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 THE LIBRARY 
 
 OF 
 
 THE UNIVERSITY 
 
 OF CALIFORNIA 
 
 IRVINE 
 
 GIFT OF 
 
 Dr . and Mrs . 
 JOHN F. BELL
 
 ECONOMIC PROBLEMS 
 
 OF 
 
 PEACE AFTER WAR
 
 CAMBRIDGE UNIVERSITY PRESS 
 
 C. F. CLAY, Manager 
 
 LONDON •. Fetter Lane, E.C. 4 
 
 NEW YORK: G. P. PUTNAM'S SONS 
 
 BOMBAY, CALCUTTA, MADRAS: MACMILLAN AND CO., Ltd. 
 
 TORONTO: J. M. DENT AND SONS, Ltd. 
 
 TOKYO: THE MARUZEN-KABUSHIKI-K.AISHA 
 
 All rights reserved
 
 ECONOMIC PROBLEMS 
 
 OF 
 
 PEACE AFTER WAR 
 
 (SECOND SERIES) 
 
 THE W. STANLEY JEVONS LECTURES AT 
 UNIVERSITY COLLEGE, LONDON, IN 1918 
 
 BY 
 
 WILLIAM ROBERT SCOTT 
 
 M.A., D.Phil., Litt.D., LL.D. 
 
 Adam Smith Professor of Political Economy in the University of Glasgow 
 and Fellow of the British Academy 
 
 Cambridge : 
 
 at the University Press 
 
 1918
 
 c 
 
 S4 5" 
 
 Never doth an important truth spread its roots so wide, or clasp 
 
 the soil so stubbornly, as when it has braved the winds of controversy. 
 
 There is a stirring and a far-heard music sent forth from the tree of 
 
 sound knowledge, when its branches are fighting with the storm, 
 
 which passing onward shrills out at once truth's triumph and its own 
 
 defeat. 
 
 S. T. Coleridge.
 
 PREFACE 
 
 T N the previous course of lectures an effort was made to 
 -*- indicate some of the chief principles which should guide 
 us in contemplating the economic future. The general conclusion 
 which resulted was that emphasis should be laid upon general 
 rather than on particular tendencies. It is to be feared that 
 much of the planning which has been undertaken during the 
 war has been weakened, and some of it wasted, through an undue 
 concentration upon details and the neglect of wide and compre- 
 hensive principles, many of which are psychological, rather than 
 purely economic. It may seem almost a paradox to say that 
 what is most important in facing the future is first to reach the 
 right point of view. Accordingly, all that was possible in the 
 former series of addresses was to seek for the proper attitude of 
 mind towards the problems with which the country will be con- 
 fronted. It was not possible upon that occasion to do more than 
 to suggest in a tentative manner how the general principles 
 should be applied to special cases. 
 
 In the ensuing pages concrete illustrations are afforded of the 
 working of this method. It has been by no means easy to select 
 the particular topics to be treated. Many economic problems 
 arose and were alluded to in the course of the previous discussion. 
 From amongst these it seemed, on the whole, that it would be 
 most advantageous to concentrate attention upon two groups of 
 questions. One of these is concerned with the economic con- 
 siderations connected with the project of a League of Nations — 
 partly as to its feasibility, partly (assuming it to be possible) 
 
 «3
 
 vi Preface 
 
 as to its consequences upon commerce and particularly in 
 relation to communication by land, sea and air. These and 
 other matters of a similar character are discussed in the first two 
 lectures. The remainder deal with problems of finance. There 
 is no field of economic enquiry where the need for investigation 
 is mere urgent. Here, in particular, according to the saying of 
 Leibniz, "the present is full of the future." To a large extent 
 what we do now is determining what we must do in the future: 
 while what we abstain from doing now will have no less striking 
 effects. Finance since the beginning of the war and until a 
 number of years after peace has been re-established constitutes 
 a unity, but it is a unity part of which (namely the interval 
 between the present time and the cessation of hostilities) is 
 partly hidden from us. In dealing with the position as a whole 
 an attempt has been made to allow for this inevitable uncer- 
 tainty. Several aspects of the position have been grouped to- 
 gether for separate treatment — as, for instance, the principles 
 which should govern war finance in relation to the debt for which 
 we shall be liable when the war is ended, next various schemes 
 for the reduction of the war debt are discussed, and after that 
 certain characteristics of what may be termed the period of 
 financial transition, that is the interval from the declaration of 
 peace until the finances can be considered normal again, finally 
 if the imagination be carried forward into the earlier years of 
 peace, certain of the problems which will then be pressing can 
 be anticipated. As regards this part of the work it may be 
 mentioned that the manuscript was in the hands of the printer 
 before the Budget statement was made. Under the circum- 
 stances it did not appear that any alterations, beyond the in- 
 clusion of some later figures, were called for; since I judged it 
 best to present what had been written in its original form as an 
 independent review of the situation. It may perhaps be of
 
 Preface vii 
 
 interest to state that the calculations, which led to fixing upon 
 the sum of 900 millions as the amount which should be aimed at 
 from taxation and State services in 1918-19, were made in 
 September-October of last year and this result was announced 
 at a lecture given to the Royal Philosophical Society of Glasgow 
 in November. That happens to be the sum which Mr McKenna 
 and the other members of the House of Commons, who have 
 given special attention to financial questions, estimate as the 
 revenue in a complete financial year under the present Budget 
 [Hansard,, 103, pp. 724, 780). 
 
 The expansiveness and the solidity of the British finances 
 have been remarkable. Hitherto any reasonable estimate of 
 future revenue, however optimistic it may have seemed at the 
 date it was made, has fallen short of the reality. At the same 
 time due weight must be given to the present exceptional cir- 
 cumstances. From the financial point of view the situation may 
 be compared to that of a person who has to make extraordinary 
 efforts and is kept going by a powerful tonic. The disbursement 
 of immense sums of borrowed money and the state of the cur- 
 rency as well as the exceptional nature of war time trade maj T be 
 compared, not inaptly, to the tonic in the illustration. But the 
 question arises what is to happen to the revenue and to the 
 financial system generally when the time comes at which the 
 tonic can no longer be given? An earnest effort has been made 
 to face this problem in the last two lectures; and, given reason- 
 able care and prudent management, the result is far from dis- 
 couraging. But war time extravagance has become almost the 
 habit of some of the great spending Departments of the Govern- 
 ment, and the restoration of reasonable economy will be 
 necessary, indeed the financial position after the war cannot 
 justly be described as normal until this has been accomplished. 
 The country has ample resources for the maximum necessary
 
 vi u Preface 
 
 expences of its defence against a system which would render its 
 free development in industry impossible, but it has not resources 
 to waste, unless its recovery from the material losses of war is to 
 be unduly and even painfully protracted. 
 
 As the great struggle works itself out to the one inevitable 
 end, the nation like Sir Beaumains in the Morte D' Arthur must 
 win through "the pass perilous," not once but many times. 
 Finance is an essential element in the contest. Its function is to 
 maintain the fullest efficiency of the fighting forces with the 
 least detriment to the future. The former condition must of 
 necessity be supreme, but at the same time due attention should 
 be paid to the second. 
 
 The final result of the financial investigation shows that, if 
 the system be used judiciously, there are no grounds to fear 
 interruption of a vigorous conduct of the war through failure of 
 adequate resources. Still less is there reason to expect that the 
 burden of taxation which the war will leave behind it — heavy 
 as this must be — will prove intolerable. It appears as clear as 
 any thing can be during the uncertainties of a state of war that, 
 given prudence in the use of our financial resources, those who 
 predict either financial exhaustion during the war or financial 
 collapse after it are ill-informed in their despondency. Theirs is 
 that sad failure of vision which may be imagined almost to 
 repeat the words of Timorous and Mistrust "the further we go 
 the more dangers we meet, wherefore we would turn, and go 
 back again." 
 
 W. R. S. 
 
 April, 19x8,
 
 CONTENTS 
 
 PREFACE v 
 
 MARE LIBERUM— AER CLAUSUS? 
 
 In previous wars enemies, who felt the effects of British sea power, have 
 advocated " Freedom of the Seas " : only a few years after the end of the 
 Napoleonic wars I. Disraeli included an account of the French argu- 
 ments on this subject amongst his "Literary curiosities": the German 
 conception as developed by Schulze-Gavernitz and Reventlow: the 
 position of Grotius : his anticipation of aerial navigation : Gronovius on 
 the jus gentium and free passage through the air: the question of the 
 use of the air over the land by foreign nations: the ideal of making 
 navigation by air as free as that upon the sea before the war: the 
 danger of territorial exclusiveness aiming at a doctrine of aer clausus : 
 international regulation of navigation by air: Kipling's A. B.C.: the 
 proposed League of Nations and regulation of aerial traffic : the limita- 
 tion of the air service, if impeded by territorial exclusiveness: possi- 
 bilities of political friction in relation to trade routes: the function of 
 the proposed League regarding these: the League and the use of the 
 air for purposes of war: the effect of control of communication by land, 
 sea and air in enforcing peace ...... p. i 
 
 A LEAGUE OF NATIONS AND COMMERCIAL POLICY. 
 
 The universal wish for a stable and abiding peace, but the question at 
 once arises as to how it is to be guaranteed : the conception of a League 
 of Nations : in several respects the programmes of the proposed League 
 represent the Canadian Industrial Disputes Act of 1907 writ large: the 
 conditions precedent to the formation of a League of Nations (1) the 
 defeat of aggressive militarism, (2) a just peace, (3) industrial peace 
 after the war: assuming these conditions are satisfied, it remains to 
 inquire what may be inferred concerning the consequences of the 
 establishment of such a League upon commercial policy : the power of 
 control of trade as it may be exercised by the League : the least sufficing 
 State will be most subject to economic pressure by the League : varia- 
 tions in the economic contribution by different States to the economic 
 power of the proposed League : if it were established, at first it would 
 encourage economic self-sufficingness : the consequences as regards 
 Great Britain and the British Empire : if a League were founded, it is 
 probable that members of it would be compelled to refrain from dis- 
 criminating against the trade of other signatory States : this would tend 
 towards checking the rise in tariffs of signatory States as regards the 
 goods of other signatory States, while, conversely, duties would be 
 higher against non-signatory Powers: to that extent the latter would 
 be drawn together in commerce and the economic power of the League
 
 x Contents 
 
 would be weakened: if the League succeeded in facilitating the trade 
 of its members, there would be distinct economic advantages in joining 
 it: the difficulties of the economic weapon in the case of powerful 
 States, through smuggling and in the rationing of small countries con- 
 tiguous to the one against which an economic boycott is to be applied; 
 the centrifugal force within the League, in so far as it restrained the 
 activities of the more progressive countries : Statesmen rather empha- 
 size the economic side of the League : economists expect more from its 
 political activities: the prospects of the future, without a League of 
 Nations, can only be described as an unfavourable certainty: with it, 
 perhaps these may be transformed into a favourable uncertainty 
 
 p. 21 
 
 THE FINANCIAL BURDEN OF TODAY AND OF TOMORROW. 
 
 There are few economic questions upon which opinion has been divided 
 so much and for so long a time as the respective proportions of loans 
 and taxes in meeting the cost of war : there was a British school which 
 urged that all war expenditure should be raised within the year in 
 which it was incurred — the views of Petty, Davenant, Archibald 
 Hutcheson, Hume, Decker, Fauquier, Adam Smith, Ricardo, Chalmers 
 and J. S. Mill: another theory advanced by Berkeley, Sir J. Steuart 
 and J. Mc Arthur: a change in British opinion was shown in the finance 
 of the South African war as well as in the growth of local debt: as 
 distinguished from the view of earlier English writers German econo- 
 mists advocated reliance upon borrowing to meet war expenditure — 
 the views of von Justi, von Jacob, Nebenius, Dietzel, von Stein: the 
 place of indemnities in German financial theory — Cohn, Roscher, 
 Wagner: the relative places of borrowing and taxation, Adams, Leroy- 
 Beaulieu, Pareto and Einaudi : Adam Smith's conception of the amount 
 of war expenditure as a multiple of normal expenditure : theory of the 
 ratio between loans and taxes : (a) taxes sufficient to meet interest on 
 the net war debt at the end of the financial year, (b) to provide a 
 contribution to meet a part of the war cost, (c) the duty of the Chan- 
 cellor of the Exchequer not to injure future productivity of taxation 
 and trade but to increase taxation up to the verge of this limit : estimate 
 of the amount of taxation in 1918-19 upon these principles . p. 41 
 
 CONSCRIPTION OR PROSCRIPTION OF CAPITAL. 
 
 The future liability for taxation will depend on the amount of debt: 
 hence schemes to diminish it must be next discussed: proposals for 
 confiscation of a part of the National Debt are very old, e.g. A. Hutche- 
 son's 10 per cent, levy, schemes of Asgill, Barbier and Menier : Ricardo's 
 condition before sanctioning a general contribution for reduction of the 
 Debt : in modern schemes all that is new is the analogy to the Military 
 Service Acts, hence the idea of conscription of wealth or capital: the 
 extent to which this analogy holds and how far it is defective : already 
 the State has demanded the use of many hundreds of millions of wealth, 
 but the element of risk is not the same as in the case of personal service : 
 the logical development of the conception of conscription both of service
 
 Contents xi 
 
 and wealth, the whole population deemed to be minors for the period of 
 the war : the impracticability of this idea : partial approximations to it 
 — (a) a possible tax upon all persons not serving in the forces, (b) a tax 
 upon deficient subscriptions to War Loans, (c) suggested lower rates 
 of interest for domestic loans: the idea of conscription of the more 
 durable kinds of wealth: the relatively small amount that would be 
 obtainable : the Capital Levy of the Fabian Society : the convertibility 
 of taxes on capital and on income: this scheme a differential income 
 tax upon wealth used productively : the paradoxes which would result 
 — a bonus upon unpatriotic expenditure, "the paraphernalia of the 
 house," "immaterial capital," the check to accumulation, objections 
 to large debt redemption in the early years of peace : the need to prevent 
 taxation assuming the appearance of a proscription of Capital p. 65 
 
 THE PERIOD OF FINANCIAL TRANSITION. 
 
 Between the cessation of war and a normal financial regime a con- 
 siderable period must elapse : demobilisation of the forces : demobilisa- 
 tion of the war-expansion of the Civil Service : until both demobilisa- 
 tions are complete, there will be a continuance of outlay of the nature 
 of war expenditure: the position regarding the revenns during this 
 period : Excess Profits duty as a war tax : the possibility of a modified 
 tax on profits during the financial transition — reasons for and against 
 it: its relation to a possible tariff: prospects of Income Tax during this 
 period, the effect of the three years average, if continued : the restora- 
 tion of the damage of war: danger of a post-war crisis: the effect of the 
 state of trade and the general level of prices : variations in income tax 
 assessments 1842-1913: effect of the state of the currency on general 
 prices : the position of shipping in relation to raw material and foreign 
 trade : examination of the possibility of a protracted depression following 
 the war : the position of indirect taxation : the duration of the financial 
 transition estimated at between two and three years : in that period it 
 is hoped the foundations of the future tax system will be established 
 and that the extravagance of public expenditure will be reformed: 
 review of the liabilities of the transition and the resources to meet 
 them: expenditure will comprise outlay on the forces till demobilised, 
 the expenses of demobilisation, the beginning of reconstruction, service 
 of the National Debt and the remaining expenditure: the last two 
 should be fully met by the taxation then in force: to discharge the 
 other liabilities there will be a large balance of uncollected excess 
 profits duty and the sums realised by the sale of supplies, machinery 
 and other property accumulated during the war: if hostilities are long 
 continued the sale of government property would more than suffice 
 to meet these expenses : the balance, if any, might be reserved against 
 the principal of any loans to Allies who are temporarily in difficulties 
 or where there is doubt, if they can or will pay interest : if any surplus 
 remained, eventually, it should be used to extinguish debt : this method 
 of calculation partially stabilises the amount of the net debt during the 
 transition : interest and sinking fund in respect to the net debt would 
 be^met by this country from taxation: the position would be more
 
 xii Contents 
 
 favourable if the French conception of "unity of the financial front" 
 were accepted p. 87 
 
 TEN YEARS AFTER. 
 
 In several respects, provided that no considerable reduction of taxation 
 (except special war taxes such as Excess Profits duty) is made the 
 finance of the transitional period may be easier than that of the first 
 years which follow it : by the end of the transition the new tax system 
 should be ready: the remodelling of income tax — even graduation, 
 progression, extension upwards (upon large incomes) and possibly 
 downwards on small incomes: the position of the limit of exemption: 
 its relation to prices at the time: the circumstances of the taxpayer: 
 theory of abatements for marriage and children : the conflict between 
 average abatements and specialised abatements: the non-recognition 
 of savings : practical difficulties in exempting savings : the taxation of 
 expenditure, suggested graduated house duty: Estate Duty closely 
 related to the above taxes: the effect of the expected lower value of 
 securities: indirect taxes: proportionate taxes upon expenditure which 
 has for its object display: the luxury taxes of the French Budget of 
 1918: stamps, fees and State-services: circumstances which may affect 
 the produce of a given rate of taxation: should there be a period of 
 activity after the war, the danger of a crisis or subsequent depression : 
 the position of the net debt : the first Consolidating Loan : prospects of 
 a reduction of interest as a result of conversions 1922-1927 : the limita- 
 tion of debt by increase in the ratio of the revenue from taxation if the 
 war is comparatively protracted : the borrowing power of the country 
 during the Napoleonic Wars : tentative estimate of its present borrow- 
 ing power: cautious to be observed in making this comparison: the 
 high level of future taxation: the need for improved and extended 
 Production in order to meet it: the problem of the just distribution of 
 the burden ......... p. 109 
 
 APPENDIX 133 
 
 INDEX I37
 
 MARE LIBERUM— AER CLAUSUS ?
 
 Men cannot conceive a state of things so fair that it cannot be 
 realised. . . .What can be expressed in words can be expressed in life. 
 
 H. D. Thoreau. 
 
 Dear Child, I also by pleasant streams, 
 
 Have wander'd all night in the land of dreams, 
 
 But though calm and warm the waters wide, 
 
 I could not get to the other side. 
 
 William Blake.
 
 MARE LIBERUM— AER CLAUSUS ? 
 
 THE change from peace to war has not only been reflected 
 in military preparations and all the industrial processes 
 which are consequent upon them, but it shows itself in a more 
 subtle form in an alteration in the direction of mental activity. 
 The mind turns inevitably to a changed adaptation of means to 
 ends and also to consideration of more general issues which 
 have arisen out of the new state. When people generalise, 
 the diversion of human energy and its more immediate conse- 
 quences invite, and even compel, reflection. The same situa- 
 tion may be noticed in previous wars; but, after the long peace, 
 the old discussions, which re-emerge after a long interval, 
 come to us as wholly new and as views or problems which must 
 be dealt with afresh. An instance of this tendency is to be 
 found in the revival in other countries of the contention, 
 known as "the Freedom of the Seas." In the past almost 
 every enemy that has felt the effects of naval power, has made 
 similar claims. This is not to be wondered at. On the con- 
 trary, it is natural that a nation at war should endeavour by 
 argument to depreciate, and if possible to weaken those means 
 of offence which his adversary possesses and in which he himself 
 is relatively weak. Dutch jurists made a case against us in this 
 connection in the seventeenth century, largely in relation to 
 fishing. In the Napoleonic Wars freedom of the seas was advo- 
 cated by the French and supported by similar arguments, 
 often with considerable emphasis — a polemic which made so 
 little permanent impression upon British thought that Isaac 
 Disraeli, writing soon after Waterloo, included it amongst 
 literary curiosities 1 . It is almost brutal criticism to have noted 
 such special pleading as a mere literary curio ! From that point 
 
 1 Disraeli, Curiosities of Literature, 1859, 11. p. 79.
 
 4 Mare Liberum — Aer Clausus? 
 
 of view the former arguments, again revived, may have ac- 
 quired greater interest through their greater age; though, 
 necessarily, unless some new conditions have emerged, these 
 arguments will be less, rather than more cogent. Still, in view 
 of the renewal of this old controversy and particularly the form 
 in which it has reached the general public of this country 
 through many eloquent addresses from our kinsmen and allies 
 in the United States, it may be worth re-stating the issue and 
 examining it in the light of modern facts and possibilities. 
 
 In a lecture of the previous course I attempted to outline the 
 conditions which have brought British sea-power into existence 1 . 
 As long as the commonwealth of British peoples continues as a 
 maritime state, security of intercommunication between its 
 ports is unconditionally necessary. In war it becomes a cardinal 
 part of the nation's strength, and one which, in the end, may 
 be expected to justify to the full all that Mahan has said of its 
 decisive character. Any type of thinking which would limit the 
 use of the Navy in war, save under considerations of humanity, 
 would be a great wrong not only to the people of this country 
 and of the Dominions but to our Allies as well. To fail in 
 making the most efficient use of an instrument bequeathed to 
 us by our fathers and improved by the sacrifices of the present 
 generation in preparation for the possibilities of defence, which 
 have now become actual necessities, would be the fatal error 
 for which there would be neither excuse nor forgiveness. 
 
 While the position during hostilities is perfectly unambiguous, 
 it may be inquired whether, when we consider the prospects 
 of the earlier years of peace, there has been any new condition 
 which may conceivably modify our former views upon the nature, 
 the necessity and the use of our sea power. British and Allied 
 war aims have placed in the forefront their demand for the 
 freedom of small nations. For close upon three quarters of a 
 century Great Britain has stood for free enterprise and for free- 
 dom of trade. It may seem symmetrical to add to the ideals of 
 freedom of nations and freedom of enterprise, a third freedom — 
 that of the seas. As regards the first two the signification of 
 1 W. R. Scott, Economic Problems, First Series, pp. 49, 50.
 
 Mare Liberum — Aer Clausus? 5 
 
 the terms is known, but those who use the third have shrouded 
 their meaning in obscurity. During peace not only has there 
 been unrestricted freedom of navigation, but British sea power, 
 so far from limiting that freedom, has extended it, first by 
 repressing piracy, secondly by improving navigation and thirdly 
 by making it more safe through charting various imperfectly 
 surveyed waters, all of which activities have been for the 
 common benefit of all sea-faring nations. It follows that no 
 greater freedom of the seas can be conceived than that which 
 existed during peace. Is it claimed, then, that a similar freedom 
 can be maintained in time of war? Mr Woodrow Wilson pictures 
 an "inviolate security of the highway of the seas for the common 
 and unhindered use of all the nations of the world," while many 
 German writers have claimed during the last three years a 
 freedom of the seas in time of war, which freedom Professor von 
 Schulze-Gavernitz specifies as meaning the inviolability of 
 private property at sea in time of war, as well as during peace. 
 The latter claim is contrary to the practice of all maritime nations 
 in the past. It would not only raise an infinity of confused legal 
 questions, but it would deprive the proposed League of Nations 
 of one important power which it has been suggested to give it. 
 According to the methods to be described in the next lecture, 
 that body would be able to bring pressure to bear upon any 
 State which attacked a nation which had joined the League and 
 also upon a signatory Power which refuses to submit a dispute 
 to arbitration or does not carry out the award of the tribunal of 
 the League. One form of the coercion exercised by the proposed 
 League would be by interruption of the commerce of the re- 
 calcitrant State, and for this purpose it would be necessary that 
 it should be able to control, and divert the sea borne commerce 
 of its members. Thus if the thesis of freedom of the seas be 
 accepted in the sense of the complete inviolability of private 
 property at sea, the League of Nations either could not exist as a 
 body with coercive powers, or else it would be compelled to rely 
 exclusively upon military force. 
 
 This view, inadmissible as it is in the general interests of 
 the seafaring nations, is refuted by the full claims of German
 
 6 Mare Liberum — Aer Claususf 
 
 ambition when it is allowed free expression. Lord Robert Cecil 
 quoted in the House of Commons the following definition by 
 Count Reventlow at a meeting which the latter addressed at 
 Berlin in March 1917, "What do we Germans understand by 
 the freedom of the seas ? Of course, we do not mean by it that 
 free use of the sea, which is the common privilege of all nations 
 in time of peace — the right to the open highways of international 
 trade. That sort of freedom of the sea we had before the war. 
 What we understand to-day by this doctrine is that Germany 
 should possess such maritime territories and such naval bases 
 that at the outbreak of war we should be able with our Navy 
 ready, reasonably to guarantee ourselves the command of the 
 seas. We want such a jumping off place as would give us a fair 
 chance of dominating the seas 1 ." In this sense freedom avows 
 itself, naked and unashamed, as freedom to dominate. It re- 
 sembles the meaning which the Jacobins assigned to fraternity 
 when they always thought of themselves as the elder brothers 2 . 
 
 Some light upon the conception of the freedom of the seas may 
 perhaps be obtained by a study of the early ideas from which it 
 has been evolved. Grotius published his tract, called De Mare 
 Libero, in 1606. His object was to establish by argument a right 
 which English seamen had partially justified by arms in the 
 previous generation, namely, that in time of peace no nation was 
 entitled to close the open sea to the ships of other countries. 
 This controversy had special relation to the reservation of the 
 trade to the East Indies by the Portuguese. Grotius was far 
 removed from those who advocate freedom of the seas in the 
 interests of peace. On the contrary the Elzevir edition of his 
 treatise, printed in 1633, has an engraved title page exhibiting a 
 heavily armed ship flying the flag of the United Provinces, and 
 he declares that the refusal of free passage of merchandize by 
 sea constitutes a just cause of war 3 . In expounding these ideas, 
 Grotius enunciates certain general principles, and some of these, 
 when taken apart from their context, have been used to support 
 
 1 Times, February 15, 1918. 
 
 2 Guesses at Truth, 1873, p. 31. 
 
 8 De Mare Libero, xm. ; cf. De Jure Belli, ii. II. 13; ii. in. 12.
 
 Mare Liberum — Aer Claususf y 
 
 conclusions which he did not accept and which, moreover, are 
 contradicted either explicitly or implicitly elsewhere. That the 
 sea should be free or common to all is defined as applicable to 
 an unarmed navigation which does harm to none 1 , in which it 
 resembles free passage for private persons in foreign countries. 
 While, according to the jus gentium, there could not be "acqui- 
 sition" of the open sea, there may be dominion (imperium) over 
 it, to which he does not consider the jus gentium would offer any 
 impediment 2 . Dominion of the sea is acquired when a fleet is 
 able to command it. This requires an external act and only 
 remains as long as that act continues. Gronovius makes this 
 more precise by particularising the external act as the presence 
 of the fleet which commands the sea and which lapses when that 
 command ceases. Thus the conception of the mare liberum 
 involves nothing which is inconsistent with British practice for 
 many generations, nor when peace returns does there appear to 
 be anything which, in principle, would preclude the former free- 
 dom from being restored. Indeed, when in 1750 Frederick the 
 Great advanced the doctrine that "the sea is free," the British 
 law-officers were able to quote Grotius against him and in 
 defence of the action of the fleet which had occasioned the pro- 
 test and reprisals 3 . 
 
 We are prone to speak of peace as if it were a "stationary 
 state," whereas it has been hitherto a condition arising out of a 
 series of tensions, some of which are always operating towards 
 a disturbance of the equilibrium. It is to be hoped that the new 
 peace can be established upon a basis which will provide self 
 acting methods for checking and, if possible, in the end elimina- 
 ting those tendencies which work towards disturbance of good 
 relations between nations. Many earnest efforts have been made 
 to discover those influences which seem to threaten discord. 
 Enthusiasm for the prevention of future wars has discovered 
 possible causes of friction in some unsuspected places, often 
 
 1 De Jure Belli, ii. III. 13. 
 
 2 Ibid. ii. in. 14. The phrase is neque arbitror jus illud gentium, de quo 
 diximus, obstare. 
 
 3 Law and Custom of the Sea (Navy Records Society) 1915-16, 11. p. 370.
 
 8 Mare Liberum — Aer Clausus? 
 
 with more haste than discernment. One of these has been found 
 in the British Navy. The argument may be summarised as 
 follows. The Allies have declared that one of their chief objects 
 is the freeing of the world from the menace of German militar- 
 ism. The Germans, on their side, have complained of British 
 ' ' navalism. ' ' Thus to some it seems that a compromise is possible 
 in a League of Nations, which, together with the growth of 
 opinion in each country, would impose limits upon both forms of 
 power. In an extreme form there are some who would bid for 
 Germany's adherence to the League by advocating limitation 
 of our sea power in advance of it 1 . It seems to me that this line 
 of thought neglects the history and particularly the recent appli- 
 cations of the two forces. Militarism is a survival of the feudal 
 age, and it is working out its own condemnation before the con- 
 science of a disapproving world. The Prussian view of British 
 and Allied sea power is that it is "naval militarism," which it 
 is not, either in its object or its methods. To confound two things 
 so different will not be, in the end, the way to peace : 
 
 Such handsome words 
 Are now as if one bound up wounds with silk 
 Or with fine knots, which do not help the cure, 
 Or make it heal the sooner 2 . 
 
 In the forefront of peace conditions, as far as Great Britain is 
 affected, must be security. Attention has already been directed 
 to the importance of trade routes between the peoples that con- 
 stitute the British Empire 3 . War upon land has perhaps dis- 
 tracted popular attention from the fundamental condition of the 
 union of British peoples. For other countries with colonies the 
 means of communication by sea are important, Tnit to us they 
 are the life nerve of the State. If these be endangered, the safety 
 of the whole would be in jeopardy. Thus it was with a true in- 
 sight that Pitt described "naval defence as our national pas- 
 sion 4 ." No League which ignores or undervalues this prime 
 necessity would be acceptable to Great Britain. 
 
 1 H. N. Brailsford, League of Nations, 1917, pp. 187-209, 213-17. 
 
 s Suckling, The Goblins, Act 11. Scene 1. 
 
 8 W. R. Scott, Economic Problems, First Series, p. 50. 
 
 4 Pitt, Works, 11. p. 299.
 
 Mare Liberum — Aer Clausus? 9 
 
 The problem of the conditions of a durable peace will be found 
 to be bound up more and more with trade routes and communi- 
 cation generally. These are of equal importance, whether upon 
 sea or land, and both are becoming of greater interest to all 
 trading nations. There is no question that traffic by sea is more 
 free than that by land. In the case of the latter there are nume- 
 rous impediments of various kinds which could be materially 
 reduced. And it will not be long before the problem of communi- 
 cations by air must be considered. In the work of Grotius there 
 is a suggestion which has lain dormant for over three hundred 
 years, waiting on the progress of invention. He mentions that 
 the air is common to all, like the sea, in so far as there is any use 
 for it for which the earth is not necessary 1 . It is added that no 
 such use had been discovered, but Gronovius suggests the jus 
 gentium would ordain free passage through the air over the land 
 si homines possent volare aut versare in aere, sine tactu terrae vel 
 molis quae a terra sustinettir 2 , a remarkable provision for the 
 developments in flying which have taken place recently or which 
 are already in sight. Thus the problem of communication in the 
 future is one which cannot be confined to that by sea and land 
 but will embrace to a greater and greater extent the use of the 
 air over both. It follows that the first question to be decided 
 after peace will be the "freedom of the air." Even already there 
 are indications that the postal service will be transferred in part 
 from railways to the air. The gain in speed will compensate for 
 the greater cost of the new service in its initial stages. It may 
 not be long before some urgent passenger traffic will follow. 
 The new air routes can be made more direct; but to those who 
 have been trained in continental ways of thinking there will 
 be difficulties. There may be a reluctance to permit the unre- 
 strained use of the air within territorial limits to the air craft of 
 foreign nations. Customs barriers, which will still exist, can no 
 longer be enforced in the present form, nor could the service be 
 efficient, if it worked by the transfer of mails and goods from the 
 air-liners of one country to those of another at the frontier. Thus 
 
 1 De Jure Belli, ii. II. 3. 
 
 2 Ibid. ed. Gronovius, 1689, p. 186.
 
 io Mare Liberum — Aer Claususf 
 
 there is a danger that Europe may be robbed of a great part of 
 the fruits of recent progress in aerial invention by territorial 
 exclusiveness. Accordingly the most urgent question is to pro- 
 vide for a freedom of the air in time of peace which will in some 
 measure approximate to that which existed before, the war in 
 navigation upon the sea. A doctrine which resembles that of 
 mare clausum, as applied to the air in time of peace, may have 
 to be reckoned with. Yet it is one which is in danger of involving 
 itself in endless contradiction. The air is one, and no distinction 
 can be maintained between that part of it which is above the land 
 as contrasted with the portion over the sea. For purposes of use 
 in communication both are continuous except in so far as landing 
 places will probably be provided in the former only. At this point 
 there may be misunderstanding and no little real difficulty for 
 countries whose system has been exclusively or mainly that of 
 the land Power. No doubt it will happen that some of the air 
 routes will pass over the territory of small nations or over corners 
 of that of large ones without requiring to make use of landing 
 facilities. In the event of some of the smaller goods of large 
 value being carried by air, those of them which are subject to 
 duties, would escape the inquisition of the respective Custom 
 Houses, and the States concerned would lose revenue. Moreover 
 navigation by water is largely confined to one plane, and prob- 
 abhy for commercial purposes it will continue to be limited to 
 that plane. But in the air, flying can be effected at widely vary- 
 ing altitudes. As its mechanism is perfected and traffic in the 
 air becomes more dense, there would be great advantages in 
 safety by assigning specific heights for incoming and outgoing 
 traffic, while the craft could again be sub-divided according to 
 their speed and separate strata of the air allocated to each class. 
 This points to some degree of international agreement upon this 
 and similar subjects. In a story published only a few years ago, 
 Mr Kipling presents a wonderfully realistic picture of the aerial 
 mail from London to Quebec in the year 2,000. It seems possible 
 that, as a result of the importance of the air service in war, this 
 vivid representation of the future may be realised, at least in 
 part, much sooner than the author himself expected. That tale
 
 Mare Liber um — Aer Clmtsusf 1 1 
 
 anticipates that communication by air will be under the direc- 
 tion of an international Aerial Board of Control — the A. B.C. of 
 the tale 1 . May it not be that in this, as in some other cases of 
 late, the imaginative writer has been able to divine to some ex- 
 tent the general appearance of coming events? It certainly 
 appears that, for flying to become useful for the purposes of 
 every day life, a measure of international agreement will require 
 to be reached which must consider more matters and of greater 
 complexity than has been the case in navigation by sea. 
 
