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 OUR MONEY AND 
 THE STATE 
 
 BY HARTLEY WITHERS 
 
 Life is like playing a violin solo in public 
 and learning the instrument as one goes on. 
 
 Sa3£XJEL Btjtlee, Essays on Life, Art and Science 
 
 NEW YORK 
 
 E. P. DUTTON & COMPANY 
 
 68i FIFTH AVENUE
 
 Copyright, 1917 
 B. E. P. EUTTON & COMPANY 
 
 \ 
 
 printed in the Qnited States of Hmerica
 
 H ^ 
 
 ^ 
 
 (? 
 
 PREFACE TO THE AMERICAN EDITION 
 
 Problems of Public Finance are looked at from dif- 
 ferent angles by different peoples, but are, in es- 
 sence, much the same all over the world. More- 
 over it is possible that if the present war ends in the 
 establishment of a League of Peace, based on the 
 brotherhood of Mankind, as foreshadowed by Presi- 
 dent Wilson in his noble message to the Russian 
 people, there may be a change in the outlook on 
 questions of taxation, and they may be hencefor- 
 ward looked at from a new point of view, directed 
 to the furtherance of that brotherhood. In any 
 J case, since one of the benefits that the people of the 
 J United States have always enjoyed is the power to 
 J profit by the mistakes of Europe, it is possible that 
 Oy an English view of the relations between the State 
 \ and the property of its citizens may be of some in- 
 terest in America. 
 
 Hartley Withers. 
 
 July 191 7. 
 
 389193
 
 PREFACE TO THE ENGLISH EDITION 
 
 This book grew out of a course of lectures on Public 
 Finance delivered at the London School of Econo- 
 mics in February and March. The subject had 
 already been dealt with ably and fully by writers 
 who had made a special study of it; but the 
 present war, by making us spend with such titanic 
 recklessness, has supplied us with a huge magnifying 
 glass, by which cause and effect are more clearly seen 
 than in times of peace. The results of borrowing, 
 inflation of currency, and inequities in taxation are 
 seen at work now on such a scale that if we use the 
 experiences of the war aright they may help us to 
 better financial methods when the war is over. 
 Students who wish to pursue the subject into its 
 technical and scientific details can do so with the 
 help of Public Finance, by Prof. Bastable; The 
 Income Tclx, and other works on taxation by Prof. 
 Edwin R. A. Seligman; British Budgets, 1887-1913, 
 by Sir Bernard Mallet; The System of National 
 Finance, by Mr. E. Hilton Young, M.P. ; The 
 Financial System of the United Kingdom, by H. 
 Higgs, C.B. ; and that monument of industry and 
 mine of statistical and other information, the House 
 of Commons Return (366) of 1869, on Public In- 
 
 vii
 
 viii PREFACE ' 
 
 come and Expenditure, etc., drawn up in years of 
 patient labour by Henry W. Chishohn, sometime 
 Chief Clerk of the Exchequer : it is commonly called 
 Chisholm's Analysis of the Public Accounts, 1688 — 
 1869. 
 
 Hartley Withers. 
 6, Linden Gardens, 
 June 191 7.
 
 CONTENTS 
 
 CHAPTER I 
 
 PAGE 
 
 THE OBJECTS OF GOVERNMENTAL SPENDING I 
 
 Government spends to secure property of citizens, 
 to defend national honour, to increase country's 
 material resources and promote national health — 
 Government's theoretical right to take all citizens' 
 property modified by practical inability — Change in 
 view as to governmental activity — Spencer — Huxley 
 — Adam Smith. 
 
 CHAPTER II 
 
 MONEY TAKEN BY BORROWING .... 25 
 
 Borrowing popular owing to belief that it makes 
 posterity pay — This belief delusive — War paid for 
 while it goes on — Borrowing only affects distribution 
 of posterity's income — Borrowing at home — Its 
 drawbacks — Borrowing abroad. 
 
 CHAPTER III 
 
 MONEY WATERED BY INFLATION .... $2 
 
 Medieval debasement of currency — Modem infla- 
 tion — Methods by which currency is increased — Why 
 it happens — Evil effects.
 
 X CONTENTS 
 
 CHAPTER IV 
 
 FAOB 
 
 MONEY TAKEN BY TAXATION 73 
 
 Does money left with citizens always ' ' fructify " ? — 
 Adam Smith's maxims — Walker's criticism — Gradu- 
 ation and differentiation — The ideal income tax — 
 Unfairness of indirect taxes — Import duties. 
 
 CHAPTER V 
 
 THE LIMITS OF GOVERNMENTAL SPENDING . 105 
 
 Can the State earn revenue by trade enterprise? — 
 Fabian scheme — Imperial Committee's proposal — 
 Adverse experiences — Limits to taxation — Willing- 
 ness of taxpayers essential.
 
 OUR MONEY AND THE STATE
 
 OUR MONEY AND THE STATE 
 
 CHAPTER I 
 
 THE OBJECTS OF GOVERNMENTAL SPENDING 
 
 Why does the Government take our money? Be- 
 cause government costs money, and cannot be had 
 without it. Taxation is the price that we pay for 
 government and protection. Most of us do not 
 want, or need, to be governed ourselves. Respect 
 for law, or for the duties and customs that law 
 embodies, is so engrained in us by centuries of 
 tradition, that the presence of the policeman on his 
 beat is a fact that never influences our conduct. 
 But if we do not need to be governed ourselves, we 
 very much need other people to be governed and 
 prevented from attacking us or our belongings. 
 Protection of our persons and property, from home 
 and foreign foes, is the first and most important 
 business of government ; and the chief reason that 
 it can give if we ask it "Why should we pay taxes?" 
 is this: "Because, if you don't, you will be in dan- 
 ger of losing everything that you have got." 
 
 Government does so much in these days besides 
 its first elementary task of protecting us from one
 
 2 THE OBJECTS OF SPENDING [chap. 
 
 another and from outward foes, that we are apt to 
 forget that this is its original business. But as the 
 point is very important, as we shall see later, it 
 is well to get it fixed into our heads by reading 
 the plain words in which it is set forth by John 
 Locke. In Chapter I of his Essay concerning the 
 True Original Extent and End of Civil Govern- 
 ment he says : 
 
 "Political Power then I take to be a Right of 
 making Laws with Penalties of Death, and conse- 
 quently all less Penalties, for the regulating and 
 preserving of Property, and of employing the Force 
 of the Community in the Execution of such Laws, 
 and in the Defence of the Commonwealth from 
 Foreign Injury, and all this only for the Publick 
 Good." 
 
 In Chapter VIII of the same Essay we find : 
 
 "The only Way whereby any one divests himself of 
 his natural Liberty and puts on the Bonds of civil 
 Society, is by agreeing with other men to join and 
 unite into a Community, for their comfortable, safe, 
 and peaceable living amongst one another, in a secure 
 Enjoyment of their Properties, and a greater Security 
 against any that are not of it." 
 
 And in Chapter IX the matter is summed up thus : 
 
 "The great and chief End therefore, of Mens 
 uniting into Commonwealths and putting them- 
 selves under Government, is the Preservation of their 
 Property." 
 
 Locke did not leave the object of government on
 
 I] THE STATE'S CLAIM 3 
 
 this merely businesslike foundation. He did not 
 really mean that we only submit to being governed 
 in order that we may grow rich and fat and enjoy 
 our riches without fear of burglars or marauding 
 foes. He says in another passage that the End of 
 Government is the Good of Mankind. This is a 
 more inspiring ideal, but we shall all acknowledge 
 that it cannot be secured unless man's material wants 
 are satisfied, and that as society is at present con- 
 stituted, this cannot be done unless property is pro- 
 tected. Some day mankind will perhaps grow 
 into a race of beings who will work for the pleasure 
 of working, and not mind who takes and uses the 
 stuff that they make and grow. There are already 
 many more of such people than old-fashioned econ- 
 omists admit. But in considering present-day prob- 
 lems, we have to take human nature as it is, and 
 nations cannot at present increase their wealth, and 
 so their power to secure the Good of Mankind, 
 unless those who increase it are secured in the en- 
 joyment of it. 
 
 Protection of the property of the citizens being 
 thus the original, and still a very important, duty of 
 the State, it follows that the State, in order to 
 carry it out, can make any claims that it pleases on 
 the services and property of the citizens. The State, 
 as Professor Bastable tells us, "is entitled to claim 
 all the services and property of its subjects for the 
 accomplishment of whatever aims it prescribes to 
 itself. When stated in so rigid a form," he adds, 
 "the proposition is likely to awaken dissent, and yet,
 
 4 THE OBJECTS OF SPENDING [chap. 
 
 from the strictly legal and administrative point of 
 view, it is a commonplace since the time of Austin,"^ 
 (Austin was a great authority on law, who lived and 
 wrote in the first half of the nineteenth century.) 
 It is true enough, as Professor Bastable suggests, 
 that the average British paterfamilias may be 
 startled into an indignant denial of the great law 
 that the State has a right to take all his work and 
 all his goods. But a few moments' thought would 
 convince him that the proposition is quite sound 
 in logic, since the State cannot do its business if 
 all the citizens are to be able to decide how much, 
 or how little, they are to give, in work or in goods, 
 to its support; and he would also comfort himself 
 with the reflection that, however logical be this 
 power of the State, it cannot be exercised beyond a 
 certain point. On papefTltHe State may be able to 
 set us all to work for it, but it cannot make us 
 work hard or well unless we are willing to do so. 
 On paper, the State may be able to take all our 
 property, but if it did, then it would not be worth 
 any one's while to get property^ The citizens would 
 cease to accumulate property, that is, to leave the 
 world richer than they found it. Either the State 
 would have to accumulate on its own account, which 
 it could only do if the citizens were willing to work 
 for it, or it would find that it had come to a stand- 
 still. 
 
 Professor Bastable's proposition, though abso- 
 lutely true as a principle, is thus modified by the 
 '^ Public Finance, p. 42.
 
 / 
 
 I] TAXPAYERS' STRIKE 5 
 
 very real power of the citizen to refuse to produce 
 either the work or the property that the State has 
 the power to take. This power of the overtaxed 
 citizen to strike effectively against taxation is no 
 fanciful suggestion of what might possibly happen. 
 It has happened. Under the Roman Empire taxa- 
 tion was enormously heavy, for the support of the 
 Army, the Imperial Court, and "the great number 
 of clerks made necessary by the bureaucratic form 
 of government." It was also extremely oppressive, 
 since the senatorial class, the Army, Professors of 
 Rhetoric, and the Clergy, were largely freed from it, 
 and so the whole burden fell on the curials, that is, 
 owners of twenty-five acres of land, or its equivalent. 
 
 "When the curials were bankrupt and could no 
 longer pay the taxes, they attempted in every way 
 to escape from their class. Some of them succeeded 
 in rising into the senatorial ranks ; many of them 
 deserted their lands and became slaves, or entered the C JJ 
 Army or the Church. The Emperors, trymg to pre- 
 vent this, often seized the curial who had run away 
 and compelled him to take up his old burden 
 again." 2 '^ 
 
 This fact, of the taxpayers' power to strike, is 
 very relevant to modern problems of finance, be- 
 cause it may come into play long before there is 
 any question of the State's taking the whole of our 
 goods. As soon as the pressure of taxation begins 
 to be heavy, the danger has to be ever present in 
 / M General History of Europe (350-1900), by Thatcher and / 
 Schwill, pp. 9-10.
 
 6 THE OBJECTS OF SPENDING [chap. 
 
 the mind of the statesman who is responsible, that 
 he may, by his present exactions, be preventing the 
 future growth of the country's wealth, and so 
 making the task of his successors difficult, if not 
 impossible. Taxation that is resented, beyond a 
 certain point, will be evaded or avoided. The tax- 
 gatherer can only work to his own satisfaction if he 
 carries the sense of the taxpayers with him. Hence 
 it is of the utmost importance, not only that our 
 rulers should tax well, but that the citizens should 
 understand about taxation, recognize it as good 
 when it is good, and pay it cheerfully when it is 
 equitable and well distributed. 
 
 "All taxes are confiscation," said Mr. Joseph 
 Hume in the House of Commons in 1833.^ In the 
 original sense of the word confiscation, which meant 
 "putting into the Treasury," this is clearly a plati- 
 tude. But as it now is generally taken to mean an 
 arbitrary appropriation, these words sum up a fal- 
 lacy about taxation which has to be exorcised and 
 expelled before the fiscal arrangements of any nation 
 can be comfortable either for the taxer or the 
 taxed. In fact, taxation is, or ought to be, the 
 i process by which the State takes money from us, 
 
 -^ in proportion to our ability to pay, to spend on the 
 
 defense of our property from home or foreign 
 enemies, on the defense of the national honor, if 
 need be, on the increase of the material and other 
 resources of the country, and on the public health. 
 
 If this be a true description of taxation, taxation 
 * Seligman, The Income Tax, p. 122;
 
 I] GOOD TAXATION PAYS 7 
 
 is a process to which we must all submit gladly. 
 All the objects for which the money so taken from 
 us, with one exception, will literally pay us, if they 
 are carried out. That exception is the defense of 
 the national honor, and he would be a craven skin- 
 flint who would grudge money well spent on that. 
 Defense of our property clearly pays us. So does 
 the increase of the country's resources, because it 
 will make the burden of taxation lighter. If our 
 particular income does not increase, but that of 
 others does, and if taxation is taken in proportion 
 to our ability to pay, we shall have to pay less in 
 proportion. Public health pays us because it les- 
 sens infectious and contagious disease, and so keeps 
 down our doctors' bills. 
 
 But if this description of taxation be untrue, it 
 is our business to make it true, and this can only be 
 done if everybody gives careful thought to the 
 matter, so that if our rulers make mistakes, there 
 shall be a strong body of well-informed opinion to 
 criticize and correct them ; and also so that we may 
 learn that it is not the object of every citizen to 
 pay as little in taxes as possible, because if that 
 spirit is abroad, the fiscal machinery of the country 
 will never run smoothly and well ; we have to learn 
 to judge whether taxes are fair from the point of 
 view of the nation as a whole, and when we rec- 
 ognize them as fair, to pay them gladly and readily. 
 In time of war this readiness to pay is pro- 
 duced, sometimes, by patriotic enthusiasm. In the 
 early days of the present war, taxpayers wrote
 
 8 THE OBJECTS OF SPENDING [chap. 
 
 to the British Chancellor of the Exchequer express- 
 ing the pleasure with which they paid income tax. 
 If we could be sure that money taken in taxes was 
 taken fairly, and used well for the national benefit, 
 that pleasure ought at all times to be present when 
 we pay it. 
 
