the 
 German professor little thought of, the wages question has 
 become a question of Kultur, of Kultur against liberty.
 
 CHAPTER XVI 
 DEPRECIATION OF THE CURRENCY 
 
 Specific Depreciation 
 {Wednesday, March 17, 1915) 
 
 In a former paper * attention was called to the deprecia- 
 tion of the currency in this country in the course of the war 
 in the sense of a general loss in purchasing power of the 
 pound sterling. That there has been depreciation in this 
 sense — ^that is to say, that there has been a general rise in 
 prices — it is impossible to deny, and it is not necessary to 
 recall the main facts of the evidence. It is, however, inte- 
 resting to observe that the arithmetical fact of depreciation 
 continues to be confirmed by the usual consequences. The 
 returns of the foreign trade for February show again exces- 
 sive importation and deficient exportation as compared 
 with last year. With the high prices imports are naturally 
 stimulated and exports checked. Again, the difficulties in 
 the readjustment of wages have continued, and they are 
 no doubt to be largely attributed to the general rise in prices, 
 especially as affecting workmen's budgets. The readjust- 
 ment of wages is always one of the troubles consequent on a 
 general rise in prices. Another symptom is the decline in 
 the reserve of the Bank of England. The absolute amount 
 is larger than it was last year, and is above the average of 
 many years, but it is not the absolute amount but the 
 proportion to liabilities that counts, and the proportion 
 has been rapidly falhng, being only 24! per cent., as against 
 34I last December, and 49I this time last year. 
 
 It cannot be denied that there has been a general rise in 
 prices, which is exactly the same thing as a general deprecia- 
 
 * Part II , Chap. XIV., p. 255.
 
 2/0 WAR FINANCE 
 
 tion of the currency, but many people object to the use 
 of this latter phrase. They prefer to indicate their confusion 
 of thought by saying that the rise in prices is the " natural " 
 result of the war. On this view prices in war-time simply 
 rise because " it is their nature to," like the dogs that delight 
 to bark and bite, and the opium that has the virtus dor- 
 mitiva, whose nature it is to dull the senses. 
 
 Apart from this natural sort of fatalism in war-time, there 
 is the ingrained belief that, whatever else may be the cause 
 of the rise in prices — e.g., varied kinds of war-inspired 
 wickedness in the classes or the masses — there is certainly 
 nothing wrong with the currency. It is part of the common 
 British heritage that notes that purport to represent the 
 pound sterling cannot be depreciated, such and so great is 
 the credit of the British Government and of the Bank of 
 England. 
 
 In the great Napoleonic wars the people of this country 
 had the same belief, but in time the notes of the Bank of 
 England were depreciated some 30 per cent. By this is 
 meant not simply that there had been a general rise of 
 prices to about that extent (for, in fact, it was a great deal 
 more), but that £130 had to be given for the gold in a 
 hundred sovereigns. In other words, there was a specific 
 depreciation of the notes relatively to gold. 
 
 It is the object of the present paper to explain the nature 
 and causes of specific depreciation (compared with gold) 
 and its connection with general depreciation (or fall in 
 general purchasing power). Specific depreciation generally 
 becomes first noticeable in making foreign payments. Under 
 normal conditions, throughout the commercial world all 
 the various currencies of the different nations are expressible 
 in terms of the gold which they will command. The general 
 rule is that foreign payments have to be made by trans- 
 muting the corresponding debtor currency into gold (or the 
 right to gold), and the creditor country can again convert 
 this gold (or right to gold) into its own currency. Russia, 
 for example, collects its revenues in roubles, and to make a 
 payment in this country the roubles must be tranr-muted
 
 SPECIFIC DEPRECIATION 271 
 
 into the corresponding gold value in terms of sovereigns 
 (or the right to claim sovereigns). If the Russian debtor 
 has to pay 115 roubles for £9 sterling, payable in this 
 country, where in the normal course of things he had to 
 pay only 100 roubles, there is a specific depreciation of the 
 rouble of some 15 per cent. The loss to the Russian debtor 
 is obvious if he had not allowed for the depreciation, and if 
 the depreciation fluctuates there are always difficulties in 
 making the allowance. 
 
 This example shows the difference there is between 
 specific and general depreciation. It does not follow that 
 because for foreign payments the Russian rouble has depre- 
 ciated {e.g., in its command over the pound stcrhng), it has 
 therefore depreciated to exactly the same extent as regards 
 its general purchasing power in Russia. The evidence 
 available goes to show that in Russia there has not been 
 any great rise in prices. And it is obvious from the nature 
 of the case that the general level of prices in such a vast 
 area cannot fluctuate with every movement in the price of 
 foreign gold in terms of the rouble. 
 
 Early in the war Germany began to suffer both from a 
 general and from a specific depreciation of its currency. 
 There was a general rise in prices, and also a lessened value 
 for the mark in its command over foreign currencies. By 
 the end of November the German mark had depreciated 
 in its command over gold in New York and Amsterdam 
 about 10 per cent., and since then the depreciation has 
 shown a fluctuating increase. 
 
 In the United Kingdom the general depreciation shown 
 by the rise in prices has not been accompanied by a corre- 
 sponding specific depreciation as regards foreign currencies. 
 Up to the end of October, indeed, it was the New York 
 dollar that was depreciated as regards the sovereign payable 
 in London. But for some time now the rate of exchange 
 has been such as in normal times would have meant the 
 shipment of gold from London to New York. The pound 
 steriing has certainly not suffered an}^ specific depreciation 
 like that of the mark or the rouble, but it appears to be
 
 272 WAR FINANCE 
 
 hovering " on the margin of doubt " — the test which the 
 modern economist considers of such importance. 
 
 Those who say that the general rise in prices in this 
 country cannot be due to the currency point to the fact 
 that our currency has suffered no specific depreciation. It 
 is to be hoped that this reason may still serve their purpose. 
 
 In the initial stages, however, especiall}^ in times of dis- 
 turbance, the two kinds of depreciation depend on different 
 causes, and may even move in different directions. At the 
 outbreak of the war most foreign countries had to make 
 on balance payments in London. Since they were all most 
 reluctant to send gold, they w^ere willing to pay in their 
 own currency fanc}/ sums for the right to command gold 
 in this country. On August i it is recorded that a cable 
 transfer on London cost in New^ York seven dollars, whilst 
 under normal conditions no one would have given so much 
 as five dollars. This panic rate was, of course, only tempo- 
 rary, but it was not till the first week of November that the 
 relations of the dollar paid in New York to the pound payable 
 in London came within the normal limits. But during th^s 
 time when the pound sterling was appreciated (instead of being 
 depreciated), as regards foreign currencies, it was losing 
 its purchasing power in this country through the general 
 rise in prices. It is probable (as argued in a former paper *) 
 that this geiieral rise in prices is partly due to the general 
 inflation of currency and credit. The fact that England 
 was a great creditor country, and was also calling in interest 
 formerly left abroad for investment, and checking the usual 
 flow of its capital abroad, made the conditions favourable 
 for the appreciation of the pound sterling in terms of these 
 foreign currencies. 
 
 But although in the initial stages there may be a general 
 depreciation without specific depreciation as regards foreign 
 payments, in the course of time there is an interaction 
 between the two. Suppose that in England the general 
 rise of prices continues, then so far it becomes a good country 
 to sell in and a bad coimtry to buy from. As a consequence 
 * Part II., Chap. XIV., p. 235.
 
 SPECIFIC DEPRECIATION 273 
 
 the balance of indebtedness turns against the country so 
 far as trade is concerned. Instead of other countries — 
 e.g., the United States — ^being in urgent need of making 
 payments in England, the opposite is the case, and England 
 is in urgent need of making payments in the foreign coun- 
 tries. Consequently the English debtor is willing to accept 
 less of the foreign currency for his pound. But there is 
 always a limit to the fall in the amount he will take. If he 
 sends the sovereign itself, the gold in it will always obtain 
 the full normal value in the foreign currency. Accordingly, 
 when the value of the English pound estimated in foreign 
 currency falls below the par value plus the cost of sending 
 the actual metal, gold is likely to be sent. 
 
 When this stage has been reached, then the difficulty 
 has to be faced — ^Where is the gold to come from ? The 
 great mass of wholesale transactions are effected without 
 the actual use of gold or even of bank-notes. Within the 
 country the chief form of the circulating medium is the 
 cheque which is drawn against a credit in a bank. All these 
 cheques in the last resort give the receiver the right to 
 claim gold from the bank. In the last resort, then, anyone 
 with a credit on a bank can obtain gold for transmission 
 abroad. It follows that with a continued adverse balance 
 of trade a drain will set in on the ultimate banking reserves. 
 If the Bank of England (or the Government) follow the 
 example of foreign countries and decide to hoard the gold, 
 then, unless by some method of borrowing abroad the need 
 for the remittance of the gold is avoided, the pound sterling 
 must suffer a specific depreciation, even as the German 
 mark or the Russian rouble under similar circumstances. 
 It is, of course, possible that the Banks of France and Russia 
 may liberate some of their masses of gold for the bcnetit 
 of England, and apparently some arrangement of this kind 
 was mooted in the conference in Paris. On the face of it, 
 however, it seems doubtful if these Banks will go very far 
 in the depletion of their hoards. Both France and Russia 
 have issued great amounts of inconvertible notes, and on 
 the restoration of peace they will no doubt attempt to revert
 
 2/4 WAR FINANCE 
 
 to convertibility as soon as possible. They may want their 
 hoards for this purpose. But for a long time past the 
 hoarding of gold by foreign banks has become a kind of 
 obsession. The maxim that^^a reserve of gold ought to be 
 accumulated in ordinary times for use in an emergency has 
 been strangely perverted into the maxim that in times of 
 stress gold ought to be hoarded for liberation when the 
 stress has passed. This extraordinary perversion of the 
 use of a gold reserve finds a striking illustration in the 
 recent speech of Dr. Helfferich on the provision foi the 
 German war expenses. He said : " The maintenance of 
 Germany's stock of gold was more important than the 
 value of the German mark abroad." At the same time we 
 also know that every kind of effort is being made in Germany 
 to collect all the gold possible in the country for adding to 
 this central hoard. Gold is not to be used as currency, 
 gold is not to be privately hoarded, and everyone is to take 
 the inconvertible notes without hesitation. If, then, the 
 gold is not to be used for foreign payments nor for internal 
 currency purposes (the two legitimate uses of gold money), 
 for what reason is it to be piled up ? It would, no doubt, 
 be useful as a basis of the war indemnity to be paid by 
 German^^ but Dr. Helfferich tells us Germany expects to 
 receive and not pay an indemnity. But whatever the 
 reason may be for hoarding gold, the case of Germany is 
 not peculiar. In the face of this general devotion to hoarding 
 by foreign banks, it remains to be seen how long London 
 will remain a free market for gold. The Government has 
 this last week stopped the "ear-marking" of gold for the 
 redemption of Treasury notes, though the amount of notes 
 issued has again been increased. From the recent debate 
 in the Commons it was apparent that the gold " ear-marked " 
 against the notes was to be used for any emergency that 
 might arise. It the 27I millions of " ear-marked " gold is 
 to be used for foreign payments, it may soon run away so 
 rapidly that the method of hoarding may be preferred. 
 At the same time, the actual convertibilitj^ of the notes 
 within the countr}^ may be endangered, and if the issues 
 
 I
 
 SPECIP'IC DEPRECIATION 275 
 
 are still further increased the rise of prices will be 
 intensified. 
 
 The people of this covnitry may continue to accept the 
 rise in prices as part of the natural burden of war, but any 
 specific depreciation of the pound sterling, or, what is the 
 same thing, any doubt as to London being able to meet 
 any claims in gold, will have serious consequences. The 
 Economist of the 13th instant has a pertinent quotation 
 from the New York World on the American dollar. It is 
 there stated that " the American dollar is now at a premium 
 in the currencies of every principal country in Europe. . . . 
 International trade for years without number has been 
 financed through London. Credit in English pounds 
 sterling has been the standard and desideratum of the 
 world's commerce. This is now turning to New York and 
 in terms of the dollar." The American writer may be a 
 little previous, and New York certainly made a very poor 
 beginning on the outbreak of the war as the world's banker. 
 But it seems time that in finance as in other things this 
 country should begin to realise that we are engaged in the 
 greatest and most expensive war on record, and that there 
 are very real limits to the extension and inflation of public 
 credit.
 
 CHAPTER XVII 
 COMPENSATION AND PROHIBITION IN WAR-TIME 
 
 [April 28, 1915) 
 
 After nearly nine months of war we are told that the 
 great mass of the people do not realise that we are at war. 
 The complaint is sometimes made a fropos of some particular 
 survival of the habits of peace such as horse-racing ; some- 
 times as regards the reluctance to undertake the military 
 burdens of war on the voluntary system. But the complaint 
 is justified in a much larger sense than is suggested by any 
 particular instances. The fact is we have retained the peace 
 habit as regards principles and ideals, and we have forgotten 
 that from the very meaning of war even some of the most 
 fundamental principles of peace are not applicable. 
 
 Take first the principle of personal liberty. It is univer- 
 sally recognised that one of the first duties of the Govern- 
 ment is to protect the liberty of the subject. Individual 
 liberty is, needless to say, the corner-stone of the system of 
 political economy founded by Adam Smith. Those who 
 (like the present writer) still profess the principles of Adam 
 Smith are supposed to be extreme supporters of the principle 
 of liberty. 
 
 Even those who advocate Sociahsm, in any practical sense, 
 argue that in the socialist state there will be a greater amount 
 of real personal liberty than under present conditions. 
 John Stuart Mill, whose leanings to socialism are well known, 
 said that the ultimate test between the systems of indi- 
 vidualism and socialism was to be found in the degree of 
 liberty actually afforded under the two systems. 
 
 As a working practical principle of State action under 
 ordinar}' conditions, this idea of libert}' has much more force
 
 COMPENSATION AND PROHIBITION 277 
 
 than is commonly supposed. It is seen in an extreme form 
 in the claim of liberty to strike even in services and indus- 
 tries of the first importance to national life, e.g., transport 
 and coal mining. Out of deference to this idea of liberty 
 even in peace-time the national safety has been imperilled. 
 The worker is ready to recognise restrictions on his liberty 
 imposed by his own Trade Union, but not so ready if the 
 restrictions are imposed by the State. In the same way in 
 the matter of consumption, people resent interference with 
 then- liberty in eating and drinking, even if the regulations 
 are supposed to be in the interests of the consumer. The 
 old sumptuary laws have been abandoned, just as the old 
 laws that compelled attendance at church. There is no 
 question that in the course of progress, in spite of the inter- 
 ferences of recent years, the real liberty of the subject has on 
 the whole been greatly enlarged. 
 
 But however admirable this principle of liberty may be in 
 time of peace, in time of war it must be largely curtailed. 
 The degree of liberty that may be allowed to the subjects 
 must be subordinated to military requirements. It ma}^ be 
 laid down as a counsel of perfection that the minimum of 
 interference should take place, but in the case of doubt the 
 claim of war must prevail, and prevail instantly. The whole 
 power of the State must be directed to the speedy and 
 successful ending of the war. The smaller liberty, e.g., of 
 striking, or profiteering, or drinking, or shirking, etc., must 
 give way to the larger liberty of individuals within the State, 
 to liberty of the State itself amongst other States. 
 
 Simple as this reasoning may seem, the conclusions that 
 follow are not so readily accepted, such is the force of habit. 
 The first conclusion is that, if necessary, conscription must 
 be submitted to, and the necessity must be judged of not by 
 the possible conscripts, but by the Government and its mili- 
 tary advisers. To say that conscription is an interference 
 with the natural hberty of the subject is irrelevant in a state 
 of war. At any rate, it is a less infringement than the 
 invasion of the country or of its rights by an external enemy. 
 If the Government of this country undertakes to say that
 
 278 WAR FINANCE 
 
 conscription is necessary, the proposal will meet with no 
 opposition, from responsible statesmen. 
 
 Next, it follows that if so great an infringement of natural 
 liberty as conscription is to be admitted, any lesser infringe- 
 ment necessary for the supreme end must also be admitted. 
 If universal conscription is within the rights of war, a 
 fortiori any lesser compulsion is included. The State in 
 war-time has the right to demand the services of all whom it 
 may require. 
 
 But here we are apparently brought into conflict with 
 another of the principles of peace, that we find it so hard to 
 abandon in time of war — the principle, namely, of equality. 
 This principle of equality is not so generally or intensely 
 admired as is the principle of liberty. The British mind, in 
 particular, has never been much inclined to systems of 
 levelling. There are no doubt here, as elsewhere, people who 
 are always quite willing " to take out their sixpence and 
 pocket your shilling," but the " yearnings for equal division 
 of unequal earnings " are not very widespread or intense. 
 Jeremy Bentham, who has probably had more influence on 
 the course of legislation for the last century than any other 
 writer, and who is the reputed father of the principle of " the 
 greatest happiness of the greatest number," declared that 
 the passion for equality has its root not in virtue but in vice, 
 not in benevolence but in malevolence. Bentham, however, 
 was a cantankerous philosopher, and in some forms no doubt 
 the principle of equality is to be placed on a footing with 
 liberty as one of the great ideas of progress. Equality before 
 the law is a great text ; so is equality of taxation ; though 
 both present great difficulties in the interpretation. There 
 is also no question that in recent years, by the adjustments 
 of taxation and expenditure, we have made great strides in 
 the direction of greater equality in the distribution of wealth. 
 Equality of opportunity is one of the most popular watch- 
 words of the present-day reformer. But, as with liberty, 
 whatever the moral value of equality in time of peace, it 
 must take a second place in time of war. The business of 
 war caimot wait until all the claims for equal treatment are 
 
 J
 
 COMPENSATION AND PROHIBITION 279 
 
 adjusted. Equality is as inappropriate as liberty as the 
 basis of military discipline, and in modern war every member 
 of the State must submit more or less to military disci phne. 
 Although this reasoning cannot be objected to the conclusion 
 is only admitted with reluctance, so great is the force of the 
 peace habit. 
 
 Some weeks ago the Chancellor of the Exchequer com- 
 plained that the output of munitions essential to the success- 
 ful conduct of the war was hindered by the drunkenness 
 of a small minority. It is true that the smallness of the 
 minority was emphasised, but so also was its power for evil — 
 for drink was said to be the strongest of all our enemies. Let 
 it be supposed that the charge was true and the evil as 
 serious as was stated. The obvious duty of the Government 
 was to abate the evil by any degree of compulsion that 
 might be necessary. Where was the difficulty ?. The 
 anarchical liberty of a few was to be sacrificed to the wider, 
 truer liberty of the many. In recent years compulsion has 
 become a blessed word ; it is twice blessed, it blesseth the 
 bureaucrat who gives it and the patient who takes it. We 
 have only to recall the double blessing of compulsory 
 insurance. 
 
 The real trouble was not with the survival of the principle 
 of liberty but with the survival of the principle of equality. 
 This malevolent principle (the adjective is Bentham's) made 
 people think (or say) that if the drinking of the munition 
 workers was to be restrained, then by the principle of equality 
 equal restraints ought to be imposed on everybody else. To 
 such lengths was this search for equality carried that in the 
 midst of the greatest war on record, when all the energies of 
 the Government ought to be concentrated on the efficient 
 conduct of the war, they were asked to consider and decide 
 between large schemes for the prohibition or nationalisation 
 of the whole drink traffic. It is true that the proposals for 
 prohibition were also supported on other grounds, but the 
 beginning was to be found in this idea of equality — and 
 therein also is to be found the beginning of the end. 
 
 For this principle of equality came up against another
 
 28o WAR FINANCE 
 
 principle, which in jn'actice has often shown itself stronger 
 than either liberty or equality. This is the principle of 
 property, with the correlative moral right of compensation 
 for disturbance. Out of deference to these ideas we were 
 told that any regulation of the drink traffic ought onl}^ to be 
 put in operation with carefully devised compensation for all 
 the vested interests concerned. 
 
 There can be no question that the development of the 
 principle of property has been one of the great strands of 
 economic progress, and it is part and parcel of the modern 
 State although the crimes committed in the name of property 
 have been and are, it is true, as numerous as the crimes of 
 Hberty. As one of the greatest of jurists said, the right of 
 property is a terrible right, but it is perhaps necessary. On 
 the ordinary view of compensation in times of peace, the 
 proprietary rights that have been suffered to grow up by the 
 State in the liquor trades and industries have as good a 
 claim for compensation as other forms of lawful property in 
 case of extinction or diminution. And as Mill argued, any 
 question of compensation should turn, not on the strict 
 interpretation of the letter of the law, but on the fact of what 
 was sufficient in the case to give a title by prescription. We 
 can never forget that the British nation gave large compensa- 
 tion on the abolition of colonial slavery. 
 
 This moral cla'm to compensation, which in time of peace, 
 owing to the cost, is in practice one of the greatest obstacles 
 m the way of any kind of reform, by a curious perversion of 
 the moral judgment has been put forward in war-time as the 
 best means of facilitating drastic temperance legislation. 
 The Government can only move, it is said, if there is general 
 agreement, and this general agreement is to be found in the 
 principle of liberal compensation. Tfiose who opposed 
 compensation to the liquor interests in t'me of peace (except 
 in the way of self-supporting insurance) are urged to drop 
 their opposition so as to take advantage of the moral force 
 engendered by the war in favour of this more drastic control. 
 Legislation which could not be carried in peace may be carried 
 in war^ — -if only adequate or liberal compensation is given.
 
 COMPENSATION AND PROHIBITION 281 
 
 On the other side, the Hqiior interests are told that now is 
 their only chance of getting rid of a wasting security at more 
 than the true market value, that is to sa}^, having regard to 
 this wastage. They are warned that temperance is growing 
 by natural causes, e.g., the preference of other pleasures to 
 that of drink, the higher standard of morality and of fashion, 
 etc. ; they are warned that if they wait too long the eventual 
 compensation that they will receive may be next to nothing. 
 Therefore, let them cast their burdens on the Government, 
 and convert their unearned decrement into a satisfactory 
 increment. 
 
 But why should the State be called upon to add to the 
 numerous financial responsibilities of the war an expenditure 
 on social reform that would not be faced in time of peace ? 
 The truth is that so much has been said of the inexhaustible 
 resources of British credit, and subsidiary war expenditure 
 has been conducted with so loose a hand, that the people of 
 this country have come to look on the war fund as a kind of 
 wages-and-profit fund, and by the pernicious principle of 
 equality everyone is supposed to have a dip. The whole 
 nation has become infected with the spirit of extravagance, 
 and the latest example is the temperance reformer. Where 
 does he suppose that the money is to come from to pay this 
 liberal compensation ? 
 
 Not only is the war fund of the State supposed to be 
 inexhaustible, but so also is its work fund. It is supposed 
 to have at its command legions of officials and sub-officials. 
 Out of this abundance of talent it is assumed that an army 
 of valuators and legal interpreters and disinterested cork- 
 screws could easily be found (at a price) for any scheme of 
 compensated prohibition or nationalised management. The 
 only thing forgotten is that the responsible Government 
 with its higher officials is already over-burdened with the war, 
 and an army of social reformers like the real thing requires 
 control from above. 
 
 Such in brief is the growth of the snowball of compulsory 
 temperance. The drinking excesses of a small minority call 
 for some restraint. Equalit}^ says :■ — If one is restrained all
 
 282 
 
 WAR FINANCE 
 
 must be restrained. Property comes in and claims universal 
 compensation, and British credit is called on to provide all 
 the snow required out of the surpluses of its cold storage. 
 
 Is that all, it may be asked ? Is no advantage to be taken 
 of the moral uplifting of the war ? The answer is the answer 
 given by the King. Is not the appeal to every man's 
 conscience in a time of national affliction of more value than 
 any degree of compulsion ? The method is as simple as that 
 of Columbus with the egg, and the King himself has shown 
 the way.
 
 CHAPTER XVIII 
 THE DRINK PROPOSALS OF THE GOVERNMENT 
 
 {March 12, 1915) 
 
 As was anticipated, the ship that bore the fortunes of 
 prohibition has been wrecked on the rocks of compensation. 
 The result is, on balance, a good thing for the country. The 
 middle of a great war is not a time for extravagant expen- 
 diture on social reforms. If social reforms are necessary 
 they should be achieved by ruder and simpler methods, 
 but in general they must wait for a more convenient season. 
 Temperance is always good, and it is to be regretted that 
 the efforts of temperance reformers were diverted from the 
 paths of persuasion to the paths of compulsion. " Absti- 
 nence," says the Parson in the Canterbury Tales, " is litel 
 worth, but-if a man have good wil ther-to." The attempt 
 to use the occasion of the war in favour of extreme measures 
 has been followed by a natural reaction. The mere rumour 
 of general prohibition as possible was at once followed by 
 the laying in of stores of liquor against the evil day. When 
 the idea of prohibition was replaced by the more practical 
 dread of heavy taxation the rush to lay in stores was inten- 
 sified. Deplorable it may be — but could anything show 
 more clearly how little in accord with public opinion were 
 these drastic proposals ? 
 
 But although the extreme form of prohibition has been 
 wrecked, the ideas on which it was based still survive. The 
 Government are not content to apply a definite remedy 
 to a definite evil. They still search for a remedy that shall 
 at the same time cure another indefinite evil. The definite 
 evil is the slackness in the industrial provision for the war. 
 The speech of Mr. Lloyd George, after all possible allowance
 
 284 WAR FINANCE 
 
 for over-colouring, showed that the evil demands a prompt 
 and effective remedy. Figures were given and opinions 
 quoted from persons in authority, which proved, so far 
 as samples can prove, that the output of war materials 
 and the provision of the subsidiary services of transport 
 and the like were not in proportion to the military activity. 
 Munitions v/ere needed even more than men. The Navy 
 itself, which is the very foundation of our national safety, 
 had to wait on account of industrial slackness. Some men, 
 no doubt, were working too much for real efficiency, but 
 the averages of hours quoted were in many cases even less 
 than in peace. At the front there was through the winter 
 unexampled endurance and hardship — at home there was 
 growing comfort and relaxation. Now we are told that 
 very soon a supreme effort is to be made, and that the 
 success is contingent on the work done at home. And yet 
 the work is not being done as it should be. The position 
 is such that it cannot be too often or too emphatically 
 presented to the nation. The Chancellor of the Exchequer 
 did well to make it the main burden of his speech of last 
 week. The speech has been confirmed by the publication 
 of the " White Paper." 
 
 But though the evil was most forcibly emphasised, the 
 attention was diverted in the remedies proposed to some- 
 thing altogether different. The opportunity was used for 
 the introduction of a scheme of penal taxation, which in 
 some way was supposed to be involved in the specific pro- 
 posals for partial prohibition. The consequence is that 
 the public energies and the energies of the Press were mainly 
 devoted to consideration of the inequities of the proposed 
 taxation, and the real evil was again lost sight of. 
 
 In the practice of politics, as in the practice of physic, 
 if you want to cure a disease you must first find out the 
 nature of the disease and its cause. The nature of the 
 disease that endangers the national safety is industrial 
 slackness. That is admitted. The " White Paper " is an 
 official report on " Bad Time kept in Shipbuilding, Munition, 
 and Transport Areas." Different causes have been named
 
 DRINK PROPOSALS OF THE GOVERNMENT 285 
 
 — e.g., over-fatigue through bad adjustment of the working 
 hours ; the inferior quahty of the men, many of the better 
 kinds being at the front, etc. But the cause that was most 
 insisted on by the Chancellor of the Exchequer was excessive 
 drinking. The fatigue itself he ascribed largely to drink ; 
 and the inferior quality of the workers was said to make 
 them inferior also in standing the effects of over-indulgence. 
 The conclusion was that the proximate cause of the disease 
 was drink. In mitigation of the moral indictment implied 
 against large classes of the people, it was again stated with 
 emphasis that the drinkers and slackers were only a minority, 
 but they sufficed, and more than sufticed, to lower the whole 
 productive power. 
 
 The next point was to find out the cause of this outburst 
 of drinking, which, after all allowances, seems to be greater 
 than in times of peace. Here the answer given by the 
 Chancellor is most instructive. It is the high wages. The 
 workers had much more to spend, and they spent it on 
 drink. It is a pity he did not carry the search for causes 
 a little further. What is the cause of the high wages. 
 One answer is extravagant Governmental expenditure with 
 a general inflation of prices. This is not the occasion for 
 pressing this point. But apart from questions of currency 
 and credit, which are the most difficult in the whole range 
 of economics, it ought to be evident from the most general 
 considerations that something is fundamentally wrong with 
 our expenditure on the war. 
 
 On the outbreak of the war the Prime Minister, in most 
 impressive speeches, implored the people of all classes to 
 reduce their consumption, and in particular to eat less and 
 drink less than usual. He recognised that war must mean 
 a great destruction of wealth, that there must be less pro- 
 duced, and a lessened flow of consumable things. Appa- 
 rently the idea has not been realised. On the contrary, we 
 know that the imports into the country have reached a 
 record surpassing the records of peace, and other signs 
 show that the consuming power of the people has apparently 
 increased. How is this Samson's riddle to be answered ?
 
 286 WAR FINANCE 
 
 How can a devouring war be a cause of plenty ? How can 
 meat come out of the eater ? The answer is that the nation 
 is spending borrowed money at the rate of over a milhon 
 pounds a day — ^probably by this time nearly two millions. 
 That something is wrong ought to be obvious from the 
 universal demand for a war bonus. Instead of people having 
 to check their consumption to meet war taxes, they seem 
 to think they have a natural right to an increase of wages 
 on account of the war. 
 
 Nothing is more easy than for a nation or an individual 
 to run into debt, and spend the money whilst running. 
 Nothing is more easy than the preliminary stages of national 
 inflation. But, on the other hand, nothing is more difficult 
 than retracing the steps and checking the expenditure or 
 contracting the inflation. This last week saw the Chancellor 
 of the Exchequer adding almost another full million to his 
 " emergency " Treasury notes. Prices are still rising, and 
 likely to rise, and probably more devices and excuses will 
 be found for more inflation before any real contraction 
 takes place. 
 
 The disciplinary proposals of the Government have the 
 merit of local treatment, and do not err on the side of mild- 
 ness. But it is doubtful if local prohibition will restrain 
 the real offender. It is true that the right to do ill deeds 
 often makes the ill deeds done, and the open door is a 
 better policy for Chinese trade than for the British 
 public-house. But the prohibited areas are not likel}' 
 to be surrounded by a hedge of preventive officials, 
 and the drink urgently required for drunkenness will 
 no doubt be imported in sufficient quantities for the 
 purpose. 
 
 It is always said that it is easy to criticise ; that something 
 must be done ; and that a critic should suggest an alter- 
 native. If provision of munitions and other war require- 
 ments is as much part of the real business of war as is the 
 actual fighting, then it stands to reason that some kind of 
 military discipline suitable to the case ought to be enforced. 
 Let the interference wilh personal liberty and the habits of
 
 DRINK PROPOSALS OF THE GOVERNMENT 287 
 
 peace be the minimum necessary, but let it also be not less 
 than that irreducible minimum. Instead of penal taxation 
 on the drink, put penal taxation or penal restraint on the 
 slacker. In all industries bearing on the war regularity of 
 work and efficiency ought to be implied or expressed as an 
 essential part of the wage contract. If an offender pleads 
 fatigue or illness, or other reasonable cause for absence, let 
 the evidence be satisfactory or the penalties severe. If that 
 does not suffice, let him be dismissed. It is absurd to speak 
 of a shortage of labour such that you must employ labour 
 not up to the standard required. The losses on the military 
 side in the war do not prevent the war from being carried 
 on, although amongst the losses are some of the finest men 
 of the country. Cannot the industrial side of the business 
 afford to lose some of the worst men ? The offenders, we 
 arc told repeatedly, are a small minority. Surely the 
 majority might well approve of measures that would keep 
 the minority up to the proper standard. The minority 
 might themselves approve of such compulsion, if their 
 opinion could be got at in a sober or reflective moment. It 
 came out in one of the inquiries on the Clyde that the men 
 who most approved of total prohibition were the very class 
 who were the worst of sinners. The celebrated anonymous 
 drinker who wTote the open letter to Mr. Lloyd George 
 approved of prohibition. 
 
 The most drunken firemen on the poorest of tramp 
 steamers have not the liberty of drink on the voyage, and 
 the d'scipline in peace on all ships is more severe than is 
 required for ordinary industries in war-time. If we look 
 into the real meaning of all wage contracts, the employer 
 bargains for a certain amount of work under normal con- 
 ditions in a normal time. If a man makes himself incapable 
 of this normal work he fails in his duty, and in many cases 
 is liable to criminal proceedings. In the transport services 
 both by sea and land some kind of industrial discipline is 
 enforced ; so it is in mining and in agriculture. What 
 would be the punishment of the more skilled farm workers 
 who have to do with animals if through drunkenness they
 
 288 WAR FINANCE 
 
 imperilled the lives of the cattle or horses ? And are not 
 the lives of our soldiers of infinitel}' more importance ? 
 Let us not be deceived by words. Conscription, industrial 
 as well as military, is to be preferred to the selfish liberty 
 that endangers the whole State.
 
 CHAPTER XIX 
 
 THE NEUTRALITY OF THE UNITED STATES 
 
 I. — The Immediate Interests 
 
 {June 9, 1915) 
 
 On the outbreak of the war the immediate interests of the 
 United States seemed to admit of no doubt. These interests 
 would clearly be best promoted by the maintenance of strict 
 neutrality. 
 
 It has always been the policy of the United States not to 
 interfere in European quarrels. Similarly the principle of 
 non-intervention in the internal affairs of any independent 
 foreign State has always been strictly interpreted, as is 
 shown in the long-suffering of the anarchy of Mexico. A 
 very practical proof of the reality of this policy of non- 
 interference is found in the persistent neglect of military 
 preparation. There is no provision for an expeditionary 
 force, and without such a force the power of the Navy is 
 hmited. 
 
 The composite character of the people of the United States 
 clenched the idea of neutrality with a very practical reason. 
 By the last census (1910) it appears that the white population 
 of foreign stock [i.e., foreign born or one or both parents 
 foreign born^ is over thirty-two millions. Of this foreign 
 stock about one-third — (say) eleven millions- — is from 
 Germany and Austria-Hungary, and about one-third is from 
 the British Isles and Canada. The German element is 
 strong in wealth and political influence, and to judge by the 
 samples of its journals in sentiment is more Kaiserlich than 
 the Kaiser. 
 
 Besides those connected by blood relationship with the 
 different belligerent nations, there are many also closely con-
 
 290 . WAR FINANCE 
 
 nected by commercial and financial ties. Some of these 
 hyphenated financial interests are amongst the most impor- 
 tant of the United States. 
 
 It was obvious at once that the war would involve immense 
 monetary losses to the nations actively concerned. Their 
 trade would be crippled and their capital replaced by debt. 
 The United States, on the other hand, as a neutral, would be 
 likely to enjoy exceptional gains, as a buyer of bankrupt 
 stocks and a seller of the prime necessaries of life and of war 
 at famine prices. In recent years the foreign trade of the 
 United States has become of increasing importance, and the 
 war promised openings for the capture of markets which the 
 Germans had already taken from the British. As a result of 
 the general financial disorganisation. New York might hope, 
 if neutrality were strictly preserved, to take the place of 
 London as the clearing house of the world. There is a 
 glamour about foreign trade and the control of international 
 money markets that appeals to the popular imagination in 
 much the same way as the barbaric pearl and gold of the 
 gorgeous East used to appeal to our ancestors. " The 
 United States the Greatest Trading Nation," " New York the 
 World's Banker," would no doubt be most pleasing headlines. 
 
 From the moral point of view the case for neutrality 
 seemed equally clear. To the average American war is 
 horrible. The doctrines of Bernhardi are repulsive ; a 
 retrogression to barbarism and not an advance to a higher 
 plane. This disgust with Bernhardi's praise of war and the 
 military virtues is so strong that Mr. von Mach, a German- 
 American ^^•ho has written an able presentation of the 
 German case for the use of Americans, has taken pains in his 
 introduction to repudiate Bernhardi. " It will hardly be 
 doubted that Bernhardi neither spoke for the Germans as 
 such, nor that his book had any influence on the people as a 
 whole." Unfortunately, since the outbreak of the war, 
 Bernhardi has been surpassed in violence in an enormous 
 mass of German war literature- — in journals, i)amphlets, and 
 books — and " military culture " must be taken to be, for the 
 present at any rate, the ideal of the " Germans as such."
 
 THE NEUTRALITY OF THE UNITED STATES 291 
 
 TIic actual progress of the present war has certainly con- 
 lirined the average American in his original opinion that war 
 is horrible. War may be the lesser of evils ; war may pro- 
 mote some of the highest forms of self-sacrifice and duty ; 
 war may foster some of the noblest virtues ; these truths 
 the Americans learned in their own Civil War, which is 
 still a living memory ; but they learned also that war is 
 horrible. 
 
 Such being the state of affairs and of opinions in the United 
 States, it was plainly the duty of the President to declare a 
 policy of neutrality, and to endeavour to follow out this 
 policy with the utmost strictness and good faith. 
 
 But although the immediate interests of the United States 
 pointed clearly to neutrality, the war had hardly begun when 
 the rule of neutrality presented difficulties of interpretation. 
 Neutrality itself incurs obligations, and also claims rights. 
 The United States, as the greatest of neutrals, is concerned 
 to maintain a strict interpretation both of the rights and the 
 obligations. This attitude is the natural counterpart of the 
 policy of non-intervention. The position of the United 
 States as a great pacific and non-interventionist nation 
 would be intolerable if the military nations presumed to take 
 advantage of this pacifism in their own interests. 
 
 So important is this championship of neutrality that it 
 may be said to form an essential part of the national interests 
 of the United States. 
 
 But the position of champion neutral thus assumed 
 though obviously just in principle is beset with the gravest 
 difficulties in practice. 
 
 It is to the interest of the United States — in the strictest 
 interpretation of interest — that the accepted rules of inter- 
 national law should be observed by the belligerents and 
 thereby the system of international law itself strengthened 
 and consohdated. 
 
 For unfortunately what is called international law is 
 in strictness only international morahty. Suppose some 
 powerful nation changes its view on the accepted moral law, 
 what is to be done ? Who is to decide if the change of view
 
 292 WAR FINANCE 
 
 is justiiied by the plea of national safety or military exigency ? 
 Who is to inflict the penalty, if any ? 
 
 It cannot be expected that the United States (without an 
 army) should rush in to separate the combatants and enforce 
 the rules of fair fighting or the observance of treaties and 
 agreements which cannot be considered as directly affecting 
 American interests in the more narrow sense of the term. In 
 some part of the world there is always being committed some 
 crime against international law, but the United States cannot 
 set up to be the general judge and policeman for the whole 
 world. Don Quixote himself might have quailed before 
 such a task. 
 
 Nor can the interference of the United States be deter- 
 mined simply by the magnitude of the offence or the estimate 
 of its moral turpitude. 
 
 " It will never be possible in any war to commit a clearer 
 breach of international morality than that committed by 
 Germany in the invasion of Belgium." In these words 
 ex-President Roosevelt has expressed the opinion of the 
 civilised world. But it is by no means clear from the indig- 
 nant sermon preached from this text that even he would 
 think the devastation of Belgium in itself made the military 
 intervention of the United States inevitable. 
 
 It is to be hoped that one result of the present war will be 
 to stop such misconduct for the future ; but such, alas ! was 
 also the pious hope of the latest Hague Conferences. The 
 world still waits for the greatest discovery in practical 
 morality — namely, the imposition of effective penalties for 
 the breach of international law — effective, that is to say, as 
 preventive. 
 
 In the meantime, however, even the champion nation of 
 neutrality and of international law cannot be expected 
 to go to war simply to enforce international morality in 
 general. 
 
 But the case is at once altered as soon as any infringement 
 of accepted international law affects not only third parties, 
 but the United States itself. Under present conditions the 
 only way in which international law can be maintained and
 
 THE NEUTRALITY OF THE UNITED STATES 293 
 
 advanced is ii every particular nation, so far as lies in its 
 power, defends its own interests against any breach. 
 
 Belgium set an example that ought to be an everlasting 
 landmark in the advancement of international law. For tne 
 present it is the worst case on record of the violation of that 
 law. Belgium was offered the German guarantee of integrity 
 and compensation for disturbance after the war if only she 
 would permit the passage of German troops. A refusal was 
 to be met by war. Belgium would not accept this interfer- 
 ence with her political independence. Yet Germany had 
 promised that Belgium should suffer no material injury it 
 she yielded. Belgium has suffered martyrdom for a word — 
 for an idea — the idea of political independence. The 
 martyrdom of Belgium will be wasted unless as a consequence 
 the law of nations is put on a more solid foundation, and 
 unless a recurrence of such violation is prevented. In the 
 meantime it is more than ever necessary that no further 
 violation of accepted law should be suffered by the other 
 neutral nations. It follows that the champion of neutrality 
 ought to guard with the utmost jealousy any interference 
 with its own interests as determined by international law.* 
 Any sacrifice of political independence at the present juncture 
 is so far a reversion to barbarism. 
 
 It is, of course, a matter for the United States to determine 
 how tar in fact or in law there is a violation of its interests, 
 and to judge of the inadequacy of any explanation or redress 
 that may be offered. 
 
 It is worth while, however, to consider, by way of illustra- 
 tion of the general argument, what is meant by the interests 
 of the United States apart from the general sympathy with 
 law and humanity. We may begin with the lowest interests, 
 that is to say, the lowest in the moral scale that is still 
 commonly adopted by the nations — namely, the commercial 
 interests. The commerce of the United States is carried on 
 under the accepted rules of international law. The mere 
 announcement through the usual diplomatic channels by 
 some other nation of its intention to break this law makes no 
 difference whatever to the rights of the United States. The
 
 294 WAR FINANCE 
 
 offending nation may plead self-defence or military necessity, 
 but the very object of international law is to restrain the self- 
 interest of nations. If the intention to break the law is not 
 conveyed through the usual diplomatic channels, where it 
 might well be checked in transit, but is only advertised in 
 the newspapers, the offence is much aggravated. 
 
 When the breach of the law is specially aimed against 
 shipping it reaches the highest point of audacity. A ship 
 is thought to be as inviolable as a citizen ; in all languages a 
 ship is spoken of as a living thing, and to sink a ship unlaw- 
 fully is, so to speak, murder, or culpable homicide, as the case 
 may be. Some of the greatest wars have arisen in connection 
 with the rights of shipping and the freedom of the seas. 
 
 If, however, the rights of trade and of certain kinds of 
 property are regarded as of so much importance, d fortiori 
 any offence against international law involving the lives of 
 the citizens cannot be passed over without a sacrifice of the 
 fundamental idea of political independence. The case of 
 the Lusitania is very different from that of Belgium so far as 
 it affects the interests of the United States. The horror of 
 •Belgium was greater, but it was not the property or lives 
 of American citizens that were threatened. Although the 
 Lusitania was a British ship and alleged to carry contraband, 
 its destruction against the rules of international law, with 
 the consequent loss of American lives, is an infringement of 
 that elementary security that is the foundation of political 
 society. 
 
 On the right of the United States to demand explanation 
 and redress there can be no question, as was made perfectly 
 clear in the first Presidential Note. 
 
 But in the matter of peace and war, the question of right 
 is not everything ; there is also the question of expediency. 
 The distinction was admirably put by Canning in a speech 
 on the Spanish question (1823). " Any question of war 
 in\'olves not only a question of right, not only a question of 
 justice, but also a question of expediency. Before any 
 Government goes to war it ought to be convinced not only 
 that it has just cause for war, but that there is something
 
 THE NEUTRALITY OF THE UNITED STATES 295 
 
 which renders war its duty ; a duty compounded of two 
 considerations — the first what the country may owe to 
 others ; the second what she owes to herself." 
 
 The primary duty of the United States to other nations, 
 if the foregoing argument is accepted, is to insist that so far 
 as she is concerned, no violation of international law will be 
 permitted. The champion of neutrality must at least 
 defend the rights of neutrals in its own case. 
 
 The duty of the United States to herself must depend on 
 the view that is taken of her own interests. As already 
 shown, the immediate interests are in neutrality, but unless 
 the policy of a country is to be governed merely by the 
 opportunism of the moment, regard must be paid to ulterior 
 interests, and to the great principles which are at the basis 
 of the constitution and life of the State. 
 
 The people of the United States are not governed simply 
 by monetary calculations. Fifty years ago they submitted 
 not merely to war, but to civil war of the most dreadful kind. 
 What for ? To determine the meaning of the word liberty. 
 The liberty of the North fought against the liberty of the 
 South — the higher liberty against the lower. Who could 
 formulate in terms of money the points at issue ? 
 
 And at the present crisis in the history of the world the 
 duty of the United States to herself cannot be estimated 
 simply in the effects on opulence, and still less by that part of 
 opulence that arises from foreign trade and dealing in money. 
 It may well turn out that this wider view of interests may 
 show that the duty to self and the duty to other nations 
 coincide to a great extent, and may involve a reconsideration 
 of the policy of passive acceptance of the great German 
 Revolution.* 
 
 * These two papers on the Neuti-aUty of the United States were 
 subsequently incorporated in a pamphlet under that title (Macmillan & 
 Co., 1916). As foreseen, the United States eventually declared war on 
 Germany on moral grounds.
 
 CHAPTER XX 
 THE NEUTRALITY OF THE UNITED STATES 
 
 II.- — The Ulterior Interests 
 {June 12, 1915) 
 
 At the outbreak of the war it was commonly believed in 
 this country that the German nation had been led away by 
 the Emperor, and the Emperor b}' a military clique. The 
 English-speaking races take it as an axiom that you cannot 
 bring an indictment against a nation. Most people in 
 Britain believed that as soon as the Emperor had been 
 found out, and even if victory was delayed beyond the 
 appointed day, there would be in Germany revolution and 
 disruption. 
 
 The course of the war and the publication in Germany 
 of masses of war literature have shown that these ideas 
 were the reverse of the truth. The Emperor is the best- 
 beloved man in Germany because he best represents the 
 national ideals. 
 
 " It is no longer possible," says Mr. von Mach, " to speak 
 of a clique as in command of the Government. The com- 
 munal and individual life of German}' is democratic, and the 
 heads of departments are drawn from all classes." The 
 Emperor is well spoken of at home, and is beloved by his 
 people, " not because he is autocratic, but because his aims 
 throughout his reign have been the aims of the healthy 
 pulsating life of Germany^ — peace and progress." The 
 Germanic ideas of peace and progress have received very 
 full illumination, not onl}' from the war literature, but from 
 the war practice. The kind of peace is certainl}' the kind 
 that promotes progress ; but the progress that is sought 
 after is the progress of the German Empire regardless of
 
 THE NEUTRALITY OF THE UNITED STATES 297 
 
 the rights of other nations. It is not the German Emperor 
 only who wants a place in the sun and is not satisfied with 
 peaceful penetration. The whole nation has been seized 
 with the lust for military dominion. 
 
 In the same way it is not only by the military caste that 
 war has been glorified. The whole nation has been taught 
 to believe that the virtues of war are nobler than the virtues 
 of peace. The hatred of England is not due simply to her 
 unexpected intervention in the war, but to the feeling that 
 English ideas are most opposed to " military culture." A 
 book has been published recently by W. Sombart, one of 
 the best known German Professors of Political Economy, 
 under the title of " Traders and Heroes." The main point 
 of the argument is that the present war is a struggle between 
 " the shopkeeper " and " the hero " ; between the mer- 
 cenary and the heroic spirit. England is the nation of 
 shopkeepers and Germany is the nation of heroes. Not only 
 is war glorified, but military necessity or advantage is made 
 the final test of justice. " War is war " is not merely the 
 excuse of the ruthless soldier, but is accepted by practically 
 all the leaders of thought in Germany as a sufficient excuse 
 for the sufferings of Belgium ; it is a pity that in war the 
 innocent must suffer with the guilty — that is all. 
 
 It is only with the greatest reluctance that the British 
 people have been forced to the conclusion by overwhelming 
 evidence that the German nation is throughout permeated 
 with these ideas of " mihtary culture " and of the morality 
 of might. 
 
 It is an old saying that England is " a nation of shop- 
 keepers." The expression was used by Adam Smith, and 
 is, at any rate, good enough to be opposed to " the nation 
 of heroes." But, whatever words of praise or dispraise are 
 employed, there can be no question that the ideas at the 
 basis of German mihtary culture and hero worship are 
 exactly the opposite of the great ideas under which the 
 British Empire has grown up and been extended over so 
 wide an area. 
 
 And the key to the present argument is that it is precisely
 
 298 WAR FINANCE 
 
 these same ideas which have dominated the growth of the 
 United States, and with the vigour natural to a young 
 nation unfettered by ancient history and with boundless 
 territory have been pushed farther than in the old country. 
 
 If the opposition between the German and the British 
 ideals is marked, the opposition is still stronger between 
 German ideajs and the ideals of the United States. 
 
 What, then, are these great ideas which dominate British 
 civilisation, and are still stronger, because less restricted 
 in their unfolding, in the United States ? What are these 
 great ideas which arc so opposed to the ideas of the German 
 Revolution ? 
 
 The most persistent and forceful of them all is libert}'. 
 Liberty must always mean liberty under the law, but in 
 the British and the American nations the ideal is a maximum 
 of freedom with a minimum of coercion and regulation. In 
 German}^, on the other hand, the idea has been fostered 
 that State regulation is better than private judgment, and 
 that obedience is better than liberty. In the English- 
 speaking nations the great principle of equality before 
 the law is carried out to the full extent. With them the 
 law is no respecter of persons. In German}^ even in peace, 
 ideas of military privilege offend against this principle, and 
 in war military privilege is supreme. 
 
 As regards constitutional liberties, there is very little 
 difference between the United Kingdom and the United 
 States, although in names and in theory the latter is osten- 
 sibly the more advanced. The retention of the hereditary 
 princij)le in tlie British Empire is rather a formal than a 
 material difference. 
 
 In the German Empire, on the other hand, the Emperor 
 is not, in the British sense of the term, a constitutional 
 monarch. His personal power is real and great, alike in 
 the choice of Ministers, in the determination of foreign 
 policy, and in the conduct of war. How the (icrman people 
 can submit to a non-constitutional Ciovernment is always 
 one of the wonders of the world to the British mind. The 
 present German l^mjx'ror Ix'iieves in his divine right. The
 
 THE NEUTRALITY OF THE UNITED STATES 299 
 
 last King of England who believed in his divine right was 
 executed more than two and a half centuries ago. 
 
 In the German system of local government the permanent 
 State official holds a dominant position. The Government 
 expert is everywhere. In this country, on the other hand, 
 as Mr. Dawson observes in his great work on " Municipal 
 Lif-e and Government in Germany," " most Englishmen 
 at heart prefer the worst of amateurs to the best of experts, 
 and would rather be wrong with the one than right with 
 the other." But this greater German efficiency is bought 
 at the cost of a depression of individual character and of 
 the essentials of liberty that are the life and soul of the 
 English-speaking nations. In time of war this acquired 
 docility of the German has its advantages, at least in its 
 earlier stages. It has its advantages in regulating the con- 
 sumption of food and the provision of military requisites. 
 But the point is not as to which system gives the best 
 military results for the time being, but whether British 
 freedom or German obedience is most in accord with 
 American ideals. 
 
 In comparing " the shopkeeper " with " the hero," the 
 most striking and obvious difference is in the provision for 
 military requirements. The British ideal is to use the 
 minimum of military power that is necessary to support the 
 defence of the Empire. The Germanic ideal is to organise 
 the Empire in such a way as to promote the highest military 
 power possible. It is not necessary to ppint out that in 
 the United States the non-mihtary ideal has been carried 
 to an extreme. Even the United States, however, in recent 
 years has found it desirable to keep up an effective Navy. 
 In the British Empire the proximity of the British Isles to 
 Europe and the vast extent of the British dominions make 
 a strong Navy a necessity. But relatively to our national 
 obligations when the present war broke out, we were only 
 possessed of the minimum military power requisite for our 
 defence. Mr. von Mach, in his chapter on " Militarism," 
 tries to show that militarism prevails to a greater extent 
 in the United Kingdom than in Germany. This extra-
 
 300 WAR FINANCE 
 
 ordinary paradox is supported by taking the amount of 
 money spent by the United Kingdom on the Army and 
 Navy per head of population, and comparing the amount 
 per head of Germany. " Figured per capita," he says, 
 " the United Kingdom in 191 1 was spending about 60 per 
 cent, more than Germany." Therefore, apparently the 
 United Kingdom is afflicted with militarism more than half 
 as much again as Germany. 
 