 Upon the assumption — and it is no small one — that some form 
 of international agreement for the general use of the air in time 
 of peace will be arrived at, the next step will be to make the new 
 " navigation " as free as that of the seas. There may be communi- 
 cation by flight without there being "Freedom of the Air." 
 States with the continental spirit will be able to appreciate the 
 extent of the freedom of marine communication when it de- 
 volves upon them to endeavour to equal it in the case of the air, 
 where they will be in the position of conceding something, in- 
 stead of claiming much. 
 
 Great as is the hope of the best minds, both in belligerent and 
 neutral countries, that this war will end in a durable peace, it 
 would be extravagant optimism to expect that the goal of per- 
 petual peace will have been reached. As far as can be judged at 
 present, should war unfortunately come again, no power could 
 permit unrestricted flight over its territory. No doubt the new 
 "navy that flies" would not only endeavour to drive off all air 
 craft of hostile powers, but it would be likely to suspend even 
 neutral traffic which would be able to observe its dispositions 
 during hostilities. Also it would aim at securing observation and 
 interrupting commerce with countries hostile to it. Such con- 
 ditions reproduce upon a somewhat intensified scale those of 
 modern naval operations. In war the air, like the sea, would be 
 free to those who can control it and to such neutral States as 
 they admitted to participation in that freedom under the rules 
 and conventions of International Law. 
 
 War and Peace are not final antitheses. Each may be regarded 
 1 Kipling, Actions and Reactions, 1909, pp. 111-158.
 
 12 Mare Liberum — Aer Clausus? 
 
 as a transitional state towards the other. But no one, who is in 
 earnest with the hope of progress, can accept this transition with- 
 out endeavouring to modify it in favour of peace and against war. 
 In the future economic difficulties and questions of transport 
 will play an increasing part, either in dividing or in uniting the 
 nations. Some of the difficulties of the former will be discussed 
 in the following lecture, and it remains to treat the position 
 of transport in the new peace. Communication alike on the 
 land, the sea and in the air has a distinct bearing upon national 
 security and offensive power. The construction of strategic 
 railways is an instance of the first. The limitation of armies 
 might prove illusory, if, at the same time, any Power built a 
 large number of strategic lines, thereby increasing the combatant 
 efficiency of a reduced number of soldiers. Yet there are few 
 who would suggest any practical measures by which the League 
 of Nations, if it is established, could prevent this policy. There 
 may however be a better way, if the League could be successful 
 in removing, or at least weakening, those causes which lead to 
 preparations for military aggression. 
 
 The problems of sea and land communication are sufficiently 
 numerous when the varying interests of the whole world are con- 
 sidered. And to these there is now added those that arise from 
 man's coming conquest of the pathway of the skies 1 for peaceful 
 progress, not for purposes of destruction. Before this new 
 wonder we may well feel something of the "wild surmise" with 
 which the companions of the stout Cortez of Keats first stared 
 at the Pacific "silent, upon a peak in Darien." 
 
 It has already been shown that aerial traffic will require a con- 
 siderable amount of international regulation: and, upon the 
 supposition that an effective League of Nations were established, 
 this body would be in a position to facilitate agreement, and in it 
 certain aspects of control might be vested. The particularism of 
 land Powers would be an obstacle which could only be worn down 
 gradually. At first communication by air would be much less 
 free than that by sea, and it would be a worthy object for the 
 League to aim at making it as free as that upon the ocean. Ail 
 
 1 &»' ovpavbs d/^aros en?, Homer, Odyssey, xi. 316.
 
 Mare Liberum — Aer Clausus? 13 
 
 sorts of impediments may be expected, for many States will not 
 be able to accomplish at one leap the mental revolution of think- 
 ing in terms of right, instead of in terms of force. But the idea 
 of the general advantage, applied from the beginning, would save 
 many millions in capital which would otherwise be wasted. If 
 the new routes are deflected through territorial objects, landing 
 places and entrepots will be built in situations which are not 
 those which freedom of the air would justify. Thus a later and 
 more enlightened attitude would render all such special outlays 
 obsolete. There seems to be a great opportunity here. Wisdom 
 and a broad view of the future could contribute very much, not 
 only to the progress of the arts of peace, but even more to the 
 slow building up of a sense of international solidarity in Europe. 
 A certain diversion of traffic may be inevitable, but as was shown 
 in the previous course of lectures 1 , this may be less than might 
 be anticipated. Apart from territorial exclusiveness, the doctrine 
 of the continuous voyage may be no less difficult in this connec- 
 tion during peace than it has proved in the case of mercantile 
 shipping in time of war. 
 
 When an attempt is made to work out some of the implications 
 involved in the idea of a League of Nations, it will be found to 
 tend to unify aspects of communication that have previously 
 been divergent. From the purely economic point of view trans- 
 port, whether by land or sea or air, is fundamentally one, but the 
 cross currents of politics, as hitherto conceived, have isolated 
 each according to current views of national advantage. Should 
 a League of Nations become firmly established, it might, in time, 
 be able to overcome this unreal separation of things which are 
 essentially similar. In the past the extent to which land routes 
 and sea routes were capable of being substituted, the one for the 
 other, was limited. The introduction of a new medium of com- 
 munication for certain kinds of traffic will extend the area of com- 
 petition to an immense extent. But the growth of substitution 
 will not in itself remove all political difficulties in the extending 
 of freedom of intercourse; for in some respects, the control of in- 
 ternal transport may still be considered vital for the maintenance 
 
 1 W. R. Scott, Economic Problems, First Series, pp. 55, 56.
 
 14 Mare Liberum — Aer C/aususf 
 
 of the structure of the State. It could scarcely be expected 
 that a self-respecting land Power would hand over the ownership 
 and working of its railways either to a foreign State or to a 
 League of Nations. Yet if an air service is conceived upon such 
 territorial principles, it will be a failure as compared with what 
 it might achieve. From the political and also the economic point 
 of view a maritime State must control the ocean routes by which 
 its parts are linked together. If these can be permanently in- 
 terrupted its whole existence is endangered. As they are safe- 
 guarded and improved the unity and cohesion of the British 
 peoples are augmented ; and, as flight is developed, these unifying 
 forces will grow with a rapidity which is yet scarcely anticipated. 
 The reign of force has perverted many things to evil uses — 
 and not the least of these the beneficent power of transport. 
 Strategic railways and military lines represent a perversion of 
 the mechanism of communication. It is difficult during a time, 
 when the description of industrial activity tends almost inevit- 
 ably to express itself in terms of destruction, to imagine con- 
 ditions in which the aim of statesmen will be to reverse all this. 
 Yet if the idea of the League of Nations means anything prac- 
 tical, this should be its chief aim. In so far as it can remove or 
 diminish friction, which arises from competitive claims to trade 
 routes, it would begin to justify itself. If it fails in this, it will 
 not be long before it fails altogether. But it is probable that, if 
 it is established, neither success nor failure would be reached at 
 once. The first could only be built up slowly, and perhaps pain- 
 fully, through several generations. During that period force 
 would remain in the background, no longer to be used by any 
 nation at its pleasure, but as the instrument of enforcing what 
 the comity of nations held to be right. International law would 
 not only be re-instated, but indued with sanctions. At first no 
 one could predict with certainty whether the pact would be 
 strong enough to bear the strain. A rupture or the dissolution 
 of the League would remain for some time a possibility in all 
 international questions. None the less, if it maintained itself and 
 after at first enforcing peace in case of need, it came later to win 
 peace by the extending of mutual confidence and conciliation,
 
 Mare Liberum — Aer Claususf 15 
 
 then the leagued peoples would depend more and more upon the 
 power of a just cause than on their individual armed force. At 
 this later stage grounds for quarrel would not indeed be elimi- 
 nated, but they would yield more easily to peaceful settlement. 
 So it may be imagined that it will be under some such conditions 
 that the problems of communication will require to be dealt with 
 for as long a period as it is possible to survey, should the League 
 continue and become firmly established. 
 
 In face of the wonder of flight and the vast field of possibilities 
 which it opens up, any anticipation of what the future holds is 
 hazardous to the verge of rashness. Tis a strange thing, and 
 hath the look of a premeditation of fate to discredit our fore- 
 casting, how rarely the thing we confidently expect comes to 
 pass 1 ." In circumstances so new and, as yet, so strange, no fore- 
 cast can be made, but there is a line of enquiry which may not be 
 wholly profitless. If it be assumed that a League of Nations will 
 be established, what should be its relation to communication by 
 air with a view to increasing the prospects of peace? This cannot 
 be described as a speculative enquiry, for aerial mail services are 
 in operation and the carrying of passengers is understood to be 
 under consideration. The causes of friction are numerous; and if 
 the whole question is left to settle itself, this would mean in 
 practice that the apparent divergence of national interests 
 would, almost inevitably, re-assert itself, and some of the early 
 troubles of navigation by sea would be repeated. Moreover, 
 there would be immense advantages in favour of action by the 
 League. Not only would it have a completely new field upon 
 which to work, but the feverish activity during the war has com- 
 pressed the inventive activity of more than a generation into a 
 few years, without at the same time being able to utilise it for 
 the purposes of civil life. Thus there is that exceedingly rare 
 case of a clean sheet upon which to write the rules which will 
 direct the use of the new medium for the common interest of all 
 the nations. It is not to be expected that a final solution can be 
 attained immediately. The first rules may soon need extensive 
 amendment. Meanwhile invention will not have stood still, and 
 1 E. H. Strain, A Man's Foes, p. 88.
 
 1 6 Mare Liberum — Aer Clausus? 
 
 it is not impossible that, by that time, some kinds of goods may 
 be conveyed by air. This is a purely technical question upon 
 which it would be presumptuous, as well as useless, to express 
 an opinion, beyond pointing out that the bare possibility raises 
 in a precise and definite form the problem of aerial trade routes. 
 If the League of Nations could bring about international agree- 
 ment concerning these, it would be in a favourable position to 
 secure the observance of the conditions, and it would thus 
 possess a great advantage over previous international confer- 
 ences. 
 
 A still more thorny problem will be the attitude of the League 
 to war in the air. Here the immediate prospects seem far from 
 hopeful. One recalls the rule of the Hague Convention that 
 explosives were not to be dropped from the air, and its complete 
 non-observance by each belligerent. Unless the possibilities of 
 aerial warfare are exploited to an extent which seems improbable 
 in the present war, there will always remain the risk that a new 
 invention may tempt an ambitious State to bid for the Lordship 
 of the Air, which might mean the dominion of the world. And 
 so the words of the Tempter may return in new conditions: 
 
 Aim therefore at no less than all the world 
 Aim at the highest, without the highest attained 
 Will be for thee no sitting, or not long 1 . 
 
 Also while the League is young, each Power must continue to 
 provide for its own defence, and also for any demands which may 
 be made upon it by the League; for, at first, the effectiveness 
 of the new arrangement will be uncertain, and a nation which 
 trusted to the maintenance of peace under the pact and ab- 
 stained from taking precautions would find itself in a serious 
 position, if the League were suddenly dissolved. If, on the 
 other hand, the early years of this body inspired confidence and 
 gave strong grounds for a belief in its continuance, it may be 
 expected that armaments would be reduced. At this point, if it 
 should be reached, there would be some prospect of dealing with 
 the control of the air for purposes of war. It seems idle to antici- 
 pate that all Powers would agree to a self-denying ordinance to 
 1 Milton, Paradise Regained, Book iv.
 
 Mare Lib erum — Aer Clausus? ij 
 
 abandon aerial warfare altogether. The possibilities for obser- 
 vation and speed, as well as in actual offensive power, are too 
 immense. Yet the prospect winch is opened up is appalling. No 
 place in any country, which was subject to attack by air, would 
 offer safety to non-combatants, save at the cost of maintaining 
 a precarious existence as Troglodytes. It is true that the League 
 could ordain and might be able to enforce laws of aerial war, 
 which would go far towards humanising it, but in time it might 
 accomplish more. It would be a noble ideal if the conquest of this 
 new element by man, won by the sacrifice of so many noble young 
 lives, could be celebrated by reserving it from all future wars. 
 For this purpose it is improbable that agreements would suffice. 
 The extent to which the League could control communication by 
 sea and air would be of the greatest importance when occasions 
 arose in which it became needful to exert economic or military 
 pressure upon a turbulent State. For the former the power 
 to maintain an effective blockade would be essential. The 
 freedom of the seas would come to be recognised as having 
 been forfeited by any nation which had been adjudged in de- 
 fault by the Court of the League. The free use of the highway 
 of the sea would be conditional upon the continued good 
 behaviour of all those, who desired to avail themselves of it, 
 according to the standard established by the great majority of 
 the nations of the world. 
 
 The use of the economic boycott by the League is not free 
 from difficulties. The present war has shown the extent to which 
 small nations, with frontiers adjoining a powerful State, have 
 been subjected to pressure. If these States were members of the 
 League they would be supported by its resources, and it would 
 depend upon the efficiency of the co-operation of the signatory 
 States whether that protection was sufficient. It might happen 
 that such small States had not joined the League; and, in that 
 case questions of no little complexity would arise, as, indeed, 
 they have arisen during the course of hostilities. The signatory 
 States would all cut off commerce with the Power which was to 
 be isolated. Further, would they be within their rights in taking 
 care not to supply countries (which maintained trading relations
 
 1 8 Mare Liberum — Aer Clausus? 
 
 with the Power against which pressure was being exerted) with 
 a surplus of their products which could be passed on to the 
 isolated State? There is also the question of the action which it 
 would be equitable to take with respect to shipping which was 
 not under the control of the League. Suppose, for instance, that 
 the economic weapon had to be used against a Power which 
 owned five per cent, of the world's shipping, that States, not 
 members of the League, possessed fifteen per cent., while the 
 remaining eighty per cent, was under the direction of the League. 
 Would the League be justified in limiting trade with countries 
 which were not parties to the dispute? Or could it exercise any 
 supervision over the voyages of these ships between the nation 
 undergoing boycott and any or all non-signatory States? 
 
 These are only a few of the difficulties which can be seen at pre- 
 sent, others would doubtless manifest themselves during the early 
 years of the actual working of the League. It would be merely 
 deluding ourselves to close our eyes to the many perplexing 
 situations which would have to be encountered. The wisdom and 
 the fairness of the decisions that will be arrived at would have a 
 large place in determining whether the League would succeed. 
 Judging its prospects upon the economic side, it may be said 
 to offer a hope which is moderate. This may suffice as a 
 start, on the assumption that certain governing conditions 
 have been secured 1 . In a departure so new and so much 
 opposed to the customs which have hitherto unfortunately pre- 
 vailed in relations between nations, it would be dangerous to 
 expect too much. Enthusiasm is liable to mislead. While one 
 recognises, and sympathises with the devotion of those who have 
 developed this ideal, the only test will be success in a hard world 
 of somewhat intractable and even brutal fact. But men and 
 nations have a large share in determining what will be facts in 
 their mutual relations. For long these will be weighted with the 
 legacy of the past, and it will be only gradually that the peoples 
 of the world will become accustomed to a system which promises 
 to be better. Even if progress is slow for some generations, this 
 is of little importance, if it is sure. Work in favour of peace that 
 
 1 See below pp. 26-28.
 
 Mare Liberum — Aer Clausus? 19 
 
 will be lasting will only begin to produce its best effects after a 
 time that seems to our impatience to be very remote. Here 
 there is consolation in remembering the illuminating saying of 
 Plato that such an interval is as nothing as compared with eter- 
 nity 1 . 
 
 Even if the proposed League should effect no more than the 
 softening asperities, removing causes of quarrels, delaying appeals 
 to arms, and sometimes compelling restless nations to abstain 
 from hostilities, it would have accomplished much in preventing 
 some small wars and perhaps one or two great ones. There is 
 the hope that, in time, rudiments of morality may be introduced, 
 as the standard, in transactions between nations. This affords 
 some basis for the expectation that by a gradual, though slow, 
 process of development there may be such security the world 
 over as will stimulate industry in making full use of its powers 
 for the common benefit of mankind. 
 
 1 Repub. VI. 498 d: Ets fuKpbv y 2<pr) xpt> vov dpr]Kas. Eis ovSh /xev ovv, 2<pT)v, 
 dis ye npbs rbv diravra.
 
 A LEAGUE OF NATIONS AND 
 COMMERCIAL POLICY
 
 This League made glad the earth. 
 
 Barclay's Argenis (as rendered by 
 Sir Robert Le Grys and Thomas May).
 
 A LEAGUE OF NATIONS AND 
 COMMERCIAL POLICY 
 
 FROM the economic point of view, no less than from the 
 political one, security for the future is to be hoped from 
 the upheaval of the nations. As Mill has said, "security has 
 always hitherto characterized the progress of civilized society 1 " : 
 without it the rate of industrial advance would be checked, and 
 it might even be arrested. In order that the material losses of 
 war may be recovered as rapidly as is possible throughout the 
 world, it is desirable that reliance can be placed upon the future. 
 The tension of an uncertain peace would cramp resumed ac- 
 tivity; and it would, still more, deflect the quickened spirit of 
 discovery from the development of the arts of peace. Instead 
 of winning its way to firm ground upon which to re-build what 
 war had destroyed, humanity would remain involved in the 
 shifting sands of suspicion and perplexity. It follows that the 
 nature and the permanence of the peace will have important 
 influences upon the economic life both of the present belligerents 
 and of many neutrals. A settlement, which failed to offer 
 guarantees for the future, would act as a weight upon the re- 
 newal of productive energy for the needs of peaceful pursuits. 
 
 The wish for a stable and abiding peace is universal, but there 
 is no little difficulty in determining how it is to be defined and 
 the manner in which it should be guaranteed. One method which 
 has begun to attract attention has been the idea of a League 
 of Nations. That ideal is a very old one. Its origins may be 
 traced back to "the Truce of God " and the scheme of Gerolus de 
 Regensburg in the twelfth century. It re-appears in "le Grand 
 Dessein" of Henry IV of France, not long after the defeat of the 
 Spanish Armada. From time to time, political thinkers have 
 elaborated similar schemes, while in the nineteenth century the 
 
 1 J. S. Mill, Political Economy, iv. i, § 2 (ed. Ashley, p. 697).
 
 24 A League of Nations and Commercial Policy 
 
 general trend of British economic theory was in a similar direc- 
 tion, though it usually pointed towards a peaceful society of 
 nations gradually becoming more united through mutual co- 
 operation in the progress of industry. It is from this point of 
 view that James Mill speaks of "that great Empire in the world 
 at large of which the different kingdoms and tribes of men may 
 be regarded as provinces 1 ." The economic attitude differed 
 from that of the political idealists in so far as it was not based on 
 any action of governments but was supposed to accomplish its 
 aim by the progressive improvement in the relations of nations 
 through the growth of commercial intercourse. 
 
 The idea of a League of Nations is perhaps more a re-discovery 
 than a revival of earlier forms of the conception. It no longer 
 emanates from a spiritual power, such as the Church of the 
 Middle Ages, nor from the diplomacy of monarchs. In its modern 
 form it aims at being a court of free nations drawing its support 
 and sanction from the people. The change in the form of ex- 
 pression is emphasized by the extent to which precedents for 
 purely industrial conciliation have been drawn upon, as for 
 instance when the British League of Nations Society affirms that 
 all non-justiciable disputes between members of the proposed 
 League " are to be referred to a Council of Inquiry and Concilia- 
 tion, analogous to the bodies that have been created to deal with 
 serious disputes between Labour and Capital." In many re- 
 spects the British and American programmes for a League might 
 be described as the Canadian Industrial Disputes Investigation 
 Act of 1907 and the New Zealand Industrial and Conciliation 
 Acts, 1908-1911, magnified from the comparatively humble 
 sphere of industrial disputes to the immensely enlarged field of 
 friction between nations. While some of these will continue to 
 be economic, political difficulties will be more prominent, and 
 often more dangerous. For such the economic precedent offers 
 comparatively little help. Moreover, the analogy is incomplete 
 in one direction. Where compulsory arbitration has been estab- 
 lished in industrial disputes, an award has the prestige of the 
 sovereignty of the State behind it. In the proposed constitutions 
 1 J. Mill, Commerce Defended, 1808, p. 38.
 
 A League of Nations and Commercial Policy 25 
 
 of the League of Nations, sovereignty will continue to reside in 
 the signatory States, and it will not be transferred to the 
 executive of the proposed League. Some schemes have gone 
 further than this. Long ago Cliffe Leslie foretold "the growth 
 of law in a republic of nations." He adds "it will be ob- 
 jected that an effective international law involves a universal 
 Empire, and the purchase of peace at the cost of the independ- 
 ence of nations. This objection rests on the assumption that 
 sovereignty is of necessity indivisible and unlimited, and that 
 a legislature for international affairs must consequently be either 
 nugatory, or supreme likewise over the domestic affairs of nations; 
 an assumption which we hope upon a future occasion to prove 
 fallacious 1 ." Though Cliffe Leslie would preserve the sove- 
 reignty of each nation in its internal affairs, it is evident that he 
 regarded as essential the transfer of that part of it, which dealt 
 with international relations, to "the republic of nations" of his 
 forecast. A similar conception is to be found in the super- 
 national authority which is proposed in the Draft Treaty of 
 Peace printed by the Fabian Society, and it is to the former body 
 that the Memorandum on the War Aims of the Labour Party 
 proposes that the colonies of European Powers in tropical Africa 
 should be transferred 2 . 
 
 The idea of a League of Nations touches economic phenomena 
 at several points. It has already been shown that it has bor- 
 rowed something in the way its proposals have been formulated, 
 and perhaps also in some of those proposals themselves, from 
 the devices which are being tried for reducing the consequences 
 of industrial friction. Should such a League be established, it 
 seems possible that it may have effects upon international trade 
 and also upon communication between the various countries, 
 and each of these questions will repay a brief consideration. 
 
 As a necessary preliminary to these enquiries, there is some- 
 thing to be said, from the economic point of view, upon the 
 conditions which must precede the formation of a League of 
 
 1 T. E. Cliffe Leslie, Essays in Political and Moral Philosophy, 1879, 
 p. 127. 
 
 2 Times. December 28, 191 7.
 
 26 A League of Nations and Commercial Policy 
 
 Nations. What the economist would expect from it would be 
 a greater degree of security in international affairs. The result 
 of the present war will determine whether any scheme, that is 
 based upon the use of power to maintain peace, is possible. In 
 order to establish security, the proposed League will be required 
 to afford evidence that, in case of need, it will be able to exert 
 decisive pressure upon any great State which has been proved 
 to have endangered the world's peace. The present alliance 
 against the Central Powers is an effective test, which will show, 
 in fact, the strength of the pacific States of the world acting in 
 unison. If through weakness or weariness they failed to secure 
 a decision in favour of the freedom of humanity, the result would 
 be that the claim of the right of the world would not have pre- 
 vailed against the rebellious might of a group of States. In that 
 event the formation of a League of Nations would be nothing 
 more than a permanent advertisement of a gigantic failure. It 
 would be not only useless but mischievous. It must be proved 
 beyond the possibility of doubt, either now or in the future, that 
 the world will not permit any nation to find in war its most 
 lucrative national industry. Accordingly, the first condition to 
 be established before a League of Nations could be formed will 
 be the defeat of a system of militarism and diplomacy which has 
 been of late years wholly materialistic. If a reign of inter- 
 national freedom and security is to be made possible, the 
 antagonistic principle of the supremacy of force — that prin- 
 ciple which sees in this scheme only as Baron von Freigtag- 
 Loringhoven puts it "either crass materialism or vague cosmo- 
 politan sentimentalism " — must first be abandoned 1 . 
 
 Assuming the attainment of this first condition, a second is 
 no less necessary. The peace which ends the war must be just. 
 The proposed League aims at re-habilitating international law 
 founded upon the moral principles of the civilized world. There- 
 fore it cannot be started upon a peace which ignores these prin- 
 ciples. It would be a flagrant contradiction for a League, which 
 was based on wrong, to profess to maintain right. In the words 
 of President Wilson — "There is only one sort of peace that the 
 
 1 Von Freigtag-Loringhoven, Deductions from the World War, 191 8, p. 175.
 
 A League of Nations and Commercial Policy 27 
 
 peoples of America could join in guaranteeing.... The terms of 
 the immediate peace agreed upon will determine whether it is 
 a peace for which such a guarantee can be secured. The question 
 upon which the whole future peace and policy of the world de- 
 pends is this: Is the present a struggle for a just and secure 
 peace 1 ? " 
 
 It is useless to discuss the economic consequences of the for- 
 mation of a League of Nations unless upon the assumption that 
 the peace from which it starts, and which it will be its object to 
 maintain, will be such as will contain elements of permanency. 
 Otherwise the economic condition of security would be wanting. 
 What the terms will be which would fulfil that condition are in 
 the main a matter for statesmen. From the economic point of 
 view, any terms v/hich involve the economic subserviency of one 
 nation to another would be objectionable. Such arrangements 
 might well be drafted in a manner that would recognise political 
 independence of a particular nation, but at the same time would 
 consign it to economic serfdom. An enforced tariff may provoke 
 as much unrest a£ an imposed frontier. Also, compulsory econo- 
 mic dependence is a more subtle evil, than political subserviency. 
 The latter is determinable by the map, and it appeals to all the 
 generous impulses of liberty loving peoples. But the former can 
 be concealed under a fair show of equity, and its detection can 
 be evaded by technicalities which require not only lengthy 
 explanations but also a knowledge of the particular trades that 
 are affected. Hence there grows up an unrest in the country 
 which feels its economic life is restricted. There is a conquest of 
 trade by force of arms as well as a conquest of territory, and the 
 reign of violence is not ended if the captured territory be restored 
 while its trade is made subject to the aims of the conqueror. A 
 peace where this element is prominent may be founded on "no 
 annexations and no indemnities," but the conqueror or the party 
 which is more astute in the diplomacy of trade may secure both. 
 He is able to levy a tribute upon the weaker or less alert nation 
 from which he can annex, piece by piece, a portion of its wealth, 
 and thereby in the course of years gain very much more than 
 
 1 Speech to the Senate, January 22nd, 191 7.
 
 28 A League of Nations and Commercial Policy 
 
 would have been possible by an indemnity in the ordinary sense. 
 Accordingly, for a peace to be just the effect of its provisions upon 
 commerce must be considered as well as those that are political. 
 
 Not only so, but there is a third condition of a different nature 
 which is no less important. In so far as it is proposed that the 
 League of Nations should effect its purpose by means of con- 
 ciliation and the investigation of disputes, its success will be 
 governed to a large extent by the adoption of these methods 
 with fruitful results in the chief industrial countries when the 
 war is over. An era of strikes in which conciliation within many 
 countries was an obvious failure or, alternatively, met with very 
 slight success would reduce the chances of the League being 
 established firmly almost to vanishing point. If arbitration, con- 
 ciliation and mediation are without result in the smaller and easier 
 domestic sphere, it seems idle to expect that they would be tried 
 with much hope in the larger and much more difficult case of 
 international friction. Accordingly, if the war were followed by 
 serious industrial disputes in which conciliation or arbitration 
 failed, the prospects of a League of Nations would be seriously 
 endangered; while, conversely, the avoidance of such disputes, 
 in circumstances of special difficulty, would prepare the way for 
 the League and would improve its prospects very materially. 
 
 If, then, it be assumed that a peace has been effected which 
 in its essentials is just and a League of Nations has been founded, 
 the problem arises as to what may be inferred concerning its 
 effects upon commercial policy. There can be no doubt that it 
 will have effects; for one of the methods by which the States, 
 which have joined the League, are intended to put pressure upon 
 members who show a disposition not to abide by the terms of 
 the treaty to which they have agreed or secondly upon a non- 
 member who attacks any signatory State and refuses to submit 
 its case to an appropriate tribunal, is the exertion of economic, 
 as well as military pressure in case of need. Economic action is 
 intended to be graduated. It would begin with the withdrawal 
 of trade privileges conceded by the leagued States; and, if 
 further measures were necessary, it would continue until a com- 
 plete commercial boycott of the peccant Power was enforced.
 
 A League of Nations and Commercial Policy 29 
 
 In a dispute, which developed comparatively slowly, military 
 action would ensue, if economic measures failed. From this it 
 may be inferred that economic measures for coercion would be 
 used first, and, not improbably, with greatest frequency. It is 
 as if "the invisible hand" of Adam Smith had fallen from the 
 skies to become the hand that wields a policeman's baton. The 
 belief of the Manchester School that commerce promotes peace 
 and amity may have been an illusion, but one will part with it with 
 regret. Ties of trade cannot be quite the same in time of peace, 
 if they become the earliest weapons of the League when a dispute 
 arises — they will be recognised as ties that may become bonds. 
 The least self-sufficing State would be most subject to this type of 
 pressure by the League; and in the early years, when its con- 
 tinuance must be uncertain, it may be anticipated that countries 
 will aim at being self-contained in the essential industries. 
 Further, the contribution, which different States will bring to 
 the total economic pressure which the League can exert, will 
 vzxy greatly. A country which controls large quantities of food 
 or raw materials would give largely towards making the econo- 
 mic weapon efficient when it was applied against a commercial or 
 manufacturing Power. Also the sacrifice imposed upon members 
 of the League in joining in economic pressure will differ accord- 
 ing to circumstances. A nation with a large foreign trade is 
 likely to suffer most. It is true that it may not trade to any 
 great extent with the country which is to be "black-listed," but 
 it is clear that, unless that country on its side has a considerable 
 foreign trade which is important to it, there is little advantage 
 in using the economic power of the League. If that power is 
 worth applying, there must be trade with one or more other 
 countries which the one judged in fault would regret, if sus- 
 pended. The suspension of exports by these countries to the 
 one upon the League's black list would re-act upon their capacity 
 for taking goods from the first country and so it would partici- 
 pate in the loss quite out of its proportion to the quantity of its 
 trade with that State to which pressure has to be applied. The 
 effect of economic pressure during the war, when it can be esti- 
 mated accurately, will afford an indication of the results which
 
 30 A League of Nations and Commercial Policy 
 
 might be anticipated from this method of compulsion in the 
 future 1 . But it is to be noticed that the experience gained during 
 hostilities is setting up means by which States can make them- 
 selves less subject to this kind of constraint. In self-defence or 
 through force of circumstances many have had to devise means 
 of supplying themselves with commodities which they formerly 
 imported, while the invention of substitutes has made very con- 
 siderable progress in Germany and to a less degree elsewhere. 
 The war and a League of Nations following the war would both 
 advertise the advantages of economic independence. Here 
 again there is an analogy in business practice. A number of firms 
 might form a working agreement which was not limited to any 
 specific period. Each member of the syndicate would be com- 
 pelled in its own interests to keep in view the eventuality that 
 the agreement might be dissolved, and therefore, especially in 
 its early stages, they would aim at being prepared to resume 
 independent operations. They would not tie themselves during 
 a temporary combination by such a specialisation as would place 
 them at an avoidable disadvantage in the event of a rupture 
 of the agreement. Any one of these firms would have to face the 
 prospect that events might take such a course that it would be 
 forced to withdraw, and the syndicate would be re-constituted, 
 but against it. To be dependent upon those who would now be 
 its united competitors, to an extent which could be avoided, 
 would be to arrange for its own defeat in advance. When nations 
 are substituted for firms and enemies for competitors, the ten- 
 dency towards economic independence will be still stronger. 
 
 If a League of Nations were established it would be upon its 
 trial for many years. There would be influences in its favour and 
 others against it. The outbreak of hostilities has disappointed 
 all the peace-loving nations, while the long continuance of 
 the war is no less contrary to the expectations of those who 
 anticipated large and quick material gains. The sacrifice of life 
 has focussed the attention of humane people all over the world, 
 with a greater earnestness than ever before, upon devising means 
 by which all possible measures may be taken to free future 
 1 Cf. Nicholson, War Finance, 1918, pp. 208-215.
 