 It has been said that a nation gets the Govern- 
 ment that it deserves, and Public Finance is cer- 
 tainly a department in which the pressure of enlight- 
 ened public opinion can do much. But we shall 
 never learn to get our Public Finance on a sound 
 and businesslike basis until we understand our own 
 domestic expenditure better. When we recognize 
 the responsibility that is attached to the use of our 
 own money, we shall be able to begin to see that 
 our rulers make good use of the money of the 
 nation. As long as there is a common tendency 
 among the citizens to waste their incomes on frip- 
 peries and vulgarities in obedience to fashion and 
 convention, and to invest their savings in wild-cat 
 speculations in the hope of getting wealth without 
 trouble, we need not expect the national finances 
 to be as well husbanded as they might be. The 
 sum of the national wisdom, in finance as in other 
 things, may be a little greater than the aggregate 
 wisdom of all the citizens, but cannot lead it by 
 much. 
 
 Going back to our description of what taxation 
 is, or ought to be, we see at once that even if every 
 one were to agree to it as stated, there are several 
 expressions in it about which agreement is not
 
 I] HERBERT SPENCER'S VIEW 9 
 
 likely to be reached as long as the present frame- 
 work of society stands. In the first place, the ques- 
 tion of ability to pay is full of pitfalls and difficul- 
 ties which will be discussed in a later chapter. First 
 of all, we have to try to get something like a clear 
 conclusion about the objects on which the State 
 is entitled to spend our money, when it has taken 
 '^it, and on this there has been, is, and always 
 will be, a good deal of divergence of opinion. As 
 stated above, and with reservations and restrictions 
 to be noted later, I venture to think that, in these 
 days, most taxpayers would give at least a hesi- 
 tating and guarded consent to the scope of State 
 expenditure. But there was a time when it would 
 have been thought to be much too wide, and many 
 people now will think it much too narrow. The via, 
 media is a dull and unromantic path, but it has a 
 certain safety. 
 
 Herbert Sgencer may be taken as an extreme 
 exarnpTe of those who would limit the spending of 
 the State. To him it seemed that the State should 
 spend nothing except on public justice and defense. 
 He was the uncompromising apostle of personal 
 freedom, and he believed that only through it could 
 progress and development, of the individual and of 
 the nation, best be achieved. He had an uncon- 
 querable objection to anything like discipline or 
 government, so strong that, when a lad of thirteen, 
 he walked home from Bath to Derby rather than 
 stay at school. He walked forty-eight miles in one 
 day, forty-seven on the second, and twenty-five on
 
 10 THE OBJECTS OF SPENDING [chap. 
 
 the third, without sleep, and with very little food.* 
 In his youth he did not even admit that the Govern- 
 ment should spend money on external defense. 
 Either he believed that a mercenary army and navy, 
 hired by private subscription, would suffice to keep 
 out enemies, or else he took the extreme pacifist 
 view that an unarmed nation need not fear attack. 
 But, in his later years, he abandoned this view, 
 and admitted national defense as a proper object 
 of government expenditure. He still, however, 
 thought that the Postal Service would have been 
 much more cheaply and efficiently managed if it 
 had been left to private enterprise, which is quite 
 possibly true, though it is hardly likely that postal 
 facilities would have been so well distributed. He 
 "advanced the doctrine that, as we trust the grocer 
 to furnish us with pounds of tea, and the baker to 
 send us loaves of bread, so we might trust Heaton 
 & Sons or some of the other enterprising firms of 
 Birmingham to supply us with sovereigns and shil- 
 lings at their own risk and profit."^ He even con- 
 tended that sanitation was not a proper object of 
 collective activity, and records with obvious pleasure 
 how the early efforts at drainage, being defective, 
 sometimes produced disease* It need not_be said 
 that education was a matter which every citizen 
 should, and could best, provide for himself or his 
 children. He is never tired of laughing at our belief 
 in the power of the State to do anything. 
 
 * Herbert Spencer, by Hugh Elliot. 
 
 " Money and the Mechanism of Exchange, Jevons, p. 64.
 
 I] HERBERT SPENCER'S VIEW ii 
 
 "Conceiving [he says], the State-agency, as though 
 it were something more than a cluster of men 
 (a few clever, many ordinary, and some decidedly 
 stupid), v^^e ascribe to it marvellous powers of doing 
 multitudinous things which men otherwise clus- 
 tered are unable to do. We petition it to procure 
 for us in some way which we do not doubt it can 
 find, benefits of all orders; and pray it with un- 
 faltering faith to secure us from every fresh evil. 
 Time after time our hopes are balked. The good 
 is not obtained, or something bad comes along with 
 it; the evil is not cured, or some other evil as great 
 or greater is produced. . . . This emotion which is 
 excited by the forms of governmental power, and 
 makes governmental power possible, is the root of 
 a faith that springs up afresh however often cut 
 down. To see how little the perennial confidence 
 it generates is diminished by perennial disappoint- 
 ment, we need but remind ourselves of a few State 
 performances in the chief State Departments." ® 
 
 He then proceeds to give several examples of 
 administrative ineptitude, the most tragical and 
 absurd, perhaps, of which was the fact that it took 
 two centuries (1593 to 1795) for the British Admi- 
 ralty to adopt the use of lemon- juice as a protection 
 for the crews of its warships against scurvy. 
 
 "And what [he asks] has been the effect of this 
 amazing perversity of officialism? The mortality 
 from scurvy during this long period had exceeded 
 the mortality by battles, wrecks, and all casualties 
 of sea-life put together!" 
 
 * Study of Sociology, ch. vii, p. 160.
 
 12 THE OBJECTS OF SPENDING [chap. 
 
 Such an example of a waste of gallant lives by 
 the imperyiousness of the official mind to new ideas 
 goes a long way towards proving Spencer's conten- 
 tion that Governments, or some Governments, are 
 not as capable as private individuals or companies of 
 doing anything which can, on other grounds, be left 
 to the latter. And we need not turn back over the 
 pages of ancient history to find such examples of 
 departmental fatuity. During this very war there 
 has been plenty of them in England, though we may 
 hope that loss of the lives of her fighters has not 
 been thus criminally involved. 
 
 But when all this is admitted, there are still sev- 
 eral things to be said on the other side of the ques- 
 tion. A nation in which governmental action has 
 long been restricted and resented must not complain 
 too loudly if the Government, when it is suddenly 
 told to do things, does them badly. In countries 
 where a trained bureaucracy has long been encour- 
 aged to do much, its efforts are likely to compare 
 better with those of private enterprise. The effi- 
 ciency of the German governmental machine is prob- 
 ably much exaggerated; but any one who travelled 
 on the German State-owned railways had no reason 
 to complain of their comfort or of their punctuality. 
 In those respects they seemed to me, from a certainly 
 very limited experience, to compare well with Eng- 
 land's much-vaunted railway system, which, in some 
 respects, was unquestionably a disgrace to private 
 enterprise. Any one who travelled much on Sundays 
 on the suburban lines of England's leading railways
 
 I] THE OTHER SIDE 13 
 
 cannot have failed to marvel at the utter contempt 
 for public convenience with which they conducted 
 their service. They stimulated the public desire to 
 travel by cheap tickets — I am speaking, of course, 
 of days before the war — but made no attempt to 
 provide accommodation for it; a few slow trains, 
 disgracefully unpunctual and more disgracefully 
 overcrowded, were the only means afforded to jaded 
 Londoners who sought for a few hours of fresh air 
 on the day of rest. Why the public submitted to 
 it was a mystery. If the railways had then been 
 in the hands of the Government there would have 
 been a clamorous outcry against mismanagement by 
 jacks-in-office. As it was companies — "with no- 
 body to be kicked, or soul to be damned" — that were 
 at fault, there was never a murmur. In America, 
 that other home of individual enterprise, the un- 
 punctuality of the railroads is often astonishing. 
 I once travelled — it is some years ago — from Pitts- 
 burg to New York on Christmas Eve. The loco- 
 motive was attacked by a malady called "hot box" 
 and the train was four hours late. It was full of 
 unfortunate holiday-makers who had connections to 
 make in New York, so as to get home in time for 
 the Christmas gathering, but they all seemed to 
 accept it as something in the nature of things, and 
 not a matter that called for protest or complaint. 
 
 We had better admit that in this half-baked world 
 of ours, in which progress is only at the beginning 
 of its journey, and man is only just beginning to 
 learn the use of his powers over Nature, not many
 
 14 THE OBJECTS OF SPENDING [chap. 
 
 things are yet very well done either by Governments 
 or by private enterprise, and the only way for 
 them to get done better is by every one of us trying 
 to do his own little job just as well as ever he can. 
 In some countries Governments do things better 
 than anybody else. In others, it is otherwise. In 
 England it is safe to say that Government has not 
 yet distinguished itself as a practical worker. It 
 has done great things in the war, but chiefly with the 
 help of men who came in from outside; and whether 
 the public's experience of governmental activity 
 during the war will, or will not, encourage it to 
 give Government more to do when the war is over, 
 is a very open question. 
 
 Moreover, even if Herbert Spencer's view of the 
 ineptitude of governmental action were as com- 
 pletely proved as he believed, there are still some 
 things which have to be done by a public authority, 
 as even he would probably have admitted if he 
 had lived to this day. His notion of private com- 
 panies competing for the business of draining towns, 
 and only cleansing those neighborhoods in which 
 they could get enough customers to make it worth 
 their while, is now commonly recognized as a fan- 
 tastic example of overdriving a principle. Huxley, 
 in his great Essay on Administrative Nihilism, at- 
 tacks the Spencerian position in the following well- 
 known passage: 
 
 "Suppose, however, for the sake of argument, that 
 we accept the proposition that the functions of the
 
 I] HUXLEY ON SPENCER 15 
 
 State may be properly summed up in the one great 
 negative commandment, 'Thou shalt not allow any 
 man to interfere with the liberty of any other man' •, 
 — I am unable to see that the logical consequence is ' 
 any such restriction of the power of Government as 
 its supporters imply. If my next-door-neighbor { / ^_ 
 chooses to have his drains in such a state as to ere- ' 
 ate a poisonous atmosphere, which I breathe at the 
 risk of typhus and diphtheria, he restricts my just 
 freedom to live just as much as if he went about 
 with a pistol, threatening my life; if he is to be al- 
 lowed to let his children go unvaccinated, he might as 
 well be allowed to leave strychnine lozenges about in 
 the way of mine; and if he brings them up untaught! 
 and untrained to earn their living, he is doing his best' 
 to restrict my freedom, by increasing the burden ofi 
 taxation for the support of gaols and workhouses,] 
 which I have to pay." '' 
 
 Since the days when these two giants threw moun- 
 tains of arguments at one another, it need not be 
 said that Huxley's view has prevailed, and more 
 than prevailed. It has wiped out the Spencerian 
 doctrine, and it has been carried to lengths which 
 Huxley himself might well consider absurd if he 
 were still alive. The popular cry in England is now 
 for the Government to do everything. An extraor- 
 dinary example, as it happens, is chronicled in the 
 paper of this day on which I am writing, Sunday, 
 February i8th, 19 17. To-day's Observer records 
 how — 
 
 "at a meeting of the Southend Townsmen's Associa- 
 ^ Critiques and Addresses, p. 10.
 
 i6 THE OBJECTS OF SPENDING [chap. 
 
 tion it was suggested that the Minister of Labor 
 should be asked to encourage the production of 
 food by the closing of the churches on Sunday 
 morning, and so enabling a greater amount of la- 
 bor to be available. The suggestion had reference 
 to the large number of Southend business men and 
 clerks who are away from home all the week, and 
 have only Sunday mornings on which to look after 
 their gardens." 
 
 This astonishing paragraph was headed "Church- 
 goers' Neglected Gardens," and seems to indicate 
 an extraordinary state of mind prevalent in a sub- 
 urb inhabited by people who may be taken as average 
 specimens of the dwellers in Greater London. Be- 
 cause people work all through the week, and can only 
 dig in their gardens on Sundays, it is proposed, in 
 order to enable them to do so, to get the Minister of 
 Labor to close the churches. In a land that calls 
 itself free and is engaged in a great battle for free- 
 dom, it is really astounding that a body of Southend 
 citizens should have seriously thought (i) that as 
 long as the churches were open, their frequenters 
 had no freedom of choice about staying in their gar- 
 dens and growing food, and (2) that it was the busi- 
 ness of the Government to help them to do so by 
 depriving all the other members of the various con- 
 gregations, who have all the week to dig in, of their 
 freedom to seek ghostly consolation by attending 
 divine worship. 
 
 It is easy to make too much of a wild example 
 of this kind. Southend is not England, and prob-
 
 I] THE PREVALENT TENDENCY 17 
 
 ably the Townsmen's Association is not Southend. 
 In war-time the babbling busybody gets a chance, ^tt. 
 in associations and on committees, such as he never 
 enjoyed beforci. But it will hardly be denied that 
 this is only an extreme example of a tendency that 
 is rife. It is high time that the British public con- 
 sidered this tendency seriously and reckoned its pos- 
 sible effects, if it goes unchecked, on the Govern- 
 ment's spending in the future. It need hardly be 
 pointed out that the spread of governmental activity 
 is bound to increase the cost of government, since 
 everything that the Government does costs money, 
 usually more than it would if it were done by pri- 
 vate individuals or bodies managed thereby. It is 
 very evident that the present tendency to leave 
 everything to Government is due partly to the war, 
 because war on its present scale demands something 
 like dictatorship, and when it is necessary for victory 
 that the whole resources of a nation shall be made 
 available for purposes of defense, individual free- 
 dom takes a very different place in the scale of im- 
 portance. So far, there is good reason for this ten- 
 dency. But it was also very rife before the war, 
 and was even then showing signs of running to ex- 
 tremes. This was natural and inevitable, because it 
 was only a reaction against the extreme laisscr-faire 
 or "leave-people-alone" policy, of which Herbert 
 Spencer was perhaps the doughtiest champion. 
 
 This policy had been dominant in England in the 
 early part of the nineteenth century. It was well 
 summed up in the report of a Commission appointed
 
 i8 THE OBJECTS OF SPENDING [chap. 
 
 by the House of Commons in 1810, quoted in Mr. 
 and Mrs. Webb's History of Trade Unionism, as 
 follows : 
 
 "No interference of the legislature with the free- 
 dom of trade, or with the perfect liberty of every 
 individual to dispose of his time and of his labor in 
 the way and on the terms which he may judge most 
 conducive to his own interest, can take place with- 
 out violating general principles of the first importance 
 to the prosperity and happiness of the community." 
 