 Unfortunately for this conclusion, it is forgotten that the 
 population of the United Kingdom is only about one-tenth 
 of the population of the British Empire, and the. main burden 
 of the defence of the Empire is thrown on Britain. 
 
 In British policy the principle of non-interference with 
 the internal affairs of foreign States has long been the 
 accepted rule, and in the United States the rule has again 
 been carried to an extreme. 
 
 With Germany, on the other hand, the degree of inter- 
 ference appears to be only limited by the chance of 
 success. 
 
 With regard to external relations with foreign countries, 
 the present war has shown that, whilst Britain made the 
 observance of treaty obligations the first consideration, 
 Germany began by an official repudiation of international 
 law. " We have been forced into a state of self-defence, 
 and the necessity of self-defence knows no other law. Our 
 troops have occupied Luxembourg, and have perhaps 
 already been obliged to enter Belgian territory. That is 
 against the rules of international law." Thus spake the 
 German Chancellor, and the appalhng devastation of Belgium 
 has made his words immortal. A belated attempt was made 
 to explain away the speech, but the explanation was more 
 than neutralised by a series of other violations of inter- 
 national law, culminating (for the time) in the sinking of 
 the Lusitania. 
 
 Only on one other point need the comparison of national 
 ideals be extended. One of the great ideas common to 
 British and American policy is the idea of humanity. The 
 evidence is overwhelming that in the conduct of the present
 
 THE NEUTRALITY OF THE UNITED STATES 301 
 
 war Germany has transgressed the moral laws of humanity 
 to an incredible extent. 
 
 Such,, in brief outline, are the chief features of the British 
 and of the German ideas of government as compared and 
 contrasted with those of the United States. To the impartial 
 observer in the United States we may say : — Look on this 
 picture and on that, and see which is most like your own 
 country — which answers best to the ideals by which your 
 national policy is guided ? On which side will you throw 
 the weight of your moral approval ? 
 
 The impartial observer may, perhaps, hesitate, and say 
 that the choice between ideals of Empire is none of his 
 business. The United States, as a nation, he may urge, is 
 not only non-military but non-imperial. The American 
 Republican does not like the word empire, even when it 
 is joined with the word liberty. 
 
 But if he does not like the idea of empire with liberty, 
 how would he like the idea of empire without liberty ? The 
 ideal of government in the British Empire, as in the Mother- 
 land, is the maximum of liberty that is consistent with the 
 development of each part and the security of the whole. 
 This ideal had been realised in practice to an extraordinary 
 degree, as was shown in a marvellous manner on the outbreak 
 of the war. What Germany had expected and hoped for 
 and paid for, was an outburst of rebellions against the 
 British yoke, and a rush to the friendship and protection 
 of Germany. In the words of the great adopted poet of 
 Germany, the subject races of Britain were to say — " Now 
 is the winter of our discontent made glorious summer by 
 this sun of — — ! " What is the missing word ? Who except 
 a Prussian would venture to say — ^Prussia ? 
 
 The latest German suggestion is that the United States 
 has more to fear from the Marinismus of England than from 
 the Militarismus of Germany. For a hundred years past 
 the United States has had nothing to complain of from 
 British naval power ; what Germany means by the freedom 
 of the seas maybe conjectured from the use of her submarines. 
 If by any disaster the outcome of the present war were
 
 302 WAR FINANCE 
 
 altogether favourable to Germany, and if to the military 
 power of Germany were added the power of the sea, the 
 world dominion of Germany would be unquestioned for many 
 generations. 
 
 That is the real issue of the war. Could the United States 
 contemplate with equanimity such an accession of power 
 by Germany ? Could the United States afford to see the 
 British Empire go under, and a German Empire on even 
 a larger scale take its place ? 
 
 What are the real ulterior interests of the United States 
 in this world struggle ? Surely the interests that are most 
 in accord with the national sympathies and ideals : liberty, 
 justice, and humanity. In this sense it is not the chief 
 interest of the United States to pocket the money gains of 
 neutrality from the expansion of foreign trade. It is not 
 her chief interest to see in her own territories the greatest 
 number of people producing and consuming the greatest 
 amount of material wealth, regardless of the rest of the 
 world. Non-intervention may be good, non-militarism may 
 be good — but the United States cannot live in isolation. 
 And it is not to the interest of the United States that inter- 
 national law, which has grown up with the growth of civilisa- 
 tion, should be uprooted by military force, and that the 
 ideals of Western freedom should be displaced by the ideals 
 of German discipline. 
 
 By all means, if possible, let the United States avoid 
 war^ — by all means possible unless war becomes her duty — 
 " a duty," again to recall the words in which Canning 
 expressed the general moral judgment nearly a hundred 
 years ago — " a duty compounded of two considerations — 
 the first what the country may owe to others ; the second 
 what she owes to herself." 
 
 What she owes to herself it is for herself alone to decide. 
 What she owes to others is to support, so far as her duty 
 to herself will permit, the law of nations as against the 
 arbitrary violation by military power.
 
 CHAPTER XXI 
 THE NEW WAR LOAN AND ECONOMY 
 
 [July 10, 1915) 
 
 The occasion of the new War Loan has been seized by the 
 Prime Minister and the Chancellor of the Exchequer and the 
 Bishop of London and so on in a descending order of dignity 
 by all sorts of people to preach economy in eating and drink- 
 ing of the most old-fashioned order. It really seems as if 
 gluttony both of the quantitative and of the qualitative kind 
 were once more to be reckoned amongst the sins and not 
 amongst the virtues. Already public dinners and private 
 dinner parties are almost unfashionable ; and the papers are 
 full of calculations of the number or the weight of the proteids 
 or other meaty elements necessary to support life. The 
 vegetarian is no more an example to be wondered at, but one 
 to be followed. Persons of importance write to the Press to 
 suggest that the flower beds in the parks should be planted 
 with summer cabbages, to be followed by a course of winter 
 parsnips, and so on of other devices in a descending order of 
 usefulness. 
 
 We might be a little more confident that some good would 
 come out of the preaching if we did not remember that about 
 three months ago the preachers and the country were in a 
 still greater ferment about the drink than they are in now 
 about the victuals. The net result has been (it is hoped) an 
 improvement in the quality of the spirits, so that people can 
 drink as much as before, but with less danger to their 
 equilibrium or their longevity. That is about all that 
 remains of the great outcry in favour of universal prohibition, 
 coupled with universal compensation. 
 
 It is easy to show by a little bit of moral arithmetic that if
 
 304 WAR FINANCE 
 
 we drink i6o millions a year, and if of this (say) only 
 twenty-live millions a year is medically necessary, we 
 waste the interest on a loan of 3,000 millions at 4^ 
 per cent. 
 
 But the well-known characteristic of figures in mass is that 
 they have little effect on the conduct of the individual. The 
 eternal difficulty of preaching morality wholesale is that each 
 particular unit thinks his own little lapse or effort, as the case 
 may be, can have no effect on the total mass. A drop in the 
 bucket or a drop out of the bucket — what difference can it 
 make to the bucket ? That is the vital difficulty in the best- 
 laid schemes for Socialism or war loans that depend on the 
 appeal to the public spirit of individuals. And this explains 
 the parodox that a man will give up his life by voluntary 
 enlistment, but his brother at home will not give up his glass. 
 The man who gives up his life knows it is something ; the 
 man who does not give up his glass thinks it is nothing. 
 
 Is, then, no appeal to be made to the individual to check 
 his consumption in the national interest ? By all means ; 
 but let the appeal be such as to enter into his heart and mind. 
 The ordinary person cannot see the connection between 
 saving a crust of bread or a lump of sugar and helping a war 
 loan of 1,000 millions. 
 
 The provision for contributions in small sums by the issue 
 of the five shilling voucher and the five pound bond will 
 probably do more for the War Loan than appeals for lessened 
 eating and drinking. Most people, and especiall}^ the wage- 
 earners, are used to making money contributions in small 
 sums for big objects, and they can understand, even for a 
 war loan, the usefulness of small money contributions. At 
 the same time, when the War Loan is presented to them as a 
 business proposition, they are entitled, as much as the big 
 financiers, to look at the business side closely. Instead of 
 appealing to their patriotism, which is unnecessary, it would 
 be better to try to get over their difficulty. The difficulty 
 with the small investor is that the War Loan is excellent as a 
 permanent investment, but suppose the investor wants to 
 get the use of the money for some pressing need. He is told
 
 THE NEW WAR LOAN AND ECONOMY 305 
 
 he can sell out at the market price of the day, and it should 
 be clearly explained to him what that means. 
 
 But if it happens that the market price of the day is 
 below the subscription price, the little capital is so far 
 eaten into. 
 
 From this point of view it is quite irrelevant to speak of 
 the security of the British Government. The War Loan 
 of last year has fallen quite 2 per cent, (if we reckon accrued 
 interest), and the old Consols are practically unsaleable at 
 the official price, 35 below par. The interest covenanted 
 for is no doubt quite secure — so far the guarantee of the 
 British Government is perfect — but the capital value becomes 
 less with every rise in the outside rate of interest. Nothing 
 is to be gained by making a confusion between two different 
 kinds of investment. All banking rests on the recognition 
 of the difference. If people wish to save money,- and also 
 to have the money at call whenever they wish, they must 
 be content with a low rate of interest, or sometimes none 
 at all. The people who use savings banks, and have this 
 privilege, are very well off with the interest they receive. 
 If, on the other hand, people want a permanent investment, 
 or mean to let the money lie, it may be, for years, nothing 
 could be better than the new War Loan. Of course, it is 
 possible that the stock may rise instead of falling in price 
 when the war is over, but it is extremely improbable that 
 there will be any rise in price before the end of the war. It 
 is much more likely that there may be some fall until a 
 higher rate of interest has to be paid on the next loan, and 
 then the price will rise again, and the higher rate will also 
 be obtained on the old investment. 
 
 It would be a national misfortune if small people are 
 induced to put their savings into the War Loan under the 
 idea that they can at any time draw out the money intact 
 with the accrued interest. The War Loan is an excellent 
 investment for the small person, but the market price will 
 be subject to variation, and should be allowed for. 
 
 The appeal by people in authority to check consumption 
 is not only of a general character, but of a very special
 
 3o6 WAR FINANCE 
 
 character. People are exhorted to be sparing in all things, 
 but most of all in imported things. M'hatever you do^ — that 
 is the text — consume the home-made and not the foreign- 
 made in your eating and drinking and apparel and every- 
 thing on which you spend your money. All the old wisdom 
 about buying in the cheapest market has gone the way of 
 Jonah. Just as we have got back to mediaeval morahty 
 about gluttony and the hke, so we have got back to mediaeval 
 ideas on foreign trade. The mediaeval man believed that 
 the country would lose if it exported good wool — wool the 
 like of which no country could raise- — and got in return 
 " apes and japes " and other luxuries. Therefore, said the 
 mediaeval man, live on your own and let the foreign luxuries 
 go by. 
 
 But this was only part of the old learning that we have 
 gone back to. The old idea of foreign trade was that the 
 advantage to the country was to be measured by the favour- 
 able balance. Therefore, it was said, check your imports 
 as much as j^ou can, and encourage your exports ; because 
 in this way you will get a balance of money due to the 
 country. And the greater the balance the greater the 
 advantage. This is the doctrine which a year ago was 
 considered the height of folly. Of course circumstances 
 alter cases, and the case of war and of a War Loan is a 
 very different case from peace and the investment of surplus 
 national savings in foreign parts. But, all the same, when 
 people are invited to give up all they have been taught 
 about the blessing of imports in ever-increasing abundance, 
 they naturally want to know the reason for the sudden 
 change. And thereupon the advisers of the people, from 
 the Prime Minister and the Chancellor of the Exchequer 
 downwards, do their best — and they do it very well — to 
 explain to the people the theory and the practice of the 
 foreign exchanges, with special reference to war and war 
 loans. 
 
 The great difficulty, we are told, is the New York Exchange. 
 A quotation which used to move about 4-87 has taken to 
 moving about 47S. That is the fact we start with ; and it
 
 THE NEW WAR LOAN AND ECONOMY 307 
 
 seems absurd that a mountain should be born out of such 
 a ridiculous little mouse. But so it is. The change in the 
 order of these two figures (though they are only decimal 
 point figures) is a change in the financial barometer from 
 fair to rain, and if the English barometer is to follow the 
 spasms of the French and the Russian barometers, then 
 much rain will be too mild a description. 
 
 The readers who have skimmed the preceding paragraphs 
 on foreign trade, and were giving up altogether at the New 
 York Exchange, may now be invited to begin again. They 
 may take it, on the authority of the Government, that the 
 country is in an increasing difficulty in meeting its payments 
 for foreign imports. In the last resort the balance that is 
 not met by exports must be met by something else. All the 
 gold in the banks is not enough. And long before all the 
 gold is taken from the banks there would be something very 
 like a crisis. 
 
 That is the real meaning of all the talk about the foreign 
 exchanges. All our vaunted system of credit rests on a 
 gold basis. The system is in perfect working order if all 
 the forms of credit and all the monetary obligations are 
 convertible into gold on demand whenever required. If 
 there is any delay interposed, if there is any suspension of 
 the convertibility, then the machine does not work well. In 
 ordinary times very little gold is required, but even in 
 ordinary times a large amount of gold is kept as a central 
 reserve in the Bank of England. The proportion of that 
 reserve to the immediate claims that may be made on the 
 Bank is one of the signs of the soundness of the national 
 banking system. Before the danger of war was realised 
 and banking was in a normal state, the last return of the 
 Bank of England (July 22, 1914) gave a proportion of 
 reserve to liabilities of 52! per cent. ; by the return last 
 week the proportion was 16^. 
 
 The reason for the fall is the continuous drain for foreign 
 payments, and that accounts for the anxiety of our financial 
 authorities for a more favourable balance of trade, and for 
 these appeals to the public to check their use of imports
 
 3o8 WAR FINANCE 
 
 and of things that may be exported. The appeals and the 
 advice are much more worthy of consideration as symptoms 
 than as remedies. 
 
 The remedies will have to be much more severe than 
 changes of diet and changes in relaxations. In what book 
 on the foreign exchanges, from Goschen's downwards, will 
 the reader find a mention of an appeal to the consumers 
 of imports and exports to readjust their consumption so as 
 to correct the foreign exchanges ? 
 
 If the Government are really anxious to check imports 
 of consumable commodities, there is one very simple and 
 most effective remedy. That remedy is to lay on heavy 
 taxes. Compulsion is in the air ; compulsion is becoming 
 the fashion. We are all of us (so we say) longing to be 
 compelled to do something for the country. All we are 
 afraid of is that we may happen to do more than our share, 
 whilst other people are doing less. Our sense of justice will 
 not admit of such inequality. Numbers of young men are 
 burning to enlist, but their ardour is extinguished by the 
 dread of injustice. Let compulsion come to all, and to all 
 alike, and none will be more willing. That is the chorus. 
 
 In the same way, there are all the people who are too old 
 or infirm or too young or too feminine to work at war things, 
 and they are all longing to be compelled to do something. 
 What they want above everything is compulsion, or at least 
 a badge to show that they have been compelled and found 
 wanting. 
 
 How much longer are the people to be left without the 
 compulsion that will fall directly or indirectly on all the 
 people ? There is no compulsion like the compulsion of 
 taxation — except death. Death and taxes none can escape, 
 said the old proverb. This proverb is still true of death, 
 but not of taxes, because in these days on balance a great 
 mass of people escape taxation altogetner. On balance, 
 that is to say, after allowance is made for the public expen- 
 diture made on their behalf for things they formerly had 
 to do for themselves. 
 
 Taxes have two main functions. The chief and original
 
 THE NEW WAR LOAN AND ECONOMY 309 
 
 function is to raise revenue. From this point of view, the 
 best taxes are those which are most productive of revenue 
 at the least cost and also satisfy the sense of justice. The 
 present income tax is an excellent revenue-producer, but 
 it is unjust in many ways. 
 
 The other function of taxation is preventive, and so far 
 as taxes are preventive they cannot also at the same time 
 obtain revenue from the people who do not use the taxed 
 things. Of course, a very high tax may be prohibitive to 
 some people, and make others pay a good deal to the revenue. 
 If taxes are to be imposed on imports, these two ideas must 
 be separated. Under present conditions, it seems as if the 
 yield of revenue is of less importance than the check to 
 consumption — that is to say, if we are to accept the position 
 that it is the duty of everyone to consume as little as pos- 
 sible. Taxes of any kind whatever would check the con- 
 sumption of somebody. They would also have the moral 
 advantage of bringing home to the payers that there is a 
 state of war, and that in war-time people ought not to 
 expect that there should be no change whatever in the 
 standard of comfort. To keep up consumption as usual 
 and to raise as much as possible by debt, without resort to 
 taxation, shows a very poor public spirit. It also encourages 
 reckless extravagance in all kinds of public expenditure. 
 
 Preaching private economy is a very feeble remedy 
 against the practice of public waste.
 
 CHAPTER XXII 
 THE PERIL OF PUBLIC EXTRAVAGANCE 
 
 {July 24, 1915) 
 
 At last, in the twelfth month of the war, an effort is 
 being made by public speeches and leaflets to check the 
 pri^'ate extravagance even of the wage-earners. An appeal 
 is made to them to invest some of their war bonuses in war 
 vouchers that will yield 5 per cent. They are even implored 
 to check the consumption of imported luxuries so as to 
 steady the foreign exchanges — and the advice is likely to 
 have about as much effect as the absence of the daily fore- 
 casts from the papers has on the steadiness of the weather. 
 The preaching of personal thrift at the present juncture is 
 no doubt to be highly commended, not only on economic 
 but on moral grounds. The war ought to make a might}/ 
 appeal to the moral sense of every honest man. In a time 
 of national danger a man who wastes his substance or his 
 energies is wasting his own soul and helping to waste the 
 soul of the nation. 
 
 But when all is said and done, the checks on private 
 extravagance will be of little use unless checks are also 
 imposed on public extravagance. Great nations, said Adam 
 Smith, are seldom much affected by the extravagance of 
 individuals, because the extravagance of some is in general 
 compensated by the frugality of others. He even maintained 
 (of course he was a Scotsman) that in the greater part of 
 men, taking the whole course of life at an average, the prin- 
 ciple of frugality seems not only to predominate, but to 
 predominate very greatly. He admits, however, that " the 
 principle of expense prevails in almost all men upon some 
 occasions and in some men upon almost all occasions."
 
 THE PERIL OF PUBLIC EXTRAVAGANCE 311 
 
 Unfortunately the present war seems to be one of the 
 occasions in which almost all the people of the country are 
 bitten with the microbe of extravagance. 
 
 But the main burden of Adam Smith's argument is that 
 the real danger of the impoverishment of great nations lies 
 not in the private prodigality of the people but in the public 
 prodigality of the Government. The recent experience of 
 this country seems to show that it is no exception to the 
 general rule. 
 
 For some years before the war began our public expen- 
 diture was open to the charge of prodigality. The main 
 figures in proof of this charge were brought out in a recent 
 debate in the House of Lords, not, be it observed, in the 
 House of Commons. In the House of Commons, a day or 
 two later, the Prime Minister said with grim truth that the 
 usual result of any discussion in the House of Commons of 
 the Estimates was an increase in the amount. Even in 
 peace time, with exuberant prosperity, debt was being 
 piled up. It is true that nominally a certain amount of 
 the old National Debt was being paid off, but permanent 
 public charges of an unproductive character were incurred 
 to a much greater extent — unproductive, that is to say, 
 in any interpretation of the term productive expressible 
 in real money valuations. We were told much about an 
 increase of efficiency, but too often the fact took the form 
 of an increase in bureaucracy. Does anyone really suppose 
 that in Scotland the mass of the people are better educated 
 for the ordinary business of life and the moral conduct of 
 life in the palatial Board schools of the present than they 
 were in the thatched cottages of the parish schools of the 
 past ? Even in peace the taxes which ought to have been 
 reserved for an emergency were put on a war footing. The 
 income tax was not only increased in the higher incomes, 
 but taken off entirely in the lower incomes formerly included. 
 The productivity of the tax for emergencies — its greatest 
 merit in the eyes of Mr. Gladstone — was seriously injured 
 at both ends. The same improvident policy was followed 
 in the death duties and taxes on accumulations of capital.
 
 312 WAR FINANCE 
 
 At the same time, those indirect taxes which fall on the 
 masses of the people were diminished whenever any occasion' 
 offered. The general result was that the people who received 
 the benefits of the public expenditure were the people who 
 paid the least in taxes and had the greatest voting power. 
 This increase in public expenditure for social benefits was 
 accompanied by a growing reliance on Governmental help 
 in all sorts of things which the people before had done for 
 themselves, with a consequent strengthening of the national 
 character. 
 
 When the war broke out, instead of any check being 
 placed on the spirit of extravagance and on the reliance on 
 the State, exactly the opposite happened. For every Httle 
 disturbance of the usual arrangements Government was 
 called on to provide a remedy. And instead of the Govern- 
 mental energies being concentrated on the conduct of the 
 war, they were saddled with extra peace duties. Everyone 
 asked for Governmental help, and nearly everyone got it. 
 It is one of the evil traditions of the British Government 
 that Government must expect to pay higher than other 
 people. In Germany the case is the opposite. In Sven 
 Hedin's book on the " German Armies in the West," amidst 
 the barren waste of his accounts of joy motor rides and 
 suppers with " wee German lairdies " there are occasional 
 bits of valuable information on German finance. The point is 
 that German methods will take a good deal longer to come 
 to their last hundred miUions than will the British methods. 
 On his way to the front, whilst in Germany Sven Hedin 
 found that officers get what they require, and pay with a 
 receipt. " On producing this receipt before the competent 
 military authority, the host receives his money, but not 
 at the same rate as in peace time, for values are set at a lower 
 figure than under normal conditions. The same applies 
 to horses, carts, motor cars, and much else that is needed 
 in war. Everything is valued by special committees, and 
 then paid for with a receipt." Needless to say that in the 
 occupied enemy country the mode of payment is still less 
 burdensome to the German higher command. The unfor-
 
 THE PERIL OF PUBLIC EXTRAVAGANCE 
 
 O-Lj 
 
 tiinatc purveyors of war necessaries or luxuries are paid 
 in bons, and the bons, they are told, will be met out of the 
 indemnities to be got from the conquered, especially, it may 
 be assumed, the British. 
 
 Apart from the usual causes of public extravagance — 
 e.g., the incompetency of routine officials to initiate and 
 carry through great changes, the employment of men of 
 war for trading, the wickedness of contractors and sub- 
 contractors, and the other evils last illustrated in our last 
 war — in this war there has been one special cause at work 
 not usually associated with or expected in great wars — 
 namely, a great and protracted inflation of credit. 
 
 The natural idea is that on the outbreak of a great war 
 there will be a great collapse of credit, and that only very 
 gradually will a recovery be made. Seeing that London 
 was the clearing house of the world as regards credit trans- 
 actions, and seeing also that this country is internally at 
 a higher stage of credit development than any other country, 
 it was inevitable that the Government should take measures 
 to preserve the credit system of the country, both in its 
 foreign and its internal arrangements. 
 
 This was a necessary part of the duty of the Government, 
 because in the last resort it is the Government that pre- 
 scribes and provides legal tender for the payment of debts. 
 A limited moratorium and a limited issue (or power of 
 issue) of emergency currency were natural remedies under 
 the circumstances. It may be said that the moratorium 
 and the emergency currency were forced on us by the 
 action of other countries. 
 
 But although something had to be done, as the course 
 of events has shown, the Government did far too much in 
 its support of credit. It is not necessary to recall the various 
 measures taken, but the result was that, instead of merely 
 staving off a crisis, credit was extended so as to lead to a 
 general inflation. In ordinary times any general inflation 
 of credit after a certain point is checked by a very real 
 limit — namely, the necessity of providing legal tender for 
 cash transactions. An inflation of credit in general first
 
 314 WAR FINANCE 
 
 raises wholesale prices and profits, and is followed by a rise 
 in retail prices and wages. The rise in these things means 
 that more legal tender must be provided. In all countries 
 in normal times the amount of gold currency available is 
 never capable of much extension, and the amount of bank- 
 notes and subsidiary currency is always proportioned with 
 varying degrees of elasticity to the amount of gold in the 
 banks. In the United Kingdom, under normal conditions, 
 the amount of bank-notes that may be issued is much more 
 stringently limited than in any other country. 
 
 This strictness as regards the creation of paper money 
 has been no doubt one of the principal causes of the financial 
 supremacy of London. 
 
 In an ordinary inflation of credit not only does the 
 internal rise in prices lead to an internal demand for legal 
 tender (that is for gold or currency based on gold), but it 
 also leads to a demand for gold for export. The inflation 
 that raises prices at home encourages imports into the 
 country and so far checks exports. The balance of indebted- 
 ness turns against the country, and there arises what is 
 called a foreign drain for gold. This drain may be so sudden 
 and so large that at once it puts a stop to the inflation of 
 credit. The central banks raise their charges, and they 
 look more narrowly at the securities offered. 
 
 The so-called emergency measures taken by our Govern- 
 ment at the outbreak of the war and continued since have 
 removed these rigid limits on the inflation of credit. Any 
 internal demand for legal tender to carry on trade and 
 effect cash transactions at the higher level of prices has been 
 met by issues of Treasury notes and silver. 
 
 In the course of these papers from the beginning attention 
 was called to the dangers of the inflation of the currency. 
 The first danger is a general rise in prices or a fall in the 
 purchasing power of money. That such a rise of prices 
 has taken place (whatever the causes) is known from official 
 returns. The rise of prices, if it is to be kept up, requires 
 the circulation of a larger amount of legal tender than was 
 the case before the rise. More cash is needed for higher
 
 THE PERIL OF PUBLIC EXTRAVAGANCE 315 
 
 wages and retail purchases, and so on. If the cash were 
 not forthcoming, the prices could not be kept up. 
 
 The rise in prices has had serious consequences. One of 
 them is the war bonus, perhaps the most astonishing fungus 
 that ever afflicted a long-suffering nation in war-time. The 
 worst of it is that a luxurious crop of war bonuses is looked 
 on as a sign of national prosperity. On any proper inter- 
 pretation it means that by way of providing for the enormous 
 expenses of war the country is consuming far more and 
 producing far less than in peace. 
 
 Another evil of the rise in prices is that all the expenses 
 of the war are so much greater — where two millions a day 
 might have sufficed (even with British wastefulness), another 
 million is required to meet the rise in prices. The same 
 thing applies to the accumulation of war debt. More money 
 has to be raised, and is more quickly spent. 
 
 A general rise in prices is the natural consequence of an 
 inflation of credit and currency. It may be too difficult 
 a task to reverse the rise so far effected. A sudden con- 
 traction of the currency to its old limits is impossible, but 
 at least any further inflation should be stopped. By the 
 returns, however, of the last two weeks, the amount out- 
 standing of the emergency Treasury notes has been increased 
 by nearly three million pounds. Latterly the state of 
 foreign indebtedness has begun to cause anxiety. Any 
 considerable export of gold will bring rapidly nearer the 
 definite adoption of inconvertible notes. The Government, 
 by way of preparation, should issue one or more leaflets 
 showing with notable historical examples, brought up to 
 date by reference to the other belligerents, the nature and 
 e\'ils of incon\'ertible paper. 
 
 Apart from the inflation of the currency and the danger 
 of drifting into inconvertible paper, there is to be considered 
 the waste of public credit. The apparent success of the 
 new War Loan is apt to lull people into a false security. 
 The rate of interest found necessary to float the loan ought 
 to be a warning. British credit at 4^ per cent, seems incre- 
 dible. But in order to attract new money privileges were
 
 3i6 
 
 WAR FINANCE 
 
 granted to the holders of old forms of public debt, which 
 meant an additional charge to the Government. More than 
 this, a promise was given that in any new loan (not external) 
 at a higher rate of interest, the present loan would auto- 
 matically get the benefit. In order to attract small sub- 
 scribers special privileges were given, again involving extra 
 cost, whilst in this case there is the further danger that on 
 any depreciation of the market price of the stock the small 
 investor will have to get a war bonus. The rise in the rate 
 of interest is in itself bad enough. It means that so much 
 more must be raised by taxes to pay the interest, and with 
 all the present reluctance to adopt war taxes it is impossible 
 not to pay new interest out of new taxes. 
 
 But the rise in the rate of interest (with the extra privileges) 
 is of even more importance as a symptom of the approaching 
 exhaustion of public credit. After the paeans on British 
 credit at the beginning of the war, to speak of possible 
 exhaustion may seem alarming. But the rate of expenditure 
 has also been alarming. We are told that the war is now 
 costing nearly four millions a day, and that the tide of 
 expense is still rising. Is it never to be realised that every 
 extra million of public credit wasted brings us nearer to the 
 end of all credit, and to the subscription of forced loans 
 and inconvertible notes and all the other horrors of financial 
 debility ? We are not yet in actual danger, but surely the 
 time has come when the most severe restraints must be put 
 on the public extravagance. 
 
 Before the war Germany was calculated to be about as 
 wealthy as the United Kingdom. What is now the real state 
 of German credit in spite of German organisation and 
 authority ? Are we to follow Germany on the road to 
 ruin, or shall we make certain of success by solid economic 
 endurance ?
 
 CHAPTER XXni 
 THE DEPRECIATION OF THE POUND STERLING 
 
 {October 2, 1915) 
 
 In this series of papers attention has been called from 
 the beginning to the dangers arising from the inflation of 
 the currency and of credit. It was pointed out that such 
 an inflation was likely to cause, first, a general rise of prices, 
 and, secondly, an unfavourable rate of exchange in foreign 
 payments. A general rise in prices means a fall in the 
 purchasing power of the pound sterling, or technically a 
 general depreciation as compared with commodities. The 
 fall in the rate of exchange in foreign payments is the 
 specific depreciation as specially shown in the relation of 
 the pound sterling to the American dollar. Both kinds of 
 depreciation are closely connected, and after a certain 
 point is reached in inflation are certain to occur. As a rule, 
 however, the depreciation of both kinds only sets in gradually, 
 and when it is too marked to be passed over is usually set 
 down to other causes. The consequence of this faulty 
 diagnosis is that the inflation is allowed to grow, and the 
 evils are met by temporary expedients which do not strike 
 at the root cause. 
 
 The present monetary situation in this country illustrates 
 the justice of these general observations. The recent reports 
 of the Board of Trade and the records of the Ecenomist 
 index number show that since the beginning of the war the 
 purchasing power of the pound sterling in this country has 
 fallen by about one-third. The serious fall in the American 
 exchange is obvious from the appointment of the Com- 
 mission now touring the United States under the leadership 
 of the Lord Chief Justice of England.
 
 3i8 WAR FINANCE 
 
 The facts of depreciation, both general and special, cannot 
 be denied, but there is still a great reluctance to ascribe 
 either one or both to the inflation of the currency. The 
 inflation is not supposed to have even a partial influence, 
 and it is allowed to continue at an increasing rate. 
 
 In the present paper the rise in prices only will be con- 
 sidered, or, in other words, the general depreciation of the 
 pound sterling. This depreciation, whatever the causes 
 may be, is productive of very serious difiiculties. There is, 
 for example, the great difficulty of readjusting wages to 
 the new scale of prices. It is, of course, true that in a great 
 war labour ought not to expect to bear none of the sacrifice, 
 and to have no fall in its standard of comfort. But if there 
 is a general rise of prices through inflation, unless wages 
 also rise so far, there will be an exceptional gain for profit. 
 Apparently labour is not unwilling to bear its share of the 
 burden, but it is suspicious of the gains of capital. The 
 only justification for general war bonuses to those above 
 the poverty line is the recognition of such a general rise in 
 price as may be caused by inflation. But from any point 
 of view w^ar bonuses must be set down as at best a choice of 
 evils. 
 
 Although the connection between inflation and the rise 
 of prices may be denied, the inflation itself must be admitted. 
 Even those who most applauded the measures taken to 
 support credit on the outbreak of the war now confess that 
 the support was very much overdone. Little harm would 
 have ensued if the measures taken had come to an end 
 with the emergency from which they arose. But although 
 the banking system of the country quickly recovered its 
 normal working capacity, the so-called emergenc}^ measures 
 were continued. The most important of these measures 
 was not only continued, but greatly extended in the progress 
 of the war- — the measure, namely, which provided for the 
 issue of Treasury notes for £i and los. The reason at first 
 assigned for the issue of these notes was that they were 
 needed to take the place of other forms of bankers' credit. 
 It was supposed that in the war crisis people might v>ish to
 
 DEPRECIATION OF THE POUND STERLING 319 
 
 withdraw their deposits ; that they would look askance 
 at cheques ; and that more transactions must be conducted 
 on a cash basis, (The banks were to be allowed to obtain 
 Treasury notes to the extent of 20 per cent, of their deposits, 
 and if the privilege had been acted on the country would 
 have been flooded with £200,000,000 of notes — which, as 
 Euclid used to say, is absurd.) But when the emergency 
 had been surmounted, with an immense display of jubilation 
 on the part of all concerned, the emergency notes, instead 
 of being withdrawn, were increased. 
 
 The facts regarding the issues are very striking. At the 
 end of September, 1914, by which time the crisis had passed, 
 the outstanding amount was just under twenty-eight 
 millions. In the last three months of 1914 this amount had 
 been increased by ten millions only. But in the one month 
 from August 11 to September 8, 1915 — i.e., after more than 
 a year of war — the outstanding amount was increased by 
 more than twelve millions. In the next week ending 
 September 15 over six millions more were added, and this 
 last week ending September 22 another three millions has 
 raised the aggregate outstanding to over seventy millions. 
 
 As the suppression of the crisis and the victory over the 
 emergency had been celebrated nearly a year ago, it has 
 become necessary to find a new justification for the con- 
 tinued increase in the issues. The theory now is that the 
 notes are issued to take the place of gold in circulation. It 
 is argued that the gold will be far more useful in a central 
 bank or a war-chest than in the pockets of the people. The 
 experience of Scotland is appealed to in the matter of the 
 one pound notes, and long ago the half-sovereign was con- 
 demned as a most wasteful coin. These reasons are in them- 
 selves excellent. The pity is that they were not discovered 
 sooner by the responsible authorities. If, after the immediate 
 crisis of the outbreak of war had been got over, steps had 
 been taken to withdraw the gold from circulation and to sub- 
 stitute notes, probably no objection would have been taken 
 by anyone. There was a general feeling that gold was 
 needed by the State. But not only was the gold allowed
 
 320 WAR FINANCE 
 
 to remain in circulation, but in the first year of the war 
 from July 29, 1914, to July 28, 1915, the Bank of England 
 was said to have lost in gold currency to the provinces 
 about twenty-two millions. Under pressure from the 
 Government on the banks part of this gold has been recovered 
 recently, but by the latest reports it seems that the inflow 
 from the country has been diminished or even reversed. 
 
 In addition to the Treasury notes there has been an 
 increase in the issues of other banks, e.g., the Scottish banks 
 and the Bank of England, and there has also been a large 
 increase in the silver coins. 
 
 The general conclusion is that if we compare the amount 
 of money used for internal purposes before the war with 
 the amount at present in use, there has been a very great 
 increase. Such a great increase in the quantity of money 
 in a country might be expected to raise general prices, and 
 accordingly it is reasonable to ascribe at any rate part of 
 the admitted rise of general prices in this country since the 
 war to the inflation of the currency. 
 
 This view is confirmed by the weakness of the other 
 causes assigned. Such causes, if they are adequate to account 
 for a general rise in prices, must be of a general and wide- 
 reaching character. When prices began to rise the cause 
 usually assigned was scarcity of commodities. The ofticial 
 returns of imports and of the consumption of representative 
 commodities show that scarcity can no longer be considered 
 the principal cause. All the evidence points to abundance. 
 Our favoured land compared with our great enemy's is a 
 land flowing with milk and honey, or the less innocent 
 modern substitutes. 
 
 Another cause of the rise in prices that has found much 
 favour is monopoly. No doubt, in practice, whenever 
 monopoly emerges prices tend to rise. In theory, a mono- 
 polist may possibly make a greater net profit by low prices 
 and large sales, but in practice he never takes this kind of 
 risk unless compelled by the Government. In time of war 
 competition is in many ways hindered, and whatever checks 
 competition promotes monopoly. In important cases, no
 
 DEPRECIATION OF THE POUND STERLING 321 
 
 doubt, monopoly of various degrees has raided prices in 
 this country during the progress of the war. And in this 
 connection the opinion of Adam Smith may be recalled 
 that " the gains of monopolists whenever they can be come 
 at, are the most proper subjects of taxation." But though 
 the rise in prices in some things may be due to monopoly, 
 it cannot be said that monopoly is a wide enough cause to 
 account for the whole of the general rise. 
 
 Whether we consider the extent of the inflation of the 
 currency on the one side, or on the other the inadequacy 
 of the other causes assigned, we seem forced to the con- 
 clusion that (to say the least) the inflation is at any rate 
 one of the most important causes of the rise that has taken 
 place in this country. This view is confirmed by reference 
 to other countries. In other countries also there has been 
 inflation and a corresponding rise in prices — e.g., in Germany, 
 France, and Russia. (In these cases also there has been 
 the specific depreciation of the monetary unit in foreign 
 exchange — a point not considered in the present paper.) 
 
 It is noteworthy also that precisely similar points arose 
 for consideration in the great Napoleonic wars, and were 
 treated by such writers as Ricardo, who was at the time 
 the leading man in London in practical finance, and also 
 the outstanding authority in monetary theory. There is, 
 indeed, no country which does not offer at some period of 
 its history examples of the depreciation of its currency due 
 to inflation. 
 
 But the correct analysis of the actual rise in prices in the 
 present war is by no means a matter of historical interest 
 only or of the confirmation or illustration of monetary 
 theories. The point of practical importance is that if up 
 to now the inflation of the currency has had any influence 
 any further inflation will from henceforth have much greater 
 influence. If we look to the efficiency of our banking system 
 and to the large additions to the currency already made, 
 there can be little doubt that the saturation point has been 
 reached. More currency notes and more silver can no doubt 
 be thrown into circulation, and in spite of war loans bank
 
 322 WAR FINANCE 
 
 deposits may again increase. But this further inflation 
 can only take place with a corresponding further rise in 
 prices. In matters of currency we always have to bring 
 in the qualification " after a point," because in currency, 
 as in most other things of human interest, we pass by slow 
 degrees from one extreme to the other. The watched pot 
 boils at last, and boils over though the water may be ice cold 
 at first. In the same way we pass by slow gradations from 
 the most perfect system of convertibility as exemplified in 
 England before the war to the system of inconvertibility 
 and forced paper currency as illustrated in the most extreme 
 form in the old French assignats. The question is always 
 where to draw the line — where to stop in the creation of 
 war credits and emergency currencies. So long as the 
 simple principle of convertibihty is held to, so long as gold 
 is held to meet all possible demands for internal use or for 
 export, there is no diliiculty, because the whole system 
 works in an automatic way. But once any restrictions are 
 put in the way of conversion, the working of the system 
 depends on the judgment of the authorities. According to 
 the old way of speaking, we have a managed currency instead 
 of one that is automatic. In practice in a managed currency 
 it nearly always seems necessary or advantageous to the 
 authorities to expand the currency and credit far beyond 
 the point that would be reached under the automatic 
 system. 
 
 If any form of deferred or suspended convertibility is 
 adopted and is associated with an increase of issues prices 
 will rise just as they would have done if the notes were 
 definitely inconvertible. Under present conditions, in which 
 the international movements of gold are very greatly 
 restricted and controlled, the level of prices in any one 
 country is much more subject to purely local influences 
 than in the normal times of peace. In normal times seventy 
 millions of small Treasury notes, with a simultaneous increase 
 of coins and other notes, could not have been put into 
 circulation ; nor could the American exchange have fallen 
 to so low a figure. In times of war all this extra currency
 
 DEPRECIATION OF THE POUND STERLING ^2 
 
 o-'^ 
 
 can only be used coincidentally with a rise in prices in the 
 home country and a fall in the foreign exchange. The mere 
 holding of a reserve of gold in a central bank is no guarantee 
 against depreciation. Unless that gold is used as required, 
 it might as well be in the mines. 
 
 According to their official returns, France, Russia, and 
 Germany hold very large stocks of gold — much larger than 
 is the case with us — but no one will deny that these three 
 countries are suffering from (or enjoying) a depreciation of 
 their currency, both special and general. These three 
 countries, on the outbreak of war, at once made their notes 
 inconvertible. It was part of our glorification of British 
 credit that we were not obliged to adopt this extreme 
 measure. But we took no effective precautions to keep 
 from drifting into the same system. We have recently 
 been informed that the Government intend to make all 
 their own payments in notes, and the banks are enjoined 
 to press notes on their customers. If the gentle terms of 
 persuasion are not sufiicient, no doubt in a short time the 
 use of gold or the refusal of notes will be penalised, as it is 
 in Germany. 
 
 Even apart from any question of a further inflation and 
 further rise in prices, the system of note issues ought to 
 be put on a definite basis. The old system, except in name, 
 has been abandoned. The new system, if there is one at 
 all, is an official secret. Fortunately the present Chancellor 
 of the Exchequer has reverted to the old traditions of his 
 office, and has presented a Budget of facts and figures 
 without disguise. What is the universal complaint ? The 
 universal complaint is that the taxes were not put on soon 
 enough, and that now they are not heavy enough. Every- 
 one knew that something was wrong with the body politic 
 through its surfeit of expenditure. Will not the same 
 Chancellor throw his searchlight on the financial measures 
 affecting our currency and credit — -the measures already 
 adopted, and those that may have to be adopted in the 
 near future ? Is the country simply to be allowed to drift 
 into inconvertibility, and is the system to be worked simply
 
 324 WAR FINANCE 
 
 according to the needs of the day in a hand-to-mouth 
 fashion ? 
 
 The principle of hmitation must be apphed in some way 
 to every form of paper money, if its value is not to fall to 
 the value only of the paper itself. Where are we going to 
 draw the line ? During the last six weeks the outstanding 
 amount of currency notes has been increased on the average 
 by more than half a million a day (including Sundays). 
 This is nearly as much as the reported daily cost of our 
 Navy. Apparently we have only to print off about ten 
 times as many notes daily to bear the whole expenses of the 
 war. It seems too good to be true — but where is the line 
 to be drawn ?
 
 CHAPTER XXIV 
 
 THE AMERICAN EXCHANGE AND THE 
 ANGLO-FRENCH LOAN 
 
 {October i6, 1915) 
 
 Lord Randolph Churchill, after his hasty resignation 
 of the Chancellorship of the Exchequer, is reported to have 
 said at his leisure that he had forgotten Goschen. Since 
 that time a good many people have forgotten Goschen and 
 his work. In his day Goschen was the leading authority 
 in the higher finance of money and banking. He was the 
 exponent of the ideas and the methods by which London 
 had obtained and maintained the monetary supremacy of 
 the world. Goschen was not only a banker after the most 
 straitest sect of banking orthodoxy, but he was an orthodox 
 economist, who cherished both in theory and in practice 
 the old economic principles as regards public expenditure. 
 
 If Goschen had been Chancellor of the Exchequer on the 
 outbreak of the war — but why pursue the profitless specu- 
 lation ? At the present juncture, failing the living voice, 
 we may turn for counsel to the written word ; and the 
 legislator who has to form an opinion on the American 
 exchange problem may well prepare his mind by reading 
 Goschen's " Foreign Exchanges." The book is a classic, 
 and the illustrations drawn from the American Civil War 
 are peculiarly apposite, mutatis mutandis, at the present 
 time. It is, however, in the method and in the ideas rather 
 than in the particular illustrations that the value of Goschen's 
 work is to be found. The argument of the present paper 
 is based on the two concluding chapters on the interpretation 
 and on the correctives of the foreign exchanges. 
 
 The first point to seize in the interpretation of the foreign
 
 326 WAR FINANCE 
 
 exchanges is that the}/ are to be regarded in Goschen's 
 phrase as "an unerring mercantile and monetary barometer." 
 Any unusual movement in the foreign exchanges, especially 
 any movement beyond the limits which normally determine 
 the import or export of gold, must be due to some excep- 
 tional cause. The first thing is to discover the cause of the 
 exceptional movement- — that is to say, the problem is one 
 of interpretation. It is onl}/ after the true interpretation 
 has been reached that any steps can be taken towards a 
 correction of the movement- — if such a correction should, 
 after "inquiry, seem desirable. 
 
 Nothing could be more absurd than to look on a fall in 
 the exchange as a kind of disease which can be overcome 
 by attacking the symptoms and not the cause. " At all 
 events," says Goschen, " it must be borne in mind that that 
 which is really to be corrected is not the actual position of 
 the exchanges, but that state of things which brought it 
 about." No one would be so foohsh as to think he could 
 amend the weather by artificially raising the barometer. 
 The barometer, as the name imports, is a measurer, it is 
 not a maker, of weather. When we are told that the Anglo- 
 French loan is meant to support the exchange, the language, 
 at any rate, is suggestive of a very old fallacy^ — the fallacy, 
 namel}^ that the movements of international trade depend 
 on the exchanges and not the exchanges (so far) on the 
 trade ; the conclusion drawn from the fallacy being that 
 the Government must correct an unfavourable exchange in 
 the interests of the nation's trade. 
 
 On this view it is said that the American exchange must 
 be supported, or else the imports from America will be 
 diminished, and (presumably) cease altogether with a con- 
 tinued fall. The falsity of this view is shown by a simple 
 reference to facts. Since the beginning of the war there 
 has been a more or less continuous fall in the American 
 exchange from the highest point on record to the lowest. 
 Has there been any falling off in our imports from America ? 
 On the contrary. Most of those who look to the interpreta- 
 tion of ilu' fall ascribe it principally to the excess of imports.
 
 THE AMERICAN EXCHANGE 327 
 
 And, in fact, with a record in the fall in exchange there has 
 been a record in the imports. 
 
 International trade will adapt itself to all sorts of fluctua- 
 tions in the exchanges of various countries. Any uncertainty 
 in the exchange is only one more of the chances to be taken 
 account of in the adjustment of the real bargain, and the 
 difficulty may be got over in various ways. 
 
 There is, however, a sense in which an unfavourable 
 exchange or a fall below certain limits is unfavourable to 
 the nation at large. " The phrase," says Goschen, " is 
 accurate enough from the monetary or banking point of 
 view." After a certain point is reached in the fall in the 
 exchange it pays to export gold from the country. The 
 remittance of gold may become the cheapest way of settling 
 a foreign debt. " Under present circumstances a merchant 
 or banker will consider that to be an unfavourable state 
 of things which points to a dangerous diminution of the 
 stock of gold." 
 
 When we seek for the reason why an adequate supply of 
 
 gold is the foundation of banking stability- — and Goschen 
 
 was never tired of telhng the British bankers that their 
 
 gold reserves were inadequate to meet an exceptional strain' — 
 
 it is found in the great principle of convertibihty. " Under 
 
 the present state of legislation all engagements involve 
 
 payments in gold or in paper convertible into gold, the 
 
 merchants engaging to pay in gold or bank-notes at their 
 
 option, and the Bank of England being bound by law, 
 
 without option, to pay these bank-notes in gold." Of 
 
 course, even in the early 'sixties, large payments were very 
 
 seldom settled in England in actual gold or notes, and since 
 
 that time there has been a still greater development in the 
 
 economy in the use of gold. But at any rate, up to the 
 
 outbreak of the war, the whole banking system rested on 
 
 the principle oi convertibility as laid down by Goschen. 
 
 In other words, London was a free market for gold. 
 
 In other banking centres there was not the same freedom 
 as in London in obtaining the gold — e.g., in Paris or Berlin, 
 though in botli places much larger stocks of gold were kept.
 
 328 WAR FINANCE 
 
 Under the British system the gold was not regarded as a 
 hoard which ought to be increased as much as possible. 
 The idea was only to keep in hand such an amount as would 
 suffice, under any circumstances, to meet the demand. 
 As Goschen said — " When the stock of gold is evident^ 
 adequate it is even, in a banking point of view, erroneous 
 to consider a further accumulation advantageous or desir- 
 able. . . . the temporary excess of gold at one point is of 
 no advantage whatever, but rather the reverse." The 
 United States at the present time seems to have reached 
 this stage of repletion. 
 
 Under the system described by Goschen the principle of 
 convertibility was interpreted most strictly. The issues 
 of bank-notes were severely limited by law, and suspended 
 or deferred convertibility was not admitted. It is true 
 that in other countries, and notably in India, this strict 
 principle of convertibility had been departed from under 
 the various devices of what is now called the gold-exchange 
 standard. Under this system it is supposed that if the 
 foreign exchanges are artificially kept within the normal 
 limits the principle of convertibility is sufficiently observed. 
 Under this system it is the duty of the Government to 
 support the sterling exchange, that is to say for external 
 purposes. (On this plan the Indian exchange has been 
 supported, though there has arisen in India itself since the 
 war a heavy premium on gold.) 
 
 In England, however, up to the outbreak of war no 
 inroads had been made on the old principle of convertibility 
 either as regards internal circulation or foreign payments. 
 The outbreak of war naturally, and perhaps necessarily, 
 led to considerable changes. The effects of these changes 
 have been cumulative. As shown in a previous paper, there 
 has been an enormous increase in the output of paper money 
 and also of silver token money. Last week there was again 
 the usual increase of over three millions in the amount of 
 the currency notes outstanding. Coincidentally, even if the 
 causal connection is denied, there has been a general rise 
 in prices or a general depreciation of the pound sterling.
 
 THE AMERICAN EXCHANGE 329 
 
 Such a general rise in prices, according to the principles 
 adopted by Goschen, tends to encourage importation and 
 to discourage exportation. Coincidentally (it again the 
 causal connection is denied) there has been an abnormal 
 excess of imports over exports — the returns lor September, 
 as well as for the nine months of the year 1915, being very 
 striking. No doubt other causes are also at work — no one 
 supposes that the excess of imports is due entirely to the 
 inflation of credit and currency in the home country. But 
 all experience shows that such a cause is operative and is 
 cumulative as long as it lasts. The noimal sequence of 
 events in any inflation is in the following order : — Inflation, 
 over-importation, adverse balance, drain of gold, check to 
 credit, commercial crisis. If the later stages are not reached 
 it is only because the iniiation has been checked in time, 
 or the export of gold has been hindered. 
 
 According to the exposition of Goschen, an export of 
 gold (or such a condition of the exchanges as would naturally 
 lead to such export) may arise in three ways — it may be 
 the result of the settlement of indebtedness, or of differences 
 in the value of money {i.e., in the sense of rate of interest), 
 or of differences in currency. The correction of the exchange 
 (or the check to the outflow of gold) must depend on counter- 
 acting the dominant cause. 
 
 Under the old system a drain of gold duo to excessive 
 imports was met by a rise in the Bank rate and a correspond- 
 ing contraction 01 credit and prices. This contraction led 
 to a fall in prices. The country was no longer so good a 
 market for imports, and the cheapness encouraged the 
 exports. In this way the outflow of gold was checked or 
 reversed. 
 
 Under the S37stem that has been in force since the war 
 this mode of adjustment has been altogether inoperative. 
 There has been no pretence of correcting the adverse balance 
 by any kind of contraction. The Bank rate has remained 
 fixed, and most of the emergency measures adopted for the 
 facile creation of credit are still in use. How can contraction 
 be effective when, for example, the Bank of England is
 
 330 WAR FINANCE 
 
 bound to advance on the old War Loan at the price of issue 
 at I per cent, below Bank rate ? And this is only one 
 example of the aids to inflation. For all internal purposes 
 currency notes replace gold, and the issues depend on no 
 recognised principle of limitation. 
 
 As the old methods of correcting the falling exchange 
 have become obsolete other methods nave been substituted. 
 People are implored not to use so many foreign imports, 
 and to check their consumption of exportable things. But 
 though the heavens should fall — let alone the exchanges — • 
 the true Briton will spend his extra money according to 
 his appetites. Now that any hypnotic suggestion of modera- 
 tion has been found to be a futile remedy, the compulsion 
 of taxation of imports has been resorted to, but, unfortu- 
 nately lor the success of the remedy, only in homoeopathic 
 doses. 
 