 A League of Nations and Commercial Policy 31 
 
 generations from so great suffering. The spirit of conciliation is 
 not confined to the belligerents. Neutrals, also, have shared in 
 the catastrophe; and to them, though possibly to a less degree, 
 the removal of future occasions for war will be an object of the 
 greatest moment. In this way throughout the civilized world 
 there will be a genuine desire to avoid war to an extent which 
 has not existed for several generations. After a just peace, this 
 desire will be the most important condition for the effective 
 career of the League. But no peace could settle all the questions 
 at issue. If it establishes the fundamental principles that are 
 involved and secures compromises upon several of the minor 
 difficulties, it will have accomplished much. In a very few years, 
 however, the nations will cease to be satisfied with several of 
 these compromises, while new difficulties will emerge; and fric- 
 tion will result from both. The League will be judged by the 
 success or failure with which it meets these situations. Mean- 
 while no State which joined the League, could afford to neglect 
 its measures for defence. They may subscribe to the principles 
 of the League, and undertake new obligations as a result, but 
 they cannot do so with more than a hope that peace will be 
 maintained by the efforts of the States which have joined the 
 concordat. The deep impression produced by the horrors of war 
 must, for a long time, cause nations to regard a League for peace 
 as an extra insurance; and at first it is natural that they will 
 continue to rely upon the proved means of defence. No doubt 
 there will be critical occasions when the League itself will seem 
 to be in danger of dissolution. It may even be that, if it is estab- 
 lished, there might come a time when it would be broken into 
 two opposing camps and a new war would result. Therefore, in 
 so far as each nation conceives a particular form of industry to 
 be advantageous for its defence or even for resistance against 
 what it might hold to be undue pressure by the League, it will 
 not consider itself justified in taking any steps which would 
 weaken its powers of economic endurance. 
 
 In the particular case of Great Britain, the economic weapon 
 of the League will involve a greater departure from the practice 
 before the war than in the case of any other country. On the
 
 2,2 A League of Nations and Commercial Policy 
 
 assumption that Great Britain would become a member of the 
 League, she would pledge herself to withdraw most favoured 
 nation treatment, and if necessary to join in enforcing a com- 
 mercial boycott, in the case of any State which incurred the 
 censure of the League. The question whether this country will 
 establish a general tariff or one upon a few industries may still 
 be regarded as open. If either of these courses is adopted, there 
 can be no question that the British tariff would be much lower 
 than that of any other manufacturing country. This would 
 probably hold good if it were compared with the pre-war duties 
 of other States, and it is in the highest degree probable that the 
 great majority of these will increase their Customs duties very 
 largely in order to raise a part of the larger revenue which 
 they will require. Thus there will be a sacrifice which will be 
 considerable for the United Kingdom, but which will be less 
 felt by all the other members of the League. In the first place, 
 this country will be compelled to accept definitely the principle 
 of the control of trade by the State in order to effect political 
 objects, while such control will be exercised, in the case of 
 a decision by the League to use it, at the bidding of an ex- 
 ternal authority in the formation of whose judgment the British 
 Government has a voice but only as one of many Powers which 
 will be represented. Again, it is probable that the Power, which 
 has a great external trade and which relies to a comparatively 
 small extent upon Customs duties, will suffer more from the 
 use of the economic weapon of the League. On the other hand, 
 such a Power is more interested than any other in maintaining 
 the peace of the world, and if these measures secure it, the gain 
 would tend to outweigh its loss. 
 
 The prospects of a League of Nations in its reactions upon 
 the economic position cannot be developed further until some 
 attention has been given to the problem as to whether Germany 
 will become a member or not. It is impossible to determine how 
 States will act in advance. Should Germany decide to stand 
 outside the League, the position of the latter would seem to be 
 liable to great misrepresentation. It would, no doubt, be de- 
 scribed as a comprehensive organisation which was designed to
 
 A League of Nations and Commercial Policy 2>Z 
 
 hold a threat of war against Germany and its supporters with the 
 instrument ready to its hand in an economic " war after the war." 
 The right which the League endeavoured to maintain and en- 
 force could be described as a hypocritical disguise for might 
 which was ashamed to avow itself openly. If the present Allies, 
 together with a proportion of neutrals, assented to the principles 
 of the League, it would control both the bulk of the world's raw 
 materials as well as the main routes for transporting them. The 
 use to which this overwhelming economic power was put would 
 determine the reputation which the League would win for itself. 
 A Germany outside it would not affect its economic power to a 
 sufficient extent to render it ineffective, but it would make the 
 early years more difficult. This, however, is only one alternative. 
 If the war ends in an indecisive and probably temporary peace, 
 it would be waste of time and energy to attempt to establish a 
 League of Nations. There would be no respect for international 
 arrangements of any kind and material force would remain 
 dominant, as was said long ago, "relying upon the fury of con- 
 tention 1 ." But when the war ends in the establishment of the 
 sanctity of a nation's plighted word, and in the recognition of the 
 elementary moralities in the affairs of nations, the new Germany 
 which accepts these principles may be expected to be not only 
 ready but willing to enter a League of Nations, if not at the 
 beginning after a brief delay. Then it will rest with the League to 
 induce, and if need be to compel observance, of the fundamental 
 principles which have been bought at a very great price. This is 
 the "great consummation" which Mr Wilson had in view when 
 he spoke of " the common force which shall safeguard right as the 
 first and most fundamental interest of all peoples and all 
 governments, when coercion shall be summoned not to the 
 service of political ambition or selfish hostility, but to the 
 service of a common order, a common justice and a common 
 peace." 
 
 The proposed League could be constituted so as to offer some 
 inducements to nations to become members, not only from 
 
 1 veiKei fiaivofi^vip Triawos. Empedocles, De Natura (ed. Karsten), Carm. 
 1. 6. 
 
 S. 3
 
 34 A League of Nations and Commercial Policy 
 
 political motives but also upon economic grounds. While each 
 signatory Power would remain altogether free to maintain its 
 own commerce and also to protect it, if it thought that course 
 advisable, it would be contrary to the permanence and success 
 of the League if the States, belonging to it, should take measures 
 to discriminate against each other's trade. Common political 
 action is unlikely to succeed if accompanied by economic hos- 
 tility, even though veiled. Representatives of the leagued 
 nations could not meet under the best conditions, in order to 
 maintain peace, if some of them were involved in tariff wars at 
 the time. 
 
 Political and economic conditions interact to a larger extent 
 than has been recognised in this country hitherto. Where rela- 
 tions between two countries are strained, neither can be ex- 
 pected to avoid injuring the trade of the other, when this is 
 possible. Similarly, where there are antagonistic commercial 
 interests, there is often discrimination and this, if continued, will 
 arouse or increase political tension. Economic pressure to be 
 effective must be vested in the League while the States, which 
 become members, would be almost compelled, logically, to 
 abandon the use of this instrument in the form of discrimination 
 as against each other. Conversely, they would retain full free- 
 dom of fiscal action against non-signatory Powers. As far as the 
 result can be forecasted, the tendency would be for tariffs of 
 most of the members of the League to be relatively high as 
 against States outside it, and this would be an inducement for 
 the latter to come within the League. But if this estimate of the 
 future is correct, it leads to an important consequence. As 
 tariffs of the States of the League rise against nations, who are 
 not members, the latter will be compelled to trade more with 
 each other, and, to that extent, the economic weapon of the 
 League becomes less effective against a non -signatory State, 
 but probably somewhat more effective against a member of 
 the League to whom pressure must be applied. 
 
 The .idea of a self-denying ordinance, by which the signatory 
 Powers would refrain from imposing discriminating duties upon 
 each other's trade involves some difficulties. The perennial
 
 A League of Nations and Commercial Policy 35 
 
 question of trade between colonies and the mother country 
 arises. It may reasonably be held that any preference or privi- 
 lege given by the parent country to the colony or secured in the 
 colony for the home country should not be construed as a discrimi- 
 nation against the other nations of the League. If a customs union 
 were instituted between a European country and its colonies, by 
 the former increasing its duties against all outsiders, the question 
 of discrimination could not be raised. The problem here is 
 economic, but it soon acquires importance from the political 
 aspect. The importance of colonies consists, from one point of 
 view, in the raw materials which they provide, as well as the 
 market which they afford to the manufactures of the mother 
 country. Freedom of access to the raw materials of all colonies, 
 or at least all tropical colonies, by members of the League has 
 been suggested 1 , and there is little doubt that this method would 
 remove one powerful economic motive resulting in the "scramble 
 for colonies." As applied to tropical dependencies, it would be, 
 in fact, an economic internationalisation of these. This plan 
 would meet a great part of the difficulty, but still a part of it 
 would remain. A case is possible in which a country owns a 
 dependency which is capable of producing a raw material that 
 many countries desire. By a careful integration of the industry 
 from the production of the raw material up to the completed 
 manufacture, a monopolisation of the commodity could be 
 effected. It is true that the part of the industry which obtained 
 the raw material would lose by restricting the sale of it. Tempt- 
 ing offers from foreign merchants would be refused. But from 
 the point of view of the trade as a whole, that loss would be more 
 than recovered by the monopoly accruing from the sale of the 
 finished goods. Such a policy might not be to the national in- 
 terest in the long run, but it could be supported by exceedingly 
 plausible arguments. While other nations feel the economic 
 inconvenience, the political remedy is not easy to discover. 
 If the process of manufacture, which has been suggested, had 
 grown up altogether by private enterprise, there is no discrimi- 
 nation against foreign nations by the Government of the State. 
 1 H. N. Brailsford, A League of Nations, 1917, pp. 230, 264, 283-6. 
 
 3—2
 
 36 A League of Nations and Commercial Policy 
 
 On the other hand, to suggest that the League of Nations ought 
 to interfere in the internal economic organisation of one country, 
 in the interests of other countries, would be to prejudice its 
 chances of success at the outset, for it would incur the risk of 
 acquiring the character of a mere international busy-body. An 
 ultimate solution is possible upon the condition that the League 
 became firmly established and gradually secured the respect 
 and confidence of the greater part of the world. In that case, 
 when the time was ripe, it might perform a useful function in 
 considering the question of monopolies in so far as they affect 
 international relations; and, as a result of such consideration, 
 further agreements might be effected which would regulate 
 them. 
 
 The more the proposed League could facilitate commerce, the 
 greater would be the advantage of membership; and, as a con- 
 sequence, the economic pressure which could be exerted upon a 
 member would be more powerful and effective. Small civilized 
 countries would feel that pressure most. A large and powerful 
 State would probably not wait for economic measures to be taken 
 by the League, but would attack its immediate enemy at once, 
 in the hope that victory could be secured before the slow moving 
 forces of the League could be brought against it with effect. 
 Besides, as has already been shown, most countries of this class 
 would be able to build up means of supplying their essential 
 needs either by development of existing natural resources or 
 through the improvement of substitutes. There is also the risk 
 of extensive smuggling to be taken into account when the League 
 proclaims an embargo upon commerce between all signatory 
 States and a country which has infringed the code of the League. 
 It can scarcely be expected that all these countries would exer- 
 cise the same painstaking supervision of their exports that would 
 be needed in order to attain the maximum degree of efficiency. 
 The danger of indirect trade through small countries, which 
 were not members of the League, would be considerable ; while 
 a universal "rationing" of these by all signatory States appears 
 to be almost impracticable. 
 
 Weighing all the diverse considerations, it may be concluded
 
 A League of Nations and Commercial Policy 3 7 
 
 that economic influences could be used in such manner as to con- 
 tribute materially to the cohesion and stability of the proposed 
 League. At first the unifying influence would be dormant. The 
 League would be an experiment; and, however much some of 
 the members might hope from it, no State could place any great 
 reliance upon it at this stage. A high degree of faith in the future, 
 and even in peace, would not necessarily involve unlimited trust 
 in the League. Later, if it survived the first critical years and 
 nations became accustomed to co-operate with, rather than to 
 frustrate each other, a tendency would show itself towards 
 reciprocal arrangements in trade. When this point would be 
 reached the force of economic pressure, as applied to offending 
 States, might be expected to be rather greater in the case of a 
 signatory nation, than in that of one similarly situated which was 
 not a member. Further, if an early dissolution of the League 
 could be avoided and if it is to be anything more than a species 
 of international "Advisory Council," the commercial privileges 
 of membership would tend to attract within its orbit some 
 States, which at first stood outside. As against this, a certain 
 degree of centrifugal force may be anticipated which would work 
 towards detaching others which are the more progressive and 
 enterprising. What often happens in the "case of small organisa- 
 tions would be likely to show itself upon the larger scale with 
 greater intensity — namely that membership imposes limitation 
 and restraint upon the abilities of the most active and far-seeing 
 members. As far as the League will affect progress, it would 
 establish a rate which was neither the fastest nor the slowest, 
 but a species of intermediate pace. At the same time if all the 
 great commercial nations join it, though they would lose some- 
 thing, the tendency would be rather more to a levelling up than 
 to a levelling down. Perhaps the ultimate loss would not be very 
 great, for in the past some small nations, through their different 
 ideals of national life, have shown themselves to be remarkably 
 obstructive to the ideas of Western industry, both to their own 
 loss and that of the industrial nations. When such small States 
 belonged to the League they would have an opportunity of 
 coming into close contact with the new problems of international
 
 38 A League of Nations and Commercial Policy 
 
 relations in commerce, and it might well be that the League 
 could take steps to protect them from being exploited. 
 
 These inferences lead on to another. The League cannot 
 develop unless numerous and somewhat detailed agreements are 
 made between the members. Therefore its foundation will be the 
 restoration of faith in the pledges of nations. After the experi- 
 ence of nearly four years, the re-building of confidence in inter- 
 national agreements must be slow. It is idle to wrap up in 
 sugared phrases the fundamental condition that, though the 
 League may proclaim its reliance upon right, this will be almost 
 useless unless it is able to defend the arrangements which 
 are believed to approximate justice as nearly as possible. An 
 active policy of this kind, which would be supported loyally by 
 all the members, if necessary, up to the limits of their power, 
 would be a strong influence in guaranteeing peace. Unfor- 
 tunately it may not be more than a conditional guarantee, for 
 it might happen in the changes which time brings that two 
 groups of States, within the League itself, which were approxi- 
 mately equal in resources would interpret right in some crucial 
 case in contradictory senses. In that case, if most of the Powers 
 which formed the League were involved in the dispute, it would 
 be impossible to constitute a Council to which the dispute could 
 be referred with a prospect of obtaining a decision which would 
 command even a moderate amount of support. There would be 
 no effective mediation possible, and it seems as if the dissolution 
 of the League would follow with a world war as the consequence. 
 Under not unfavourable circumstances there appears to be 
 another alternative. Provided such a test of the League did not 
 come in the first years of its existence, it would seem possible 
 that it could develop some form of organisation which would 
 meet the difficulty. Failing the discovery of a better method, 
 the period for deliberation which some suggestions for consti- 
 tuting the League recommend, might be extended for a longer 
 period with the consent of both parties: and, after the expiration 
 of this further interval, the points at issue might be re-submitted 
 to the Council. In the state of feeling which will follow the war 
 the prolonged interval for reflection and enquiry would doubtless
 
 A League of Nations and Coimnercial Policy 39 
 
 be used in the preparation of armaments, but this result need 
 not necessarily follow if the League were well established. People 
 would remember instances of disputes, which at first seemed 
 almost insoluble, where a peaceable and equitable solution was 
 attained by the intervention of the Council. Such experiences 
 would give prestige to the judicial processes of the League, and 
 it might well be that reflection and enquiry over a number of 
 3'ears, joined with the progress of events, would eventually 
 point the way to a solution. 
 
 In the foregoing account of the possibilities of the League, 
 attention has been directed as far as possible to its economic 
 effects. Any complete abstraction of these from the political 
 consequences would be unreal and illusory. The two constantly 
 interact. It seems to me that the attitude of supporters of the 
 League inclines somewhat too much towards over emphasizing 
 the power of economic compulsion. While diplomatists and states- 
 men, who advocate the scheme, are cautious as to the political side, 
 they incline to be more optimistic as to the economic one. The 
 economist would be disposed to lay stress on his hopes from the 
 political rather than the commercial side. Possibly, where the 
 difficulties are most before the mind, there is less confidence. An 
 armed peace has been followed by a devastating war, and it is 
 only ordinary prudence to strive earnestly to make peace easy and 
 war difficult. On the assumption of a just peace, it will remain 
 to make it as lasting as possible. The development of commerce 
 and industry will crave not only security but a higher degree of 
 it than has been experienced during the last thirty years. The 
 project of a League of Nations is a scheme which may be, on the 
 whole, deserving of a fair trial. The end of the war is the time 
 when it could be established with the best prospects. In the 
 words of Lord Bryce "if this opportunity be lost, another such 
 opportunity may never re-appear." No doubt there are many 
 obstacles and hindrances, political, constitutional, military and 
 even economic. But if no League of Nations is established, 
 against these must be balanced the almost certain return of 
 tension and insecurity not many years after peace has been 
 signed. The prospect offers sufficient hope to point towards
 
 4-0 A League of Nations and Commercial Policy 
 
 giving the scheme a trial, but not sufficient hope to rely upon it 
 until it has actually justified itself by a protracted test. Thus 
 the most that can be said of the scheme at present is that it is a 
 favourable uncertainty, against which is to be set an unfavour- 
 able certainty. In such circumstances we should be wise, upon 
 the whole, in accepting Tennyson's maxim, "Cleave ever to the 
 sunnier side of doubt."
 
 THE FINANCIAL BURDEN OF TODAY 
 AND OF TOMORROW
 
 Boni pastoris est tondere pecus non deglubere. 
 
 Tiberius Caesar, quoted by Suetonius.
 
 THE FINANCIAL BURDEN OF TODAY 
 AND OF TOMORROW 
 
 IN Burke's speech upon conciliation with America, he paused 
 at one point in order to review the effect of the crisis (which 
 then existed) upon the opinions that had been commonly held 
 upon important questions. He said, " It is good for us to be here. 
 We stand where we have an immense view of what is, and what 
 is past. Clouds, indeed, and darkness rest upon the future 1 ." 
 Another orator, Louis Kossuth, might almost be said to have 
 corrected Burke's metaphor — "As the sun looms through the 
 mist before it rises, so the future is seen in the events of the 
 present day" — a sun that some of us think will rise in a fair 
 dawn, but which others regard as angry and presaging storm and 
 tempest. 
 
 "The immense view" includes much which the exigencies of 
 the time force upon our attention and enable us to see with a 
 clearness that was formerly impossible. Economic writers of the 
 past sometimes considered the best course of action in the cir- 
 cumstances which they anticipated would arise in time of war 
 and stated the conclusions to which their enquiries led them. 
 But those results were always based upon either general con- 
 siderations or the experience of past wars which were applied to 
 what was for them a future war, — and, as far as British writers 
 were concerned, to hypothetical wars which it was always hoped 
 would not be possible. For us, unfortunately, the hypothetical 
 war has become a sad actuality, and it will not be out of place to 
 endeavour to test the theories of the past by applying them to the 
 needs of the present which they were, in part at least, designed 
 to meet. The particular instance in point is the discussion of the 
 best method of raising funds for the prosecution of war — a ques- 
 tion which is not only of interest during the conduct of hostilities, 
 1 E. Burke, Works, 1793, 11. p. 33.
 
 44 The Financial Burden of Today and of Tomorrow 
 
 but which will react upon the rate of recovery in the early years 
 of peace, and which may influence, and even mould, many social 
 changes in that period. Both national credit and mercantile 
 credit may be affected materially by the methods adopted and 
 their consequences, while serious errors may produce grave 
 commercial and industrial disorders. 
 
 There are few economic questions upon which opinion has 
 been so divided and for so long a time. Broadly speaking, there 
 were two dominant and contradictory views. The earlier, which 
 may be named the British theory, was that all war expenditure 
 should be obtained from taxes levied while the war was in pro- 
 gress. To this was opposed the German theory, that all war 
 expenditure ought to be met by loans. For brevity the first may 
 be called the " all tax view," and the second the " all loan view." 
 These extreme opinions were not held generally in either country 
 in their original form at the outbreak of the present war. Their 
 clear cut precision has been very considerably modified; but, as 
 far as it is possible to generalise, in this country and in the 
 United States taxation was given a larger place in a war economy 
 than was the case in Germany. 
 
 Of these two theories the British "all tax" theory was the 
 earlier, and therefore it may be described first. From the time 
 of Petty to that of John Stuart Mill this doctrine was advocated 
 with emphasis by many of the leading writers. Petty, writing 
 in 1665, based his calculations for the distribution of the taxa- 
 tion to pay the expenses of the war with the Dutch, then in pro- 
 gress, upon the assumption that the whole amount would be 
 raised by this method 1 . Davenant, writing thirty years later, 
 urged that it would be well, "if we could bring it about," to 
 meet the year's expense with revenue obtained within the year, 
 and he considered that this might be accomplished by Excise 
 duties, if the raising of them "might not hazard the Constitu- 
 tion 2 ." Archibald Hutcheson, the acute critic of the period of 
 
 1 Petty, " Verbum Sapienti " in Works, edited by Hull, p. 103. 
 
 2 Davenant, " Essay upon Ways and Means of supplying the War," 1695, 
 in Works, I. p. 80. Davenant, however, was far from consistent. In his " Dis- 
 courses on the Public Revenues and on Trade," 1698, he wrote, "Nations 
 that have a war too big to be managed by any income to be raised within the
 
 The Financial Burden of Today and of Tomorrow 45 
 
 inflation during the South Sea Bubble epoch, declared that 
 "until our debts are discharged we can scarcely be said to be a 
 people. I'm sure, till then, we are a people in a state of the ut- 
 most insecurity 1 ." Similarly Hume contended that "either the 
 nation must destroy public credit, or public credit will destroy 
 the nation 2 ." These statements were negative, as regards public 
 loans, rather than positive in advocating the raising of the neces- 
 sary expenses immediately by taxation. Decker and Fauquier 
 emphasized the latter conclusion, the latter proclaiming explicitly 
 that all funds required by the Government for whatever purpose, 
 even for an expensive war, should be raised by taxation "within 
 the year," and he believed everyone would recognise this method 
 as the most advantageous, and consequently the most eligible 
 for himself, his children and his country. "And though it should 
 be attended with some little present inconvenience, I am sure 
 that man can have little pretence to any feelings of public spirit, 
 who would not submit to a short-lived tax upon his extravagance 
 to procure such certain and lasting advantages 3 ," in the avoid- 
 ance of an addition to the national debt. 
 
 The raising of all supplies for public expenditure within the 
 year by means of taxation became a maxim in public finance 
 during the succeeding century. Adam Smith, Ricardo, Chalmers, 
 M'Culloch and J. S. Mill all assented to it, and some of them 
 supported it vehemently. A passage of Chalmers perhaps states 
 the position with the greatest brevity and point. 'The differ- 
 ence," he writes, " between the system of raising money by loans 
 and that of providing for all the expenses by taxation is that, 
 while in both ways the same pressure is made at the time on the 
 comfort of families, in the former way there is the formation and 
 
 year, could not avoid proceeding in this manner [i.e., by borrowing], and 
 must be contented for a while, to pay taxes to one another, which may be 
 done without great mischief to the subjects, provided a due moderation be 
 observed ; for in this matter there is a certain limit, beyond which there is 
 no passing in any wisdom." Works, I. p. 153. 
 
 1 Some Paragraphs on Mr Hutcheson's Treatise on the South Sea Subject, 
 1723, p. 10. 
 
 2 "Of Public Credit" (1752), Works, 1779, 1. p. 381. 
 
 3 Francis Fauquier, An Essay on Waysand Means (1 756), Baltimore, 1915. 
 pp. 28, 29.
 
 46 The Financial Burden of Today and of Tomorrow 
 
 growth of a great national mortgage which remains to oppress 
 and enfeeble the country. In either way, the State may obtain 
 the same supplies; but, in the former way it obtains them at a 
 double expense to the nation. The present burden is just as heavy 
 in the one way as in the other; over and above which there is 
 the prospective burden equal to the present which the system 
 of borrowing leaves behind it 1 ." While Ricardo agreed with the 
 practical conclusion which Chalmers advocated 2 , he was too 
 acute to adopt the catchword of "the double expense" of loans 
 to the nation. He expressly stated that in point of economy 
 there is no real difference between the method of taxes and that 
 of loans. He advocated the raising of all supplies within the yeax 
 upon other grounds, such as the bringing home to the people 
 the cost of the war, and thereby shortening the continuance of 
 hostilities 3 . 
 
 The discussion of the principles involved in these contentions 
 may be postponed until the arguments for the converse view 
 have been stated; but, in the meantime, it is worthy of note that 
 the great majority of those who, after the middle of the eight- 
 eenth century, urged the raising of all supplies within the year 
 wrote during the peace following a war in which the debt had 
 been increased. The generation which is involved in a war 
 usually forms an estimate of the benefit of its results to posterity, 
 which posterity not infrequently fails to indorse, thereby justi- 
 fying the satire of Swift, who said "it is pleasant to observe how 
 free the present age is in laying taxes on the next: future ages 
 shall talk of this: this age shall be famous to all posterity 4 ." 
 The writings of the posterity of Swift's time during the next 
 three generations show that his anticipation of the volubility of 
 those, who paid the taxes which furnished interest upon previous 
 loans, was realised to the full. And this part of economic doctrine 
 in the eighteenth and the early part of the nineteenth centuries, 
 
 1 T. Chalmers, Political Economy, 1832, pp. 494, 495. 
 
 2 Professor Edgeworth mentions some of the objections to Chalmers' view, 
 remarking wittily that " his view of a public debt as a double burden is twice 
 removed from the view which I have entertained." The Cost of War, p. 46. 
 
 3 Ricardo, "Essay on the Funding System" (1820), in Works, 1852, p. 538. 
 
 4 Swift, "Thoughts on Various Subjects," in Works, 1762, 1. p. 291.
 
 The Financial Burden of Today and of Tomorrow 47 
 
 affords an instance of one type of future satisfaction which, un- 
 like most, is not undervalued 1 , namely that which one genera- 
 tion estimates its successors will procure from successful national 
 defence ! 
 
 It is not to be thought that during the eighteenth and the first 
 half of the nineteenth century opinion in this country was wholly 
 agreed upon the advisability of raising all supplies within the 
 year. Occasionally there were a few who advocated reliance upon 
 credit to a greater or less degree. Berkeley considered that a 
 nation's credit was proportionate to what he termed its " momen 
 turn," that is the united action of a whole people, and that such 
 credit was the principal advantage England had over the other 
 countries of Europe 2 . Sir James Steuart contended that when a 
 great expenditure has to be met, unless reliance is placed upon " a 
 systematic scheme of credit, the infallible consequence would be 
 that the taxes formerly imposed cannot be paid, much less 
 augmented 3 ." A less known writer, John M' Arthur, after an 
 examination of the debt during the eighteenth century, came to 
 the conclusion that both the revenue and the wealth of the 
 country had increased more than in proportion, and that in that 
 period "the public credit of Great Britain had risen to a pitch of 
 grandeur and stability unknown to other nations 4 ." 
 
 The Crimean War represented a turning point in the method 
 of providing funds. Though Gladstone argued in favour of the 
 traditional "all tax" policy, and while, as Leroy Beaulieu has 
 shown 5 , both in this and the previous great war Great Britain 
 was exceptionally favourably situated for raising a large part of 
 the cost by taxation, the proportion of the outlay obtained by 
 taxation fell from 47 s per cent, in the French War to 43 per cent 
 
 1 H. H. Gossen, Gesetze des mensch. Verkehrs, 1889, p. 3; W. S. Jevons, 
 Political Economy, 191 1, p. 35. 
 
 2 Berkeley, Querist, Nos. 233-235, 582, 583. 
 
 3 Steuart, Inquiry into the Principles of Political Economy, 1 767, 11. pp. 471 , 
 472. 
 
 4 M'Arthur, Financial and Political Facts, 1801, pp. 163, 171. 
 
 5 Leroy Beaulieu, TraiU de la Science des Finances, 1891, 11. p. 251. 
 
 6 Professor Bastable shows that the amount of war expenditure during 
 the Napoleonic Wars which was met from taxation was actually less than 
 27 per cent. The total war expenditure was 830 million pounds. Of this 600
 
 48 The Financial Burden of Today and of Tomorrow 
 
 in that of the Crimea. Between the Crimean War and that now 
 being waged there has been no opportunity of testing the general 
 trend of opinion upon the question of the financing war expen- 
 diture upon a large scale, but the magnitude of the change since 
 Adam Smith and Ricardo may be seen by the growth of local 
 debt in recent years. Expenditure, whether by the central or 
 local authorities, is essentially one from the point of view of 
 public finance, and so likewise are the loans by these two classes 
 of borrowers acting on behalf of the State 1 . The increase in the 
 loans of local authorities during the last fifty years is a matter of 
 common knowledge 2 , and recent writers have ceased to question 
 the necessity of such borrowings, provided due safeguards are 
 observed. It is clear that this represents a striking departure 
 from the teaching of Adam Smith and Ricardo. While develop- 
 ments in the production of many things, which make for im- 
 provements of social life, have caused these to increase in cost, 
 and therefore made it difficult, if not impossible, to provide them 
 out of income levied within the year in which the expense is in- 
 curred, the principle governing the acceptance of the practice 
 of loans is not wholly clear. It is not based on borrowing for 
 the establishment of so-called reproductive enterprises, since, 
 historically, local loans were first adopted for unproductive 
 undertakings 3 which were judged necessary for the health or 
 welfare of a particular community. Thus it cannot be main- 
 tained that, in all cases, these loans are of such a nature as to 
 yield a revenue which would provide the necessary interest, nor 
 can it be shown that there is invariably an asset which is vested 
 in the local authority which is equal in value to the amount of 
 the loan outstanding. For instance the money value of the 
 clearing of congested areas, of street widening and other improve- 
 ments (however admirable these may be for other reasons) is 
 
 million pounds was borrowed and 230 millions raised by taxation — Credit, 
 Industry and the War, 1915, p. 242. The percentage is stated at a higher rate 
 in a calculation of Mr W. Schooling printed in The Economist, March 23, 1918. 
 
 1 Bastable, Public Finance, 1903, p. 722. 
 
 2 The outstanding loans of local authorities, between 1875 and 1913, 
 increased by about 600 per cent. 
 
 3 Economic Journal, xiv. p. 49.
 
 The Financial Burden of Today and of Tomorrow 49 
 
 often highly problematical. Accordingly, it appears that the 
 ultimate distinction which was accepted in the first years of the 
 present century was that borrowing by a local authority might 
 be justified, if it was considered that the purpose, for which the 
 loan was required, was one which advanced the welfare of the 
 district and which, at the same time, involved a large capital 
 outlay 1 . 
 
 On the outbreak of the South African War the effect of the 
 change of opinion showed itself as having extended from local to 
 national finance. Giffen did not criticise the amount raised by 
 borrowing, though he took exception to the form of the loans 2 . 
 Professor Bastable considered that in the later stages of the war 
 weakness was shown in not watching the increase of debt, and, 
 after the war, in not making sufficient provision for redemption 
 of war loans 3 . At the same time, the break with the early writers 
 is marked, when, in discussing the Budget of 1900, in relation 
 to the proposal that the whole cost of the war should be met by 
 taxation, he approved of the policy of borrowing a part of the 
 war expenditure, remarking that " the proposals of the Chancellor 
 of the Exchequer are not heroic, but heroic finance is both 
 troublesome and expensive 4 ." Professor Nicholson took the 
 view that in war "borrowing is the only resource." A just war* 
 is in the permanent interests of the State, and therefore a part of 
 the cost should be borne by posterity. Even in the interests of 
 future generations the whole cost should not be raised by im- 
 mediate taxation, because very high taxation injures the pro- 
 ductive power of the country, and thus it would injure posterity 
 more than the burden of the loan. Indeed, if an effort was made 
 to carry out the counsels of the early economists which resulted 
 in taxation becoming excessive, the results would be unfortunate. 
 For it would become unproductive, and, if the war were to be 
 continued, it would be necessary to borrow, probably upon less 
 advantageous terms than would have been obtainable otherwise. 
 
 1 Nicholson, Public Finance, 1906, p. 16. 
 
 2 Giffen, Works, 11. pp. 218, 219. 
 
 3 Economic Journal, xn. p. 261; Public Finance, 1903, p. 641. 
 
 4 Bastable, "Note on the Budget of 1900," in Economic Journal, x. 
 p. 201.
 
 50 The Financial Burden of Today and of Totnorrow 
 
 Thus the final consequence, as regards future generations, would 
 be that they would be burdened doubly, first by contracted pro- 
 duction (which might have been avoided) and secondly by the 
 loan itself 1 . 
 