 Such was the view that was maintained by the 
 economists who followed Adam Smith and carried 
 much further than he did the revolt that he had 
 led against the excessive interference by Govern- 
 ment with trade and with the freedom of individual 
 contract, which had marked the history of the earlier 
 centuries when, for example, justices of the peace 
 fixed wages, or tried to. Supporters of the extreme 
 laisser-faire school based their doctrine on the as- 
 sumption — so true in an ideal world composed of 
 ideally educated people, so pathetically untrue as 
 things are — that everybody is the best judge of his 
 own interest, and that if every one is left to pursue 
 his own interest, the best interest of the commu- 
 nity as a whole will somehow be secured. The 
 practical result of the application of this doctrine, 
 in a community in which employers had been taught 
 that they served the common good by pur- 
 suing their own immediate interests, and the 
 employed had often been taught nothing, was
 
 I] THE THONG AS PRODUCER 19 
 
 that children of five years were sent to work in 
 factories, and in France, according to a report 
 pubHshed in 1840 by Dr. Villernie, "the thong 
 used for the punishment of children in the spin- 
 ners' trade appears as an instrument of produc- 
 tion."^ The fact is, that very few of us ever know 
 what is best to do for our interest. Most people go 
 through life mechanically, and without thinking 
 about it, choosing a profession for some quite illog- 
 ical reason, or being pitchforked into a position 
 without attempting to weigh it against other pos- 
 sibilities. Moreover, we are obliged to make up our 
 minds about the matter, in most cases long before 
 we have got a mind to make up. As for the doc- 
 trine that each man by pursuing his own interest 
 helps to secure the common good, its truth is pleas- 
 antly illustrated by the millions nowadays earned 
 by sellers of worthless medicines and printed trash, 
 which rot the public stomach, bodily and mental. 
 If the economists of the nineteenth century had 
 foreseen the activities and success of the advertisers 
 of the twentieth, they might have modified their 
 optimism. 
 
 But there is no need to linger over the absurdities 
 thought and written by the extremists of the laisser- 
 faire school. Peace with their ashes, for they did 
 a great work in clearing away a mass of rubbish. 
 It was not their fault that thongs were laid in the 
 name of liberty on the backs of bairns who ought 
 
 * Quoted by Messrs. Gide and Rist, History of Economic 
 Doctrines.
 
 20 THE OBJECTS OF SPENDING [chap. 
 
 to have been playing hopscotch. Liberty is a god- 
 dess with many shapes, looking quite different to 
 different observers. Abraham Lincoln observed 
 that — 
 
 "with some, the word liberty may mean for each 
 man to do as he pleases with himself and the prod- 
 uct of his labor; while with others, the same word 
 may mean for some men to do as they please with 
 other men, and the product of other men's labor. . . . 
 The shepherd drives the wolf from the sheep's throat, 
 for which the sheep thanks the shepherd as his lib- 
 erator, while the wolf denounces him for the same 
 act, as the destroyer of liberty, especially as the sheep 
 was a black one." ^ 
 
 It has already been noted that the extreme limits 
 imposed on Government activity and consequently 
 on governmental expenditure, by Herbert Spencer 
 and the economists who followed Adam Smith, 
 were an exaggeration of the doctrine laid down by 
 Adam Smith. He took a much more level-headed 
 view of the matter. In his examination (in Chap- 
 ter I, Book V, of the Wealth of Nations) of the 
 expenses of the Sovereign or Commonwealth, he 
 lays stress on his or its duty — 
 
 "of erecting and maintaining those public institutions, 
 and those public works which, though they may be 
 in the highest degree advantageous to a great so- 
 ciety, are, however, of such a nature, that the 
 profit could never repay the expense to any indi- 
 vidual, or small number of individuals, and which it 
 ' Speech at Baltimore, April i8th, 1864,
 
 I] ADAM SMITH ON SPENDING 21 
 
 therefore cannot be expected that any individual, 
 or small number of individuals, should erect or main- 
 tain." 
 
 Thus, in effect, he gives a free hand to the State 
 to spend money on anything that will be advan- 
 tageous to society, but will not yield a profit. 
 
 With regard to education, Adam Smith arrives 
 at conclusions which were diametrically opposed to 
 those of Herbert Spencer. He points out that in 
 cases in which the state of the society does not 
 place — 
 
 "the greater part of individuals in such situations as 
 naturally form in them, without any attention of 
 Government, almost all the abilities and virtues which 
 that state requires, or perhaps can admit of," 
 
 then — 
 
 "some attention of Government is necessary in order 
 to prevent the almost entire corruption and degen- 
 eracy of the great body of the people." 
 
 He goes on to show that, owing to the division 
 of labor — 
 
 "the man whose whole life is spent in performing a 
 few simple operations . . . has no occasion to exert 
 his understanding. . . . His dexterity at his own par- 
 ticular trade seems, in this manner, to be acquired at 
 the expense of his intellectual, social, and martial vir- 
 tues. But in every improved and civilized society, 
 this is the state into which the laboring poor, that is, 
 the great body of the people, must necessarily fall, 
 unless Government takes some pains to prevent it."
 
 22 THE OBJECTS OF SPENDING [chap. 
 
 A little later he shows that — 
 
 "the common people . . . have little time to spare for 
 education. The parents can scarce afford to main- 
 tain them even in infancy. As soon as they are 
 able to work, they must apply themselves to 
 some trade by which they can earn their subsistence. 
 That trade too is generally so simple and uniform as 
 to give little exercise to the understanding; while, 
 at the same time, their labor is both so constant and 
 so severe that it leaves them little leisure and less 
 inclination to apply to, or even think of, anything 
 else. . . . For a very small expense the public can 
 facilitate, can encourage, and can even impose upon 
 almost the whole body of the people, the neces- 
 sity of acquiring those most essential parts of edu- 
 cation." 
 
 Here we have the Father of Economics, so often 
 appealed to, by those who do not read him, as an 
 out-and-out champion of laisser-faire , advocating 
 compulsory education, at the public expense, nearly 
 one hundred years before it was introduced in 
 England. 
 
 It is perhaps even more interesting in these war- 
 like days to note that Adam Smith thought that — 
 
 "even though the martial spirit of the people were 
 of no use towards the defense of the society, yet to 
 prevent that sort of mental mutilation, deformity and 
 wretchedness, which cowardice necessarily involves 
 in it, from spreading themselves through the great 
 body of the people, would still deserve the most seri- 
 ous attention of Government; in the same manner as
 
 I] ADAM SMITH ON SPENDING 23 
 
 it would deserve its most serious attention to pre- 
 vent a leprosy or any other loathsome and offen- 
 sive disease, though neither mortal nor dangerous, 
 from spreading itself among them. . . . The same 
 thing may be said of the gross ignorance and stu- 
 pidity which, in a civilized society, seems so frequently 
 to benumb the understandings of all the inferior 
 ranks of people, [Only the "inferior" ranks, Doc- 
 tor?] The more they are instructed, the less liable 
 they are to the delusions of enthusiasm and super- 
 stition which, among ignorant nations, frequently oc- 
 casion the most dreadful disorders. ... In free 
 countries where the safety of government depends 
 very much upon the favorable judgment which the 
 people may form of its conduct, it must surely be of 
 the highest importance that they should not be dis- 
 posed to judge rashly or capriciously concerning it." 
 
 I have dwelt at some length on ancient contro- 
 versies concerning the limits of State action and 
 consequently of State expenditure, because the ques- 
 tion is a very burning one to-day, and if we see 
 what our forbears thought about it, we may be 
 helped to a right decision in our present difficulties. 
 We have seen the extreme view that the State 
 should do nothing but police and defense give way 
 to a tendency — even among those who do not pro- 
 fess to be Socialists and to want the State to take 
 over the whole business of production and distribu- 
 tion — to call on the State to interfere constantly 
 in the private affairs of citizens ; and looking back 
 to the doctrine of Adam Smith, we find that he was 
 in favor of State expenditure on education for those
 
 24 THE OBJECTS OF SPENDING [chap.i 
 
 who could not afford It, on the cultivation of the 
 martial spirit, on checking disease, and on the en- 
 lightenment of those classes which, in his opinion, 
 especially needed it. I think it mayjairly be claimed 
 that the formula adopted earlier in this chapter may 
 be taken as representing a safe compromise between 
 the extreme views : that is, that the State should 
 spend our money on the defense of our property 
 from home and foreign enemies, on the defense of 
 the national honor, on the increase of the material 
 resources of the country, and on public health. At 
 first sight, this formula would not appear to include 
 education, old-age pensions, or unemployment in- 
 surance. But it would be very easy to show that all 
 these objects of expenditure, in countries in which 
 they are necessary, help the increase of the material 
 resources of the country, to which nothing can be 
 more important than a well-taught community, and 
 a working class with a feeling of security and a 
 knowledge that the State cares for its interests, and 
 is prepared to spend money on its welfare. In fact, 
 all really effective measures of social reform are 
 directly beneficial to the whole community, on the 
 coldest business considerations. Every man and 
 woman who is not fit in mind and body to be self- 
 supporting has to be supported, to a greater or less 
 extent, by his or her neighbors ; and so government 
 spending that lessens the number of the unfit, by 
 better care for the minds and bodies of those who 
 are born into conditions which do not give them a 
 fair chance, is a sound investment.
 
 CHAPTER II 
 
 MONEY TAKEN BY BORROWING^ 
 
 Whatever be the duties that a Government is 
 asked to fulfil, it can only perform them by taking 
 to its own use such goods and services as are needed 
 for them. To keep order at home it must have 
 the services of policemen and the goods needed to 
 feed, clothe, and equip them. To build a railway 
 it must have steel rails, rolling stock, and land and 
 the services of all the people who lay the railway 
 out and get it ready for working. To carry on war 
 it must have all the goods needed for the feeding 
 and equipment of an army and the services of the 
 fighters and of those who organize and manage 
 the campaign, the transport service, and all the other 
 items in the problem. These goods and services 
 have to be supplied out of current production at 
 home and abroad, and so current production has 
 to be diverted, to the extent of the Government's 
 demand, to supplying those needs, unless (which is 
 unlikely in time of war) it can be increased suffi- 
 
 ^ Since this chapter was written I have been fortified by 
 seeing its main contention endorsed by Professor Sprague, of 
 Harvard, in an article in The Economic Journal for April 
 1917, which embodied an address given by him to the Ameri- 
 can Economic Association. 
 
 25
 
 26 MONEY TAKEN BY BORROWING [chap. 
 
 ciently to produce them without this diversion. In 
 order to bring about this diversion, Government 
 has to check the demand of individuals for goods 
 and services so that labor and energy may be set 
 free to work for it; and this it does by taking money 
 from individuals in taxes, which it can only im- 
 pose on its own citizens, or in loans, or by reducing 
 the buying power of individuals through the proc- 
 ess known as inflation, which consists of increasing 
 the volume of the currency and thereby debasing 
 its value and raising prices. 
 
 We will begin with the borrowing process. When 
 a Government borrows, it invites people to lend it 
 money, and, as a rule, promises to pay them a 
 certain rate of interest for it, and sometimes prom- 
 ises to pay back the money to them or their heirs 
 and assigns at some more or less distant date. Even 
 when no such promise of repayment is given to 
 the lenders, the fact that the holder of the security, 
 or promise to pay interest, can always sell it at 
 a price on the Stock Exchange, enables him to 
 rely on getting back at least part of the money 
 that he has lent, if he wishes to do so. 
 
 It was stated that when a Government borrows 
 it promises, as a rule, to pay interest. This is now 
 so usual that a loan without interest seems to a 
 modern mind to be almost a contradiction in terms. 
 But such things have happened. In the good old 
 days impecunious sovereigns who could not get as 
 much as they wanted out of their subjects by 
 taxation, used to write to people of property and
 
 ii] LOANS WITHOUT INTEREST 27 
 
 demand a sum from them on loan; the latest ex- 
 ample, in England, of this form of finance occurred ^-lyy^^ 
 in the early years of the reign of James I. A large 
 number of these letters — which were called Letters 
 of Privy Seal — dated July 31st, 1604, were sent to ^ 
 
 the principal noblemen and gentlemen in all the coun- 
 ties of England, and excited great and general dis- . , 
 satisfaction. Their form was as follows: 
 
 "By the King: -.^^ 
 
 "Trustie and well beloved we greete you well. ,y 
 
 Although there be nothing more against our minde '"'"'^ 
 
 than to be drawne into any course that may breed 
 in our subjects the least doubt of our unwillingness 
 to throw any burthen upon them, having already 
 published both by our speeches and writings, our 
 great desire to avoide it in the whole course of our 
 Government: Yet such is our estate at this time in 
 regarde of great and urgent occasions falne and 
 growing daily upon us, (in no sort to be eschewed) 
 as wee shall be forced presently to disburse greater 
 summes of money than it is possible for us to pro- 
 vide by any ordinary means, or to want without 
 great prejudice, in which consideration ... we 
 think it needless to use any more arguments from 
 such a King to such subjects : But that as our ne- 
 cessitie is the only cause of our request, so your 
 love and duety must be the chiefe motive of your 
 ready performance of the same . . . That which 
 we require, therefore, is that within twelve dayes 
 after the receipt hereof, you will cause the summe 
 of to be delivered to whom we 
 
 have appointed to be our collector in our countie 
 Qf
 
 28 MONEY TAKEN BY BORROWING [chap. 
 
 "The loan whereof we do desire to be untill the 
 Foure and Twenty day of March which shall be in 
 the yeere of our Lord God 1605, for assurance 
 whereof we have directed these our letters of Privie 
 Scale unto you, which, with the hand of our sayd 
 collector testyfying the receipt of the same summe 
 of shall bind us, our heirs, and suc- 
 
 cessors for the repaiment thereof . . . upon the de- 
 liverie of this our Privie Scale unto our sayd re- 
 ceipt." 2 
 
 Through all the rambling verbiage of this Letter 
 of Privy Seal, a large part of which has been left 
 out, there is no whisper or hint of any interest 
 payment. The loan was for nearly eight months, 
 and from its terms was evidently a requisition, leav- 
 ing the receiver of the letter little or no choice 
 about producing the sum required of him. 
 