 In the meantime, failing other correctives of the exchange, 
 the Anglo-French loan in the United States holds the field. 
 In itself the loan seems quite a simple and efficient expedient. 
 Having regard to the war conditions prevailing, the usual 
 American methods of business, the various interests to be 
 conciliated, etc., the terms of the loan seem quite reasonable. 
 They are not easy to reconcile with the large ideas of the 
 inexhaustibility of British credit that were so dominant a 
 year ago, but that is a matter of no importance in the midst 
 of the constant flux of opinion on every aspect oi the war. 
 The new loan is a payment by means of promises to pay 
 instead of by means of gold or other things for an excess 
 of imports, which excess is due to the war. It is an excep- 
 tional remedy for an exceptional case. The natural pre- 
 sumption is that the loan is to be expended solely in pay- 
 ments for most necessary Governmental requirements. The 
 loan in itself cannot restore the exchange to its normal 
 limits. And as soon as the proceeds are spent the adverse 
 balance becomes so much greater on account of the payment 
 of interest. Then will come a new loan, probably on harder 
 terms and more interest. Still, when we look to the amount 
 of our own war loan and to the needs of the immediate
 
 THE AMERICAN EXCHANGE 331 
 
 future, the American loan just arranged for may be con- 
 sidered good business. 
 
 But it is difficult to follow the reasoning by which the 
 chief merit of the loan is said to be in the support given to 
 the exchange. Is it intended that the Government should 
 attempt to stabilise the American exchange by the methods 
 applied to India ? Unless some artificial management of 
 this kind is attempted, the only effect of the loan will be 
 through the direct diminution of the adverse balance. So 
 far as this adverse balance may be due to inflation, the 
 American loan will rather aid than diminish the influence 
 of the inflation. 
 
 But whether we look to the internal circulation and the 
 state of prices, or to the outward flow of gold and the foreign 
 exchanges, some check on the continued inflation seems 
 desirable. 
 
 In Goschen's interpretation of the exchanges the first 
 element looked to was always the indebtedness. But the 
 next was the state of the currency and circulation. The 
 moral of the present argument may be conveyed in a 
 quotation from Goschen on the effect of the issues of notes 
 in the American Civil War : " Strangely enough, the 
 depreciation was actually delayed far beyond the time when 
 it was expected to occur, and the Americans began to believe 
 that it was possible to print paper money without losing 
 gold or depreciating the remainder of the currency." Appa- 
 rently we are afflicted with the same belief.
 
 CHAPTER XXV 
 LIBERTY, CONSCRIPTION, AND ECONOMY 
 
 [November 13, 1915) 
 
 The crimes committed in the name of liberty have become 
 proverbial. Most of the crimes are the result of not under- 
 standing the nature and meaning of liberty. Sometimes 
 the meaning is construed too loosely, and hberty degenerates 
 into anarchy. Some forms of the opposition to the methods 
 of compulsion in military service are purely anarchical. 
 Similar arguments would destroy the compulsory power of 
 taxes or legal punishments. Fortunately, this misinterpreta- 
 tion of liberty has not survived exposure to the light. No 
 reasonable man would now maintain that under no circum- 
 stances ought compulsory service to be adopted. The 
 practical question is whether it is worth while to resort to 
 compulsion. The right to use the compelling power is 
 admitted, if only in the grudging form that needs must 
 when the devil drives. 
 
 But though the anarchical interpretation of liberty has 
 been abandoned, and we no longer hear of threats of a general 
 strike against conscription in any form, the fair field for 
 argument on the merits is still cumbered with other mis- 
 understandings. There is the dread, for example, still 
 expressed in some quarters that the adoption by us of 
 compulsory military service would engender a spirit of 
 militarism. By the natural associations now clinging to 
 the word, militarism is supposed to mean Prussianism, and, 
 with so awful a disease, the old advice to check the begin- 
 nings seems at least excusable. A little sober reflection, 
 however, will show that compulsory service is not of neces- 
 sity a forerunner of the Hohenzollern pestilence. Nor does 
 training in tlie use of arms and in submission to military
 
 LIBERTY, CONSCRIPTION, AND ECONOMY 
 
 DDJ 
 
 discipline imply any weakening in the love of personal 
 freedom and in the admiration for our hard-won political 
 liberties. On the contrary, a general appeal to history 
 shows that compulsory national service has been commonly 
 adopted by the most liberty-loving peoples. The danger 
 to liberty has arisen not from national service, but from 
 standing armies and mercenary troops. " Men of Repub- 
 lican principles," says Adam Smith, " have been jealous 
 of a standing army as dangerous to liberty. . . . The stand- 
 ing army of Cgesar destroyed the Roman Republic. The 
 standing army of Cromwell turned the long Parliament 
 out of doors." But, as Adam Smith is careful to point out, 
 even a standing army is only dangerous to liberty when the 
 interests of the commander and the principal officers are 
 not in accord with the principles of the constitution. To 
 take a modern instance, the interests of the Kaiser and his 
 military caste have strangled the liberties of the German 
 constitution. On the other hand, the spirit of France and 
 the spirit of Russia in the present war are unquestionably 
 ennobled by the idea of the duty of national service. 
 
 The opinions of Adam Smith on liberty, conscription, 
 and economy are specially deserving of attention in this 
 country at the present time. Adam Smith was the greatest 
 of economists, and his greatness is partly due to the fact 
 that he always took a large view of his subject — he never 
 fell down and worshipped a rigid code of formal precepts. 
 If his teaching is to be summarised in one sentence, the 
 sentence must say that he was the great apostle of liberty. 
 His whole economic system is known as the system of 
 natural liberty. His ideas on hberty were akin to those of 
 the great French philosophers, his contemporaries, who were 
 sowing the seeds of the French Revolution. The difference 
 was that Adam Smith tempered his liberty with a fuller 
 knowledge of the nature of mankind as revealed by actual 
 history and experience. The work of Adam Smith bristles 
 with facts. That is one reason why it always appeals to 
 the practical man — that is to say, his real work, and not 
 the cut-and-dried formulae into which it has been reduced.
 
 334 WAR FINANCE 
 
 But the chief reason why the " WeaHh of Nations " has 
 retained its great popularity is because it is pervaded by 
 the spirit of hberty. Everybody feels at some time or other 
 that to.G^much Government is a nuisance. The natural man 
 may like well enough to govern other people (especially 
 if he is well paid for it), but for himself he likes to be let 
 alone, and he hates taxes. Anyone who wishes to make 
 an effective attack on any Governmental abuse cannot 
 prepare his spirit better than by reading a little Adam 
 Smith — the great master of liberty and economy. 
 
 Adam Smith treated of the questions that are just now 
 agitating the British mind under two headings — namely, 
 the Expense of Defence and the Expense of the Education 
 of Youth. Both Defence and Education come into the 
 range of economics because they involve expense, and 
 since Adam Smith wrote the expense of both has increased 
 enormously. In considering the expense of these institu- 
 tions Adam Smith was led into a more general treatment 
 of national defence and national education, and of the 
 very close interconnection between the two. Those who 
 have a vague idea that Adam Smith was the father of a 
 peace-at-any-price policy will be surprised to hear that 
 no present-day writer has ventured to put the case for 
 universal military training with the elemental moral vigour 
 of Adam Smith. Here are the main steps in the argument, 
 and be it observed they are taken from the section that deals 
 with the education of youth : — 
 
 " In the progress of improvement the practice of military 
 exercises, unless government takes proper pains to support it, 
 goes gradually to decay, and together with it the martial spirit 
 of the great body of the people. . . . But the security of the 
 society must always depend more or less upon the martial spirit 
 of the people." 
 
 Adam Smith does not look on the martial spirit of the 
 people simply as a cheap mode of insurance for liberty. He 
 goes on to say :■ — 
 
 " Even though the martial spirit of the people were of no use 
 towards the defence of the society, yet, to prevent that sort of
 
 LIBERTY, CONSCRIPTION, AND PXONOMY 335 
 
 mental mutilation, deformity, and wretchedness which cowardice 
 necessarily involves in it from spreading themselves through 
 the great body of the people would still deserve the most serious 
 attention of government ; in the same manner as it would deserve 
 its most serious attention to prevent a leprosy or any other 
 loathsome or offensive disease from spreading itself amongst 
 them." 
 
 If we remember that the system of natural liberty rests 
 on the idea of individual freedom, the following sentence is 
 in complete harmony with that system :• — 
 
 " A coward, a man incapable of defending or of revenging 
 himself, evidently wants one of the most essential parts of the 
 character of a man." 
 
 Fortunately for the British Empire the martial spirit of 
 the great body of the people has not decayed, although we 
 have no modern substitute for the old compulsion of the 
 practice of archery. The British Empire, with its variety 
 of interests in all parts of the world, has had continual 
 reminders that the paths of peace need safeguarding by 
 something stronger than the mere love of peace. The 
 martial spirit has been kept alive by little wars and rumours 
 of greater w^ars, and an unwavering belief in the British 
 power of the sea. Happily, in the hour of need not one of 
 the nations of which the British Empire is composed was 
 too proud to fight. At the same time, it must be admitted 
 that amongst a certain number of the people there has not 
 been that alacrity to show the martial spirit in practice 
 which might have been expected if the duty of military 
 service had been inculcated by actual training in 3'outh. 
 
 But it is not only on the moral excellence of the martial 
 spirit that Adam Smith founds his argument for national 
 training. He approves indeed of martial training — as just 
 shown — even if it Were not necessary for defence, but the 
 solid foundation of the whole argument is that the defence 
 of the nation, even from the point of view of the most 
 elementary security, cannot be altogether left to the volun- 
 tary action of the people. 
 
 This part of the argument is specially enforced in the
 
 336 WAR FINANCE 
 
 section that deals with the expense of defence. The basis 
 of the whole argument is that the trade of the soldier cannot 
 be left to the voluntary action of individuals. In industries 
 the choice of occupations may be left to the natural play 
 of demand and supply. Division of labour, which in the 
 extended sense means the varied occupations of the people, 
 is naturally introduced by the prudence of individuals who 
 find that they promote their private interests better by 
 confining themselves to a particular trade. 
 
 " But it is the wisdom of the State only which can render the 
 trade of a soldier a particular trade separate and distinct from 
 all others. ... It is the wisdom of the State only that can 
 render it for the interest of the private person to give up the 
 greater part of his time to this pecuhar occupation, and States 
 have not always had this wisdom even when the preservation 
 of their existence required that they should have it. . . . An 
 industrious, and upon that account a wealthy, nation is of all 
 nations the most likely to be attacked ; and unless the State 
 takes some new measure for the public defence, the national 
 habits of the people render them altogether incapable of defending 
 themselves." 
 
 Until the conduct of the present war showed that Germany 
 takes a very serious view of the right of the exaction of 
 maximum indemnities from the conquered, the idea had 
 come to prevail that a wealthy nation, if it happened to be 
 on the other side of the Atlantic, was not open to attack, 
 and was sufficiently protected by its own peacefulness and 
 the tradition of the Monroe Doctrine. It now appears that 
 even in the United States the argument of Adam Smith is 
 being accepted both as regards the dangers of attack and 
 the necessity for defence. As regards our own country, if 
 this time we escape from the consequences of unreadiness, 
 the lesson is not likely to be soon forgotten. 
 
 According to the teaching of Adam Smith, although the 
 wealthy nation is most liable to be attacked, it is also, by 
 reason of its wealth, the most capable of defence. " In 
 modern wars," so he wrote, " the great expense of firearms 
 gives an evident advantage to the nation that can best 
 afford that expense ; and conscqucntl}^ to an opulent and
 
 LIBERTY, CONSCRIPTION, AND ECONOMY 337 
 
 civilised over a poor and barbarous nation. In ancient 
 times the opulent and civilised found it difficult to defend 
 themselves against the poor and barbarous. In modern 
 times the poor and barbarous lind it difficult to defend 
 themselves against the opulent and civilised. The invention 
 of firearms, which at first sight appears to be so pernicious, 
 is certainly favourable to the permanency and to the exten- 
 sion of civilisation." Adam Smith did not foresee or discuss 
 the case of most interest at the present time^ — namel}', that 
 of the nation that is barbarous as well as wealthy. 
 
 The relation of wealth to military power leads up to the 
 third division of the present text — namely, economy. At 
 the outbreak of the war we took it for granted too easily 
 that the greater the wealth the greater the power for endur- 
 ance. We looked with complacency at the aggregate value 
 of our national wealth. We forgot that the greater part 
 of this realised wealth could not be mobilised for war. The 
 State might take the whole of the rental of lands and houses, 
 but it could not take the lands and houses themselves for 
 consumption in war. It is the opinion of most economists 
 that the national income is a far better test of the national 
 wealth than is the capitalised value of that income. The 
 national income of the United Kingdom in normal times is 
 reckoned as somewhere about 2,000 million pounds. The 
 present rate of our war expenditure at five millions a day 
 works out at nearly 2,000 million pounds a year. No wonder 
 that the Prime Minister in his most important speech since 
 the war began described the financial situation as serious. 
 The only consolation now offered is that the situation of 
 Germany is more serious. In this comparison of burdens, 
 however, it is fogotten that we cannot adopt the German 
 methods of exploitation or so-called organisation. 
 
 The most complete system of conscription will be useless, 
 or worse than useless, unless it is accompanied by far greater 
 economy in the use of our wealth. In war as in industry 
 labour is only one of the factors to be reckoned with. It 
 seems probable that the admirable effort of Lord Derby will 
 directly or indirectly give the State the command of all
 
 338 WAR FINANCE 
 
 the labour fit for military purposes. What we have now 
 to realise is that this labour cannot be effectively used for 
 the period of the war unless we practise the strictest economy 
 in every sense of the term ; and the word " economy " has 
 at least two meanings applicable to the present case. 
 
 There is economy in the simple sense of saving or of 
 refraining from present gratification with a view to the 
 future. In this simple sense people are asked to eat and 
 drink less and so on, and put the money saved into the 
 War Loan. The State will then use the money for the 
 defence of our interests, that are far greater than wealth. 
 This aspect of economy, as we are reminded by Professor 
 Edgeworth in a recent discourse was expressed in noble 
 language by one of the greatest of Scotsmen- — namely, 
 Dr. Chalmers, who was moved by the menace of Napoleon. 
 " Exchanging luxury for security and independence," that 
 is the moral profit that is offered to the soul of the nation. 
 " Instead of splendour and luxury they will receive liberty 
 and protection, and the conscious importance which ever 
 accompanies the feeling of being an independent people." 
 " These are the feelings," said Chalmers, " and they are 
 worth purchasing." But Chalmers did not rely only on 
 voluntary sacrifice and on the appeal to patriotism. "Taxes," 
 he said, " will whip us on to improvement "■ — that is to say, 
 in the exchange of the luxuries of peace for the necessaries 
 of war. The statistics of our consumption during the 
 present war show clearl}^ enough that this whip must be laid 
 on with more vigour. 
 
 But there is a second meaning of economy that is of 
 equal importance at the present time. Economy in this 
 second sense means the lessening of cost in the attainment 
 of any object. It implies that of the many methods possible 
 the least expensive, if it answers the purpose, is the test. 
 Economy in the first sense gives the State the money ; 
 economy in the second sense makes the State use the money 
 to the best advantage. The course of the war has shown 
 that it is this second kind of economy that has been most 
 neglected. Hitherto, with the aid of loans, plenty of money
 
 LIBERTY, CONSCRIPTION, AND ECONOMY 339 
 
 has been forthcoming, but at every point the economy of 
 expenditure has been neglected. This is not the occasion 
 for any enumeration of details, but one preliminary con- 
 dition of successful economy may be emphasised. It is no 
 use making economies in one direction and spending more 
 in another. Surely with expenditure at five millions a day 
 it is time to enforce the principle of rigorous limitation. 
 Let no expenditure of any kind be taken up unless the money 
 is obtained from some less urgent need. Before any Member 
 of Parliament boasts that he nas obtained some increase of 
 public expenditure for some estimable object let him show 
 that he has saved the money from some less estimable mode 
 of expenditure. What is wanted is not a readiness on his 
 part to vote for more taxes for his favoured scheme, but 
 a definite indication of a source of saving of waste.
 
 CHAPTER XXVI 
 THE GRAVITY OF THE FINANCIAL SITUATION 
 
 {December 22, 1915) 
 
 " We have got into a position which I think is extremely 
 dangerous, and for this reason. As long as we can borrow 
 money freely to any extent that is required there is a fictitious 
 prosperity spread over the whole country, and instead of 
 making sacrifices people are better off than they ever were 
 before." These were the words of Mr. Bonar Law, speaking 
 as Leader of the House of Commons about a month ago, 
 in the absence of the Prime Minister, who had himself 
 described the situation as serious a little time before. It 
 might have been supposed that such utterances would have 
 been the prelude to a serious attempt to reverse the policy 
 which has brought the country to this " extremely dan- 
 gerous position." 
 
 " Instead of making sacrifices," said Mr. Bonar Law, 
 and since he spoke what signs are there of any greater 
 readiness to make sacrifices ? At the- outset of the war the 
 spirit of self-sacrifice was high throughout the land. The 
 spirit of self-sacrifice still beats high where the lives of men 
 are concerned. That the Voluntary system should have 
 called forth millions of men to face the horror of modern 
 large scale war is marvellous. But in the matter of monev 
 self-sacrifice has been displaced by self-seeking. Getting 
 and spending, we lay waste our powers. " Bear ye one 
 another's burdens " has given way to " share ye one another's 
 bonuses." Common sense tells us that a time of war ought 
 to be a time of stress. More work and less cnjoyment^ — 
 more self-help and lessened appeals to an o\'er-burdened 
 Government — these ouglit to be our guiding rules. The
 
 GRAVITY OF THE FINANCIAL SITUATION 341 
 
 very opposite has been the case. Public and private extra- 
 vagance have combined to make the financial position 
 " serious " or " extremely dangerous "■ — the words are the 
 words of the leaders of our two great political parties. 
 
 Mr. Bonar Law finds our greatest danger in the fictitious 
 prosperity of the country at large. How can such prosperity 
 have arisen in time of war ? The most obvious answer is 
 the extravagant expenditure of public money raised by 
 loans. The loans are professedly war loans. The proceeds 
 ought, therefore, to be spent in the conduct of the war. 
 The test of proper or improper expenditure ought to be in 
 every case — How far does spending this money help to win 
 this war ? How much is necessary, and how much is orna- 
 mental or even wasteful ? 
 
 Mr. Bonar Law had specially in view the rise in wages. 
 The rise in wages still goes on. The Chancellor of the 
 Exchequer and the Prime Minister united their efforts to 
 implore the working classes not to ask for more wages, and 
 the next week the papers announced another bonus to 
 munition workers, this time the amount named being four 
 shillings. Since then there are rimiours of demands on a 
 larger scale to compensate the rise in the prices of neces- 
 saries. The bonuses are spent, and the mischief circulates. 
 
 Since we all became sociahsts — the saying is nov/ respect- 
 able by age — a rise in wages of any kind has come to be 
 looked on as a sign of national progress. Whether this 
 opinion is just or not depends on the cause of the rise in the 
 wages and also on the ways in which the extra earnings are 
 spent. The principle of " the economy of high wages " is 
 based on a deep-seated feeling of human nature. Increase 
 a man's share in the product of his labour, let wages rise 
 in proportion to useful effort, and the efficiency .of that 
 labour will surely increase. The magic of property turns 
 sands into gold, and the curse of slavery turns gold into 
 sands. 
 
 There is equal truth in the principle of " the morality of 
 high wages." There are things made by sweated labour 
 that ought either to be made with higher-priced labour or
 
 342 WAR FINANCE 
 
 not made at all. Better for a nation a system of outdoor 
 relief than a system of indoor sweating. 
 
 Both of these principles may be also applied to the 
 expenditure of the money wages. If the money is spent 
 on things that make for efficiency or humanity, then is the 
 rise in wages doubly blest- — it blesses not only the master 
 that gives, but the man who takes. But if the wages are 
 spent on drink and the devil and other baneful vanities, 
 then both the work and the man are the worse of the high 
 wages. 
 
 Precisely similar reasoning may be apphed to profits. 
 Our working classes have been so much preached to and 
 preached at in the matter of war bonuses that other kinds 
 of war bonuses have been lost sight of. " Our merchants," 
 said Adam Smith, " often complain of the high wages of 
 British labour, but they are silent about the profits of stock." 
 The moral for to-day is obvious. The difficulty is in apply- 
 ing the moral. 
 
 Profits and wages under normal conditions may be 
 regarded as the universal elements in cost of production. 
 If a thing is to be produced in a regular way to meet a 
 regular demand the various sets of producers concerned 
 must get the normal rates of remuneration, or they will 
 transfer their capital and labour to more attractive fields. 
 From this point of view it is true that the relative prices 
 of products are normally proportioned to their relative costs 
 in wages and profits. 
 
 The threefold rise in the price of munitions which Mr. 
 Bonar Law mentioned is often accounted for by the rise 
 in the corresponding wages and profits. But in this case 
 there is another and a much truer way of looking at the 
 relation between prices on the one side and wages and 
 profits on the other. When the prices of products rise owing 
 to an abnormal increase in demand, the fortunate producers 
 obtain for the time being what the modern economist calls 
 a quasi-rent. A quasi-rent of this kind is just as much an 
 unearned increment as a rise in the rental of land. In any 
 expansion of trade, or more generally in any period of
 
 GRAVITY OF THE FINANCIAL SITUATION 343 
 
 inflation, sucli quasi-rents abound. In this country during 
 the present war they have grown up hke mushrooms. It 
 is a remarkable instance of the mutabihty of fortune that 
 the present Minister of Munitions should have planted and 
 watered so many of these fungi. It is to be hoped that his 
 efforts in gathering in part of the increase may be more 
 successful than in the case of the unearned increments of land. 
 
 The present period of fictitious prosperity, with its wealth 
 of bonuses and quasi-rents, is no doubt due in the first place 
 to the enormous increase in the demand by the Government 
 for all sorts of things. When people speak of the demand 
 for things raising their price, they often forget that all 
 demand implies two elements — the desire to possess, and 
 the means of purchase. Desire without money and money 
 without desire are equally ineffective. The British Govern- 
 ment in the matter of desire felt the urgent driving of 
 military needs. A war demand is overpowering in its urgency. 
 The urgency is decided by military officers, and their word 
 is final. The money power of a war demand is also unhmited; 
 it is backed by the whole credit of the State, present and 
 prospective. At the outset of the war we were altogether 
 unprepared for a great land war. Our military needs were 
 extreme. At the same time our credit was unexampled. 
 Hence these quasi-rents and war bonuses. We began with 
 emergency measures, and the emergency idea is still dominant 
 after sixteen months of war. One would suppose that our 
 armies were rushing on the enemy with the most furious 
 haste instead of being stuck fast in trench warfare. A war 
 of attrition ought to give ample opportunity for a revision 
 of measures that were undertaken in the beginnings of a 
 war which threatened to be a matter of weeks unless we 
 made up for lost time in frantic haste. 
 
 We have been told from the beginning that we were 
 bound to win this war by our greater financial endurance. 
 If we only escaped disaster at the beginning all would go 
 well. Our money machine would beat the German war 
 machine. This hope was strengthened by confidence in 
 our sea-power. By our credit and our sea-power we could
 
 344 WAR FINANCE 
 
 draw on all the world. The forecast in our favour seemed 
 most reasonable if only we were allowed time enough. The 
 contest between the two machines has not been of the 
 expected character. Germany has wasted men, and we have 
 wasted money. The Allies are now getting the advantage 
 in military power, but our Ministers tell us that the financial 
 strain is becoming serious. The greatest possible tragedy 
 in this war would be a premature peace through the collapse 
 of the monetary system. Of all the powers for good and 
 evil in our modern world, the money power is the most 
 timid and the most fearful for its own existence. 
 
 One particular group of war bonuses, the most important 
 of all, has been most overlooked. These are the bonuses 
 that have been given to the dealers in British credit. If 
 we talk in the language of wage-earners, the very first 
 demand pressed on the Government was that the standard 
 of comfort of the great financial houses should be kept up. 
 Much may be excused in the panic that arose in the first 
 days of the war. The relief measures and preventive 
 measures adopted were, as wecannowsee, excessive, although 
 they were perhaps errors on the safe side. But why should 
 the emergency measures have been continued long after the 
 panic had subsided, and the dealers in credit were suffering 
 from repletion ? 
 
 From time to time in these papers attention has been 
 called to the successive expedients of the Government in 
 supporting the dealers in British credit. On this occasion 
 it is sufficient to recall the cumulative effect. The most 
 important result of all this Governmental assistance to the 
 monied interests has been an inflation of credit and of paper 
 money, which has rendered possible and mamtained the 
 general rise in prices that is now so marked it cannot be 
 denied. The Economist index number for November shows 
 that the rise continues at an increasing rate. All experience 
 proves that you cannot greatly increase the amount of paper 
 money in circulation without raising prices. In normal 
 times such an inflation is brought down b}' the necessity of 
 providing a sufficient substratum of gold or of notes definitely
 
 GRAVITY OF THE FINANCIAL SITUATION 345 
 
 based on gold. But the paper money of the Government, 
 now approaching a hundred millions, and growing regu- 
 larly every week by about three millions, takes away all 
 need for the provision of gold for internal use. The banks 
 no longer fear an internal drain, because the Governmental 
 cistern is always kept full. The external drain is not so 
 easy to manage. Paper money cannot be exported. But 
 again the Government is called on for assistance, and the 
 Government, with its wonted complacency, is to become 
 the biggest stock-jobber in the world. 
 
 There can be no question that the general rise in prices, 
 to whatever cause it be attributed [e.g., scarcity, which is 
 absurd, or war, which is vague) is the proximate cause of 
 that lictitious prosperity which Mr. Bonar Law deplores, 
 and, to say the least, is a contributory cause in all our 
 financial difficulties. Why do the wage-earners demand 
 rises in wages ? Only to meet, so they say, the rise in prices. 
 Why is the Governmental expenditure rising so rapidly ? 
 Because all the requirements of war are costing more money. 
 Why, with all our credit, is it so difficult to correct the 
 foreign exchanges except that our balance of indebtedness 
 is so largel}^ swollen by the rise in prices ? Whatever way 
 we turn it is tfie rise in prices that is the one persistent 
 cause that intensifies the trouble. 
 
 According to the authorities who have explained the 
 system by which our financial greatness has been achieved — • 
 e.g., Ricardo, Goschen, Bagehot, all of them practical men 
 as well as economists^ — the principle of limitation is the 
 onl}^ safeguard against the evils of inflation. This is the 
 one principle to which the present leaders of finance turn 
 a blind eye. In the discussion on the Finance Bill in reference 
 to the limitation of the paper currency, it was said by Mr. 
 Montagu : " The Treasury takes from day to day and from 
 hour to hour the advice of those engaged in this matter in 
 the City." Nothing could seem more reasonable and 
 reassuring — but for one objection. It is no part of the 
 business of the City or of the bankers or the great financial 
 houses to consider the effects of their credit operations on
 
 346 WAR FINANCE 
 
 the general level of prices. Their business is with par- 
 ticular credits and particular prices. General prices, so 
 they think, apparently, depend on the act of God or the 
 King's enemies, and not on the dealers in credit. What 
 concern is it of theirs if the Economist index numbers rise 
 or fall ? What have they to do with real wages and con- 
 suming power ? Their business is only with money, and 
 especially the paper substitute for money. The old-age 
 pensioners "and the M.P.'s and other people with fixed 
 salaries must take the prices as they come. 
 
 Is there, then, no hope ? Is the political economy of 
 to-day to be even more dismal than the political economy 
 of yesterday ? The answer is that in matters of finance it 
 is never too late to mend. In the midst of a great war we 
 cannot gather up the wasted credit, but we can put a check 
 to further extravagance. Our position, economic and 
 financial, in spite of all our waste, is still very much stronger 
 than that of Germany. We read lamentable tales of the 
 German ladies having war bread without butter — it seems 
 as if the want of butter would end the war ; but as for all 
 the inhabitants of these fortunate isles, " their eyes stand 
 out with fatness ; they have more than the heart could 
 wish." Germany is already on the margin of want, but 
 we have not yet begun to economise. xA.ll that we have to 
 do is to put in force a little healthy abstinence, and half 
 the battle is won. But the healthy abstinence must be 
 applied first of all by our rulers. So long as they pour out 
 the money, the people will spend it. Strange as it may seem, 
 if there were not so much money in circulation, people would 
 not have so much to spend. W'hat we need is a small 
 threatening of a crisis — not a cataclysm, but a slight warning 
 tremor. The tremor cannot be far off. British credit in 
 five-year bonds is offered at 5 per cent, to the foreigner 
 without deduction of taxes. The American investor has only 
 taken up sixty out of the hundred millions of the Anglo- 
 French Loan. The next loan is to be supported with collateral. 
 The principle of limitation has many ways of coming home, 
 but it always arrives. Let us hope it will arrive in time.
 
 CHAPTER XXVII 
 EQUALITY OF SACRIFICE IN WAR-TIME 
 
 [January 15, 1916) 
 
 Once on a time, perhaps after too long gazing on the 
 darkness visible of the modern mathematical political 
 economy, Mr. Balfour spoke of the " thin lucidity " of John 
 Stuart Mill. Delusive simplicity would have been nearer 
 the truth, for Mill was the begetter of many maxims which 
 seem simple and certain, but when tested by facts are 
 doubtful and complex. Of such is the dictum — " Equality 
 of taxation means equality of sacrifice." 
 
 Much of the weakness of our war finance has arisen from 
 the non-critical application of this maxim. It was most 
 desirable that from the outset of the war the working classes 
 should contribute their share to special war taxation for 
 various reasons — to aid the public revenue, to check extra- 
 vagant consumption, to lessen our indebtedness to foreign 
 States, and, above all, to impress on the great body of the 
 electors the absolute need for the most economical use of 
 our resources. This was the meaning of the tradition that 
 there should be some kind of proportion between direct and 
 indirect taxation — the idea being that the direct taxes fell 
 for the most part on the classes and the indirect on the 
 masses. The tradition was still observed in the Boer War, 
 a war of very small magnitude compared with this present 
 war. In the Boer War the nation, which at that time 
 regarded Free Trade as the accepted national policy, con- 
 sented to a war tax on imported corn. The principal argu- 
 ment advanced in favour of the tax was that in time of war 
 the general body of the people must be made to feel their 
 share of the burden.
 
 348 WAR FINANCE 
 
 During the first year of the present war this heaUhy 
 tradition was abandoned. The income tax was promptly 
 doubled, but there was no equivalent increase in taxation 
 meant to fall on the masses of the people. The tax on beer 
 had the unfortunate result ol driving the beer-drinker to 
 spirits. The modest increase in the tax on tea was the only 
 general war tax attempted in the first year. Last May 
 Mr. Lloyd George showed the need of more taxation, but 
 imposed none. In the autumn the present Chancellor of 
 the Exchequer lowered the income tax limit of exemption 
 to £130 and increased the tax on tea, but at the same time 
 the income tax falling on the old income tax-payers was 
 increased by another 40 per cent. 
 
 The general result of our war taxation has been to impose 
 real and considerable burdens on professional people and 
 others with fixed or lowered incomes*' In the case of the 
 commercial and trading classes, besides the usual income 
 tax an excess profit tax has been levied. But no effective 
 war taxation has been imposed on the masses of the people. 
 On the contrary, through the general adoption of a system 
 of war bonuses the material condition of the people has 
 been improved. 
 
 Adam Smith, when laying down the fundamental prin- 
 ciples of taxation, compared the people of a country to the 
 joint tenants of a great estate. It was their duty to provide 
 for the upkeep of the estate. Everyone ought to contribute 
 in proportion to his ability. That was Adam Smith's idea. 
 That is not our idea. Our great estate was threatened by 
 a vast inundation. We proceeded to borrow immense sums 
 on mortgage to secure the estate against the flood of destruc- 
 tion. Having got the money and checked the inundation 
 with part of it, we used the rest to celebrate the occasion. 
 We converted the threatened deluge of barbarism into a 
 flood of felicity. What a miracle ! Never was there such 
 a sudden improvement in the masses of the people of a 
 country since the celebrated outburst ot public credit under 
 John Law. in France two hundred years ago. All the returns 
 of official figures tell the same tale. Never were the figures
 
 EQUALITY OF SACRIFICE IN WAR-TIME 349 
 
 for pauperism and unemployment so low ; never were the 
 records of imports and of wages so high. 
 
 And yet everyone feels that there is something wrong 
 about this miracle, both economically and morally. We 
 live in a state of fearful expectation that the false miracle 
 will be followed by a plague in the old Egyptian fashion. 
 In the meantime the more curious want to know how the 
 magicians have worked the miracle. There are, no doubt, 
 many causes of the fictitious prosperity, but one great cause 
 is to be found in the false ideas engendered in the people 
 by this innocent-looking maximum of equahty of sacrifice. 
 In the modern mode of speech, they have been hypnotised 
 by false suggestions of sacrifice. 
 
 The first evil suggestion is a kind of Communism that 
 puts on an appearance of justice and humanity. The real 
 sacrifice (it is said) involved in paying taxes will vary, not 
 only according to wnat is taken, but according to what is 
 left. The idea in itself seems most reasonable, and may 
 be supported by the highest authority. When the widow 
 cast into the treasury two mites (which make a farthing), 
 the great Lord of Sacrifice said to Llis disciples that this 
 poor widow had cast in more than the rich men ; for they 
 cast in out of their abundance, but she of her penury cast 
 in all the living that she had. 
 
 The modern protector of the poor has bettered tlhs 
 instruction. There is no possible comparison, he argues, 
 between the sacrifice of necessaries and the sacrifice of 
 luxuries. To take a mite from the poor involves far more 
 real sacrifice than to take a million mites from the rich man. 
 We can only begin (so he says) to apply the idea of equality 
 of sacrifice rightly if, first of all, we exempt from all taxation 
 a necessary minimum income. Then for the incomes above 
 this limit we must adopt a rapidly-increasing progression. 
 In every case we must shear away superfluities before we 
 touch on the comparative necessaries. The old name for 
 this thoroughgoing process of equalisation was "levelling," 
 and the supporters of the plan were called " levellers." 
 
 The people of this country have never carried the idea
 
 350 WAR FINANCE 
 
 of levelling to an extreme. We can hardly think of London 
 having a Commune even after an unsuccessful war. But 
 the idea that a certain minimum income should be free from 
 taxation has gained a considerable hold, and the minimum 
 is placed pretty high. It is this notion that has dominated 
 our statesmen in their abstinence from effective war taxation 
 of the masses. They have assented to and encouraged the 
 belief of the working classes that they have a natural right 
 to the pre-war standard of comfort ; that for every rise 
 in the cost of living there ought to be a corresponding bonus 
 on wages ; and that the bonus ought to be given even if 
 the rise is due to taxation. 
 
 If the term " minimum income " is interpreted strictly, 
 "its exemption from taxation may be defended on purely 
 economical grounds altogether apart from any ideas of 
 sacrifice. If the exaction of a tax would send the payer 
 over the margin of self-support the tax must be returned 
 to him (with expenses) in the shape of poor rehef. We 
 cannot tax people to death. Or again, if the tax on the 
 minimum income really lessens the productive power of 
 labour by reducing the standard of life the nation may lose 
 much more than the revenue yielded by the tax. 
 
 But obviously these arguments do not apply to incomes 
 above the efficiency minimum. Moreover, in considering 
 what is the efficiency minimum under any circumstances, 
 and in estimating the real burden of any general taxes, we 
 ought always to take account of what is returned to the 
 taxpayer in the benefits which he obtains from public expen- 
 diture. Even in peace-time, if an ordinary working man 
 puts a money value on the education of his children, and 
 on the contributions of the national and local governments 
 to the pubhc utilities in which he has the greatest share, 
 he would often find that on balance his taxes would leave 
 a considerable bonus. 
 
 If we apply these ideas it is quite clear that the working 
 classes of this country were well able to bear their share in 
 war taxation. But for the most part their actual condition 
 has been bettered by the war, and on balance, instead of
 
 EQUALITY OF SACRIFICE IN WAR-TIME 351 
 
 paying taxes, they have received bounties. No doubt there 
 are exceptions. The war bonuses have not been very evenly 
 distributed. Some people — e.g., the old age pensioners — 
 have had no bonus, and have suffered instead from the rise 
 in prices. Some people have had too many bonuses. They 
 have waxed fat and kicked. They have been soothed and 
 flattered, but they are not happy. They are suffering from 
 the ill-temper that follows indigestion. On the whole, how- 
 ever, the great masses of the people are taking their bonuses 
 gladly, and are being attested, 'and giving other evidences 
 of a healthy pubHc spirit. But the best friends of the people 
 cannot pretend that in the mass they have been called on 
 to bear such an amount of taxation and consequent privation 
 of comfort as might be expected in a great war, according 
 to the principle of equality of sacrifice. 
 
 In the Napoleonic wars the modern version of equality 
 of sacrifice had not been discovered. There was not a 
 person, or commodit}^ or occasion that escaped taxation. 
 On everything whatever, living or dead, on every occasion 
 from birth to burial, taxes were imposed of all degrees of 
 inequality. In those days taxes were real plagues fittingly 
 comparable to locusts and hailstorms. What was the general 
 condition of the people who were called on to bear these 
 taxes ? " The privation and misery which fell on the lot 
 of the poor was exceedingly great." Such is the summary 
 of the simple annals of the poor in Porter's " Progress of 
 the Nation." How could it be otherwise when we look to 
 the records of wages and the cost of food ? in Glasgow, 
 for the six years which ended with Waterloo (1810-15) the 
 weekly wages of carpenters were 18s., and of shoemakers 
 15s. ; and if the lordly plumber got 22s. 6d., the common 
 labourer, on the other hand, had only lis. Over the same 
 six years the average price of wheat was 93s. per quarter, 
 and ranged between 122s. and 63s. 
 
 The comparison of our burdens with those of the other 
 belligerents in the present war is not much more flattering 
 to our self-respect from the point of view of sacrifice. We 
 are no doubt an easy first in the accumulation of war debt
 
 352 WAR FINANCE 
 
 per head of population. Our five millions a day war expen- 
 diture (and perhaps by this time it is six) has an imposing 
 appearance. But spending the proceeds of debt is not 
 sacrifice to the people who do the spending. Let us leave 
 out the money or forget where it comes from and search 
 for the real sacrifices of comforts amongst our stay-at-home 
 masses. The consumption of the people has increased. So 
 far as material comforts are concerned, taking the average 
 mass of the people, there are no sacrifices. 
 
 Compare our people with the people of Germany. Germany 
 is also piling up debt. Germany has not yet begun to put 
 on new war taxes. But there is no fictitious prosperity for 
 the masses of the German people. Instead they have their 
 meatless days and their fatless days. " Cauld kail made het 
 again," they are ofiicially assured, is excellent if helped out 
 with a mealy potato. According to their own reports, the 
 artificial liver sausages and the other substitutes for food 
 made by the German chemists are amongst the nastiest 
 and dearest things ever tried by a besieged people. Our 
 Allies — that is to say, our greater Allies — are no doubt 
 better off, but they read with amazement of our style of 
 living, and graciously say it is part of the English madness. 
 
 Nor is the appeal to equalit}^ of sacrifice much more 
 satisfactory when we look to the distribution, apart from 
 taxation, of the whole burden of the war on our own people. 
 One man gives up his life and another takes his job at a 
 higher wage. Thousands at the front rush to their death 
 on entanglements which might have been cleared awa}^ 
 (so we are told by the Minister of Munitions) but for the 
 slackness of a few thousands of highly-paid workers at home. 
 We are about to apply compulsory military service to our 
 young unmarried men. What is the principal objection 
 raised ? The fear that a corresponding compulsion will be 
 applied to the makers of munitions and other providers of 
 the industrial needs of war. Why not ? What has become 
 of that principle of equality of sacrifice which is so much 
 respected when it means exemption from taxes ? 
 
 By all means let us strive to retain as much as possible
 
 EQUALITY OF SACRIFICE IN WAR-TIME 353 
 
 of the ideals of peace. Far be it from us to accept the 
 German teaching of the art of war : that success justifies 
 any means whatever. But in a state of war we must be 
 prepared to revise some of our ordinary rules of conduct, 
 and try to discover what other rules are better fitted to 
 achieve our real aims. 
 
 We are fighting, in the first place, for national liberty. 
 There is no need to wander off into metaphysical discussions 
 on the meaning of national liberty. Look at Belgium, look 
 at Serbia. The kind of liberty these countries have lost, 
 that is the kind of liberty we are fighting to preserve for 
 ourselves, and also, as in honour bound, to restore to them. 
 In order to achieve this greater liberty, the lesser liberties 
 of all kinds must give way. Even those liberties which in 
 time of peace seem fundamental may be ranked as lesser 
 in the new perspective of war. Of such is the liberty of 
 every man to do as he hkes with his own labour. " The 
 property which every man has in his own labour," says 
 Adam Smith, "as it is the original foundation of all other 
 property, so it is the most sacred and inviolable." Yet the 
 same Adam Smith approved of compulsory military service. 
 The members of trade unions look with the greatest jealousy 
 on any infringement of the " liberties " which they have 
 obtained by a hundred years of struggle. Even if we grant 
 to the full the claim of the unions as the guardians of the 
 liberty of labour — a large claim — or if we allow that a time 
 of war is not a time to dispute the claim, still the unions 
 must be asked to sacrifice their lesser liberties for the greater 
 national liberties. They must have a very poor belief in 
 their own power if they think a concession of this kind will 
 imperil their position in peace. Their position is much 
 more likely to be imperilled if by their restrictions they 
 shorten or delay the supply of war material. 
 
 The greatest truth about war is that war must involve 
 sacrifice, and the greatest error is to imagine that the 
 sacrifices can be made equal in the case of individuals. The 
 most the State can do is to avoid or mitigate glaring inequali- 
 ties. But always equahty of sacrifice is of secondary import-
 
 354 WAR FINANCE 
 
 ance to the sacrifice itself. Everyone knows and feels that 
 in this war he ought to be making some sacrifice, and it is 
 unworthy of this feeling to hold back through the fear that 
 he may be doing more than his neighbours. If he should 
 do more than some, it is quite certain that he will not get 
 near to the sacrifice of others. 
 
 Still less should the Government allow its hands to be 
 weakened b}^ undue deference to equality of sacrifice. By 
 all means, keep to the rule if the needs of the State admit 
 of its observance. But taxes that are intended to raise 
 revenue or to check consumption are not to be frittered 
 away in exemptions in the vain search for equality. Lay 
 on the taxes, and let the exemptions look after themselves. 
 We have been told that we failed at Suvla Bay for want 
 of ruthlessness ; our commanders were too busy measuring 
 • the sacrifices to be incurred. It is to be hoped that our 
 financial authorities will not have to make similar lamenta- 
 tions when it is too late. There has not been so far much of 
 the ruthlessness of war about our economy.
 
 CHAPTER XXVIII 
 
 THE TURN OF THE TIDE IN PUBLIC 
 EXTRAVAGANCE 
 
 [Fcbniayy 19, igi6) 
 
 Everyone knows how difficult it is to find out if the 
 tide has really begun to ebb, especially in rough weather. 
 The watched tide seems never to turn back, and some 
 seventh wave beats all the former water-marks. At various 
 times since the outbreak of the war we have been assured 
 that the tide of public extravagance has begun to turn, 
 but hitherto, after a short interval, all the old marks have 
 been washed out. 
 
 In this country one of the best signs of the advance of 
 public extravagance has been the continued rise in prices. 
 The proximate cause of the rise in prices has been the enor- 
 mous expenditure of public money. Before the war the 
 central government had about two hundred millions to 
 spend in the year. Most of it had to be spent to meet 
 former obhgations : the charges for debt and for the publ'c 
 services. The amount of new money at the disposal of the 
 Government for a new fiscal year was what we should now 
 call a flea-bite, a mere flea-bite, or a contemptible flea-bite, 
 or some adjective of that sort. We have got into the very 
 bad habit of thinking in millions. A million pounds, we say, 
 would not keep our part of the war going for six hours. 
 What is the use of saving a million ? \\c are in for a war of 
 three years or longer. By this method of calculation the 
 closure of the museums will keep the war going perhaps a 
 (juarter of an hour. 
 
 From the very beginning of the war the Government has 
 been called on to help all kinds of things that in peace- lime
 
 356 WAR FINANCE 
 
 had to rely on self-help. The latest demand is for public 
 money to build merchant ships in order to bring down the 
 freights — a specially interesting and irritating flea-bite. 
 
 On the outbreak of the war the Government, which had 
 been used in peace-time to spend on routine lines, and had 
 not a beggarly million to do as it liked with, was suddenly 
 given a free hand with hundreds of millions, and in the 
 course of the war the hundreds became thousands. Long 
 ago Mr. Gladstone said : " Good finance consists more in 
 the spending than in the collecting of revenue." How much 
 more, then, must good finance consist in the spending of 
 loans rather than in the issue of the loans. In the course of 
 a few months we had to provide for a Continental army of 
 our own, and to assist in providing for several other armies 
 of our Allies. The providing was done, for the most part, 
 in the first place by spending huge sums of money in this 
 country. Naturally prices rose. Naturally the receivers 
 of the new money spent it. They spent most of it in increas- 
 ing their consumption. There broke out what the leading 
 English newspaper is wont to call an orgy of extravagance. 
 
 There is no need to go into the mysteries of currency and 
 high finance to understand how the rise in prices is one of 
 the best signs of the growth of public extravagance. In 
 an}^ case, everybody of any importance had forgotten all 
 about the principles of currency. Perhaps forgotten is the 
 wrong word. They were too busy with practice to look 
 into principles. The money was found, the money was 
 spent, and the prices rose. And, as Spinoza said, when a 
 thing is once done, nothing is more foolish than repentance. 
 
 On the present occasion, however, the business is not to 
 account for the height of the tide, but to look at the marks 
 and see if the ebb has begun. The first mark is not very 
 encouraging. The index number of the Economist is the 
 best known device for measuring movements in average 
 prices. The index number for last January has surpassed 
 all records. It is higher than it has ever been since it was 
 first calculated by Newmarch in 1850. " Our index number 
 this mouth is the most sensational record in the whole
 
 TURN OF TIDE IN PUBLIC EXTRAVAGANCE 357 
 
 history of modern prices." Such is the editorial comment. 
 Actually the index number was 174-5 compared with the 
 basic 100 of 1901-05. Of course index numbers, like other 
 statistics, are to be used with caution, but the evidence of 
 high prices and the connection of the high prices with 
 extravagance is too strong to be denied. A record index 
 number from the middle of last century is a notable high- 
 water mark. It is rather disquieting also that the rise in 
 the month was greater than in any month since the beginning 
 of the war. 
 
 So far the search for the turn of the tide is not very 
 encouraging. And the worst of it is that the rise in prices 
 is not only a sign in our case of national extravagance, but 
 is a sign also of other national troubles. One of the forgotten 
 principles of the old political economy was that a general 
 rise in prices in any country tended to encourage imports 
 and to check exports. The consequence of the combined 
 operation was an adverse balance of trade. Economic 
 principles do not cease to be valid because they arc forgotten, 
 and this particular bit of old learning has been abundantly 
 verified by our foreign trade statistics during the course of 
 the war. Imports are still rising and far above the records 
 of peace, whilst exports are far below, and any expansion 
 is very sluggish. There is nothing new in our having an 
 excess of imports over exports. What is new is the amount 
 of the excess and the way in wliich it is paid lor. Before 
 the war we were paying for the deficit in material exports 
 by " invisible " exports. We were not only paying in this 
 way for all the extra imports, but we were continually 
 adding to our investments of capital abroad. It is said that 
 before the war these investments amounted to about four 
 thousand millions. We are now paying for our excess 
 of imports by the sale of securities abroad or by incurring 
 debts wherever we can get credit. 
 
 The adverse trade balance, and the mode of meeting it, 
 are viewed by the British public and their advisers with 
 apparent equanimity for two reasons, both of them lallacious. 
 One is that the adverse balance seems a flea-bite in the fare
 
 358 WAR FINANCE 
 
 of the four thousand milhons we have to draw upon. It is 
 forgotten that for the present we are selHng the cream of 
 our foreign securities. When we come to the second and 
 the lower classes, how much will America absorb, and at 
 what prices ? The other reason for the popular indifference 
 to the dangerous excess of imports is due to the survival ot 
 the old Free Trade maxim that if you take care of the 
 imports the exports will take care of themselves. It is 
 forgotten that the foundation of this comfortable belief is 
 the more vital maxim that if the imports are not paid for 
 they will cease. In the meantime we are living so far on 
 our capital. 
 
 There is yet another reason for the popular indifference 
 to the excess of imports, a reason which is valid up to a 
 point, but dangerous when carried too far. This is the 
 belief in the unlimited power of British credit. British 
 credit, like other kinds of credit, must rest on real founda- 
 tions. It is not merely a matter of sentiment or prestige. 
 The result of the search for credit in the United States last 
 autumn by the Government and the bankers was not 
 encouraging. On balance we are certainly providing more 
 credit for our Allies than we are receiving from benevolent 
 neutrals. 
 
 It is not only the amount of the adverse trade balance 
 that is or ought to be disquieting, but the quality of it. In 
 the first place, there is an important omission. In the 
 Board of Trade returns no account is taken of imports on 
 Government account for the purposes of the war. How 
 much that may amount to perhaps no one knows accurately, 
 but Sir George Paish, who has been closely associated with 
 the Treasury, stated in his recent optimistic discourse to 
 the London School of Economics that the sum was 145 mil- 
 lions a year. The residual truth remains that a good deal 
 of the adverse balance is due to luxuries. It is often hard 
 to draw the line between luxuries and necessaries. But it 
 is not so hard when a nation is engaged in a great war. In 
 war-time we may class as luxuries all the things that are 
 not needed, directly or indirectly, for the conduct of the
 
 TURN OF TIDE IN PUBLIC EXTRAVAGANCE 359 
 
 war. The term " indirectly " no doubt brings in a good deal 
 of laxity, such as is suggested by the pernicious byword 
 ■' business as usual." But, on the other hand, the conduct 
 of the war is a very healthy saving clause. It reminds us 
 that in many cases the distinction between luxuries and 
 necessaries is not one of kind but of degree only. Grain 
 and sugar may be made into intoxicants, and tea into indi- 
 gestion, although the initial pleasures and the final ailments 
 may be very unevenly distributed amongst the people. 
 Here another of the musty truths of the old economists 
 forces its unpleasantness on the attention. All the con- 
 sumption of the productive labourer is not productive 
 consumption, but only that part that maintains or increases 
 his productive power. The conclusion of this part of the 
 matter is that the adverse balance which is beginning to 
 alarm the Government is not necessary for the conduct of 
 the war, and might be reduced to the great advantage, 
 moral and physical, of the people. 
 
 But although when we look at the records of rising prices 
 and adverse trade balances the tide of extravagance seems 
 to be still running strong, there are some little pebbles and 
 footprints at the extreme verge of the water-mark that 
 seem to indicate that the tide is beginning to turn. The 
 Prime Minister has declared that a million is not a flea-bite, 
 and that every penny counts. The voice is the voice of 
 Gladstone. It is to be hoped that the chorus of approval 
 will be such as it used to be. There can be no question that, 
 as Gladstone once said on a famous occasion, the great 
 cause of the growth of public expenditure is the growth of 
 the spirit of extravagance. In the present war the spirit 
 of extravagance, which had been growing rapidly in peace, 
 instead of being retarded, as it ought to have been, received 
 most stimulating encouragement. Money fell from the air 
 like manna, and all the people said, " It is manna," and 
 they remembered that Moses had said, " Let no man leave 
 of it till the morning." And they spent the money or ate 
 it, and said they felt the better of it. But they forgot that 
 the age of miracles is past. The Prime Minister has reminded
 
 36o WAR FINANCE 
 
 them that a pound is made up of pennies. The people must 
 begin to think, not in millions of pounds, but with the two 
 hundred and fortieth part of a pound as their unit. Instead 
 of saying that a saving of £50,000 on museums would only 
 keep the war going (and only the British part of it) for a 
 quarter of an hour, let them consider rather that if a British 
 soldier costs £150 a year, the despised £50,000 would keep 
 333 soldiers for a year. Instead of talking of silver bullets, 
 let us talk of the real thing. The poorest can give enough 
 to buy a real bullet. A real bullet ought not to cost much 
 more than a penny flag, and any one bullet might account 
 for a German. 
 