 It will be noticed that there has been a gradual change in 
 British opinion. The earlier " all tax view " had been abandoned 
 before the present war by most of the leading financial writers; 
 but, at the same time, there remained an almost universal 
 advocacy of increasing taxes in time of war. While this was the 
 accepted opinion in this country, it is far from being received 
 with general favour elsewhere. And for purposes of contrast, 
 the views of German economists may be examined next. If, at 
 one period, British thinkers usually advocated an "all tax" 
 policy for war costs, there was a strongly marked German ten- 
 dency towards an " all loan " policy. Traces of this view may be 
 found in Justi, whose chief work was issued in 1755. He was 
 greatly impressed with the extreme cost of war, which required 
 rather the sacrifice of unmeasured sums of money than of blood 2 . 
 If the amount to be raised is not very great and is not required 
 at once, while if on the other hand the expense is expected to be 
 temporary, then it is best to rely upon taxation. But if these 
 conditions are not fulfilled, then loans are necessary. In view 
 of this need and the circumstances of the time, Justi directed 
 much attention to the development of German credit 3 . Tem- 
 porarily Adam Smith exerted some influence upon German 
 writers of his own generation 4 , but the view of Justi was re- 
 asserted after the Napoleonic Wars by von Jacob 5 and Nebe- 
 nius 6 . Rau was even more definite in asserting that, in the event 
 of a sudden emergency such as war, loans were not only necessary 
 but even beneficent, thereby reviving the view of a seventeenth 
 century English writer who entitles his tract — Taxes No Charge" 7 . 
 
 1 Nicholson, Principles, ill. 408, 409 ; War Finance, pp. 432, 433. 
 * J. H. G. von Justi, Politische unci Finanzschriften, 1761, p. 175. 
 8 Ibid. Staatswirthschaft, Th. II. pp. 435, 587-608. 
 
 4 E.g., Schmalz, who spoke of State debts as a great evil, Handbuch der 
 Staatswirthschaft, 1808, §§ 419-423. 
 
 6 L. H. von Jacob, Die Staatswirthschaft, 1821, § 728. 
 
 6 F. Nebenius, Der offentliche Credit, 1820, p. 429. 
 
 7 Sta*e Tracts of William III, 1689, 11. p. 116.
 
 The Financial Burden of Today and of Tomorrow 5 1 
 
 A more definite position was taken by Dietzel, who distin- 
 guished between ordinary and extraordinary expenditure, the 
 latter being that which is non-recurrent. Taxes suffice for the 
 ordinary outlay, whereas the extraordinary (which includes all 
 expenditure on the maintenance and extension of the national 
 establishment) ought to be met by loans as a matter of course 1 . 
 Stein, like Dietzel, endeavoured to incorporate the defence of 
 loans into a system of national finance. Borrowing for extra- 
 ordinary expenditure is a necessary and organic part of the life 
 of a State forming part of the higher statesmanship. The State, 
 without a debt, either does too little for its future or rests too 
 much upon its past. In a sense an increase of debt is an addition 
 to the national capital for, according to Stein, it provides for 
 its interest and redemption by reason of the useful purpose 
 which it serves. In some cases the realisation of the desired end 
 is long deferred, and the existence of a debt for that special 
 expenditure enables the necessary taxation (which is required 
 for its interest and redemption) to be imposed with equity upon 
 those who benefit by the expenditure 2 . It was not unnatural 
 that the financial result of the Franco-Prussian War seemed to 
 give the support of actual experience to the theories of Dietzel, 
 and the possibility of an indemnity finds a significant place in 
 subsequent German financial literature. Cohn, who did not 
 agree with all the theoretical implications of this view, never- 
 theless accepts its practical maxims, mentioning the possible 
 favourable outcome of war in the form of an indemnity 3 . Thus, 
 to adopt an expression of Junius, "what was yesterday a fact, 
 to-day is doctrine." Similarly, Roscher 4 and Wagner 5 both 
 endeavoured to remove some of the more palpable exaggerations 
 of Dietzel and Stein, while they accepted the need of loans to 
 meet extraordinary expenses, subject to certain limitations. 
 The latter, for instance, held that taxation and borrowing are 
 two forms of the same operation, the consequences of which are 
 
 1 C. Dietzel, System der Staatsanliehen, p. 182. 
 
 8 L. von Stein, hehrbuch der Finanzwissenschaft, 1871, pp. 660-672. 
 
 s G. Cohn, Science of Finance, Trans. Chicago, 1895, p. 721 
 
 4 W. Roscher, System der Finanzwissenschaft, 1886, p. 523. 
 
 5 A. Wagner, Finanzwissenschaft, 1877, pp. 118, 123.
 
 5 2 The Financial Burden of Today and of Tomorrow 
 
 specifically alike and gradually become differentiated. The 
 tendency is to relegate extraordinary outlay to borrowing, but 
 there are theoretical limits which are determined, in the main, 
 by the degree to which, in any special case, taxation would in- 
 volve less hardship than loans. 
 
 It will appear then that the result of the progress of opinion 
 has been that, on the one side, German writers have modified 
 their nineteenth century "all loan" method of raising the funds 
 necessary for a great war, but to a trifling extent ; while, on the 
 other hand, the early British "all tax" system has been greatly 
 changed. The position before the war was that German econo- 
 mists relied mainly upon borrowing for war finance, while in this 
 country, so far as the question was discussed, it was held that 
 a part of the outlay should be obtained from taxation 1 . How 
 far each country followed the views of its financial writers, how 
 far the methods actually adopted have been successful are being 
 shown in the finance of the war, but the ultimate result will only 
 be revealed during the generation which follows the war, here, 
 once more, the days to come will prove the most reliable wit- 
 nesses 2 . 
 
 There have been other special studies upon this topic made 
 elsewhere than in Great Britain and Germany. Professor Adams, 
 in discussing the financial management of war in 1888, shows 
 that it would have been impossible to have obtained the amount 
 required in the first year of the American Civil War by means 
 of taxation, without precipitating a crisis in the Northern 
 States which would have prevented the securing of adequate 
 funds during the remainder of the contest. He recommends 
 borrowing the whole of the first year's special war outlay. 
 Then, during the course of that year, new taxation should be 
 imposed, partly by increasing existing duties and partly by 
 
 1 It is interesting (and highly significant as regards responsibility for the 
 origin of the war) to observe the detailed examination of war finance by 
 German writers during the last fifty years, as compared with the cursory 
 allusions to this subject by British authors, cf. W. R. Scott, "Economics of 
 Peace in Time of War," in Credit, Industry and the War, 1915, p. 2. 
 
 2 aixipai. d' iirlXoiiroi 
 
 im&pTvpes ao<pd)Ta,Toi. Pindar, Olympian Odes, 1. 33.
 
 The Financial Burden of Today and of Tomorrow 53 
 
 adding new ones. From these a small revenue will be received 
 in the second year, but the remainder for that year must be 
 borrowed. Thereafter, during each year the war continues, the 
 proportion of income from taxation will increase till at the end, 
 if the struggle be long continued, the proportion obtained by 
 taxation may exceed that from loans 1 . As regards this propor- 
 tion, it is probable that the course suggested was influenced 
 partly by the experience, and partly by the recognised mistakes 
 of the finance of the Civil War. The late Professor Leroy- 
 Beaulieu agrees in part with Adams. In normal times taxes are 
 to be preferred to loans, but in critical circumstances the neces- 
 sary amount of taxation would produce a terrible crisis and 
 almost paralyse the life of the country. Therefore recourse 
 must be made to loans, though, at the same time, taxation 
 should be imposed, where it is possible, in order to prevent the 
 debt from becoming too great 2 . Professor Pareto, in reviewing 
 the financial policy of the belligerents in 1916, regarded the 
 increase in the debts of some of them with considerable anxiety, 
 and he evidently concluded that, in some cases, repudiation was 
 a possibility which might have to be considered 3 . The whole 
 question has been studied afresh by Professor Einaudi, and he 
 comes to the final conclusion that a war cannot be financed 
 either by new taxes or additions to old ones. Thus borrowing 
 must be added to the resources provided by taxation. The pro- 
 portion between the two will depend upon the wealth of the 
 country involved in war and the level of pre-war taxation in 
 relation to its resources. When these facts are known, the 
 respective percentages of war expenditure procured by taxes 
 and loans will be determined on the one side by the limit of not 
 pushing taxes to an extent which would provoke political 
 reaction and on the other by taking care that the loan policy 
 will be accommodated to the economic needs of the country 4 . 
 It will be observed that none of the leading authorities in any 
 
 1 H. C. Adams, Public Debts, 1888, pp. 109, 140-142. 
 
 2 P. Leroy-Beaulieu, Traite de la Science des Finances, II. pp. 244-280. 
 
 * V. Pareto, "I Debiti publici dopo la Guerra," in Riv. Di Scienza Ban- 
 caria, Feb. 1916. 
 
 * L. Einaudi, La Finanza della Guerra, 1914, pp. 22-53.
 
 54 The Financial Burden of Today and of Tomorrow 
 
 country, before the war 1 , adopted the "all tax" doctrine of the 
 eighteenth century British writers, while many approximate to 
 a greater or less degree to the opinion which, on the whole, pre- 
 vailed in this country before the war. On the other hand, in this 
 as in a vast number of other cases, the intellectual isolation of 
 Germany is marked — very few financial writers in other Euro- 
 pean countries having accepted the "all loan" dogma. 
 
 Hostilities have created an opportunity and a need for the 
 testing of the doctrines held before the war in the light of current 
 financial demands. Moreover the sad events of war have com- 
 pelled us to make precise much that was left indefinite in the 
 views upon this subject which were held here and in France, 
 Italy and America — a vagueness of statement undoubtedly due 
 to the essentially pacific disposition of these nations. 
 
 When one reads carefully those writers who advocated the 
 "all tax" system, some impression begins to emerge as to the 
 amount of war expenditure which they had in view. Adam 
 Smith seems to have contemplated that, in war, the additional 
 expenditure would bring the whole outlaj/ up to three or four 
 times the normal. This was the amount which he recommended 
 should be paid by taxation 2 . But that proportion has been 
 secured, approximately, in the financial } r ear 1917-18 and is 
 likely to be exceeded in 1918-19; so that, although we are far 
 from conforming to Adam Smith's principle as he formulated it, 
 we are curiously near the actual amount which he thought should 
 be raised by taxes. In other words, if the proportion between 
 war expenditure and the normal expenditure had continued the 
 
 1 Soon after the declaration of war by the United States 275 American 
 Economists framed a memorial urging that war expenditure should be met 
 mainly by taxation. This recommendation was based in part upon the 
 alleged tendency of borrowing to cause inflation of general prices and in part 
 upon social and ethical considerations. Professor E. R. Seligman points out 
 in reply that the memorial exaggerates the degree of inflation caused by 
 loans. Much depends upon the conditions on which the loans are con- 
 tracted. He recommends raising enough by taxes to pay interest on the 
 debt, and, in addition, its speedy amortization. But he adds that the 
 Revenue Authorities should be careful to avoid stifling enterprise and 
 causing intolerable discontent. E. R. Seligman and R. M. Haig, How to 
 Finance the War, 1917, pp. 1-14. 
 
 2 Adam Smith, Wealth of Nations, 1904, 11. p. 395.
 
 The Financial Burden of Today and of Tomorrow 5 5 
 
 same as that which he had in view, we should have raised the 
 amount which he considered necessary 1 . 
 
 This lengthy review of opinion in the past has seemed advis- 
 able in order to clear the ground for an investigation of some of 
 the chief issues which are involved. Some of the current thought 
 upon this topic is in danger of incurring that fruitless labour so 
 well described by Shakespeare — 
 
 If there be nothing new, but that which is 
 Hath been before, how are our brains beguiled, 
 Which labouring for invention, bear amiss 
 The second burden of a former child 2 ! 
 
 It remains, then, to discover how far the financial enquiries 
 of the present day are adapted to existing conditions and whether 
 the children of their "invention" are in fact fitted to survive in 
 the world into which they are born. The attitude of mind with 
 which the present must approach the theories of the past has 
 been well expressed in that old romance known as the Argents 
 of John Barclay, which Coleridge, Cowper and Southey esteemed 
 so highly. "Our ancestors," Barclay said, "did provide for the 
 affairs of those times, according to the disposition of them. To 
 us, it will be sometimes for the best, as the occasions doe differ 
 which we are encountered withal to dissent from their opinion 
 and vary from their courses. And I should think it an unrever- 
 ent pride in everything to neglect the wisdome of our ancestors, 
 so I should account it an absurd kinde of respectiveness, which 
 should perpetually bind us to the observation of their courses 3 ." 
 
 I may start by a'truism. The State requires goods and services 
 which will be immediately available here and now in order that it 
 may wage war — "an army cannot live on bread to be delivered, 
 
 1 In the French wars the largest increase in the revenue from taxation 
 was in 1815. The amount then obtained was three and three quarter times 
 that of 1792. This proportion is curiously close to that obtaining between 
 the revenue from taxation and State services in 1913-14 and 1917-18, 
 respectively. All the same full weight must be given to the larger propor- 
 tionate resources of the country at the later period. 
 
 2 Shakespeare, Sonnets, lix. 
 
 3 J. Barclay, Argents, 1621, lib. in. The translation in the text is that of 
 Sir Robert Le Grys of 1629.
 
 56 The Financial Burden of Today and of Tomorrow 
 
 at the option of the baker, between twenty and forty years from 
 the date of the contract 1 ." The question then is should the 
 Government take the necessary goods and services without com- 
 pensation (the "all tax" method) or with compensation (the 
 "all loan " method) or partly in one way and partly by the other. 
 The answer cannot be given in any absolute form, for it depends 
 upon a number of diverse and exceedingly complex considera- 
 tions. Modern warfare requires the exertion of a nation's power, 
 and the words of Peel come back to us, after the lapse of more 
 than three quarters of a century with added force and a new 
 meaning. "The first step towards safety," he said, "is a know- 
 ledge of the real source of our strength, a just confidence in it, 
 and a firm resolution to exert it 2 ." Clearly, if a nation at war 
 determines not to borrow, it may run the risk of depriving itself 
 of the benefit obtainable from the goods, suitable for carrying on 
 war, which it might secure from other nations, either neutrals or 
 allies. Even some of the most thorough-going advocates of the 
 revival of the "all tax" policy appear disposed to permit foreign 
 loans as an exception 3 . From the point of view of the aggregate 
 goods obtainable, there can be no question that a larger amount, 
 under existing conditions, can be secured by the State by a well- 
 judged system of borrowing than if it relies upon taxation only 4 , 
 even if it be assumed that the latter method would be workable. 
 The reason for this will be apparent when it is remembered that 
 no system of taxation, however well devised, can secure all the 
 available resources of all the people, still less is taxation an in- 
 centive to eliciting their maximum effort. Thus, at some stage, 
 the aid of credit must be invoked, if a nation is to mobilise all 
 its economic resources. "If one combatant will strain his re- 
 sources to the utmost, and the other is obliged to act similarly 
 at the risk of being extinguished, in these circumstances even 
 the straitest sect of economists do not now insist on the necessity 
 
 1 H. C. Adams, Public Debts, 1888, p. 107. 
 
 2 Sir R. Peel, Speech at the Merchant Taylors' Hall, nth May, 1835. 
 
 3 O. M. W. Sprague, " The Conscription of Income," in Economic Journal, 
 xxvii. p. 7; J. E. Allen, in Industry and Finance, [1918], Appendix, pp. 850 
 851. 
 
 * S. J. Chapman, Outlines of Political Economy, 1917, pp. 409, 410.
 
 The Financial Burden of Today and of Tomorrow 5 7 
 
 of meeting from year to year the expense which a war entails 1 ." 
 Borrowing, within due limits, is in fact an element in national 
 power, and Nebenius recognised in the most ample terms the 
 stupendous influence of British credit in the liberation of Europe 
 at the beginning of the nineteenth century 2 . Thus a failure to use 
 the nation's credit in a great war would be a sacrifice of com- 
 batant efficiency through a mistaken economic pedantry. 
 
 Further the "all tax" method, if applied in practice, would 
 result in a very curious paradox — its object is to avoid loans, 
 but the amount of taxation required would be certain to induce 
 loans through the magnitude of the taxes forcing the contri- 
 butors to borrow in order to pay their taxes. And so the position 
 is reached that a method is recommended in order to avoid 
 borrowing which on the contraty compels borrowing. It is true 
 that in this case loans would be made not to the State, but to 
 individuals, but the resulting pressure upon credit, when it 
 would be already subject to some strain, would soon become 
 severe with the risk of grave consequences. Not only so, but this 
 paradox at once produces another. One of the modern argu- 
 ments against loans is that they cause inflation of prices. So 
 far as they have this effect it is not attributable to loans, as such, 
 but to undue subscriptions by banks to loans. Now it is probable 
 that sufficiently high taxation would compel more loans to be 
 made by banks to taxpayers to meet their taxes than these in- 
 stitutions have paid in on their own account for their own hold- 
 ings in war loans. Accordingly, the probabilities are that very 
 high taxation would cause more inflation than a well-devised 
 system of borrowing. 
 
 It follows that, from the aspect of the successful conduct of 
 war, much is to be said for a policy of borrowing as being likely 
 to be most productive of the supplies required. But productive- 
 ness may appear to come into conflict with equity. Borrowing 
 means taxation in the long run, and therefore the question re- 
 solves itself into a choice between immediate and deferred taxes. 
 The practical difficulty in respect to the latter is in distributing 
 
 1 F. Y. Edgeworth, The Cost of War, 1915, p. II. 
 
 2 F. Nebenius, Der offentliche Credit, 1820, pp. 317-55.
 
 58 The Financial Burden of Today and of Tomorrow 
 
 the necessary levies when the time comes. The diversion of 
 large amounts of capital (which would have been employed pro- 
 ductively) to largely unproductive uses is likely to re-act un- 
 favourably upon the future position of the wage-earning classes 1 ; 
 and, accordingly, if they are subjected to increased taxation after 
 the war in order to pay something towards its cost they are in 
 danger of suffering doubly, partly by being in a less favourable 
 position to dispose of their labour, partly by the new taxes. 
 Those who rest on this line of argument might well repeat to the 
 less well-to-do the lines which Massinger addressed to the Earl 
 
 of Pembroke: 
 
 Why should you 
 (Pardon my boldness) pay more than his due, 
 Be the debt ne'er so great 2 ! 
 
 But there is another side, new capital, accumulated during the 
 war, is in an apparently favourable position in so far as an ab- 
 normally high rate of interest is paid; and, after peace has been 
 declared, the loans may be saleable at a premium, while several 
 have been floated with a bonus on redemption. Not only so, but 
 in terms of things, there is a further apparent bonus, in so far 
 as the purchasing power of the money subscribed will almost 
 certainly be less than that of the money in which the loan will 
 be redeemed, since at the later date prices may be expected to 
 have fallen. So it would appear that the situation justified the 
 censure of Sheridan when he satirically described the seeming 
 noble alacrity of the citizens to contribute to the necessities of 
 the State as patriotism " cringing for its bonus 3 ." But the bonus 
 in the form of higher interest, a small appreciation of capital, 
 
 1 A. C. Pigou, Economy and Finance of the War, 1916, pp. 42-47, 66-83. 
 
 2 P. Massinger, Works (ed. Hartley Coleridge), p. 442. 
 
 3 J. B. Sheridan, Speech on the New Assessed Taxes Bill in 1797. "If a 
 native inhabitant of Bengal or China were to be informed that in the west of 
 Europe there was a small island, which in the course of one hundred years 
 contributed four hundred and fifty millions to the exigencies of the State, 
 and that every individual, on the making of a demand, vied with his neigh- 
 bour to subscribe, he would immediately exclaim, 'Magnanimous nation! 
 you must surely be invincible.' But far different would be his sentiments if 
 informed of the tricks and jobs attending these transactions, where even 
 loyalty was seen cringing for its bonus ! "
 
 The Financial Burden of Today and of Tomorrow 59 
 
 and any further bonus through a fall in prices is, to a large 
 extent, an incentive to overcome a hardship inherent in the 
 circumstances. Though war produces changes in the distribution 
 of income which bring a surplus to a few which can be lent with- 
 out inconvenience, in order to secure the increase in saving which 
 is necessary, the rate of accumulation must be greatly augmented, 
 and in the majority of cases the saving involves greatly increased 
 hardship. Accordingly, a very marked increase in the real com- 
 pensation for such saving is far from inequitable. On the whole, 
 in a typical case, it is probable that the real aggregate reward for 
 war saving will be less, and not more, than it would have been 
 for normal saving by the same person if there had been no war, 
 when the consequent sacrifices are taken into account. On the 
 side of labour it is to be observed that no taxation should be 
 imposed upon any worker of whatever kind which would impair 
 his efficiency. This is not only equitable, but is necessary be- 
 cause, otherwise, the recovery after the war would be delayed 
 unduly and by avoidable causes. The securing of the freedom of 
 the nation is an object of the highest concern, and it is right that 
 each citizen who has a surplus beyond what is required for 
 necessaries, should contribute his share, however small, because 
 he is in enjoyment of the benefits to secure which that cost was 
 incurred. What that share will be must be determined in view 
 of the new circumstances which will have then arisen, and equity 
 would seem to require a cautious but still a distinct progression 
 in the taxation of the higher incomes. 
 
 Equity in taxation has so many variations that it justifies the 
 saying of Selden in another connection that "Equity is a roguish 
 thing 1 ." If this principle should be thought to point in a differ- 
 ent way from that of productivity in securing funds for war, the 
 latter is to be preferred to the former. As Dr Marshall has said, 
 "even in the interests of equity, canons based on the mere con- 
 sideration of equity are often of but secondary importance in 
 practice 2 ." 
 
 Connected with these considerations there is another akin to 
 
 1 J. Selden, Table Talk, 1890, p. 49. 
 
 2 Memoranda on Imperial and Local Taxes [C. 9528], p. 114.
 
 60 The Financial Burden of Today and of Tomorrow 
 
 them. If the choice is between immediate and deferred taxation, 
 why should the burden be postponed, would it not be better to 
 meet it at once and leave the future unembarrassed? As 
 Ricardo put it, "20 millions in one payment, 1 million per annum 
 for ever, or £1,200,000 for forty-five years are of precisely the 
 same value 1 ." In figures this is true, but it is questionable in 
 terms of the sacrifices involved and their concomitants. The 
 mere fact of giving the taxpayer time to adjust himself to a new 
 and heavy burden will lighten it materially for him 2 . Also in- 
 dustry will be given a chance of expanding to provide a part of 
 the new impost. But for both results time is necessary, and this 
 points to advantages — some probable, others contingent — in 
 deferring taxation for a part of war expenditure. 
 
 There is another line of thought which tends to the same con- 
 clusion. Taxation represents an abstraction of a certain amount 
 of the satisfaction to be derived from the possession of an in- 
 come. Most reasoning concerning the sacrifice demanded by 
 taxation proceeds upon the assumption that in normal times 
 on the average there are no great variations in these satisfactions. 
 But war changes all this, and the mass of the people become in- 
 volved in a whole series of new sufferings and anxieties. The 
 general suffering of the Napoleonic wars was described in gra- 
 phic terms by Robert Hall, "The people are drained of the most 
 precious part of their population, their youth, to repair the waste 
 made by the sword. They are drained of their wealth by the 
 prodigious expense incurred in the equipment of fleets and the 
 subsistence of armies in remote parts.... The fearful catastro- 
 phies, the strange vicissitudes, the sudden revolutions of fortune 
 which, thinly scattered heretofore over a long tract of ages, 
 poets have collected and exhibited to the terror and commisera- 
 tion of mankind have crowded upon us with so strange a rapidity 
 and thickened so fast that they have become perfectly familiar 
 and are almost numbered amongst ordinary events. Astonish- 
 ment has exhausted itself; and, whatever occurs, we cease to be 
 
 1 D. Ricardo, Works, 1852, p. 539. 
 
 2 Professor Edgeworth has an ingenious formula for correcting Ricardo's 
 statement. The Cost of War, p. 37.
 
 The Financial Burden of Today and of Tomorroiv 6 1 
 
 surprised 1 ." There are great non-economic sufferings to be 
 borne, and it would appear equitable and expedient not to add 
 to them during the war by purely economic burdens which may 
 be postponed with safety. 
 
 If these conclusions be pressed to their logical issue they would 
 seem to lead to the view upon which Germany has been acting 
 that all special war expenditure ought to be borrowed, even as 
 has been maintained there the interest on war loans should be 
 postponed. But to appreciate this trend of thought it is neces- 
 sary to be clear about its implications. It is based upon the con- 
 ception that the State is a necessity of civilized existence. There- 
 fore whatever the State requires must be procured, and the fact 
 that the State feels this want shows that in a higher sense it is 
 productive for the country. From that point of view the extra- 
 ordinary expenditure upon war is of the nature of capital out- 
 lay — the present generation fight and future generations pay 
 the cost. The main conclusion is strengthened by the suppressed 
 premises in the mind of most recent German writers, namely 
 that wars would be short and large indemnities would be secured. 
 Thus sufficient time would not elapse for large war taxation, if 
 levied, to bring in a revenue, while the anticipated indemnities 
 would render taxes during war unnecessary. But the continu- 
 ance of the present war has proved the illusory character of the 
 first expectation, and its final result may be expected to falsify 
 the second even more completely, at least as far as Germany is 
 concerned. 
 
 The conception of the German State appears to me to lead 
 logically to an "all tax" rather than an "all loan" policy; for, 
 according to that conception, the State would be able to make a 
 better use of the resources of its people than the people could 
 themselves. But, in practice, this issue may be limited by what 
 some one has called the unwillingness of the rulers of a nation 
 (which has little true freedom) to impose heavy taxes upon it. 
 
 Even if a war be financed at the beginning exclusively by 
 borrowed money, experience points to the wisdom of adding a 
 sufficient amount to the existing taxes to cover the interest upon 
 
 1 R. Hall, Works, 1832, 1. pp. 92, 155.
 
 62 The Financial Burden of Today and of Tomorrow 
 
 the new loans. If the war lasts into a second year, the absence 
 of revenue to cover the interest would re-act unfavourably upon 
 the national credit. In the case of Germany the want of facilities 
 for the raising of foreign loans has concealed the evils of an 
 erroneous system of finance, but those effects remain and they 
 have weakened Germany's effort during the war and still more 
 they will delay her recovery when the war is over 1 . 
 
 If follows, then, that the financing of a great war should be 
 conducted by a combination of immediate taxation and of bor- 
 rowing. But there still remains the determination of the ratio 
 which ought to subsist between the two sources of revenue, so 
 that they may be articulated as parts in a uniform plan. Upon 
 several grounds taxation should be increased to a sufficient 
 extent to meet the interest upon war loans. Those loans should 
 be issued (as they can be) in a manner which will not produce 
 inflation. This leads on to a doubtful point, namely, should new 
 revenue be sufficient to cover interest on the debt actually con- 
 tracted at the date of the Budget, or, in addition to that, to 
 provide interest for the further loans which will probably be 
 floated during the current financial year? Of these alternatives 
 the second is to be preferred. Next, should the Budget raise by 
 taxation a further sum sufficient to provide for a sinking fund 
 for the redemption of the debt? That is not necessary, and 
 would be in some respects undesirable. It would be better that 
 the excess of revenue which is raised by taxation, in addition to 
 the normal income and the charge for interest accrued and 
 accruing, should be devoted to extinguishing war costs, thereby 
 preventing the growth of debt. Is it possible to determine 
 to what extent it is advantageous to augment war taxation 
 beyond the necessary limit already prescribed ? Here very much 
 will depend upon the wealth of the country, the previous rate 
 of taxation, and how the nation in question, its territory and its 
 trade have been affected by hostilities. As regards Great Britain, 
 
 1 It is interesting to note that in the fonrth year of war both German 
 and Austrian public men have begun to admit, reluctantly, the superiority 
 of British financial methods, as for instance Dr Kuzyuski in the Weser 
 Zeitung, and Baron Plener in the Reichrath, both in October, 191 7.
 
 The Financial Burden of Today and of Tomorrow 63 
 
 in the present circumstances, it is the duty of the Chancellor of 
 the Exchequer to keep his finger upon the pulse of the country's 
 trade imposing new taxes and increasing old ones, when neces- 
 sary, until they begin to yield a balance of disadvantage by in- 
 juring trade, by diminished productiveness of the revenue and 
 by producing other evils. All taxes inflict some damage, and it 
 is a matter of the most delicate skill to forecast whether the 
 anticipated gain will outweigh the various fiscal and other incon- 
 veniences. Taxation should stop before these limits have been 
 reached; but, in my judgment it should be pushed upwards until 
 the verge of those limits has almost been touched. There is 
 another limit, though of less importance. During a war, such 
 as this, which makes great demands upon the human energies 
 of the country, it is needful to economise labour in the collecting 
 of taxes. Hence new and fairly productive imposts might be 
 temporarily undesirable through want of the labour which 
 would be required to collect them. 
 
 It is difficult, if not impossible, to translate the principles of 
 war-taxation, which have been outlined, into a concrete estimate 
 of the amount which ought to be raised by taxation 1 , say in 
 the financial year 1918-19. On the whole and subject to the 
 various conditions already indicated, it may be estimated that 
 900 2 millions should be aimed at, and even more, in that year. 
 The amount may seem formidable, but it must be borne in mind 
 that the real produce of taxation consists of the things which 
 the Government is able to obtain by use of the money it levies. 
 But the rise in prices has affected the quantity of these things 
 procurable from a given rate of taxation. As prices rise, in 
 order to keep up merely the same flow of munitions and supplies, 
 the nominal amount of taxation must rise roughly in proportion. 
 Therefore 900 millions does not go as far now as a smaller sum 
 a year ago. In July 1915 Professor Bastable estimated that 
 under emergency pressure and for a limited period 500 millions 
 
 1 Under this head there is included the so-called "non-tax" revenue. 
 
 * It is to be remembered this sum does not exhaust the " taxation " paid. 
 In addition there are all onerous rates. The sum of 900 millions mentioned 
 in the text is that which it is expected the Budget of April 22nd will realise 
 in a complete year.
 
 64 The Financial Burden of Today and of Tomorrow 
 
 per annum might be raised 1 . But by July 1917, owing to the 
 rise in prices, it would take on the average about 825 millions 
 to purchase the things obtainable at 500 millions in 1915 
 and at the prices of December 1917 about 890 millions 2 , so 
 that it follows that the estimate of Professor Bastable, which is 
 based on certain standard principles, has been adapted to the 
 alteration of prices and stiffened a little, on the one side to correct 
 some factors which scarcely received sufficient prominence 3 , and 
 on the other side in view of the deplorable extravagance which 
 is still to be observed and which, clearly, would be a suitable sub- 
 ject for further taxation, if it can be reached. Even if it should 
 prove possible to raise 900 millions by taxation in 1918-19, at 
 the present rate of expenditure over 2,000 millions must be 
 found in other ways. Allowing for the proceeds of sales of 
 securities and other credits abroad and for foreign loans, by far 
 the larger part of this sum must come from the savings of the 
 people. The money can be found in this way, but the economy 
 campaign must be prosecuted more vigorously and more con- 
 tinuously. In fact, all income which exceeds that required for 
 the vital needs of the recipient should not only be saved, but also 
 be lent immediately to the State. 
 
 1 Credit, Industry and the War, 1915, p. 244. 
 
 2 Considering the character of the disbursements of the Government, it 
 is possible that the full measure of the rise in prices has not been felt by it. 
 If so, the sum required to purchase the things and pay the services (which 
 would have cost 500 millions in 1915) would be less than the amount stated 
 in the text. 
 
 a It seems to me, in view of later experience, that Professor Bastable may 
 have under-estimated the National Dividend in 191 5.
 
 CONSCRIPTION OR PROSCRIPTION 
 OF CAPITAL
 
 II y a plusieurs grands Docteurs en matieres d'imposts, qui scavent 
 
 beaucoup de moyens de faire fonds aux finances, mais ils n'ont jamais 
 
 eu le vraye science d'honneur, n'y la prudence politique. 
 
 Bodin.
 
 CONSCRIPTION OR PROSCRIPTION 
 OF CAPITAL 
 
 IN the previous argument the general conclusion has been 
 that in war finance the balance of advantage remains upon 
 the side of a judicious combination of taxes and loans, where the 
 ratio between them is determined upon the principles which have 
 been established. In that enquiry full consideration has been 
 given to many schemes which aim in different ways at augment- 
 ing the amount to be obtained from taxation. These plans are 
 often so constructed as to point in two different directions. On 
 the one side they may be directed towards raising the greater 
 part of war expenditure by taxation while the war is in progress; 
 or, on the other side, they may advocate measures for extin- 
 guishing a part of the debt, which the war will leave behind it, 
 by some special tax or levy designed for this purpose. It follows 
 that schemes of the latter type will require separate examination 
 before any attempt is made to investigate the conditions which 
 may be expected to govern finance in the early years of peace, 
 since a large part of the revenue (which will then be required) 
 will depend to a large extent upon the amount of debt out- 
 standing, and consequently a reduction in that total would react 
 both on the annual charge for interest and redemption. 
 