 In modern times, however, these things do not 
 happen. A rate of interest is universal, and a defi- 
 nite promise of repayment is very usual. It is 
 notably absent, however, in the case of the British 
 Government Consols. The holder of Consols has 
 no right to repayment from the Government, only 
 the right to a perpetual annuity of so much a year, 
 originally 3%, converted in 1888 to 2^% and in 
 1903 to 2^%. A very large part of the French 
 3% Rentes are also what is called a perpetual debt, 
 with no obligation on the part of the debtor to repay. 
 
 When a Government raises money by borrowing 
 it thus hires certain of its citizens, or those of any, 
 
 •Chisholm's Analysis of the Public Accounts, p. 509.
 
 II] ADVANTAGES OF BORROWING 29 
 
 other country who may like to subscribe to the 
 loan, to find money for it, and it does so by prom- 
 ising them a rate of interest, varying according 
 to the state of the money market, its own credit, 
 and the circumstances under which the loan is made. 
 Borrowing thus has this very tempting but always 
 dangerous advantage over taxation, that it enables 
 a Government to get money from the citizens of 
 other countries. Let us leave this consideration 
 on one side for the time and see what are the advan- 
 tages and disadvantages of borrowing at home over 
 taking money in taxes. 
 
 From the point of view of the practical and adroit 
 politician, who wants money for the State and does 
 not want to make himself or his policy unpopular 
 by increasing the burden of taxation, the advan- 
 tages of borrowing are obvious and overwhelming. 
 To the public the advantages are equally clear and 
 weighty, because the public thinks that by means of 
 the borrowing system it is able to avoid being taxed, 
 and to hand on to posterity the task of finding 
 the money that is required for its present 
 needs. 
 ' This view has been dinned into the public ear 
 by economists, financial writers (among whom I 
 must plead guilty to having done my small share), 
 and business men.^ But it is largely a delusion. 
 Let us take the example of the present war. We 
 
 / ' A New York banker's circular, dated April 14th, 1917, says : 
 / "Posterity will chiefly benefit from the struggle for freedom 
 I and should pay its part."
 
 30 MONEY TAKEN BY BORROWING [chap. 
 
 cannot hand its burden on to posterity. It has to 
 be paid for now by somebody, and all wars have 
 always been paid for during the time in which they 
 were fought and finished up. War cannot be carried 
 on with goods produced or work done either by 
 our ancestors or by our posterity. The goods con- 
 sumed in war — shot, shells, rifles, food, clothes, 
 horses, motor-lorries, wagons, ships, and everything 
 else — have to be new and up to date, and, apart 
 from the store of them with which the contending 
 nations began, are made and produced as the war 
 goes on. As they clearly have to be in existence 
 before they can be used, it is obvious that they can- 
 not be produced by posterity. The British army 
 cannot eat the bread that is going to be sown in 
 1930. or wear boots made out of hides whose origi- 
 nal owners are yet unborn. Whatever posterity pro- 
 duces will belong to posterity for its own use, and 
 nothing that we do now can deprive posterity of a 
 single ear of wheat that it sows and grows. It is 
 true that when England sells part of her accumu- 
 lated wealth, in the form of securities, to Americans, 
 in order to pay for goods wanted for the war, or 
 when she borrows in America and contracts to pay 
 Americans interest in the meantime and their money 
 back some day, she thereby arranges that a larger 
 share of posterity's wealth will go to America and a 
 lesser share to her; but the sum of posterity's 
 wealth will not thereby be affected, and this only 
 happens when a country borrows from, or sells' 
 securities to, other countries, and this side of war
 
 II] GILDING A PILL 31 
 
 finance we are not at present considering. Confining 
 ourselves to that portion — by far the greater — of 
 our war borrowings that are raised at home, we see 
 if we look at the matter steadily that the borrowing 
 policy is only a gilding that makes us swallow a 
 pill and believe that we are eating something good 
 and nourishing. The British Government wants 
 money and offers its citizens a beautiful security, 
 with 5% interest, at 95, repayable in thirty years 
 at par, and they calculate that these terms give 
 them a net return of ^J4% ior their money. 
 With the help of a tremendous advertising cam- 
 paign, and a very real and patriotic effort on the part 
 of a large number of good citizens, the nation hands 
 over 1,000 million pounds to the Government, and 
 the achievement is very justly hailed as the biggest 
 financial success ever won. It is a perfectly magnifi- 
 cent success. But it does not mean that the citizens 
 have thereby handed to posterity the business of pay- 
 ing for 1,000 million pounds' worth of the war. 
 They have paid now by handing over those 1,000 
 millions. In return for them they receive from the 
 Government securities, that is, promises to pay in- 
 terest and repay capital, and the Government can 
 only meet these promises out of their pockets. These 
 securities are assets that they hold, in return for 
 their money, but they are also liabilities that they 
 as taxpayers have to meet; they will only get in- 
 terest on their money as we pay it ourselves, and 
 they will only get their money back as debt-holders 
 if they pay it as taxpayers.
 
 32 MONEY TAKEN BY BORROWING [chap. 
 
 But what of the man who did not subscribe to 
 the loan, having an income large enough to let him 
 do so ? He, as far as this loan is concerned, appears 
 to have paid nothing towards the war. If this 
 were really so it would not be a good argument in 
 favor of the borrowing system, for it would make 
 patriotic people pay and leave the others free to 
 spend money on themselves. But, in fact, those who 
 do not subscribe to loans probably pay more in 
 the long run, because they have henceforward to 
 pay their share of taxation to meet the interest on 
 the loan, and as they do not hold any of it they get 
 no share of interest payment back into their own 
 pockets. The borrowing system gives the citizen 
 the choice of (i) paying up his share of the war 
 cost now by subscribing to a loan, and afterwards 
 being taxed to pay himself interest and to pay him- 
 self back, or (2) paying nothing at the time when 
 the loan is issued, and being made to pay regularly 
 hereafter interest and redemption money to those 
 who subscribed. When a Government loan is issued, 
 all the taxpayers on whom the loan charge will 
 fall are, forthwith and at once, jointly poorer by 
 the amount of the loan. Those who have found 
 the money, and paid for the object needed by 
 making a sacrifice now, have an asset to set against 
 the future increase in taxation. 
 
 But, it will be objected, a man who has subscribed 
 for f 1,000 of the loan will be able to sell it, very 
 likely at a profit, in a few years' time. Then he 
 will have got his money back, and somebody else
 
 II] THREE TIMES OVER 33 
 
 will have paid It back to him. Quite true, but the 
 result of his selling will be that he will have got 
 rid of his asset but not of his liability. He will no 
 longer receive interest on the stock that he has 
 sold, but he will continue to pay Interest on It, and 
 perhaps money for Its redemption, all of which will 
 go Into the pocket of the man to whom he sold, 
 instead of into his own. He and his estate after 
 him, in whosoever' s hands It be, will have to com- 
 plete the repayment to somebody else of the money 
 which he thought he had got back again when he 
 sold his stock. By borrowing for war purposes a 
 Government sets up a roundabout process by which 
 the war, In so far as it is paid for by this means, 
 is paid for three times over. First, It Is paid for 
 as it goes on by the citizens who subscribe to thcr 
 loans ; then it is paid for by the citizens as a whole, 
 who provide the money needed for this purpose, 
 plus interest, by taxation; and the Government 
 finally hands the money back to the original sub- 
 scribers, or their estates. f 
 
 The unwieldiness of the whole arrangement is 
 seen best If we imagine a nation composed of citi- 
 zens all with the same Income and taxed to the same 
 extent. Let us suppose that there are ten million 
 heads of families each with an income of $1,500 a 
 year. The Government offers a 5% loan and 
 they each, being equally patriotic, subscribe $500; 
 this produces 5,000 millions, and each family has 
 $500 less to spend that year, because its $500 has 
 gone into the hands of the Government. They will
 
 34 MONEY TAKEN BY BORROWING [chap. 
 
 j have the interest to spend? By no means. In or- 
 der to pay them their 5% the Government will 
 have to raise 250 millions in taxes (or in another 
 loan), that is, take $25 each out of their pockets and 
 pay it back to them. And as soon as the war is over 
 the Government will set a Sinking Fund to work to 
 pay the loan off. A Sinking Fund is money used 
 for paying off debt, and has to be provided by a 
 balance of revenue over expenditure. If the Gov- 
 ernment fixes this Sinking Fund at 1%, it will 
 have to take another $5 from the pocket of each cit- 
 izen, and so they will pay themselves back their 
 capital. If, in the meantime, any one of them sells 
 his $500 bonds to a neighbor, he will have got his 
 money back, but he will still as a taxpayer have to 
 pay his $30 a year till the loan is extinguished, so 
 that the effect of getting his money back will be that 
 he will be paying his neighbor interest and capital 
 instead of himself. When we clear the problem 
 by this imaginary example we see at once that the 
 nation paid for the war when it happened, but 
 merely because it preferred to lend instead of being 
 taxed it went through an elaborate process of pay- 
 ing itself all over again, so that it might feel 
 happier about it. It is fairly safe to say that, under 
 such circumstances, an intelligent people would soon 
 awake to the fact that it would save itself and its 
 rulers a good deal of trouble and some book-keeping 
 expense, by submitting to taxation at the time when 
 the war is in progress and writing off the cost of 
 
 the war at once. 
 I
 
 II] ELUSIVE POSTERITY 35 
 
 But of course nations do not consist of citizens 
 with equal incomes, equally taxed, and they do not 
 subscribe equal amounts to the loans that are raised 
 by their Governments. This inequality complicates 
 the problem, but does not alter the fact that the 
 war has to be paid for as it goes on, and in so far 
 as it is paid for by raising loans at home, is paid 
 for out of the nation's current income. If we try 
 to pay for it by selling our old investments to one 
 another, those who buy the old investments must 
 have a balance available to pay for them. The gen- 
 eration which lends the money either pays itself 
 back out of subsequent taxation, or is not paid back 
 at all; it cannot be paid back by posterity, because 
 whatever posterity pays it pays to itself. The whole 
 notion that we can leave posterity the task of paying 
 for any part of the war, by borrowing at home, is 
 a delusion. Perhaps it is lucky that we cannot do so, 
 for posterity is likely to have plenty of problems of 
 its own to face. But whatever it produces it con- 
 sumes. What we can do, and are doing, in England 
 is to lessen__the power of posterity to produce, be- 
 cause we shall hand on to it a less well-equipped 
 industrial and agricultural organization, owing to 
 the fact that during the war we are not saving and 
 putting into capital improvements as much as we 
 did in peace. Before the war England was esti- 
 mated to be saving and investing at home and 
 abroad some 400 millions sterling a year, so increas- 
 ing either her own power to make and grow things, 
 or the debt of other countries to her on which
 
 36 MONEY TAKEN BY BORROWING [chap. 
 
 they paid her interest in the form of goods and 
 services. During the war nearly all her savings 
 go into furnishing victory for the cause of liberty 
 and progress and protecting her property against 
 external attack. On the other hand, she may fairly 
 hope to hand on to posterity a better organiza- 
 tion and a better spirit than she would have be- 
 queathed to it, if she had not learnt many useful 
 lessons from that stern schoolmaster the God 
 of Battles, who has birched her soundly for her 
 good. 
 
 But as incomes are unequal and taxation likewise, 
 and as people subscribe unequal amounts to loans 
 levied by Governments, let us see what is actually 
 the effect of the borrowing policy. If we compare 
 first the case of two Englishmen with the same in- 
 come lending unequal amounts, we find two people 
 with f i,ooo a year, of whom Jones puts £50 into the 
 loan and Smith £500. They will both have their 
 taxes increased to the same extent to pay interest on 
 the loan and provide a Sinking Fund to redeem it; 
 but one will get £2 los. 3l year (less income tax) in 
 interest, and the other £25. If the circumstances 
 of both are the same, this is quite just, because 
 Smith is rewarded after the war for the effort that 
 he made during it by putting half his income at 
 the disposal of the Government when it called on 
 the citizens to subscribe; probably the interest that 
 he gets will more than offset the higher taxation 
 that the existence of the war debt will necessi- 
 tate. In the case of Jones, who continued to spend
 
 II] AN EVIL AFTERMATH 37 
 
 most of his income on himself, and only put in 
 a small amount to be spent on powder and shot 
 for the army, he will only get a small sum in 
 interest, which will almost certainly be less than 
 the extra taxes that he will pay. So that in cases in 
 which conditions are equal, the interest payment, by 
 rewarding patriotic effort in war time, gives a just 
 and well-earned guerdon to those who saw their 
 country's need and made the right effort to meet it. 
 
 But if we find that Jones was educating five 
 children, whereas Smith was a bachelor, it becomes 
 evident at once that Jones's £50 that he subscribed 
 to the loan was a greater effort — cost him more in 
 health and comfort for himself and his youngsters 
 — than Smith's £500, so that the after-effect of the 
 borrowing system in penalizing Jones and .benefit- 
 ing Smith is highly inequitable. And this is a very 
 serious evil in the aftermath of borrowing by Gov- 
 ernments, that by its inability to discrimii^te be- 
 tween the effort made by the various subscribers it 
 emphasizes the inequities of the system of taxation. 
 