 People who are anxious to follow the advice of the Prime 
 Minister, and save a penny for the Chancellor of the Ex- 
 chequer, and do not know how so small a sum can reach 
 so great a money dealer, may resort to a very simple and 
 effective method. It is the penny flag method, without its 
 abuses. Anyone who wishes to give a penny to the State, 
 and is content not to make a public display of his charity, 
 has only to take a new postage stamp and burn it. The 
 burning of the stamp is a sure way of paying a penny (less 
 the negligible cost of the stamp) to the State. The recent 
 increase in postal charges is the compulsory form of the 
 voluntary offering proposed. 
 
 There are other small signs of the turn of the tide. It 
 is rumoured that all the M.P.'s who have no use for their 
 official salary will be relieved of the popular odium attached 
 to its acceptance. The Retrenchment Committee has 
 resumed its labours, and a new committee has been appointed 
 to preach thrift to the people. The device of burning 
 postage stamps is respectfully suggested as a unique com- 
 b' nation of extravagance and saving. 
 
 One of the most hopeful of all the signs of the turn of the 
 tide is the fact that from the end of last year the aggregate 
 amount of the Treasury one pound and ten shilling notes 
 has begun to contract. With the New Year the authority 
 which manages this part of the business of war made a 
 good resolution. The new paper mone}^ had surpassed the
 
 TURN OF TIDE IN PUBLIC EXTRAVAGANCE 361 
 
 hundred millions, and it seemed to him enough. The good 
 resolution was to add no more, or even to contract the old 
 issues. For the four weeks in January the good resolution 
 was kept. The outstanding amount was actually diminished 
 by about five millions. The last week of the month the 
 resolution was a little sickly, and the rate of reduction was 
 lessened. The next week there was a severe relapse and 
 the issues again increased, but the authority pulled him- 
 self together, and by the last return the good resolution is 
 doing well. 
 
 As often explained in the course of these papers, in the 
 opinion of the writer the general rise of prices in this 
 country is partly due to the over-issue of paper money 
 and the consequent relaxation of the checks, which in 
 normal times are imposed on the undue inflation of bankers' 
 credit. 
 
 Before the war the average amoimt of Bank of England 
 notes in circulation was less than thirty millions. At the 
 end of last year it is true that this amount had only been 
 increased by some five millions. But in addition there 
 had been issued more than a hundred millions of the new 
 Treasury notes. That is more than £2 per head of popula- 
 tion, and is pretty well for a country that boasts that its 
 currency is the cheque. In France, where the cheque 
 system is little developed, the notes have been a little 
 more than doubled, whilst with us the increase has been 
 over threefold. 
 
 Our bankers turn longing eyes to the stores of gold held 
 by France. If only they could get fifty millions as required 
 to help the American exchange how happy they would be 
 ■ — for the time. But how long would the relief last if the 
 present rate of importation is to continue ? Let us be 
 just. Our adverse trade balance is due largely to our 
 own extravagance. On the other hand, the additions 
 made by France to her gold reserves have been collected 
 from the people, and special gold certificates given in 
 return. 
 
 Fortunatel}^ it seems as if this high tide of extravagance
 
 362 WAR FINANCE 
 
 had begun to turn. It is to be hoped that the httlc signs 
 will be followed by greater and more certain evidences. 
 The coming Budget will be looked for with the expectation 
 that a real check will be placed on the extravagance of the 
 national consumption.
 
 CHAPTER XXIX 
 THE BUDGET 
 
 {April 12, 1916) 
 
 " With all its imperfections we may perhaps say of it 
 what was said of the laws of Solon, that though not the 
 best in itself, it is the best which the interests, prejudices, 
 and temper of the times would admit of. It may perhaps 
 in due time prepare the way for a better." Such was the 
 comment made by Adam Smith on the system of Corn Laws 
 established by a statute passed some three years before the 
 publication of the " Wealth of Nations." Adam Smith's 
 opinions of questions of economic policy^ — even on Corn 
 Laws^ — were never purely theoretical, but were always 
 revised in the light of historical development and the 
 circumstances of the time. The praise and the hope of the 
 sentence quoted may be transferred to the present Budget, 
 and the speech with which it was introduced. The interests, 
 prejudices, and temper of the times have forced the Chan- 
 cellor of the Exchequer to leave undone some of the things 
 which he ought to have done or might have done. But 
 the Budget as it stands has very great merits, and so had 
 the speech. The speech was a model of lucidity and of 
 brevity. The arithmetical peroration was far more forcible 
 than the resounding eloquence of which Mr. Gladstone set 
 the fashion. " We are raising £300,000,000 in the present 
 year by new taxation imposed since the war, while Dr. 
 Helfferich announces a doubtful increase of £24,000,000." 
 From the artistic point of view the peroration should have 
 ended with the paltry twenty-four millions of the Germans. 
 The praise of our civic courage is not so convincing. Records 
 in drinking and amusements, excess profits and strikes,
 
 364 WAR FINANCE 
 
 extravagance and fictitious prosperity, are more suggestive 
 of business as usual than of civic courage. In persons and 
 in places, no doubt, from the highest to the lowest, there 
 have been evidences of civic courage, but the fact remains 
 that hitherto the masses of the people have not felt the 
 real burden of war, and that too many of the classes have 
 made greater fortunes or made higher incomes than they 
 could ever have obtained biit for the war. 
 
 To return to the arithmetic ; the Budget has great merits. 
 There are many rules of taxation which it is well to observe, 
 but in time of war they must all give way to the great rule 
 of productiveness. Mr. McKenna's taxes are all productive 
 as they stand, and it is to be hoped they will not be whittled 
 down in deference to interested objections. It is true that 
 the first of Adam Smith's rules for taxation is equahty, 
 and by equality we mean justice as between classes and 
 between the members of any class. In the new Budget 
 equality is not altogether neglected. It would be well if, 
 with due regard to productiveness, still greater equality 
 could be attained. 
 
 In the income tax^ — and in the main the Budget is an 
 income-tax Budget- — there is a rough progression. If the 
 progression were less rough, it would be more equitable, 
 and probably more productive. A parliamentary paper 
 has been issued giving some illustrative figures. Here is 
 an example. A person with ;^i,ooo a year earned income 
 pays at the rate of 2s. 6d. per pound — i.e., £125. A person 
 with an income of £1,001 a year of earned income pa^^s at 
 the rate of 3s. per pound^ — i.e., £150 3s. That is to sa}-, if 
 a man earns one pound more he has to pay twenty-five 
 pounds more tax. A difference of twenty-five pounds on 
 practically the same income seems absurdly unequal. \\'ho 
 would be so foolish as to earn the extra pound, or twenty-five 
 pounds, or if he earned it would not do his best to evade 
 the tax ? A continuous progression such as is adopted in 
 some of the Australian land taxes would get rid of such 
 glaring anomalies. 
 
 The history of the British income tax and the changes
 
 THE BUDGET 365 
 
 in public opinion regarding it are instructive. During part 
 of the Napoleonic wars the income tax was submitted to 
 as a war tax, but it was probably the most umpopular of 
 all the taxes. As soon as peace was declared there was an 
 outcry, led by the City of London, for the repeal of the tax. 
 The Government wished for its continuance, but were 
 defeated, and " the result was declared amidst the greatest 
 cheering and the loudest exultation ever witnessed in the 
 English Senate." Lord Brougham thereupon moved that 
 all the records of the tax be destroyed, and the motion was 
 adopted by an overwhelming majority. The tax was renewed 
 with reluctance by Peel in 1842, and was strengthened 
 by Gladstone in 1853. By way of apology he delivered a 
 speech about five hours in length, of which the part that 
 has become immortal is his declaration that " in my indi- 
 vidual opinion it is perfectly plain from the mode in which 
 it was put an end to at the termination of the great war 
 that it is not adapted for a permanent portion of your fiscal 
 system unless you can remove what are called its inequali- 
 ties. Even, however, if you could remove its inequalities 
 there would still remain, in my mind at least, objections of 
 the gravest character." As everyone knows, the income 
 tax was continued by Gladstone himself, and since his day 
 has been increased, until at present it is by far the most 
 important part of our tax system. Coincidently with this 
 growth of the tax and of its yield there has been a corre- 
 sponding change in public opinion in its favour. 
 
 This great change in public opinion has been mainly due 
 to the removal of some of the inequalities and of some of 
 the other objections which Gladstone had in mind. Next 
 to the inequalities the greatest of the objections was the 
 power of evasion. Taxation at the source and other devices 
 have lessened the evasion in normal times, and the rise in 
 the Hmit of exemption with the introduction of progression 
 and differentiation have lessened apparent inequalities of 
 sacrifice. But the enormous rise since the war has empha- 
 sised the inequalities that remain, and introduced others. 
 Judging by the experience of the past in our own and in
 
 366 WAR FINANCE 
 
 all other countries, a tax that can be evaded will be evaded, 
 and the higlier the tax the greater the desire to evade. If 
 all the excess profits of the war are really subjected to their 
 full taxation according to law, we shall have the greatest 
 example on record of civic courage and the power of con- 
 science. 
 
 If, as seems probable, the income tax must perforce 
 remain at a very high rate for long after the conclusion of 
 the war, it is highly desirable that as far as possible it should 
 be freed from new inequalities and new incitements to 
 evasion. 
 
 When we look to the distribution of the new taxation 
 between different classes of the community — especially as 
 between the income tax-payers and the others — there is not 
 much observance of the rule of equality except in the breach. 
 The increase in indirect taxation has not yet been sufficient 
 to check the extravagance of which such complaints have 
 been made, and the new taxes are limited both in extent 
 and*in degree. Hitherto the rise in the price of sugar has 
 had practically no effect on consumption, and the new taxes 
 on sugar, chocolate, and the like will probably have no 
 more effect if the rise in wages continues. 
 
 For " the willingness displayed by our citizens as a whole 
 to submit to the exactions of the tax-gatherer " Mr. McKenna 
 said he could find no parallel. So far as the masses of the 
 people are concerned, the willingness has not been very 
 severely tested, and the proposed railway tax is already 
 resented in the interests of labour. The payment of war 
 bonuses in war bonds was long ago suggested, but the 
 willingness of the workers to submit to this mildest of all 
 forms of taxation — if deferred payment with the best 
 security in the world and 5 per cent, interest can be called 
 taxation^ — was not tested. The prejudices of the times do 
 not admit of so great an interference with the liberty of 
 labour to do as it likes with its own property. 
 
 The consequences of this reluctance to impose taxes on 
 the non-payers of income tax will only be fully realised at 
 the end of the war. In many games and in most businesses
 
 THE BUDGET 367 
 
 a stroke must be judged, not only by itself, but by the 
 position it leaves. Considered as an emergency Budget, 
 the present Budget is a success in raising a great revenue 
 for immediate needs. But what about the general position 
 that it leaves ? Can the present taxes be continued after 
 the war ? How can a tax of 5s. in the pound on so-called 
 unearned incomes be retained when the restrictions on 
 foreign investment are removed ? Such a heavy tax will 
 not only encourage the export of capital, but also hinder 
 its accumulation. The super-taxes will have similar effects. 
 Heavy taxes on earned incomes are sure to react on pro- 
 ductive power, and, as earned and unearned incomes are 
 inseparably blended in practice, to react also on capital. 
 The merchant, said Adam Smith, is a citizen of no par- 
 ticular country. A very trifling disgust will make him move 
 his capital from one country to another. The present 
 income tax on the higher incomes, if continued after the 
 war, will be reckoned as more than a trifling disgust. 
 
 " An old tax is no tax " is one of the wisest of financial 
 maxims. But it never applies to the income tax. The 
 income tax is always felt, and whatever adjustments may 
 be made the tax comes out of the income that is left. Taxes 
 on commodities or on services in the course of time become 
 part of the customary price. The man who drinks a glass 
 of beer has no idea how much of the price is tax. It is 
 certain that the same revenue could not be obtained from 
 the same people by any device of direct taxation. 
 
 It is often forgotten that the income tax-payer is also a 
 payer of indirect taxes. To the ordinary professional man 
 the extra income tax lops away his usual margin — even if 
 his income has not fallen — and his household expenses 
 increase with every tax on articles of general consumption. 
 But even to the income tax-payer of this class after a point 
 indirect taxation is less burdensome than another penny 
 or another sixpence in the pound. 
 
 These considerations become of increasing importance 
 when we look to the financial position that will be left on 
 the conclusion of peace. Mr. Mclvenna gave a summary
 
 368 WAR FINANCE 
 
 of the position on the supposition that the war ended with 
 the present financial year on March 31 next. The statement 
 is admirably clear, but there is an omission which may 
 easily be converted into a false suggestion of optimism. 
 The suggestion is not warranted, but that is true of most 
 suggestions. 
 
 After the war — (say) March 31, 1917 — our peace expenditure 
 is put down as £338,000,000. The yield of the present 
 Budget, which is described in ominous terms as revenue of 
 a possible permanent character, is given as £423,000,000. 
 This will leave an apparent surplus of £85,000,000. 
 
 But consider how the post-war expenditure is calcu- 
 lated. The expenditure (apart from the charge for debt) is 
 put at the same annual figure as before the war — namely, 
 £173,000,000. Of this sum, according to the last estimates 
 before the war, £77,000,000 were assigned for the Army 
 and the Navy, including the non-effective charges. Our 
 own net war expenditure (not counting advances to our 
 Allies) for the present financial year is stated as£i, 150, 000, 000, 
 which is about fifteen times as much. In a world war such 
 as this, even after the declaration of peace, it will be neces- 
 sary to keep up large forces by way of insurance against a 
 renewed outbreak or the non-fulfilment of the conditions. 
 One of the greatest of the financial difficulties of the future 
 will be the indisposition (to use no stronger term) to rely on 
 German promises not backed by material guarantees. In 
 the last resort the material guarantees can only be main- 
 tained by the military forces of the Allies, and this country, 
 as the richest, must bear the lion's share of the charges. It 
 seems quite obvious that, even if the war is ended next 
 March, our next financial year will see this country still 
 making large additions to its debt. The estimated surplus 
 of £85,000,000 will certainly not suffice to meet the post-war 
 military and naval charges for some time to come, and it 
 is quite possible that with the new demands the old days 
 of " bloated armaments " of £77,000,000 a year will never 
 be restored. 
 
 The same result is arrived at if we consider the pre-war
 
 THE BUDGET 369 
 
 civil expenditure. We have to take account of the rise ni 
 prices, and to take account also of the demands that will 
 be made for greater Governmental interference and manage- 
 ment. Are we not told that we can never revert to our 
 former ideas of laisser faiye, and that more and more Govern- 
 mental organisation must be arranged for — and paid for ? 
 
 The remainder of the £338,000,000 of estimated expendi- 
 ture is made up of a total debt charge of £145,000,000 and 
 £20,000,000 for pensions. The debt charge is reckoned on 
 what is called our net debt, which is arrived at after a 
 deduction of some £800,000,000 for advances to our Allies 
 and Dominions. How much of this amount and how soon 
 will be recoverable it is not possible to say, but it is quite 
 clear that our own net charge will not be freed from this 
 addition in the next financial year. Accordingly, just as 
 the pre-war charge (less debt) of £177,000,000 is sure to be 
 much exceeded, so also is the estimate of £165,000,000 for 
 debt charge and pensions. The surplus of £85,000,000 will 
 thus become a German kind of accounting surplus instead 
 of a British real surplus. 
 
 The debt charge of £145,000,000 is said to include a 
 substantial charge for sinking fund. It will be time enough 
 to speak of sinking funds when the debt has ceased to grow, 
 of which there is very little prospect for some time after the 
 conclusion of peace. 
 
 One short paragraph of the Budget speech was devoted 
 to the possibility of economies. The Chancellor of the 
 Exchequer said that he would be disappointed if serious 
 economies were not effected in the course of the year. He 
 alluded to the admirable work of the Committee presided 
 over by Mr. Long. But the hope was shattered in the next 
 sentence : " On the other nand, we must not forget that 
 there has been a material rise in prices, and the result of 
 the economies may do no more than make up for the increased 
 charge from this cause." 
 
 As often pointed out in these papers, the rise in prices 
 is one of the principal contributory causes of our financial 
 inconveniences. The adverse balance of trade, the extent
 
 370 WAR FINANCE 
 
 of the excess of war profits, the persistent recurrence of 
 labour disputes, are all aggravated by the rise in prices. If 
 there is any truth in the principles which were accepted 
 both in theory and in practice in this country before the 
 war, an inflation of the currency and of the credit based 
 upon it is certain to lead to a rise in prices. As yet there is 
 no indication of any contraction of the inflation. The effort 
 of January — if it was an effort and not an accident— soon 
 collapsed. Since the end of January the outstanding 
 Treasury notes and certificates have been increased by 
 nearly twelve millions, the greatest weekly increase being 
 that for last week. 
 
 We are ready enough to admit the sequence of cause and 
 effect in Germany. We think that in Germany the over- 
 issue of paper money of all kinds raises prices, though in 
 Germany the other great cause of rising prices- — namely, 
 scarcity — is operative. In our own case we are content 
 to suppress the symptoms of a depreciating currency. We 
 keep up the American exchange by the export of securities 
 bought with public money. This last month our imports 
 have increased by some ten millions over March of last 
 year, and nineteen millions over March of 1914 (the exports 
 being nine millions less). 
 
 In the current number of the Economic Journal, the 
 quantitative theory of money is applied by a Swedish expert 
 to the principal countries. After describing the difficulty 
 of calculating the quantit}^ of the circulating medium, he 
 writes :■ — 
 
 " Nevertheless, it has been possible to prove that the advance 
 in the general level of prices such as shows itself in the index 
 numbers of Mr. Sauerbeck (continued by the Statist) is, broadly 
 speaking, proportional to the increase of the circulating medium 
 of the country, and thus that the enhancement of prices is 
 essentially to be regarded as an expression of the inflation of 
 money."
 
 CHAPTER XXX 
 THE RATE OF INTEREST ON BRITISH WAR LOANS 
 
 {May 27, 1916) 
 "Unto thy brother thou shalt not lend upon usury." 
 
 About one hundred and fifty years ago Adam Smith 
 observed that in Great Britain money was lent to the 
 Government at 3 per cent, and to private people on good 
 security at 4 or 4! per cent. A difference in favour of British 
 Governmental securities before the present war had come 
 to be accepted as a kind of law of nature. The British 
 Government could borrow at less rates than private people 
 and at less rates than other Governments. At present a 
 comparison of the rates of interest on British war borrowings 
 seems to show that this difference in favour of the British 
 Government has disappeared, or is fast disappearing. 
 
 Before the war the rate of interest at which a Government 
 could borrow was commonly supposed to be the simplest 
 and surest test of national credit. The rate was usually 
 estimated by the yield on the purchase price of the stock 
 that represented the chief form of the national debt. In 
 this country the price of Consols was regarded as the national 
 credit barometer. In the decade before the war one-half 
 of the present Coalition Government (the new half) was 
 criticising the other half (the old half) for the fall in the 
 price of Consols. It is true, whatever may have been the 
 causes, that the differential rate in favour of British Govern- 
 mental securities was not so great as it had been in former 
 decades, but it was still there, and tried by this test British 
 Governmental credit still led the field. 
 
 What are the facts at the present time ? The Government 
 is advertising in all possible ways its Exchequer bonds
 
 372 WAR FINANCE 
 
 bearing 5 per cent, interest and redeemable in December, 
 1920. The lure is adapted to the banker, who does not look 
 at a less unit than a thousand pounds, and to the working 
 man, who is invited to invest 15s. 6d., which will grow into 
 a nice Christmas-box of a pound in 1920. In brief, anyone 
 can lend to the British Government as much as he likes at 
 5 per cent, for five years. As an additional inducement the 
 holders of the bonds are promised that in case a long period 
 loan is issued at a higher rate of interest, they can transfer 
 into the new loan without loss and without the provision 
 of any " new money." That is to say, the Government is 
 not only borrowing at 5 per cent, actual, but is giving a 
 conditional promise to raise the rate in the future. Besides 
 borrowing by bonds, the Government is also borrowing in 
 the same unlimited way by means of Treasury bills for a year 
 and lesser periods. The rate of interest in the case of the 
 yearly bills works out at about 5j per cent, on the money 
 received. There are also certain advantages in calculating 
 income tax which make the bills a better investment for 
 the lenders and a more costly mode of borrowing for the 
 Government, but in practice the bills are not available to 
 the ordinary investor. 
 
 The foreign investor in our Exchequer bonds is freed from 
 any payment of income tax or any other tax, present or 
 future. The loan placed in the United States for exchange 
 purposes was on a 6 per cent, basis (also with certain 
 privileges) . 
 
 But leaving out of account any privileges, and taking the 
 rate paid by the State at 5 per cent, only, how does this 
 rate compare with other rates in the home countr}^ ? The 
 Scottish banks are paying only 3 per cent, on deposits. Of 
 course, the right of withdrawal at any time of the principal 
 without depreciation has a market value, but it seems 
 surprising that any ordinary investor should leave his 
 money with a bank at 3 per cent, rather than with the 
 Government at 5 per cent, if the principal is to be repaid 
 in five j^ears. The proper comparison, however, is not with 
 bank deposits, but with money lent on mortgage or deben-
 
 RATE OF INTEREST ON BRITISH WAR LOANS 373 
 
 tiires and the like. In the advertising cohimns of the news- 
 papers we see mortgage companies, local corporations, 
 boards, and trusts of various kinds offering to take money 
 at 5 per cent, for five years, with lesser rates for shorter 
 periods. In these cases there are no contingent promises 
 to pay higher rates, and there is no appeal to patriotism. 
 
 The comparison with other Governments is not much 
 more satisfactory. Naturally, one would have supposed 
 that in a world war the comparative rate of interest paid by 
 the British Government would have been still more in its 
 favour than in times of peace. Relatively, the security 
 offered by the British Government seems much greater than 
 in the case of any other of the belligerents. But if we look 
 at the rates of the war loans of the other States, we find that 
 Germany has issued its loans at 5 per cent., and even Russia 
 has issued internal loans at 5 per cent. 
 
 The method of borrowing for short periods has its con- 
 veniences, but it also has its dangers. The borrowings of a 
 Government in a great and prolonged war are always in 
 reality long-period borrowings. In the so-called short-period 
 method (or the method of continuous borrowing, as it has 
 come to be called by its advocates) the moneys borrowed 
 must be continuously repaid. Failing surplus revenue from 
 taxation, they can only be repaid by fresh borrowings. 
 There will certainly be no real surplus revenue at the end 
 of next year, and probably not at the end of five years. In 
 December, 1920, it is extremely unlikely that even one 
 hundred millions will be available from taxation to pay off 
 the short-term Exchequer bonds. Of course, the security 
 is perfect, but the bonds can only be repaid out of fresh 
 borrowings. The Treasury bills, already exceeding 
 £600,000,000, must, of course, be renewed from time to 
 time as they fall due. 
 
 The method of short-term borrowing cannot be extended 
 indefinitely, and some time a new big long-period loan must 
 be floated. Already we are told that it must have new 
 attractive features, which, being interpreted, means that, 
 directly or indirectly, the Government must be asked to
 
 374 WAR FINANCE 
 
 pay more than they have hitherto offered for a permanent 
 loan. 
 
 What, then, is the conclusion ? Are we to say that the 
 credit of the British Government is no better than that of 
 a common investment company ? No better than that 
 of the German Government ? After all the fanfares of our 
 trumpeters and the resounding thumps of our drummers, 
 are we to confess that we are to be put with the common 
 herd of Governments, and pay more than 5 per cent, to 
 the home investor, and more than 6 per cent, to the American 
 lender (if any) ? 
 
 Fortunately, there is an alternative explanation. It is 
 not altogether flattering to our business methods, but it 
 is preferable to the other : the explanation — namely, that 
 the British Government has paid higher rates of interest 
 than it ought to have paid. Instead of following the rise at 
 its usual respectable distance. Governmental borrowing has 
 led the rise in the rate of interest, and other first-class 
 borrowers have come lumbering after. As a natural con- 
 sequence, the capital value of all first-class securities has 
 depreciated, much to the inconvenience of financial institu- 
 tions, which are large holders. 
 
 This depreciation (or the fear of it) and the desire to pro- 
 vide a remedy (or prevent it) has induced the Government, 
 in addition to the actual interest, to offer those other induce- 
 ments, which are perhaps best described as war bonuses. 
 When the Government issued its first loan, for what now 
 seems to be the small amount of 350 million pounds, the 
 nominal rate of interest was, indeed, only 3I per cent. But 
 the price of issue was 95, and practically the loan was on a 
 4 per cent, basis. In addition to the interest there was 
 offered a most extraordinary bonus. The Bank of England 
 guaranteed for a period of three years to lend on this security 
 at I per cent, below Bank rate up to the value of the price 
 of issue. As a rule a common bank will only lend with a 
 good margin, but here we find the premier Bank of the world 
 actually lending more than the value of the security at 
 I per cent, below its own minimum. The fact would seem
 
 RATE OF INTEREST ON BRITISH WAR LOANS 375 
 
 incredible — one would suppose there was some unofficial 
 way of evading so odd a bonus — but the recent bankruptcy 
 of a noble Duke showed that the privilege had been used 
 for a good-sized speculation, his share in the gain being 
 put at ten thousand pounds. No doubt the underlying 
 idea in this bonus was that the privilege would prevent the 
 depreciation of the stock, and it was never imagined that 
 the price of the stock could fall, as it has done, to 87. 
 
 In the next long-period loan the nominal rate of interest 
 was 4h per cent., but there was the extraordinary proviso 
 that if any new long-period loan was issued at a higher rate 
 the old stock would automatically receive the benefit of the 
 rise. In that way it was supposed that this stock could 
 never be depreciated. The idea was that as soon as any 
 depreciation was threatened, the Government would have 
 to borrow at a higher rate, and the rise in the rate would 
 check the depreciation. This argument was supported by 
 another, which, indeed, was ostensibly the chief argument— 
 namely, that no one would have any reason to wait and 
 see if the next loan would give a better rate. 
 
 Not only was the attempt made to provide against the 
 depreciation of the new 4I per cent, loan, but provision 
 was also made for reducing the depreciation already incurred 
 in the old Governmental loans. Holders of these old securi- 
 ties (Consols, 3I per cent. War Loan, etc.) were enabled to 
 convert their holdings into the new loan (with its new 
 privilege) if they provided a certain amount of " new 
 money." On balance there was a considerable gain to the 
 converters, and a corresponding increase in the debt charge 
 to the State. 
 
 As already pointed out, the Government is now borrowing 
 by the continuous method at 5 per cent, (or more). Judging 
 by the progressive rise of the rate of interest in the past, 
 we may expect the next long-period loan to be issued at a 
 still higher rate, directly or indirectly. The new attractive 
 feature that is being asked for is a partial exemption from 
 income tax. The collection of the full 5s. income tax at 
 the source is certainly troublesome, inequitable, expensive,,
 
 376 WAR FINANCE 
 
 and deterrent. On the other hand, any remission means 
 that the Government has to pay so much higher rates on 
 its borrowings. 
 
 In the meantime the incubus of the automatic rise on the 
 4| per cent, long-period loan has given great encouragement 
 to the short term or continuous method. But if the war is 
 prolonged and new long-period loans become inevitable the 
 automatic rise in the rate of interest, which applies also to 
 the 5 per cent, bonds, becomes expensive. If we allow for 
 the automatic incubus a new long-period 6 per cent, may 
 involve extra incubus payments which will make the real 
 rate on the new money 7 per cent, or more, according to 
 the size of the old loans. If the policy of the automatic 
 rise is continued, and if every new loan at a higher rate 
 must drag up all its sinking older brothers, the arithmetic 
 becomes worse than expensive^ — ^it becomes absurd. 
 
 What, then, is the practical conclusion ? The only use 
 of criticism in war-time is to lead to improvement in the 
 future. It is perhaps too late to go back on the 5 per cent. 
 M^hich has already become the Governmental effective rate, 
 and if a new loan is issued at any higher rate, then also the 
 automatic rise must be submitted to. But it is never too 
 late to apply the principle of limitation. It is a mistake to 
 suppose that a rise in the rate of interest is necessary with 
 every new loan. Five per cent, on internal loans issued by 
 the British Government ought to be the maximum in the 
 strict sense, and ought not to be exceeded by bonuses of 
 any kind, direct or indirect. If people were made to under- 
 stand that under no circumstance would the Government 
 offer more than 5 per cent, on its internal loans there would 
 be no hanging back in the hope of better terms. The auto- 
 matic incubus would cease to grow, and the decision between 
 short-term and long-term borrowing could be taken on its 
 merits. With £600,000,000 of Treasury bills outstanding 
 (not to mention the bonds), the time for deliberation seems 
 to have come. 
 
 But it may be rejoined : Suppose that 5 per cent, will 
 not draw out the money ? Suppose that the people prefer
 
 RATE OF INTEREST ON BRITISH WAR LOANS 377 
 
 3 per cent, on deposit receipt or 10 per cent, on good rubbers 
 or breweries ? Or suppose that they put the money in 
 business and trade ? What is the Government to do then ? 
 The answer is to be found in the blessed word " compulsion." 
 Long ago Mr. Bonar Law warned the public that if they 
 did not subscribe to the voluntary war loans they would 
 be compelled to subscribe to a forced loan. There ought 
 to be no difficulty in the admission of the principle. In the 
 face of compulsion on life the objection to the compulsion 
 on money is negligible. It is to be observed also that from 
 the very beginning of the war the method of the forced loan 
 was adopted in an indirect or concealed manner. The 
 restrictions on other investments by the Treasury forced 
 money into the Governmental channels. The fixation of 
 minimum prices on trustee securities meant that the yield 
 on the price was a forced low yield. At the same time, the 
 higher rate of interest paid by the Government made these 
 old securities unsaleable at their minimum prices. Limita- 
 tions have also been imposed on business profits either by 
 regulation or taxation, and the general opinion is that this 
 principle of limitation has not yet been applied with sufficient 
 stringency. It might well be extended. 
 
 In matters of principle, and especially in cases that concern 
 freedom of contract, the opinion of Adam Smith is always 
 to be considered, because no man ever maintained so fully 
 and so sanely the principle of natural liberty. But this same 
 Adam Smith approved of a legal maximum of the rate of 
 interest even in peace times. He considered 5 per cent, a 
 fair legal maximum in his day. We have given up the idea 
 of a legal maximum in peace time — no doubt with advan- 
 tage — but in war we arc constantly thrown back on the 
 methods of earlier times. War in a sense is a reversion to 
 economic barbarism — or, let us say, to lower stages of 
 economic development. 
 
 A forced loan is by no means so horrible as it may appear 
 at first sight. To compel a patriot to save £100, and accept 
 5 per cent, interest for lending it to the State, is not a very 
 oppressive kind of compulsion. Many a professional man
 
 37^ WAR FINANCE 
 
 who managed to put away (say) £ioo in the year now finds 
 that the income tax on the top of other war charges absorbs 
 all the ;^ioo. In this case the State may- be said to take 
 from him a forced loan, on which it pays no interest and of 
 which it never repays the principal. There is no difficulty 
 about the morality of a forced loan in war-time, or of a 
 limitation of the interest to' be paid by the State to a reason- 
 able figure. The real diihculty is in the practical methods 
 by which the plan may be realised. A short time ago the 
 bankers and great financiers issued a manifesto on the need 
 for economy on the part of people in general. They did 
 not mention the economy in the interest to be paid on war 
 loans. Now is their opportunity.
 
 CHAPTER XXXI 
 
 THE PARIS ECONOMIC CONFERENCE 
 
 [July I, 1916) 
 
 During the course of the war occasional echoes have been 
 heard of the fiscal controversy that shook the country ten 
 years ago, and was the dominant issue of a General Election. 
 In general, however, it has been recognised that a state of 
 war ought to be a state of silence on party issues. Ministers 
 of the Coalition have pushed the self-denying ordinance 
 to an extreme. When the exigencies of the war made a 
 check on imports desirable, Ministers of both complexions 
 were careful to explain that there was no question of any 
 change of principle. The restraints on imports were war 
 measures pure and simple. The explanation seemed so 
 reasonable that most people were surprised at the mildness 
 of the war measures actually adopted. 
 
 The recommendations of the Paris Economic Conference 
 raise issues which cannot be passed over so lightly. They 
 involve a full consideration of the principles which are to 
 guide the policy of the Allies, not only during the period 
 of the war, but also in the period of reconstruction after the 
 war and in the more remote future, when, to put it in the 
 concrete, the Kaiser is as dead as Queen Anne. 
 
 It is much to be desired that, in the necessary discussion 
 of principles, people should recognise that the old arguments 
 for the most part need a readjustment of emphasis. The 
 readjustment is as necessary for the pre-war Tariff Reformer 
 as for the pre-war Free Trader. Such a readjustment of 
 emphasis may be best accomplished by going back to Adam 
 Smith. The greatest of Free Traders (as he was the greatest 
 of economists) admitted in every part of the Free Trade 
 system that on occasion the rule must yield to the exception.
 
 38o WAR FINANCE 
 
 The present war has shown that some of his recognised 
 exceptions are now of vital importance. The most stahvart 
 of Free Traders need not be ashamed to follow in the foot- 
 steps of his great master. At the same time, the most ardent 
 of Tariff Reformers will find that the question of Customs 
 duties or prohibitions is only one of the measures of mutual 
 assistance and collaboration among the Allies taken account 
 of in the report of the Conference. The truth is that the 
 war has in part revealed and in part created conditions 
 which render the pre-war modes of thought inappropriate. 
 The war has revealed the extent and the nature of German 
 penetration in the past, and made equally clear thel^ind of 
 penetration that is contemplated for the future. But 
 although the gravity of the German peril was the basis of 
 the whole discussion at the Conference, it is doubtful if it 
 is adequately realised by the people at large. And it never 
 will be realised if it is supposed that the principal question 
 is a question of Free Trade or Protection under ordinar}' 
 peace conditions. 
 
 The text of the Conference report begins with the declara- 
 tion that the Central Empires, after forcing upon the Allies 
 a mihtary contest in spite of all their efforts to maintain 
 peace, are to-day preparing, in concert with their allies, for 
 a contest on the economic plane which will not only survive 
 the re-establishment of peace, but will at that moment attain 
 its full scope and intensity. From the German point of 
 view, it is now clear from varied evidence that the main 
 cause of the outbreak and of the continuance of the war 
 has been the hope of economic gain. Germany wanted an 
 expansion of overseas colonies and an expansion through 
 South-Eastern Europe into Asia. Apart from territorial 
 expansion it was desired that the whole economic position 
 should be strengthened. Long before the war the prepara- 
 tions had been made by what was called the method of 
 peaceful penetration. We were surprised at the outbreak 
 of war to find how far this penetration had extended even 
 in this country ; but in other countries and in other parts 
 of the Empire this penetration had been much more exten-
 
 THE PARIS ECONOMIC CONFERENCE 381 
 
 sive and dangerous — dangerous in the most elementary 
 sense of the word to national independence. In Russia the 
 German influences were as dangerous to the ruling classes 
 as vodka to the peasantry. The change of name from 
 Petersburg to Petrograd was a sign of the national reaction 
 against the Germanisation of Russia. The relative weakness 
 of Russia until these last days is mainly to be ascribed to 
 this Germanisation. In Italy the German influence was still 
 greater and more pernicious. Even now Italy is not tech- 
 nically at war with Germany, and the delay in joining the 
 Allies, in spite of the popular determination, has made the 
 task of Italy doubly hard. Even in the United States in 
 recent years attempts have been made to check the natural 
 assimilation of the German immigrants and to make their 
 adopted country of secondary importance as regards 
 political obligation. 
 
 This part of the case cannot be too strongly pressed upon 
 the British public. They must be brought to understand 
 the extent and meaning of the peaceful German penetration 
 before the war. At first too much attention was directed 
 to the ideas of the militarism of the ruling caste and of the 
 anti-religious German philosophy. The relapse of Germany 
 into barbarism in its military methods and its treatment of 
 conquered countries could not fail to seize the popular 
 imagination. Criminology is always more popular than 
 political economy. A book of celebrated murder trials is 
 always more interesting than a history of commercial crises. 
 Peace has her victories no less than war, but the victories 
 of peace are only realised with difficulty and at long intervals. 
 And so also are the defeats. We have been slow to realise 
 both the triugiphs of German organisation and the disasters 
 of German peaceful penetration. The foundation of the 
 recommendations of the Paris Conference is the recognition 
 of the dangers of German peaceful methods. The dangers 
 of the future can only be avoided by realising the dangers 
 of the past. The Government should take care that the 
 people are well informed on the real meaning of German 
 peaceful penetration.
 
 382 WAR FINANCE 
 
 The proposals of the Conference, as already indicated, 
 are introduced by a reference to the preparations by the 
 Central Empires for an economic contest immediately on 
 the declaration of peace. Already in this country the ques- 
 tion is being asked by the supporters of our traditional 
 laisscr faire : Where is the evidence ? It surely cannot be 
 expected that Germany should publish in the middle of the 
 war its particular plans for the economic contest in olhcial 
 papers. But there is abundance of material in current 
 German literature to show that the econoniic contest is to 
 be more determined than before the war. The best pre- 
 sentation of the German case is given in the book on Central 
 Europe by Herr Friedrich Naumann (see Part I., Chap. 
 VIII., p. 130). It is to be hoped that the translation will 
 be as widely read as the famous " J 'accuse." Herr Naumann 
 writes with great restraint. Of hatred against England 
 there is not a word. On the contrary, there is more often 
 outspoken admiration of English political methods in 
 dealing with dependent nations. Germany, he thinks, must 
 rely more on the consent of the governed and less on military 
 force. He admits that the Germans are disliked all the 
 world over. He accounts for this universal dislike partly 
 by envy — the envy of other nations of German organisation. 
 Perhaps disgust with German penetration would be a truer 
 description of this part of the emotion. But also Herr 
 Naumann admits that there has been too much of stamping 
 everything with the Prussian stamp and the Prussian heel — 
 too much despotism and too little freedom. The German, 
 he sa^^s, must imitate the Briton in the arts of conciliation 
 and toleration of diversity. The advice is good, and it seems 
 simple — as good and as simple as telhng a sinner to get 
 his soul saved. Herr Naumann, it is stated, was once a 
 pastor. He must have been a very delightful minister. In 
 the middle of the war, in the middle of Germany, he has 
 written a most popular book, without a sentence to which 
 any censor in the wide world could object, though it is 
 surprising that some of it has been passed in German}* itself. 
 But there is a good deal of golden silence just at the danger-
 
 THE PARIS ECONOMIC CONFERENCE 383 
 
 points, and a good deal of commendation of the Kaiser at 
 fitting moments. There is in particular one Wagnerian 
 passage of such glory that the Kaiser himself might be 
 expected to put it to music. 
 
 Such being the pleasant character of the book, what is the 
 real argument ? What are the basic ideas which have 
 given it such a vogue in Germany in spite of the pro-Briton 
 flavour ? The answer is that the book displays, in the most 
 sohd argumentative, fateful manner the nature of the 
 coming economic contest. 
 
 Germany, on this view, is not strong enough even econo- 
 mically to stand alone. Germany and Austria-Hungary 
 must be fused into a super-State, able to stand against the 
 other three great world super-States, Greater Britain, Russia, 
 and the United States. The union with Austria and Hungary 
 is to be the foundation of the new Central Europe. The 
 absorption of the neighbours that arc suitable will come in 
 due course- — first the Balkan States and Turkey, to be 
 followed, it is to be hoped, after sufiicient penetration, by 
 Italy, and shortly the rest of Jiurope with the exception 
 of Russia. But to begin with, the Central Empires after 
 the war are to achieve a super-State economic and military 
 solidarity. 
 
 In spite of the pleasantness of the literary dress, there is 
 no concealment of the belief that the present war will be 
 the forerunner of still greater wars. And in these greater 
 wars the economic structure and strength will be of vital 
 importance. If anyone wishes to get a preliminary idea 
 of the kind of economic contest against which the Paris 
 Conference sought to provide, let him look at the substance 
 of Herr Naumann's argument. This argument may be 
 taken as giving the minimum of the effort at reorganisation 
 that is to be made. Even a smashing military victory on 
 our part cannot in itself prevent the development of a 
 Central European organism of greater economic power than 
 Germany at the outbreak of the war. 
 
 It is interesting to observe that in the building up of this 
 new Central Europe the question of tariffs is looked on as
 
 384 WAR FINANCE 
 
 of minor importance. Althougli the key to the situation is 
 the closest possible economic union of Germany with 
 Austria-Hungary (associated with equally close military 
 union), the idea of a uniform Customs union and inter-State 
 Free Trade is not regarded as either advantageous or pos- 
 sible. It is recognised that in some ways the other two 
 countries will need protection of their industries against 
 the greater technical power of Germany, and that foreign 
 trade with the neighbouring Balkan States must not be left 
 to unregulated competition. Austria and Hungary are to 
 get their share, not by natural competition, but by syndica- 
 tion with Germany. Much more reliance is placed on the 
 method of combination than on the method of competition. 
 The same ideas are also applied to labour. Organisation, 
 not competition, is to be the basis of the new military 
 economic super-State. 
 
 The Central Empires will no doubt try to construct a 
 new scientific tariff against outsiders, but at the most the 
 tariff is only one part of the machinery. The next time the 
 economic preparation is to be much more complete before 
 the military attack is launched. 
 
 Reference has been made to the book by Herr Naumann 
 not only because in itself it is an outstanding work, but 
 because it is representative of a large body of Central 
 European opinion. Already before the end of 1914 the 
 economic bodies in the Central Empires that correspond to 
 our Chambers of Commerce were discussing after-the-war 
 commercial policy. In a meeting at Budapest in December, 
 1914, the result of the discussion was summed up by the 
 president in the statement that the experience and the 
 teaching of the war, and the political situation arising 
 therefrom, as well as the reciprocal economic interests of 
 the countries concerned, demand that the Monarchy and 
 Germany should strive for closer economic union, and make 
 their preparations in good time. Such a closer union, it 
 was said, would naturally be made without the sacrifice 
 on either side of economic independence as regards trade. 
 The point is that to a great extent Germany, Austria, and
 
 THE PARTS ECONOMIC CONFERENCE 38.5 
 
 Hungary are to retain their control of their tariffs, both as 
 regards their mutual relations and as regards foreign nations, 
 but the economic union and development is to be promoted 
 in other ways. 
 
 The Paris Conference is the recognition by the Allies of 
 the fact that, whatever the result of the war, the Central 
 Empires will at once set to work to strengthen the economic 
 foundations of their military power. The Central Empires 
 will not be turned aside from their main idea by over-rating 
 the difficulties of adjusting tariff relations amongst them- 
 selves. In this respect the Allies must follow their example. 
 They are combined in a great war of defence. One essential 
 part of their power is their relative economic strength. If 
 the Central Empires take thought to add to their economic 
 strength the Allies must follow suit. The key to the Paris 
 policy, as shown in the recommendations, is defence against 
 aggression. The nature of the defence must depend on the 
 nature of the aggression. The greatest obstacle to peace 
 is the fear of the peaceful methods of Germany. If the 
 people of this country are forced to go back in the direction 
 of mediceval restrictions, the reason is that Germany has 
 led the way. There was a time in England when foreign 
 merchants were only allowed to come to the country for 
 four great fairs. Later on, greater freedom was allowed — 
 but their stay was limited to forty days. Gradually the 
 restrictions were broken down, but even when permanent 
 residence was permitted, there were restraints of various 
 kinds affecting property and personal liberty. How far 
 we may be compelled to go back in our reimposition of 
 restraints will depend on how far the Germans advance 
 with their new morality. What the Germans look on as 
 progress in morality we look on as retrogression. 
 
 Let the anxious Free Trader and the anxious supporter 
 of our greater freedom of larger political ideas read a lesson 
 or two from the great apostle of freedom. " The very bad 
 poHcy of one country," says Adam Smith, " may render it 
 dangerous and imprudent to establish what would otherwise 
 be the best policy in another." The lesson that the wealth
 
 386 WAR FINANCE 
 
 of neighbouring nations is certainly advantageous in trade — 
 one of the lessons that did most to break down the old 
 beggar-my-ncighbour commercial policy of Europe — is 
 introduced with a remarkable qualification^ — the wealth of 
 neighbouring nations, says the teacher, " though dangerous 
 in war and politics." A little lower down we find the provo- 
 cative expression — it was applied to France and England — 
 " being neighbours they are necessarily enemies." Every- 
 body by this time knows that " defence is of more importance 
 than opulence." But everyone does not remember the 
 context : — 
 
 " When the Act of Navigation was made, though England 
 and Holland were not actually at war, the most violent animosity 
 existed between the two nations. . . . National animosity at 
 that particular time aimed at the very same object which the 
 most deliberate wisdom would have recommended the diminution 
 of the naval power of Holland, the only naval power that could 
 endanger the security of England." 
 
 The times have changed and we also. We are good friends 
 with Holland and brothers with France. We are enemies 
 of Germany, and even if not actually at war we shall con- 
 tinue to be enemies so long as Germany's ideas of peace are 
 centred in the methods of peaceful penetration which led 
 up to the present war. The Paris Conference is the beginning 
 of the new defence against the next war.
 
 CHAPTER XXXII 
 
 GOVERNMENTAL BORROWING AND COMPULSION 
 
 {August 2, 1916) 
 
 In a former chapter * attention was called to the high rate 
 of interest on British war borrowings and to the progressive 
 rise in the rate. Since then there has been an advance of 
 I per cent, in the principal form of borrowing — namely, 
 Treasury bills. On the yearlings the discount rate is now 
 6 per cent., and the interest on the money obtained by the 
 State is about f per cent. more. The amount of Treasury 
 bills outstanding is rapidly rising, and now stands at over 
 £831,000,000. 
 
 Besides the Treasury bills there are other forms of borrow- 
 ing for short periods, varying from two to five years. Five 
 years is longer than one 3^ear, but in the matter of public 
 debt it is a short period. This accumulation of a very large 
 floating debt is now called the method of " continuous 
 borrowing." The worst of continuous borrowing is that it 
 means also continuous renewals, and if the rate of interest 
 is rising renewals at an increasing cost. 
 
 The rise in the rate of interest on the floating debt reacts 
 on the rate of interest on long-period loans, and a new long- 
 period loan can only be issued at a higher rate. This higher 
 rate must automatically be extended to the old loans. It is 
 so nominated in the bond. The continuous system cannot 
 go on for ever. A new long-period loan must be faced some 
 time ; the longer it is deferred the harder the conditions. 
 What is to be done with this enormous floating debt at the 
 end of the war ? How is the recovery of trade to be financed ? 
 How are all the encouragements to industry and commerce 
 
 * See Part II.. Chap XXX , p. 371.
 
 388 WAR FINANCE 
 
 of which we hear so much to be paid for ? Arc we to go on 
 borrowing for the reconstruction of peace ? 
 
 These are very serious questions. Whatever answer is 
 given, one thing ought to be absohitely clear — namely, that 
 every economy ought to be made that does not impede the 
 conduct of the war. But the experience of the last two 
 years has shown that general appeals to economy are of 
 little use unless by way of introduction to some practical 
 expedient. 
 
 One of the economies not yet tried is an economy in the 
 rate of interest on public borrowings. The practical expedient 
 by which such an economy might be effected is compulsion. 
 It may perhaps be thought that the present time is inoppor- 
 tune for the suggestion of compulsion, when a great national 
 effort is being made to raise money by the voluntary War 
 Savings Certificates. The recent increase in the sales of 
 these certificates has been remarkable. In May the sales 
 averaged about a quarter of a million a week. In the first 
 week of July the amount had risen to nearly a quarter of 
 a minion a day. The latest report of the " boom " in War 
 Certificates is that the daily sales have again doubled. The 
 financial and moral results of these efforts are considerable. 
 But they ought not to be exaggerated. A sale of half a 
 million a day will only provide for one-tenth of the normal 
 five millions. The other nine-tenths must be raised in other 
 ways. And it must be remembered that this half a million 
 a day of war savings is not presented to the State as a free- 
 will gift — it is not like one of the great war charities. On 
 the contrary, it is to be repaid at the end of five years with 
 what in other cases would be called an " unearned incre- 
 ment " free of income tax of about one-third of the original 
 advance, not to mention facilities for withdrawal without 
 loss in the interval. The economy for the individual investor 
 is excellent, but the economy for the State is not so 
 excellent. To the State, indeed, the gain is supposed to 
 be chiefly indirect, as is so well explained in the latest 
 thrift poster. 
 
 From the moral point of view there may seem to the eye
 
 GOVERNMENTAL BORROWING— COMPULSION 3S9 
 
 of the philosopher more of prudence than of patriotism in 
 so attractive an investment. " Breathes there a man with 
 soul so dead " that he will not lend to his own native land 
 15s. 6d. for £1 ? 
 
 Surely our perfervid appeals to patriotism might have a 
 more robust ending. Surely we might test our patriotism 
 in the matter of money as we have tested it in the matter of 
 life. Unfortunately, however, it is only in mathematics 
 and not in politics that the greater includes the less. The 
 people who howled for a forced levy of men will cry out 
 that a forced loan of money will blast for ever the business 
 character of the Government and of the people. The people 
 who say that laisser faire is dead, that wages must be fixed 
 and profits controlled, shrink with horror from Governmental 
 interference with the rate of interest, although it is the 
 oldest and the most respectable of all the Governmental 
 interferences in history. The Government may pay a soldier 
 one shilhng a day instead of the market rate of (say) five 
 shillings for his labour, and give him no option, but the 
 Government must not discount its bills at 5 per cent, if the 
 Bank rate is 6 per cent. 
 
 The revolutionary sociahsm suggested in this last sentence 
 may be neutralised by another example. Very early in the 
 war — when war bonuses on wages began to be rampant in 
 the favoured industries — it was proposed that the bonuses 
 should be paid in War Loan Certificates. Had this plan 
 been adopted all the economic gains of the V/ar Savings 
 Certificates which are now so much extolled would liave 
 been multiphed a hundredfold. Extravagant consumption 
 would have been checked, the balance of trade would have 
 been improved, and the plenty of war would have been made 
 to help the coming leanness of peace. What were the real 
 obstacles to so beneficial a war economy ? One real obstacle 
 was that we tried to carry on in time of war with the economic 
 ideas of property only adapted for times of peace. The 
 working man had earned his bonuses — they had become his 
 property — shall a man not do what he likes with his own ? 
 Does not the institution of private property itself rest on
 
 390 WAR FINANCE 
 
 the principle that every man has a right to dispose of the 
 product of his labour ? But the correct answer is no, not in 
 war-time. In war-time the need of the State is the supreme 
 law. 
 
 But perhaps a still greater objection to this excellent plan 
 was found in the perversion of the principle of equality of 
 sacrifice. Why should the working man be made to con- 
 tribute to a forced loan and other classes be left free ? Why 
 should not all incomes be made to invest a certain proportion 
 in War Loan ? The answer of those interested was that 
 other incomes were subject to a progressive income tax, 
 and that excess war profits in addition w^ere mulcted in a 
 drastic manner. The reply is cogent. But to the working 
 classes this interpretation of equality of sacrifice seemed 
 altogether irrelevant. They looked not to the amounts that 
 were taken by the State, but to the amounts that were left. 
 Suppose a man with a hundred thousand a year were to 
 be left with only thirty thousand — only (they say), some 
 six hundred pounds a week^ — where is the sacrifice ? 
 
 The truth is that equality of sacrifice is unattainable in 
 peace and is unworkable in war. After the acceptance of 
 compulsory military service it is idle to speak of equality 
 of sacrifice. It is, however, quite a different thing to argue 
 that if it is good for the working classes to accept part of 
 their wages in War Loan, it is also good for a proportionate 
 part of other incomes to be advanced to the State in a 
 similar v/ay. A forced loan of this kind, after all, would be 
 only the natural development of the income tax. In the 
 case of incomes that have not risen in proportion to the 
 rise in the cost of living (including the rise in taxes), the 
 tax-payers, in order to pay their increased income tax are 
 obliged to make extra savings. The State takes these forced 
 savings, and in effect makes a forced loan — but with no 
 interest and no return of the principal. 
 