 The external form in which the current proposals of this type 
 have been expressed has been determined by the operation of 
 the Military Service Acts. Thus there are many references to 
 Conscription of Wealth, Conscription of Income and Conscrip- 
 tion of Capital. The names are new, but the idea is very old. 
 During War all schemes for meeting the whole cost within the 
 year might be made topical by being described as a Conscription 
 of Wealth, while the compulsory reduction of debt upon a great 
 
 5—2
 
 68 Conscription or Proscription of Capital 
 
 scale after the end of a war has been the goal of many ingenious 
 schemes. One of the earliest and most thoroughgoing of these 
 was drawn up by Archibald Hutcheson, just two hundred years 
 ago. In addition to a plan for redemption of the land tax, he 
 proposed that one-tenth part of the National Debt should be 
 cancelled or, as he euphemistically termed it, "remitted," like- 
 wise one-tenth part of all other net personal property should be 
 taken from the owners and devoted to the repayment of debt, 
 also one-tenth of those incomes, now termed "earned," should 
 be collected, annually, and devoted to the purchase of Govern- 
 ment stock 1 . Thus the proposal amounted to a levy of 10 per 
 cent, upon the total value of all property together with a like 
 percentage assessed annually upon salaries and perquisites. The 
 proposals of Asgill and Barbier of the same period were based 
 upon methods of conversion of debt into notes, upon the analogy 
 of some of the operations of John Law. These plans, if adopted, 
 would have caused very great inflation. In 1750 Hooke pro- 
 posed a less drastic scheme which aimed at a large ultimate 
 reduction of debt by a voluntary conversion into annuities 2 . 
 After the Napoleonic Wars a general contribution or general 
 assessment was proposed from time to time, but Ricardo urged 
 that there was a precedent condition, namely that the country 
 must be "resolutelv determined" not to create new debt under 
 any circumstances. In that case he approved of a tax on pro- 
 perty for paying off the debt once for all 3 . Again, after the 
 Franco-Prussian War, Menier propounded his tax upon fixed 
 capital in order to readjust the finances of France. So far from 
 obtaining support he was described as a revolutionary, his 
 articles were refused by the leading economic journal, his books 
 were not allowed to be sold on the public bookstalls, while he 
 felt most of all the taunt — "De quoi se mele-t-il? Ou il reste 
 done a faire son chocolat 4 ." 
 
 What was considered revolutionary in the seventies has now 
 
 1 A. Hutcheson, Collection of Treatises, 1720, p. 27. 
 
 2 A. Hooke, Essay on the National Debt, 1750, p. 44. 
 
 3 Ricardo, "Essay on the Funding System," in Works, 1852, p. 545. 
 
 4 Menier, L'Impot sur le Capital, 1874, pp. 25, 26, 473-485.
 
 Conscription or Proscription of Capital 69 
 
 become a commonplace of Labour oratory and is advocated in 
 other quarters with considerable persistency. That advocacy of 
 drawing upon wealth in some way in order to meet the material 
 cost of war originates from an ideal which is no ignoble one. 
 Life has been given without stint, and it is natural to expect the 
 lesser sacrifice of money. Hence it is asked "if life be conscript- 
 ed, why not wealth also? " The question is pertinent, and the 
 answer to it requires to be made as precise as possible. While 
 war is in progress, the State is entitled to demand the service of 
 the people and of their wealth in that form which is judged best 
 for the preservation of the country's permanent interests. Faced 
 by the supreme need for the maintenance of free institutions, 
 there can be no doubt that both the effort and the material 
 resources of the citizens must be directed and controlled by 
 the State in order to accomplish the most vital object that 
 has arisen in the national life for a century. Each has func- 
 tions which it can discharge in respect to the waging of war, 
 and the claim upon each for its own duty is of equal force. 
 Further, in so far as there can be any substitution of one for 
 the other, it is unquestionable that material resources should 
 be employed, and if need be sacrificed, in order that life may be 
 conserved. 
 
 So far there can be little difference of opinion ; but, as Epicte- 
 tus pointed out long ago the difficulty is in the application, many 
 evils arising from using general principles in a manner which 
 does not fit particular cases 1 . Conscription both of service and 
 of wealth is exceedingly partial. As regards the former it does 
 not apply to all those, who by reason of age, sex or deficient 
 physique are not considered capable of rendering efficient 
 military service. Thus, since personal service is of varied charac- 
 ter, the State claims that which it requires for the defence of the 
 country. Further, while it demands that service, it does not take it 
 without compensation ; since, though soldiers' pay, allowances and 
 pensions remain inadequate, the principle of an economic con- 
 sideration is admitted. Similarly, various forms of wealth, such 
 
 1 ToOto yoLp £<tti rb afriov roh avdpwirois ■na.vruiv t£ji> kolkQiv , rb rhs irpoX-fpf/eis 
 ras Koivhs fii) dijvajdai i(papp.6$eiv rols iirl /^poi/s. Diss. IV. 42.
 
 70 Conscription or Proscription of Capital 
 
 as factories, ships and hotels for government offices have been 
 taken over or "conscripted," sometimes upon no more defined 
 method than an ex gratia payment. From the point of view of 
 waging war the abstract term "Wealth" is likely to mislead. 
 Certain kinds of wealth are of use, others are not. The Govern- 
 ment has "conscripted" property valued at many hundreds of 
 millions, giving compensation roughly upon the approximate 
 basis of pre-war earnings. There is a possibility of misappre- 
 hension at this point. Conscription of service does not necessarily 
 mean conscription of life. The State restricts personal liberty 
 by demanding the services of perhaps 15 per cent, of the 
 population for which a compensation is given, which may be 
 more than the person was earning previously; but, even when 
 all allowances are considered, is more often less. The soldier runs 
 various degrees of risk of loss of life or disablement through 
 wounds or disease according to the arm of the service to which 
 he belongs. Thus the demand upon him is not for his life, but 
 to risk it, if his duty requires. Some of those who speak of con- 
 scription of wealth seem disposed to use this term in the sense 
 that all the wealth required for carrying on war should be taken 
 by the State without compensation and that there should be no 
 return of it to the owners. The risk, as affecting wealth, would 
 be arranged as in the plot of David, so that in the report of "all 
 the things concerning the war," there would be the sinister con- 
 clusion "and thy servant Uriah the Hittite is dead also." 
 
 If it be assumed that the State decided to apply the principle 
 of conscription both to services and wealth upon an equality, 
 as far as the nature of each permits, it may not be wholly unin- 
 structive to endeavour to develop the working of this principle 
 in practice. All services of every kind would come under a new 
 Act combining military and national service. Everyone would 
 be allocated his or her service as judged best by the monster 
 Department concerned and at rates of pay which would certainly 
 not be more and probably should be less than those for corre- 
 sponding ranks in the forces when all allowances were included 
 in each case. All those drawing income from investments would, 
 as it were, be deemed to be minors. The whole of their unearned
 
 Conscription or Proscription of Capital 7 1 
 
 incomes would be devoted to paying the expenses of the war, 
 except in such cases as the recipients were unable through 
 reasons of ill-health or age to perform any useful work, when 
 they would receive an allowance for their support. As affecting 
 earned incomes the same principle would mean that the worker, 
 who before the war was unskilled and was making over £800 a year 
 in 1917 1 , would be reduced to about 10 per cent, of that amount 
 (say from £80 or £90) together with his billeting allowance. Simi- 
 larly the man who had earned £8,000 a year would obtain, for 
 the period of the war, whatever his service was considered worth. 
 It might be private's pay or that of a commissioned officer, not 
 according to his capacities in peace time but as these were 
 valuable or the reverse in war. This is the principle of con- 
 scription developed logically. It is in fact the basis of that con- 
 scription of income which is advocated by Professor Sprague 2 ; 
 and in a less precise form, but with the same general purpose, by 
 Mr Hartley Withers 3 . There is something to be said for this 
 scheme, particularly if it had been adopted early in the war. 
 It would, or at least it should, have prevented those bonuses to 
 labour and capital which have been reprobated by Professor 
 Nicholson 4 . When, however, the magnitude of the task is con- 
 sidered, the ill success in the utilisation of man-power upon a 
 smaller scale and the growth of public extravagance till "it has 
 become a habit 5 ," one must hesitate before giving any support 
 to a scheme which would almost infallibly smash the straining 
 machine of Government. 
 
 In an address to the staff College at Camberley in 191 1 Sir 
 William Robertson drew attention to one of the psychological 
 reactions of peace upon preparations for war. He said "the 
 longer peace continues, the more difficult it is to prepare for war, 
 for the usages of peace have a habit of pushing themselves more 
 and more into prominence, until they assume the appearance of 
 
 1 Commission of Enquiry into Industrial Unrest, No. 4 Division, Report 
 (Cd. 8665). 
 
 2 Economic Journal, xxvu. pp. 1-15. 
 
 3 Our Money and the State, 1917, p. 25, Economist, Dec. 15. 1917- 
 
 4 J. S. Nicholson, War Finance, 1917, pp. xx, 395-399. 
 6 Ibid. p. 435.
 
 72 Conscription or Proscription of Capital 
 
 war conditions and begin to be regarded as such 1 ." As the 
 war becomes protracted the reverse tendency has begun to 
 establish itself; and people, almost insensibly, grow accustomed 
 to think of war conditions as if they were permanent. Amongst 
 men of alert mind there is needed, in the present situation, a 
 species of "double consciousness," upon the one side to strive 
 earnestly for the maximum effort to give effect to the national 
 ideals in the present ; and, upon the other side, to keep steadily in 
 view the resumption of life upon the usual conditions of peace in 
 the future. Thus, at the same time, they must act abnormally and 
 think normally. In such difficult conditions the view expressed 
 in the previous course of lectures, namely that the aim should be 
 the minimum divergence from the organisation of life in peace 
 time, which will secure full efficiency for military effort, has 
 become strengthened and confirmed 2 . The difficulties in the 
 demobilisation of the army and the diversion of labour from the 
 work of war to that of peace will be sufficiently great without 
 adding to these the enormous task of the vaster and more com- 
 plicated demobilisation of the whole of the remainder of the 
 population, and the simultaneous attempt to wind up the great 
 national trust which would have been constituted to hold the 
 property and wealth conscripted. The result would be that it 
 would be discovered that the greater part of the material 
 productive power of the nation had fallen into Chancery : 
 
 Like money by the Druids borrowed 
 In the other world to be restored 3 . 
 
 Industry and commerce would be hung up in re-starting after 
 peace to an extent which would be both protracted and dangerous. 
 Analysis proves that this conception, when developed, would 
 be impracticable. But, at least according to the view of 
 Matthew Arnold, we are not distinguished as a nation for con- 
 sistency 4 ; and, it may be, that the idea may be applicable in 
 part, though not as a whole. In other words, while the complete 
 
 1 G. A. Leash, Sir William Robertson, p. 104. 
 
 2 W. R. Scott, Economic Problems, First Series, pp. 34-35. 
 
 3 S. Butler, Hudibras, Part in, 975. 
 
 4 M. Arnold, Essays in Criticism, 1884, p. 12.
 
 Conscription or Proscription of Capital 73 
 
 transformation of the distribution of wealth, as an emergency 
 measure for the period of the war, would result in more loss than 
 gain, it may be worth enquiring whether some temporary modi- 
 fications during that period may be less disadvantageous. This 
 it will be observed is a much more humble enquiry. The vague, 
 if perhaps magnificent, idea of an omniscient State — the war- 
 time trustee for all wealth which it assigns to the population it 
 employs — must be abandoned; and finding the Leviathan of 
 Hobbes inert, we must content ourselves with the advice of the 
 sage in Johnson's Rasselas that "the memory of mischief is no 
 desirable fame 1 ." There may be temporary and less ambitious 
 readjustments of spending power amongst the members of the 
 community in which the element of national disadvantage will 
 be a minimum, and there will be considerable advantages. 
 Under the method of war economy, which is being followed, 
 wealth is being made to play its part in the contest by the 
 Government taking over for the purposes of the war certain 
 things in which it has been embodied, such as railways, ships 
 and buildings, upon terms that afford a smaller compensation to 
 the owner than if he had remained free to use these things for 
 his own interest. Also, taxation upon all wealth, which yields an 
 income above a small minimum, has been more than quadrupled; 
 and in addition, Excess Profits Duty takes away four-fifths of all 
 earnings of businesses in excess of the pre-war standard. There 
 is a large measure of conscription of wealth in these arrangements. 
 But as compared with conscription of men there is a difference. 
 The man runs risk through his military service, wealth does not 
 through the service which it renders either in being used tem- 
 porarily by the Government or in paying taxation. It seems not 
 unreasonable that, as suggested by Professor Pigou 2 , those who 
 run no personal risk should pay extra taxation, in addition to 
 the difference in the rate of Income Tax which has already been 
 conceded to officers and men serving in the Forces. A tax of this 
 type is already levied in Italy. What should be the rate of the 
 suggested tax? Upon the basis now outlined, it would follow 
 
 1 S. Johnson, Rasselas, 1823, p. 109. 
 
 2 The Economist, Nov. 15, 1916.
 
 74 Conscription or Proscription of Capital 
 
 that its annual amount ought to be such a sum as would be re- 
 quired to insure the excess of any income above £130 for a period 
 of one year. The successful defence of the country has in fact 
 insured the incomes of its inhabitants from a grave risk, and it 
 seems to be equitable that those, who undergo no personal 
 danger, should be compelled to contribute to this extent, in 
 addition to their other taxes. This view, it may be observed, 
 is not what is called by Professor Seligman "the insurance pre- 
 mium theory of taxation 1 ." It is rather the expression of a 
 peculiarity of life during a period of hostilities, and is designed 
 to recognise differences in personal risks. Where for instance in 
 munitions-making there is danger of injury comparable to that 
 upon general service, or if the inhabitants of a particular place 
 suffered very many casualties from bombardment or attacks 
 from the air, this special tax might be remitted. 
 
 The revenue derived from taxation would leave a large margin 
 to be found by borrowing. The amount of economy which is 
 required by those who provide the loans represents in the 
 aggregate a great sacrifice. But the misfortune during three 
 and a half years of war has been that it was most unequally dis- 
 tributed. Very great numbers of the people have begun to 
 understand what the older economists meant when they de- 
 scribed saving as "abstinence." The "waiting" which involves 
 no more than the deferring of the satisfaction to be obtained 
 from the spending of a part of an income, is intensified by the 
 sacrifice of much that in happier days was considered almost a 
 necessary of a moderately complete life. On the other hand, 
 while many with stationary or declining incomes have managed 
 to save, others who have obtained very great increases have 
 certainly not saved in proportion; many, it is to be feared, have 
 not saved at all. Moreover, saving as such does not exhaust the 
 responsibility of the citizen. There are tempting opportunities 
 for investment open to those who have opportunities of judging 
 and can afford to wait. But wealth used in this way, is shirking 
 the responsibility of its service in the conduct of the war. 
 There is much to be said in favour of an act of the New Zealand 
 1 E. R. Seligman, Progressive Taxation, 1908, pp. 165, 166.
 
 Conscription or Proscription of Capital 7 5 
 
 Parliament which established a quota for subscription to war 
 loans under a penalty. Every tax payer with an income not less 
 than £700 a year was required to subscribe to the loan of 1916 an 
 amount equal to one and a half times the total of his land tax and 
 income tax, and to the loan of 1917 three times his payments to 
 those taxes. Persons who failed to subscribe for the necessary 
 amount of stock were liable for double the land and income 
 taxes for one year 1 . A measure of this kind, with the New Zea- 
 land provision for appeal in cases of hardship and a much lower 
 limit of income subjected to its provisions, would be advan- 
 tageous in this country. It would also be beneficial in forcing 
 payers of income tax to disclose their holdings of war loan and 
 would facilitate the collection of this tax upon the later issues, 
 the interest upon which is paid in full. There is also an import- 
 ant question of principle involved. And here it is necessary to 
 draw a fine distinction. The penal tax is not required in order 
 to provide sufficient subscriptions to loans. In one way or another 
 these will be furnished. But such a tax would be convenient as 
 a species of fine upon unpatriotic expenditure. Those who have 
 sufficient incomes to invest in war loans, but refuse to do so 2 , 
 are doing injury to the nation, if they spend the sums which 
 could and should have been saved, either upon superfluities or an 
 excessive quantity of necessaries. They, in fact, are diverting 
 labour from the essential needs of the time. In addition to the 
 negative injury to the national cause of withholding the "sinews 
 of war," these persons are doing positive damage by maintaining 
 the diversion of services from war work to purely selfish ends. 
 Borrowing by the State, with some degree of compulsion, 
 has been advocated at a lower rate than what the market rate 
 may be supposed to be. To some extent this principle has 
 already been applied in practice. Investments outside the King- 
 dom have been reduced to a very large extent ; and, in addi- 
 tion, the Bank of England established in January a differential 
 
 1 Act of New Zealand Parliament, Geo. V, No. 9, § 40. 
 
 2 Capital expended upon works of national importance or used to supply 
 the defect of working capital caused by delay in payments by Government 
 departments, should be treated as invested in war loan.
 
 y6 Conscription or Proscription of Capital 
 
 rate as between home and foreign money, by which the latter is 
 favoured by 29 per cent. The terms for Government loans in 
 this country average less than those raised abroad; and while 
 discounts on their issue and a premium upon redemption should 
 be avoided as far as possible, it seems that further compulsion 
 should not be applied until the saving habit is more firmly 
 established. As the burden of taxation increases, the difficulty 
 of saving will grow, and reduction in the rate of interest on new 
 loans can only be attempted with the greatest caution. 
 
 Conscription of Wealth appears also to be used in another 
 sense, as applying to the more durable things in which it is 
 embodied. That view rests upon the error of taking figures 
 for things. Granting that the wealth of the country in 1914 was 
 14,300 millions, it at first seems easy to suggest an arrangement 
 by which the State will take the necessary amount for carrying 
 on the war 1 . But the prices upon which this valuation was 
 based have changed since 1914, and they would vary to an 
 immense extent — and that unfortunately in a downward direc- 
 tion — if any attempt were made to effect a compulsory change 
 of ownership from individuals to the State. If it be assumed that 
 the Government would seize one-fourth of the wealth of the 
 country, the widespread depreciation in values, which would 
 ensue, would result, in terms of things, in the taking of perhaps 
 twice or thrice as much. But this is by no means all. It is 
 extraordinary how little of the great sum of 14,300 millions is in 
 reality available for carrying on the war to any larger extent 
 than at present. At the prices of 1914 one-third consisted of 
 land, buildings and farming capital, and as much as one half 
 of a variety of items some of which are used by the Government 
 already as fully as if it owned them and others are not suitable 
 for the purpose. These classes comprise the value of the National 
 Debt owned in Great Britain, the railways and businesses of 
 the country, mines, Government and municipal property. 
 There remains, roughly, one-sixth which comprised investments 
 abroad and movable property, such as furniture. It will thus 
 be observed that immediately before the war five-sixths of the 
 
 1 J. C. Stamp, British Incomes and Property, 1916, pp. 4°4> 4°5-
 
 Conscription or Proscription of Capital yy 
 
 National Wealth was in the form of fixed capital and other 
 property in this country. Suppose thaf the Government were 
 unwise enough to claim a percentage of its value, the question 
 of realisation would arise. Since the levy would be universal, 
 it would be difficult, if not impossible, to find purchasers in 
 this country, since those who had free funds available would 
 require them to pay their own share of the levy. There was one 
 instance of a great sale of this kind in our history which should 
 be a sufficient warning. During the financial embarrassments 
 of the Long Parliament, the Crown Lands and other forfeited 
 properties were sold by the State. The prices realised repre- 
 sented about 25 per cent, of the values before 1640, and in 
 some cases as little as 10 per cent. 1 Such a proposal would in 
 fact result in the State being forced to sell the property it 
 obtained at the rates of a sale of a bankrupt's stock. There is 
 the alternative of selling the property received in payment of 
 the proposed tax as far as possible abroad. In the case of joint- 
 stock companies, it might be possible to make a market for their 
 shares upon foreign stock exchanges. In that case, as regards 
 the future of commerce, a mortgage would be imposed upon the 
 productive power of the country in the form of the dividends 
 which it would be necessary to export. Clearly, if the national 
 freehold must be encumbered, it is better from many points of 
 view, that the creditors should be fellow subjects rather than 
 foreigners. 
 
 Accordingly it appears that, as regards about five-sixths of 
 the National Wealth, the difficulties of realisation are insuper- 
 able. There is the remaining one-sixth. Its chief constituents 
 were capital invested abroad and household effects. The former 
 can be sold without difficulty, but much of it has been marketed 
 abroad already. Possibly one half of the valuation of the latter 
 might be realised, though with considerable loss. The difficulty 
 would be to secure particulars of the effects in excess of the 
 necessary minimum, otherwise there is something to be said 
 for a levy of this kind. Costly movables, such as pictures, 
 
 1 W. R. Scott, Constitution and Finance of Joint Stock Companies to 1720, 
 1912, 1. p. 246.
 
 J 8 Conscription or Proscription of Capital 
 
 statuary, plate and jewels represent the keeping of wealth in 
 an unproductive form; and, while some of these have a certain 
 educational value, in circumstances of financial pressure, there 
 would be wisdom in reducing by exportation a stock of such 
 things, which, though moderate in times of prosperity, may be 
 excessive in altered circumstances. The case of foreign invest- 
 ments is different. From the standpoint of war finance these had 
 a high value in correcting the foreign exchanges. They were 
 "conscripted" in the sense that the State demanded the owner- 
 ship or the use of them under a heavy penalty, but liberal com- 
 pensation was given. The taking of such investments without 
 compensation would have been inequitable as discriminating 
 severely against the very securities which were capable of per- 
 forming a valuable national service. 
 
 Yet another form of the plea for conscription of wealth is the 
 suggested levy upon Capital which attracted some attention in 
 1917 and the early part of the present year. This scheme differs 
 from that just described in so far as it may be taken to exclude 
 some comparatively durable things which do not produce in- 
 come. If applied in practice, it would tend to encourage the non- 
 productive use of resources, and to that extent would be pre- 
 judicial to industrial recuperation on the return of peace, when 
 Capital will be greatly needed 1 . Also there is the obvious in- 
 equality that those who have responded to their duty in saving, 
 in order to provide funds for the prosecution of the war, would 
 be penalised, as compared with others whose circumstances were 
 similar but who had selfishly turned a deaf ear to the nation's 
 need. Thus in very many cases this scheme would be a direct 
 bonus upon unpatriotic conduct, and it would act as a deterrent 
 towards accumulation in the future besides, probably, reacting 
 upon the revenue by causing Capital to be placed outside the 
 country and concealed. Without anticipating the enquiry still 
 to be made concerning future taxation, it will be apparent that 
 very considerable dependence must be placed upon direct tax- 
 ation, and particularly upon Income Tax. The yield of this tax 
 is peculiarly sensitive to the feelings of the tax-payers, and any 
 
 1 W. R. Scott, Economic Problems, First Series, p. 94.
 
 Consci'iption or Proscription of Capital 79 
 
 action which would leave a sense of injury amongst large bodies 
 of those affected would, almost inevitably, produce that type 
 of casuistry which professes to justify evasions 1 . 
 
 Some speakers and writers, who have given insufficient con- 
 sideration to the consequences of their schemes, suggest an ex- 
 tinction of a part of the national debt without compensation. 
 That would be, as far as all experience is any guide, the one 
 infallible method of delaying indefinitely the recovery of the 
 country after the war. In times of great trial in the past it was 
 always the care of our ancestors to maintain "the inviolability 
 of the public faith." Defoe described England in 1720 "as poor 
 in being encumbered in debt, speaking of the publick state of 
 things as a government, and yet with all this, while the publick 
 credit remains, we can never be said to be poor 2 ." All those who 
 took note of projects for a partial repudiation of the debt during 
 the Napoleonic wars speak of them with scorn and contempt. 
 Hamilton says "the extent of distress attending a public bank- 
 ruptcy, whether brought on systematically or overtaking us as 
 the necessary consequence of our being overwhelmed with the 
 magnitude of our debt, would be so great ; the present overthrow 
 of everything valuable so compleat; and their future extrication 
 so uncertain, that we can hardly conceive a greater public evil 3 ." 
 Coleridge, too, shows in a passage of great power that it is not to 
 the interest of merchants, farmers, or labourers to refuse to pay 
 interest upon the debt, and he concludes "least of all could it be 
 the wish of the lovers of liberty, which must needs perish, or be 
 suspended, either by the horrors of anarchy or by the absolute 
 power with which the government must be invested in order to 
 prevent them. In short, with the exception of men desperate 
 from guilt or debt, or mad with the blackest ambition, there is 
 no class or description of men who can have the least interest in 
 producing or permitting a national bankruptcy 4 ." 
 
 In these views the close relations between taxes upon income 
 
 1 E. R. Seligman, Shifting and Incidence of Taxation, 1910, p. 328; 
 Essays in Taxation, 1895, p. 31. 
 
 2 [D. Defoe], The Chimera, 1720, pp. 7, 8. 
 
 s R. Hamilton, National Debt, 1813, pp. 33, 34. 
 4 S. T. Coleridge, The Friend, Misc. 1, § 1, Essay 7.
 
 80 Conscription or Proscription of Capital 
 
 and upon Capital must not be overlooked. A tax imposed upon 
 Capital may fall upon income, and conversely 1 . A heavy tax 
 upon income may be largely paid out of Capital, a light tax upon 
 Capital may be met, to a great extent, from income. In addition 
 to the magnitude of the tax, the attitude of mind of the nation 
 taxed must be taken into account. A saving people will make 
 extraordinary sacrifices in order that each individual may keep 
 his capital intact; while, on the contrary, where the general 
 habit is that of profusion many will resort to their capital in 
 order to meet taxes upon income. From this point of view the 
 question resolves itself into the weight of taxes in excess of what 
 may be described as the necessary minimum, namely that re- 
 quired for civil government and for interest upon debt. A great 
 increase beyond that amount, for reasons given in the previous 
 lecture, would be likely to produce a balance of disadvantage. 
 When the consequences of the conscription analogy are de- 
 veloped logically, they lead to some curious results. Is a capital 
 levy to be applied to all capital? If so, the capital of those, who 
 have served on the sea or in the field, would be included, and the 
 somewhat confused basis of the scheme is wrecked. For capital 
 is to be conscripted on the ground that its owners have not been 
 subjected to the same risks as many other persons. If that 
 capital were excluded from the levy, the yield would be greatly 
 reduced. But in practice such exclusion would be difficult. The 
 soldier, who owns no property but who has a large insurance 
 upon his life, would be entitled in equity to the exemption of this 
 amount from the special tax, if such exemption were granted to 
 members and ex-members of the forces, but it would be exceed- 
 ingly difficult for insurance offices to differentiate between 
 service and civilian policies in order to obtain a rebate of the 
 capital levy upon the former. Further, the men who have 
 served would be subjected to a further hardship in so far as 
 many have "reasonable expectations" of inheriting from their 
 families. It seems hard measure to mete out to these men, 
 that while they are risking their lives or immediately they 
 return, their country shows its gratitude by imposing a dif- 
 
 1 C. F. Bastable, Public Finance, 1903, pp. 290, 673.
 
 Conscription or Proscription of Capital 8 1 
 
 ferential tax either upon their property or that to which they 
 are entitled to succeed. Thus the argument from equity, when 
 fully developed, leads to the paradox that in the end but little 
 wealth would remain to which the tax could be justly ap- 
 plied — farturiunt montes, nascitur ridiculus mus. Indeed, upon 
 principles of equity, any Government which proposed a levy 
 upon the capital of men who had served would be in an alto- 
 gether untenable position. Less merciful than the highwayman 
 it would demand not a man's money or his life, but both his 
 life and his money. 
 
 There is a more serious aspect of the question — namely 
 assuming that a levy on Capital were practicable — what is the 
 capital that should contribute? This is far from being the simple 
 matter which it appears. In this discussion Capital is commonly 
 confined to material capital only, but there is immaterial Capital 
 also, and it seems equitable that this also should be called on 
 to bear a share of special taxation adapted to its peculiar con- 
 ditions. Mill has discussed this problem in a striking passage — 
 " If property bore the whole interest of the debt, property might, 
 with great advantage to itself, pay it off; since this would be 
 merely surrendering to a creditor the principal sum, the whole 
 annual proceeds of which were already his by law; and would 
 be equivalent to what a land-owner does when he sells part of 
 his estate to free the remainder from a mortgage. But property, 
 it need hardly be said, does not pay, and cannot be made to pay, 
 the whole interest of the debt. Some indeed affirm that it can, 
 on the plea that the existing generation is only bound to pay 
 the debts of its predecessors from the assets it has received from 
 them 1 , and not from the produce of its own industry. But has 
 no one received anything from previous generations except those 
 
 1 Mill had the debt of the Napoleonic wars in mind when he wrote. He 
 however takes no account of the effect in a reduction in the rate of interest 
 upon Government debt. Thus the tendency of redeeming the -'mortgage" 
 of taxation is towards that mortgage being capitalised at the proportion 
 of the annual revenue required for the service of the debt at the rate of 
 interest paid during war; whereas the real rate would be the present value 
 of a charge at 5 per cent, for x years, falling say to 4 per cent, after y years 
 and perhaps to 3 per cent, after z years. 
 
 S. 6
 
 82 Conscription or Proscription of Capital 
 
 who have succeeded to property? Is the whole difference be- 
 tween the earth as it is, with its clearings and improvements, its 
 roads and canals, its towns and manufactories, and the earth as it 
 was when the first human being set foot on it, of no benefit to any 
 but those who are called the owners of the soil? Is the capital 
 accumulated by the labour and abstinence of all former genera- 
 tions of no advantage to any but those who have succeeded to 
 the legal ownership of part of it? And have we not inherited a 
 mass of acquired knowledge, both scientific and empirical, due 
 to the sagacity and industry of those who preceded us, the 
 benefits of which are the common wealth of all 1 ? " Mill's queries 
 have become more pertinent through the lapse of time since he 
 wrote. The industrial system, with all its faults, provides an 
 instrument which men of energy can use so as to make a surplus 
 above their needs. Similarly, the advantages of free or sub- 
 sidised education, both in the schools or the Universities, con- 
 stitute an essential instrument for the production of immaterial 
 wealth. Considerable incomes, which depend upon these aids, 
 are not strictly speaking wholly earned. Theoretically, they are 
 separable into two parts, one of which consists of the proportion 
 assignable to the aid of immaterial capital; and, in principle, 
 a capital levy, if made, should apply to this as well as to material 
 capital. From this point of view, the proposal to tax capital is 
 subject to the same exception in the favour of the critic as was 
 noted by Samuel Butler in regard to self love : 
 
 And though all cry down self, none means 
 His own self in a literal sense 2 . 
 
 Finally there is a variant of the Capital levy which calls for 
 separate consideration. This is the "heroic measure" of a 
 Special War Levy as "an entirely exceptional expedient" soon 
 after the termination of the war for the extinction of a part of the 
 debt. It is proposed that all persons owning £100 worth of pro- 
 perty should "be deemed to be dead," and would be liable for 
 this Special Levy of 10 per cent, upon the total value of their 
 property. The tax would be collected in equal instalments of 
 
 1 J. S. Mill, Political Economy, v. 7, § 2. 
 
 2 S. Butler, Hudibras, Pt. n. 459.
 
 Conscription or Proscription of Capital 83 
 
 1 per cent, per annum for ten years, and, combined with a 
 special poll tax of 10s. per head for the same period, applicable 
 to all persons earning over 30s. per week, is expected to realise 
 1,200 millions 1 . Incidentally it is unlikely, for the reasons 
 already stated, that the proposed taxes would produce the 
 estimated amount. An objectionable feature is that there is no 
 provision for reaching those who, having earned moderate or 
 considerable incomes, have refused to save and thus have no 
 property upon which the Special War Levy would fall. Even, 
 with special tenderness to the salaried classes, the "parapher- 
 nalia" of the house (e.g., furniture, clothes, etc.) up to "perhaps 
 a maximum of one or two thousand pounds " is excepted. This 
 produces the following grotesque result. A and B have each 
 an income of £2,000 a year. A is a professional man with 
 a salary of this amount. He has no savings and his furniture 
 is less than amount exempted from the levy. B realised his 
 property and invested it in War Loans, adding considerable 
 amounts as the result of strict self-denial during the War. Under 
 this scheme the unfortunate B is liable to additional taxation 
 of £4,000. What might A be expected to pay in view of the 
 immaterial capital embodied in him and also through his failure 
 in contributing to the needs of the State? Would £200 a year 
 be too much during the ten years, making £2,000 against the 
 £4,000 demanded from B? It is scarcely to be credited that, as 
 far as the plan has been disclosed, against B's contribution of 
 £4,000, A is required to pay only £5 in instalments spread over 
 ten years. In other words B is asked to surrender approximately 
 £400 a year — while A magnanimously contributes towards the 
 reduction of the National Debt the cost of a half penny paper 
 during five days a week! 
 