 If, then, borrowing has this merely stupid effect 
 that the payment for the object which is secured is 
 carried out twice, first when the lenders hand their 
 money over to the Government to spend on the 
 desired purpose, and later and more gradually when 
 they hand their money over to the Government to 
 be paid back again to themselves, what are the 
 advantages about it which make it so poguljj. with , 
 practical politicians and the public whom they have 
 to keep in a good temper? It is simply this, that 
 
 389193
 
 38 MONEY TAKEN BY BORROWING [chap. 
 
 the borrowing system makes lis feel happier and 
 keeps us in a good temper because we see the 
 security that we have received and the interest 
 that we get on it, and forget that the interest comes 
 out of our own pockets and that if the loan is paid 
 back to us it will be paid back out of our own 
 pockets. When we subscribe to the loan we either 
 do so out of money that we borrow — a process that 
 will be considered in the next chapter when we 
 come to deal with the question of inSation — or 
 out of money that we save, or by drawing down 
 our bank balances, in which case, unless we have 
 been stupid enough to keep unnecessarily big ones, 
 we shall save to replenish them. If we save we 
 have so much less to spend on our own comforts 
 and amusements, or so much less to invest in 
 other directions, from which we should have re- 
 ceived interest and repayment that would not have 
 come out of our pockets. So by subscribing we 
 hand over our money to be spent on the war and 
 so pay for the war as it goes on. If we do not 
 subscribe but continue to spend as usual, then the 
 taxation involved in order to pay interest 
 and redemption of the loan comes out of our pockets 
 and does not come back again. So that the borrow- 
 ing system gives us this choice, of postponing 
 paying our full share of the war's cost during its 
 course, and only meeting it over a period of years 
 by paying taxes needed for the debt charge and 
 getting none of it back in interest or repayment. 
 If we exercise this choice and die immediately
 
 ii] ESCAPE BY DEATH 39 
 
 after the loan has been brought out, we apparently 
 escape paying for our share of the war altogether, 
 because we are never taxed to pay interest to any- 
 body. But, in fact, we die so much poorer because 
 the estate that we leave does not contain the amount 
 of war loan to which, if we had done our duty, 
 we should have subscribed, and it does carry with 
 it the liability which will fall on our heirs and 
 assigns to pay their share of the debt charge in 
 taxation. In other words, we have left the job 
 of paying for the war to our heirs, and is not 
 this the same as leaving it to posterity ? Yes ; but 
 we can only perform this feat if we die at once. 
 If the Government offers a loan for war or any 
 other purpose, all the taxpayers immediately become 
 liable to pay interest on it, and any one who does 
 not subscribe for such proportion of it as his in- 
 come and conditions indicate, will consequently be 
 so much the poorer, as long as he is alive, until 
 the loan is redeemed, and will be so much the poorer 
 at his death, because his estate will be encumbered 
 by the debt charge and will hold no asset against it. 
 If he subscribes his fair share he has so much the 
 less to spend when he does $0, but afterwards, if 
 taxation is fairly apportioned, has his interest and 
 his share of the loan, as repaid, to set against the 
 extra taxation. 
 
 It is commonly said that England is still, as a 
 nation, paying for the cost of the war that her an- 
 cestors waged against Napoleon more than a hun- 
 dred years ago. But this is not so. As taxpayers
 
 40 MONEY TAKEN BY BORROWING [chap. 
 
 Englishmen pay interest on the debt then raised. 
 But they pay that interest to those Englishmen who 
 ^tipld the debt by inheritance or otherwise* As a na- 
 tion England enjoys now all that she produces, and 
 the vagaries of her ancestors only affect the man- 
 ner in which her production is distributed. 
 
 But what happens in the case of loans that are 
 never repaid? Never is a long word, but if we 
 can really conceive that as long as mankind lasts 
 the existing national debts will be outstanding, then 
 the interest charge will continue to be a burden to 
 the citizens as a whole, and an income to the heirs 
 of those who originally subscribed. 
 
 Borrowing at home, then, for war purposes or 
 any other, does not, as is usually supposed, shift 
 the burden of payment on to the shoulders of pos- 
 terity. Whatever it is that the Government is buy- 
 ing, whether it be the services and equipment of 
 an army in the field, or a system of sanitation, or 
 a railway, has to be paid for by somebody at the 
 time when it is provided. By raising the money 
 by a loan instead of by taxation the Government 
 escapes the unpopularity which a great increase in 
 taxation might produce, and hires some of the cit- 
 izens to pay now, and then taxes them all to pay 
 interest and redeem the debt. Those who have sub- 
 scribed receive a security which they can sell, and 
 as long as they hold it receive interest which they, 
 in common with the rest of the community, have 
 to find by paying taxes. 
 
 The system thus has this advantage in a com-^
 
 II] DEBT AND WEALTH 41 
 
 munity in which wealth is unequally distributed, 
 that it enables those who have a margin of income 
 above the necessaries of life to pay for whatever be 
 the object that the Government wants without at 
 the time feeling any poorer, because they get a 
 security that makes them think they are actually 
 richer. If taxation is equitably imposed they will 
 afterwards be taxed to pay themselves interest in 
 proportion to the amount that they ought to have 
 put into the loan when appealed to by the Govern- 
 ment. But here comes in a great difficulty, as we 
 shall see when we come to the question of taxa- 
 tion. If those with a margin, who can save with- 
 out serious discomfort, take up all or the greater 
 part of the loan, and then taxes are imposed on all, 
 whether they have a margin or no, then the system 
 of financing Government spending by loan tends. 
 to accumulate more and more wealth in the hands 
 of those who are well off. The existence of a 
 1- J, national debt, held by the citizens of the nation, 
 redoes not affect the wealth of the nation as a whole. 
 "^ >:^ The wealth of a nation consists of its material 
 V-1 assets in the way of industrial plant, agricultural 
 y estates and stock, houses, roads, railways, canals, 
 and so on, and its holding, if any, of foreign invest- 
 ments, and its income consists of the annual pro- 
 duce of these material assets as organized and 
 worked as a going concern by the nation's brains 
 and sinews. These assets and this working power 
 are no less productive because, owing to existence 
 of a national debt, certain people have to be paid
 
 42 MONEY TAKEN BY BORROWING [chap. 
 
 out of the taxes levied on this national produce. 
 But the distribution of the national produce is 
 seriously affected, because it means that the debt- 
 holders, without making any further effort, get for 
 all time, as long as the loan is outstanding, a large 
 slice of the nation's revenue, which has to be found 
 out of its annual produce: and if this debt-charge 
 is heavy and any large part of the nation thinks 
 itself to be overtaxed, there is only too likely to 
 be discontent and resentment on the part of those 
 who pay interest to the holders of war debt and 
 forget that these holders are the people who found 
 the money to pay for the war, or their representa- 
 tives. If this grievance were acutely felt, it might 
 endanger the stability of property. A system based 
 on property is not, of course, the only conceivable 
 system under which mankind need work for its 
 'living. But so far it is the only one that has been 
 found to work, and it would be dangerous to im- 
 peril it before we are ready with a substitute. So 
 that, though we cannot by any ingenuity make pos- 
 terity pay for war or anything else on which we 
 or our Government spend money now, we may by 
 the adoption of the borrowing system leave some 
 very awkward problems to it. Whatever posterity 
 produces it will consume; but the fact that certain 
 members of posterity, descendants of those 
 who paid on our account, will thereby have 
 a prior lien on posterity's produce might have awk- 
 ward results. 
 
 Since, then, the view that borrowing at home puts
 
 ^ 
 
 II] BORROWING FOR WAR 43 
 
 the burden on to posterity is a delusion, since the 
 goods and services needed for war or for anything 
 else on which a Government is spending have to 
 be found and paid for, by somebody, at the time 
 when the thing is done, and since the system of 
 hiring certain of the citizens to do the paying at 
 that time, and giving them a claim on part of the 
 nation's income in return, may have dangerous con- 
 sequences when carried far, does it follow that bor- 
 rowing at home is a policy that is never justified 
 on economic grounds, though it may be necessitated 
 by the exigencies of politics and the need for keep- 
 ing the public in a good temper at a time of crisis? 
 x:I think it does, from the purely theoretical point 
 '^-of view, except when the object on which the money 
 v is to be spent is an enterprise like a railway, from 
 *=«y: which a profit may be expected at least sufficient 
 
 ^' to cover the interest on, and redemption of, the 
 debt put into it. But perhaps a case might be 
 made out for borrowing for purposes, such as 
 education and health, which, if the money is well 
 
 "V spent on them, may be expected to improve the 
 ^ country's productive power. 
 
 (J War is certainly the worst purpose for which the 
 borrowing system can be used, because in war-time, 
 especially when war is on a stupendous scale as 
 now, taxation (i) is easily raised, (2) is little if any 
 hindrance to industry, and (3) produces a bene- 
 
 c§^ ficial effect on the consumption oFthe community. 
 
 *^ Moreover war, especially when on ,a stupendous 
 "^ scale, is certain to be followed by a period of dis-
 
 44 MONEY TAKEN BY BORROWING [chap. 
 
 location and uncertainty in which industry should 
 be as free as possible to contend with the difficulties 
 that face it, and should therefore be as little as 
 possible burdened by taxes that have to be paid to 
 debt-holders. Let us consider these assertions. 
 
 ( I ) Taxation is more easily raised in war than in 
 peace, for the obvious reason that, the nation being 
 patriotically stirred by some cause affecting its 
 honor or its existence, or both, its citizens are 
 readier to hand over their money to Government. 
 In an ideally educated nation with an ideal system 
 of taxation and an ideal Government that could be 
 trusted not to waste its money, this difference would 
 perhaps not appear, because under these circum- 
 stances the citizens would always be ready and 
 willing to pay by taxation for objects that the 
 nation had decided to be desirable. But as things 
 are, many people in ordinary times grudge the 
 money that they have to pay in taxes, partly be- 
 cause they have not been taught to see that the 
 common good is their good and that they ought to 
 contribute to it gladly, partly because they often have 
 a suspicion that they are being taxed too much and 
 their neighbors too little, and partly because, in Eng- 
 land, there is a general suspicion, not to say con- 
 viction, that a large part of any money which the 
 Government spends is wasted, owing to the ex- 
 cessive cost of it's cumbrous machinery. In war-time 
 these considerations have much less weight, and 
 Englishmen when they pay an extra price for their 
 tobacco or tea, or draw a bigger cheque for the
 
 II] TAXATION'S ADVANTAGES 45 
 
 King's taxes, feel that they are putting something 
 into the Treasury for a great cause, or for the 
 national honor, or to "keep the old flag flying," 
 or to "help the boys at the front" who are fighting 
 for them, or just that "it's war-time," and there's 
 an end of it. At such a time a Government con- 
 fident in its cause, and in the readiness of the citizens 
 to back it, could, I believe, take a much greater 
 part of the nation's income in taxes than has been 
 attempted yet. ~ ^ 
 
 (2) Taxation is less hindrance to industry in 
 time of war, because war in many ways simplifies 
 the task of industry. Industry knows more exactly 
 what it has to produce, and has a better and more 
 certain market. Its difficulty is to get enough men 
 to do the work, and stuff to put into it. At home 
 there is the Government wanting more war mate- 
 rial than can be turned out. Abroad there are neu- 
 trals full of money that they are making out of 
 selling things to the warring Governments, want- 
 ing to buy stuff that they used to get from us and 
 our trade competitors — now busy on war work — 
 and unable to supply their wants. The manufac- 
 turer has more certainty that he will be able to sell 
 at a good profit whatever he can turn out, and 
 he is consequently less likely to have his enterprise 
 checked by the existence of high taxation. He is 
 so certain to be able to take his taxes out of his 
 customers that taxation, under such conditions, 
 hardly weighs with him. 
 
 (3) Taxation in war-time is twice blessed. It
 
 46 MONEY TAKEN BY BORROWING [chap. 
 
 gives the Government revenue and it checks the 
 consumption of the individual, and this is, at such 
 a time, an equally important economic advantage. 
 Because owing to the enormous demands of the 
 Government on the available supply of goods and 
 services there are not enough to go round, and if 
 the citizens try to enjoy their usual allowance of 
 comforts and amusements — none of which can be 
 provided without using up a certain amount of labor 
 and of stuff, and probably of coal in transport — 
 the result is that the Government and the indi- 
 vidual citizens compete against one another in a 
 limited market and force up the price of every- 
 thing to their mutual disadvantage, and, what is 
 worse, to the great disadvantage of all whose wages 
 or incomes have not risen as fast as the rise in 
 prices has moved. It may be objected that borrow- 
 ing checks consumption just as efficiently as taxa- 
 tion, since people cannot spend what they lend. 
 This is true if all the money lent is saved, and is 
 not produced by borrowing or inflation, a subject 
 to be dealt with in the next chapter. But even so, 
 when money is taken in taxes and not in loans, 
 people are likely to be thereby stimulated to save 
 something besides. As we have seen, if a man puts 
 $5,000 into a Government loan, he thinks he has 
 got an asset and forgets that it also involves a 
 liability. If $5,000 is taken from him in taxes, 
 he is likely, if at all thriftily inclined, to try to 
 put something away besides. 
 
 Further, borrowing in war-time has this great dis-
 
 II] PENALIZING PATRIOTISM 47 
 
 advantage, that it penalizes those who go to the 
 front. Doctors who give up fine practices and take 
 a pittance as military surgeons, business men, 
 mechanics and miners who forsake big profits and 
 high wages for the pay of officers and privates, 
 come back when the war is over and find that the 
 comrades and competitors whom they left behind 
 have made big investments in war loans, and that 
 they, whose pay has enabled them to do little or 
 nothing in this direction, will be subject to higher 
 taxation to pay them interest. The system thus 
 directly fines those who do the most important war 
 work. 
 
 For all these reasons taxation in time of war is 
 greatly preferable to borrowing, and this is still 
 more so when we consider war's aftermath. Every 
 million that we pay in taxes in war-time means that 
 there is a million less of debt to be dealt with when 
 peace comes, and consequently so much more taxa- 
 tion to be taken off, just at the very time when taxa- 
 tion will be the greatest nuisance. Because when 
 peace brings the tremendous problem of putting our 
 industry back on to peace work, with uncertain 
 markets and all kinds of queer problems that are 
 certain to arise, it is above all necessary that our 
 producers and merchants shall feel bold and confi- 
 dent and ready to set the whole machine going in 
 the good hope of bigger production and readier 
 consumption than ever have been seen before in 
 peace time. High taxes, due to a big debt charge 
 produced by home borrowing, will only go out of
 
 48 MONEY TAKEN BY BORROWING [chap. 
 
 one pocket into another, but the taxpayers will 
 not all recognize this, and if they are not 
 also debt-holders it will not console them if they 
 do. So that if taxes have to be kept on at the 
 war level, or even raised, in peace time, the great 
 recovery in trade with which I hope that 
 England may astonish the world even more than 
 by anything that she has done during the war, 
 may be seriously impeded, especially if there is 
 discontent and bad feeling in the country about 
 the manner in which the burden of taxation is im- 
 posed. The Germans, who have raised, ^o far, a 
 quite contemptible part of the war cost by taxation, 
 are likely to find themselves seriously hampered 
 when peace comes by the problem that they are thus 
 creating for themselves. 
 
 For these reasons borrowing at home in war-time 
 is not a policy that commends itself on economic 
 grounds. The extent to which it is practised may 
 be taken as a measure of the want of confidence of 
 the Government in itself or in the readiness of the 
 people to make sacrifices for the war, or of its mere 
 thoughtless following of a bad habit handed down 
 by. its predecessors. 
 