 The income tax-payer has been warned that he may expect 
 another increase. If, however, he were to get instead of 
 a receipt for his extra tax a promise of partial repa3'ment 
 at the end of the war, even with no interest, he would be
 
 GOVERNMENTAL BORROWING— COMPULSION 391 
 
 comparatively happy, and with 5 per cent, he would leap 
 with joy. This extension of the method of war bonuses 
 to the income tax-payers might be begun in the most ten- 
 tative way and the screw could be turned according to tire 
 capacity of the lender. A spectacular beginning might be 
 made with the salaries of M.P.'s. What voter could refuse 
 a forced loan if his own M.P. set the example ? 
 
 It may, of course, be objected that without any com- 
 pulsion the Government can borrow as much as it requires 
 for the conduct of the war. But consider the price that has 
 to be paid. If the present methods are continued, we may 
 expect that the progressive rise in the rate of interest will 
 also be continued. The more we borrow the less easy will 
 it be to go on borrowing. With the continuance of the war ' 
 the demand for new money will not be less, and the supply 
 will certainly not be more. Where is the cause to be found 
 that will counteract the rise in the rate of interest ? Not 
 one cause is imaginable until the return of peace. 
 
 We are told, no doubt, that during the war the deposits 
 of the joint-stock banks have increased by some two 
 hundred millions, but everyone knows that these deposits 
 are not the savings of the people, but the extension of 
 bankers' credit. There are real limits even in war-time to 
 the sound extension of the banking credit of the most 
 wealthy nation. Real savings from income — even if the 
 savings are forced^ — serve to contract the wasteful con- 
 sumption of non-combatants. The inflation of bankers' 
 credit only tends to raise industrial wages and incomes, 
 and by a fictitious prosperity to encourage consumption. 
 A period of inflation is always a period of wasteful extra- 
 vagance. 
 
 Once the principle of compulsion as regards public loans 
 and interest is accepted there is no reason to fear that it 
 will be carried into practice with dangerous haste. It is 
 an old saying that Nature does nothing by leaps, and in 
 this sense the British Government is the most natural in 
 the world. We never rush the application of any new idea. 
 We pass by tentative steps from one extreme to another.
 
 392 WAR FINANCE 
 
 We have seen the process in tlie provision of the human 
 capital for the war. We began with voluntarj/ enhstment 
 in the fullest sense of the term " voluntary." We advanced 
 step by step with painful slowness to the extreme limits of 
 peaceful persuasion. The last steps of persuasion were a 
 good deal more disagreeable to the people concerned than 
 the first steps of compulsion. It is quite possible that if 
 the " boom " in war savings continues and is extended, 
 that here also the persuasion may prepare the way for the 
 simpler plan. The question will come to be asked, Why 
 should the bad men (or women) not be compelled to do 
 what the good are doing of their own freewill — with sugges- 
 tions and encouragements from their ministers and their 
 neighbours ? 
 
 Compulsory borrowing and limitation of interest are not 
 likely to be rushed. In the meantime the difficulty rather 
 is to make a beginning. Apparently everybody is willing 
 to begin with his neighbour. The bankers would begin 
 with the war bonuses on wages, and the working classes 
 cry aloud for the conscription of wealth. When everybody 
 is willing that everybody else should begin, the principle 
 cannot be far off general acceptance. In time the most 
 blind will begin to see that what is good for their neighbours 
 may be good for themselves. 
 
 A beginning of the forced loan method was very nearly 
 made by the Government when it commandeered American 
 securities. The first proposal was to pay for them in War 
 Loan. Apparently this excellent plan was not in accord 
 with the principles of private property and of equality of 
 sacrifice as then interpreted in the City of London. The 
 securities were paid for in cash, and it was left to the dis- 
 cretion or the benevolence of the seller to invest the proceeds 
 in War Loan. As soon, however, as the sales began to fall 
 off, a method was adopted which showed that the rigid 
 interpretation by the City of London of the two great 
 principles cited had been relaxed. A new kind of compulsion 
 was accepted in spite of private propert}^ and equality. 
 The owners of American securities who were holding back
 
 GOVERNMENTAL BORROWING— COMPULSION 393 
 
 were encouraged to come forward by a penal income tax. 
 They came forward with a rush. The manner and the speed 
 of their coming was approved of by the City of London. 
 
 Perhaps now another step might be taken, suggested by 
 the American experience. Suppose that, encouraged by 
 the success of this last device, the Government go back to 
 their first idea, and pay for any securities they want with 
 War Loan. To single out the forced sellers of American 
 securities and make them accept payment in War Loan 
 may seem inecpiitable. The inequity or inequality of 
 sacrifice will disappear if the plan is applied all round. If 
 one class of investors is to be made to invest in War Loan, 
 why should not other classes be so compelled to a propor- 
 tionate extent ? Why should anyone who has new money 
 to invest not be made to use some of it for the defence of 
 his country ? The recent activity of the Stock Exchange 
 shows that there is new money seeking investment. 
 
 In the foregoing argument no stress is laid on an}^ par- 
 ticular method, though the methods suggested are directly 
 practicable and indirectly advantageous. The great thing 
 to recognise at the present juncture is that continuous 
 borrowing at continually rising rates is not sound finance 
 in the greatest war on record. Other prices have been 
 controlled, and in other cases the right of pre-emption on 
 the part of the State has been recognised and put into 
 practice, witness the regulation of tonnage and freights for 
 wheat. Where is the difference in principle if the Govern- 
 ment takes the money it needs at reasonable rates ?• — that 
 is, of course, so far as its internal loans are concerned. 
 
 It may be said that the supply of loanable money depends 
 on the stabilit^^ of the system of credit. But an extravagant 
 rate of interest on pubhc war loans is neither a cause nor a 
 sign of good national credit. 
 
 At the beginning of the war no praise was too great for the 
 Government, which had enabled the great financial houses 
 to tide over the expected monetary crisis. The situation 
 was saved by the issue by the State of a mass of paper money 
 and by other uses of public credit. These emergency
 
 394 WAR FINANCE 
 
 measures were continued long after the crisis, and are still 
 continued. Why should the State, which itself provides the 
 principal foundation of the credit system, be asked to pay 
 so high a price for the use of it ? 
 
 The central fact is that the war must be carried on, and 
 five millions a day must be provided — that is to say, for the 
 most part borrowed. When we take account of the terrible 
 sacrifices of life, where is the injustice in limiting the rate 
 of interest on the money borrowed to 5 per cent. ? Con- 
 sidering the danger of an enormous dead- weight debt with 
 a high rate of interest at the end of the war, the proposal 
 for the present limitation of interest is one of the mildest 
 counsels of prudence.* 
 
 * In a letter to the writer regarding this paper the late Lord Cromer 
 stated that he had no objection in principle to a forced loan.
 
 CHAPTER XXXII] 
 
 THE RISE IN WAR BONUSES 
 
 {Sepiembcf 30, 191 6) 
 
 Under the threat of a strike the railway employees have 
 received a war bonus of five shillings a week. Some of the 
 younger workers get half this amount, and the women and 
 some of the workers in the shops get nothing. No doubt 
 their turn will come. The bonus actually granted to 350,000 
 men works out at about seven and a-half miUions a year. 
 When all the consequential arrangements have been made 
 the bill will be larger. As the railways have for the war 
 been taken over by the State the loss falls on the nation at 
 large. And as we have been told many times in the course 
 of this war, we are a wealthy nation. 
 
 It must not be supposed that the railway men are des- 
 perately wicked, and through having the control of a national 
 necessity are able to extract a big ransom. This latest war 
 bonus is only part of the general movement which has been 
 going on from the beginning of the war, after a short period 
 of readjustment. The last issue of the Labour Gazette shows 
 that for the eight months ending August 31, 1916, 2,600,000 
 workpeople received a net increase of £360,000 per week. 
 
 These returns do not take account of large numbers of 
 the population who have also received war bonuses, especially 
 if we take the family as the wage-earning unit. Agriculture, 
 for example, is not represented, and in agriculture not only 
 have the rates of wages risen greatly, but there has been 
 a great increase in the employment of women and children. 
 In the towns and cities also the increase in the employment 
 of children and old people is plain to the most casual 
 observer. Unfortunately, the Lahoiir Gazette is unable to 
 record the family earnings of these workers, but from the 
 samples quoted from time to time in the papers there is no
 
 396 WAR FINANCE 
 
 doubt that the war bonus has visited the greater part of 
 them. The statistics of consumption and of amusements 
 point to a general increase of spending power as regards 
 large masses of the people. Speaking broadly, this increase 
 is to be ascribed to war bonuses or war wages. 
 
 There are no doubt exceptions. The salaried classes in 
 many cases have received no bonus and have had their 
 salaries mulcted by direct taxation. People living on 
 annuities or interest on capital are most severely hit. The 
 capital value of the source is diminished by the rise in the 
 rate of interest, and the interest actually received is heavily 
 taxed. 
 
 These taxes on the fixed (or lessened) income receivers 
 help to pay the war bonuses of the wage-earners and their 
 families. In the last resort the greater part of the war 
 bonuses are paid out of public expenditure. Part of the 
 money is derived from present taxation, and the rest from 
 anticipated taxation in the shape of public debt. 
 
 One of the amazing things in this war is the resurrection 
 of old economic fallacies in the naked simplicity of new-born 
 truths. There is a whole family of these fallacies, of which 
 the central idea is that Governmental expenditure can be 
 increased indefinitely, with an indefinite increase of the 
 public good. This can only mean, when translated into 
 practice, that the greater the public debt and the greater 
 the taxation, so much the better for the national welfare. 
 A consideration of the real burden of debt and taxes may 
 be left for future comment. At present another of these 
 old fallacies is of more particular interest. The idea 
 is being revived, and put into practice on a great 
 scale, that wages ought to rise with every rise in the cost 
 of living. This is the root idea of the war bonus. This is 
 the great truth which must prevail, whatever happens to 
 the minor creeds. The minor creeds taught the people that 
 in industries with saleable products the efficient causes of 
 a rise in wages were an increase in the output, or an increase 
 in the prices of the particular products, or increased efficiency 
 or economy. Any sa\'ing of cost, e.g., by improved processes
 
 THE RISE IN WAR BONUSES 397 
 
 or machinery, or by lessened price of raw material not 
 immediately followed by a fall in the price of the product, 
 might be made the occasion of a rise in wages. During the 
 last century industrial money wages benefited greatly in 
 this way. Real wages benefited also by the fall in the cost 
 of living. In the second half of the nineteenth century 
 money wages moved up and the necessaries moved down. 
 In those days we heard nothing of the converse doctrine 
 that the money wages ought to fall with every fall in the 
 cost of living. We are told, however, that at the end of the 
 war this practical application is to be made good. That is 
 said to be the meaning of a war bonus. It is for the period 
 of the war. The war raises the cost of living, hence the 
 bonus. The peace will bring down the cost of living, and 
 the bonus will disappear automatically. Will it ? 
 
 In the meantime, we have enough to do with the rise in 
 bonuses and the immediate consequences. The rise is very 
 unequal. A strong union in a vital national industry heads 
 the procession. The organised trades follow in order of 
 their striking power. The oki age pensioners and others 
 with no striking power at all bring up the rear of the pro- 
 cession about two years after the start. 
 
 The inequality in time is only part of the inequality of 
 this mode of adjustment. Let us suppose that the bonus 
 is justified in the sense that v/ithout it the wage-earner will 
 really have to decrease his consumption of necessaries. Let 
 us take account also of the well-established economic truth 
 that in any enforced contraction of expenditure real neces- 
 saries are often decreased first of all. The force of habit is 
 stronger than the force of health. Even to the best paid 
 labour a rise in the cost of food means a contraction either 
 of food or of some pleasing habit. Lower down in the scale 
 there may be an enforced lowering of the standard of life 
 by the rise in its cost. 
 
 In practice, the bonus is given first to the higher-paid 
 kinds of labour. They at once increase their demand to its 
 former habitual level. This increase in demand again raises 
 prices. By the time the bonus has spread to the lowest
 
 398 WAR FINANCE 
 
 ranks of labour a new bonus will be demanded at the top 
 of the scale, and so in the old phrase the mischief circulates. 
 These evils are recognised by the thinking part of the 
 labour leaders. They know very well that of itself a rise 
 in the cost of living does not justify a rise in wages. The 
 fundamental question always is what the industry will bear. 
 But then they say that the rise in profits shows that, as a 
 rule, the industries can pay the bonus. It is the old conflict 
 between labour and capital for the debatable surplus arising 
 out of higher prices. Labour (they say) will forego the 
 bonus if the State takes for the war all the excess profit. 
 But labour will not forego its bonus and reduce its standard 
 of living if profits are to rise in consequence. This argument 
 in some cases is quite valid. Its validity has been recognised 
 in the excess profits tax. 
 
 The argument has also a foundation of reason in a wider 
 sense as applied to industries in general. Experience shows 
 that in any general upward movement of prices the rise in 
 money wages usually lags behind the rise in prices. This 
 means that capital benefits before labour. The reason is 
 plain. Labour contracts are not so easily adjusted as 
 commercial contracts. 
 
 Failing the seizure by the State for the period, and for 
 the purposes of the war, of all war profits of every kind and 
 degree, labour, it is said, will be content to forego its bonuses, 
 and to keep its promises not to ask for more, on condition 
 that the rise in the cost of living is stopped. Take away 
 the cause (says labour) and the effect will also cease. Let 
 the Government stop the rise in prices, and labour will stop 
 the rise in bonuses. 
 
 Hitherto the Government has put aside this request as 
 practicall}^ impossible. It remains to be seen if the Com- 
 mittee appointed to investigate the rise in the cost of living 
 will suggest any measures for practicable Governmental 
 control. The letter of the President of the Board of Trade 
 expounding the difhculties is not very hopeful, but the 
 arguments advanced are not very convincing. Specially 
 unconvincing is the appeal to the experience of other nations.
 
 THE RISE IN WAR BONUSES 399 
 
 In this case the proverbial ounce of fact does not seem to 
 outweigh the ton of theory. Look at Germany, says the 
 President. Look at the nation which has carried to an 
 extreme the organisation above and the docihty below. 
 Was there ever any people so obedient to so much govern- 
 ment ? And yet the cost of hving in Berhn has risen 117-6 
 per cent, since the beginning of the war, whilst our cost has 
 only risen 65 per cent. If German autocracy could not stop 
 the rise in prices, how could a CoaHtion Government of the 
 liberty-loving British people hope to succeed ? If Germany 
 was powerless, where should we be ? There is the ounce of 
 fact- — only 65 per cent, for us, against 117-6 for Berlin. Here 
 is the ton of theory, and in this case the ton outweighs the 
 ounce. 
 
 A deficiency in the supply of necessaries, unless controlled 
 by the State, raises prices out of all proportion to the 
 deficiency. If, with the actual shortage in Germany, prices 
 had been left to the free play of competition, they would 
 have risen not twofold, but many-fold. Before the repeal 
 of the British Corn Laws, when for the most part this 
 country relied on its own harvests, the price of wheat varied 
 according to the deficiency, the extreme being 126s. 6d. per 
 quarter in 1812 and 39s. J^d. in 1835. Tooke, the great 
 historian of prices, and by the way a great merchant, said 
 that a deficiency of one-third in the wheat harvest might 
 raise prices five, six, or even ten fold. How many fold prices 
 might have risen in Germany but for Government action 
 we cannot say, but, giving the devil his due, the German 
 Government did pretty well by keeping down prices as it 
 did, and if the necessity of control had been recognised 
 earlier, possibly the rise would have been still less. It 
 would certainly have been less but for the inflation of the 
 currency, which has raised prices in general. Our financial 
 authorities recognised the inflation of German currency at 
 a very early stage. 
 
 Another official argument against official control is the 
 argument from the world's price. The world's price is 
 supposed to be determined by causes beyond the influence
 
 400 WAR FINANCE 
 
 of the British Government. If in this country we fix a lower 
 range of legal prices all the stuff will be sent to the other 
 countries which will give the world's price. On this view 
 the world's price is wafted from overseas like the weather, 
 and as such is beyond Governmental control. 
 
 If this argument is tested in the manner of the first 
 argument, by reference to the experience of particular 
 nations, even the ounce of fact is against it. Since the 
 beginning of the war the cost of living in the United States 
 has risen only ii per cent., and the greater part of this rise 
 has taken place in the last year. It is true, of course, that 
 in order to get the national price we must always add to 
 the world-price the cost of getting the commodity to the 
 national market. This again leads to the contention that 
 there is also a world's rate for freights, and if we do not pay 
 these rates all the stuff will go to other nations. It will be 
 interesting to see in the forthcoming report of the Food 
 Committee, first, how much of the British rise in prices is 
 paid away in freights ; and, secondly, whether the rise in 
 freights has preceded or followed the rise in prices. In any 
 case, when we have the command of the sea and the control 
 of the greater part of the mercantile shipping of the world, 
 the fixation of an outside world's price for freights, which 
 must be accepted like the weather, seems carrying to an 
 extreme the old economic ideas of laisscr fairc. What is the 
 good of the command of the seas except to secure our over- 
 seas supplies ? But if ransom prices have to be paid, where 
 is the control of supply ? 
 
 World prices, e.g., of wheat, meat, etc., depend on supply 
 and demand. The sources of supply are many, so are the 
 sources of demand. Both suppl}^ and demand are affected 
 in var3nng degrees by competition and by monopoly. Both 
 competition and monopoly are influenced m^ore or less by 
 the Governmental action of various nations. 
 
 One of the most important elements affecting the demand 
 for most of the necessaries of life is the British demand. If 
 the British demand for foreign supplies were suddenly 
 stopped altogether, as, for example, by some miracle of
 
 THE RISE IN WAR BONUSES 401 
 
 German submarines, how great would be the fall in the world 
 prices of wheat and other things. Instead of this country 
 being compelled to accept world prices made outside, it is 
 nearer the truth to say that our extravagant and unregulated 
 demand was one of the chief factors in raising world prices. 
 
 It has been contended in this series of papers that this 
 extravagant demand was not due simply to the necessities 
 of the war. There was from the beginning a general laxity 
 in public expenditure, and the root cause of this laxit}/ was 
 the easy inflation of currency and the credit based on it. 
 The inflation raised general prices, and food shared in this 
 general rise. The recognition of the inflation has passed 
 through the two stages characteristic of popular beliefs. In 
 the first period, when the inflation might have been checked, 
 it was not only denied, but said to be impossible, under our 
 excellent system of management. In the second stage, 
 when the general rise in prices was unquestionable, a certain 
 degree of inflation was not only admitted, but was said to 
 be one of the unavoidable necessities of war. 
 
 In the meantime, the general rise in prices continues, and 
 the remedy proposed is a continuous rise in the war bonuses. 
 We are actually told that a sliding scale ought to be adopted, 
 so that money wages should rise automatically with every 
 rise in the cost of living. Such a scale, if applied at all, 
 ought to be appHed all round. But the wider the range, so 
 much the greater and the more speedy must be the rise in 
 prices. There is no escape from the vicious circle. Prices 
 rise, therefore wages are raised. The wages are spent, there- 
 fore the prices again rise. More currency is required with 
 the higher prices, and more currency is issued. The circular 
 movement may continue until the foundations of credit 
 will no longer bear the superstructure. Fortunately in this 
 country we are in the habit of stopping short in the logical 
 application of our popular remedies for low wages. The 
 proposal for a universal automatic war bonus will perhaps 
 be found impracticable at an early stage. Unfortunately its 
 practical adoption for the strongest industries has already 
 made the position of the less favoured worse than before.
 
 CHAPTER XXXIV 
 THE REAL BURDEN OF A NATIONAL DEBT 
 
 [October 14, 1916) 
 
 The expenses of the war are being met in proportion of 
 about one-fifth by war taxation and four-lifths by debt. 
 As between the present and future generations the propor- 
 tion does not seem unduly favourable to the present on 
 broad considerations of equity. Apart from the real burden 
 of extra war taxes, the present race has to make large 
 sacrifices of life and of personal liberty. Of these sacrifices 
 the coming race will reap the chief reward, and will make 
 no corresponding sacrifices in kind. The coming race will 
 only have to pay interest and sinking fund on a money 
 debt — a small price to pay for freedom from German domi- 
 nation and desolation. To escape so great a peril it may 
 truly be said that no price would be too high. 
 
 When estimates are made of the probable national income 
 of the coming race, and the proportion to be paid by way 
 of war debt charges, the burden on the future seems still 
 more light. In his review of the financial situation the 
 Chancellor of the Exchequer compared the British people 
 to the owner of an estate incurring for a necessary outlay 
 a debt of (say) one year's income. The national income of 
 the United Kingdom is put down at some three thousand 
 millions, and the debt at the end of the financial year is 
 estimated at about the same sum. Where is the danger ? 
 Where is the difiiculty ? 
 
 This comfortable assurance is strengthened by another 
 assurance still more comfortable. It is said that so long 
 as the debt is an internal debt, the payment of interest and 
 sinking fund is only a matter of accounting from the national
 
 THE REAL BURDEN OF A NATIONAL DEBT 403 
 
 point of view. By such payments, it is argued, there is no 
 real national loss, but only a redistribution of income. 
 Taxes are taken from certain people, and the proceeds are 
 diverted to other people. What is lost by Peter is gained 
 by Paul. The sum total of the national income remains the 
 same. 
 
 Some of our optimists go even further, and try to show 
 that the creation of a great mass of public securities in the 
 shape of national debt adds so much to the aggregate 
 national wealth. On this view, the greater the debt the 
 greater the happiness, and the greater the war boom, so 
 much greater will be the peace boom. The plain man has 
 an uneasy feeling that there is something wrong with this 
 political arithmetic. If nothing is to be made out of nothing, 
 how can something be made out of less than nothing ? 
 Perhaps the best way to expose the fallacy that in public 
 debt it is only the right hand which pays the left, and that 
 there is no real national burden, is to express the burden 
 in terms of taxation. It is only out of taxation that the 
 interest can be paid, and the sinking fund (it any) put aside. 
 
 In the year before the war, 1913-14, the Budget estimate 
 for revenue by taxation for the United Kingdom was 
 £160,000,000. [In addition there was a non-tax revenue 
 {e.g., postal services, etc.) of about ;£35,ooo,ooo.J 
 
 It is true that for part of our war debt our AlHes and 
 Dominions are responsible, and so far our taxation for 
 interest will be less. On the other hand, the expenses of the 
 war will not end with the war. In the year before the war 
 the total Army Estimates, including effective and non- 
 effective services (pensions, etc.), were only £28,000,000, 
 and the corresponding Estimates for the Navy were 
 £48,000,000. It will be many a year after the return to 
 peace before there will be a return to anything approaching 
 these modest estimates for military and naval services. On 
 balance there can be little doubt that if our war borrowing 
 is to cease with the war, for some years we shall have to 
 raise by extra taxation for the interest on war debt, and for 
 increased military and naval and air charges a good deal
 
 404 WAR FINANCE 
 
 more than the total amount raised by taxation before the 
 war. Aheady also large claims are being put forward for 
 Governmental assistance in the reconstruction of trade and 
 industry after the war, in the promotion of education and 
 research and other aids to national development, and until 
 these various betterments begin to yield their fruit they 
 will involve more new taxation. 
 
 Let those who talk lightly of the right hand paying the 
 left describe more in detail by what particular methods they 
 propose to double taxation without imposing any real 
 burden on the nation. What, for example, becomes of the 
 right hand paying the left if the working classes are to be 
 asked to pay double taxes ? 
 
 We are told that the war expenditure has caused a great 
 improvement in the condition of the masses of the people, 
 and that there has been a rise in the standard of living. In 
 the coming peace it is maintained that the first duty of the 
 nation is to see that this higher standard is not impaired. 
 The only difficulty is to discover the practical methods by 
 which this first duty is to be achieved. Several have been 
 propounded by scientific and other philanthropists. The 
 workers are to work more and to produce more. The trade 
 union restrictions on the efficiency of labour are to be 
 annulled. Devices for " making work " are to be displaced 
 by preventiv^es of waste of labour. These and similar 
 commonplaces of old-fashioned prudence, when stated in 
 the abstract, are no doubt as admirable as the greatest 
 happiness of the greatest number. 
 
 But if the working classes are told that the real reason 
 why the labour machine must be speeded up is that labour 
 may be able to bear more than the pre-war taxes, their zeal 
 for high-pressure work will cool down. And the cooling 
 process will not be lessened by the assurance that the 
 proceeds of their taxes — the payments by their right hands — 
 will go into the left hands of the fund-holders, or through 
 various beneficent Governmental officials and sub-officials 
 be devoted directly or indirectly — especially indirectly — to 
 the improvement of the condition of labour. When it
 
 THE REAL BURDEN OF A NATIONAL DEBT 405 
 
 comes to the payment of taxes out of wages, how many of 
 the working classes would approve of an indefinite extension 
 of the method of compulsory insurance, even for their own 
 benefit ? If, however, the taxation of wages is to be increased 
 beyond the pre-war level, not to provide more insurances 
 for labour or more improvements in the conditions of labour, 
 but simply to enable labour to pay its share in the interest 
 on the war debt and in the increased charges for the new 
 peace footing of the Army and the Navy, who will be bold 
 enough or foolish enough to tell them that the taxes are no 
 real burden because the proceeds will be spent within the 
 country ? Taxes that have to be paid to meet the expenses 
 of a dead war and its consequences will be about as popular 
 with labour as making up long arrears of unpaid insurances. 
 Already some of the representatives of labour are saying 
 that they have given their blood, and other people must 
 give their money — that the conscription of life can only be 
 balanced by the conscription of wealth. It is useless to 
 reply that the professional and others of the non-working 
 classes have given in proportion probably more life. No 
 consideration of this sort will make war taxation that falls 
 on labour seem other than a real burden to labour. The 
 right-to-the-left-hand theory breaks down altogether when 
 it is applied in the concrete to actual taxes on consumable 
 things. How are we to show that the particular part of the 
 interest on our war debt that is to be paid out of the extra 
 tax on tea is only a right-to-left payment that involves no 
 real burden on the masses of the people ? And where is the 
 essential difference between a tax on tea and any of the other 
 taxes that may Ipe imposed on the consuming power of 
 labour ? 
 
 Any adequate estimate of the real burden of taxation that 
 affects the consuming power of the working classes ought 
 to take account not only of the discomfort involved, but 
 of the indirect effects on national productive power. The 
 flow of emigration that is expected to set in after the war 
 will be increased by every rise in the taxes that affect labour. 
 The continuous struggle on the part of labour to find com-
 
 4o6 WAR FINANCE 
 
 pensation for higher prices in higher wages will tend to raise 
 the cost of labour, and there will be a reaction on foreign 
 trade. It is, however, useless to recall the lessons of history 
 on the crippling effects of heavy taxation on national pro- 
 ductive power. It is quite sufficient for the present purpose 
 to consider the direct burden of war taxes intended to fall 
 on labour. And when peace comes and the war bonuses 
 cease — when, instead of spending the proceeds of loans, 
 we begin to pay interest on the loans by the proceeds of taxes, 
 there will be no need to show to the labour concerned that 
 taxes on labour are burdensome — in other words, that the 
 part of the interest on the dead war debt that is paid by 
 labour involves a very real burden. 
 
 The probability is that the burden of any taxation meant 
 to strike labour and intended to pay for war charges and 
 not for the direct benefit of labour will seem so great, and 
 will be resisted by so great an outcry, that it will not even 
 be attempted. 
 
 Precisely the same arguments may be applied to wealth 
 as to labour. We must translate all our proposals into 
 definite taxes. Let us begin with the income tax. Even 
 before the recent lowering of the limit of exemption, by 
 which over a million of the wage-earners have been included, 
 most of the people who paid income tax earned the whole 
 or part of their incomes by labour of some kind. As the 
 census returns show, the unoccupied class of possible workers 
 — the conscientious objectors to work of any kind — is really 
 very small. It is true that the British income tax differen- 
 tiates between earned and so-called unearned incomes, and 
 higher rates are imposed on the unearned. In theory, the 
 idea is to distinguish between the terminable earnings of 
 the higher forms of labour and the otiose interest derived 
 from capital that is assumed to be permanent. In practice 
 the division between the classes is to a great extent arbitrary, 
 and the justiiication from the national standpoint seems 
 very doubtful. 
 
 It is very difficult to separate pure interest from the other 
 elements with which in practice it is conjoined — e.g., the
 
 THE REAL BURDEN OF A NATIONAL DEBT 407 
 
 insurance against all kinds of depreciation of the supposed 
 permanent source. 
 
 The more closely we look into the interest yielded by the 
 varied investments of British capital, the less appropriate 
 seems the term " unearned " — if by unearned we mean that 
 the receivers of the interest have conferred no corresponding 
 national benefit. In the time of peace the investment of 
 British capital abroad has given us new sources for raw 
 material and food, and in that way greatly increased the 
 real wages of labour. And in the present war the large 
 excess of imports of war materials for ourseKes and our 
 Allies has been paid for by means of these investments. 
 From the beginning of the war we have been told that we 
 could outlast the enemy on the financial side. Suppose that 
 instead of these large investments ol capital the owners 
 had wasted their substance in riotous living, or suppose that 
 the surplus had been devoted entirely to raising wages, 
 and that the wages had been spent in what in the working 
 classes is called keeping up the standard of life ? Where 
 would have been the reserves of financial strength of which 
 we are so confident ? From the national point of view, the 
 interest on capital in normal times is a cheap price to pay 
 for the accumulation. If taxation on capital cuts away any 
 of the gross earnings which ought to be devoted to insurance 
 against depreciation of all kinds, the wasting of the capital 
 is still more rapid. 
 
 On the advent of peace we are told that there will be 
 unheard-of openings for British capital. We shall be able 
 to pick and choose the best parts of the field formerly 
 occupied by the Germans. But if every extra gain from 
 enterprise is to be snapped up as unearned increment or as 
 excess profit, the enterprise will not be forthcoming, or the 
 corresponding capital will find a home in foreign lands. 
 Capital is still more ready than labour to leave the land of 
 heavy taxation. 
 
 The capture during the war of excess war profits is on 
 quite a different footing. Such profits arise because Govern- 
 ment made bad bargains with its contractors, or allowed
 
 4o8 WAR FINANCE 
 
 monopoly prices to be exacted, which ought to have been 
 regulated. 
 
 After all, however, of the incomes that are subject to 
 income tax in this country, the largest number are earned 
 in the narrowest sense of the term. The incomes are the 
 wages of the higher forms of labour. A large mass of the 
 salaried classes receive lower pay than the better-paid 
 artisans. Are we not told that one condition of improving 
 the educational system of the country is to give higher pay 
 to the teachers ? In their case also we are asked to apply 
 the principle of the economy of high wages. To reduce 
 their earnings by taxation is surely a queer beginning. Many 
 classes of income tax-payers — the professional classes and 
 most of the middle classes — will certainly find the con- 
 tinuance of war taxation after the peace a heavy burden. 
 If the income tax is not a burden, why should so much 
 stress be laid on the exemption from income tax of the 
 War Savings Certificates ? 
 
 Similar arguments may be applied to every part of our 
 tax system. It is only other people's taxes that seem to us 
 too light — only the excess of incomes above our own that 
 seem unearned. The really unearned incomes, after all 
 allow^ances are made and all precautions are taken against 
 injuring the source, are not nearly sufficient to meet the 
 dead-weight charges of the war debt. 
 
 So long as the public loans are being spent as they have 
 been spent in this country during the war, the receivers of 
 the money do not feel the burden^ — their war bonuses exceed 
 their war taxes. There is a general feeling of prosperity 
 amongst large classes. In the careless expenditure of the 
 loans the old peace standards are lost sight of. A million 
 a year is a mere trifle. What is one amongst so many ? If 
 we borrow a thousand millions at 6 per cent, instead of 
 5 per cent., what is ten milHons a year to a great country 
 like this ? The true answer is ten millions more in taxes. 
 
 Early in the war we used to assume that with the return 
 of peace borrowing would come to an end and the war taxes 
 would be reduced. If borrowing does cease there must be
 
 THE REAL BURDEN OF A NATIONAL DEBT 409 
 
 a great hardening of heart of our financial advisers. Loans 
 for reconstruction will be called productive. Government 
 will be invited to make vast speculations in unearned 
 increments. All the old arguments on the socialisation of 
 national welfare will be worked into excuses for more debt. 
 
 In such an atmosphere, to stop borrowing and to continue 
 war taxation will be hard indeed. But some time or other 
 the borrowing must stop, and thelonger it lasts the heavier 
 the taxation to pay for it — unless the speculations for 
 unearned increments under State management have a 
 miraculous success. 
 
 The foregoing argument is not meant to imply that on 
 the financial side we have reached the limit of our war 
 strength. Not so. We can borrow more, and we can pay 
 more taxes. We have a long way to go before we reach the 
 strain already imposed on the other belHgerents. But, 
 morally as well as economically, it is time for us to think 
 of debt in terms of deferred taxation, and to think of taxation 
 not as a national benefit but as a national burden.
 
 CHAPTER XXXV 
 
 FREE TRADE AND PROTECTION 
 
 A Reconciliation 
 
 [November 25, 1916) 
 
 It is quite easy to state the case for Free Trade on the 
 one side and for Protection on the other in such a way that 
 reconcihation is impossible. This way is, indeed, not only 
 easy, but popular. Each side lays down a set of short and 
 simple dogmas, and if they are not at once accepted and 
 put into practice, accuses the other side of a shortage of 
 intellect or morality. Says the Free Trader- — " Every import 
 means an export. Open wide all the doors. Make no charge 
 for admission. All will be well if you only stick to free 
 imports." Says the Protectionist — " Markets are hmited. 
 The home producer has the first claim to home markets. 
 Impose on all foreign goods an all-round entrance fee, with 
 extra charges for the better places, and no admittance to 
 the very best." Between absolute freedom of entry and a 
 minimum tariff graduated up to total prohibition no recon- 
 ciliation is possible. 
 
 This is only one example of the opposition of popular 
 dogmas on Free Trade and Protection. There are many 
 more of these oppositcs^ — each to each, as we used to be 
 taught in our Euclid. Look to the consumer, says one. 
 Consumers must first be producers, says the other. In time 
 the dogmas take on the fervency of religious creeds. The 
 controversy is waged with more than the proverbial theo- 
 logical hatred and narrowness. I once asked the late 
 Professor Flint — the last survivor of men of universal know- 
 ledge — if there was any more narrow-minded man than the 
 rnaterialistic man of science. None, he said, except the
 
 FREE TRADE AND PROTECTION 411 
 
 theologian. The dogmatic Free Trader, and equally the 
 dogmatic Tariff Reformer, each in his ov/n way combines 
 the narrowness of the two kinds. 
 
 Fortunately, although there is no way of reconcihation 
 of these extreme popular dogmas, there are two well-tried 
 paths of peace still open. The first is shown to us by the 
 experience of great nations, and the second by the wisdom 
 of great writers. 
 
 Take hrst the appeal to the history of great nations. The 
 appeal reveals an extraordinary combina-tion of the two 
 opposing methods^ — namely, the methods of Free Trade 
 and Protection. In all the great progressive nations internal 
 In-ee Trade has displaced internal Protection. There was 
 a time in England when every town protected itself against 
 every other town. Every town had its own market or 
 markets, and the foreigner was only admitted under the 
 most suspicious surveillance. For this purpose the native 
 of any other town was a foreigner. The market regulations 
 of the towns of mediaeval England are as curious as the 
 armour and the dresses. And yet every one of these fan- 
 tastical regulations had its origins (like the superstitions 
 of the Golden Bough) in reason according to the outlook of 
 the times. But with the growth of a national economy all 
 these curious devices were whittled away into nothingness. 
 
 When England was united to Scotland the opposing 
 Protections were welded into one internal Free Trade. One 
 of the most enduring of Irish complaints was that the union 
 with England involved Free Trade — but the rule was fol- 
 lowed. In the mighty colonial expansion of Britain one of 
 the causes of the American disruption was that this policy 
 of Free Trade within the Empire was not sufficiently de- 
 veloped. Britain, indeed, gave much greater freedom in 
 the way of trade to its colonies than did any other great 
 nation, but the restraints that were imposed in favour of 
 the Mother Country — the Protectionist policy of England 
 against its own colonies — was a source of sentimental 
 friction. 
 
 Other examples on a large scale of the development of
 
 412 WAR FINANCE 
 
 the rule of internal Free Trade need only the barest mention. 
 The United States of America within its own borders has 
 Free Trade. The German Empire only began to be an 
 Empire when it abolished the multitudes of the Customs 
 duties imposed in truly mediaeval fashion by each of the 
 German States against the rest. The British Dominions 
 have followed on the same lines of internal freedom. Inter- 
 State Protectionism has been broken down on the accom- 
 plishment of a wider and closer political union. 
 
 It is not unreasonable to argue that this displacement of 
 internal variegated Protectionism by uniform Free Trade 
 in national development must have as its basis some great 
 national advantages. In the history of nations the advance- 
 ment towards internal Free Trade stands out almost as a 
 natural law of progress. 
 
 It is, however, equally remarkable that if internal Free 
 Trade has been one of the goals of national progress, so also 
 has external Protection. The United States and the German 
 Empire, for example, have combined external Protection 
 with internal Free Trade. So has Italy, so has France, and, 
 indeed, there is only one notable exception. Who can say 
 off-hand that, in the light of experience, external Protection 
 has retarded the industrial progress of these great nations ? 
 
 The one notable exception is furnished by the British 
 Empire, and there the exception is only partial and may be 
 said to prove the rule. The British Empire, as a whole, has 
 not adopted internal Free Trade. The overseas Dominions 
 are Protectionist against the Mother Country. It is, however, 
 noteworthy that with the growth of ideas of closer political 
 union advances have been made in the direction of internal 
 Free Trade by the development of preferential duties. 
 Probably this movement would have been accentuated but 
 for the fact that the United Kingdom was itself the only 
 notable exception to the general rule of external Protection. 
 Owing to this policy, we had nothing to offer in return in 
 the way of preferences. But in the light of the present war 
 the most confirmed Free Trader would hardly deny that 
 within the United Kingdom there has grown up a strong
 
 FREE TRADE AND PROTECTION 413 
 
 feeling that as regards enemy countries the United Kingdom, 
 for a more or less considerable period at any rate, must 
 break with the simple rule of freedom and follow the example 
 of the other great nations. 
 
 Surely in the light of this broad survey, it is reasonable to 
 suppose that in each of these great policies there are elements 
 of strength and advantage. The old argument that Germany 
 would have been even more prosperous under Free Trade 
 may be balanced against the other old argument that the 
 United Kingdom would have made even greater progress 
 under external Protection. Probably Germany would have 
 done better with less cunning and Britain with lesssimplicit^^ 
 
 The conclusion suggested by the appeal to experience that 
 in both systems there are elements of advantage is confirmed 
 by the wisdom of great writers. This is the second path of 
 reconciliation, and may be specially recommended to the 
 practical man. The practical man dearly loves to quote 
 a recognised authority in support of his argument. The 
 worst of it is that in economic ideas a writer only becomes 
 an authority after he is dead. And then the practical man 
 on the other side is apt to retort : " What can a dead man 
 know of the problems of to-day ? " Adam Smith, we are 
 told by the practical Protectionist, published his great book 
 just one hundred and forty years ago. The odd thing is 
 that the same practical man will give as his authority List, 
 oblivious of the fact that List published his great book 
 just seventy years ago. Are we to suppose that the authority 
 of List is just twice as good or twice as fresh ? Of course, 
 when we look carefully into the meaning of this time test, 
 we find that the really great writers are always in advance 
 of their time, and that time never overtakes and passes the 
 greatest of them all. The practical Free Trader and the 
 practical Protectionist may be well assured that Adam Smith 
 and Friedrich List are both still in advance of the dominant 
 living thought of their respective countries. Their books 
 will not give cut-and-dried answers to our practical problems, 
 but they will give some of the ideas by which they may be 
 solved. And, as it happens at the present crisis, what is
 
 414 WAR FINANCE 
 
 most needed is to emphasise the points of agreement rather 
 than those of difference in these two great writers. 
 
 The Germans have begun to discover the greatness of 
 their prophet a Httle too late. In the matter of creative ideas 
 List was the architect of the German Empire. So long as 
 the builders followed his plan that Empire grew and pros- 
 pered. It is now threatened with ruin because they have 
 brought in a new set of ideas, or rather they have revived 
 old ideas which to List were repugnant. 
 
 The dominant influence over List was the expansion of 
 England into the British Empire. List thought in history, 
 and most of all in British history. On occasion List made 
 most bitter attacks on English policy, but his eulogy of the 
 British Empire as compared with other great Empires is 
 enthusiastic. At a time when Germany was split up into a 
 number of principalities with its own protective policy, List 
 drew up his scheme for a great Customs Union, with internal 
 Free Trade amongst all the German States. Internal 
 consolidation on a Free Trade basis was to be followed 
 by external expansion with protection against outsiders, 
 especially against England. On the view of List, England 
 had gained her commercial supremacy by the methods of 
 Protection. She only threw away the ladder ^when she had 
 reached the summit. 
 
 Germany was to follow the example of England not only 
 in commercial but in political expansion. The Government 
 of the new Germany was to be constitutional, and based on 
 liberty. Greater Germany was to expand through South- 
 Eastern Europe into Asia. Turkey was to be the German 
 India. 
 
 Greatly influenced by England, List was a firm believer 
 in the power of the sea. Germany must also have overseas 
 possessions protected by her own navy. This great German 
 Empire was to be created not on the ruins of the British 
 Empire, but side by side. The world was big enough to 
 admit of both expansions. List hoped for a real, genuine 
 alliance or understanding with England. The last efforts 
 of his life were directed to tlie furtherance of such an agree-
 
 FREE TRADE AND PROTECTION 415 
 
 merit. His latest biographer says that he died of disappoint- 
 ment on the faikire of his proposals for such a closer union. 
 
 It is easy to see now where the latest German builders 
 went astray. They stifled constitutional liberty and set up 
 militarism. In place of friendly rivalr}/ with the British 
 Empire, they planned its destruction. No wonder that 
 in Germany the cry is now being raised of " Back to 
 List." 
 
 List was no narrow Protectionist. He was the very 
 reverse. He was the greatest of the Protectionist writers, 
 but the greatest because he was the broadest. If our own 
 narrow Protectionists would only read List instead of mis- 
 quoting h'm they would shiver. Did their own particular 
 prophet really say that England ought to have adopted 
 Free Trade immediateh^ after Waterloo instead of waiting 
 for the potato famine? He really did. Did the same 
 prophet really say that protective duties were properly only 
 educative taxes ? Did he also think that agriculture needed 
 no protection ? That all duties should be moderate, and 
 none prohibitive ? Yes, these and many other queer ideas 
 were held by the greatest prophet of Protection. It might, 
 perhaps, be thought that List was a careless writer, and 
 his little exceptions must not be taken without the context. 
 He was certainl}^ a very careless writer. Most of his life he 
 was a journalist. A journalist has not time for research. 
 His consistency is of the short-period variety ; how else 
 can he be up-to-date or interesting ? List, however, was 
 not merely a journalist, but a great thinker and an enthusiast 
 for certain great ideas. Amongst these great ideas were his 
 ideas on commercial policy. 
 
 One of the most careless things that List did was to affix 
 the name of Adam Smith to opinions which were in many 
 cases the very reverse of his fundamental positions. It is 
 true that very often List attacks, not Adam Smith by name, 
 but what he calls " the School." " The School " is the 
 short name for the narrow dogmas on commercial policy 
 associated with the name of Adam Smith. Sometimes, how- 
 ever, List misuses the name of Adam Smith and fastens it
 
 4i6 WAR FINANCE 
 
 on to dogmas utterly opposed to the real ideas of the old 
 Adam. 
 
 If the narrow Free Trader will only read Adam Smith 
 instead of misquoting him, it will be his turn to shiver. And 
 he will probably shiver even more than the follower of List, 
 because Adam Smith was the very reverse of a careless 
 writer. He spent the greater part of his life in getting the 
 material for the " Wealth of Nations," and he took about 
 ten years to write it. He was not a journalist in a hurry — 
 quite the contrary. He is, however, one of the clearest of 
 writers. He uses no technical words. He is popular in the 
 best sense of the term. He is not a mathematical economist. 
 Anybody who can read a leader in a newspaper can read 
 Adam Smith. But whilst the reader of a leader generally 
 finds in it more or less what he buys his paper for, the 
 present-day Free Trader will find in his Adam Smith a series 
 of shocks and surprises. Instead of being cosmopolitan, 
 Adam Smith was intensely nationalist, or rather Imperialist. 
 This part of his work, after being entirely neglected, is now 
 bearing fruit. Adam Smith wrote on the eve of the disruption 
 of the British Empire by the severance of the North American 
 colonies. He propounded as an alternative a great federation 
 with a truly Imperial Parliament. 
 
 Free Trade was only one part of his subject, and in his 
 statement of it he also stated the fundamental ideas of what 
 is supposed to be the alternative policy of Protection with 
 greater force than they have been stated by any professedly 
 Protectionist writer. In no writer, for example, is so much 
 importance attached to home trade and the employment 
 of labour and capital in the home country, and especially 
 in agriculture. It is against the methods of Protection that 
 his attack is directed. The restraints, he argued, must in 
 nearly all cases be either hurtful or useless. That is the 
 great negative argument for Free Trade that has always 
 been its strongest support. 
 
 The popular idea that Free Trade is always theoretically 
 the best policy for every nation, but that for practical or 
 political reasons some occasional exceptions may be admitted
 
 FREE TRADE AND PROTECTION 417 
 
 is just the reverse of the teaching of the great economists 
 from Adam Smith downwards. It is easy to point out in 
 theory most important exceptions — the real difiiculty is to 
 put them into practice without causing more mischief 
 indirectly. Adam Smith's most famous exception to Free 
 Trade — and one of most interest at the present time — was 
 the policy embodied in the Navigation Acts. Curiously 
 enough, this was the first part of the old system to break 
 down, simply through the difficulty of working it in practice. 
 
 It is not, however, for their treatment of any particular 
 problems that the modern reader is recommended to read 
 either Adam Smith or List. To learn to quote them cor- 
 rectly may be an elegant accomplishment, but probably 
 misquotation would be more popular. The real use of 
 reading these great writers is to get some of their breadth 
 of view and elasticity of thought. When the present war 
 comes to an end there will be an opening for laying 
 down a great national trade policy such as never before was 
 offered to this country or this Empire. There is an un- 
 rivalled opportunity for breaking away from old dogmas and 
 taking the best of both great policies. 
 
 The real strength of Free Trade lies in the stress laid on 
 the character and initiative of the individual. Its great 
 danger is that unlimited competition may destroy the ideas 
 of nationality and national w^elfare. The strength of the 
 opposing system is in organisation and in the stress laid on 
 the power of good government. Its great danger is that 
 too much government will destroy the character and force 
 of the individual. 
 
 List brought out most clearly and emphatically the 
 necessity of organisation — Adam Smith the necessity of 
 giving full play to individual energy. What we need at 
 present is the best of both systems. And what we have to 
 avoid is the worst in both. On these general texts many 
 practical sermons might be written.
 
 CHAPTER XXXVI 
 INFLATION AND THE RISE IN PRICES 
 
 {December 23, 1916) 
 
 The public expenditure, according to the statement of 
 Mr. Bonar Law, has risen from £5,000,000 to £5,700,000 
 a day. The total expenditure of this country since the 
 outbreak of the war is £3,852,000,000. "It is a colossal 
 figure, but I do not think it is an appalling figure.' If it is 
 not an appalling figure it is onl}^ for the reason given by the 
 Chancellor in the sentence immediately preceding : " I do 
 not think we can in the least grasp v/hat it means." It is 
 surely time that the Government and the people of this 
 country began to realise the meaning of this " stupendous " 
 war expenditure. With national service, unless we alter 
 our methods, another great rise in expenditure must be 
 expected. 
 
 There are many ways of getting pretty vivid ideas of the 
 real meaning of our expenditure. We can work it out in 
 terms of taxes — every man for himself. The end of the war 
 will not mean the end of war taxes ; it will only mean the 
 end or the beginning of the end of spending borrowed money. 
 The appointed time will come at the end of the war for the 
 stoppage of the war bonuses. 
 
 Another vivid way of realising the effect of our expendi- 
 ture is to consider the terms on which the British Government 
 can borrow the money it needs. In the home country it 
 pays 6 per cent, for loans repayable in three years — the 
 kind of period that gives to the lender the maximum advan- 
 tage of the combination of the short and the long period 
 loan. It is true that some of this interest is got back in 
 income tux. But we are also borrowing from Japan at
 
 INFLATION AND THE RISE IN PRICES 419 
 
 6 per cent., free of all taxes. In the United States we have 
 to provide collateral security. The Federal Reserve Board 
 has warned the banks against locking up their resources in 
 the bills of warring powers which will have to be continually 
 renewed. The warning was specially directed against the 
 Treasury bills of this country. To our own bankers and other 
 providers of money in a liquid form these bills have been 
 issued to the extent of over 1,100 millions. From the banking 
 point of view this also ought to be a pretty vivid way of 
 grasping the meaning of ' ' colossal ' ' and ' ' stupendous 
 when applied to our public expenditure. 
 
 Another vivid way of realising the weight of the burden 
 of the war is to consider the rise in prices. Once more the 
 Econoniisi idex number has passed ail records. Compared 
 with the basic number of 100 for the years 1900-05, and with 
 ii6-6 at the end of July, 1914, the last return for November 
 is 217-2. That is to say, as measured in this way prices have 
 more than doubled compared with the beginning of the new 
 century. 
 
 It is to this aspect of our " colossal " expenditure that 
 singularly little attention has been paid by our financial 
 authorities. Yet it is roughly true that if the prices of things 
 in general have doubled, our aggregate expenditure has so 
 far been also doubled. If the rise in prices is to continue, 
 then for the same quantities of munitions and other sup- 
 plies we shall have to pay increasing amounts, and another 
 20 per cent, rise in prices will so far mean another million 
 a day. 
 
 In the first paper of this series, published in the first week 
 of the war, the question was discussed of the possible effects 
 of the war on prices. Contrary to the popular opinion, it 
 was shown that there is no necessary connection between 
 war and high prices — that is to say, general high prices. 
 Some things, of course, immediately rise in price owing to 
 the special demand for war purposes, as in the old days 
 for saltpetre and cordage. But, as was clearly shown by 
 Tooke in his great "History of Prices," up to the end of 
 the eighteenth century there was no observable coincidence
 
 420 WAR FINANCE 
 
 of a general rise in prices in war and a fall in peace. He 
 confirmed the opinion by a table of the years of war and 
 peace extending from 1688 to 1792. A similar survey from 
 that period down to the outbreak of the present war gives 
 the same result. The alternations between high and low 
 ranges of prices do not conform to the alternations between 
 peace and war. For two years after the conclusion of the 
 Franco-German War prices rose very rapidly to a much 
 greater height than during the war. 
 
 It was, however, admitted by Tooke that " if a state of 
 war includes the supposition of an increase in the quantity 
 of money, then indeed the case is altered." Following up 
 this same principle, I pointed out that the course of prices 
 in the present war would depend largely on Government 
 policies regarding money. If a general war should lead to 
 a general contraction of credit and a pressure on gold — as 
 seemed very probable in the first week of August, 1914 — 
 so far general prices would tend to fall and not to rise. If, 
 on the other hand, the currencies of the nations were inflated 
 by large issues of paper money, and credit were inflated by 
 exceptional Governmental guarantees, then a general rise 
 of prices might be expected. If in any country inconvertible 
 notes were issued without due regard to the principle of 
 limitation, then no limit could be assigned to the rise in 
 prices in the country concerned. 
 
 The course of events has shown that all the Governments 
 of the great belligerent countries have inflated their cur- 
 rencies and expanded their credits. Instead of there being 
 any world pressure on gold, the reverse has happened. Gold 
 has overflowed into neutral countries, so that they have 
 become alarmed lest the excess of gold should in their case 
 also give rise to inflation. Sv/eden has placed limitations 
 on the payment for her exports by gold and on the coinage 
 of gold. 
 