 Nor is this all. In practice the Special War Levy resolves 
 itself into a differential income tax upon unearned income with 
 a fringe covering such capital as does not yield interest or 
 dividend. The latter may easily be overestimated. For instance 
 all the railway stocks (Debenture, Preference and Ordinary) of 
 
 1 How to pay for the War (ed. S. Webb), 1917, pp. 263-5; Great Britain 
 After the War, p. 78. 
 
 6—2
 
 84 Conscription or Proscription of Capital 
 
 the railways of the Kingdom, which pay no dividends and 
 are quoted upon the London Stock Exchange, are nominally 
 close on 40 millions, but their market value at the making up 
 prices of January, 1918, was less than two millions. Dividendless 
 securities are held in the expectation of income at a future date. 
 If such hopes are persistently disappointed, their value declines 
 till it becomes little more than nominal. 
 
 The proposed Capital Special War Levy is superimposed upon 
 an income tax which inevitably must be high. No doubt, if 
 financial methods were sound, taxation could be reduced to the 
 extent that debt was extinguished, thereby diminishing the sums 
 required for interest. But that benefit, which cannot be accepted 
 without further enquiry, would be secured at the expense of 
 those who owned capital at the time the Levy was established, 
 and it would free pro tanto the large fortunes which will no doubt 
 be made as a result of the activity in business arising out of 
 restoration of the damages of war, as well as high salaries which 
 will continue to be distributed. As regards businesses of all 
 kinds the consequences would be unfortunate, for the tendency 
 would be to deplete working capital at a time when practical 
 wisdom urges its increase in order to meet the severe foreign 
 competition which will have to be met in the attempt to regain 
 overseas markets. In fact industry, upon which our national 
 recovery will depend, is to be severely handicapped in the 
 interests of the professional and salaried classes. 
 
 Further the Levy would discriminate against the formation 
 of new capital. Dr Marshall has sounded a warning against 
 heavy taxes on Capital. He points out that "ethical considera- 
 tions and those of high policy make alike for the preservation 
 of the Capital that is needed to sustain the strength of a country 
 in peace and when assailed by hostile aggression." He adds that 
 "taxes on Capital must be handled with caution 1 ." Whatever 
 solemn declarations were made by Ministers (who were suffi- 
 ciently unwise to introduce such a tax) as to its unique and 
 exceptional character would be received with contemptuous in- 
 credulity by those who smarted under what they felt was a gross 
 
 1 After the War Problems (ed. W. H. Dawson), 191 7, pp. 322, 323.
 
 Conscription or Proscription of Capital 8 5 
 
 and palpable injustice. They would feel that an expedient of 
 this type might, and probably would be repeated in the future. 
 Accordingly, the incentive to accumulation would be checked 
 and the rate of interest would be higher by reason of this Levy. 
 It is true that there is another alternative. The State might 
 elect to provide Capital for industry, but this would mean that 
 it would have to raise it by taxation, either open or disguised. 
 The latter would arise, if the Government carried on industries 
 or performed various services (such, for instance, as providing 
 transport on the sea or by rail or possibly by air) and charged 
 higher rates than were necessary, in order to accumulate a 
 surplus for capital outlay. In that case, however, the method 
 devised, to reduce taxation, would end in increasing it. 
 
 In principle and in an ideal world there is much to be said 
 for a great redemption of debt as soon as possible — in the actual 
 circumstances after peace there will be little or nothing in its 
 favour outside a severely limited sinking fund. The extrava- 
 gance of our war finance has been notorious, and until it has 
 experienced a radical reformation, the magnitude of the debt 
 constitutes a certain check and an incentive towards public 
 economy. Almost all writers upon public finance unite in de- 
 ploring the tendency towards free spending of public funds by 
 Government Departments. The press of a time of war and the 
 creation of great numbers of officials have made extravagance 
 inevitable. Further, it may be questioned whether a certain 
 amount of responsibility does not rest upon the whole com- 
 munity. Even in time of war, an economical people will not 
 permit waste of public funds. During more than three years of 
 war, there has been no effective pressure towards economy in 
 expenditure. It was only in the summer of 1917 that the Select 
 Committee upon National Expenditure was constituted. It may 
 be that the apparent apathy of the nation resulted from other 
 causes. It has given its wealth for the prosecution of the war 
 generously and with both hands, but the public have noticed 
 with regret and pain that the fruits of its parsimony have been 
 lavished with reckless profusion by successive Governments. If 
 a future Parliament should come, like the plausible spendthrift,
 
 86 Conscription or Proscription of Capital 
 
 asking for further sacrifices to reduce its debts, it is only ordin- 
 ary prudence to demand proof of amendment by the test of 
 experience. Until that time comes, the harassed taxpayer has 
 a certain amount of protection in the magnitude of the debt 
 and the consequent high taxation which it involves. There is a 
 limit to the taxable capacity of the country, and that, in the last 
 resort, is a safeguard against the extravagance of public expen- 
 diture. In my judgment the taxpayers of the country would be 
 well advised to resist any large repayment of debt until the 
 State has shown convincing proofs that it has begun to practise 
 again the elementary duty of economy in public expenditure. 
 
 I regret that much of what has been said in the present lecture 
 is necessarily negative, though some conclusions of a positive 
 character may be developed from it. To a large extent it repre- 
 sents a clearing of the ground for an investigation of the future 
 financial position, as far as that can be foreseen at the present 
 time. There is no special merit either in taxes upon capital or 
 upon income, since in special circumstances either may tend to 
 transmute itself into the other. Every proposed system of taxa- 
 tion must be investigated upon its merits and in relation to 
 possible alternatives. The various methods of Conscription of 
 Wealth or Capital Levies which have been discussed appear to 
 be open to serious objection upon the ground either of dangerous 
 consequences or in a failure of equity. In devising a system of 
 taxation for the period after the war, special care must be taken 
 that owners of wealth or capital, as the case may be, will not 
 feel that they have been proscribed. Proscription of wealth is as 
 much to be avoided as industrial conscription.
 
 THE PERIOD OF FINANCIAL 
 TRANSITION
 
 You know, 
 Our sad condition 
 
 Was partly owing to 
 The quick transition 
 
 From war to peace. 
 
 William Hone.
 
 THE PERIOD OF FINANCIAL 
 TRANSITION 
 
 MANY discussions concerning the finances after the war 
 proceed upon the tacit assumption that, when peace is 
 signed, a normal financial system will be re-established. This im- 
 pression is shown to be misleading, merely by being made explicit. 
 The cessation of hostilities cannot end all the expenses of war, 
 since time must elapse before the Army can be brought home 
 and demobilised. Many other kinds of outlay will continue, 
 though at a rapidly declining rate; so that, even after peace, 
 expenditure will be comparatively high for a considerable 
 period. On the other hand, the revenue will probably be subject 
 to considerable fluctuation. Special war taxes, such as Excess 
 Profits Duty, may be remitted. If there is a fall in prices, it 
 would seem that there may be a reduction in profits with a de- 
 cline in assessments for income tax. As against this there will 
 be new incomes subjected to tax, as the soldiers are demobilised, 
 and they return to the businesses they left in order to undertake 
 military service. It follows that there will be a fairly well 
 marked period of financial transition, which will begin when 
 peace is re-established, continuing during the demobilisation of 
 the forces and probably extending beyond the latter date. 
 During this interval of transition the foundations of the financial 
 system which will prevail in the succeeding five or ten years 
 should be laid; and, accordingly, it is important to analyse 
 the general character of the transition and also to attempt to 
 determine the space of time over which it may be expected to 
 extend. 
 
 There are two aspects of demobilisation — the one that of the 
 Army, which is concerned with the time at which soldiers can 
 be liberated from military service as well as the provision of
 
 90 The Period of Financial Transition 
 
 transport in order to return them from overseas service, and 
 the other that of the Ministry of Reconstruction which is 
 charged with arrangements for facilitating the settling of the 
 men in productive work. The first of these is more important 
 from the point of view of expenditure, and the second will 
 acquire prominence later from that of the revenue. A rapid 
 demobilisation would quickly reduce the portion of the outlay 
 upon the Army which consists of pay and the cost of equipment 
 and rations. No period can be placed upon the process of de- 
 mobilisation until the terms of peace, which will be made, are 
 known. Military reasons might require the retaining of a con- 
 siderable number of troops under arms for a comparatively pro- 
 tracted period. But there will be a large balance to be returned 
 to their homes as soon as transport is available. It follows that, 
 for the greater part of the over-seas forces, the time taken in 
 demobilisation will be determined by the supply of shipping 
 which will then be available for this purpose. When account is 
 taken of the great distances which very large bodies of men must 
 be transported, it becomes clear that the process will extend 
 over a considerable time. British troops in distant theatres of 
 war must be brought home, while the Canadian, Australian, 
 New Zealand, South African and American forces will require 
 to be carried to their own countries. While the total period of 
 demobilisation may be comparatively protracted, it has to be 
 noticed that the Armies at home can be demobilised almost at 
 once ; and, as each group of men is returned from over-seas, they 
 will cease to draw rations, as also Army pay, soon afterwards. 
 But a more important and a quicker reduction will be in the 
 winding up of the Ministry of Munitions. The great need for an 
 increased production of the appliances of war, which called it into 
 strenuous life, will have ceased when peace has been proclaimed, 
 and as soon as possible the manufacture of guns and shells in 
 new national and controlled factories will be ended. Within a 
 few weeks by far the larger part of the outlay upon this Depart- 
 ment will have been concluded. This will result in a great re- 
 duction of expenditure. Up to September 1917 the Ministry 
 of Munitions had disbursed over 1,000 millions since its
 
 The Period of Financial Transition 91 
 
 inception 1 . This constitutes approximately one quarter of our 
 total expenditure during that period; or, if loans to Dominions 
 and Allies be omitted, rather over one-third of the balance for the 
 same period. While there will be a great reduction in the outlay 
 of this Department, there will be inevitable delay before it comes 
 to an end. An enterprise, which has grown to such a vast size 
 and which has so many ramifications, cannot be wound up 
 immediately. While manufacturing will cease when peace has 
 been established, there will remain great quantities of materials 
 and stores. A staff must be retained in order that these may be 
 disposed of to the best advantage. Also there will be much 
 valuable machinery which must be cared for until the time 
 comes when it can be placed upon the market. From the point 
 of view of administration, it may happen that, at this stage, 
 the work will be transferred to the Ministry of Reconstruction ; 
 but, as regards finance, it is clear that the expense of the officials 
 and workers must be met; and, until the plant and materials are 
 sold, a temporary charge will remain. 
 
 In addition to the demobilisation of the forces, there will be 
 a second demobilisation namely that of the army of officials 
 which has been called into existence by the needs of the war. 
 Some of these services can be dispensed with at an early stage. 
 The Ministry of Blockade, the War Trade and Propaganda 
 Departments would naturally come to an end at an early date. 
 Many of the extensions of other Government Departments, 
 which came into existence to meet war needs, would be reduced 
 at varying times according to the requirements in each special 
 case. Six months after peace there should be a striking con- 
 traction, even when full allowance is made for the demand for 
 officials in services which will have expanded once peace has 
 been made. It appears that trade and shipping will require a 
 certain amount of regulation for a moderate period, even when 
 the war is over. Thus the Ministry of Shipping may be expected 
 to be but little reduced during the first year of peace. The 
 scarcity of many essential raw materials and of the shipping to 
 convey those that are available will make the continuance of a 
 
 1 First Report from the Select Committee on National Expenditure, p. vii.
 
 92 The Period of Financial Transition 
 
 certain degree of control inevitable, while that control will in- 
 volve the services of staffs by which it will be exercised. On the 
 whole, it may be inferred that the demobilisation of officials will 
 be slower than that of the forces and that it will extend over a 
 longer time. In the first stages very large numbers will be re- 
 leased from the service of the Government, but later the process 
 of contraction will be slow. This estimate is based upon aggre- 
 gates. There are many of the regular Civil Servants who have 
 joined the Forces; and, as these men are demobilised, they will 
 displace those who have been acting as substitutes for them. 
 Such replacement may effect some small saving to the Exchequer, 
 but it will not be quite in proportion to the numbers of persons 
 for whom there will be no longer employment in Government 
 offices. 
 
 These various considerations point to a continuance of war- 
 expenditure at a declining rate for many months after the war 
 is over. After the Napoleonic wars great stress was laid upon 
 the magnitude of "winding up" expenses, but this insistence 
 was probably designed to cloak political projects 1 . Under con- 
 ditions of the present day the largest items of war expenditure 
 will cease immediately, or they will soon be greatly reduced. 
 Still, even a year after peace, there will remain outlays connected 
 with the liquidation of war industry which, while inconsiderable 
 as contrasted with the expenditure of 1917, will be of moment 
 in the altered circumstances. From the side of expenditure 
 there is no particular time at which it can be said that the 
 financial transition will have ended, rather it will shade off into 
 the normal period which will succeed it. In the early days of 
 peace the transitional character will be more prominent; but, 
 as time goes on, the return to normal conditions will become 
 more marked. When the stage is reached at which the latter 
 becomes the more powerful influence, it may be said that, for 
 practical purposes, the transition will have terminated. 
 
 Subject to the inevitable uncertainty in assigning dates, the 
 transition regarding expenditure is much more determinable than 
 
 1 W. Smart, Economic Annals of the Nineteenth Century, 1801-20, 
 P- 465-
 
 The Period of Financial Transition 93 
 
 that in the case of revenue. In the latter case the uncertainties 
 are both great and many, and one is reminded of the candid 
 confession of Gait's Micah Balwhidder "whose thoughts were 
 just the rack of a dream without form, and driving witlessly as 
 the smoke that mounteth up, and is lost in the airy heights of 
 the sky 1 ." Yet there is something which may perhaps be in- 
 ferred concerning the fire which has caused the smoke, and it is 
 this investigation which now confronts us. 
 
 The prospects of the revenue during the period of financial 
 transition are bound up with the state of trade during that time. 
 If it were necessary to attempt to forecast the level of profits 
 and other income subject to tax, it is not likely that any reliable 
 conclusions could be reached. But it is fortunate that the 
 position may be envisaged in a different manner, namely with 
 reference to the yield of the taxes which were in force at the 
 end of the war, and then in relation to possible modifications 
 of these. 
 
 According to the estimates for the financial years 1917-18 and 
 1918-19 the total revenue was derived from three main sources in 
 approximately equal proportions, namely income tax and super 
 tax, Excess Profits Duty, and thirdly all the remaining branches 
 (including the Post Office). The Excess Profits Duty, as a tax, 
 has undergone a number of modifications. Its real justification 
 has been the popular feeling against "the making money out of 
 the war." Thus the original conception was that of "a war 
 profits tax." If, however, it had been imposed in that form, it 
 is to be feared that it would have proved unworkable owing to 
 the difficulty of determining what were "war profits," and also 
 the yield would not have been considerable. For these reasons 
 it assumed the form of a duty upon the excess over a pre-war 
 standard of profit, but levied upon businesses, not upon the 
 actual recipient of the income. It has frequently been objected 
 that, in the case of a number of investments owned by the same 
 person where some are subject to Excess Profits Duty and others 
 yield a less income than before the war, the taxpayer is bearing 
 a tax upon higher profits; while, as a matter of fact, his income 
 
 1 John Gait, Annals of the Parish, for the year 1792.
 
 94 The Period of Financial Transition 
 
 may be reduced below the amount he received before the war by 
 reason of this special impost 1 . This argument has been gradually 
 losing such force as it possessed at the time this tax was intro- 
 duced. The strain upon man-power and scarcity of shipping have 
 together brought about a new situation. The productive capa- 
 city of the country was diverted as the war progressed from the 
 less important to the more important industries. At the stage 
 when the State concentrated labour upon "work of national 
 importance," it was, in effect, adding to the general profit- 
 earning capacity of these industries; and therefore, at a time 
 when a great increase of revenue was required, it was not inequit- 
 able that those trades which, through the assistance of the State, 
 received special advantages, whether in a greater turnover or in 
 being supplied with materials and labour which were denied to 
 other businesses, should be required to surrender a large pro- 
 portion, or even the whole, of the increased profit which may be 
 held to have resulted from this combination of circumstances. 
 If this interpretation of the real justification of Excess Profits 
 Duty be well founded, it suggests some further considerations. 
 It might be claimed that during the early period of Reconstruc- 
 tion the same line of argument would hold good, but to a less 
 degree. Licences for importing raw material and the earlier 
 demobilisation of the more essential classes of workers will 
 favour some industries. Thus the question arises whether Excess 
 Profits Duty should be continued at a lower percentage and 
 
 1 Suppose an investor had an income of ^500 in 1913 drawn from five 
 different sources of ^100 each. In 191 7-1 8 three of them paid no dividends, 
 one paid ^87. 105. and, after providing for the same reserves, the remaining 
 one could have paid him ^412. 10s. The result will be that his share of 
 profits would be the same as before the war, but through Excess Profits 
 Duty it is reduced by one half. 
 
 
 Investment 
 
 Dividends in 191 7 
 
 apart 
 
 Dividends after 
 
 
 1913 
 
 from Excess Profits 
 
 Duty 
 
 Excess Profits Duty 
 
 A 
 
 ^100 
 
 Nil 
 
 
 Nil 
 
 B 
 
 100 
 
 Nil 
 
 
 Nil 
 
 C 
 
 100 
 
 Nil 
 
 
 Nil 
 
 D 
 
 100 
 
 £87 10 
 
 
 ^87 10 
 
 E 
 
 100 
 
 412 10 
 
 
 162 10 
 
 ^500 ^500 o ^250
 
 The Period of Financial Transition 95 
 
 based upon standard profits for a period of years between 1910 
 and the end of the war. In this way the result would be secured 
 that only firms which experienced an exceptional prosperity, 
 which might with reasonable probability be attributed either to 
 deferred consequences of the war or to special facilities provided 
 by the State, would be subject to the reduced duty. At the 
 present time it is impossible to pronounce a decided opinion 
 upon this matter. Upon general grounds there would be many 
 weighty arguments against such a tax. When British merchants 
 have to enter into competition in over-seas markets, the exist- 
 ence of a Duty of this kind, to which some of their competitors 
 were not liable, would constitute a most serious impediment to 
 the regaining of our position in international trade. On the other 
 hand, circumstances might possibly arise in which the full injury 
 of such a tax would not be felt. If the chief foreign trading 
 nations were compelled to continue their War Profits taxes at 
 a reduced rate during the period of financial transition, British 
 traders, in being liable to a similar burden, would not suffer a 
 differential disadvantage; though it is true that they would 
 lose a benefit in so far as, under these circumstances, our 
 financial position might have enabled us to dispense with it and 
 in that case thejf would have been advantageously situated in 
 relation to the burden imposed by taxation upon profits. As far 
 as can be judged this condition is not likely to be satisfied. 
 Some neutrals and perhaps one or two belligerents, will not have 
 had such great war expenses that they will be compelled to 
 continue a War Profits tax, but there are other circumstances 
 which may be more probable. In the first nine or twelve months 
 after peace there will be most urgent demands upon many trades 
 in all countries for the re-starting of the normal life of Europe. 
 If that demand is in excess of the total capacities of supplying it, 
 those firms which can get to work early will have a double element 
 of a temporary monopoly, first in getting a start by permission 
 of the Government in securing labour and shipping space, and 
 secondly in so far as, owing to their being established before the 
 war, they will have the field to themselves before competition 
 could be developed. Should events take this turn, a continuance
 
 96 The Period of Financial Transition 
 
 of Excess Profits Duty at a reduced rate for a year or so after 
 peace would not be inequitable 1 . 
 
 Then there is a special case which requires separate considera- 
 tion. The encouragement of new industries, the maintenance 
 of key industries and the economic policy which might result 
 from the establishment of a League of Nations 2 may result in the 
 favouring of certain industries by the State for a period of years. 
 There is no reason to revise the views expressed upon the econo- 
 mic aspect of this policy in a lecture of the previous series 3 . But 
 should the country eventually decide upon a policy of State- 
 intervention in favour of industry by means of protective 
 tariffs, something remains to be said from the point of view of 
 revenue. It is a commonplace that in so far as a tariff is efficient 
 in affording protection it produces little revenue. Also one of 
 the great objections from the social point of view is that, sooner 
 or later, large masses of the people feel that they are being taxed 
 through a rise of prices, which is believed to be due to the tariff, 
 for the benefit of private interests. It seems that the latter 
 objection could be greatly mitigated, with advantage to the 
 revenue, by the continuance of a special Excess Profits Duty, 
 which would survive the transition period, upon any industries 
 that may be protected. In the particular case of those con- 
 sidered essential for National safety, a certain volume of pro- 
 duction will be required. In such circumstances it usually 
 happens that there are wide variations in the rate of profit and 
 that a certain amount of that variation is caused by extrinsic 
 conditions. If a liberal standard rate of profit was established, 
 and an Excess Duty levied at between 25 per cent, and 50 per 
 cent, on the remainder, the public would feel that there was a 
 considerable compensation for the higher prices caused by a 
 tariff as affecting the industries concerned. Also such a tax 
 would meet, to some extent, another objection, namely the 
 
 1 Final Report on Commercial and Industrial Policy after the War 
 [Cd. 9,035] ; W. L. Hitchins, Some Problems of Modern Industry, 1918, p. 29. 
 
 2 See above, p. 34. 
 
 3 W. R. Scott, Economic Problems, First Series, pp. 36-39; cf. "Nationality 
 and Cosmopolitanism" in Scientia.
 
 The Period of Financial Transition 97 
 
 tendency of a tariff to survive after the conditions which caused 
 it to be imposed have passed away. The vested interest in pro- 
 tection would not be so attractive, when those who obtained the 
 highest rate of profit from it were subject to differential taxation. 
 These considerations point to an addition to the revenue being 
 obtainable from a survival of Excess Profits Duty in an altered 
 form during the transition period, and, if it should happen that 
 a tariff were instituted and a sur-tax imposed upon excess profits 
 obtained under it, a proportion of that revenue might continue 
 at a later stage. It may be conjectured that from these sources 
 30 millions a year could be obtained. But this does not exhaust 
 the productivity of the Excess Profits Duty. When peace has 
 been made, there will remain a very large revenue from this 
 source still to be collected. On April 22nd, 1918, the Chancellor 
 of the Exchequer estimated that at March 31st, 1919, and at the 
 end of future financial years during which the war continued 
 there would be as much as a balance of 560 millions of this tax 
 still to be collected 1 . These arrears will arise in part from delay in 
 adjusting assessments and in part from the fact that, at whatever 
 month of the year the war comes to an end, there will remain a 
 number of firms whose financial year has not closed and which 
 will remain liable for the duty in the year then current. At the 
 same time it must be noticed that this balance is subject to a 
 liability. Under the Finance Act No. 2, 1915, Part m, persons 
 subject to Excess Profits duty are entitled to recover losses, 
 subsequently encountered in their business and while the duty 
 remains in force, from the amount previously paid by them 2 . 
 If this provision remains in operation at the declaration of peace, 
 there will be a liability against the amount of duty which has 
 not been paid in to the Exchequer at that date. Necessarily at 
 the present time it is difficult to estimate the seriousness of this 
 liability. Much will depend upon the extent to which there will 
 be a dislocation of production through the cessation of war 
 demand. To some extent, perhaps indeed to a considerable 
 extent, the protraction of the war has resulted in a very large 
 
 1 Hansard, 105, p. 699. 
 
 2 Spicer and Pegler, The Excess Profits Duty, 1916, pp. 8, 9. 
 
 s. 7
 
 98 The Period of Financial Transition 
 
 postponed demand for many of the products of industries which 
 are now yielding Excess Profits duty. Therefore, to the extent 
 to which this will be experienced, it may be expected that many 
 of the firms producing goods of this character will avoid sustain- 
 ing losses in their first financial year after peace and so they will 
 be unable to make claims upon the sums they have already paid 
 in this duty. The course of prices will have an effect upon the 
 profits of many businesses, and the result of the fall which may be 
 anticipated will be discussed below in relation to income tax and 
 super tax; but, on the whole, the conjecture may be hazarded 
 that, under the former head, the amount of refunds will not be 
 very great in proportion to the total arrears. 
 
 The yield of income tax during the transition period opens up 
 a number of fascinating uncertainties. Naturally any examina- 
 tion of what it may be expected to produce must begin with the 
 income from it in the last financial year of the war. The longer 
 hostilities continue, the larger will be the proportion of the 
 expenditure raised from taxation; and, of the total so obtained, 
 income tax and super tax will be prominent contributors. The 
 chances are against peace being made in the few weeks of the 
 year when the forthcoming Budget is prepared, so that it may 
 be assumed that the first months of peace will be passed under a 
 War-Budget. It is impossible to form any opinion as to whether 
 it will be possible to effect a reduction in these taxes in the first 
 Peace Budget. If the war does not last very long, or even if it 
 does and at the same time the revenue from taxation is increased 
 materially in the later stages, it may be possible to effect some 
 small remissions of this tax. However this may be, it will be 
 more convenient to treat the prospects of the produce of the tax 
 during the whole of the period of financial transition as if it were 
 levied at the rates which obtained during the last year of the war. 
 
 The influences which will govern the yield of income tax in 
 this period will be both technical and general. In the future the 
 method of assessment of profits on the basis of a three years' 
 average may be modified, but there are strong reasons against 
 effecting the change until the financial transition is completed. 
 Accordingly, during that period, the produce of the tax will
 
 The Period of Financial Transition 99 
 
 benefit, in the case of profits, from one or two years of the war 
 period being brought into the assessment. Then, in addition, 
 when the Excess Profits Duty is modified or abandoned, profits 
 above the pre-war standard, which are earned, will begin to pay 
 income tax instead of Excess Profits duty. In actual working 
 this will assist the revenue more than might appear at first 
 sight, owing to the different bases of assessment for the two 
 taxes and also, in cases where a refund is made from Excess 
 Profits duty, through that refund being subject to income tax 1 . 
 In addition the increased amount of Government and Colonial 
 loans, upon the interest of which income tax will be collected 
 eventually, has to be taken into account 2 . 
 
 The general considerations raise many questions of immense 
 complexity, and all that is possible will be to draw attention to 
 aspects of these which seem at present to be of most importance. 
 For the reasons which have just been explained, the state of 
 trade and the level of prices will be less important as affecting 
 income tax during the financial transition than might appear at 
 first sight. In the case of profits a decline in the amount would 
 exert in this period less than one third of the effect that might be 
 expected. As regards salaries a reduction in the rate, if that 
 takes place, would be felt towards the end of the transition. On 
 the other hand, by that time, there would be some tendency 
 towards compensation in such earnings of officers and men, who 
 have been demobilised, as exceeded the level of abatement. 
 
 The effect of the possibility of a serious crisis must be taken 
 into account. Should this happen the results of former experi- 
 ence afford a large measure of consolation. During the seventy- 
 one years from 1842 to 1913 the cases in which the assessments 
 for income tax showed a decline upon that of a previous year are 
 very few. They only amount to ten occasions over the whole 
 
 1 Spicer and Pegler, The Excess Profits Duty, 1916, pp. 27-30. 
 
 2 Owing to the payment of interest upon recent Government loans 
 having been made without deduction of tax, there is a delay in the tax 
 reaching the Exchequer, as compared with other loans where it is deducted 
 at the source. Since the tax-payer must return the amount of dividend in 
 his assessment and then be taxed, the average delay appears to be about 
 eighteen months.
 
 ioo The Period of Financial Transition 
 
 period and some of the decreases were inconsiderable. When 
 allowance is made for changes in the principle of assessment and 
 "comparable" assessments are contrasted, the years in which a 
 decline is shown remain the same. Moreover in that period there 
 were included several very serious panics, and it is remarkable 
 that in some cases these did not suffice to effect a reduction in 
 the assessments either in the year of the crisis or in those of the 
 immediately succeeding years upon the figure of the year before 
 it. This was the case with the crises of 1847, I 857, 1866, 1873 
 and 1890. In the present century each year has shown an in- 
 crease upon its predecessor. There remain three crises which 
 were not so serious as those already mentioned but which did 
 effect a reduction in the assessments, though in no case to the 
 extent of two per cent. 1 Taking the "comparable" totals the 
 following results are obtained: 
 
 Crisis of 1855 Assessment of 1855-6 less than that of 1853-4 by 
 
 o*3 per cent. 
 Crisis of 1884 Assessment of 1886-7 ^ ess tnan tnat °f I 883~4 by 
 
 i*2 per cent. 
 Crisis of 1893 Assessment of 1894-5 less than that of 1892-3 by 
 
 1 *7 per cent. 
 
 The chief effect of crises has been to check the normal rate of 
 increase in the growth of the assessments, and it is noticeable 
 that where there have been small decreases these have been 
 more than compensated for by later increases of large amount. 
 This was remarkable in the closing years of last century, when 
 the increase was as much as twenty per cent, in six years. The 
 rapid increase in taxable income in the period of a decline in 
 general prices in the sixties and again in the seventies after a 
 previous sharp advance is both noticeable and instructive. 
 
 The mention of the effects of previous crises upon the yield 
 of income tax is not to be understood as an indication that one 
 is inevitable during the time of financial transition. It is true 
 that the termination of a state of war, especially when it has 
 followed a long period of peace, may be a pre-disposing tendency 
 
 1 J. C. Stamp, British Incomes, 191 7, pp. 318-19.
 
 The Period of Financial Transition 101 
 
 towards a disturbance, but in a lecture of the previous course 1 
 reasons were adduced which pointed to the conclusion that this 
 was not be regarded as inevitable. Rather if speculation is not 
 allowed to get out of hand and if credit is used with judgment, 
 being neither too constricted nor too liberal, there are good 
 grounds for hoping that a crisis will be avoided. 
 
 In so far as the Government can exercise control upon prices 
 through the currency it would probably be desirable on the whole 
 that the fall, which must come, should not be too rapid. It will 
 only be when peace has almost been won that it will be possible 
 to say whether there will be any danger of a collapse of prices. 
 During the latter part of 1917 and the early months of the pre- 
 sent year, the scarcity of things in this market and Governmental 
 action in fixing prices were in my judgment rather more import- 
 ant in determining the general level than purely monetary 
 causes. The scarcity of things will continue for some time after 
 the termination of hostilities. But there seems reason to believe 
 that goods will then find an easier entrance into the British 
 market than during the later part of the war. Before the end of 
 1918 it is to be hoped that British Shipping may be expected to 
 increase, while it is probable that the United States, and perhaps 
 some neutrals, will own a considerably larger tonnage than 
 before the war. If it be assumed that, when peace is declared 
 the tonnage Great Britain can use for all purposes will be no more 
 than that available at present, it will certainly carry more im- 
 ports. Some auxiliary cruisers will be refitted and returned to 
 their original uses, while the termination of the convoy system, 
 as well as delays for diverted routes and for examination, will 
 make the same tonnage very much more efficient 2 . Also the 
 flow of traffic will be changed. During the war ships from the 
 United States and the Dominions came to Europe bringing 
 men and supplies for the forces and returned either empty or 
 lightly laden. When demobilisation begins, tonnage can be more 
 fully employed by conveying soldiers to their homes and return- 
 ing laden with food and raw materials from the Dominions and 
 
 1 W. R. Scott, Economic Problems, First Series, pp. 69, 76. 
 
 2 T. Tooke, History of Prices, 1838, 11. p. 12.
 
 102 The Period of Financial Transition 
 
 the United States. Hence it follows that, while transport will 
 not be adequate at first, it will be possible to use it to consider- 
 ably better advantage and this will be an important factor in 
 the supplying of the British market. 
 
 Another general consideration which may re-act upon the 
 revenue would be a depression following a severe and protracted 
 struggle. Many anticipate this contingency upon the analogy of 
 the period after the Napoleonic wars. In the judgment of Tooke 
 the distress from 1814 to 1816 was caused by the reaction from 
 speculation and by the seasons. As already shown the first may 
 be avoided and the latter is less important now than a century 
 ago. If the reboundjfrom the anxiety of war conditions can be 
 disciplined and controlled, there is no great reason to anticipate 
 such a disturbance as would effect any material reduction in the 
 income from taxation. An examination of the indications avail- 
 able points to the conclusion that care and caution will be re- 
 quired, while pessimism, based on a faulty analogy, is to be 
 deprecated. Rather the words of a character in an old play may 
 be recalled as probably more apposite : 
 
 Pray, forbear 
 And search not thus into eventful time 
 For ills to come 1 . 
 