 ^ A well-informed and benevolent despot, with a 
 perfectly docile people, would see that if there js 
 money in the country that he can get by borrowing 
 he can also get it by taxing if he sets about it in the 
 right way, and that by doing so he not only cheapens 
 the war by reducing his subjects' demand for goods 
 which competes with that of his War Minister, but
 
 II] THE BENEVOLENT DESPOT 49 
 
 also makes industrial recovery in peace more rapid 
 and hearty, by the absence of after-war taxation. 
 All the money that he wanted for war he would just 
 take from his people in taxes as the war went on, 
 without going through the cumbrous process of 
 borrowing it from them and afterwards taxing them 
 to pay themselves back. But in order to do so he 
 would have to be able to rely on a truly equitable 
 system of taxation, which would curtail the power 
 even of the richest to waste money on things that 
 are not really needed at a time of national crisis, 
 without taking food out of the mouths and clothes 
 off the backs of those who are hungry and ill-clad. 
 Borrowing at home in time of peace for some 
 purpose that is, as Adam Smith said, of great na- 
 tional advantage, but not likely to pay, is less objec- 
 tionable than war borrowing, since the special 
 advantages, set out above, of taxation over borrow- 
 ing that prevail in war-time are then absent. But 
 it is always dangerous, because it encourages the 
 delusion that a nation can have things now and 
 pay for them some day, whereas whatever it has now 
 it pays for now if it raises the money at home, and 
 the simplest, cleanest, and most honest way of pay- 
 ing for it is by taxation. In the case of revenue- 
 earning enterprises there is very little objection to 
 borrowing for their cost if the revenue is likely to 
 cover the debt charge ; but since it is generally ad- 
 mitted that such enterprises are more costly, in 
 most countries, when managed by Government, the
 
 ;^* ti 
 
 \-j 
 
 50 MONEY TAKEN BY BORROWING [chap. 
 
 economic argument against their being so managed 
 is strong. 
 
 borrowing abroad, except for reproductive pur- 
 poses such as railway building, is so evidently "bad 
 business" that it is only done by Governments of 
 economically backward countries, or by Govern- 
 ments which are impelled into this course, against 
 their will, by the force of circumstances, as happened 
 to England's in the present war. The volume of 
 munitions and war goods required for her and for 
 her Allies was so great that she had not the plant 
 ready to provide them fast enough, so she had to 
 buy them from neutrals. As her industry was de- 
 pleted of its best men and had more work to do than 
 it could manage, it was not possible to pay for these 
 war imports by increasing the volume of goods and 
 services that she exported. So she was obliged to 
 make these payments by drawing on her accumu- 
 lated capital and by pledging her future production. 
 Some of her accumulated capital was in the form of 
 the bonds and shares of American railroads and of 
 Government and municipal bonds of many neutral 
 countries, which had been acquired by her 
 through the process of investment abroad, that is 
 by providing goods and services in the past and 
 taking securities in exchange for them. These for- 
 eign investments stood her in good stead since she 
 was able to ship them back to the country of origin, 
 or to others that would take them, in exchange for 
 war imports. By this means she, as a nation, paid 
 for part of the war's cost out of work done in 
 
 >>
 
 II] BORROWING ABROAD 51 
 
 former years, by using it to induce foreigners who 
 bought the securities to pay, during the war, other 
 foreigners who were supplying her with goods and 
 services needed for it. By so doing she deprived 
 herself for the future of the stream of goods and 
 services that she used to receive from foreign coun- 
 tries to meet the interest on and redemption of these 
 securities that she had acquired in former years. 
 This process has very much the same effect as bor- 
 rowing abroad, which was another means employed 
 by the British Government for financing the war. 
 For example, when it raised a loan of 250 millions 
 in America it, in effect, hired certain American in- 
 vestors to pay now for the munitions, etc., that it 
 was importing, promising to pay them in future so 
 much a year in interest. This interest England will 
 have to provide out of her annual production of 
 goods and services. So that both these processes of 
 financing, by selling securities and by borrowing 
 abroad, mean that she will have to work harder in 
 future to provide for her own wants, for one reduces 
 the payments that folk abroad have to make to her 
 and the other increases the payments that she has to 
 make to them. But it may be noted that the extent 
 to which she has made use of these methods of pay- 
 ing for war is, so far,* roughly balanced by the loans 
 that she has made to her Allies and Dominions. 
 
 * Written in March 1917.
 
 
 CHAPTER III 
 
 MONEY WATERED BY INFLATION 
 
 In the good old medieval days rulers who wanted 
 more money than they could squeeze out of their 
 subjects by taxing used often to solve the prob- 
 lem by debasing the coinage. This was most easily 
 and effectively done by putting less precious metal 
 and more alloy into coins and then issuing them in 
 payment with all the appearance of having the same 
 value as before. By this process the monarch was 
 able to make a given amount of gold or silver go so 
 much further in turning it into pieces that their 
 unsuspecting subjects would take in exchange for 
 goods, until the fraud was discovered and prices 
 
 / adjusted themselves, more or less. 
 
 V Nowadays most commercial transactions, except 
 the retail purchases on which we spend our pocket- 
 money, are carried out by means of various forms 
 of paper money, the most important of which, in 
 England, is the cheque currency with which our 
 banking system provides us. Before the war, we 
 ' used to carry gold and silver coins for retail pur- 
 ! poses, but even then all big payments were made 
 ■■ 52
 
 [chap. Ill] MULTIPLYING PAPER 53 
 
 by cheque. Since the war, gold has practically van- 
 ished from circulation, and its place has been taken 
 by Treasury notes, issued under the Currency and 
 Bank Notes Act of 19 14, and convertible on de- 
 mand into gold at the Bank of England. This 
 power, that a modern community has gained, of 
 multiplying its currency by means of the printing 
 press and of banking machinery, makes it easy for 
 Governments when they want money and are shy 
 of taking it directly and openly out of the pockets 
 of the citizens, to debase the currency, not by fraud- 
 ulently tampering with it in the medieval manner, 
 but by merely multiplying the amount of the paper 
 instruments that will be taken by the public in 
 exchange for goods. The buying power of the 
 public is thus watered down by inflation, if this 
 mixture of metaphors may be permitted. This is 
 a very tempting and attractive method of financing 
 any expensive enterprise, especially a war, because 
 it does not, at first sight, call upon any one for any 
 such sacrifice as is involved when taxes are raised 
 or when the citizens are called upon to limit their 
 spending, save their money and lend it to the State. 
 By increasing the currency a Government does not 
 take money out of anybody's pocket, but puts new 
 money into the pockets of those to whom it has to 
 make payments. It seems to be a delightfully easy 
 and simple way of paying for things, just to manu- 
 facture new money for the purpose, and this device 
 is in fact the basis for all kinds of schemes by which 
 well-meaning currency reformers often believe that
 
 54 MONEY WATERED [chap. 
 
 they can make mankind rich, by increasing the 
 volume of the medium by which payments are ef- 
 fected; whereas the only way by which we can 
 be made really better off is by increasing the supply 
 of things that we need and improving the system by 
 which they are distributed among us. In fact the 
 effect of an increase of currency, unless it is accom- 
 panied by an increase in the output of goods, is 
 just the same as that of the medieval debasement. 
 It tends to produce a rise in the prices of all com- 
 modities in general use, and so throws the burden of 
 paying for war, or providing whatever be the object 
 that the Government is trying to secure, on the 
 shoulders of the people least able to bear it — namely, 
 ill-paid workers and salary earners and people with 
 small fixed incomes. It is a devious, unscientific, 
 and round-the-corner dodge, and can only be ex- 
 cused on the ground that Governments make use 
 of it without realizing what they are doing, and 
 then continue it because, when once it is started, 
 it is very difficult to stop it, or even to check its 
 growth. 
 
 It is simply finance by inflation. The subject is 
 difficult and technical, and to enter into all its in- 
 tricacies would involve us all in much confusion 
 and weariness of mind, and would also fill out a 
 portly volume. But if we keep to the broad outlines 
 of the matter, it seems to me that the case against 
 it is plain to the understanding and convincing to 
 common sense. Professor Foxwell, in the course 
 of a lecture on Inflation, lately gave an excellent
 
 Ill] DR. JOHNSON ON CURRENCY 55 
 
 illustration of the effect of the quantity of currency 
 on prices from a remark of Dr. Johnson's. When 
 told that in Skye twenty eggs might be bought for 
 a penny, Johnson observed : "Sir, I do not gather 
 from this that eggs are plenty in your miserable 
 island, but that pence are few." There it is in a 
 nutshell. If currency, is scarce, prices are low. If 
 it is plentiful, prices are high. By inflation I mean 
 an increase in the currency more rapid than in the 
 volume of commodities and services that the com- 
 munity is producing. When this takes place, if at 
 the same time what is called the velocity of the 
 circulation — that is, the pace at which money is 
 turned over — remains the same, it is impossible to 
 avoid the conclusion that a rise in prices must hap- 
 pen. Let us see the process at work in an imaginary 
 example. 
 
 If we all woke up one morning to find that some 
 well-meaning fairy had doubled the amount of 
 money in our pockets and in our banking accounts, 
 and if at the same time no more stuff and services 
 were being produced, we should all, probably, feel 
 nice and rich until we found out that everybody 
 else's money had also been doubled; then if at the 
 same time there were no increase in the things that 
 money is used to buy, the stress of competition 
 would make the price of everything shoot up like a 
 rocket. If the price of everything, including labor, 
 services and capital, were exactly doubled, then we 
 should all be exactly as we had been before, with 
 regard to our power to buy ; but in fact there would
 
 56 MONEY WATERED [chap. 
 
 be a painful process of adjustment in which those 
 who were strongest in bargaining power would do 
 best out of the scramble and the weakest would fare 
 worst. Moreover, those who had made investments 
 in house property, mortgages or securities, entitling 
 them to so many dollars a year for a term of years 
 or for all time, would find that the buying power of 
 their so many dollars had been greatly lessened, 
 but that they had no right to make their tenants or 
 their debtors pay them more than was stipulated 
 in the original contract. The result, then, of such 
 an increase in the currency as we have imagined 
 would be a great upsetting of the community's 
 economic relations, with a rise in prices followed by 
 a rise in wages for those who were strong enough 
 to secure it, probably much friction and many strikes 
 before this adjustment was secured, a good deal 
 of injustice to unorganized workers and people 
 like clerks and typists who are too respectable to 
 strike, and a very unfair advantage to debtors, who 
 would be able to pay interest and repay capital to 
 creditors in currency that had been debased to the 
 extent of about half its value. 
 
 If inflation took place on this wholesale scale, we 
 should all see at once what was happening, but of 
 course it does not. It is usually done, even in times 
 of acute crisis, so gradually that its effect is not 
 observed until it is too late to remedy the evil by 
 drastic measures, without raising a fresh crop of 
 awkward problems. In normal times inflation is, 
 as a rule, only practiced on a very modest scale,
 
 Ill] THE GUERNSEY MARKET 57 
 
 though it is said that there have been examples of 
 economically backward States that worked the print- 
 ing- press so hard that at last their paper became 
 so worthless that it did not even pay to print it. 
 If inflation really has the excuse, like the unauthor- 
 ized baby, of being "only a very little one," its 
 effect is hardly noticeable, and it appears to work 
 a very comfortable miracle. There is the famous 
 example, referred to in Jevons's book on Money, 
 Chapter XVI, of the Guernsey market, which was 
 "built without apparent cost." The Governor of the 
 island wanted to build a market, and, not having 
 the wherewithal, "issued under the seal of the 
 island four thousand market notes for one pound 
 each, with which he paid the artificers. When the 
 market was finished and the rents came in, the 
 notes were thereby canceled." The whole trans- 
 action was completed, and the market had seem- 
 ingly been built out of nothing. In fact it had 
 been built by means of temporary inflation, the 
 effect of which would tend to raise the prices of all 
 the goods that the community was consuming. 
 Jevons indeed considers that the infusion of those 
 notes into the currency drove out so much gold. If 
 that really happened, then there would be no infla- 
 tion, because paper would have taken the place of 
 gold in circulation and there would have been no 
 increase in the total currency in the hands of the 
 ; Guernsey folk. But Jevons does not state that 
 ^ gold was, in fact, actually driven out; and with 
 I all deference to his authority, the explanation
 
 58 MONEY WATERED [chap. 
 
 of the miracle given above seems to me more 
 probable. 
 
 In order to avoid misunderstanding, I think it is 
 better to make it clear that by inflation I mean 
 any increase in any form of currency, whether 
 metallic, legal tender, or other — coins, bank notes, 
 postal orders, or clieques — that is accepted in pay- 
 \ ment by the community. It is quite possible to 
 ' have inflation by too great an inrush of gold, as 
 several neutral countries have found in the course 
 of the present war. But when it is a matter of too 
 .much gold, then equilibrium can be restored in 
 ordinary times by the export of the gold, because 
 it will be taken in payment elsewhere; but a coun- 
 try's paper money is not available as an article of 
 export. 
 
 In normal times, such inflation as we are liable 
 to is usually corrected by gold exports and the 
 operation of other economic processes. If a coun- 
 try's currency system is sound, the inflation process 
 should thus carry its own remedy with it. In Eng- 
 land's case, if we get in too much gold, or our banks 
 create too much cheque currency, the consequent 
 rise in prices tends to check our exports and in- 
 crease our imports of goods. Thereby in the first 
 place the volume of goods offered in our home mar- 
 kets increases and so the relation between goods and 
 currency is helped to return to the former level, and 
 in the second, as we are importing more goods and 
 exporting less, there is a tendency for gold to be 
 shipped to pay for some of the extra imports. So
 
 Ill] UNCHECKED IN WAR-TIME 59 
 
 that if we are suffering from too much gold, the 
 cure begins to work; or if it is a case of too much 
 banking credit, the export of gold calls attention 
 to the diminished basis of this credit and so helps to 
 cure it. 
 
 — In war-time, if the war is big and obtrusive 
 enough, these nice and pretty checks and balances do 
 not work to keep inflation down. Shipping gold is 
 made expensive by high rates of freight and in- 
 surance, and the people who usually handle the 
 business of shipping gold, and do so, in peace time, 
 whenever they can see a profit in it and sometimes 
 merely to get the advertisement that gold ship- 
 ments usually bring with them, are checked by 
 patriotic motives and the desire to avoid export- 
 ing a financial weapon which has to be kept for 
 special uses. And so inflation can proceed 
 merrily without setting to work the automatic mech- 
 anism that usually produces the antidote for the 
 disease. 
 