 The United States has at present only reached the stage 
 of lamentations on the over-abundance of gold. Mr. Wilson 
 has not yet written a note about it. But the American 
 Labourists have written a note to Mr. Wilson on the rise
 
 INFLATION AND THE RISE IN PRICES 421 
 
 in prices. They have invited him to say whether the rise 
 in the cost of Hving — which has at last become noticeable 
 in the United States — is to be ascribed to cornering and 
 profiteering or to a shortage of American stuff due to expor- 
 tation to Europe. The President, when he has had time 
 for looking into all the evidence, will perhaps reply that the 
 rise is largely due to an over-abundance of money, and that 
 in a state of war a certain amount of inflation of prices is 
 as unavoidable as a certain amount of sinking of American 
 and other neutral seafarers. War prices and war risks in 
 America, as elsewhere, may be made to answer for a multi- 
 tude of financial sins. 
 
 That an undue increase in the quantity of paper money 
 is likely to bring about an inflation of prices was perhaps 
 that part of economic theory which before the war had been 
 most commonly accepted as true and abundantly confirmed 
 by history. All the great nations had been warned by their 
 own experience of the dangers of over-issue of paper money, 
 and had placed such issues under stringent regulations. In 
 no country had the regulations been made so stringent as 
 in England. The system of the Bank of England was 
 described as a cast-iron system. 
 
 This excessively stringent regulation of the note issues 
 was the more remarkable because as regards other forms 
 of bankers' credit the maximum of freedom was allowed. 
 Any bank could give a cheque-book to whom it pleased, 
 and open an account under any conditions it liked. The 
 kinds of investments and the proportion of reserve were not 
 governed by bankers' law, but by bankers' sense. 
 
 The contrast between our cast-iron system in notes and 
 our cast-loose system in all the other functions of banks 
 was often the subject of comment, generally sarcastic. But 
 the general opinion seemed to be that after all it did not 
 matter much what the regulations were regarding the notes, 
 because the notes were practically of very little importance 
 in such a country as this. 
 
 More than forty years ago Bagehot called attention to 
 the democratic character of our banking as one of the great
 
 422 WAR FINANCE 
 
 factors in our commercial supremacy. Since that date the 
 democratic character has been intensified. In the address 
 of the President of the Institute of Bankers, pubUshed in 
 the current number of the Journal of the Institute, it is 
 said that there are about five million accounts open with 
 the"joint-stock banks. Taking the deposits at one thousand 
 millions (the pre-war figure), that gives an average of £200 
 per account. In the same address it is said : — •" Our system 
 has made it possible to dispense with coin and notes in the 
 everyday transactions of life, and it has gathered into one 
 great store the loose cash of the people." 
 
 When we know that the bankers' clearings amount in 
 normal years to over £16,000,000,000 per annum, and know 
 also that this amount represents only part of our credit 
 transactions, and when we set against these fabulous sums 
 the tiny amount of gold and notes, there is no wonder that 
 we were accustomed to look on the notes and their functions 
 as quite insignificant. 
 
 Accordingly, when on the outbreak of war the Government 
 printed off one pound and ten shilling notes as fast as 
 they could, nobody supposed that anything unusual had 
 happened. Any banking criticism was directed only 
 against the quality of the paper and the printing. Not 
 only was the old principle of limitation abandoned, but 
 the new one put in its place was the very opposite. Any 
 bank was to be allowed to get the new notes up to 20 per 
 cent, of its total liabilities and current accounts as shown 
 in its monthly statement last issued before August 6, 1914. 
 The amount of notes issued was treated as an advance by 
 the Treasury to the bank, bearing interest from da}^ to 
 day at the current Bank rate. The bank was allowed to 
 repay the whole or any part of such advance either in 
 currency notes or otherwise. 
 
 The consequence of issuing notes in this way, with the 
 provision afterwards made effective that they could only 
 be converted into gold at the Bank of England, was to make 
 the notes dc facto inconvertible. This country gradually 
 adopliHl in an indirect or disguised manner the method of
 
 INFLATION AND THE RISE IN PRICES 423 
 
 inconvertibility which had been avowedly adopted by the 
 other belligerents at the beginning of the war. With incon- 
 vertible notes it cannot too often be repeated that the only 
 way to limit the rise in prices is to limit the notes. 
 
 In the case of these other belHgerents we have no difficulty 
 in ascribing a good deal of the rise in prices to the inflation 
 caused by excessive note issues. The case of Russia is 
 perhaps most interesting. One of the reasons for our ill-fated 
 Dardanelles expedition was to make available the over- 
 abundant supplies of Russian wheat and other food-stuffs. 
 Russia was the land of plenty. Yet, according to the last 
 Russian supplement of the Times, prices in Russia of the 
 principal articles of consumption have risen actually more 
 than in Germany. Of seventeen articles quoted, only six 
 had risen more in Berlin than in Moscow, and grain, sugar. 
 and meat had increased in Russia from one and a-half times 
 to twice as much as in Germany. 
 
 In the same way we are all quite prepared to admit that 
 in Germany one of the causes of the great rise in prices of 
 all kinds is the over-issue of paper money. 
 
 Why, then, should we suppose that we alone are to be 
 exempt from the consequences of the inflation of our cur- 
 rency ? Is it really the fact that " it is possible to dispense 
 with coin and notes in the everyday transactions of life ? 
 Is it true that we have so developed our cheque system that 
 the amount of issues of the notes is of no practical import- 
 ance ? By all means let the experiment be made. Let the 
 wages bill of the country for a single week be paid in cheques, 
 and let these cheques be the only currency. Let the multi- 
 tudes of our workers go into the shops or the railway stations 
 or the public-houses and offer their cheques in payment. 
 The experiment will not be made, because it is impossible. 
 
 This last week there has been a further large expansion of 
 Treasury notes, and the total now outstanding is over 
 141 millions. How much longer are these increases to take 
 place ? Has our vaunted cheque system broken down ? 
 On the contrary, everybody knows that our banking business 
 has never been more active. And part of this extra activity
 
 ^24 WAR FINANCE 
 
 is due to the simple fact that our banks as a whole, instead 
 of having to keep up a stock of " hard " money to provide 
 for their internal needs, have only to get a sufficiency of 
 " soft " money in the form of the Treasury notes. 
 
 In the time of the great bimetallic controversy in the 
 'eighties the commercial and financial stability of this 
 country was supposed to depend on the maintenance in its 
 full integrity of the gold standard. In those days our 
 bankers worshipped the gold standard. To them it was 
 unthinkable that monetary contracts made on a gold basis 
 could be settled in silver. Even in the United States the 
 chief argument against making silver full standard money 
 for all purposes was the fear of over-abundance and inflation. 
 Silver was branded as " soft " money. The " hard " gold 
 standard was not to be diluted with the " soft " silver. 
 
 But silver, after all, is a precious metal, and, compared 
 with unlimited paper money, silver is adamantine in its 
 hardness. So long as the paper money is under all circum- 
 stances immediately convertible into gold on demand the 
 provision of the gold gives a necessary limitation. But we 
 have increased the issues of our Treasury notes since May, 
 1915, by one hundred millions without providing any new 
 gold in reserve. And still the issues continue. What is the 
 reason for this marked neglect of the principle of limitation, 
 which is the foundation of any sound system of paper 
 money ? The artificial stability of the exchange with the 
 United States, which is kept up by a stream of exported 
 securities, is no evidence that within the country there is 
 not a general depreciation of the currency. Of course, so 
 long as people are content to ascribe the high prices simply 
 to " the war," they will pay no regard to the excessive issues 
 of paper monc\\ Even bankers as a rule pa}^ no attention 
 to movements in general prices. Bankers, however, ought 
 to have observed with some concern the cases recently 
 reported of heavy penalties imposed on persons in this 
 country for attempting to sell sovereigns for a shilling or 
 eighteen-pence above the normal value. 
 
 Quite recently the argument has become fashionable that
 
 INFLATION AND THE RISE IN PRICES 425 
 
 high prices are a blessing in disguise, because high prices 
 check consumption. High prices do not check consumption 
 if for every rise there is a demand for war bonuses to meet 
 the rise in the prices. High prices check consumption only 
 if the incomes of people remain the same. But by the lavish 
 expenditure of borrowed money the incomes of large masses 
 have been raised. So long as our credit and securities last 
 we can pay the high prices for imports, but the method of 
 war bonuses is fatal to any economy through high prices. 
 In one of his latest ofhcial utterances Mr. Runciman said 
 that too little attention had been paid to inflation. It will 
 be extremely interesting to observe any steps taken by the 
 new Prime Minister to check inflation and extravagance. 
 An old proverb reminds us that he ought to make a very 
 good hand at the business.
 
 CHAPTER XXXVII 
 
 THE GENEROSITY OF THE WAR LOAN AND THE 
 ALTERNATIVE 
 
 {February 3, 1917) 
 
 Any criticism of the War Loan during the period of 
 subscription may perhaps be considered out of season. 
 Fortunately, however, the most severe criticism that can 
 be offered ought to give the greatest encouragement to 
 investment in the new loan. Every point of criticism is 
 a point in favour of the investor. The chief fault of the 
 loan is that it errs on the side of generosity. The terms 
 offered to the investor are too favourable. There is, how- 
 ever, a perfectly simple explanation of the present high 
 rate. From the beginning of the war the Government has 
 always been paying more than it ought, not only for its 
 goods and its labour (except the labour of actual fighting), 
 but for its money. Not only was the rate of interest raised 
 too rapidly to too great a height, but the Governmental 
 loans were made more attractive by a succession of curiosities 
 in the way of war bonuses. 
 
 Every bonus on War Loans — every extra little attraction 
 to the investor— costs money. It costs money that must 
 in the last resort be raised out of the forced economy of 
 •taxation. No amount of misty circumlocution can hide 
 this simple truth. The cumulative effect of these little 
 bonuses is to raise the rate of interest. Besides the expense, 
 they create a mass of unnecessary complicated business 
 and dull the sense of patriotism. The lender to the State 
 is taught to expect more and more favourable terms. 
 
 One example strikes the eye at the present time. Just 
 at the critical stage of the war, when most of all new money 
 is needed, the business energies of the financial world are
 
 THE GENEROSITY OF THE WAR LOAN 427 
 
 distracted by the complicated conversion of former loans. 
 These conversions not only bring in no new money^ — it was 
 part of the bonus on the old loan that no new money was 
 to be demanded on conversion — but the effect is to make 
 a fresh demand on new money raised by taxes to pay the 
 increased interest. The expense of this bonus was not the 
 only evil. Ever since the promise was given the old sub- 
 scribers have been looking out for the higher rate. They 
 understood not only that they would share in a rise in the 
 rate of interest if a rise were necessary, but they were led 
 to believe that a rise must come as a matter of course. The 
 delay was a grievance. Accordingly when the new loan 
 was announced with the higher rate, and with some of the 
 usual little bonuses, they only thought that their just 
 expectations were at last being realised. 
 
 The present high rate offered for the new loan, and the 
 garnishing of it with new bonuses, has nothing whatever 
 to do with the security of the loan. For the ordinary 
 investor as distinct from the speculator, the new loan is 
 the best security in the market. This was made evident 
 by the fall in the price of other securities, which simply 
 meant that they became less attractive as compared with 
 this new loan. 
 
 The only reason for calling attention once more to the 
 weakness of the financial pohcy which has raised so unduly 
 the rate of interest on British Governmental loans is to 
 emphasise the investor's present opportunity. The gene- 
 rosity of the loan is too great because the former financial 
 policy was too weak. The financial pohcy was not only 
 weak, but wasteful. It was bad economy just when good 
 economy was most needed. In a war of endurance every- 
 thing in the last resort depends on economy. And economy 
 covers a good deal more than a healthy reduction of meat 
 and drink. It includes economy in borrowing money. 
 Economy, said the old Latin tag, is the greatest source of 
 revenue. It was long ago pointed out in these papers that 
 the British Government by any test was paying far too high 
 rates for its money. The only excuse offered that made
 
 428 WAR FINANCE 
 
 any show of reason was that it was necessary to pay high 
 rates to attract neutral money. At last, after millions 
 have been wasted, we are told in the sober columns of the 
 Economist' that it is quite easy to pay higher rates for 
 neutral money than for home money. Such, indeed, it is 
 now said, is the belief in the City. It is discouraging to 
 think that it should have taken years of war to discover 
 this plain truth. Everybody knows that there is not one 
 rate of interest, but a multitude of different rates, varying 
 with different conditions. Anybody who professes not to 
 know has only to look at a Stock Exchange list. The 
 British Government could offer on every point the best 
 conditions favourable for a low rate. Not only is the 
 security the finest in the world, but from the very beginning 
 of the war a stringent check in this country had been imposed 
 on any other kind of investment. The Government really 
 put itself in the position of having a buyer's monopoly in 
 the borrowing of money. But this immensely strong posi- 
 tion was frittered away to such an extent that the British 
 Government was actually paying last year more than 
 6 per cent, for short loans in its own market. 
 
 The new Chancellor of the Exchequer could not all at 
 once break the vicious habit of the war bonus in the matter 
 of borrowing. But he has taken the first step. Instead of 
 saying to the doubting investor, " Please do not hesitate to 
 lend now, for as soon as ever the rate of interest rises, and 
 it will not be long, you shall have your share," Mr. Bonar 
 Law told him that he would never again have so good an 
 offer. He intimated also at the same time that if the present 
 loan did not answer the national requirements, the next 
 would not be so favourable and the method would not be 
 voluntary. That was the alternative. 
 
 It would do much for the success of the loan if this part 
 of the argument were enforced by those in authority with 
 more vigour. The war must be carried on. The land is 
 a land flowing with money and credit. In the face of the 
 quantities and qualities of compulsion already swallowed 
 any squeamishness about a forced loan v\'ould be ridiculous.
 
 THE GENEROSITY OF THE WAR LOAN 429 
 
 For many reasons a voluntary loan is preferable. But 
 when the income tax on incomes from investments has 
 reached five shillings in the pound, to say nothing of the 
 super-tax, to the owner of capital a forced loan might well 
 seem preferable to a still higher income tax. Perhaps the 
 strongest objection most people feel to a forced loan is in the 
 sentimental idea that Germany has not yet been compelled 
 to adopt this expedient. If Germany has evaded this 
 special form of compulsion, it is only because more and 
 much worse forms of compulsion have been enforced. We 
 have had far too much of comparisons with Germany. 
 Surely by this time we ought to be rather encouraged to take 
 any course of action not adopted by Germany. 
 
 In the meantime, further consideration of the alternative 
 may be deferred. It is sufficient to be assured that the 
 present terms for the free-will offering are better than any 
 terms to be offered in the future, whether voluntary or 
 not. 
 
 It seems pretty clear that Mr. Bonar Law himself thought 
 that 5 per cent, was the limit for the British Government 
 in its own markets, even though that 5 per cent., like all 
 the other incomes from other investments, was subject to 
 income tax varying with the needs of the country in war- 
 time. It was a pity he was induced to spoil the sweet 
 simplicity of the 5 per cents.- — what a change in itself from 
 the sweet simpHcity of the old threes — by the addition of 
 bonuses, which mean probably that the real cost of the loan 
 is nearer 6 per cent, than 5 per cent. 
 
 All these bonuses, however, which add so much to the 
 cost of the loan to the State, are so much added to the 
 benefit to the investor. Consider, for example, the Sinking 
 Fund. From the investor's point of view the effect will be 
 that the price of his security will be more steady. The 
 very object of the Sinking Fund is to steady the price of 
 the loan. So far as it operates it will have this effect. It 
 will be an additional element in value of the new loan com- 
 pared with other investments not so provided. But from 
 the point of view of the State, a sinking fund that is not
 
 430 WAR FINANCE 
 
 raised by taxation is usually worse than useless. If there 
 is no surplus of revenue, it must be itself raised by borrowing. 
 And generally this means borrowing at a higher rate. If, 
 however, by the aid of a little compulsion the Government 
 in the future borrows at more reasonable rates, the Sinking 
 Fund used to extinguish some of the old debt may pay its 
 own expense. In any case, the investor in the new loan 
 has another little bonus in the Sinking Fund. 
 
 In the same way the price of issue at 95 is not good 
 finance from the public point of view. It means that for 
 every £95 pounds which the Government receives it pays 
 £S interest, whilst the debt to be repaid is ;^ioo. If with 
 its conversions the new loan reaches only 2,000 millions, 
 the Government will have to pay back a hundred millions 
 more than it has received in capital. But once more we 
 have an excellent little bonus for the investor. With the 
 close of the war his stock is likely to rise to a premium on 
 the price of issue,* 
 
 The concession by which the income tax is not levied at 
 the source, having regard to the frailty of human nature 
 and other hazards, is likely to reduce the revenue and to 
 save the pockets of the tax-payer whoowns War Loan. Simi- 
 larly the provision for the payment of death duties in War 
 Loan Stock gives the Government its own paper instead of 
 new money — again a benefit to the private lender at the 
 expense of the public borrower. 
 
 It is not necessary to dilate further on the generosity of 
 the loan, and the time for the alternative is not yet. There 
 are, however, two points on the generosity side of the argument 
 which may still be pressed on those in authority. There is 
 the appeal to the small investor, and there is the appeal to 
 the investor who has to borrow the money. It is doubtful 
 if within the limits of time assigned for subscription these 
 
 * In Part II , Chap. IX , p. 222 sq., on the probable effects ot war on 
 the rate of interest, a considerable rise after the war was anticipated. 
 The possibility of the Five per cent. War Loan rising above 95 after the 
 war depends partly on the date of redemption and partly on the expecta- 
 tion that, as predicted by Mr. Bonar Law, the Government would never 
 again offer such liberiil terms.
 
 THE GENEROSITY OF THE WAR LOAN 43 1 
 
 two sources will be made as productive as they might be. 
 As regards the small investor, the War Savings Certificate 
 is preferable both to the State and to the investor. It is 
 better economy, and the interest is not paid until after the 
 war. H, however, the small investor does not like to defer 
 the interest for so long and prefers the 5 per cent, of the 
 new loan, surely it would be easy to devise some mode of 
 payment of a continuous kind. 
 
 With regard to borrowing from the banks, it seems as 
 if a longer time were needed before the scheme is likely to 
 be understood by the small or moderate investor, who 
 knows nothing of " bank rate varying," and has a healthy 
 dislike of borrowing even if good may come of it to his 
 country. Perhaps the greatest merit of the borrowing 
 scheme is the gentle intimation it affords of the way in 
 which the alternative may be carried into effect if and 
 when it comes. 
 
 From the bankers it is most gratifying to learn that at 
 last they are becoming alive to the possible dangers of 
 inflation. Altogether it seems as if the whole country were 
 beginning to realise that the greatest war on record may 
 involve the greatest sacrifices. Let everybody take his 
 last dip into the lucky bag of bonuses provided by the 
 generosity of the new loan, and provide his own insurance 
 against the alternative of compulsion. Very properly the 
 Chancellor of the Exchequer has said that the free-will 
 offering will be fully taken into account in distributing the 
 compulsion.
 
 CHAPTER XXXVIII 
 FOR AND AGAINST A FORCED LOAN 
 
 [February 15, 1917) 
 
 The possibility of a forced loan has already come within 
 the range of practical politics. With the increase in expen- 
 diture and the development of the most critical stages of 
 the war a forced loan may be a matter of months. The 
 arguments for and against should be dul}' weighed whilst 
 there is still time for dehberation. The extent and the 
 degree of the compulsion will vary according to the estimate 
 of the advantages and difficulties. It will vary also according 
 to the success or failure of the voluntary method. 
 
 It is easy to show that there is nothing in the principle 
 of a forced loan that has not already been conceded in other 
 matters at least equally important in the present war. The 
 analogy of the conscription of life is obvious. So is the 
 increase in taxation far beyond the normal peace limits even 
 of recent times. 
 
 The opposition between taxation and compulsory borrow- 
 ing is not one of principle but of degree. What the Govern- 
 ment takes by taxation it does not give back at all except 
 in general benefits which are not proportioned to the con- 
 tributions of the particular payers. What the State takes 
 by a forced loan is supposed to be restored after a time with 
 or without interest. If the time is long, and the incon- 
 venience to the forced lender very great, the difference with 
 taxation is practically of little importance. 
 
 If the forced loan is repaid in a short time- — suppose, for 
 example, it has first claim at the end of the war^ — it may 
 afford a convenient mode of softening the hardships of 
 taxation.
 
 FOR AND AGAINST A FORCED LOAN 433 
 
 A good deal of wild talk has been indulged in lately on 
 the desirability of taking from the rich so much as to leave 
 them with only the very moderate competence of the average 
 man. The idea of equality of taxation at the root of this 
 levelling is that everybody should be left equal after all 
 the proposed socialistic pruning and lopping had been 
 accomplished. We do not want a social revolution of this 
 kind in this country at the critical stage of the war. It is 
 in Germany that a social revolution of another kind seems 
 (to us) desirable. In the matter of the conscription of 
 money, as in other things, it is our nature to proceed on 
 methods of compromise and adjustment, not by simple 
 confiscation. 
 
 Taxation after a certain point is unjust to the present 
 race as compared with future generations, which will have 
 most of the benefit of the war. Of course the full resources 
 of the country must be used to the utmost, but it will make 
 no difference to the immediate use if a promise is given that 
 of the compulsory takings by the State a part will be returned 
 after the war. All that this means is that after a point a 
 forced loan is preferable to the further increase of taxation. 
 
 It is preferable also to the reliance on voluntary loans if 
 such loans have to be paid for at too extravagant rates of 
 interest. Before the present loan was offered the idea had 
 prevailed that the Government must go on paying increasing 
 rates in every new borrowing. This idea was false economi- 
 cally and wrong morally. The rise in the rate of interest 
 was not necessary to attract new money. There was the 
 absence of other modes of investment, and there was 
 patriotism. Apart from these considerations the higher 
 rates were never high enough to attract the unpatriotic 
 minority who looked entirely to their own interests. To 
 these people the more they saw the wealth of the patriots 
 going into the war loans the less they saw there would be 
 left to go into the other things. The other stocks would 
 fall in price, and offer better and better bargains. The 
 analogy with the unpatriotic providers of labour is exact. 
 The more the patriots volunteered for the war so much the
 
 434 WAR FINANCE 
 
 fatter would be the places that were left. A remedy was 
 found in the matter of labour, and a similar remedy can be 
 found in the matter of money. The compulsion of labour 
 was adopted only gradually — so let it be with money. 
 
 The time has come when an expedient suggested to the 
 former Chancellor of the Exchequer might, perhaps, be 
 put in practice. Let everyone who makes any investment 
 of money in buying stocks, or who lends money in any form, 
 be compelled to invest in War Loan a proportionate amount. 
 To begin with the proportion may be small and the field 
 narrow. With increasing needs both may be enlarged. 
 
 We may borrow from the Times a glaring example. 
 There are the professional money-lenders who advertise 
 their philanthropy in the columns of the papers. They are 
 prepared to lend large sums without security. Where 
 would be the hardship if for every loan at 50 per cent, to 
 the foolish they were made to advance a similar amount to 
 the wiser Chancellor of the Exchequer at 5 per cent. ? 
 
 We may take another example from the other extreme— 
 from the owners and employers of the great capitals which 
 have been used in beating our plowshares into swords and 
 making ready for the great decision : " Multitudes, multi- 
 tudes in the valley of decision : for the day of the Lord is 
 near in the valley of decision." 
 
 In war as in industry our labour would have been helpless 
 without capital. Nothing could be more unjust than to 
 suppose that the great capitalists of this country have set 
 themselves, like mediaeval usurers, to extract the utmost 
 from the necessities of the people. But if our capital has 
 saved the nation it has also earned good profits. Even 
 after an equitable excess has been taken by the State, the 
 balance is beyond the normal range of peace. It was stated 
 recently by Sir Edward Holden in his able surve}^ of the 
 monetary situation that a large part of the thousand odd 
 milHons of our floating debt, in the form of Treasury bills, 
 was held by the makers of war profits, and he advised them 
 to put £500,000,000 into the new loan. In this case not 
 very much compulsion ought to be needed. Perhaps the
 
 FOR AND AGAINST A FORCED LOAN 435 
 
 proper limits of special taxation of war profits have already 
 been reached with due regard to enterprise and efficiency. 
 Perhaps not. In any case there seems no great hardship 
 if the Government, instead of paying 5| per cent, for the 
 temporary use of the surplus war profits, should pay 5 J per 
 cent, for a longer period, especially as the stability of the 
 long loan is supposed to be assured by the Sinking Fund. 
 
 Although the Stock Exchange has suffered severely from 
 want of business, the records show that some of the makers of 
 war profits are finding investments at attractive prices. Why 
 not ? But why not also be made to put a part in War Loan ? 
 
 There are, however, two great dangers in general com- 
 pulsory borrowing as compared with a great increase of 
 taxation. There is the danger of lessening economy. There 
 is also the danger of increasing inflation. Taxation of 
 necessity enforces economy on the people, and after a point 
 the difficulty of getting money by taxation imposes some 
 check on Governmental extravagance. If, however, the 
 Government can get as much as it wants by compulsory 
 borrowing, one of the great checks on public extravagance 
 is removed. 
 
 Our experience in the present war has shown that economy 
 has been disregarded to such an extent that public extrava- 
 gance has become a habit. Even at this stage of the war, 
 in trying to arrange for national service on a voluntary 
 basis, one leading idea seems to be to provide a minimum 
 wage and additional compensation in case of transfer to 
 another place. A legal minimum wage has hitherto been 
 regarded as an ideal unattainable even in peace. With 
 difficulty the plan has been realised in some of the sweated 
 industries. Again, it is provided that everyone employed 
 in some new calHng is to get the standard rate. But how 
 will it be possible to ensure the standard efficiency ? It is 
 easy to see that voluntary national service under bureau- 
 cratic control will involve an increase of cost as compared 
 with peace, and also will tend to increase the consuming 
 power of the masses reckoned in money. 
 
 The people who clamoured most for the extension of
 
 436 WAR FINANCE 
 
 Governmental management are now alarmed at the enormous 
 and increasing expense of the all-pervading bureaucracy. 
 How much of the money raised by loans and taxes really 
 finds its way to the ships and the men and the munitions ? 
 How much is wasted by the multitudinous officials many 
 stages removed from the actual conduct of the war ? We 
 are told that in London there is a famine of typewriters. 
 There are not enough machines, and there are not enough 
 young women trained to work them. Is the war to be won 
 by typewriters, dead or living ? The biggest and best 
 hotels and mansions are taken (and adapted) for the comfort 
 of non-militant staffs. Everybody knows of somebody who 
 is earning more than he ever did or ever will again, except 
 in what is called war work. Much of this so-called war work 
 consists in the management of human beings. People are 
 to do what they are told, and therefore they must be told 
 what to do, and somebody must see that they do it. Any- 
 body, it seems, can manage human beings. For such employ- 
 ment no particular skill is required. The management of 
 cattle and sheep and horses and even pigs requires some 
 training. Even in the present dearth of agricultural labour 
 the farmers will not entrust their live stock to untrained 
 war workers. Our Government is not so particular with 
 its human live stock. This, then, is the first great danger 
 of compulsory borrowing— the danger of an increase in 
 public extravagance. The second danger which is closely 
 connected with the first, is the danger of inflation. 
 
 That the country is already suffering from inflation is 
 now evident to the least observant. The foreign trade returns 
 for January again show lessening quantities, but rising 
 prices. The adverse balance arising from the excessive 
 prices of imports is still one of the chief troubles of our 
 financial authorities. The magnitude of this adverse balance 
 is largely due to the inflation of prices in this country. 
 
 The banking position is also significant of inflation. The 
 records of banking are too prosperous and the real material 
 foundation is too narrow. Tliere is no reason again to 
 press this point, as it is now admitted by the bankers them-
 
 FOR AND AGAINST A FORCED LOAN 437 
 
 selves. They have stated that they do not wish to encourage 
 borrowing for investment in the War Loan unless the bor- 
 rower means to make good by real economies in a limited 
 time. Borrowing in the German method can only lead to 
 further inflation and a further rise in prices. 
 
 Inflation is one of those human errors of which the saying 
 is true that it is never too late to mend, with this interpreta- 
 tion, that bad as it is, it may always get worse. The only 
 remedy is to stop. It is time to stop when prices have 
 doubled since the beginning of the war, and are still rising. 
 
 If, however, the method of a forced loan is adopted, many 
 people may think it necessary to borrow from the banks who 
 would not do so under the voluntary method. In order to 
 make the forced loan successful the Government might even 
 compel the banks to advance on certain approved security 
 for the period of the loan. In this case the inflation of prices 
 must be increased. Such is the teaching of the old financial 
 authorities, and such is also th(?warning of the present-day 
 bankers at their latest general meetings. 
 
 Therefore, once more the end of the sermon is that every- 
 body in his own way, to the best of h's strength and courage, 
 should practise economy. If the economy is made in the 
 necessaries of which there is a limited supply so much the 
 better, but such economy cannot be nearly suflicient to meet 
 the demands of war expenditure. Let it be clearly under- 
 stood that any kind of economy that puts more money at 
 the disposal of the State is so far beneficial. 
 
 For the encouragement of this very necessary economy 
 no better example could be offered than by the Government 
 itself. Any action of the State is always writ large. Why 
 should the average man pinch his family or even himself 
 if the proceeds are to be wasted in things that can only 
 hinder the conduct of the war ? In the present emergency 
 any waste of labour of any kind is as serious as the waste 
 of material. We have lately put up an image of Mr. Glad- 
 stone. We may take to heart one of his sayings that deserves 
 to become proverbial : " Good finance consists more in the 
 spending than in the collecting of revenue."
 
 CHAPTER XXXIX 
 THE FOOD SHORTAGE 
 
 {April 10, 1917) 
 
 In the wisdom of the ancients, Fortune was always 
 regarded as one of the greatest, if not the greatest, of the 
 powers that govern human affairs. In the fair humanities 
 of old religions, Fortune was a most beautiful goddess who 
 must be instantaneously seized by the lock of hair in front 
 before she could turn and flee away and offer her bald pate 
 to the vain pursuer. 
 
 The same idea has been Expressed in tlie poetry and the 
 proverbs of all nations, and history is full of examples of 
 lost opportunities and vain pursuits. In war the power of 
 Fortune and the need for instant seizure of the happy chance 
 has been recognised by all the greatest captains, f And it 
 is not only in the battlefield that quick decisions are needed 
 for success in war. The recognition of this truth at the 
 end of last year led to the compression of the Cabinet and 
 the freeing of its members from departmental work. It 
 led also to the appointment of dictatorial controllers. It was 
 hoped that by these devices anything that had to be done 
 would be done quickly. Hitherto the speed has not been 
 astonishing, except perhaps in the multiplication of officials. 
 But time and tide wait for no man. 
 
 These general reflections have been aroused by the present 
 shortage of food in this countr3^ It is a time in this case 
 for rapid decision. Fortune has already begun to turn her 
 head. Of the fact of the shortage there can be no doubt. 
 There are no figures available, but the suppression of the 
 figures is itself ominous. According to the speeches of 
 responsible statesmen, there are not enough breadstuff s to
 
 THE FOOD SHORTAGE 439 
 
 last till the next harvest. According the the naval authori- 
 ties, the importation of the necessary amount is not certain. 
 No country can resist starvation beyond a certain limit. 
 The ignominy of a peace forced on us by Germany through 
 cutting off our overseas supplies would be unspeakable, 
 and the real disaster to world-civilisation would be as great 
 as the national shame. 
 
 No doubt the shame might be partly hidden by excuses. 
 There is, for example, the historical excuse going back to 
 the repeal of the Corn Laws. For the last seventy years 
 our agricultural policy has been adverse to the production 
 of grain. But it is doubtful if any Governmental policy 
 could have maintained the arable acreage in the face of the 
 opening up of new countries and the unexpected improve- 
 ments in transport. For thirty years the repeal of the 
 Corn Laws only prepared the way for the contraction of 
 the home supplies. The actual contraction on a serious 
 scale only began in the last quarter of the nineteenth 
 century. 
 
 The real corrective to this loss of self-sufficiency in the 
 production of essential food supplies was found in our power 
 of the sea. The argument was that so long as we had the 
 command of the sea we could draw supplies from the ends 
 of the earth, and that our supplies would be surer than if 
 we relied on our own resources under our own climatic con- 
 ditions. This argument was perfectly valid. The recent 
 snowstorm ought to be a useful reminder to our people that 
 our climate is variable. The history of British agriculture 
 over centuries shows that oscillations have occurred between 
 very high and very low prices according to the goodness 
 or badness of the seasons. The famine prices of the Napo- 
 leonic wars were due to a succession of bad seasons. The 
 country at the time, under normal conditions, was self- 
 sufficing. In fact, for more than a century before the 
 Napoleonic wars the country had been more than self- 
 sufficing in normal years. The bounty given on the export 
 of British corn in this period is the most famous of all 
 bounties. In years of scarcity the bounty was suspended.
 
 4^0 WAR FINANCE 
 
 In the Napoleonic wars the import duties were in general 
 not operative if the price of corn rose above a certain height. 
 The main cause of the high prices was the bad seasons in 
 England, and whenever a good season occurred prices fell 
 below the normal. In 1812 the price of wheat was 126s. 6d. 
 per quarter ; in 1822 it was 44s. yd. After the repeal of the 
 Corn Laws, and after the great improvements in transport 
 in the 'seventies, British weather ceased to be the governing 
 factor in the price of British grain, and in some of the worst 
 seasons on record there was practically no compensation in 
 the rise in home prices. 
 
 British weather is not only very variable, but as yet has 
 not been brought under any law of averages of any use for 
 practical agriculture. For a long time, in accordance with 
 some lunar theory or superstition, it was believed that 
 nineteen years would see a complete cycle of weather, and 
 a nineteen years' lease was supported on that ground ; but 
 Thomas Tooke, the great historian of Napoleonic war prices, 
 showed by his researches that a hundred years at least 
 would probably be required to reduce to a fair average the 
 inequahties of the seasons. 
 
 No one supposes that the present war is likely to last a 
 hundred, or, for that matter, even nineteen years, and yet 
 in the belated provision for abundance of home-grown wheat 
 for the next year or two very little account is taken of the 
 weather. The farmer is guaranteed minimum prices on a 
 falling scale, which is a very different thing. British weather 
 not only varies from time to time, but very often from 
 county to county. The method of minimum prices suggested 
 by Lord Milner's Committee would have been the cheapest 
 insurance ever effected for the encouragement of home-grown 
 wheat ; but there was no one ready to seize the frontal lock 
 of Fortune, and ever since agricultural policy has been a 
 kind of moving picture of a panting John Bull in a vast 
 hurry pursuing a classical bald-headed goddess. 
 
 If the warnings of our responsible governors are to be 
 taken seriously, and if the country is within range of possible 
 disaster from food shortage, our food poHcy ought to be
 
 THE FOOD SHORTAGE 441 
 
 governed by military considerations and our supplies made 
 sure by military methods. 
 
 British miHtary methods in the present war fall into two 
 classes — the methods, namely, of persuasion with over- 
 payment, and the methods of compulsion with under- 
 payment. In the ordinary conduct of the war we are still 
 trying both kinds. We are still raising the war bonuses 
 of the stay-at-homes and sending them in case of need our 
 best public orators to compose their feelings, and at the 
 same time we are casting wider the net of compulsion and 
 handing over the captives to war rations and the raucous 
 drill-sergeant. 
 
 H it is really necessary to stimulate home production to 
 prevent military disaster or an ignominious surrender to 
 Germany, then instead of a falhng scale of minimum prices 
 we ought to offer a rising scale of bounties on production. 
 Promise the farmer so much extra for every extra quarter 
 actually forthcoming. If for any reason the method of 
 bounties does not suffice, or if it is not thought equitable, 
 then it should be supplemented by the method of com- 
 pulsion. The nation at war has the first claim on the use 
 and the produce of the land. Such a doctrine is not revolu- 
 tionary, but the very corner-stone of political society. 
 
 But at the end of the third winter of the war it is too late 
 to rely simply on any great increase in British production. 
 Apart from the hazard of the seasons a system of agriculture 
 cannot be changed in the twinkling of an eye. Production 
 depends not only on bounties or compulsion as the case 
 may be, but on skilled labour and specialised capital and 
 material. The supplies of both, however, are limited. Both 
 are required for other war purposes. And we can never 
 be sure that a wet summer or autumn will not destroy the 
 greater part of the expected crops. 
 
 The aim of the present argument is not to show that any 
 attempts to increase our home supphes are of little use. On 
 the contrary, to increase home production we should be 
 justified in resorting to greater bounties and also to greater 
 compulsion than have yet been tried.
 
 442 WAR FINANCE 
 
 But the point is that in any case we shall have to rely 
 very largely on overseas supplies. In the matter of national 
 food in a war of endurance assurance ought to be made 
 doubly sure. In the very grave speech made by the present 
 Prime Minister after two months of office, he said that 
 unless we were to adopt the most stringent measures regard- 
 ing the imports that are admitted and in the consumption 
 of those imports, we are faced with disaster. This statement 
 was not a side remark made under the play of oratorical 
 emotion, but the reasoned conclusion of a long argument 
 bristling with official calculations. 
 
 Once before, under the previous regime, the Government 
 made a long list of restraints on imports and of proposed 
 taxes on imports. The restraints were loosened by licences 
 and the taxes were whittled away by trade interests. The 
 full effect is seen in the record magnitude of the imports of 
 last year. The growth of imports that used to be the glory 
 of Britain has now become our shame. The only reasonable 
 sequel to the grave warnings of the Prime Minister is the 
 great and continuous displacement of other imports to 
 make room for additional cereals. In spite of the world 
 shortage there are probably still supplies obtainable by 
 this country at a price, and for the present there is enough 
 of tonnage and power of the sea to ensure delivery. 
 
 It is, perhaps, not yet too late to try the method of public 
 granaries. The method was advocated even in the seven- 
 teenth century, when the country was in normal times 
 self-supporting. The idea was much in vogue before the 
 present war. It is an essential part in the new economic 
 system of Central Europe, made popular by Dr. Naumann. 
 Until other countries actually prohibit the export of grain, 
 the richest and most eager customers will get supplies, even 
 at the expense of semi-starvation in the corn-lands them- 
 selves. But if it is not too late, there is no time to be lost. 
 Whilst we still have the ships and the money, we ought to 
 make sure of the grain. There are already statistical reports 
 of shortage in the United States ; and Argentina is said to 
 have already resorted to prohibition of exports.
 
 THE FOOD SHORTAGE 443 
 
 Even if the home production is increased to the utmost ' 
 in the time available, and even if the weather is favourable, 
 and even if we can buy abroad, and even if we can bring 
 home the surplus still available, and even if (fifthly) we 
 have the sense in time to store up the new supplies, the old 
 standard of living will have to be contracted. We were 
 assured by the Prime Minister that if the people assented 
 to the restrictions on consumption suggested by the Govern- 
 ment, all would be well. But in a matter of national life 
 and death, with Germany as the would-be executioner, we 
 need a surer guarantee than the voluntary abstinence of a 
 people pampered by war bonuses. 
 
 The natural economic restraint on consumption of any 
 kind is a rise in the price of the article concerned. Everybody 
 is supposed to know that the prices of things, if left to them- 
 selves, depend on demand and supply. If the quantity 
 demanded is greater than the quantity offered, the price 
 rises until the weaker demanders are thrust out. 
 
 In the case of necessaries (natural and habitual) any rise 
 in prices has little effect on the quantities demanded until 
 there is a serious lessening of spending power. Accordingly, 
 it follows that if with every rise in prices there is to be a new 
 war bonus to meet the increased cost of living, this m^ost 
 vital of all checks on consumption is relaxed. Yet every 
 day we read of threatened strikes averted by new war 
 bonuses. 
 
 The old economic principles which were neglected and 
 reviled in the fictitious prosperity of public extravagance 
 on borrowed money are once more beginning to assert their 
 rude elemental strength. People are being forced to measure 
 national prosperity, not in money, but in the necessaries and 
 other things that the money will purchase. 
 
 The fall in the purchasing power of money, or, what is 
 the same thing, the rise in general prices, goes on increasing 
 at an increasing rate. The index number of the Economist, 
 which is the most popular measure of the rise in prices, 
 last month not only surpassed all former records, but made 
 the greatest advance of any month in the war. Taking the
 
 444 WAR FINANCE 
 
 average of prices of 1901-05 as 100, the index number for 
 the last of July, 1914, was iib-6, and for the last of March, 
 1917, the figure is 240-9. Expressed in the simplest terms 
 this means that prices on the average are two and a-half 
 times as high now as in the hrst hve years of the present 
 century. It does not mean that we arc two and a-half times 
 as prosperous, but so far quite the contrary. 
 
 If the country is to escape from disaster — the word is 
 getting as common as the wolf in the fable — the national 
 saving must be a real saving in consumption, and not a 
 mere money saving of war profits and war bonuses and war 
 credits. 
 
 And the saving must be a saving by the masses for the 
 masses. This is a hard saying, but, as all the other belli- 
 gerents have found, war is a hard master. One of the 
 greatest of all our economic mistakes in the present war 
 was to use the occasion for raising the pre-war standard of 
 living by the expenditure of money borrowed for the conduct 
 of the war. Germany from the beginning began to practise 
 the difficult art of lowering the national standard of comfort. 
 In France, Russia, and Italy the people have felt from the 
 beginning the real burden of war in reduced consumption. 
 It is now our turn.
 
 CHAPTER XL 
 GLUTTONY IN WAR-TIME 
 
 {April 30, 1917) 
 
 "To have respect of persons is not good; for, for a piece of 
 bread that man will transgress." — Proverbs xxviii. 21. 
 
 It is quite certain that voluntary rationing can never 
 succeed unless our people as a whole realise the national 
 danger. How can the people know unless they are taught, 
 and how can they believe when their responsible teachers 
 tell them smooth things and show, by their own example, 
 that voluntary avoidance of w^aste is an impracticable 
 ideal ? 
 
 " It is not good to have respect of persons." The words 
 of my text were suggested by reading in the Times that on 
 the luncheon tables of the House of Commons the waiters 
 had to sweep up a quantity of wasted bread. Perhaps this 
 incident will be explained aw'ay. Perhaps the House of 
 Commons will be the first public body to abolish the use 
 of bread at lunch and dinner. Perhaps not. The reluctance 
 of the House of Commons to follow the example of the King 
 in the matter of drink has not yet been explained away. 
 
 It is no doubt quite true that the amount of bread actually 
 consumed or wasted by our legislators is negligible. But 
 the votes they give and the examples they set are by no 
 means negligible. They give plenty of advice to the " pros- 
 perous " classes, and tell them to eat less bread so that the 
 poorer masses may have a sufficiency. But they never 
 venture to draw the line of " prosperity." Where does 
 prosperity end and poverty begin ? What is the standard 
 of comfort which is really an. irreducible minimum ? Our 
 legislators have become so accustomed to recommending
 
 446 WAR FINANCE 
 
 war bonuses in proportion to the rise in the cost of Hving 
 that the idea of a general fall in the pre-war standard is 
 quite unthinkable. Great play is made with the efficiency 
 of labour and the economy of high wages, and exceptions 
 are added to exceptions until voluntary rationing of bread 
 fails altogether. And yet the Food Controller tells us that 
 unless the voluntary rationing of bread succeeds in the 
 next six or eight weeks compulsory rationing must be 
 enforced. But he also says that compulsion is so difficult 
 that another effort ought to be made to save the voluntary 
 system. 
 
 That is the reason for plain speaking. " To have respect 
 of persons is not good." The masses, too, are persons — 
 persons with mouths. The other da}^ in a walk in the out- 
 skirts of the City, I picked up four pieces of bread which had 
 been thrown away half-eaten. They weighed two ounces- — 
 just the amount suggested as the bread ration for a meal. 
 This experience is only one sample. Many instances on a 
 much larger scale are recorded in the papers, and every 
 acquaintance is ready to cap my little story with a worse. 
 " Nobody," said Adam Smith, " ever saw a gentleman 
 drunk with beer." The gentleman chooses a more expensive 
 kind of drunkenness. In the same way nobody ever saw 
 a gentleman throwing away in the streets half-eaten pieces 
 of bread. The gentlemen of the House of Commons leave 
 their unfinished pieces on the tables. 
 
 Who then are the people so unprosperous that they only 
 get a bare sufficiency of bread, and have none to waste and 
 can buy no other substitute ? Dr. A. L. Bowley, the well- 
 known statistician, gives the following pre-war figures of 
 the ordinary expenditure of certain families. The poorest 
 of London households just able to pay their way, out of 
 a normal weekly expenditure of 21s., spent on bread and 
 flour 3s. id. Out of 23s. 4d. the labourer in provincial towns 
 spent 3s. 3^., and out of 41s. the artisan in provincial towns 
 spent 4s. on bread and flour. The average price of the 
 quartern loaf in 19 14 before the war was S^d., so that in 
 loaves the consumption per family was 6^, y^j, 8^1- From
 
 GLUTTONY IN WAR-TIME 447 
 
 other figures in Dr. Rowley's tables it appears that the 
 artisan with 41s. per week spent 25s. on food, of which only 
 4s. was on bread and flour. His family used a little more 
 than two loaves a week more than the poorest Londoners 
 and nearly two loaves more than his fellow provincial 
 labourers. 
 
 The question is — Was the artisan with the pre-war 
 standard of 41s. a week prosperous ? In case of need could 
 he have reduced his bread ration ? Another question is 
 equally pertinent — Supposing the quartern loaf had been 
 doubled in price so that he would have had to spend 8s. 
 instead of 4s. out of his 41s. to get his former allowance, 
 would he have taken less bread ? The answer is probably 
 not, and that if other foods, e.g., meat, had risen in price 
 equally he might even have taken more bread or flour. 
 
 The war has just doubled the price of bread (to say 
 nothing of the fall in quality) and has also raised other 
 things. But the war bonus has raised money wages (espe- 
 cially with the family as unit) and rents have been kept down 
 by the law. Is it likely that the prosperous working class 
 family of the 41s. standard before the war will now reduce 
 its consumption of bread on the invitation of the Food 
 Controller ? And if the line of prosperity is to be drawn 
 above, and much above, the artisan standard, then in the 
 name of arithmetic how is it possible that the voluntary 
 restraint of the prosperous classes shall suffice to give the 
 poorer the full pre-war standard ? 
 
 If we are not to be forced to a shameful peace by lack of 
 bread, the masses of our people must be made to understand 
 the danger. If a dozen families taken at random from our 
 people were submarined actually and were put in boats 
 with limited food, they would submit to the necessary 
 rationing with resignation. Not one would throw away 
 the precious bread, and not one would steal from the common 
 stock. Why should millions of families not conform to 
 the sample to escape the German peril ? The only reason 
 is that they do not really believe in the peril. And they 
 never will believe in it if they are constantly told that there
 
 448 WAR FINANCE 
 
 is no need for alarm if only they will be a little careful. Why 
 should they not be alarmed ? What is the use of giving 
 the alarm if people will not take the alarm ? The sooner 
 people are alarmed and the more they are alarmed so much 
 the better. Taken in samples they are all decent people of 
 good courage. If masses of decent people regularly waste 
 their daily bread (after regularly praying for it), or if they 
 eat the share of other people, it is because they sin in igno- 
 rance. They are gluttons without knowing it. 
 
 The war has in many ways restored the moral health of 
 the people. Some of the old virtues have regained their 
 lost power. The opposite sins and vices have been rooted 
 up or cut down. Before the war some of these ill weeds 
 had been so cultivated and cultured that they were regarded 
 as prize flowers. Sloth, for example, a rank old mortal sin, 
 in its most cultured forms was greatly admired by all classes 
 from the highest to the lowest. The war has restored the 
 dignity of labour. To find some kind of war work is the 
 highest ambition of the idle. The feeling is real. Ordinary 
 men and women who cannot fight are ready to do anything 
 to help on the war. There are exceptions, just as there are 
 people who are colour blind or " no wise." The new cult 
 of labour means so far the digging up of sloth. A real 
 sluggard is now no longer a prize bloom, but a weed. 
 
 But one of the greatest and the rankest of the old mortal sins 
 is still flourishing, and in many of its forms is still greatly 
 honoured in the observance. Gluttony. The warning in my 
 text seems specially aimed against gluttony. " For^ for a piece 
 of bread that man will transgress." How far, then, would 
 he go on the wrong path for continued good living ? In 
 preaching against gluttony for the period of the war no 
 respect must be paid to persons. We are all of us miserable 
 sinners in this matter, often without knowing it. The old 
 definition of gluttony in the " Poor Man's Catechism " is 
 " an inordinate desire of meat or drink." According to 
 the old masters of morality there were five chief kinds of 
 gluttony. The curious reader will find them all described 
 in Chaucer's " Parson's Tale " {sub voce gule). The first kind
 
 GLUTTONY IN WAR-TIME 449 
 
 is drunkenness — but there are four others. Each of the 
 five is represented as a finger on the devil's hand. In the 
 old treatment gluttony of meat (in the old sense of food) 
 and gluttony of drink were always classed together. During 
 the war excess of drink has been restrained, but instead of 
 the nation curbing its eating, what was saved in drink seems 
 to have been wasted in food. What we have to realise is 
 that just now excess of eating is as bad for the soul of the 
 nation as excess of drinking. List to the old exhortation : 
 " Excess of meat and drink nourishes almost all diseases of 
 the body as well as of the soul. Other accidents may 
 threaten but this destroys. For gluttony kills more than 
 the plague or the sword." 
 
 The words are directed to the individual, but the nation 
 is made up of individuals. And the words are literally most 
 truly applied to the nation in our present case. If we go 
 on at our present rate of consumption we shall lose the war. 
 That is the message of all our responsible statesmen, though 
 unfortunately the habit of saying smooth things has become 
 so engrained that the warning is lessened by the usual 
 flatteries. There is no immediate danger — the real danger 
 will come in two or three months. It will. 
 
 The issues that depend on our food supplies are so vital 
 that assurance ought to be made doubly sure. The risks of 
 failure are so terrible that excess of caution is what is needed. 
 
 It is far better that the people of this country should 
 realise the possible danger to the fullest extent — far better 
 that they should be alarmed— than that they should be 
 made comfortable by calHng to mind all the possible alter- 
 native chances. 
 
 Even suppose that, after all it should turn out that the 
 Food Controller has been rather too stringent, or that 
 thousands or millions of people in these islands have eaten 
 less than they might have done- — that is to say, that they 
 have lost so much happiness in pleasures of the table and 
 even suffered some of the pains of hunger. Where is the 
 real harm when the balance is struck ? Even if the war is 
 to end before the autumn, the food difficulty will not be
 
 450 WAR FINANCE 
 
 over. Any store of any kind of food will be most precious 
 next winter. 
 
 The case is really too clear for argument. It is not argu- 
 ment that is needed, but moral courage on the part of every 
 kind of teacher and speaker and writer to tell the people 
 that under present conditions too much eating is a national 
 danger. There are in the land all sorts of organisations 
 that might be used to tell the truth. Let the temperance 
 people remember that excess in drink is only half the sin 
 of gluttony, and that just now the other half, the excess in 
 feeding, is the more dangerous. Let the promoters of the 
 war savhigs tell the people that the saving that is now 
 most needed is not the saving of money, but the saving 
 of food. Let the teachers in the schools make the children 
 see that every piece of bread they throw away is helping 
 the Germans. There is not a social or religious institution 
 of any kind that may not find an occasion to repress gluttony. 
 The great thing — the essential thing — is to pay no respect 
 to persons. When it comes to the saving of food every 
 mouth counts. If a few thousand zealots were to starve 
 themselves to death, it would be of no avail if the rest of the 
 nation went on eating as usual. 
 
 The logical outcome of the argument is that the greatest 
 of all organisations — namely, the State itself — should use 
 the greatest of all arguments — namely, compulsion — to 
 make effective this particular kind of insurance against the 
 great national peril. Such is indeed the true conclusion. 
 But in State action so far-reaching the consent of the 
 governed is more than ever necessary for success. Regula- 
 tions may be evaded — the army of food officials may be 
 unfitted for so hard and unusual a task. Even German 
 docility and German organisation have only partially 
 succeeded. We are brought back always to the hearts and 
 minds of the millions of living beings who make up the 
 nation. If the people do not see the need for the restraints 
 and the reasons of the restraints they will not submit to 
 the daily discomfort. Everybody wants to do bis bit. 
 Everybody can do a bit more by eating a bit less.
 