 There remains another section of the revenue, comprising 
 Customs, Excise, Estate Duty, minor branches and the Post 
 Office. Several of these depend for their yield upon the state 
 of trade, and the various influences, already discussed, will 
 apply here also. The improvement of communication and the 
 gradual withdrawal of orders limiting the consumption of duti- 
 able articles 'should be in favour of an improvement in the re- 
 ceipts from Customs. This influence is subject to counter-action 
 by a fall in wages, but that may be expected to be accompanied 
 by a reduction of prices so that the spending power of the work- 
 ing classes as a whole upon these articles may not be greatly 
 checked. Indeed it is likely to be reinforced first by the disburse- 
 ment of arrears of pay by soldiers as they are demobilised and 
 
 1 W. Whitehead, The Roman Father, in. 1.
 
 The Period of Financial Transition 103 
 
 later by their wages when they will have returned to civil em- 
 ployment in so far as they do not displace those workers who were 
 engaged to make good the deficiency of labour during the war. 
 
 Excise will occupy a peculiar position. In 1915-16 it produced 
 61 millions, and in 1917-18 the estimate was for little more than 
 half. Here again it may be anticipated that restrictions upon 
 the production of beer and spirits will be relaxed, though they 
 may still be retained with reference to the strength at which both 
 may be supplied. Accordingly, the revenue will be considerably 
 larger than that in the last year of war, and this anticipation is 
 independent of the manner in which the trade is carried on. If 
 the country decides for State-ownership, the resulting revenue 
 will be derived from a Government monopoly instead of from 
 the present category of Excise. It is significant that in the 
 Report of the Advisory Committee on Proposals for State Purchase 
 of the Licensed Liquor Trade of 1916 1 , very considerable stress 
 was laid upon the financial advantages of the proposed transfer. 
 
 The question remains as to the period over which the financial 
 transition, in the sense in which it is understood for the purposes 
 of this enquiry, may be taken to extend. It appears that this 
 period may be considered to be relatively complete between two 
 and three years after the declaration of peace. It is by no means 
 intended that by that time the financial situation will have 
 adjusted itself upon the equilibrium of its normal post-war con- 
 dition, but that the more prominent characteristics of the epoch 
 of transition will, by then, have passed away. This interval 
 should permit of two annual Budgets being presented at the 
 usual time. The forces will have been reduced to the establish- 
 ment of the new standing Army, and taxation upon the proceeds 
 of the labour of the men demobilised will be reaching the Exche- 
 quer. It is to be hoped that during the transition the main 
 principles of the future system of taxation will have been estab- 
 lished, so that this system will begin to produce revenue during 
 the first year after the transition. There can be no question that 
 much patient enquiry, united with constructive thinking, will 
 be needed. The vastly larger revenue which must be obtained 
 
 1 Cd. 8283, p. 5.
 
 1 04 The Period of Financial Transition 
 
 will render the reconstruction of the Income Tax system (which 
 was already overdue before the war) inevitable. If this can be 
 accomplished in the time and fitted into its proper place in the 
 whole system of taxation, the instrument for procuring the 
 necessary revenue for the post-transitional period will be ready 
 to the hand of the Chancellor of the Exchequer. 
 
 It is earnestly to be hoped that during this interval the ele- 
 mentary virtue of economy in public expenditure will be re- 
 established. After the reign of war extravagance, it seems that 
 the only hope of reform will be through "frugality being forced 
 on the Government by the public 1 ." 
 
 Is it possible to make a provisional summary of the liabilities 
 and the assets of the revenue during the period of financial 
 transition? While it would be a delusive preciseness to deal in 
 definite figures, certain broad equivalences can be stated leaving 
 out of consideration the question of indemnities, since such as 
 may be obtained will be in all probability assignable by those 
 Allies who will need them most. On the side of the liabilities, 
 there will be the expenses of demobilisation and so much of those 
 of reconstruction as will fall within this period. Some of the 
 latter will involve the same principles as the outlay on demobili- 
 sation, that is they should not be paid out of loans. It would be 
 unwise to borrow for either purpose. During the later stages of 
 the transition there will be other demands for reconstruction 
 which will be of a different order. These will be of a reproductive 
 character. Though it would be advantageous that borrowing 
 should be avoided once definite war expenditure ends, this 
 course would be legitimate, if funds for an urgent reform, such 
 for instance as workmen's houses, could not be provided other- 
 wise. In the special case of a State purchase of some class of 
 property, already in existence, upon a large scale (as for in- 
 stance, railways, mines or the liquor trade) this particular ques- 
 tion will not arise, since, from this point of view, the transaction 
 would resolve itself into an exchange of securities — Government 
 stock being substituted for the shares of joint stock companies 
 or the interests of private owners. 
 
 1 W. L. Sargent, Apology for Sinking Funds, 1868, p. iii.
 
 The Period of Financial Transition 105 
 
 The financial liabilities of the transition will thus be seen to 
 be sufficiently formidable. The following will be the general 
 nature of the assets available to meet them. Successive Chan- 
 cellors of the Exchequer have accepted the principle that the 
 continuing revenue from taxation ought to suffice to meet the 
 cost of Civil Government and the interest on the net National 
 Debt. In addition a beginning must be made in the reducing of 
 the Debt. According to the information available, the balance 
 of probability points to the total revenue from these branches of 
 revenue being approximately maintained during the transition, 
 if the rate of taxation is not reduced. It may be that, with an 
 increase in the yield from taxation towards the end of the war, 
 there may be a surplus from these branches over the charges 
 now specified. In any case no material reduction in permanent 
 taxation as a whole should be made in the first year of the 
 transition, whether one would be possible in the second Budget 
 would depend upon circumstances which cannot be estimated 
 at present. 
 
 Assuming that the expense of Civil Government, of interest 
 and sinking fund on the net national debt are thus provided for, 
 there remains the expenditure on demobilisation and on the 
 beginning of reconstruction. How is this to be met without loans, 
 except for definitely reproductive purposes? The problem may 
 seem insoluble, if it is not remembered that there are two import- 
 ant resources. One of these has already been described. It 
 consists of the balance of Excess Profits duty which will amount 
 to a large sum, together with any additions to it which may 
 arise, in the manner already suggested, from modifications of 
 that tax. The other is a concealed asset, but which will become 
 of very great importance by the time the war ends. Out of the 
 funds, which have already been counted as war expenditure, 
 large sums have been used in order to provide working capital 
 for the purchases of wheat, sugar and raw materials 1 . Up to 
 September, 1917, the wheat Commission had received 67 millions 
 from the Treasury 2 . These sums will return to the Exchequer as 
 
 1 Hansard, Debates, Commons, 98, p. 1330. 
 
 2 Second Report of Committee on National Expenditure, p. viii. In The
 
 1 06 The Period of Financial Transition 
 
 the stocks are sold off in the period of transition, subject to any 
 loss or profit which has been made. Some of these trading trans- 
 actions of the Government will yield a profit, but there will be 
 losses to a greater amount upon others. Still if the loss is met at 
 the time it is incurred and the profit carried forward, some benefit 
 will be derived from the latter in the transition. Then there will 
 be whatever is obtained for surplus army supplies as these are 
 realised. But what will be much more important will be the 
 sales of ships, factories and plant which have been acquired by 
 the State during the war. The vast amount of engineering plant, 
 purchased by the Ministry of Munitions, should be disposed of 
 as soon as possible consistently with realising to the best advan- 
 tage. The sooner it is sold, the more quickly it can be put to 
 productive uses. While a few of the new National Factories may 
 be retained, some, together with other war time national plants, 
 will no doubt be disposed of, and the sums realised will be 
 available in the period of financial transition. In addition, there 
 will be the National Shipyards and all the shipping acquired by 
 the State. However these will be dealt with, it is unquestionable 
 that they constitute an asset of great value. If both are sold, 
 which would appear to be the wiser course, the proceeds would 
 be a great addition to the revenue. If, however, it were decided 
 to maintain a State transport system, the ships would constitute 
 an asset of large value, which would require to be taken into 
 account in picturing the financial position after the war. 
 
 If it be assumed that the State-owned ships are sold, it is 
 clear that the period of transition will be provided with a great 
 extraordinary revenue, arising from the balance of Excess 
 
 Economist, April 6, 1918, it was estimated that at the end of the financial 
 year 191 7-1 8, recoverable expenditure, other than loans to the Allies and 
 Dominons would amount to about 400 millions. According to the statement 
 of the Chancellor of the Exchequer in introducing the Budget on April 22, 
 1918, the recoverable expenditure (after making allowance for loss on reali- 
 sation) upon advances, other than loans, to the Dominions and Allies, food- 
 stuffs, bought by the Government for resale, land securities, buildings, ships 
 and stores of the Ministry of Munitions, at the date of the Budget, amounted 
 to 572 millions, rising to 672 millions by March 31, 1919. At the later date 
 it was estimated there would remain 500 millions of Excess Profits Duty to 
 be collected. — Hansard, 105, pp. 698, 699.
 
 The Period of Financial Transition 107 
 
 Profits duty, perhaps from modifications of that duty which will 
 be continued, from sales of Government property and ships. 
 Some of these assets will almost certainly be increased before 
 the war ends, so that the aggregate proceeds will be very large. 
 In the circumstances, it is impossible to make any estimate even 
 within wide limits, but it would be surprising if this source of 
 revenue did not suffice not only to meet the cost of demobilisa- 
 tion, but also to leave a surplus. If a surplus were secured, it 
 might be allocated, for purposes of calculation, to the credit of a 
 suspense account to meet any cases where an Ally, which has 
 been hard pressed during the war, is unable to pay interest, at 
 first, upon the sums borrowed from Great Britain 1 . It is possible 
 that during the period of financial transition there may be 
 doubt in a few cases if these obligations can be met, and so the 
 value of such loans will be uncertain. For the purposes of certain 
 calculations to be made in the next lecture, it will be convenient 
 to be able to rely upon the amount of interest which will actually 
 be paid upon loans made to the Dominions and Allies. This 
 method to a large extent will meet the difficulty. If eventually, 
 as is to be hoped, interest will be paid upon the whole of this 
 debt, then the sums, allocated as a suspense account in this form 
 of statement, will be available for the extinction of debt. 
 
 If a proposal, which is at present being debated in France, 
 were carried into effect the debt charge would be lower than 
 that upon which the foregoing calculation is based. The French 
 scheme is to add a fourth unity, namely that of finance to the 
 united cause, the united front and the united command. It is 
 proposed that all allied expenses should be aggregated and that 
 interest should be divided amongst the nations in proportion to 
 their national incomes. The effect would be to afford a great 
 relief to France at the expense of the United States. Great 
 Britain would gain to an appreciable extent. Professor Gide has 
 calculated that, upon the assumption that the war lasts till the 
 
 1 The same general effect would be secured even if the ships were not 
 sold, but were worked as a Governmental enterprise. The income derived 
 from such operations would be available to meet the interest which was not 
 forthcoming from an Ally.
 
 io8 The Period of Financial Transition 
 
 end of 1918, this plan would reduce the charge on the British 
 debt by 20 per cent. 1 
 
 This scheme is interesting and suggestive; but, at the present 
 stage, it has not been sufficiently developed to afford a basis for 
 calculation. It may suffice to say that, if it were adopted, the 
 substitution of a proportionate debt for a net debt would effect 
 a substantial reduction in the charge for interest and sinking 
 fund. 
 
 1 C. Gide, Des Projects d'Eniente Financie're, 1918, p. 3.
 
 TEN YEARS AFTER
 
 Restraints laid by a people on itself are sacrifices made to liberty ; 
 
 and it never exerts a more beneficent or a greater power than in 
 
 imposing them. 
 
 W. Savage Landor.
 
 TEN YEARS AFTER 
 
 THE conclusions of the previous lecture constitute the point 
 of departure for the final stage of the enquiry. It was 
 inferred that the period of financial transition would last for 
 between two and three years after the declaration of peace. 
 Provided there will be no great reduction in the revenue through 
 remissions of permanent taxation at this stage, it was proved 
 that there were ample resources in sight to meet the liabilities 
 of that time. While it is in progress, it may be anticipated, that 
 the foundations of the system of taxation which will be required 
 in order to meet the tremendous burden that the nation must 
 bear, will have been elaborated. Possibly that system may be 
 sufficiently advanced to be used to some extent in the last Budget 
 of the transition, and it should be more fully established in the 
 first Budget of the ensuing period. The simplification of Income 
 Tax should be completed by this date with the result that it will 
 be primarily more productive, and also more equitable. The 
 details of a method of taxation, which were tolerable when this tax 
 was low, became a real hardship when the rate was increased by 
 more than 500 percent. Many anomalies had been recognised and 
 were awaiting consideration in the years immediately before the 
 war; and, even during hostilities, these became accentuated by 
 the increase in the tax. A smooth graduation of the tax, by 
 which the "jumps" at certain points which were characteristic 
 of the early war period may be avoided, will be necessary. On 
 the one side it will be graduated more steeply in order to bring 
 the larger incomes more heavily under contribution ; while, at the 
 other end, it may be considered necessary to lower the limit of ex- 
 emption ; provided, in the new system of taxation, the total burden 
 upon the more necessary commodities is not increased. The 
 latter involves in the words of Dr Marshall "inverse graduation "
 
 1 1 2 Ten Years After 
 
 upon those classes with small incomes 1 , that is to say, indirect 
 taxes upon the commodities they consume will be felt by them 
 to a disproportionate degree. Accordingly the limit of exemp- 
 tion is closely related to the taxation of commodities, and it 
 also is relative to the level of general prices. An exceedingly 
 steep graduation, which may take in income tax as much as two- 
 thirds of the largest incomes, must, upon the conditions indi- 
 cated but not otherwise, be balanced by a low rate of exemption. 
 As the tax on the higher incomes rises and as it may extend 
 further downwards, the progression will tend towards an in- 
 crease upon the intermediate incomes. Thus there is contem- 
 plated an income tax which with the addition of super tax 2 , 
 starts at a low level and rises gradually and progressively with 
 each increment of income. In the circumstances it must in- 
 evitably fall very heavily upon the largest incomes, indeed to an 
 extent which can only be justified by great financial pressure. 
 Almost any graduation that starts from a low income of perhaps 
 £100 a year on an average and proceeds onwards progressively, 
 must take a very large proportion from the greatest incomes, if 
 it is to raise a sufficient revenue. 
 
 Extension of the tax and an increase in its rate must be re- 
 lated to the nature of the abatement allowed. It is possible that 
 more attention will be paid to the circumstances of the taxpayer 
 as regards the necessary claims upon him. The system of 
 abatement, which was in force before the war, was based on wide 
 averages. It favoured the tax payer who could claim it and at 
 the same time had no dependents. It seemed to prejudice an- 
 other who had a large family. It may be possible to classify 
 abatements so as to recognise varying domestic conditions, 
 making additional allowances for the married man and further 
 abatements for children and other dependents. A decrease in 
 the limit of exemption would make such a course almost inevit- 
 
 1 After War Problems, pp. 326, 327. 
 
 2 The scale of progression, which is contemplated, would advance from 
 the least income taxed up to the highest. It is a matter of convenience 
 whether, after a certain point, the tax on larger incomes is collected as 
 income tax or is divided into income tax and super tax, provided in the 
 latter case that the progression is applied to both.
 
 Ten Years After 113 
 
 able. But the proposal is not so simple as it appears at first 
 sight, and it raises two interesting theoretical considerations. 
 Whatever income be selected for purposes of exemption the 
 bachelor, who has no dependents, has a larger surplus upon 
 which taxation can be levied than the married man with young 
 children whose income is the same. So it would seem to follow 
 that, for all incomes whatever the amount, an abatement for 
 marriage and for children should be allowed. But this conclusion 
 comes into conflict with another principle of a different nature. 
 Progressive taxation is founded upon the conception that the 
 enjoyment obtainable from the use of an income does not in- 
 crease as rapidly as the income increases. Therefore the taking 
 in taxation of larger proportionate sums from the larger income 
 does not in general involve as great sacrifice by the recipients 
 of those incomes as if an equal sum were collected from the same 
 income which was divided amongst several taxpayers. Thus 
 progressive taxation is closely related to the estimation of utility 
 derived from income. But the suggested abatements for a 
 family are traceable to the purely objective principle of " ability " 
 of the taxpayer. In terms of utility, on the average, the happi- 
 ness arising through wife and children is universally recognised 
 as beyond price, and so it follows that the father of a family is 
 asking to be relieved of taxation on the ground of a loss of 
 utility while, on the contrary, he has, upon the average, gained 
 in utility. It follows then that progressive taxation, together 
 with universal abatements upon the ground of family responsi- 
 bilities, cannot be justified. Either may be maintained as parts 
 of alternative systems of taxation, but not both together, unless 
 progressive taxation can be supported on other grounds than the 
 principle of Diminishing Utility. But, while universal abate- 
 ments for family responsibilities cannot be established as part of 
 a scheme of progressive Income Tax, they may perhaps be applied 
 in relation to the smaller incomes. In this case it is in the 
 interest of the State that the citizen should not be prevented by 
 taxation from rearing a healthy family. Accordingly, if the 
 limit of exemption is fixed at a flat rate, without taking account 
 of marriage or dependents, that limit must be placed at the 
 
 s. 8
 
 ii4 Ten Years After 
 
 amount in which the family is regarded as the unit. This is in 
 fact presenting a bonus to the unmarried. If, on the other hand, 
 in these incomes extra allowances were made where the taxpayer 
 was married and supported his wife and also for each depen- 
 dent, the limit of exemption would then apply primarily to the 
 unmarried who were without dependents. In that case it might 
 be reduced, upon the principle that the income exempt from tax 
 was just that amount which was necessary for the support of 
 anyone upon whom no one was dependent 1 . 
 
 The same line of thought applies to a class of cases which has 
 been subject to some discussion of late. This is the apparent 
 anomaly that if two persons, who have each an unearned income, 
 should marry they at once become liable to higher income tax 
 than if they lived together without the marriage ceremony. In 
 terms of utility there can be no doubt that there is a heavy 
 burden of disadvantage upon those who form an irregular union. 
 Amongst the many causes of such unions it would be futile to 
 pretend that any appreciable number of persons have con- 
 tracted them through the dread of paying a higher rate of 
 Income Tax. Probably there is no one who has seriously entered 
 into an irregular relationship in order to evade tax. In any case, 
 a slight extension of the present special abatements on the ground 
 of marriage and dependent children to persons with small in- 
 comes would meet the objection, if at the same time the limit 
 of exemption were made applicable to those who had no imme- 
 diate financial responsibilities for others. 
 
 An income tax improved, graduated more precisely and perhaps 
 extended downwards would be highly productive, but it would 
 still be subject to one great defect. It would not discriminate 
 between income which was saved and that which was expended 
 in ways which may be wasteful or even hurtful. Liixitria saevior 
 armis is a saying that will apply with particular force in the 
 generation after peace has been made. Attention has already 
 
 1 According as the State relieves the taxpayer of financial responsibility 
 regarding his family (as for instance by providing free education, meals for 
 school children, or "endowment of motherhood") so far these abatements 
 would be reduced.
 
 Ten Years After 1 1 5 
 
 been drawn to the most urgent need for accumulation of capital 
 in order to provide the instruments for the great production 
 which will be required 1 . It is true that the repercussion of war 
 is tending to provide for a considerable increase in saving; but, 
 to some extent as taxation falls with increasing weight upon the 
 higher incomes, it will cut into the surplus from which savings 
 have normally been made. Accordingly, if it were possible, it 
 would be desirable that taxation should also differentiate 
 against luxurious or extravagant expenditure and in favour of 
 saving. Unfortunately, beyond the limited scope of taxes upon 
 luxuries, sumptuary legislation has always been unsuccessful. 
 It is to be noticed that the existing Income Tax is concerned 
 primarily with income as a whole; while, in recent years there 
 has been a tendency to give consideration to the source from 
 which the income is drawn and to some extent, in the case of 
 small incomes, to the claims upon it. To favour savings would 
 be to go a step further in a direction which was strongly advo- 
 cated by Mill, who said that "no income tax is really just from 
 which savings are not exempted 2 ," but hitherto practical diffi- 
 culties, as well as the rapid accumulation of capital during the 
 second half of last century, have prevented any material 
 changes in this direction. The claim for the favouring of savings 
 or (what tends to be the same thing) the discriminating against 
 extravagant uses of income will be based on other grounds than 
 those of equity. As far as the future in the next generation can 
 be foreseen, it appears that there will be a national advantage 
 in increased saving as compared with that before the war, while 
 such saving may be more difficult. As yet no comprehensive 
 plan for encouraging saving by means of income tax exemption 
 has been devised which seems likely to be satisfactory, but the 
 problem may be approached from the other side by discrimina- 
 tion against the expenditure of that surplus of income from 
 which savings could be made. Long ago Mill favoured a gradua- 
 ted house duty as a tax upon expenditure, since the annual value 
 of the house occupied was in general considered to be a rough 
 
 1 W. R. Scott, Economic Problems, First Series, pp. 94, 95. 
 e J. S. Mill, Principles, v. 11, § 4. 
 
 8—2
 
 1 1 6 Ten Years After 
 
 measure of the expenditure of the person who uses it. It may 
 be questioned whether this is as true now as it was when Mill 
 wrote. Before the war improved facilities for travel, and in 
 addition the use of motor cars, have produced larger inequalities 
 between the annual value of a particular class of house and the 
 total expenditure of those who occupied that type of dwelling. 
 Still, in spite of obvious defects, an increased graduation of the 
 pre-war house tax, is deserving of consideration. For purposes 
 of this tax the annual value of several houses in the occupation 
 of the same person should be aggregated, so as to bring the 
 total under the higher rate of duty. In the scarcity of housing 
 there is a certain element of monopoly in one family reserving 
 for its own use in a number of houses perhaps five times its 
 maximum demand for accommodation and much more than that 
 as contrasted with its average requirements. The hardship, 
 which would result to some wealthy persons, should be con- 
 siderably minimised by the discovery which so many have made 
 during the war, namely, that it is possible to live with as much 
 or even greater comfort by contracting their demand for house 
 accommodation, as for instance when one of a number of country 
 houses owned by the same person has been devoted to national 
 purposes or let, instead of being occupied by the family for a 
 month or two in the year. Should a steep graduation of the 
 House Duty be adopted, a great deal would depend upon the 
 time at which it was brought into operation. In so far as it was 
 effective, in restricting expenditure, it would have the result — 
 unless there was a substantial increase in the incomes of the 
 richer classes — in a general movement downwards into houses of 
 lower annual value. Therefore it should not be introduced too 
 early (since otherwise there would be an additional pressure 
 upon some classes of houses with, perhaps, a great temporary 
 scarcity); nor yet too late, since once the arrears of building 
 have been overtaken, and contractors are looking for new work, 
 it would be important that they should be able to anticipate any 
 alteration in the demand for particular classes of houses which 
 would result from the change that might be made in this tax. 
 In several respects Estate Duty is closely related to the im-
 
 Ten Years After 1 1 7 
 
 posts which have just been discussed. If this duty were con- 
 sidered in isolation from the remainder of the system of taxation 
 a comparatively strong case would exist for a large increase in 
 the rate. From that point of view it seems that, on the whole, 
 the war will have the effect of lightening the burden of the duty 
 for a number of years after peace, as long as the rate remains 
 unchanged. This unexpected result arises from the fact that the 
 greater part of estates, passing at death, are held for income 
 by the recipients, and are not turned into commodities. In the 
 latter case, on the assumption that prices for ten years after the 
 war will fall but will remain higher than in 1913, it follows that 
 a bequest turned into commodities will have less purchasing 
 power than formerly. This is much the rarer case, and where 
 the heirs retain the securities they inherit (or acquire other 
 securities of equivalent value) they gain while the rate of duty 
 remains the same, because, on the average, prices of first class 
 securities will be lower during the early years of peace than they 
 were during a corresponding period before the war. Since this 
 duty is assessed upon the capital value, the lower price of stocks 
 will cause the duty to be less, hence the same income can be in- 
 herited with a lower charge for Estate Duty than before the 
 war 1 . This, however, is only one side of the case. It has also 
 to be considered in relation to the part of the tax system which 
 has been already outlined. In that system the suggested large 
 
 1 Strictly speaking this applies to Estates not exceeding £60,000. Early 
 in the war the rate of duty on those of £60,000 and over was increased. The 
 working of the principle suggested in the text may be illustrated as follows 
 in cases where the duty remains unchanged. In the case of an Estate 
 valued at £20,000, which for simplicity may be taken to pass to one person 
 and the investments remain unchanged, it may be supposed that it was in- 
 vested in 4 per cent, stocks which, before the war, were quoted at par. If 
 that Estate passed by death, say in 1913, the duty would have been £1,200. 
 In 191 7 its value would have been only £16,000. It is improbable that 
 stocks of this class will average pre-war prices during the first ten years of 
 peace. Let it be assumed that in that period they may average 90, that is 
 a price mid- way between the war-price and the pre-war price. Then the 
 value of the Estate for purposes of Estate Duty would be £18,000, and, in 
 that case, the duty would be £900, since the total is less and the rate falls 
 from 6 per cent, to 5 per cent. Thus, while the income would be the same, 
 the beneficiary in this particular case would benefit by £300 in duty, or as 
 much as 25 per cent.
 
 1 1 8 Ten Years After 
 
 progression in income tax would add materially to the burden of 
 the wealthy, and so it will make it more difficult for them to 
 save. In so far as the desire to provide for children is an ex- 
 ceedingly powerful incentive towards accumulation, to that 
 extent a high and progressive Income Tax united with large 
 graduated Death Duties would act as a dangerous check upon 
 saving just at the time that this form of self-denial was most 
 required. Accordingly it may be concluded that, if Income Tax 
 is made sufficiently progressive, no material increase in the rate 
 of Estate Duties would be judicious. It is true there is an alter- 
 native. It may seem to some that the line of least resistance 
 would be to rely upon augmented Estate Duties rather than 
 upon an increase of Income Tax upon high incomes. It is 
 probable that the latter method would be more productive of 
 revenue, and its psychological effect, as regards saving, would 
 be less unfavourable. As yet there are no data for calculating 
 what are the effects of super tax or a steep progressive Income 
 Tax upon the desire for accumulation. No doubt it would differ 
 amongst different persons. It is those, who look ahead and are 
 self-denying, who form the saving classes; and it is precisely 
 these who feel a diminution of their capital through action of 
 the Government most, and resent it greatly. Since a high pro- 
 gressive tax upon income cannot co-exist with high Estate 
 Duties, it appears that of the alternative increases upon the 
 rates of 1917-18, the balance of advantage, from the point of 
 view of avoiding as far as possible the checking of accumulation, 
 would rest with taxation of income 1 . There remains another 
 
 1 The testator who saves for his heir, would be right in assuming that 
 extra taxation would be more advantageous from the point of view of his 
 successors if levied on income rather than on the capital. Suppose that, 
 under a progressive scale of income tax, the tax on a very large income was 
 60 per cent, and the alternative was an Estate Duty of 50 per cent. The 
 recipient of the income would probably consider it was worth saving, since 
 (at 5 per cent.) he would still receive 2 per cent, clear of tax. If it be 
 assumed that the particular beneficiary was liable to income tax at 20 per 
 cent, in the former case he would receive the full value of the investment 
 subject to a duty of say 20 per cent., which is the present rate. That after 
 deducting his own income tax would yield him 3^ per cent. ; whereas, with 
 a 50 per cent. Estate Duty and on similar conditions, the yield to him would 
 be reduced to only 2 per cent.
 
 Ten Years After 1 1 9 
 
 possibility, instead of endeavouring to secure the main increase 
 in direct taxation from one of these sources, that increase might 
 be obtained from both. Instead of a steep graduation of either 
 Income Tax (including Super Tax) or of Estate Duties, a less 
 graduation might be applied to each. There would be some 
 slight advantage to the Revenue in relying more upon taxes 
 upon income, while what slender indications are available point, 
 though somewhat uncertainly, to the taxpayers having a 
 preference for these rather than the corresponding Death 
 Duties. 
 
 These seem to comprise the more important matters, which 
 are ripe for discussion at the present stage, in relation to the 
 chief direct taxes. There remain the indirect taxes. In a 
 recent work Dr Marshall has said, very judiciously, all that is 
 necessary about these 1 . It is there shown that "the war has 
 developed a new political situation,... and it has forced even 
 those, whose detestation of war is the most intense, to recognise 
 that industry and trade can no longer be regarded only as hand- 
 maids of life; for they are likely to be used by a strong military 
 Power as pioneers of destruction and death. It may therefore 
 be right to take some measures, which are not appropriate to 
 ordinary conditions, in order to lessen the ability of a determined 
 enemy to destroy." Such a balanced judgment is far removed 
 from some of the wilder incitements to an "economic war after 
 the war" which was condemned long ago by Thackeray, when 
 he satirized somewhat similar demands of his own time — 
 "Block the harbours for ever; destroy the inlets of Commerce 
 of the world; perish cities so that we may wreck an injury on 
 them. It is the talk of madmen, but none the less wicked 2 ." 
 The maintenance of "key" industries or those deemed necessary 
 for the safety of the country may require some measure of inter- 
 vention by the State, though, as regards the former, the country 
 in a few years may be in danger of acting as many individuals 
 do, namely, preserving carefully the keys after the locks have 
 been lost ! Further it is to be taken into account that (as has 
 
 1 After the War Problems, pp. 326—345. 
 
 2 Thackeray, Roundabout Papers — On Half a Loaf.
 
 1 20 Ten Years After 
 
 already been shown 1 ) some forms of the economic action of the 
 proposed League of Nations may require either temporary or 
 permanent tariff arrangements. From the point of view of the 
 present enquiry it is more significant that any scheme of moder- 
 ate duties, should such be established, would not be productive 
 of a considerable revenue, as this will require to be interpreted in 
 view of the financial demands of the future. Such additions to 
 the taxation of commodities as may be made will be directed to 
 political and social ends, and therefore they will succeed pre- 
 cisely to the extent that they are non-productive of income to 
 the Exchequer. 
 
 In addition to those taxes, both direct and indirect, which 
 were in force in the financial year 1917-18, others no doubt will 
 be added. Amongst the many instruments which will be em- 
 ployed in the era of Reconstruction, taxation will no doubt find 
 a place, either directly to check forms of activity which are 
 deemed disadvantageous in the new circumstances or indirectly 
 in order to provide revenue with which to pay the subventions 
 which may be granted to encourage some useful development. 
 Here it must be observed that, as larger proportions of the 
 national dividend are taken in taxation, the new imposts become 
 the more subject to objection. As a rule the less disadvantageous 
 taxes are imposed first; and, as it becomes necessary either to 
 augment the rates of existing taxes or to add new ones, the 
 burden of disability involved tends in general to increase. Con- 
 versely, even though the revenue from taxes, new or old, is 
 augmented and at the same time the income of the people has 
 grown more than in proportion, the total burden, in general, may 
 not be added to. The demands upon man-power during the war 
 precluded the establishment of some new duties which seemed 
 promising to the Chancellor of the Exchequer 2 . As a rule, where 
 expenditure by individuals has the effect of accomplishing its 
 object in relation to similar expenditure by other persons, a pro- 
 portionate tax upon all such expenditure would leave the relative 
 position of all the same as before. In so far as any outlay, which 
 has for its object display or social pre-eminence, could be reached 
 
 1 See above, p. 34. 2 Hansard, 93, p. 379.
 
 Ten Years After 1 2 1 
 
 by taxation, proportionate duties would leave the persons 
 affected by them in the same state as regards each other. Taxes 
 of this type, if practicable, could be paid with the least possible 
 sacrifice by those subject to them and with no loss to the re- 
 mainder of the community, even in some cases the result would 
 be a gain. The case of men servants in livery, if these men are 
 in existence after the war, may serve as an illustration 1 . Another 
 instance, though here there are some obstacles, would be a tax 
 upon the larger displayed advertisements. Small announce- 
 ments of wants would be free of this tax, but large posters and 
 corresponding spaces in newspapers and magazines would be 
 charged in proportion to size. The new French Budget law has 
 made wide use of this principle. Commodities of the nature of 
 luxuries are divided into two classes. One of these consists of 
 articles which are luxuries under all circumstances such for 
 instance as diamonds, pearls, jewellery of gold and platinum. 
 The other comprises goods of the nature of dress or furniture, 
 expenditure on which becomes extravagant when the price paid 
 for an article exceeds a certain amount. Then there is a group 
 of conditional luxuries (e.g., motor cars as used for pleasure and 
 not for professional and business purposes). The tax is 10 per 
 cent, ad valorem on the full value of the first, at the same rate 
 on the excess upon the permitted minimum of the second. The 
 remaining group pays on the full value for luxurious uses but it 
 is exempted for necessary ones. Such a system will no doubt 
 have some of the disadvantages of Excises on many commodi- 
 ties, but its working may prove suggestive if taxation at the 
 source, by means of a developed income tax, fails in checking 
 certain forms of profuse expenditure. 
 
 The same financial pressure would justify increases in the 
 amount of a number of fees and licences. Stamps can be made 
 to yield more. Readjustments in the charges of the postal, 
 telegraphic and telephonic services may be made productive of 
 a larger net revenue. The State should aim at covering the cost 
 of production (including interest upon capital) of any service 
 
 1 Dr Marshall suggests a steeply graduated tax upon servants and par- 
 ticularly high in the case of male servants. After the War Problems, p. 325.
 