 How merrily inflation can work, when it is thus 
 given its head, the experience of the present war 
 has well shown. All the warring countries in Eu- 
 '':' rope have been calling in gold from circulation and 
 ,<Teplacing it with a much larger quantity of paper. 
 Much of the gold that they have called in they have 
 shipped to neutral countries to pay for goods, and so 
 all over the world there is this common experience 
 of an increase in currency over and above the supply 
 of goods, and a more or less universal rise in prices. 
 The thing has gone to such a pitch that the Scandi-
 
 rt 
 
 60 MONEY WATERED • [chap. 
 
 navian countries have in effect closed their ports 
 
 against the entry of gold, and in America the danger 
 
 of the inflation produced by the great mass of gold 
 
 . ' imported has long been a commonplace among eco- 
 
 ' ^ nomic writers. 
 
 The method of inflation differs in each country 
 according to the arrangements of its currency sys- 
 tem. During the present war England is doing 
 it in three or perhaps four ways. The Govern- 
 ment has done it by printing paper currency, much 
 greater in extent than the gold which it has replaced 
 in circulation, and by minting a great quantity of 
 ?{;i * silver. The Bank of England has done it by lend- 
 ^^ ing money to the Government, to Allies, to Colo- 
 nial Governments, and to private individuals; and 
 the other banks have done it by increasing their 
 investments in Government securities and by mak- 
 ing advances to customers in order to enable them 
 to take up Government securities. In other words, 
 most of the inflation has been due chiefly to the ac- 
 tion of the Government in either directly increasing 
 the currency itself by printing or coining it, or in 
 borrowing money from the Bank of England and 
 the other banks instead of getting it out of the 
 pockets of the public by taxing it or borrowing its 
 savings. It is entirely natural that the British Gov- 
 ernment should have done this, because in peace time 
 it does so habitually and as part of its regular 
 : scheme of finance. It borrows from the Bank of 
 ' England on Deficiency or Ways and Means advances 
 to tide it over a time when taxes are coming in
 
 [ 
 
 III] CURRENCY MADE BY BANKS 6i 
 
 sluggishly, and on the other hand big payments have 
 to be made, and for like reasons it sells Treasury 
 bills, or temporary promises to pay, to the Bank of 
 England, or to other banks. These devices are, 
 usually, on so small a scale, as compared with the 
 vast sum of our monetary turnover, that the conse- 
 quent addition to our currency has no noticeable 
 effect. But the huge scale on which they have 
 been used in this war has had bad results for all 
 parties. -— 
 
 As many people may be puzzled by the assertion 
 that the Government increases the currency by bor- 
 rowing from banks, it is better to explain the 
 process briefly here, though in another book I have 
 already shown how loans made by banks produce 
 manufactured money by adding to the banks' de- 
 posits, which embody the right of their customers 
 to draw the cheques which are the chief form of 
 currency that we now use.^ 
 
 When the Bank of England makes a loan to the 
 Government or subscribes to any issue of Govern- 
 ment security, it increases its holding of Govern- 
 ment securities as shown in its weekly return. When 
 it makes advances to any less august borrower, it 
 increases its holding of what it calls Other Securi- 
 ties. In either case it increases, on the other side of 
 its return, the amount of its deposits, which, as the 
 appended specimen shows, are divided into Public 
 : and Other, the former being the balances of the 
 various departments of the British Government, 
 
 * Meaning of Money, pp. 64 et seq.
 
 62 MONEY WATERED [chap. 
 
 and the latter those of all other depositors, includ- 
 ing the other banks : 
 
 BANK OF ENGLAND 
 
 Banking Department 
 July ist, 1914 
 
 Million £ 
 
 Government Securities . 11 
 Other Securities . . 49J^ 
 Reserve .... 28^ 
 
 
 Million £ 
 
 Capital . 
 
 . H'A 
 
 Rest 
 
 . 3J4 
 
 Public Deposits . 
 
 . 17 
 
 Other 
 
 . 54^ 
 
 
 89^ 
 
 89^ 
 
 Any one to whom the Bank of England makes 
 an advance thereby gets a credit in its books, and 
 so the amount of the deposits at the Bank is in- 
 creased by the amount of the advance. If the Brit- 
 ish Government is the borrower, the advance is 
 added both to the Government Securities among the 
 assets and to the Public Deposits among the liabili- 
 ties ; but as the Government does not borrow money 
 in order to have the pleasure of contemplating a 
 large balance at its banker's, it sooner or later makes 
 payments, out of this deposit, to contractors or 
 other folk to whom it owes money, by means of 
 cheques on the Bank of England; the contractors 
 pay these cheques into their own banking accounts, 
 and so the money originally lent by the Bank of 
 England to the Government is transferred from the 
 Public to the Other Deposits, to the credit of the 
 other banks to whom it has been distributed, and 
 henceforward it figures as cash at the Bank of Eng- 
 land in their balance sheets. If the Bank of England
 
 Ill] CURRENCY MADE BY BANKS 63 
 
 makes an advance to any other borrower, he is cred- 
 ited with a corresponding deposit. He draws on it 
 and transfers it to any one to whom he has to make 
 payments, but the deposit remains to the credit of 
 some one as long as the advance is outstanding. 
 How far this process has been carried we see from 
 the figures of the Bank of England's returns pub- 
 lished at the end of last year, comparing with those 
 at the end of June 1914,^ given on a previous page: 
 
 Banking Department 
 
 December 27th, 1916 
 
 
 Million £ 
 
 Million £ 
 
 Capital . 
 
 . 143^ 
 
 Government Securities . 57 
 
 Rest 
 
 . 3J4 
 
 Other Securities . . io6j^ 
 
 Public Deposits . 
 
 . 52 
 
 Reserve . . . -33 
 
 Other 
 
 . I26M 
 
 
 
 1961^ 
 
 196^ 
 
 Here we see an addition of more than 100 mil- 
 lions to both sides of the balance sheet, by in- 
 creases in the securities on one hand and in the 
 deposits on the other. These deposits are potential 
 currency and more, for being "cash at the Bank of 
 England," in the hands of the other banks they are 
 regarded as just as good a reserve for them as gold 
 or legal tender. Let us see the effect on the other 
 banks of this increase in the currency which may 
 be called, in a sense, part of the basis of their credit 
 operations. I append an aggregate balance sheet 
 of nineteen of the biggest English banks, showing 
 * These dates are chosen to fit those of the balance sheets 
 of the other banks, vi^hich are only published half-yearly.
 
 64 
 
 MONEY WATERED 
 
 [chap. 
 
 their position first on June 30th, 1914, the last date 
 on which they were published before the war, and 
 then on December 31st, 1916: 
 
 Aggregate Balance Sheets of Nineteen Principal 
 English Banks 
 
 June 30th, 1914 
 
 Capital and Re- 
 serves . . 69,864,000 
 
 Acceptances and 
 Endorsements . 37,646,000 
 
 Deposits (includ- 
 ing undivided 
 profits, etc.) . 747,243,000 
 
 i8s4,753,ooo 
 
 Cash in hand and 
 at bank . . 115,242,000 
 
 Investments . 114,583,000 
 
 Discounts and Ad- 
 vances (includ- 
 ing Money at 
 Call, etc.) . . 571,451,000 
 
 Cover for Accept- 
 a n c e s, P r e- 
 mises, and Sun- 
 
 dries 
 
 • 53.477,000 
 ;£854,753,ooo 
 
 December 2'^stj 1916 
 
 Capital and Re- 
 serves 
 
 Acceptances and 
 Endorse- 
 ments 
 
 Deposits (in- 
 cluding u n- 
 divided p r o- 
 fits, etc.) 
 
 72,497,000 
 
 57,498,000 
 
 1,095,574,000 
 
 £1,225,569,000 
 
 Cash in hand and 
 at bank . 
 
 Investments 
 
 Discounts and 
 Advances (in- 
 cluding Money 
 at Call, etc) . 
 
 Cover for Ac- 
 ceptances, Pre- 
 m i s e s, and 
 Sundries 
 
 251,875,000 
 303,461,000 
 
 592,056,000 
 
 78,177,000 
 
 £1,225,569,000
 
 Ill] POTENTIAL CURRENCY 65 
 
 The most notable features In this very instructive 
 comparison are the increases in the deposits on the 
 liabihties side and in the cash and investments 
 among- the assets, that has taken place during the 
 period. It will be observed that the deposits, which 
 are potential currency in the hands of the public, 
 since they give the banks' customers the power to 
 draw cheques against them, have risen by 348 mil- 
 lions, while the cash held by the banks has risen 
 by 136 millions, their investments by 189 millions, 
 and their loans and discounts by 21 millions. How 
 much of the addition to the cash is due to the Bank 
 of England's lending activities, as described above, 
 how much to the issue of Treasury notes, of which 
 150 millions sterling were outstanding on Decem- 
 ber 31st last, and how much to gold paid in by 
 customers, it is impossible to guess, but it is safe 
 to assume that these three processes between them 
 have done most of it. But a still larger move- 
 ment is the increase in investments, the whole of 
 which, it is safe to guess, has been due to the big 
 subscriptions made by the banks to the two first 
 War Loans, and to Exchequer bonds and Treasury 
 bills, by means of which they increase on the one 
 hand their investments and, on the other, the de- 
 posits of their customers, — by this process. When 
 they subscribe to War Loans or buy Treasury bills 
 from the Government, the banks pay for the securi- 
 ties so taken by a draft on their balance at the 
 Bank of England, and so, for the time being, 
 hold so much less cash at the Bank of England and
 
 66 MONEY WATERED [chap. 
 
 so much more investments; but as the Government 
 uses its increased balances to pay debts, by drawing 
 cheques on them, and the contractors who get the 
 cheques pay them into their banks, the banks get 
 back their balances at the Bank of England and 
 also have their deposits increased, by the cheques 
 on the Bank of England, which their customers 
 pay in; and so when the transaction is all com- 
 plete the banks find themselves with their deposits 
 increased by the amount that they have subscribed 
 to the new loan, or whatever the security may 
 be. In other words, they and the Government be- 
 tween them, by this credit operation, have increased 
 the amount of currency in the hands of the public, 
 and if at the same time there has been no corre- 
 sponding increase in the volume of goods, infla- 
 tion is thereby produced. The figures given above 
 are complicated by the addition, during the period, 
 of two small banks by amalgamation; but if bank- 
 ing figures of the whole of the United Kingdom 
 could be compared, the total increase in deposits, 
 that is in potential currency, would be over 400 
 millions. 
 
 A similar process is set to work when a bank 
 makes an advance to a customer to enable him to 
 take up War Loan, or any other security, or for any 
 other purpose. As I have shown elsewhere,^ as 
 long as the loan is outstanding there is almost 
 certain to be a deposit in some bank or other against 
 it. The English banks had not, up to the date of 
 * Meaning of Money, loc. cit.
 
 m 
 
 III] BORROWING FOR WAR LOAN 67 
 
 the balance sheet shown above, done much of this 
 business since the war. In fact, owing to the extent 
 to which industry is now on a cash basis and owing 
 to the decrease in Stock Exchange speculation, the 
 increase in loans and discounts of the banks was 
 quite, small. But during the first quarter of 1917 
 they must have made very large advances to cus- 
 tomers, since every one was urged to anticipate 
 future savings, borrow from his bank and sub- 
 scribe to War Loan, and we know that the public 
 responded very practically to this appeal. This 
 v/as quite as it should be, since it was by only 
 anticipating savings that the huge amount requited 
 V could be got ; but, as was pointed out at the time by 
 Professor Pigou, in a letter to the London Times of 
 January 19th, 191 7, unless the money so sub- 
 
 ' scribed was saved and paid back to the banks, so 
 £vi;Canceling the increased credits, as fast as it was 
 
 I spent by the Government, this system of subscribing 
 
 I out of bank advances could only lead to inflation. 
 
 5 The banks are, among other things, manufac- 
 turers of currency, and as long as their manufac- 
 ture does not outstrip the pace at which goods are 
 being produced, the general level of prices will re- 
 main fairly level. Or if new currency that they cre- 
 ate is used by producers to set to work and make 
 more goods, then by creating it they are helping the 
 production of goods and so maintaining the equilib- 
 rium between goods and currency. It is when they 
 manufacture currency that is handed straight over 
 to a great consumer like a Government in war-time,
 
 68 MONEY WATERED [chap. 
 
 that inflation can almost be seen getting to work. A 
 new buyer comes into the markets, with a great mass 
 of currency to draw on, competing with all other 
 buyers and probably, from what we (in England at 
 least) know of Government departments, with 
 itself,* and up go prices. It is a subtle, insidious, 
 but very effective way of getting money out of us, 
 not by taking it from us, but by watering down the 
 value of all the money that we possess. As the prices 
 of goods rise our buying power over them declines, 
 and so we have to put up with less of them. This is 
 right and reasonable if they are wanted for the na- 
 tion's needs, but the inflation process does the job in 
 the worst possible way by throwing the burden of 
 going without on those who are least able to bear it. 
 Inflation, however, does not only hit the poorest 
 members of the community. It is bad finance for 
 the Government that indulges in it to any extent 
 that suffices to cause any serious rise in prices and 
 depreciation in the currency. In the first place, the 
 Government drives prices up against itself and so 
 makes the war, or whatever else be the object of its 
 spending, more costly. In the second, the Govern- 
 ment, being not only an inflater but a borrower, 
 since it is by the borrowing process that much of 
 the inflation is done, borrows at a time when the 
 currency is depreciated by its own action and en- 
 
 *A report of the Committee of Public Accounts quoted in 
 the London Economist of August 26th, 1916, p. 357, shows that 
 the British Admiralty and the War Office were buying against 
 one another.
 
 Ill] IS INFLATION INEVITABLE? 69 
 
 gages to pay interest and pay the debt back in 
 years hereafter, when we may fairly hope that prices 
 will have gone back from their present level. Con- 
 sequently the British Government borrows millions 
 of depreciated pounds with a fair prospect of hav- 
 ( ing to pay back its debtors later on with pounds that 
 / will be much more valuable. Unlike the quality of 
 j mercy which blesseth him that gives and him that 
 1 takes, the system of financing by inflation curses 
 \ both the inflater and the inflatee. 
 
 "But," it is argued, "you cannot possibly get 
 away from inflation in time of war. It is inevitable. 
 The rise in prices makes a larger amount of cur- 
 rency necessary." But could there be a general rise 
 in prices without an increase in the volume of cur- 
 rency? There could, of course, if there had been a 
 decrease in the production of goods. But if the 
 production of goods had remained fairly constant, 
 as it probably did if we include war material as 
 goods, and if there had been no increase in the 
 volume of currency, then, I think, though certain 
 prices must have risen, others must have fallen. 
 