 CHAPTER XLI 
 GLUTTONY IN WAR-TIME 
 
 {May 19, 1917) 
 II * 
 
 We have already adopted compulsion in regard to the 
 waste of food. The penalty for such waste is £100 fine and 
 (or) six months' imprisonment. The penalties may easily 
 be raised. The difficulty is to enforce the penalties except 
 with the intelligent consent of a willing people. Penalties 
 of any kind are preventive, not in proportion to their 
 severity but in proportion to their certainty, though this 
 elementary pohtical wisdom is constantly forgotten. 
 
 And yet the simple truth is that if the edict against waste 
 were strictly interpreted and carried out with certainty 
 the difficulty of compulsory rationing would be overcome. 
 Anybody who eats more than a reasonable quantity of 
 food wastes that food. What is reasonable is laid down 
 from time to time by the Food Controller or by Royal 
 Proclamation. Could anything be more simple ? The law 
 against gluttony, though occasioned by the defence of the 
 realm, would be supported by all the authorities on health, 
 morality, and religion. There is only one obstacle. The 
 people do not see the necessity. 
 
 We are always brought back to the need of public enhghten- 
 ment on the facts. But in any statement of facts we must 
 be very careful not to encourage the Germans or discourage 
 our own people. Under these very proper limitations we 
 are told officially that if the people in the main accept the 
 advice of the Food Controller, and if they are judicious in 
 their consumption, we shall survive to the coming harvest 
 
 * See above. Chap. XL. 
 
 G C 2
 
 452 WAR FINANCE 
 
 without any real privation, and that by 1918 we shall be 
 self-supporting. 
 
 It is assumed in this statement that if we can only get 
 over the difficult months to the coming harvest all serious 
 danger will be past. Suppose, however, that the harvest 
 is a good deal below the average through bad weather. We 
 cannot forecast the probable weather, but we are warned 
 by the past not to be too confident. Here are some samples 
 of British weather within the experience of many people 
 now living. The samples are estimated by the yield of 
 wheat per acre over the thirty years from 1849 to 1878 in 
 a table drawn up by the late Sir J. Caird. The average for 
 the period was 28 bushels per acre. If we take this as 
 represented by 100, so as to put the percentages in a con- 
 venient form, we find that the yield in 1849 was 123, or 
 23 per cent, above the normal. But in 1852 the figure was 
 79, and in the next 3'ear only 71. Again in 1870 the yield 
 was 112, but the figures for 1875-76-77 were yS, 76, 74. 
 
 The point is that we ought to allow for a good margin 
 of safety in the matter of the weather. The potato failure 
 of last season and the world shortage of cereals ought to 
 be fresh in the minds of everyone. So far the winter and 
 spring of the present year bear a dismal resemblance to 
 1816, which is described as being the most inclement year 
 since 1799, the harvest in consequence showing a lamentable 
 deficiency in quantitj' and a miserable inferiorit}^ in quality. 
 " Indeed, all that had been saved of the crops was in so damp 
 a condition as to be unfit for immediate use " (Tooke's 
 " History of Prices," vol. ii., p. 14). 
 
 When we speak of self-supporting independence in 1918 
 it is well to realise what is really meant by independence in 
 a country such as this. 
 
 Reference may again be made to the period of our last 
 great war, 1793-1815. Before the war the country was not 
 only normally self-supporting, but was even an exporter 
 of grain. For the greater part of the war period the seasons 
 were very bad. In 1808, however, the harvest was good, 
 and there was actually a balance of exports of grain from
 
 GLUTTONY IN WAR-TIME 453 
 
 the country. But the occurrence of this and one or two 
 other good years only brings into stronger contrast the 
 effects of the bad seasons in general. Here is an example 
 of our " independence " in 1801. In that year, just before 
 the harvest was secured, the price of wheat in London rose 
 to 180S. per quarter, and for four weeks the quartern loaf 
 was IS. io|(/,— just about double of our present price. 
 
 Perhaps it will be said that, in spite of the bad seasons, 
 we fed our people and carried on the war for another fourteen 
 years after 1801. Give us now the same independence 
 (it may be said), and we also can carry on. But again we 
 have to remember that in 1801 the population of Great 
 Britain was only about io| millions as against 40I millions 
 by the Census of 191 1. And we have to remember also the 
 methods by which the people were fed in the last great war. 
 Wages were so low that it was only by supplementing them 
 by the poor rates that the population was kept alive. The 
 heroic character of the endurance of our people in the last 
 great struggle for European liberty can only be realised by 
 considering the misery of the masses. There are, it is true, 
 no full records of wages and of workmen's budgets and of 
 the rise in the cost of living such as are now furnished by 
 the Labour Gazette of the Board of Trade. On the whole, 
 however, it may be said that in the last great war the 
 condition of labour fell far below its pre-war level, whilst 
 up to the present in this war the general condition of labour 
 has improved compared with our pre-war level. How, then, 
 shall we bear the test of real privation if it comes as a thief 
 in the night before the next harvest ? How shall we carry 
 on in the winter if this expected harvest is deficient ? 
 
 With regard to our overseas supplies, the reference to 
 the previous great war period is not so encouraging as is 
 generally supposed. In spite of our command of the sea 
 our mercantile marine suffered severely, as is shown in an 
 interesting paper by Professor W. R. Scott in the current 
 number of the Scottish Historical Review : " The losses from 
 all causes between 1803 and 1814 were very great. At least 
 40 per cent, of the British tonnage of 1803 had disappeared
 
 454 WAR FINANCE 
 
 from the British registry. ... It was only the new con- 
 struction that saved the situation." 
 
 Whether we look to home production or to overseas 
 supplies, the lesson from history warns us that unless we 
 allow a good margin for safety we run the risk of putting an 
 unbearable strain on our people. 
 
 If the margin for safety is to be obtained by diminished 
 consumption a very strong moral effort will be required all 
 round. The effort must be all the stronger owing to the 
 artificial prosperity caused by the lavish war expenditure 
 up to the present time. In every industry connected with 
 the war the ruling idea seems to have been that the pre-war 
 standard of comfort ought to be raised. It has been raised. 
 Whether such an improvement was equitable, desirable, 
 or even necessary, is not now the question. The thing has 
 been done. Numbers of families since the war began have 
 consumed more than they ever did before. How can they 
 be brought to consent to a reduction of one quarter below 
 the pre-war standard in their staple food ? 
 
 The Times has given prominence to what is entitled a 
 strong labour manifesto. The essence of its strength is 
 given in large lettering. It is a demand for a cheap loaf. 
 The loaf is to be reduced to sixpence. Such is the outcome 
 of all the bonuses to meet the rise in the cost of living. To 
 get the benefit of the bonuses the cost of living must now 
 be reduced to the pre-war level. To cheapen bread in this 
 way is to lessen one of the few effective restraints on its 
 consumption. It is also demanded in this manifesto that 
 the cost of the loaf above the sixpence should be provided 
 by the State as part of the expense of the war. As if the 
 expenditure on the war w'ere not already large enough 
 without giving outdoor relief to the whole population. 
 And all the time these fresh demands are being made for 
 State aid any tax that is supposed to fall on the working 
 classes is resisted as inequitable. The cheapest seats in 
 the picture-houses must not be taxed at all. We seem to 
 be setting up as our ideal the proverbial bread and circuses 
 of the degenerate Romans.
 
 GLUTTONY IN WAR-TIME 455 
 
 Another example is more distmbing, because it is ex- 
 pressed, not in words, but in deeds. At the most critical 
 stage of the war, when a maximum effort is needed, not 
 only for guns and munitions, but to build and arm the very 
 ships that are to bring the grain for the sixpenny loaf, we 
 read of labour unrest and strikes in the most vital industries. 
 So serious is the condition supposed to be that the inciters 
 to unrest are warned that they are liable to penal servitude 
 for life. If the penalty were far less severe and far quicker 
 in coming "we might have some hope. Experience suggests 
 that the difficulty will be got over by a new bonus either 
 in money or in relaxed control. 
 
 The outlook for a great moral effort is not flattering. Can 
 the nation be awakened in time to meet the danger ? The 
 time is very short and the flesh very weak. The habit of 
 being crammed with distressful bread (or less distressful 
 food) is hard to break. 
 
 There is, however, one encouraging feature in the case. 
 The kind of moral effort that is required is essentially 
 economic. And people who are deaf to the appeals of 
 religion or patriotism or duty will listen to a business 
 proposition. 
 
 The particular business idea that we have to apply in 
 this food crisis is the principle of insurance. Everybody is 
 familiar with insurance against risks of all kinds. After the 
 Zeppelins had visited the south-east of Scotland last year 
 there was such a rush for anti-aircraft insurance that the 
 offices were choked. Such was the effect of a very small 
 practical demonstration. 
 
 If before the next harvest the shortage of food becomes 
 acute the worst of the evil will not be semi-starvation. 
 But without particularising other dangers — e.g., a German 
 peace abroad and industrial war at home — it is enough to 
 take the semi-starvation itself. The burden cannot be 
 thrown entirely on the wealthy or the " prosperous " 
 classes. They are too few, according to the popular inter- 
 pretation of " prosperous." The nation is made up of 
 about ten million famihes. The rest of the ten milHons will
 
 456 WAR FINANCE 
 
 see to it that in time of real need no one family shall escape 
 if they know it. That is the kind of equality of sacrifice 
 that everybody understands. 
 
 How, then, is the prudent individual — the average sample 
 of the masses — to guard against this danger ? How is he 
 to secure his own family from the impending want ? Money 
 will not save him, for the food will not go to the highest 
 bidder. If the staple food is short, the substitutes will 
 soon be short also. Hoarding will not save him, for already 
 hoarding is prohibited, and the hoarder in time Of real want 
 is more likely to lose his life than to save it. 
 
 The only method by which the individual can make 
 liimself and his family safe is by insurance. Everybody 
 knows the principles of insurance. We make a certain 
 sacrifice in the present to guard against the chance of a 
 greater calamity in the future. The amount of the present 
 sacrifice depends partly on the nearness of the danger. We 
 are beginning our food insurance very late. The danger is 
 pressing. We must pay higher premiums. The present 
 premium is to lessen our eating of bread by one quarter 
 and more or less diminish our consumption of other things. 
 If we go on eating as usual for another month or two the 
 premium will rise. The beleagured nation may have to 
 go on half rations. 
 
 Most insurances have to be done on a large scale. This 
 particular insurance, if it is to succeed, must be done on 
 a very large scale. Everyone who saves his own quarter 
 of bread is interested in making others see the necessity. 
 
 The only difference between this kind of insurance and 
 the kinds with which we are most familiar is that the food 
 insurance must be made good by actual saving of the food 
 and not by money payments. There is nothing so very 
 strange about this requirement in time of w^ar. Money 
 payment, for example, does not exempt from military 
 service. 
 
 Have we become such slaves to money both in deed and 
 in thought that we cannot understand or undertake any 
 business that is not put in terms of money — money gain
 
 GLUTTONY IN WAR-TBIE 457 
 
 and money loss ? " The ants are a people not strong, yet 
 they prepare their meat in the summer." " What a piece 
 of work is a man ! how noble in reason ! how infinite in 
 faculty ! in apprehension how like a god ! the beauty of 
 the world ! the paragon of animals ! " The words are 
 familiar ; the moral is obvious.
 
 CHAPTER XLII 
 THE INEQUITIES OF INFLATION 
 
 {July II, 1917) 
 
 Everybody now is familiar with the fact that since the 
 beginning of the war prices on the average have been 
 doubled. Some things have risen more and some less, 
 according to the special circumstances affecting their 
 particular demand and supply, but the general average is 
 about double. 
 
 Although the rise is not uniform, it is practically universal. 
 For a long time certain customar}^ prices were maintained 
 by the aid of a lessening in quantity or quality. Newspapers 
 struggled on with smaller sheets at the old penny and half- 
 penny rates, and railways and other vehicular conveniences 
 kept to the old fares, with a gradual fall in comfort and 
 regularity of supply. But in the course of the progress of 
 the inflation at last these customary prices gave way before 
 the general flood. 
 
 The universality of the rise shows that it is not due 
 entirely or even mainly to scarcity. There is no scarcity 
 of earthworms, but earthworms have risen in price. The 
 other day I asked a man who was gathering this bait for 
 sale if the price had gone up. I have long been in search 
 of something that has not risen in price. He quoted the 
 prices of the worms by the handful, and by the bucketful — 
 the prices that he obtained himself for the gathering and 
 the prices the dealers made on the first change of hands. 
 The worms, it seems, were sent to distant markets, and, 
 no doubt, by the time they got into the hands of the patterns 
 of old patience, old Isaak Walton's scholars, they would be 
 at least double the usual price. But my friend said that 
 though he was told the gatherers were getting fourpence in
 
 THE INEQUITIES OF INFLATION 459 
 
 the shilling more he had not yet had such luck. In his case 
 the customary price still prevailed. 
 
 Let us ascend from the particular jto the general. It has 
 been proved over and over again that whenever there is a 
 general rise in prices^ — from whatever cause — the rise in 
 incomes is very uneven. The consequence is that in the 
 distribution of the national wealth — of victuals, drink, and 
 clothing, and all the other luxuries and necessaries — some 
 people get more and some less than their former share. The 
 people with fixed salaries or customary wages have to pay 
 the increased prices, and, in fact, be content with less, 
 whilst those who have a rapid turnover of capital with the 
 rising prices make profits and fortunes impossible in ordinary 
 times. 
 
 A period of inflation, in short, is most favourable to 
 speculation and profiteering, and most unfavourable to 
 the forms of employment under the influence of customary 
 payments, and for which there is no special demand. 
 
 Let us again descend from the general to the particular. 
 I was talking lately with one of the youngest captains in 
 the army on his way to receive a decoration from the King. 
 The conversation happened to turn on a certain demand 
 for a war bonus of ys. 6d. a week. " That," said the captain 
 reflectively, " is more than all the pay the Tommy gets, 
 and he has to send half to his family." 
 
 Why should the non-combatant parts of the war services, 
 the providers of the materials and munitions, receive double 
 or treble or, in some cases, ten times as much as the soldiers 
 who risk life and limb ? The contrast between the men who 
 do the actual fighting and undergo the strain of preparation 
 and the men whose incapacity gives them exemption from 
 war work and better pay for civil employment, is still more 
 astonishing. 
 
 Such inequities in the rewards of labour are due to two 
 causes both closely connected. One is the shortage of labour, 
 the other the inflation of money. 
 
 The labour market is depleted by the calls to military 
 service. The shortage of labour forces up wages. Into this
 
 46o WAR FINANCE 
 
 depleted labour market steps the Government, with un- 
 limited supplies of money, and bids for every kind of labour 
 that can be directly ox indirectly employed in the subsidiary 
 operations of warfare. If the Government had to get the 
 money by taxation some check would be imposed, but with 
 unlimited power of borrowing there is no real check. The 
 inflation of money forces up wages still more. 
 
 As the increased money wages are spent, prices go up. 
 But some kinds of incomes do not rise at all. The pay of 
 the soldiers and their dependants is not increased. The 
 professional classes who are paid by salaries or by customary 
 fees, annuitants living on the hard-earned savings of family 
 insurances, the pensioners of the State, whether retired 
 officials or old-age workers — all these classes receive only 
 the same number of pounds, but every pound has only half 
 the purchasing power. Their position is even worse, because 
 they have to bear their share of the national taxation. When 
 the family trust funds have to be reahsed, it is found that 
 half the capital has disappeared, mainly through the extrava- 
 gant rates paid for fresh Governmental borrowing. 
 
 It may, of course, be argued that all those who cannot 
 find war work, and war bonuses, are, from the rnilitary point 
 of view, useless mouths, and that in time of war it is only 
 right that more of the nation's wealth should go to the real 
 war-workers and less to the non-workers. The worst of it 
 is that the war bonuses are not given in proportion to war 
 merit — the bonuses increase with the distance from the 
 front, and the allowances to meet the rise in the cost of 
 living are not proportioned to needs but to wages. 
 
 The inequities arising from the uses of capital are even 
 more glaring — witness Mr. Bonar Law and the tramp 
 steamers. A large part is commandeered or put under State 
 control, and the more necessary for the war so much more 
 strict is the control. But the capital not under control 
 through the shortness of supply has exceptional oppor- 
 tunity. And apart from such special chances of gain in a 
 period of inflation, with prices rising rapidly at unknown 
 rates, profits in general tend to rise. The elements of cost
 
 THE INEQUITIES OF INFLATION 461 
 
 also increase, it is true, but not so fast as the final prices 
 charged to the consumer. 
 
 Take, for example, the case of meat. The Government 
 takes nearly the whole of the overseas supplies, and pays 
 reasonable prices in the country of origin and reasonable 
 freights, with the result that the meat costs about ']d,. a 
 pound. But though our home supplies were never so 
 abundant, prices are forced up to unreasonable heights. 
 Were it not for the general inflation in which all the custo- 
 mary landmarks and guide-posts have been submerged, 
 prices could not have risen to such an extent. 
 
 We are always brought back to the root evil of inflation. 
 The real meaning of all old monetary contracts and customs 
 is upset. With the change in the money measure people 
 feel as much lost as if the yard and the pint and all the other 
 familiar measures had shrunk in unequal proportions for 
 different uses. With the new meanings of money some 
 people gain and others lose. In a general monetary dis- 
 turbance of this kind there cannot be gains without losses 
 any more than in betting. Some classes — w^age-earners as 
 well as profiteers — get large unearned increments, and others 
 suffer large unearned decrements. The whole distribution 
 of national wealth is less equitable than under normal peace 
 conditions. Over-payment and under-payment in pro- 
 portion to the services rendered are both causes of industrial 
 unrest. 
 
 The real position may be made clear by putting it in 
 terms of taxation. Suppose that on the outbreak of war 
 the Government had imposed taxes on all kinds of things, 
 increasing in amount from month to month until the taxes 
 had reached the old value of the things themselves. 
 
 Let us suppose, in short, that the doubling in price of all 
 things was due to taxation — that bread and meat and 
 clothes and everything else had been taxed up to the full 
 extent of its former value. Can we conceive of any system 
 of taxation that could be more inequitable ? Do we not 
 remember that in the piping times of peace any taxation 
 whatever of necessaries was supposed to be altogether
 
 462 WAR FINANCE 
 
 wrong on account of the glaring inequality of sacrifice 
 involved ? 
 
 But prices have in fact risen just as effectively as if all 
 things had been taxed, and it follows that unless in every 
 case a corresponding rise in money incomes has taken place, 
 just the same inequalities of sacrifice must appear as in 
 taxation. 
 
 According to the old economic teaching, the principal 
 evils of inflation are summarised in the statement that it is 
 a most inequitable kind of indirect taxation. 
 
 It may well be that the whole of the general rise in prices 
 cannot be ascribed simply to the inflation of the currency. 
 But the inequity is none the less if, as usually happens, the 
 inflation is associated with speculation, monopoly, and 
 profiteering. People may bear with resignation the scarcity 
 that is due to natural causes or the hazards of war or the 
 act of God. It may even be admitted that high prices 
 caused by scarcity are indirectly beneficial by checking 
 consumption. But if certain classes, with every rise in 
 prices get a new war bonus, whilst others get nothing, wiiere 
 is the justice ? 
 
 A doubling of prices by means of taxation would be 
 aggravated in its inequity if remissions were granted to the 
 most prosperous classes, and actual bounties were given to 
 the favoured few. We hear in these days a great deal of 
 equality of sacrifice. W'hen the principle was first applied 
 in practice it was directed against the exemptions of special 
 privileged classes — aristocrats, clergy, and others. The 
 most glaring and odious form of inequality of taxation is 
 found when the richer classes are exempted, and in conse- 
 quence the poorer classes have their own burdens increased. 
 
 The reasoning is not altered if different examples are 
 taken. There are aristocrats and aristocrats. If the pros- 
 perous classes are to receive bonuses in proportion to their 
 prosperity to meet the rise in prices, and the poorer classes 
 in proportion to their weakness are to get little or nothing, 
 then the aristocracy of labour benefits at the expense of the 
 lower clas5:-es. The pursuit of equality of opportunity by
 
 THE INEQUITIES OF INFLATION 463 
 
 the lower classes is hopeless when the aristocracy of labour 
 are always getting new bonuses in advance. 
 
 Inequalities of sacrifice in war-time are bound to increase 
 if the people in power — whether the power is official or 
 economic- — cleave to the notion that the pre-war standard 
 of comfort both for labour and for capital ought to be 
 maintained. The thing is absurd. If a large part of the 
 national productive powers are turned into the manufacture 
 of the wastes of war — for which there is no return, but 
 honour and sorrow and other spiritual goods— how can 
 there be the same amount of the material things that make 
 up the standard comforts of peace ? There is no escape 
 from the simple fact that if some classes are to retain the 
 pre-war standard, other classes must fall a good deal below. 
 
 The fundamental moral position is that everybody ought 
 to expect, on the whole, to be in a less favourable position 
 than in time of peace. War on the greatest scale is only 
 possible with corresponding sacrifice. No man ought to 
 make a private gain out of the necessities of his country. 
 Not that the maxim is to be made unworkable by being 
 made altogether unreasonable. Exceptional services in 
 war-time, whether of labour or of capital, ought to receive 
 exceptional rewards. But these exceptional rewards should 
 be given for effective contributions to the war and not for 
 accidental advantages of position. 
 
 The immorality of inequitable distribution is not the 
 worst evil of the inflation of prices. The worst result is 
 that the monetary inflation is accompanied by a kind of 
 moral inflation. The moral fibre of the nation becomes 
 loose and flabby. Material needs are over-emphasised. The 
 land is flowing with money, and why should it not also flow 
 with milk and honey, and beer, and all the other things that 
 money stands for ? 
 
 If the things are too dear, why not give the people more 
 money to meet the rise in prices ? If it is too diasgreeable 
 to raise money by taxation, why not borrow it ? , And whilst 
 our fighting men go from glory to glory, or from martyrdom 
 to martyrdom, our people at home go from inflation to
 
 464 WAR FINANCE 
 
 inflation, and from bonus to bonus, and think that exemption 
 from active service means exemption from active sacrifice. 
 Whenever by a great effort of all the preachers the nation 
 has begun to realise that the war means sacrifice — elementary 
 sacrifice of common stomachic comforts — when the people 
 have begun to think that they, as well as the Germans, 
 are in a beleagured city, somebody in authority comes out 
 on the battlements and sings with magnificent voice and 
 spirit a variant on " Comfort ye, comfort ye my people." 
 And then the people are comforted by being told that the 
 Exchequer will cheapen the loaf — as if the Exchequer were 
 a great store instead of a great drain. If the loaf is to be 
 cheapened by the Exchequer taking over part of the cost, 
 where is the money to come from ? The popular answer 
 is to put it down to the war account. The war has made 
 the loaf dear, why, then, should the war not pay for making 
 it cheap ? What is the real use of a war if it cannot raise 
 the standard of comfort ?
 
 Chapter xliii 
 prices after the war 
 
 {July 25, 1917) 
 
 It was stated in the recent debate on the excess profits' 
 duty that, in the opinion of many good judges, the level 
 of prices would rise rather than fall at the end of the war 
 and for some time after. Not so long ago we were told 
 that the same good judges held the contrary opinion and 
 were expecting a general slump. 
 
 In the course of the war there has been too much of 
 this simple appeal to authority (varying) and far too little 
 insistence on the principles by which before the war we 
 attained and maintained our financial supremacy. 
 
 It is" the purpose of the present argument to show that 
 general prices after the war may be expected to fall, and 
 that if they do not fall but are artificially maintained it will 
 be a serious national misfortune. 
 
 Such appeared to be the thought underlying the grave 
 pronouncement of the Chancellor of the Exchequer on the 
 difficulties of the coming peace. He spoke of the false 
 prosperity engendered by excessive borrowing. Not for the 
 first time Mr. Bonar Law has refused to follow the authorities 
 of the City. He refused to allow the rate of interest on 
 British Governmental loans to go on rising, and his substitu- 
 tion of a threat of compulsion for the promise of a bonus 
 was like a breath of the north-east wind in the sweltering 
 heat of London. 
 
 The continued rise in the rate of interest on British Loans 
 was, however, a minor evil in comparison with the con- 
 tinued rise in prices. In spite of abounding patriotism and 
 determination to win the war we have been constantly en
 
 466 WAR FINANCE 
 
 the eve of most serious labour troubles. And the root cause 
 has been the suspicion that with the rise in prices the 
 workers lose more as consumers than they gain in money 
 wages. 
 
 To suppose that with the coming of peace there is to be 
 a further rise in prices instead of a fall is a dreary outlook 
 for the masses of the nation. If the rise is inevitable it is 
 high time that remedies or alleviations should be prepared. 
 
 First of all, what is the probable forecast for peace prices 
 as compared with war prices when we search for reasons and 
 not for authorities ? 
 
 The natural way to answer the question is to consider the 
 causes of the rise during the war and the probable effect on 
 these causes of the coming of peace. 
 
 Experience has already disproved the reality or the 
 importance of some of the causes assigned for the rise in 
 prices during the earlier stages of the war. There was, for 
 example, the rise in freights. It is now quite clear that, 
 taking a broad survey, it was the rising prices which caused 
 the rise in freights, and not the converse. It is true 
 that the owners of the ships that were not commandeered 
 or controlled made huge profits, but the effect on the 
 final prices of commodities in general was not propor- 
 tionate. Everybody now knows that of the rise in the 
 prices of bread and meat and other necessaries only a small 
 part can be assigned to freights, 
 
 A more potent cause commonly assigned for the rise in 
 prices was the actual and increasing shortage of tonnage. 
 Even if there were no rise in freights at all, a real shortage 
 of suppl}^ caused by a shortage of tonnage would so far raise 
 prices. But for the first two years of the war, so far as this 
 country was concerned, the rise in prices could not be mainly 
 ascribed to lessened imports through shortage of tonnage. 
 The truth rather is that high prices have an artificial stimulus 
 to imports and not deficiency of imports a stimulus to 
 prices. 
 
 During the last year the bad world harvests and the 
 obstructions to overseas commerce have no doubt caused
 
 PRICES AFTER THE WAR 467 
 
 real shortage in food supplies and in raw materials. But 
 there is no reason to expect a bad world harvest with the 
 advent of peace. The probability is that, as was normally 
 the case before the war, bad weather in one area will be 
 compensated by good weather elsewhere. It is certain also 
 that with the cessation of war the obstructions to world 
 commerce must rapidly decline, and also that the shipping 
 available fpr commerce must rapidl}^ increase. 
 
 Another point is often overlooked as regards shortage 
 of supplies of foods and raw materials^ — namely, the great 
 advances made in recent years in the practical sciences 
 bearing on agriculture and the extractive industries generally. 
 Already we have the happy expectation of a glut of potatoes 
 in spite of the war. Many years ago it was my privilege on 
 a railway journey of about two hours to overhear the con- 
 versation of a carriage full of potato merchants or growers 
 interested in a great potato market. All the way and all 
 the time they talked of potatoes and nothing but potatoes- — 
 the kinds, the soils, the selection, the times and the seasons, 
 and much else. Evidently at that time the book of wisdom 
 on potatoes was a very large book, and since that time no 
 doubt the science of potato-growing has been advanced. 
 And this apphcation of scientific knowledge is one of the 
 reasons why the famine of last year bids fair to be replaced 
 by a glut. 
 
 What is true of potatoes is true of all kinds of raw 
 produce. During recent years there has been a very great 
 advancement in the practical sciences bearing on all the fruits 
 of the earth. Farmers and other growers have only partially 
 and imperfectly adopted these scientific methods — that is 
 to say, when we survey the world around and do not look 
 only to the Lothians. In the United States, for example, 
 vast sums have been spent on agricultural experiments of 
 all kinds, and the commercial value has been demonstrated, 
 but the practice has lagged far behind the precept. A great 
 stimulus will be given by the coming demand of peace to 
 the adoption of scientific improvements. 
 
 Before the war there was every prospect that in the near
 
 468 WAR FINANCE 
 
 future, taking a world view, the dismal law of diminishing 
 return would be counteracted, and that a given amount 
 of capital and labour would get more instead of less from 
 the earth and the seas. The practical conclusion of the 
 argument was that the prices of raw products were likely 
 to fall relatively to the manufactured products. Once more 
 the old belief was to be revived that in the production from 
 the land nature labours with man and not against man if 
 only man has the wit to guide nature aright. In the first 
 six months of 1914 prices were falling. 
 
 With regard to manufactures in the widest sense as 
 contrasted with raw products, taking a broad survey, there 
 has been little destruction of the world's machinery, and 
 it is well known that before the war any slight rise in price 
 was sufficient to over-stimulate supply. In manufactures 
 there was always supposed to be a law of increasing return 
 at work. 
 
 Of course, in the determination of any particular prices 
 we must always look not merely to supply but to demand, 
 and the organisation by which the demand is met. To 
 judge by the historical past, the advent of peace may usher 
 in a wave of speculation — but the war has taught us that 
 speculation ought not to go unbridled. If in this country 
 in the coming peace we were to take away all restraints on 
 profiteering, and at the same time to drop the excess profits' 
 duty as only being levied for the period of the war, we should 
 deserve a social outburst on the Russian model. 
 
 After all, however, the rise in prices during the war cannot 
 be ascribed mainly to profiteering any more than to restraints 
 on imports or to high freights. These causes may have had 
 their share in the rise, but with the peace they will be rapidly 
 neutralised. The root cause of the rise in prices, as is now 
 generall}/ admitted, has been the enormous public expen- 
 diture of borrowed money. For the most part this borrowed 
 money has been manufactured out of inflated credit based 
 on inflated legal tenders. The gradual progress of this 
 inflation has been traced in these papers from the beginning 
 of the war.
 
 PRICES AFTER THE WAR 469 
 
 The general argument on the characteristic evils of 
 inflation is confirmed by the Report of the Commission of 
 Inquiry on Industrial Unrest, just published. The Com- 
 missioners are unanimous in regarding as the most important 
 of all the causes of industrial unrest the fact that the cost 
 of living has increased disproportionately to the rise in 
 wages, and that the distribution of the food supplies is 
 unequal. Not only is this the leading cause in itself, but, 
 according to the report, its existence in the minds of the 
 workers colours many subsidiary causes, and the feeling 
 exists that sections of the community are profiting by the 
 increased prices. 
 
 In response to this report the Government propose to 
 lower the price of the loaf by throwing part of the cost on 
 the Exchequer. The remedy is only partial. It affects the 
 loaf and not the other elements in the cost of living. It is 
 also only a temporary alleviant, liable in the end to aggravate 
 the disease. It means spending more borrowed money, and 
 again the mischief circulates. 
 
 With the end of the war there ought to be a severe check 
 on borrowing and a severe check on any further inflation. 
 The inflation that has occurred may or may not have been 
 necessary for the conduct of the war. Before the next great 
 war perhaps the question will be decided and the moral 
 drawn. In the meantime it ought to be recognised that 
 inflation in the coming peace would be a great evil. It 
 will not be possible for peace to be signed one day and 
 the pubhc expenditure to be drawn within the limits 
 of ordinary revenue the next, but under firm guidance 
 the borrowing and the consequent inflation ought to be 
 reduced as soon as possible with the narrowest limits 
 practicable. 
 
 After the war our runaway financial machine has two 
 very bad corners to turn. The first is the national discon- 
 tent — not to say disgust — with the rise in prices. During 
 the war this discontent has been kept from violent outburst 
 partly by patriotism and partly by war bonuses. With the 
 end of the war the war fever of patriotism will be abated.
 
 470 WAR FINANCE 
 
 And after the war, according to the agreement, the war 
 bonuses are to come to an end. That is the meaning 
 of a war bonus — it is for the duration of the war only. 
 Will anyone maintain that the war bonus is to be 
 succeeded by a peace bonus, and that wages are to go on 
 rising for ever ? The only alternative is to check the rise 
 in prices. 
 
 We have a warning next door. The Russian revolution 
 was not due in the main either to love of the Germans or 
 to hatred of the Tsar, but to the intolerable economic con- 
 ditions induced by the high prices and consequent abuses. 
 A Russian writer on the war, who, like most other people, 
 never dreamed of a revolution, deplored the grasping, sordid 
 greed of the mercantile classes, who somxCtimes made 
 enormous fortunes in a few days out of the inflated prices. 
 The peasants at last began to refuse the paper money. They 
 reverted to a state of barter. Long before we could reach 
 that stage in this country the popular discontent would be 
 uncontrollable. That is the first awkward corner — the 
 danger, if not of a social revolution, at any rate of a succes- 
 sion of labour troubles that would cripple our productive 
 powers. 
 
 The danger of the second awkward corner is not so glaring, 
 and is not so much feared, but it is equally real. During 
 the war we have been importing millions of pounds' worth 
 of goods more than we could pay for by our exports. We 
 have paid by borrowing abroad and by selling or pledging 
 our securities, the real savings of former years. In war-time 
 such expedients may be approved. The only matter for 
 regret is that we have used part of these imports, paid for 
 by war credits, not only for the conduct of the war, but for 
 all kinds of extravagance. 
 
 We cannot go on borrowing and selling our securities in 
 peace-time to pay for excessive imports. Such a drain must 
 inevitably lead to a monetary crisis and a long period of 
 restricted confidence. A chronic breakdown of credit would 
 be almost as disastrous to national wealth as a chronic 
 outbreak of strikes.
 
 PRICES AFTER THE \\'AR 471 
 
 In any case the transition from war to peace will not be 
 easy. But it will be much more difficult if we try to counter- 
 act the natural fall in prices on the cessation of the war 
 by the continuance of the lavish expenditure of borrowed 
 money.
 
 CHAPTER XLIV 
 
 BOLSHEVISM 
 
 [May 4, 1918) 
 
 Prefatory Note 
 
 [Under the Bolshevist command of the means of communi- 
 cation it is difficult to get authentic news from Russia. It 
 seems certain, however, that since this paper was written 
 the dissolution of Bolshevism under economic pressure has 
 gone on even more rapidly than was anticipated. On the 
 other hand, it is disappointing to find that in this country 
 the basic Bolshevist ideas still find favour amongst certain 
 classes with Sociahst leanings. It ought to be obvious that 
 in the United Kingdom, which depends so greatly on foreign 
 trade and stability of credit, Bolshevism would be a greater 
 disaster even than in Russia. Seeing that warning of 
 disaster is not alwaj^^s sufficient to check social revolution it 
 is matter for regret that so little attention is paid to the 
 predisposing causes. The reaction after the war from the 
 false prosperity of Governmental extravagance and inflated 
 credit is awaited by the leaders of finance apparently with 
 the unconcern of old Greek gods. Bolshevism has been 
 already condemned by all the other Russian Socialists in 
 their appeal to the Socialists of Europe (Stockholm mani- 
 festo, Times, July 31, 1918). The condemnation, however, 
 is mainly political, not economic, as shown in the following 
 question : " Are we right when we declare that Bolshevism 
 has done nothing to apply Socialist principles and has 
 only succeeded in destroying industry and bringing about 
 universal unemployment and starvation ? " Economically 
 its application of Socialist principles was most " thorough," 
 and the result was as stated.]
 
 BOLSHEVISM 473 
 
 Bolshevism is an economic ideal, or rather disease, that 
 to be understood must be submitted to economic tests. 
 
 The first business of political economy considered as a 
 practical science is to show how the people of any State 
 may provide themselves with a plentiful flow of wealth 
 or of the necessaries and comforts of life. Thus spake 
 Adam Smith. The great weakness of revolutionary Socialism 
 is that the stress is always laid on the division of present 
 wealth instead of providing for the continued flow. " Once 
 the things are there," as Mill said, " mankind individually 
 or collectively can do with them as they please." How the 
 pleasure of mankind is to be ascertained or enforced is a 
 pretty difficult question, as the course of the Revolution 
 in Russia has shown. But there is a deeper and more difficult 
 question to be answered if any economic revolution is to 
 succeed. The things that are to be divided must be there 
 not only once, but they must keep on getting there all the 
 time. It is easy enough to divide up any stock of wealth — 
 the difficulty in revolutions is to renew the stock from day 
 to day and year to year. 
 
 History shows indeed that nations have provided them- 
 selves with a plentiful flow of wealth under economic systems 
 very different from our own. Truth is stranger than fiction 
 even in economics — witness Peru before the discovery of 
 America brought the miseries of European dominion. If, 
 however, economic history reveals great diversities in the 
 provision of the plentiful flow of wealth, it shows also that 
 certain great principles must be observed or else the nation 
 or tribe will lapse into misery. 
 
 How does Bolshevism stand the test of an appeal to these 
 great principles ? The first requisite of national existence 
 — putting aside well-being — is security. And security itself 
 is of many kinds. The most elementary security of all is 
 protection against external enemies. 
 
 In the middle of a war against a great robber State, the 
 Bolshevists divided up the Russian armies into sections 
 under the control of self-elected Committees. If discipline 
 is the life of every army, these Bolshevist Committees were
 
 474 WAR FINANCE 
 
 suicide clubs. Trotsky and Lenin actually put their trust 
 in rhetorical appeals to the German rank and file to mutiny. 
 They were seriously annoyed during the peace negotiations 
 because the German High Command would not give faciUties 
 for their mutinous propaganda. " See," they said, " we 
 have conscripted the wealth of the capitalists and the 
 bourgeoisie and taken the lands of the aristocrats. It is 
 quite simple. Let us show 3'our soldiers the new way." 
 
 Every one knows the result. Russia under Bolshevism 
 has no security whatever against foreign attack. A state- 
 ment has been going the rounds of the papers showing what 
 the peace, or rather the abject surrender, has already cost 
 Russia ; a third of her population, a third of her railways, 
 three-quarters of her iron production and 89 per cent, of 
 her coal. Such was the ransom paid to Germany, and such 
 is the kind of security offered by Bolshevism against foreign 
 enemies. Next in importance may be placed security for 
 person and property within the State itself. One of the 
 first acts of the Bolshevists was to close the Law Courts 
 and put an end to the orderly administration of justice. It 
 is old economic learning verified over and over again in 
 history that even more important than the security afforded 
 by the State against the wrong-doing of its subjects one 
 to another is security against the exercise of arbitrary power 
 by the officials of the State itself. 
 
 History shows, indeed, that a people may thrive in spite 
 of a certain amount of internal disorder — witness the con- 
 stant feuds of the great houses of mediaeval Florence, but 
 no nation can withstand the continuous violation of life 
 and property by uncontrolled officials — witness Turkey-in- 
 Asia. The effect of the insecurity due to Bolshevism is 
 seen in the simplest case of all — namely, the cultivation of 
 the land itself. It is stated on the authority of a Times 
 correspondent long resident in Russia that the peasants 
 will not sow more land than is necessary for their own needs. 
 They do not know how much of any surplus will be com- 
 mandeered. The peasants form about 90 per cent, of the 
 population of Russia. The}^ were offered by the Bolshevist
 
 BOLSHEVISM 475 
 
 leaders the greatest and most irresistible of all bribes — 
 a division of all the lands held by the nobles, the Church, 
 and the bourgeoisie generally. The peasant soldiers, disci- 
 pline having disappeared, promptly deserted to get their 
 share. It was the coming of the kingdom in a form they 
 could all understand. But no provision had been made 
 for the orderly distribution of the confiscated lands. There 
 was nothing but " the good old rule, the simple plan," and 
 the Russian peasantry are now struggling with one another 
 by districts and villages and families and units for the new 
 land. In the meantime the confiscated lands, which alone 
 had been worked with some of the knowledge and capital 
 of modern agriculture, are going derelict. Russia, the 
 great food producer, is threatened with famine. If Tsarism 
 failed in the distribution of wealth, Bolshevism has made 
 an even greater failure in its production. 
 
 Production cannot be carried on without trade. The 
 greatest of all trades, as Adam vSmith showed, is the trade 
 between the country and the towns. Trade cannot be 
 carried on without money of some kind. The first and 
 simplest lesson in any book on money is to show the help- 
 lessness of barter. Before the Revolution Russia had been 
 cursed by the over-issue of paper money. One of the chief 
 causes of the Revolution itself was the discontent due to 
 the depreciated paper. Already the peasants had begun 
 to resort to barter through dislike of the paper money, 
 which gave less and less command over the good things of 
 the towns. How did the Bolshevists try to remedy this 
 evil ? How did they try to restore the stability of the 
 monetary system without which trade is impossible and 
 production is thrown back into the crude methods of 
 barbarism ? 
 
 Under the Bolshevists the flow of paper money has become 
 a torrent, and Russia bids fair to repeat the notorious lesson 
 of the assignats of Revolutionary France. 
 
 To complete the confusion the Bolshevists " nationalised " 
 the banks. The process was very simple. The owners of 
 deposits above a reasonable (Bolshevist) amount were
 
 476 WAR FINANCE 
 
 " considered as dead "■ — to adopt the phrase of an English 
 Bolshevist — and " death duties " absorbed the whole of 
 the surplus. In this case the evils of the destruction of 
 internal credit became so manifest that, " for high reasons 
 of State," the banks were again " denationalised." But 
 the mischief had been done. Internal credit had been 
 shattered. According to the reports of the British refugees 
 who fled from Southern Russia by way of Siberia and Tokio, 
 every district has its own paper money, which is not accepted 
 beyond its own borders. It is pleasing to hear that the 
 liberated German prisoners in Siberia have received money 
 for their return journey in large notes which they cannot 
 change. It is less pleasing, though no less instructive, to 
 hear that in the Ukraine the Germans have already pro- 
 hibited the use of Russian money and introduced their own 
 forced currency. 
 
 - Not content with the blind destruction of the monetary 
 system necessary for the trade between the country and 
 the towns, the Bolshevists proceeded to destroy the foreign 
 credit of Russia, and with it the foreign trade. The present 
 state of British trade with Russia is shown by the fact 
 that even postal communication has altogether ceased. 
 Foreign capital invested in Russia, needless to say, has 
 been confiscated — is not Bolshevism a war on capital ? — 
 and the materials, factories, machinery, etc., have been 
 placed under the control of workmen's committees, whose 
 one idea is to raise wages and lower work. Our war bonuses 
 to labour may be looked on as healthy mushrooms compared 
 with the giant toad-stools of Russia. 
 
 The foreign pubhc debt of Russia was repudiated. It 
 was not a case of temporary suspension of interest under 
 financial stress, but an absolute repudiation of the principal 
 on the ground that the debt had been incurred by the Tsar. 
 The foreign trade of Russia is now reduced to accepting 
 what Germany is inclined to give for what Germany chooses 
 to take. We may be sure that Germany will take sufiPxient 
 guarantees for the investment of any capital necessary for 
 the exploitation of Russia. Nothing but a crushing defeat
 
 BOLSHEVISM 477 
 
 of Germany by the Allies, whom the Bolshevists have 
 betrayed, can save Russia from becoming enslaved to 
 German capitalism. 
 
 In the light of economic histor}^, Bolshevism left to itself 
 is a reversion to barbarism. The kind of barbarism which 
 the Bolshevists wished to restore is a form of the old village 
 community. Under modern conditions this system has two 
 great inconveniences. It means the abandonment of all 
 the higher forms of industrial production. It means also 
 the abandonment of national defence. Under modern con- 
 ditions the art of war involves the highest development of 
 industrial methods. 
 
 The kind of barbarism which the Bolshevists will be forced 
 to accept is German slavery. The process has already begun. 
 Every day we read in the papers of some fresh humble 
 petition by the Bolshevist leaders to their German masters. 
 One of the latest complaints is that the Germans are deporting 
 the people of the occupied Russian provinces in organised 
 droves into the Russia that is nominally under Bolshevist 
 rule. German cynicism will tell the Bolshevists, if it troubles 
 to answer at all, to settle the newcomers on the confiscated 
 lands. The misery of the deported people must be as great 
 as that of the Serbians and Belgians under German rule. 
 
 The moral picture of Bolshevism in the light of common- 
 sense morality is even more tragic than the economic. At 
 the beginning of the war the Russian people of all the Allies 
 showed the greatest moral courage and enthusiasm. The 
 people, however, were ruined by the Germanised Court. 
 The Revolution, that destroyed Tsarism and German corrup- 
 tion, was carried out by classes and leaders who, but for the 
 Bolshevist extremists, would have made Russia in military 
 and economic and moral power stronger than ever. Bol- 
 shevism did not make the Revolution under which " a 
 glorious people vibrated again." Bolshevi-:m destroyed the 
 Revolution, and when Russia might have saved the world 
 the Bolshevists poisoned her so that she could not save 
 herself. 
 
 The Bolshevist betrayal is the greatest crime in history.
 
 478 WAR FINANCE 
 
 \\^iat comfort is it to the Armenians who had fled to Russia 
 for protection to know that the Bolshevists are sending 
 telegrams to the Germans to ask them to ask the Turks to 
 stop the massacres ? 
 
 It is reported that at last*the Bolshevists have come to 
 understand the need of a disciplined army as the basis of 
 the security of national existence. The officers who have 
 not been murdered have been invited (or ordered) to create 
 a " Red " army under the most severe discipline ! The 
 French military mission has also been invited to take part 
 in the military reorganisation of the Bolshevist " bands " — 
 for such, alas ! is the correct German description of the 
 fragments of the great Russian army. Was ever a request 
 so shameless when Bolshevist betrayal has put France, and 
 with France the world, in peril of German militarism ? 
 
 All that was worst in the Russian peasant has been given 
 free play, and what was best has been trampled on. The 
 peasants have been permitted, by the laxity of government, 
 to make their own vodka, the root of all evil in Russia, and 
 they have been exhorted to forget and despise the religion 
 which was the root of theii" idealism. In holy Russia, before 
 the advent of Bolshevism, on the coming of Easter, every one 
 saluted his neighbour by saying, " Christ is risen," and the 
 neighbour replied, " He is risen indeed." In this last black 
 Easter can we suppose that the emancipated peasants, in 
 honour of their Church being disendovv'ed and disembowelled, 
 went about with the greetings, Trotsk}' is risen ; Lenin is 
 risen ; both have risen indeed ? 
 
 Bolshevism is a terrible disease. After it has reached a 
 certain pitch, as in Russia, the only remedy seems to be to 
 let it run its course and wait for the natural reaction. But 
 will Germany wait ? 
 
 Whatever be the outcome in Russia, it is high time for 
 the other nations to guard against the Bolshevist scourge. 
 At the beginning of the great battles in France the Prime 
 Minister took occasion to warn labour' of the dangers of 
 sectionalism. War cannot be carried on under workmen's 
 committees. That much even the Russian Bolshevists novv^
 
 BOLSHEVISM 479 
 
 admit. It is not labour only that needs the warning. With 
 every lull in the war there has been some revival of political 
 sectionalism. Even at the most critical stage of the present 
 decisive battles Irish sectionalism has made its worst 
 breakaway. 
 
 Nor is sectionalism the only danger of Bolshevism. Sec- 
 tionalism may be held in check by the German peril. But 
 after the war Bolshevism will again make its international 
 appeal against capitalism. The revelations of the Auditor- 
 General on the Munitions Accounts are only a beginning of 
 a greater national audit on war expenditure. Capital is 
 no doubt as necessary to production as arc land and labour. 
 But if the gains of capital are unconscionable, the natural 
 outcome is Bolshevism.
 
 CHAPTER XLV 
 ANOTHER YEAR OF INFLATION 
 
 {July 3, 1918) 
 
 Prefatory Note 
 
 [Since this paper was written I have obtained through 
 the courtesy of the Deputy-Master and Comptroller of the 
 Royal Mint the figures for the net issues of bronze and 
 silver up to the end of June, 1918, in quarterly returns. 
 (See Appendix B to this chapter.) The table on p. 108 is 
 thus brought up to date. In Appendix B reference is made 
 to the position of gold and silver as commodities.] 
 
 In a paper * read before the Statistical Society, June, 1917, 
 on " The Statistical Aspects of Inflation," the principal 
 evidences were brought under review of the relations between 
 currency, credit, and prices from the beginning of the war. 
 The general result was that there had been an abnormal 
 growth in the various forms of currency and credit, associated 
 with an abnormal rise in the prices of the groups of commo- 
 dities used as the basis of index numbers and associated also 
 with an abnormal rise in profits and wages. 
 
 After another year of war it may be interesting to give a 
 general survey of the changes that have occurred in the 
 financial picture. Within the limits of the present paper 
 only a few representative figures can be given, but they will 
 suffice. 
 
 The year has been a year of financial records — mostly bad. 
 There are, however, signs of improvement. 
 
 * See above, Part I., Chap. V.
 
 ANOTHER YEAR OF INFLATION 481 
 
 New records have been made in the outstanding amounts 
 of currency notes, bank notes, and bank deposits. By the 
 latest return (June 26, 1918) the currency notes have made 
 a new record by passing the £252,000,000. At the end of 
 June, 1917, the outstanding amount of currency notes was 
 under £162,000,000. It is worth noting that no addition 
 has been made to the amount of coin and bullion, £28,500,000, 
 held against the notes since June, 1915, when the outstanding 
 amount of notes was only £46,000,000. 
 
 The circulation of the notes of the Bank of England, and 
 also of the Scottish banks, has increased by one-third during 
 the year. 
 
 The latest banking number of the Economist (May 18, 1918) 
 brings the figures of deposits up to the end of 191 7. The 
 growth in that year is £260,000,000, as compared with a 
 growth of £200,000,000 in the previous year. Compared 
 with December, 1913, the gross increase in deposits and 
 circulation at the end of 191 7 was nearly 89 per cent. By 
 this time the gross amount of 1913 has probably been 
 doubled. 
 
 Corresponding to these increases in notes and credits there 
 has been an increase in prices, wages, and profits. In spite 
 of the growth of official control of important prices, the 
 Economist index number has continued to make new records, 
 being 270 at the end of April, 1918, as compared with 116 at 
 the end of July, 1914. 
 
 New records have also been established in the current 
 year of war bonuses to labour. .According to the Lahour 
 Gazette, nearly two milhons of people in Januaiy- April, 1918, 
 received net increases in weekly wages of about 5s. 6d. per 
 head. The two milhons do not include railway servants, 
 agricultural labourers, seamen, and Government employees, 
 who have also got large bonuses. The excess profits tax 
 for the present financial year 1918-19, according to Mr. Bonar 
 Law's Budget speech, is expected to bring in £300,000,000, 
 as against £220,000,000 in 1917-18. 
 
 In the former paper (June, 191 7) a close connection was 
 traced between the increases in silver currency and the rises
 
 482 WAR FINANCE 
 
 in wages. The returns of the Mint on silver coinage are not 
 yet pubHshed,* but it is well known that there has been a 
 large increase. It is significant that a proclamation has been 
 issued against the melting down or the hoarding of silver, 
 and heavy penalties have been already imposed. 
 
 The price of silver has for some time been controlled, and 
 no doubt the actual or natural price (for illicit dealings) is 
 above the current official market price of 48^^. per oz. The 
 possible melting down of silver coins may lead to the issue 
 of notes of smaller denomination than ten shillings, and 
 another check on inflation will be removed. 
 
 The foreign exchanges with neutral countries — e.g., Spain 
 and Holland — have marked new adveise records since 
 June, 1917. 
 
 Our adverse balance of trade has been growing, and in the 
 first four months of 1918 was at the rate of about ^770,000,000 
 a year. Although some deduction may be made from this 
 figure on the ground that part of it is met by the high lates 
 paid for our shipping, the rates paid to neutral shipping are 
 much higher. Were it not for the credits obtained in 
 America it would be difficult to pay for our necessary 
 imports. 
 
 The Select Committee on National Expenditure has 
 revealed new records of foolish extravagance and muddled 
 accounting. New economies are partly neutralised by new 
 leakages and partly by new claims, and our war expenditure 
 steadily increases. 
 
 The growth of the National Debt is such that at the end 
 of the present financial year the gross amount will probably 
 be about £9,000,000,000. It is true that from this gioss 
 sum large deductions have to be made. There are our loans 
 to our Allies and Dominions. Account must also be taken 
 of the property held by the Government — e.g., factories and 
 machinery, stores of materials, food products, etc., and of 
 arrears of taxation. But some of the loans will not be 
 repaid for a long term of years (if ever), and the expenses of 
 
 * See Appendix B. to this chapter.
 