 122 Ten Years After 
 
 which it renders. After the close of the period of financial 
 transition it may be anticipated that the heading of "Miscel- 
 laneous Revenue" will contract. Upon the form of statement, 
 which is adopted here, it is only necessary to take into account 
 any net revenue accruing from new State-services. In the first 
 ten years of peace, that net revenue, should such services be 
 established, would be small. In the aggregate it is possible that 
 the balance might be upon the side of expenditure rather than 
 of revenue. 
 
 In a system of taxation, such as has been outlined, the main 
 weight is thrown upon an Income Tax which is sufficiently pro- 
 gressive. It must be frankly admitted that, if the graduation 
 becomes very steep as affecting the largest incomes, it will be a 
 disagreeable necessity. But in comparison with other methods 
 of securing the same revenue, on the whole, the balance of dis- 
 advantage will be less. Increases in existing taxes upon luxuries 
 (as contrasted with the rates in force in 1917) or altogether new 
 duties will be useful in providing further revenue. 
 
 Owing to the prominence assigned to Income Tax, the cir- 
 cumstances which affect its yield at any given rate may be taken 
 as generally symptomatic of the produce of most of the remain- 
 ing taxes. Therefore it may be sufficient to restrict attention to 
 such influences as may be expected to affect the income from 
 this source. It has already been shown that the revenue from 
 Income Tax during the period of financial transition need not 
 occasion anxiety 1 . It will be aided, as regards profits, by the 
 inclusion of the final war years when business should remain 
 good. Through the exigencies of the work of restoration, upon 
 the three years average, the first two or three years of peace 
 should still receive considerable benefit. Though debt will have 
 continued to increase until the end of the war, the interest paid 
 upon it will return in part to the Exchequer in the form of 
 Income Tax. Many are of opinion that, once the urgent work 
 of restoration has been finished, there will follow a period of 
 dulness or even depression in trade. It would seem as if com- 
 merce and industry, after the extraordinary efforts demanded 
 
 1 See above, pp. 98-100.
 
 Ten Years After 123 
 
 by war-production and the subsequent pressure in restoring 
 war's damage, must pause for recuperation. It is true that de- 
 pression in trade has followed several previous wars, but atten- 
 tion must be paid to a radical difference in the conditions. 
 On many of those occasions — perhaps in most — one outstanding 
 cause of the check to activity was the undeveloped condition of 
 credit in former times. If the resources of modern banking and 
 allied financial institutions are used to advantage, there appears 
 no good reason to expect an inevitable depression. At the worst 
 the produce of a given rate of Income Tax would, on the average, 
 either re-act slightly or increase more slowly than normally. But 
 in so far as it is possible to estimate numerous highly uncertain 
 conditions, subsequent events have tended to confirm the expec- 
 tation expressed in the previous course of lectures, namely that 
 the present awakening of the nation will be productive of highly 
 beneficial results for its industry and commerce 1 . The experi- 
 ences of the young manhood of the country will have added 
 greatly to the intangible, but none the less important, immaterial 
 wealth of the country. At present the vital energy, hope and 
 determination of the young is wanting in the facing of the future, 
 and allowance must be made for the pessimism of the tired, the 
 middle aged and the elderly towards coming changes. Thus 
 there are too often apprehensions in the minds of many towards : 
 
 Things to come 
 Which leave within them musings troublesome 
 To their weak spirits 2 . 
 
 Another anxiety is the dread that high taxation will exercise 
 a restricting influence upon trade. This is most commonly ex- 
 pressed with reference to the future of overseas markets. It is 
 feared that the British merchant, burdened with heavy taxes, 
 will compete at a disadvantage. This might be the case if he had 
 to meet traders of other nations who would be subjected only 
 to the lesser weight of their pre-war burdens. But one result of 
 a world-war has been that all the chief foreign trading nations 
 will be compelled to raise much higher revenues from taxation 
 
 1 W. R. Scott, Economic Problems, First Series, I9 1 ?. P- l 9- 
 
 2 G. Withers, A Dark Lantherne, 1652, p. 7.
 
 124 Ten Years After 
 
 than in the past. It seems possible that in the majority of cases 
 their merchants will be at the greater disadvantage as regards 
 the burden of taxes they will have to bear. Certainly any system 
 of taxation, such as that suggested above, inflicts the minimum 
 of damage upon commerce. 
 
 On the whole the prospects of the revenue are favourable. At 
 the end of the financial year 1917-18, the method of permanent 
 taxation then in vogue produced a revenue which was sufficient 
 to meet the charge of civil government upon a peace basis 1 , to 
 pay interest upon the net debt and to provide for pensions and 
 a sinking fund 2 . The system of taxation which has been de- 
 scribed could be made as productive as will be required, mainly 
 by increasing the graduation of Income Tax. 
 
 Hitherto any estimate of the liability for interest upon the 
 net debt has been made perplexing by the extent to which 
 portions of it may not be recoverable and there may be delay in 
 the payment of interest. By the end of the period of financial 
 transition this uncertainty should be removed or at least greatly 
 diminished. The method of presentation which has been 
 adopted in the previous lecture, namely by reserving certain 
 concealed assets as a suspense account against such sums as 
 will then appear doubtful and passing any surplus that remains 
 to a sinking fund for debt redemption, leaves a clear statement 
 of the net debt for purposes of calculation. Regarded from this 
 point of view, it will consist of the total debt less the loans to the 
 Dominions and the Allies upon which interest is then being paid. 
 
 1 As will be shown below, it seems reasonable to expect that the necessary- 
 outlay of the peace establishment must be higher after the war than it was 
 before it. 
 
 Millions Millions 
 
 2 Total Revenue from taxation and State Services in 
 
 1917-1918 ... ... ... ... ... 707 
 
 Less Excess Profits Duty ... ... ... ... 220 
 
 Expenditure as estimated in 1914-15 ... ... 205 
 
 Interest and sinking fund on net War Debt (5179 
 millions less 2,000 millions) at 5 per cent, and 
 1 per cent, for redemption, say ... ... ... 192 
 
 Available for pensions and contingencies ... ... 90 
 
 487 
 
 — 487
 
 Ten Years After 1 2 5 
 
 It is probable that by the end of the war there will remain a con- 
 siderable floating debt as well as short dated loans which are 
 due for early repayment. It will be a matter of great financial 
 judgment to select the propitious moment for a first consolidat- 
 ing loan. The rate of interest will certainly be lower than that 
 paid during the later stages of the war. It may be 4! per cent, 
 or even less. The first of the 5 per cent. National War 
 Bonds of the issue of October, 1917, will fall due for repayment 
 on October 1st, 1922, the next series in 1924, the third series in 
 1927 and the earliest date for the redemption of the 5 per cent. 
 War Loan of January, 1917, is in 1929. As each is consolidated 
 the rate of interest will be reduced. Even in the transition period 
 a perceptible lightening of the dead-weight charge will be ex- 
 perienced and five years after peace this will have become more 
 marked. 
 
 More important than the lightening of the burden of interest, 
 through conversion and the operation of the sinking fund, will 
 be the tendency towards the limitation of debt in the later 
 stages of the war. The Army has a saying that the "first three 
 or four years of the war will be the worst," and this will certainly 
 be true of the annual additions to the National Debt. The pro- 
 portion of the total expenditure raised by taxation will increase 
 towards the end as it did in the French Wars. In spite of ex- 
 penditure being much heavier in the second half of that contest, 
 less was borrowed than in the previous period, so that the 
 addition to the Debt was smaller. In the present war, whatever 
 may have been the mistakes of our finance, one error, namely 
 that of restricting expenditure in the first years, has been 
 avoided. No doubt there has been great and even gross ex- 
 travagance, but the manifestation of this encourages the hope 
 that, without loss of efficiency (which in the circumstances is 
 paramount) our own net expenditure will cease to increase and 
 perhaps decline. With an augmented revenue from taxation the 
 additions to the net debt for equal periods in the future should 
 be less than they have been up to the end of the financial year 
 1917-18. 
 
 It is recorded that, upon Lord Mansfield being asked at the
 
 126 Ten Years After 
 
 beginning of the French Revolution when it would end, he 
 replied " It is an event without precedent, and therefore without 
 prognostic." The present war has no precedent in its financial 
 conditions, and as it would seem to follow that prognostication as 
 to its consequences would be futile, if not misleading. We cannot 
 tell the amount of debt which the war will leave behind it, nor 
 what the rate of interest payable upon it will be when the 
 greater part of the debt has been converted and the sinking fund 
 is in full operation. Still less can it be determined what the ex- 
 pense of civil government will be nor what future expenditure 
 upon the defence of the country will be required. At the same 
 time, whatever the figures for these expenses will be, they will 
 be governed by certain principles and a little can be stated 
 about each of them. As regards the debt, it has already been 
 shown that it is probable it will increase less rapidly in the con- 
 cluding period of the war, and a method has been developed by 
 which the amount of net debt can be stabilised for purposes of 
 treatment. It is necessary that (as shown in the previous 
 lecture 1 ) the swollen civil services should be demobilised during 
 the time of financial transition. Owing to prices for some years 
 after the war being higher than they were before it, it is not un- 
 reasonable to calculate that the cost of the same services to the 
 State will be somewhat higher than they were previously. There 
 may be new services added. These may be of two kinds. Some 
 will be of a character which will not be productive of revenue; 
 but while some of these may be desirable, it will be of great im- 
 portance that they should be more severely scrutinised from the 
 point of view of finance than in the past and that for the first 
 ten years they shall only be established when the need is proved 
 to be unavoidable. Employment by the State upon productive 
 services is of a somewhat different order. If the accounts of those 
 services bring into the general balance sheet of the Exchequer 
 their net balances, the salaries and wages will be shown as pro- 
 vided by the particular service; and, from the point of view of 
 the present enquiry, all that need be taken into consideration 
 will be the small surplus or deficit. In a period of financial 
 
 1 See above, pp. 90-92.
 
 Ten Years After 1 2 7 
 
 stringency, it will be necessary that the latter should be avoided. 
 The expenditure upon the Navy and the Army after the period 
 of financial transition must be a matter of the greatest uncer- 
 tainty. After the Allied ideals of a stable and enduring peace 
 have been established, it is to be hoped that expenditure upon 
 armaments will be reduced, but that cannot be expected to have 
 been attained in the early years of peace. It follows that during 
 that period a considerable increase under this head may be 
 expected. 
 
 At the present time it is not possible to assign any precise 
 figure to the expenditure, and the revenue required to meet it, 
 when a normal financial regime has been restored. But the 
 capacity of the country to meet the great burden it will have to 
 bear may be demonstrated from the experience of the Napole- 
 onic wars. It was proved by experience that the nation was able 
 in the succeeding generations to meet the burden of the debt 
 which remained after that struggle and to take some steps to 
 reduce it. What, then, was the relation of that debt and the 
 expenditure which it involved to the resources of the country at 
 that time? It is obvious that it would be useless to compare the 
 debt as it was after Waterloo with the "National Income" or 
 the " National Capital" at the same time, because there are at 
 present no data by which the corresponding amounts could be 
 estimated for the period after this war. Accordingly it will be 
 necessary to calculate the burden of the debt at the end of the 
 Napoleonic wars in reference to the wealth of the country at an 
 earlier period. The only comparable figures would be those for 
 the income or the capital of the nation at the beginning of the 
 two wars. There is no reliable estimate of either of these for the 
 year 1793, but there are estimates for a few years earlier and 
 later. The "National Income" was calculated by Giffen as 
 having been 200 millions in 1783 and by Mulhall as 230 millions 
 in 1800 1 . For the purposes of the present investigation the 
 average of these figures may be taken, namely 215 millions, as the 
 amount of "National Income" immediately before the outbreak 
 
 1 J. C. Stamp, British Incomes and Properly, 1916, p. 427.
 
 128 Ten Years After 
 
 of the earlier war. In 1816 the total debt was 860 millions 1 , 
 that is borrowing had been pushed until it reached four times 
 the income of the people twenty-three years before. Since the 
 " National Income" of the United Kingdom in 1914 has been 
 variously estimated as between 2,100 millions and 2,300 millions 
 and if an average of 2,250 millions be taken, a net national debt 
 of four times the income would amount to 10,000 millions 2 . This, 
 however, can be regarded as no more than a first approxima- 
 tion. The "National Income" can only be regarded as a measure 
 of borrowing power in so far as it affords a surplus above the cost 
 of maintaining the population from which surplus the interest 
 upon the debt can be obtained by means of taxation. Comparing 
 the "National Incomes" of 1793 and 1914, and taking account 
 of the population at the two periods as well as the change in 
 prices, it is clear that the later income is capable of affording a 
 surplus more than in proportion to the increase. The income of 
 1914 is more than ten times as great, and therefore for this 
 reason it is capable of yielding considerably more than ten times 
 as much in taxation. The nation was able to pay 66| millions 
 in taxation in 1816, and, if necessary, it could pay very much 
 more than 665 millions after this war is over. 
 
 There is, however, another side to the question of the available 
 borrowing power that can be exercised with safety. Income in- 
 creased very rapidly during the Napoleonic wars. If it be 
 assumed to have been 215 millions at the beginning, it had 
 doubled before the end, advancing according to Colquhoun's 
 estimate to 431 millions in 1812-13. After that war the rapid 
 increase ceased. There may have been a decline during the 
 earlier years of peace; and, comparing the estimate of National 
 Wealth for 1822 with that of 1812-13, it appears that in the 
 later year the earlier figure was only just repeated 3 . It can 
 scarcely be expected that the "National Income" will double 
 
 1 G. R. Porter, Progress of the Nation, 183S, § iv. p. 294. 
 
 2 This calculation is confined to the finances of the United Kingdom. 
 In estimating the total financial effort of the British peoples and their 
 borrowing capacities, account would require to be taken of the very large 
 aggregate of loans subscribed locally in the Dominions and in India. 
 
 3 R. Giffen, Growth of Capital, 1889, pp. 103-105.
 
 Ten Years After 129 
 
 itself during the present war; or that, if it does, that figure will be 
 maintained in the immediately succeeding years. There has been 
 a greater proportionate withdrawal of men for military service 
 in the present war than in the last great struggle. On the other 
 hand, women have taken a larger and more efficient share than 
 then in the production of the country. Therefore it seems 
 reasonable to expect upon this as well as upon other grounds, 
 that, unless this war lasts longer than now seems to be possible, 
 the "National Income" will not have increased to the same 
 extent when peace is made, but, at the same time, produc- 
 tion instead of becoming stationary in terms of money (as 
 it may have done from 1816 to 1820) will continue to expand, 
 yielding a larger "National Income" as the source from which 
 taxation may be drawn. Accordingly, although the round sum 
 of 10,000 millions as representing our own debt upon which 
 interest must be paid from taxation may be an overstatement of 
 the sum which could be borrowed with reasonable safety in case 
 of extreme need, it appears probable that the amount justified by 
 resources now in sight, would be perhaps two-thirds to four-fifths 
 of that figure 1 . 
 
 The treatment of this question is rendered difficult by the 
 interaction of two distinct orders of ideas. Once debt has been 
 contracted and until the rate of interest on the loan is reduced 
 upon conversion, the transaction is recorded in terms of money. 
 During that period the rate of interest will be the same however 
 prices may vary, and the amount to be raised by taxation for 
 this purpose will be unaltered. When, however, the point of 
 view is changed and attention is paid to the aggregate incomes 
 from which the taxation is to be obtained, things become more 
 important than the money value of those things. When prices 
 rise during war, even though production may decline, it is 
 possible for the "National Income" to increase as expressed in 
 money. After peace prices will fall but they cannot be expected 
 to average the pre-war level within the period now under con- 
 
 1 In the Appendix an attempt is made to present a picture of the financial 
 position ten years after the financial transition upon the assumption that 
 it is necessary to use the borrowing powers at present available.
 
 1 30 Ten Years After 
 
 sideration, and so the same real production would give a roughly 
 proportionately smaller "National Income" after the war. If 
 production expands sufficiently to make good the extent to 
 which price»have fallen, then the final " National Income" of the 
 war period will be maintained. After a possible pause it is to 
 be hoped that the quickened spirit of the people may accomplish 
 more than this; and, if so, the "National Income," in terms of 
 money, will increase. Also, the fall in prices will be a material 
 benefit to the taxpayer. What is important to him is not so 
 much how much money is left him by the tax gatherer, but 
 what quantity of things he can purchase with that balance. It 
 follows that as prices fall, the real burden of the same taxes will 
 be reduced. 
 
 While it would be aiming at a meticulous precision to en- 
 deavour to fix the amount of borrowing which could be exercised 
 with a fair measure of safety, one result is plain, namely, that 
 in an emergency similar to that which confronted our forefathers, 
 it is unlikely that, when full account is taken of their resources 
 and of ours, we shall be called upon to submit to real financial 
 sacrifices, either during the war or after it, which will be as great 
 as those which they endured and survived. In the field and on 
 the sea we may perhaps hope that we have not been wholly un- 
 worthy of their great example. In the lesser task of financial 
 endeavour, it will remain to complete the period of sacrifice by 
 bearing the burden which the war will leave behind it as cheer- 
 fully as may be. Even when peace has been secured the greater 
 part of the material ransom of humanity will still remain to be 
 paid. No doubt in the future, as in the past, there will be "igno- 
 rant impatience" of post war taxation 1 . This can be mitigated 
 
 1 W. Smart, Economic Annals of the Nineteenth Century, 1801-20, p. 469. 
 An instance of the impatience alluded to in the text may be quoted from a 
 rare periodical publication called The Black Dwarf. It occurs in a Letter to 
 the Yellow Bronze of Japan, dated May 25th, 1819. "My good friend John 
 Bull has played the silly spendthrift so long, that it is not easy to remove 
 his bad habits. What he has done he thinks a sufficient reason for what 
 he does, or what he may do. Accustomed to pay, he habitually feels in his 
 pocket for his cash; and, when he finds none, he is much distressed at his 
 inability, but never thinks about enquiring if the debt is really due. All 
 his personal property and ready money is now gone and a set of impudent
 
 Ten Years After 131 
 
 in part by an equitable distribution of the inevitable sacrifice in 
 some such manner as that which has been detailed. Much of the 
 feelings of injury, and even of wrong, which remained amongst 
 many classes of taxpayers early in the nineteenth century is to 
 be attributed more to the inequalities of the fiscal system of those 
 times than to the magnitude of the aggregate amount in relation 
 to the available resources of the country — great as that undoubt- 
 edly was. It will be possible to achieve substantial justice in 
 distributing the load to be borne, and thereby the sense of weight 
 will be lessened. As was said by Dion Chrysostom when all join 
 in paying their share of war taxes, the burden of each is lightly 
 borne 1 . The apportioning of sacrifice, justly and at the same 
 time with the least disadvantage to commerce and to social 
 needs, will occupy much of the attention of students of public 
 finance in the future. But there will be another aspect of finance 
 which will be no less important and which is much wider in its 
 scope. The liability imposed by the war upon future generations 
 of taxpayers, might be described as fixed in its initial stages but 
 with an undetermined fringe. At least half of it will consist of 
 interest upon the debt and sinking fund, pensions, too will 
 remain to be met, though later these will decrease, automatically. 
 Much of the peace expenditure is unavoidable. All these items 
 together will constitute a definite amount which will vary little 
 in the earlier years of peace. But the source from which taxation 
 will be drawn to meet this liability may be augmented by in- 
 creased and more effective Production. In order to meet that 
 part of the cost of war, which has been borrowed, a larger and a 
 more efficient output of Wealth will distribute approximately 
 
 varlets...now tell him that his real property, lands, houses and all is mort- 
 gaged to the fundholders for upwards of eight hundred millions of money 
 advanced and spent in his service. John says he is now in a much worse 
 condition than he ever was before and that his pockets have been emptied 
 of a thousand millions more in the shape of taxation besides the tythes and 
 the poor rates and the country rates and the devil rates besides which have 
 rated him out of all reason and out of all means of subsistence to boot. When 
 John talks in this way they tell him he is mad. But if oppression maketh 
 even a wise man mad, what is to be expected from revenge and oppression 
 to boot operating upon a mind not more than usually strong?" 
 
 1 "Orai' yap e£ airavroiv <rvveiff<p{pr)Tai, eKaarui Kovcpov yiverai to eTrirayfia.
 
 132 Ten Years After 
 
 the same burden of taxation over a greater "National Income" 
 with the result that the sacrifice upon each unit of that enlarged 
 income will tend to be less. As the possible surplus above the 
 maintenance of the population and the taxes to be paid grows, 
 so the fund from which savings can be made will increase and the 
 provision of new Capital will aid further industrial advance. In 
 this way the ultimate financial problem at once merges itself 
 into, and at the same time reinforces all wise schemes and all 
 the concentration of effort for the improvement of industry and 
 commerce in the future. And so the argument returns upon 
 itself, and it comes back again to the point with which the open- 
 ing lecture of the former course ended. Reasons were then ad- 
 vanced which led to the conclusion that very great developments 
 were possible, and that there were reasonable grounds which led 
 to the confident expectation that many of these would be 
 realised. I may be permitted to repeat what I said upon that 
 occasion, for the events of the past year have confirmed my 
 anticipations — "The energising of the nation through a time of 
 trial will result in greater efficiency when the present struggle 
 is ended. Discoveries of new processes and methods, with im- 
 provements in old ones, will lead not only to a more productive 
 industry; but, it is to be hoped, also to a better industry. As the 
 murk of the battle cloud clears, one sees the first signs of a fairer 
 dawn in which the arts of industry, broadened and deepened and 
 at the same time more humanely organised, can accomplish in 
 the next generation more than even was dreamt of by the dis- 
 coverers of the great Victorian era 1 ." 
 
 1 W. R. Scott, Economic Problems, First Series, p. 19.
 
 APPENDIX 
 
 9—3
 
 APPENDIX 
 
 Present Borrowing Capacity {in relation to taxable resources 
 now available) ten years after the Period of Financial 
 Transition. 
 
 If it be taken that, for the reasons detailed above, the resources 
 of the United Kingdom at present in sight would justify borrowing 
 to the extent of about 8,000 millions for the purpose of meeting that 
 expenditure upon which this country will be liable to pay interest 
 when all the details of outlay are known, it may be worth indicating 
 what the financial position would be upon this hypothesis. In the 
 supply of men and material the present war has taxed our resources 
 more than that at the end of the eighteenth and the beginning of the 
 nineteenth centuries. Yet, as has been shown above, the financial 
 drain has not yet been so great. A net national debt of 8,000 millions 
 for us would probably not be as great a burden as that which re- 
 mained after the Napoleonic wars. That would be about twice the 
 net estimated debt 1 at the end of the financial year 191 7-1 8 ; but upon 
 grounds, already explained, a larger proportion of expenditure may 
 be expected to be provided from taxation, and economy in the 
 spending departments should be a check on the rise in the outlay on the 
 war. A net debt of 8,000 millions appears to be a possible burden on 
 the basis of present resources. These may increase, in which case, if 
 necessity required it, there would be further capacities for borrowing. 
 If, however, 8,000 millions be taken as the present limit, it seems worth 
 endeavouring to envisage how the financial position might readjust 
 itself ten years after the end of the period of financial transition in 
 respect to the continuing revenue which is now actually in sight. In 
 such a calculation the figure for the service of that debt is ascertain- 
 able within certain limits when assumptions are made as to a reason- 
 able rate of redemption and the rate of interest. The remaining 
 
 1 That is the net debt in the sense of deducting loans to the Dominions 
 and Allies from the total debt. The term "net " in this connection is becom- 
 ing ambiguous. The Economist uses the term "net borrowings' as the 
 balance left after the proceeds of taxation are deducted from the total war 
 expenditure. Also besides loans to the Dominions and Allies, there are other 
 items of conditionally recoverable expenditure. If these also be deducted 
 the "net debt" so reached would be smaller.
 
 136 Appendix 
 
 amount which it is proposed to assign to the rest of the expenditure 
 (namely 300 millions to cover the outlay on defence, civil government 
 and pensions) is to be understood strictly upon the principles laid 
 down in the concluding lecture. It comprises (for purposes of com- 
 parison) the outlay on the Post Office, but it does not include that on 
 new services which may be rendered by the Government. The latter 
 are taken into account only to the extent that they yield a deficit or 
 a surplus. Also the sum allocated for the expense of Civil Government 
 is to be understood as on the present basis increased to allow for the 
 larger population to be served. Any extensions would require to be 
 met by further revenue secured after the war. 
 
 Revenue and Expenditure Ten Years after the End of the 
 Period of Financial Transition upon the various as- 
 sumptions explained above. 
 
 mil. mil. 
 
 Estimate of Revenue obtain- Expenditure on Civil Govern- 
 
 able in 1918-19 (p. 63) ... 900 ment and Defence with the 
 
 Deduct special war taxes or addition of pensions, on the 
 
 war revenue ending with the basis described in Lecture vi 
 
 war or in the Period of (p. 126) ... ... ... 300 
 
 Transition ... ... ... 250 mil. 
 
 Assuming a net debt at 
 
 declaration of peace 8000 
 Less debt redeemed in 
 
 12 to 13 years ... 1000 
 
 Balance net debt ... 7000 
 Interest 4% and 1 % sinking 
 fund on 7000 millions ... 350 
 
 650 650
 
 INDEX 
 
 ' Abstinence ' 74 
 Adams, H. C. 52, 53, 56 
 Allen, J. E. 56 
 Argents 55 
 Asgill 68 
 
 Barbier 68 
 
 Barclay, J. 55 
 
 Bastable, C. F. 47, 48, 49, 63, 64, 
 
 80 
 Beaulieu, Leroy 47, 53 
 Berkeley, G. 47 
 Borrowing, advocated 51 
 
 after the war 104 
 
 condemned 45, 46 
 
 its place in war finance 
 
 62, 63 
 
 Boycott, economic 28, 32 
 Brailsford, H. N. 8, 35 
 Burke, E. 44 
 
 Canadian Disputes Act 24 
 Cecil, Lord R. 6 
 Chalmers, T. 45, 46 
 Chapman, S. J. 56 
 Cohn, G. 51 
 Coleridge, S. T. 79 
 Colonies 25, 35 
 
 Communication by air 9-13, 15 
 — land 12, 13, 33 
 
 — sea 4, 5, 12, 13, 33 
 
 Compulsory arbitration 24 
 Conscription of wealth 69-72 
 Consolidation of Allied Debt 107, 
 
 108 
 Crises 100 
 
 Davenant, C. 44 
 Dawson, W. H. 84 
 Decker, Sir M. 45 
 Defoe, D. 79 
 
 Demobilisation 89, 104 
 Dietzel, C. 51 
 Disraeli, I. 3 
 
 Edgeworth, F. Y. 46, 57, 60 
 Einaudi, L. 53 
 Empedocles 33 
 
 Fabian Society 25 
 Fauquier, F. 43 
 
 Financial transition, duration of 103 
 Frederick the Great 7 
 Freedom of the air 9,11 
 "Freedom of the Seas" and the 
 League of Nations 17 
 
 and private property 5 
 
 — — as denned by Reventlow 6 
 
 in French wars 3, 4 
 
 Gide, C. 107 
 
 Giffen, R. 49, 127, 128 
 
 Gossen, H. H. 47 
 
 Government Property, sale of 105, 
 
 106 
 Gronovius 7, 9 
 Grotius 6, 7, 9 
 
 Hamilton, R. 79 
 Henry IV 23 
 Hitchins, W. L. 95 
 Hobbes 73 
 Hooke, A. 68 
 Hume 45 
 Hutcheson, A. 45, 68 
 
 Indemnities 27, 28, 104 
 ' Invisible hand ' 29 
 
 Jacob, L. H. von 50 
 Jacobins 6 
 Jevons, W. S. 47
 
 138 Index 
 
 Justi, J. H. C. 50 
 
 Kipling, R. 9, 10 
 Kossuth 44 
 
 Law, John 68 
 
 Leslie, Cliffe 25 
 
 Levies on Capital 68, 76, 78, 80, 82, 
 
 84 
 Loans and economy 74 
 
 inflation 57 
 
 local 48 
 
 (See also National Debt) 
 
 Loringhoven, von Freitag 26 
 
 MacArthur, John 47 
 McCulloch 45 
 Mahan 4 
 
 Manchester School 29 
 Mare clausum 10 
 
 — liberum 6, 9 
 Marshall, A. 59, 84, in, 112, 119, 
 
 121 
 Menier 68 
 Mill, James 24 
 
 - J. S. 24, 44, 45, 81, 82, 
 115, 116 
 
 Mulhall 127 
 
 National Debt 44, 45, 68, 79, 85, 
 105, 125 
 
 Nations, League of, analogy to in- 
 dustrial disputes 24 
 
 and blockade 17 
 
 British commerce, 31 
 
 compulsory arbitration 
 
 24 
 
 control of the air 12, 15 
 
 economic independence 
 
 30 
 phenomena 25, 26, 
 
 29, 30 
 
 pressure 28, 29, 30 
 
 international law 26 
 
 progress 37 
 
 security 26 
 
 shipping 18 
 
 small nations 17 
 
 sovereignty 25 
 
 Nations, League of, and strategic 
 railways 12, 14 
 
 strikes, 28 
 
 substitutes 30 
 
 tariffs 33, 96, 120 
 
 traffic 5. 8, 17 
 
 danger of early dissolution 
 
 16, 31, 32 
 
 industrial precedents 24 
 
 its origin 24 
 
 precedent conditions 26- 
 
 28 
 prospects 18, 39, 40 
 
 regulation of transport by 
 
 13. 17 
 
 the experimental stage 31, 
 
 37 
 Nebenius, F. 50, 57 
 
 New Zealand Disputes Act 24 
 Nicholson, J. S. 30, 49, 50, 71 
 
 Pareto, V. 53 
 
 Peace, conditions of 9, 25-28, 31 
 
 Peel, Sir R. 56 
 
 Pegler 97 
 
 Petty, Sir W. 44 
 
 Pigou, A. C. 58, 73 
 
 Pitt 8 
 
 Porter, G. R. 128 
 
 Rasselas 73 
 
 Raw materials 29, 33, 35, 94 
 Regensburg, Gerolus de 23 
 Reventlow, Count 6 
 Ricardo 45, 46, 48, 60, 68 
 Robertson, Sir W. 71 
 Roscher, W. 51 
 
 Sargent, W. L. 104 
 
 Schmalz 50 
 
 Schooling, W. 48 
 
 Schulze Gavernitz 5 
 
 Scott, W. R. 4,8,13,52,72,77,78, 
 
 96, 115, 123, 132 
 Sea Power, British 4 
 Security 23, 26 
 Selden, J. 59 
 Seligman, E. R. 54, 74, 79 
 Sheridan, J. B. 58
 
 Index 
 
 139 
 
 Smart, W. ' 92, 130 
 
 Smith, Adam 29, 45, 48, 50, 54 
 
 Spicer 97 
 
 Sprague, O. M. W. 56, 71 
 
 Stamp, J. C. 76, 100, 127 
 
 Stein, L. von 51 
 
 Steuart, Sir J. 47 
 
 Strikes 28 
 
 Swift 46 
 
 Tariffs 27, 32-34 
 Taxation and currency 101 
 
 — prices 101 
 
 in war 44-54, 62, 63, 73, 
 
 86 
 
 to provide Capital 85 
 
 Taxes, Customs 102, 120 
 
 — Estate Duty 102, 117, 118 
 
 — Excess Profits 73, 89, 93-95 
 
 — Excise 102, 103 
 
 — Fees 102, 121 
 
 — House Duty 113, 114 
 
 — Income Tax 73, 78, 80, 84, 
 
 93, 98-100, 103, 112, 113- 
 115, 121 
 
 — indirect 96, 119 
 
 — new 71, 73, 74, 76, 78, 95, 
 
 97, 103, 120, 121 
 
 — on advertisements 121 
 
 — — Capital 80, 84 
 
 — — deficient saving 75 
 
 — — exempts 73 
 
 Taxes on luxuries 121 
 
 — — profits 93 
 
 — — savings 115 
 
 — — servants 121 
 
 — stamps 121 
 Tooke, T. 101, 102 
 Trade routes 13-15 
 Transport 12, 13 
 Truce of God 23 
 
 Wagner, A. 51 
 
 ' Waiting ' 74 
 
 War after the war 33 
 
 — as a National industry 26 
 
 — Civil 77 
 
 — Crimean 47 
 
 — double consciousness in 72 
 
 — finance 46-64 
 
 — followed by trade depression 
 
 123 
 
 — Franco-Prussian 68 
 
 — Napoleonic 47, 68, 81, 127 
 
 — on dissolution of League of Na- 
 
 tions 31, 36 
 
 — South African 47, 48 
 
 — ' winding up expenses ' 92 
 Wealth of United Kingdom 76, 
 
 127-129 
 Webb, S. 83 
 
 Wilson, Woodrow 5, 26, 33 
 Withers, G. 123 
 
 — Hartley 71 
 
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