 ANOTHER YEAR OF INFLATION 483 
 
 demobilisation and of repairing the wastes of war must grow 
 the longer the war is prolonged. 
 
 As explained above (Chap. XXXIV.), the real burden of a 
 National Debt is best realised in terms of taxation. If the 
 war were ended next April, and the main part of the Govern- 
 mental borrowings stopped, it is probable that the revenue 
 to be derived from taxation, i.e., apart from non-tax revenue, 
 would have to be about five times as great as in 191 3 -14, 
 when it reached £160,000,000.* 
 
 The last Budget of the Chancellor of the Exchequer makes 
 a brave show in comparison with former Budgets in the 
 present war, and the yield of revenue makes an imposing 
 figure. But it is imposing in more ways than one. No 
 account is taken of the rise in prices, which after the war will 
 confront the taxpayer with a dilemma with two sharp horns. 
 If after the war prices fall, how are we to get the same 
 proportionate amount from income tax and other taxes ? 
 And if prices do not fall, how are we to pay for our necessary 
 imports ? If the gold standard is effectively restored prices 
 must fall. If it is not restored, and we still go on with a 
 de facto depreciated currency, what is to become of the 
 financial supremacy of London ? 
 
 The growth of the national debt and of the other financial 
 obligations consequent on the war is viewed with compla- 
 cency by two large classes of people who are blinded by two 
 dazzling delusions. The first delusion is of those who expect 
 the war boom to be followed by a peace boom. This peace 
 boom is to be financed by more Governmental borrowings, 
 nominally for productive purposes. Even these optimists, 
 however, must admit that it will be rather difficult to start 
 the peace boom if to meet prior charges some /8oo,ooo,ooo 
 must be raised by taxation. 
 
 The second delusion is to suppose that financial burdens 
 after the war have no bearing on the present conduct of the 
 
 * In a speech in the House of Lords, August 5, 1918, Lord Inchcapc 
 estimated that a revenue of ^(^700,000,000 would be required if the war 
 ended in March or before. In the rough estimate in the text more allow- 
 ance is mide for tie ri^e in normal expenditure, e.g.^ naval and militarv, 
 and for the necessary continuance for seme time of abnormal expenditure.
 
 4^4 WAR FINANCE 
 
 war. Get on with the war is the cry, and let after-the-war 
 look to itself. Sufficient to the day is the evil thereof. 
 The moral sentiment is excellent, as is the way of delusi jns. 
 But the idea that careless extravagance on the part of the 
 State is of no present consequence because the bill has to be 
 paid after the war is foolish. The greatest danger of the 
 war is premature peace. The greatest incitement to 
 premature peace is the fear of the collapse of credit and the 
 dread of repudiation. The greatest danger to credit is the 
 wasteful expenditure of borrowed or manufactured money. 
 
 After the depressing register of bad records we come to the 
 more pleasing signs of improvement. 
 
 The first sign of improvement is that during the past year 
 the rise in prices as revealed by the Economist index numbers 
 has not been so rapid as in the previous years. In the first 
 four months of 191 8 the index number rose from 265 to 
 270 as compared with a rise from 223 to 244 in 1917. It 
 is too much to hope that the rise in prices will be now 
 definitely stopped, but even a slowing down of the pace is 
 welcome. 
 
 The principal cause of the check to rising prices is the 
 extension of Governmental control, of which the most 
 striking example is provided by the moral courage and 
 practical genius of Lord Rhondda. Unfortunately the 
 control was not exercised in the beginnings of the inflation 
 before American prices had risen. Now we have to adjust 
 our controlled prices to the rising prices in America, also 
 largely due to inflation. Recent statistical inquiries in the 
 United States and Canada show that, as in this country, 
 the rise in prices in America has follow^ed, and has not 
 preceded, the increases in currency and bank credits. 
 Austr.alia also shows the same effects from the same causes. 
 
 Another sign of improvement is the closer critical analysis 
 of the details of expenditure and the relative statistics. We 
 used to be told that the war bonuses to labour were given 
 to meet the rise in the cost of living. It now appears that 
 if we have regard to substitutes and to the changes in the 
 art of living, the rise in the real cost of living is much below
 
 ANOTHER YEAR OF INFLATION 485 
 
 the figure usually quoted from the Labour Gazette. And yet, 
 in spite of this discovery and of the forcible reductions by 
 Lord Rhondda, the demand for war bonuses to meet the 
 higher cost of living still continues. Official arbitrators are 
 still giving favourable awards. A rise has just beei given 
 of IS. 6d. a day to miners above sixteen years of age, the 
 juniors getting gd. The Chancellor of the Exchequer has 
 explained that under the new regulations the Income tax on 
 a worker with a wife and small family and only four pounds 
 a week wages is to be practically nil. He has also reduced 
 the cost of entertainments by abating the tax on the lower- 
 priced tickets. 
 
 The real obstacle to the stoppage in the advance of war 
 bonuses to labour is the persistent belief that piofits can 
 bear still further advances. 
 
 It is, then, encouraging to note that in the past year the 
 control of profits has been extended. An attempt is being 
 made to keep down the rate of interest on bank deposits, 
 with the view of encouraging investment in war bonds. 
 Allowing for bonuses, however, the State is still paying more 
 than 5 per cent, for its loans. 
 
 The list of contracts against public policy is being extended. 
 Old contracts are being revised, and new contracts are being 
 made on terms more favourable to the State. But it is plain, 
 with the enormous revenue from excess profits, that there 
 is still much room for improvement. The " earnings of 
 management " given to the captains of war industries are 
 very large compared with the earnings of the captains of 
 active war. The payments for the risk of the dead capital 
 are also very large compared with the payments for the risk 
 of the living capital. 
 
 Some luxuries have already been suppressed or closely 
 rationed, and more taxes on luxuries are being talked of 
 with great animation. The bureaucrat army is being 
 gradually combed of its redundant labour, though the Civil 
 Service as a whole has been uplifted by war bonuses. 
 
 It must be confessed that the signs of improvement in 
 financial methods are little more than signs of good intention
 
 486 WAR FINANCE 
 
 when we look to the actual growth of public expenditure. 
 Much more drastic economies ought to be introduced if the 
 war is to last much longer. 
 
 If, however, the financial outlook shows but faint glim- 
 merings of new light the moral prospect is good. As so 
 often insisted on, the worst danger of inflation with the 
 inevitable stress on money interests is the degradation of 
 the soul of the nation. The collapse of Russia and the 
 consequent increase in the German menace, and even more 
 the revelation of the nature of that menace, have restored 
 the spirit of the nation to the heights it reached in the first 
 days of the war. In those far-off days the nation was 
 prepared to make any sacrifice. People went about asking 
 what they could do to help. That old spirit is being restored 
 and we again realise that the object of the war and the 
 object of peace are not to be measured by monetary con- 
 siderations. Money is the sinews of war, not the soul of 
 war. 
 
 APPENDIX A. 
 
 The Commodity Values of Gold and Silver. 
 
 The specific depreciation of the pound sterling is shown by 
 the rise in the price of gold as a commodity. 
 
 An authoritative survey was given by Sir Lionel Phillips 
 of the position of gold in a speech on the South African gold 
 industry, reported in the Times of June i8, 1918. The gold 
 is paid for by the British Government at the official price 
 of 85s. per oz. fine, but the small amount now permitted 
 to be used for trade purposes had risen to about 115s. per 
 oz., i.e., some 35 per cent, above the ofiicial figure. 
 
 The producers of gold complain that the price of gold is 
 fixed whilst all other things have risen in price since the 
 war. Under normal conditions the fixit}' of the price of 
 gold simply means that a sovereign contains a certain weight 
 of fine gold with a certain proportion of alloy (for hardening
 
 ANOTHER YEAR OF INFLATION 487 
 
 the coin) . The price is fixed simply because the weight and 
 the fineness of the sovereign are fixed by law. When 
 general prices fell between 1875 and 1895 by about one-half 
 the price of gold remained fixed. 
 
 The fixity of the price of gold is part of the meaning of the 
 gold standard, but part only. Under normal conditions the 
 maintenance of the gold standard means that the principle 
 of convertibility is in full working order. The notes of the 
 Bank of England, bills on London, and all the varied forms 
 of " representative money " are convertible into gold as 
 required at this fixed price, i.e., into coins of full weight and 
 fineness. Of course at any particular time this right is 
 exercised only to a small extent. But the right is always 
 there, and so long as this great principle of immediate 
 convertibility is maintained there can be no specific deprecia- 
 tion of the actual currency. 
 
 Whenever restraints are imposed on convertibiHty specific 
 depreciation is liable to occur, and unless the currency 
 is hmited such depreciation is certain to occur. In other 
 words, gold in the market will rise to a premium. 
 
 The producers of gold in South Africa are asking the 
 British Government to recognise the specific depreciation, 
 i.e., pay the premium on gold, or grant them a subsidy in 
 order to keep open the low grade mines and the more 
 expensive workings. Before such a subsidy is granted two 
 questions ought to receive a definite answer. First, will 
 the increase in the supply of gold improve our military 
 efficiency or power to carry on the war ? If this war 
 test had been always applied our Government would have 
 lessened its subsidies by many millions. The second ques- 
 tion is : Who really pays the subsidy and who really gains 
 by it ? If this peace test had also been appHed our Govern- 
 ment would have saved many more millions. All subsidies 
 in the last resort mean taxation, and when we leave out the 
 money mechanism taxation simply means taking real 
 wealth from some people to give to others. 
 
 The present position of silver also throws light on the 
 general monetary situation. The progress of inflation
 
 488 
 
 \\'AR FINANCE 
 
 operates on the natural {i.e., uncontrolled) price of silver 
 in two ways. The monetary demand is much' greater.* 
 So great is this demand that very Uttle is left over for com- 
 modity uses. At the same time the demand for non- 
 monetary uses is much greater owing to the general rise in 
 money incomes. The nouveatix riches both of capital and 
 labour want more silver ornaments or more plate. The 
 demand is further intensified by the restrictions on gold. 
 But for the American control the price of silver would 
 probably have reached the old parity of 60^. per oz. 
 
 For the time the situation has been relieved by the United 
 States releasing its hoards of silver and issuing small Federal 
 Reserve Bank Notes. Such relief in supply, however, can 
 only be temporary compared with the con'inued rise in 
 demand. If the natural rise in price continues Gresham's 
 law will operate in the old-fashioned way, and silver coins 
 will be melted down. Already, in India the rupee has 
 passed the melting point and in Ireland the Government has 
 issued a proclamation against melting down or hoarding 
 silver coins. Any large withdrawal of silver is sure to be 
 met by the issue of small notes and another check on infla- 
 tion will be removed. 
 
 APPENDIX B. 
 
 Table of net issues of bronze and silver coins from the end 
 of March, 1917, to the end of June, 191S, in quarterly 
 returns, bringing up to date the table on p. 108. 
 
 Net Issues of Imperial Silver Coin in the United Kingdom. 
 
 «— 1 ""^d!" 
 
 Worn Coin 
 withdrawn. 
 
 Net Issues. 
 
 June, 1917 
 
 September, 19 17 
 December, 1917 
 
 March, 1918 
 
 June, 1918 
 
 £ 
 
 833,500 
 
 343,900 
 
 601,875 
 
 1,229,650 
 
 2,066,925 
 
 £ 
 77,000 
 55,000 
 39,000 
 46,235 
 32,000 
 
 I 
 
 756,500 
 
 288,900 
 
 562,875 
 
 1,183,415 
 
 2,034,925 
 
 Total 
 
 5,075,850 
 
 249,235 
 
 4,826,615 
 
 * See pp. 92, loi
 
 ANOTHER YEAR OF INFLATION 
 
 489 
 
 Net Issues of Imperial Bronze Coin in the United Kingdom. 
 
 Quarter. 
 
 New Coin 
 issued. 
 
 Worn Coin 
 withdrawn. 
 
 June, 1917 
 
 September, 191 7 
 
 December, 191 7 
 
 March, 1918 
 
 June, 1918 
 
 / 
 100,530 
 
 II6.I45 
 167,410 
 
 150,715 
 118,200 
 
 £ 
 
 385 
 470 
 390 
 
 3^5 
 
 Total 
 
 653,000 
 
 1,980 
 
 Net Issues. 
 
 100,145 
 
 115-675 
 167,020 
 
 150,365 
 II7.815 
 
 651,020
 
 CHAPTER XLVI 
 
 THE PAYMENT OF WAR DEBT BY TAXATION 
 OF CAPITAL 
 
 {August 7, 1 918) 
 
 The amount of our war debt is already so large and is 
 growing so rapidly that at last our optimists are beginning 
 to ask what it will mean in terms of taxation at the end of 
 the war. No one expects the fighting to stop before April, 
 and the borrowing is not likely to stop with the fighting. 
 There will be the expenses of demobilisation and of insurance 
 against German treachery. To begin with the peace must be 
 an armed peace. The boom in trade and the projects of 
 social reform will mean more expense. \\'ith so many 
 excuses,«the pleasant habit of spending borrowed money will 
 not be easily broken. 
 
 When once normal expenditure is covered by normal 
 revenue, and all the debt is funded and the interest and 
 provision for redemption are paid out of taxation, the 
 estimate of five times the pre-war revenue from taxation 
 (say) £800,000,000, given in a prev'ous paper, is not likely 
 to prove excessive. 
 
 How is the money to be found ? The old salutary rule 
 that direct and indirect taxation should be increased to- 
 gether in some kind of reasonable proportion has been 
 abandoned in the war. Any additions to taxes on consum- 
 ing power have been neutralised by bonuses and subsidies. 
 After the war there is little doubt that the opinion of the 
 democracy will be in favour of throwing most if not all the 
 burden of the war debt on the payers of income tax. During 
 the war the income tax has been made more steeply pro- 
 gressive. After the war the steepening wiU continue.
 
 PAYING WAR DERT BY TAXING CAPITAL 491 
 
 It is the recognition of the advent and continuance of this, 
 steepening income tax that has given rise to the proposal 
 for the taxation of capital as an alternative. There is 
 nothing new in the idea. Just two hundred years ago, as 
 Professor W. R. Scott shows in his recent book on " Econo- 
 mic Problems after the War," Archibald Hutchison made a 
 thoroughgoing scheme for reducing the National Debt in 
 this way, and since then other proposals of the same kind 
 have come and vanished at intervals like new stars. The 
 present proposal, at any rate, excels in magnitude — perhaps 
 also it will excel in the velocity of its disappearance. 
 
 The real meaning of the proposal is to extinguish part of 
 the National Debt so that the interest on the remainder may 
 come within the range of manageable ordinary taxation. 
 
 The simplest plan would be to repudiate half (or any other 
 proportion) of the debt, or, what is the same thing, to lower 
 the interest. But repudiation and breach of contract arc 
 opposed to our most cherished ideas, and the dangers have 
 been forcibly illustrated by Russia and Germany. 
 
 Our taxers of capital make the direct extinction of war 
 debt only part of the proposal. By making the levy 
 general they hope to provide funds for a still larger extinc- 
 tion. This method pays respect to the principle of equality 
 of taxation as between the holders of property (above a 
 certain minimum), although ipso facto it makes the inequality 
 more glaring as between the haves and the have-nots. In 
 these days, however, even this respect to one of the recog- 
 nised principles of taxation is welcome. Even one principle 
 partially applied is better than none. Unprincipled taxa- 
 tion is simple robbery. Taxation does not mean simply 
 taking, but taking according to the general principles of 
 government recognised by the State. 
 
 That there is need at present for pressing the distinction 
 between " taxing " and " taking " is evident from other 
 popular proposals for " taxation." There is, for example, 
 nationalisation of land by the simple process of " taxing " 
 rents to the full value — i.e., taking them. In the same 
 way, any Socialistic scheme may be realised by unprincipled
 
 492 WAR FINANCE 
 
 taxation of this kind. Only make the income tax and the 
 death duties progressive enough, and spend the proceeds for 
 the benefit of the people, and the thing is done. 
 
 Some of the supporters of the proposal prefer to speak 
 of a levy on capital. The term levy is suggestive of con- 
 scription of wealth, with the implied idea of exceptional 
 service to meet a national emergency. But a levy is a much 
 more dangerous precedent than a tax. If a levy is justi- 
 fiable to pay for killing G ermans, why not also to save British 
 ch'ldren and their parents by- giving them a health}^ environ- 
 ment ? Peace has her emergencies no less than war. The 
 greatest happiness of the greatest number would cover a 
 multitude of levies. 
 
 If, however, the term taxation is confused, the term capital 
 is worse confounded. The definition of capital has given 
 rise to endless controversies from the time of Adam Smith 
 onwards. The question arises, Which of these meanings of 
 capital is the best, if our object is to tax the corresponding 
 thing or things ? 
 
 We may begin with the widest meaning. The wider the 
 meaning the more productive will be the tax and also the 
 more equitable. One meaning of capital is so wide that it 
 embraces every form of valuable property. When a man 
 dies taxes are imposed on the capital value of his estate, 
 including not only lands and interest-bearing securities, but 
 furniture, ornaments, and other personal belongings. The 
 advocates of the levy are very fond of quoting the analogy 
 of the death duties. All they propose, they say, is to assume 
 that all the people die on an appo'nted day, pay their duties, 
 and come alive again. 
 
 It is more to the purpose to look to practical experience 
 of general taxes on property in the past or the present. In 
 former times under simpler conditions general taxes on 
 property were common. As property became more com- 
 plex the assessments became too difficult, and the general 
 tax was broken up into special taxes. It is true that the 
 general property tax still survives in the United States. 
 There, however, it is not used by the Federal Government,
 
 PAYING WAR DEBT BY TAXING CAPITAL 493 
 
 but by different varieties of local governments in particular 
 States, cities, &c. Even when broken up into local taxes 
 this general property tax has proved to be a failure. The 
 d fficulty is in the assessment and the evasion. " Can the 
 method of assessment be made sufficiently effective to reach 
 uniformly and equitably all forms of property, especially 
 personal property ? The answer to this question, given by 
 the experience of the United States, is emphatically in the 
 negative." So says Professor Plehn in his excellent intro- 
 duction to finance. The opinion of Professor Sel gman, the 
 best-known American writer on finance, is still more pro- 
 nounced. " The general property tax as actually adminis- 
 tered to-day in the United States is beyond all peradventure 
 the worst tax known in the civilised world." " This," says 
 a commentator, " is strong language — even stronger has 
 been used." 
 
 If the assessment is difficult when carried on from year to 
 year as part of the tax system in localities it would obviously 
 be far more difficult if applied only once to a whole country. 
 Self-assessment would give a premium to dishonesty, and 
 official valuation may be judged of by the progress made in 
 the United Kingdom in the valuation of land alone in the 
 search for unearned increments. 
 
 A levy on capital would involve all the original difficulties 
 of the income tax with new ones for capital valuation. The 
 income tax has been the subject of reforms since 1853, and 
 is still imperfect. How is the levy to be perfected at one 
 blow ? 
 
 But the advocates of the levy in their laudable desire for 
 equity give a still wider meaning to capital. And, so far as 
 the definition of the term capital is concerned, they have the 
 high authority of Adam Smith. Adam Smith brought 
 under capital everything that yielded a revenue, and with 
 this definition he included under capital the natural and 
 acquired abilities of the inhabitants. This idea of including 
 in the capital of a country the value of the inhabitants was 
 fashionable a century before Adam Smith wrote. " The 
 mass of mar^kind being worth twenty years' purchase as
 
 494 WAR FINANCE 
 
 well as land " is one of the gems of Petty's Political Arith- 
 metic (1699). The present writer about thirty years ago 
 applied the methods used by Sir Robert G iff en in his calcu- 
 lations of the material capital of the United Kingdom to the 
 " living capital." The result was that the value of the 
 people was about five times the value of the things. What 
 a broad, rich field for a levy ! At the end of the war if all 
 the people came to their Soviet or whatever it was called 
 and declared the true value of themselves and their posses- 
 sions the whole of the war debt might be wiped off on one 
 day. If . . . 
 
 Unfortunately the search for equity in taxation is always 
 more productive of exemptions than of additions. On the 
 analogy of the income tax a general tax on living capital 
 must leave a minimum free. All the working classes would 
 escape. Their skill is living capital, but it cannot be 
 " polled." With the higher forms of living capital equity 
 demands that the thing should be done, but the nature of 
 the thing makes it impracticable. The levy on living capital 
 when illustrated by practical examples degenerates into a 
 bad kind of income tax. Obviously we cannot take a 
 percentage of the value of the brains of the lawyers, doctors, 
 accountants, and other experts, and they are to be invited 
 (or compelled) to pay a special extra income tax for ten 
 years or so as an equivalent. By this kind of equity the 
 levy on capital, which is proposed to alleviate the distress of 
 too heavy an income tax, ends up by putting the unfortu- 
 nate payers, who cannot turn their capital (living or dead) 
 into immediate cash, imder an additional load of income tax. 
 The ordinary professional man who lives up to his income 
 (including family provision) will be in a tight place. 
 
 Perhaps it may be thought that the wide meaning of 
 capital is too wide. But with a narrower meaning more 
 difficulties come in. Capital, says Mill, is " wealth used for 
 the production of more wealth " — a definition that for long 
 held the field. To tax capital in this sense is to infringe the 
 great rule that, as far as possible, the sources of revenue 
 should remain unimpaired.
 
 PAYING WAR DEBT BY TAXING CAPITAL 495 
 
 A tax that lessens productive power lessens also taxable 
 capacity. The history of financial reform is largely the 
 history of the abolition of taxes that impede production. 
 The answer attempted to this formidable objection is that 
 the whole capital of the country will remain unaffected. 
 There will only be a change of ownership. What the mere 
 change of ow^nership may mean in an extreme form is shown 
 by Bolshevism. But even Bolshevism had its beginnings. 
 It did not drop suddenly from heaven like a Zeppelin bomb. 
 
 Every business requires a certain proportion of circulating 
 capital. The levy, if not paid in cash, must be borrowed 
 from the banks. Does it make no difference to the business 
 man if in some way he must mortgage his business to his 
 banker ? It is one thing to borrow from a bank to extend 
 profitable business and quite another in order to write off 
 a bad debt. More and more our business is done by com- 
 panies. A prosperous company may issue debentures at a 
 low rate of interest. The new capital costs little and earns 
 much. The difference swells the dividends. But if the 
 debentures have to be issued to meet a costly law suit or 
 some other waste, the interest is a tax on the productive 
 resources of the company. 
 
 There still remains the most general obj ection of all to the 
 levy on capital — whatever the meaning to be assigned. The 
 forcible reduction of the debt is intended to reduce future 
 taxation, especially income tax. Where is the guarantee 
 that after the levy has been made the income tax will be 
 reduced ? Is it not much more probable that when the 
 taxing power of the country has been relieved from one 
 drain it will be promptly used as the basis of more debt ? 
 There will be no end to the demands for State aid with 
 borrowed money until the blindest mouths see that the 
 margin for future taxation on which the whole security of 
 borrowing depends has melted away. 
 
 What, then, is the true moral of this alarm about the 
 growth of the debt and the need for a great effort to reduce 
 the burdens ? Surely the answer is that we ought to check, 
 as far as possible, the further growth of the disorder. At
 
 496 WAR FINANCE 
 
 the present rate of interest every thousand millions added to 
 the debt means more than fifty millions of taxation — allow- 
 ing nothing for redemption. 
 
 We find, however, that every day reckless additions are 
 made to the debt— at the same high rate of interest. Yet 
 New Zealand has already shown the way to a forced loan at 
 lower rates. Obviously a forced loan, even at no interest, 
 would be less of a burden than a forced levy with no return 
 of the capital. 
 
 The indirect additions to the debt are still more reckless, 
 and show no signs of reduction. The cost of the war is 
 largely a cost of labour — and this cost is still rising by 
 bonuses. In the early days of the war our optimists always 
 minimised the piling up of debt because the money borrowed 
 was being spent in the country itself. It was the reincarna- 
 tion of the old fallacy which Adam Smith called the right 
 hand paying the left, and is now called the vicious circle. 
 What is the use of propounding fancy schemes for the reduc- 
 tion of debt after the war when we are as careless as ever in 
 adding to the debt during the war ? It is worse than the 
 old fallacy of the sinking fund. A hundred pounds at com- 
 pound interest will become a hundred millions — in time. The 
 old sinking fund such as it was did grow, but not so fast as 
 the new debt. The idea of a levy has not yet materialised 
 at all, but the debt grows at the old pac3.
 
 INDEX 
 
 Agriculture tifter the war, 143, 
 
 149 
 American Civil War, the paper 
 
 currency in, 326, 331 
 American Exchange : 
 
 Support of, 30, 275, 326, 370, 
 
 470 
 Anglo-French Loan and, 325. 
 See also Foreign Exchange 
 •Anderson, Professor B. M., 14, n. 
 Anglo-French Loan, 325 et scq., 346 
 Ashley, Sir W. J., 20, n. 
 
 Bagehot, W., "Lombard Street," 
 
 21, 37. 185. 203, 345 
 Bank rate and the state of credit, 
 
 40. 203 
 Bank Restriction, period of, 59, 63, 
 
 77, 162 
 Bankers' clearings, 41, 79, 175, 176 
 Barbour, Sir D., " The Standard 
 
 of Value," 7, 18 
 Begbie, Sir J., on Indian Finance 
 
 and Currency, 48 et seq. 
 Boer War, taxation during, 347 
 Bolshevism, 472 
 Borrowing. Governmental : 
 
 Continuous rise in rate of 
 
 interest on, 387, 418, 426 
 Question of a fixed rate on, 389 
 And the economy of a forced 
 loan, 389-94 
 Bowley, Dr. A. L., on worldng 
 classes' pre-war expenditure on 
 flour, 446 
 Britain and British Empire : 
 
 German admiration for (List), 
 12 J el seq. ; (Naumann), 136 
 et seq. 
 And the new Central Europe, 
 
 136 
 Effect of the war on (a) pro- 
 ductive agents in, 143-6 ; {b) 
 on distribution of wealth, 146 
 el seq. ; (c) on credit and 
 foreign trade, 150^1 
 
 Britain and British Empire — could. 
 
 After the war {a) possible social 
 
 unrest, 151 ; (b) regulation of 
 
 industry, 152; (c) resti'aints 
 
 and preferences, 153 
 
 British traders and German heroes, 
 
 297 
 Budget : 
 
 The first way — absence of 
 
 criticism, 228 
 Beginning of increasing taxa- 
 tion, 230 
 The doubling of the income 
 
 tax, 232 
 The tax on tea and beer, 233 
 Necessity for a wider basis of 
 
 taxation, 233 
 The regard for economy, 233 
 Of 1916, amount raised by 
 
 new taxes, 363 
 The rule of productiveness, 364 
 Income tax and progression, 
 
 364-6 
 Insufficiency of indirect taxes, 
 
 366 
 Ulterior effects of super-tax, 367 
 Post-war revenue require- 
 ments, 368 
 Bullion Committee (1810), 163 
 Bureaucracy, increasing expense 
 of, 436 
 
 C.\PITAL : 
 
 Effect of war on different forms 
 of, 144 
 
 Payment of war debt by taxa- 
 tion of, 490 
 Central Europe after the war : 
 
 Economic problems of the 
 coming peace, 130 et seq. 
 
 Naumann's view of German 
 policy, 133 el seq. 
 
 Union of Germany with 
 Austria-Hungary, 133 
 
 Ultimate absorption £if other 
 States, 134
 
 498 
 
 INDEX 
 
 Central Europe after the war — contd. 
 The aims of the new Central 
 
 Europe, 137-8 
 Methods, military and eco- 
 nomic, 138-40 
 Political nature of, 140-41 
 See also 382 et seq. 
 Chalmers, Dr., and taxes in war- 
 time, 338 
 Cheques : 
 
 As currency, 16, 70, 216 
 And inflation, 89-90 
 And quantity theory, 16 el seq. 
 Comfort, the standard of: 
 Necessity to lower, 643 
 Rise in, 148 
 Compensation in relation to Pro- 
 hibition, 280 
 Conscription, industrial and mili- 
 tary, 288, 332 
 Consols since the war, 205, 230, 
 
 252, 305. 371. 375 
 Convertibility and London's finan- 
 cial supremacy, 37, 327 
 
 See Depreciation ; Gold Stan- 
 dard ; Gold-exchange Stan- 
 dard ; Inflation 
 Corn Laws and wheat prices, 161, 
 
 399, 439 
 Crammond, Mr. Edgar, " Economic 
 Relation of British and German 
 Empires," 194 
 Credit : 
 
 Removal of limits to inflation 
 
 of, 314 
 Importance of, in war-time, 
 
 201 et seq. 
 War finance and Government 
 
 guarantees, 204-7 
 Basis of Governmental, 206 
 Inflation of and public extra- 
 vagance, 313 
 The Bank rate and state of, 
 
 40, 203 
 Money and, 183-6 
 Crimean War, prices during, 168 
 Cromer, Lord, on forced loan, 394, n. 
 Currency, War Emergency, 83-90, 
 344 el seq. 
 Danger of a " managed " cur- 
 rency, 322 
 See Treasury Notes ; Inflation ; 
 Gold Standard ; Prices 
 
 Deposits, Bank : 
 
 Increase since the war, 93, 
 
 391 
 And the sinews of war, 185 
 
 Depreciation, two meanings of — 
 (a) specific, 63-4, 269 et seq. ; 
 {b) general. 65, 255, 317 
 
 Interaction between specific 
 
 and general, 273 
 Convertibility in relation to, 
 
 36-40, 217, 260-1 
 Principal of limitation in rela- 
 tion to, 51, 221 
 Specific and foreign payments, 
 
 270, 275, 317 
 In Germany and Russia, 271, 
 
 423 
 See Inflation ; Prices ; Gold 
 Standard ; Gold-exchange 
 Standard 
 Dollar, the American, at a premium 
 
 in Europe, 275 
 Drink : 
 
 Output of war material re- 
 tarded by, 285-6 
 And the effect of high wages, 
 
 285-6 
 Method of prohibited areas, 286 
 And rigid industrial discipline, 
 287-8 
 
 Earth-worms, the rise in price of, 
 
 458 
 Economy : 
 
 And the War Loan, 303 et seq. 
 And the Foreign Exchanges, 
 
 306, 330 
 Compulsory, by taxation, 308, 
 
 338 
 And Governmental expendi- 
 ture, 339 
 Economic pressure : 
 
 In relation to necessaries in 
 
 Germany, 234-5 ; 
 In regard to money and credit, 
 
 236-40 
 And the Allies, 240 
 And the duration of the war, 
 208 et seq. 
 Economist index numbers, 95 et seq., 
 
 107, 112-14, 168, 257, 346 
 Edgeworth, Professor, 92 
 Equality of sacrifice : 
 
 Of limited application in war- 
 time, 363 el seq. 
 A hindrance to effective war 
 taxation, 347 
 Exchequer bonds, 371 el seq. 
 Expenditure, Public : 
 
 Proportion of taxation to debt 
 in meeting, 402
 
 INDEX 
 
 499 
 
 Expenditure, Public — contd. 
 Steady increase in, 418 
 Currency inflation and, 419 
 Exports and the currency deprecia- 
 tion, 67, 260, 267 
 Extravagance, Public : 
 Perils of, 310 et seq. 
 Pre-war, in taxation, 311 
 And Government inflation of 
 
 credit, 313 
 And the appointment of the 
 Retrenchment Committee, 
 360 
 And contraction in note issues, 
 361 
 
 Farming, effect of the war on, 149 
 Financial situation, the gravity of, 
 
 340 et seq. 
 Fisher, Professor Irving, " Pur- 
 chasing Power of Money," 7, 
 26 et seq. 
 Flint, Professor, 410 
 Flux. Mr. A. W., 229 
 Franco-German War, prices during, 
 
 168, 420 
 Food prices : 
 
 The rise in, 248 
 
 And burden on fixed incomes, 
 
 249 
 Effect of war on, 249-50 
 Influence of supply on, 251-2 
 The importance of demand 
 element, 252-4 
 Food rationing : 
 
 And the national danger, 445 
 And the sin of waste, 446 
 The sin of gluttony, 448 
 And moral effort for dimi- 
 nished consumption, 454 
 The principle of insurance, 456 
 Food shortage : 
 
 British agriculture and, 439-42 
 The securing of overseas sup- 
 plies, 442 
 And economy in consumption, 
 
 443 
 And gluttony in war-time, 
 445 et seq. 
 Forced Loan : 
 
 Lord Cromer on, 394, n. 
 Premonitory symptoms of, 428 
 General question of a, 432 
 War bonus as a, 389 
 Some equitable methods of, 
 
 433-5 
 The danger of extravagance 
 
 in. 435 
 
 Ford, Dr. Lester L., 92, n. 
 
 Foreign Exchanges : 
 
 " The financial barometer, "326 
 Specific depreciation and, 270, 
 
 275. 317 
 Pre-war correction of, 329 
 War methods of correcting, 
 
 330 
 After the war, 470 
 Fortune, the bald-headed goddess, 
 and our agricultural policy, 438 
 Free Trade and Protection : 
 
 Reconsidered in the light o 
 German aggression, 379-81 
 The practical wisdom of Adam 
 
 Smith, 385 
 A reconciliation, 410 et seq. 
 In the light of history, 411-13 
 In the light of the greatest 
 economists, 413-17 
 Freights and the rise in prices, 151, 
 466 
 
 George, Mr. Lloyd : 
 
 And increased taxation, 348 
 And the drink question, 283 
 And the war bonus, 343 
 Germany : 
 
 Influence of List on develop_] 
 
 ment of, 188 et seq. 
 Remarkable progress of, 19 1-2 
 Britain the obstacle to colonial 
 
 expansion, 192-3 
 Aggressive policy of, and (a) 
 
 loss of British trade, 195-8 ; 
 
 (b) loss of colonies, 198-9 ; 
 
 (c) internal contraction of 
 industry, 199-200 ; {d) con- 
 solidation of British Empire, 
 154, 193. 198 
 
 Its ability to withstand eco- 
 nomic pressure, 208 et seq., 
 
 234 
 Rise in prices in, 213-14 
 Banking system in, 214 
 Political ideals of ISritain and, 
 
 298 et seq. 
 Its policy after the war, 130 
 
 et seq., 382 et seq. 
 Gladstone, W. E., 201, 202, 231, 
 
 233. 325. 2,5^. 359. 3^3 
 Gluttony in war-time, 445 et seq. 
 Gold and Silver Commission (1888), 
 
 91 
 Gold Reserve : 
 
 Bank of England and, 37 
 Golden calf, theory of. 38 
 et seq., 383
 
 50b 
 
 INDEX 
 
 Gold Reserve — conld. 
 
 Pre-war drains on, in Britain, 
 
 72 et seq. 
 Currency notes and, 88, 94 
 Foreign banks and use of, 274, 
 
 323 
 Goschen on importance of, 327 
 Gold Standard : 
 
 Effect of demonetisation of 
 
 silver on, 32-4 
 Position of, before the war, 
 
 28 et seq., 33-4, 38-9 
 War finance and general aban- 
 donment of, 30 et seq. 
 Effects of abandonment (a) 
 
 immediate, 40, 42-3 ; (b) 
 
 ulterior, 44-0 ; (c) on the 
 
 Bank rate, 40 
 Convertibility the essence of, 
 
 33-4. 36-8 
 Gold-exchange Standard : 
 Real nature of, 7 
 Proposal for general adoption, 
 
 22 et seq. 
 Tendency towards, in modern 
 
 finance, 28 
 Cause of inflation and rise in 
 
 prices, 40, 44-6 
 And Indian rupee prices, 56-8 
 Why adopted in India, 47 
 Nature of rupee under, 47, 53, 
 
 55. 59 
 
 Effect of, on internal monetary 
 functions of rupee, 49—58 
 
 Report of Royal Commission 
 on Indian Finance and Cur- 
 rency in relation to, 48 et seq. 
 
 Involves a " managed " cur- 
 rency, 52-3 
 
 Quantity theory in relation to, 
 
 '" 19, 22-3 
 
 Importance of limitation under, 
 
 51, 58 
 
 Goschen, Lord, 28, G6, 185, 325, 
 
 327.331.345 
 Governmental management after 
 the war, 152 
 
 Harrison, Mr. F. C, 47, 54, 55 
 Helfiferich, Dr., and the German 
 
 gold reserve, 274 
 Hirst, Miss M., " Life of List," 
 
 123 
 
 Holland, a province of Germany, 
 191 
 
 House of Commons, its backward- 
 ness in rationing itself, 445 
 
 Imports : 
 
 War inflation and excess of, 
 
 357 
 War methods of payment for, 
 
 358 
 See also Foreign Exchanges ; 
 Depreciation ; Inflation of 
 Currency 
 Income of the United Kingdom, 229 
 Inconvertibility : 
 
 Publicly declared in France 
 
 and Germany, 30, 217 
 And Treasury notes, 218, 315 
 Indemnity, German expectations 
 
 towards an, 274 
 Indian Finance and Currency, 
 48 e^ seq. 
 
 See Gold-exchange Standard 
 Industrial unrest, 8, 151-3, 455, 469 
 Inflation of Currency : 
 Meaning of, 62 
 How measured, 62-5 
 Pre-war limits to, in Britain, 
 
 69-70, 72-6 
 Tendency of our war finance 
 
 to promote, 76-9 
 Present existence of, verified 
 by statistics (a) of abnor- 
 mal currency issues, 83-95 ; 
 (b) of abnormal rise in prices, 
 95-6 ; (c) of abnormal rise 
 in wages and profits, 96-8 
 {see also Appendix, 107-14) 
 Precedes the rise in prices, 
 
 79-81, 98-100 
 Time test in relation to (a) 
 Treasury notes, loo-i ; 
 (b) silver, 10 1-3 ; 
 And the rise in wages, 103-6, 
 
 397 
 Effect on imports and foreign 
 
 trade, 29-30, 67-9 
 
 See under Prices ; Deprecia- 
 tion 
 Inflation, the inequities of : 
 
 Facilitation of speculation and 
 
 profitcring, 45 8 et seq. 
 Increased inequality in dis- 
 tribution of {a) wealth, 461 ; 
 
 (b) of moral sacrifice, 463 
 " Another Year of," 480 
 Interest, Rate of ; 
 
 Dependent on demand and 
 
 supply, 222 
 Probable effect of war a 
 
 further rise in, 223-5 
 Tendency of increased security 
 
 to raise, 225
 
 INDEX 
 
 "^01 
 
 Interest, Rate ol^-contd. 
 
 The low Bank rate and possible 
 
 fall in, 226 
 On War Loan, 315, 371 et seq. 
 Governmental interference 
 with, 377, 3S9 
 International Law, its nature and 
 enforcement, 291 et seq. 
 
 Kaiser, the, as first Industrial, 140 
 
 Keynes, Mr. J. M., " Indian Cur- 
 rency and Finance," 7, 35, n., 
 48. 54. 57. 68 
 
 Kirkaldy, Professor, " Labour 
 Finance and the War," 70, n. 
 
 Kitchin, Mr. J., 94, n., 102, n., 
 104, 11., no, 11. 
 
 Kultur and the wages question, 
 262 et seq. 
 
 Kumpmann, Karl, " Friedrich 
 List," 122 et seq. 
 
 Labour : 
 
 Voluntary enlistment and 
 
 public spirit of, 266-8 
 
 Duty of non-enlisted section, 
 
 268 
 
 ' Price of, in war-time, 264 
 
 Status after the war, 143 
 
 Labour Gazette and increased wage 
 
 rates, 96, 395, 453 
 Laughlin, Professor J. L., " Prin- 
 ciples of Money," 6, 17 
 Law, Mr. Bonar, 92, 340, 345, 418, 
 
 429, 465 
 Law, John : 
 
 Early life of, 116 
 Efforts to promote his Sys- 
 tem, 1 17-18 
 New documents concerning, 
 
 in Turin, 118 
 Speculation mania and disaster 
 
 in France, 119 
 His attitude to paper money, 
 
 120-21 
 Professor Prato on dual cha- 
 , racter of, 121 
 Layton, W. T., " Introduction to 
 
 the Study of Prices," 13, n. 
 Leslie, Professor R., 47 
 Liberty and Equality : 
 
 In relation to efficiency in 
 
 war-time, 276-9 
 In relation to the political 
 ideals of Britain, Germany, 
 and the United States, 298 
 et seq. 
 See Adam Smith 
 
 List, Friedrich, 122 : 
 
 His influence on German de- 
 velopment, 125 et seq. 
 His national system, 125 
 His three methods of attaining 
 
 national power, 127 
 Foreign policy of, 127-8 
 On Free Trade and Protection, 
 
 127, 413 
 And Adam Smith, 125, 413 
 
 et seq. 
 London : 
 
 The clearing house of the 
 
 world, 28, 37, 39, 313 
 Basis of its financial strength, 
 
 .37. 327 
 Bill on, international currencj', 
 
 43 
 Lusitania, case of, and United 
 States neutrality, 294 
 
 Mach, Mr. von : 
 
 On British militarism, 298 
 On Bernhardi, 290 
 Machiavelli and German diplo- 
 macy, 254, 265 
 McKenna, Mr., 94, 11., and the 
 
 1916 Budget, 364 et seq. 
 Marinismus : 
 
 Of the United States, 128 
 Of Britain, 301 
 Marshall, Professor, 4 
 Mercantile system, 127, 180 
 Militarism : 
 
 German faith in, 296 et seq., 
 
 137 et seq., 198 
 In relation to compulsory 
 
 service, 332 
 In Great Britain, 299 
 Mill, J. S., II, 231, 267, 276, 347 
 Milncr's, Lord, Committee and 
 
 wheat production, 440 
 Mint Report and currency issues, 
 
 84 et seq. 
 Money : 
 
 Importance of, in war-time, 
 
 180, 201 
 Metal a small proportion of 
 
 total, 182 
 Sufficiency of, dependent on 
 
 bankers' credit, 183-6 
 Nature of, 171 
 Increase in the circulation of, 
 
 216 et seq. 
 Bank-notes as, 216-18 
 
 See Quantity, Theory of 
 Money ; Inflation of 
 Currency
 
 502 
 
 INDEX 
 
 Monopoly and the rise in prices, 320 
 
 Monroe Doctrine, 336 
 
 Montagu, Mr., and the Treasury; 
 
 note issues, 3-15 
 Moratorium : 
 
 Method of inconvertibiUty, 30, 
 
 219 
 InadvisabiUty of, 177 
 " Municipal Life and Government 
 in Germany," 299 
 
 Napoleonic Wars : 
 Prices during, 16S 
 Trade after, 156 et seq. 
 National Debt : 
 
 Heal burden of, 402 et seq. 
 And the national income, 412 
 Future, taxation for interest 
 
 on, 403 
 The burden of (a) on labour, 
 404 ; (6) on capital, 406 ; 
 on salaried classes, 408 
 National trade policy, present 
 
 opportunity for, 417 
 Naumann, Friedrich, see Central 
 
 Europe after the war 
 Navigation Acts, 154, 386 
 Necessaries, deficiency in, dispro- 
 portionate to rise in price of, 399 
 Neutrality of the United States : 
 Material advantages of, 289-90 
 IMoral preference for, 290-1 
 Rights and obligations of neu- 
 trals to {a) third parties, 
 291-2 ; (6) to themselves, 
 
 293 
 And political independence, 
 
 294 
 The question of expediency, 294 
 And the choice between poli- 
 tical ideals, 297 et seq. 
 
 Opulence and defence, 138, 336 
 Organisation : 
 
 In Germanj', 136 
 
 In Britain after the war, 144 
 
 Paish, Sir G., on war imports, 538 
 Pan-Germanism, 191 
 Paris Economic Conference : 
 The necessity for, 380-1 
 Its recognition of the danger 
 of the Central Empire policy, 
 382-5 
 And recommendations for 
 policy of economic defence, 
 
 385 
 Pauperism, low record in 145, 349 
 
 Peaceful penetration : 
 
 List and the method of, 127 
 
 et seq. 
 Extent of, in Britain and other 
 
 countries, 380-1 
 Danger and meaning of, 381 
 Plehn, Professor, on taxation of 
 
 property, 493 
 Population, relative growth of, in 
 
 Britain and Germany, 195 
 Porter's " Progress of the Nation," 
 
 63, 161, n., 351 
 Postal Orders as emergency cur- 
 rency, 83, 204 
 Prato, Professor, on John Law, 
 
 116 et seq. 
 Prices, General (before the war) : 
 Fall in, 1893-96, 3-5 
 Rise in, 1896-1912, 7-27 
 Main causes of changes in, 8 
 Practical importance of changes 
 
 in, 8 
 Wages and, 8-9, 104 et seq. 
 Rate of interest and, 9-10 
 Quantity theory in relation to 
 (a) in simple form, 10-13 ; 
 (h) under complex condi- 
 tions, 13-22 
 Credit and, 15-17, 21 
 Proposed gold-exchange stan- 
 dard and, 22-25 
 International interaction of, 21 
 Possible fall in, 26 
 In India under the gold-ex- 
 change standard, 25, 56 
 et seq. 
 Prices, General (since the war) : 
 Emergency currency and in- 
 flation of, 30, 44, 45, 65, 79, 
 95 et seq., 418 e^ seq. 
 Abnormal rise in, 95-6, 107-14, 
 
 419 
 Treasury notes and, 100 
 Silver and, loi 
 Tooke and the effect of war on, 
 
 167, 419 
 Question of Governmental con- 
 trol of, 398 et seq. 
 See also Depreciation ; Infla- 
 tion of Currency 
 Prices, General (after the war) : 
 Primarily dependent on con- 
 traction of inflation, 468 
 The question of freights and 
 
 tonnage, 466 
 The question of scarcity of 
 supplies, 467 
 Production, census of, 106, 229
 
 INDEX 
 
 503 
 
 Profits : 
 
 The abnormal rise in, 97 
 And a forced loan, 434 
 Prohibition : 
 
 The case for, 279 
 
 And the ideas of liberty and 
 
 equality, 279 
 And compensation, 280-2 
 Prosperity, in war-time : 
 
 Of Britain compared with 
 
 neutrals, 241-3 
 The relation to extensive bor- 
 rowing, 243-6 
 Fictitious nature of, 247, 343 
 
 Quantity theory of money : 
 
 Price and, 5 et seq. 
 
 Simple form of, 10-12 
 
 Historical verification of, 12 
 
 Deeper examination of, 13 
 et seq. 
 
 Rapidity of circulation and, 15 
 
 Credit and, 15 
 
 Abandonment of, by Professor 
 Laughlin, 17 
 
 Professor Fisher's rehabilita- 
 tion, 18-22 
 
 The proposed gold-exchange 
 standard in relation to, 22 
 
 Practical importance of, 19 
 See also Prices ; Gold-ex- 
 change Standard ; Gold 
 Standard ; Inflation 
 
 Railways, the gross receipts of, 
 in Britain and Germany, 196 
 
 Retrenchment Committee, 360, 369 
 
 Ricardo, 11, 164, 201, 321, 345 
 
 Rist, Gide and, " History of Eco- 
 nomic Doctrines," 123 
 
 Roosevelt, ex-President, on the 
 invasion of Belgium, 292 
 
 Runciman, Mr., and inflation of the 
 currency, 425 
 
 Rupee : 
 
 Fluctuation in metallic value 
 
 of, 47. 51 
 Official gold price of, 47, 51 
 Present nature of, 47, 53, 55, 59 
 Principle of limitation in rela- 
 tion to, 51, 58 
 Distinction between general 
 and specific depreciation of, 
 
 56 
 
 See Gold-exchange Standard 
 Russo-Japanese War, prices during, 
 168 
 
 Scott, Professor W. R., on loss of 
 
 tonnage in Napoleonic Wars, 453 
 
 Seligman, Professor, on taxation of 
 
 property, 493 
 Silver : 
 
 Demonetisation of, 32 
 Currency issues of, 84, 108, 488 
 Smith, Adam : 
 
 And List, 125, 413 
 
 On taxation, 230, 348 
 
 On liberty, conscription, and 
 
 economy, 332 et seq., 353 
 And a maximum rate of 
 
 interest, 377 
 On Free Trade and Protection, 
 
 379. 385. 413-17 
 Social reforms, expenditure on, in 
 
 war-time, 276, et seq., 283 
 South African War, prices during, 
 
 168 
 State Socialism, future of, in Ger- 
 many, 140 
 Stock Exchange, effect of the war 
 
 on, 41, 145, 205, 260, 435 
 Strikes : 
 
 Indefensible in war-time, 26S 
 And the war bonus, 395 
 Sven Hedin on German payments 
 in the West, 312 
 
 Taxation : 
 
 The War Budgets and, 230, 
 
 363 
 Pre-war extravagance in, 311 
 Equality of sacrifice and, 347 
 In Napoleonic Wars, 351 
 Inflation an indirect form of, 
 
 462 
 Tax, Income, history of, in Britain, 
 
 Tooke's, T., " History of Prices, 
 
 79, 81, 156, 168, 419, 440, 452 
 Trade after the war : 
 
 Lessons from Napoleonic War 
 period (a) as ~ short-lived 
 peace boom, 152; (6) a fall 
 in prices, 158, 163 ; (c) cur- 
 rency cause of high war 
 prices, 160-2 
 Application of former experi- 
 ence to present conditions, 
 161-4 
 Treasury Notes : 
 
 Limited convertibility of, 64 
 Over-issue and depreciation of, 
 
 62 et seq., 321 
 And prices, 100 et seq.
 
 504 
 
 INDEX 
 
 Treasury Notes — contd. 
 
 Rate of issue, 87, 100, 107, 318, 
 
 370 
 And Bank reserves, 44, 93-4 
 And the Bank Act of, 1844, 41 
 Lack of principles governing 
 
 issues, 221, 323 
 Proportion of, in Scotland and 
 
 England, 219 
 
 See Inflation ; Prices ; Gold 
 Standard 
 
 Unearned increments, the abun- 
 dance of, 149 
 Unemployment during the war, 
 
 145, 241, 349 
 United States : 
 
 Crisis of 1907, 38, 237 
 Golden calf theory of Bank 
 
 reserves in, 44 
 Correction of Exchange with, 
 
 39-40 
 Cause of rise in prices in, 421 
 German foreign policy towards 
 (List), 128 ; (Naumann), 136 
 See Neutrality 
 United States of Europe versus the 
 U.S.A., 128 
 
 Wages : 
 
 Rise in, since the war, 96-7, 
 105, 395 
 
 And prices, 105 et seq., 395-8 
 
 Silver and, 103 et seq. 
 
 Meaning of, 263 
 
 A question of culture, 263 
 
 In war-time, 264 et seq., 340 
 Walker, F. A., " Money " 
 War: 
 
 Effect of, on prices {a) not 
 necessarily to raise, 168 ; 
 (b) dependent on the effect 
 on (i) gold, 170; (2) credit, 
 170 ; (3) trade, 17 1-4 
 
 Prolaable duration of, 208 
 et seq. 
 
 War Bonus : 
 
 A result of rise in prices, 315, 
 
 318 
 On wages, 341 
 On profits, 342 
 On credit, 344 
 On War Loan, 374, 426 
 War demand and the, 343 
 Evil of continuous rise in, 395 
 And taxation, 396 
 . And controlled prices, 398 
 
 War Loan : 
 
 And thesmallinvestor, 305, 430 
 Rate of interest on, 315, 371 
 
 et seq., 426 
 War bonus on, 374, 426 
 And compulsion, 377, 428, 432 
 Generosity of, 426 et seq. 
 
 War and Paper Money : 
 
 Importance of limitation and 
 convertibility, 174-6, 323, 
 
 345 
 Banking and the moratorium, 
 
 177 
 Inconvertibility and the rise 
 
 in prices, 177-8 
 Duty of the Government to- 
 wards currency, 179 
 Increase in bank-notes, 320 
 In Germany, 370 
 In Russia, 423 
 War Savings Certificates, 408, 430 
 Wheat : 
 
 Effect of British weather on 
 
 price of, 439 et seq. 
 The encouragement of home- 
 grown, 440 
 Whittaker, Professor, 92, n. 
 Willis, Mr. H. Parker, 7 
 Wilson, President, the Notes of, 
 
 294, 420 
 Withers, Mr. Hartley, " jNIeaning of 
 Money," 6, 21 
 
 Zollverein, List and the German, 
 191, 124 et seq. 
 
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