 The price of carriage by sea could not help rising, 
 owing to the demands on the merchant fleets of the 
 world by the warring Governments, the shutting up 
 of Germany's ships in neutral harbors, and the de- 
 struction of Allied and neutral tonnage by German 
 submarines. This would have meant that everything 
 that came by sea would be dearer, so that in Eng- 
 land food prices must have risen. At the same 
 time, the more generous diet required by the fighter
 
 70 MONEY WATERED [chap. 
 
 and the war worker would have had a like effect. 
 War materials would also have inevitably been 
 dearer. But if there had been no increase in the 
 currency, the greater volume of it required for pur- 
 chases of food and war material would surely have 
 lessened the amount available for buying other 
 things and their prices would have fallen, and the 
 decreased demand for them might have set free la- 
 bor employed in producing them and so helped to 
 increase the production of food and war material 
 and checked the rise in their prices. Without infla- 
 tion private extravagance in England would have 
 been much less general. If, for example, the higher 
 prices paid by the British Government for the petrol 
 which it was using in such huge amounts had dimin- 
 ished by their full extent the supply of money that 
 other people could pay for it and for other things, 
 we might have heard less about English race meet- 
 ings thronged with private cars in the third year of 
 the war. But as long as the British Government and 
 the banks kept ladling out fresh supplies of cur- 
 rency, competition between the State and the citizen 
 for the goods and services available became ever 
 keener, to the detriment of both parties. As more 
 money went into buying potatoes, owing to the rise 
 in their price, less, if it had not been for inflation, 
 might have gone into buying flowers, and so ground 
 and labor used for growing flowers, would much 
 more rapidly have been used for growing potatoes, 
 and the rise in the price of potatoes would have been 
 checked. As more money was needed for ocean-
 
 Ill] GOODS AND SERVICES 71 
 
 carried food, less would have been in buyers' pockets, 
 if there had been no inflation, for ocean-carried furs 
 and feathers and wine and silk dresses, and so more 
 ship space would have been set free for food, and 
 the rise in its price would have been checked. In 
 other words, if all the money required by the British 
 Government for the war had been taken out of the 
 pockets of the public in taxes and loans paid for out 
 of savings, instead of much of it being manufactured 
 by the Government and the banks between them, 
 then the public's buying power would have been 
 reduced by the full amount spent on the war; and 
 the reduction of consumption, by which alone war's 
 needs can be met, would have been brought about 
 with much less friction and economic disturbance. 
 
 For, as has been said over and over again in the 
 course of the British War Savings campaign, the 
 Government makes war with goods and services. 
 Those that it needs for war can only be handed over 
 to it if somebody goes without. It cannot by any 
 possibility, or by any financial sleight of hand, get 
 more than the country can produce, either by its 
 own labor and energy or by selling goods abroad 
 in exchange for war goods made abroad, plus the 
 amount that it can get abroad by borrowing and 
 selling securities. As a warring country's power to 
 borrow and sell securities abroad is obviously lim- 
 ited, it is clear that after a certain point the war de- 
 mand for goods and services can only be met by the 
 reduction, enforced or voluntary, of the buying 
 power of the civilian population. Inflation helps
 
 72 MONEY WATERED [chap.iii 
 
 to effect this in an insidious, roundabout, and in- 
 equitable manner, laying much of the war burden on 
 the wrong shoulders. It is not the sole cause of 
 all the rise in prices, but by encouraging extrava- 
 gance it helps to raise the prices of goods that need 
 not necessarily rise at all, and it increases the rise 
 in prices in which a rise is inevitable. 
 
 As has been said, inflation does not "cut much 
 ice" in normal times. But it is like one of those 
 diseases that demoralize the patient into enjoying 
 them, and war's experience shows that England 
 will have to be careful to get cured of it as quickly 
 as she can without starting some other ailment, and 
 then keep it out of her system.
 
 CHAPTER IV 
 
 MONEY TAKEN BY TAXES 
 
 Given a free people with real control over the con- 
 duct of its affairs, a genuine confidence in the jus- 
 tice of the system by which money is taken from it 
 and in the wisdom and care with which the money 
 is spent, and the citizen would no more object to 
 paying taxes than he objects to paying a bill for a 
 book, or a suit of clothes, or a set of golf clubs that 
 he has ordered for himself. The prevalent spirit on 
 the subject shows how very far we are from having 
 attained these ideals. 
 
 "All taxes are confiscation," said Mr, Joseph 
 Hume as already quoted, so expressing the common 
 view that the State takes our money in an arbitrary 
 and unjust manner and spends it on purposes which 
 may be necessary but are only submitted to reluc- 
 tantly on that ground, the said expenditure being 
 necessarily and inevitably a cause of the impoverish- 
 ment of the people. In England in the last century, 
 in the heydey of the simple and satisfactory theory 
 that every man knew his own interest best and could 
 be trusted to secure it if left alone, and that by this 
 pleasant process the interest of the whole com- 
 munity would certainly be attained, it was a 
 favorite phrase with politicians and political writers 
 
 .73.
 
 74 MONEY TAKEN BY TAXES [chap. 
 
 that such money as was saved from taxation would 
 "fructify in the pockets of the people." 
 
 How much truth is there in this view? It is 
 surely a very large assumption to suppose that all 
 the money which Government takes would, if left 
 in the people's pockets, have been spent on some 
 g"ood and useful purpose and have increased the pro- 
 ductive power of the community. This theory takes 
 it for granted that the Government's revenue is 
 derived entirely from money which would other- 
 wise have been saved and well invested in repro- 
 ductive enterprise. Whereas we know that, owing 
 to various defects in the machinery of the laws gov- 
 erning joint stock companies and the ingrained crav- 
 ing in the hearts of most of us for short-cuts to 
 fortune, a good deal of the money that is invested 
 gets into the pockets of unsavory company promo- 
 ters and the evil brood employed by them, or is sunk 
 in enterprises that never had a chance of yielding a 
 profit to their shareholders; and further, it by no 
 means follows that what the Government takes 
 comes out of what the citizens would have saved. 
 Very probably it comes out of what they would 
 have spent on themselves ; and only the most in- 
 corrigible optimist, or the most ignorant theorist, 
 could maintain that whatever people spend on 
 themselves is spent well. The vulgarity and 
 absurdity and ugliness of many of the objects on 
 which the rich and middle classes spend their money 
 are apparent to all : lavish entertainments at which 
 everybody is bored, theatrical shows which are a
 
 IV] "FRUCTIFYING"? 75 
 
 scarifying criticism of the intelligence of those 
 who pay money to be amused by them, clothes and 
 gewgaws in which no really civilized people would 
 consent to be found dead, — these are a few of the 
 more innocent examples of the manner in which 
 hundreds of millions of money that the State does 
 not take "fructifies" in the pockets of its more for- 
 tunate citizens. Bad spending among the poor is 
 perhaps even commoner, owing to their ignorance 
 of the uses of money, and is much more tragical 
 in its effects owing to the fact that, even if they 
 spent well, they would seldom have enough to give 
 them a reasonable chance of full development of 
 their faculties and capacities. 
 
 Since, then, there is much bad spending in all 
 classes, we have no right to assume, as is often 
 done, that all the money taken by the State and 
 spent, well or ill, by it, would have been well spent 
 if left to "fructify in the pockets of the people." 
 It might have gone in race meetings. Tango teas, 
 picture palaces, fashionable fripperies, strong drink, 
 or trashy "literature," all of which things have 
 their uses in amusing people who do not know how 
 to amuse themselves better, but do not lead to 
 much "fructification." 
 
 It may also be mentioned here that money taken 
 by Government does not vanish. It is spent by the 
 Government on something, and thereby provides a 
 large number of people with a living. When it is 
 spent on the debt charge, it is handed straight 
 over to the debt-holders, in interest or redemption
 
 76 MONEY TAKEN BY TAXES [chap. 
 
 of debt. Spent on education, it pays those who 
 build schools and on the army of patient workers 
 who teach the rising generation — if spent well, no 
 money could be better invested, or fructify more 
 fruitfully. Even when spent on public defense it 
 provides wages for those who build our navy and 
 make our guns, and feeds and clothes those who 
 fight for us. It is true that if we had universal 
 peace all those good workers might be building 
 merchant ships instead of battleships, or making 
 and growing useful things instead of learning and 
 practicing the art of destruction. But as things are 
 at present, national security is a thing that most 
 of us are very willing to pay for, and with private 
 spending what it is, we cannot be sure that by any 
 means all the work of these workers, if set free from 
 I military and naval objects, would be put to good 
 ' and fruitful use. It is of course absurd to go to the 
 other extreme and contend that taxation creates 
 employment. It only transfers the power of giving 
 employment from individuals, who might or might 
 not have used it well, to the State, which may or 
 may not use it well. 
 
 No chapter on taxation can be complete that does 
 not quote Adam Smith's famous four maxims on 
 the subject : 
 
 "(i) The subjects of every State ought to contri- 
 bute towards the support of the Government, as near- 
 ly as possible, in proportion to their respective abili- 
 ties; that is, in proportion to the revenue which
 
 IV] SMITH'S MAXIMS 'jy 
 
 they respectively enjoy under the protection of the 
 State. 
 
 (2) The tax which each individual is bound to pay 
 ought to be certain and not arbitrary. The time of 
 payment, the manner of payment, the quantity to be 
 paid, ought all to be clear and plain to the contributor 
 and to every other person. 
 
 (3) Every tax ought to be levied at the time, or 
 in the manner, in which it is most likely to be con- 
 venient for the contributor to pay it. . . . Taxes upon 
 such consumable goods as are articles of luxury are 
 all finally paid by the consumer, and generally in a 
 manner that is very convenient for him. He pays 
 them little by little, as he has occasion to buy the 
 goods. As he is at liberty, too, either to buy or not 
 to buy as he pleases, it must be his own fault if he 
 ever suffers any considerable inconveniency from 
 such taxes. 
 
 (4) Every tax ought to be so contrived as both to 
 take out and keep out of the pockets of the people 
 as little as possible, over and above what it brings into 
 the public treasury of the State." ^ 
 
 These maxims have been generally accepted by 
 later economists as a summary of the principles on 
 which taxation should be based, except the very 
 lucid and sensible American writer General F. A. 
 Walker, who decided that "the first and most 
 famous of them cannot be subjected to the slightest 
 test without going all to pieces." As to the other 
 three, their equity and sound sense can hardly be 
 disputed (though Walker thought them "at the 
 ' Wealth of Nations, Book V, Chap. II, Part 2.
 
 78 MONEY TAKEN BY TAXES [chap. 
 
 best, trivial"), and it is also pleasant to observe 
 that the British system of taxation is not far from 
 securing them. If Englishmen fail in the matter of 
 No. 2, it is their fault rather than the State's ; if they 
 chose they could all know how much they were pay- 
 ing for government when they buy a glass of beer or 
 a pound of tea or a packet of cigarettes, and if many 
 of them buy these things every day without even 
 knowing that they are paying taxes, that is only be- 
 cause they have not troubled to think about it. As 
 to No. 3, the convenience of the contributor might 
 be still further consulted in England if income tax 
 could be paid by installments, instead of in one lump 
 as it was before the war, or in two as now arranged. 
 A system of monthly installments would be much 
 more convenient to a large number of taxpayers, 
 and, though it might involve a good deal of book- 
 keeping, it would, on the other hand, help to keep the 
 State's income even, whereas the present system 
 leaves long periods during which it has to borrow in 
 anticipation of taxes to be received later. 
 
 But it is in Maxim No. i that the whole question 
 of the equitable apportionment of taxation is really 
 locked up; and, if we examine the great American 
 economist's severe criticism of his great Scottish 
 predecessor, it will help to a clearer understanding 
 of the whole matter. 
 
 "This maxim [says Walker], though it sounds 
 fairly, will not bear examination. What mean those 
 last words 'under the protection of the State'? They
 
 IV] WALKER ON SMITH 79 
 
 are either irrelevant, or else they ■mean that the pro- 
 tection enjoyed affords the measure of the duty to 
 contribute. But the doctrine that the members of 
 the community ought to contribute in proportion to 
 the benefits that they derive from the protection of 
 the State, or according as the services performed 
 in their behalf cost more to the State, involves the 
 grossest practical absurdities. Those who derive 
 the greatest benefit from the protection of the State 
 are the poor and weak — women and children and the 
 aged ; the infirm, the ignorant, the indigent. Even as 
 among the well-to-do and wealthy classes of the com- 
 munity, does the protection enjoyed furnish a 
 measure of the duty to contribute? If so, the 
 richer the subject or citizen is, the less, proportion- 
 ately, should he pay. A man who buys protection 
 in large quantities should get it at wholesale prices, 
 like the man who buys flour and meat by the car- 
 load. Moreover, it costs the State less to collect 
 a given amount from one taxpayer than from 
 many." ^ 
 
 Walker's admirable lucidity endears him to 
 economic students, so often baffled by the obscurity 
 in which the masters of the science enfold their 
 utterances, but, I think, these criticisms of Adam 
 Smith only serve to bring out the truth of the 
 principles that lay behind his famous first maxim. 
 For Walker implies that the poor and weak, women 
 and children and the aged, enjoy most revenue 
 under the protection of the State, which they obvi- 
 ously do not. It is very true that the poor need 
 
 'Political Economy, Part VI, §§ 588 et seq.
 
 8o MONEY TAKEN BY TAXES [chap. 
 
 protection, but they do not need it in respect of 
 any property that they own or of revenue that they 
 enjoy. The protection of property, which, as we 
 saw in Chapter I, is the original and still a most 
 important function of the State, has to be given 
 in increasing measure as the extent of the property 
 owned, and the revenue derived from it, increases. 
 A junior clerk whose property consists of the bal- 
 ance in his pocket of his last week's wages needs lit- 
 tle protection from the State or anybody else. "Can- 
 tahit vacuus coram latrone viator." His employer, 
 with some furniture in a rented suburban house, a 
 few hundreds invested, and a policy on his life, 
 has little that a burglar could get at, though his 
 investments and his business make his revenue 
 depend on the general stability of society, such as 
 is provided by Government. A great English landed 
 proprietor with an agricultural rent-roll and a 
 square mile or two of house property in cities en- 
 joys his revenues only because the State is there to 
 protect his property and enable him to enjoy it in 
 peace and safety. As Adam Smith says in another 
 passage : 
 
 "It is only under the shelter of the civil magis- 
 trate that the owner of that valuable proi>erty which 
 is acquired by the labor of many years, or perhaps of 
 many successive generations, can sleep a single night 
 in security." ^ 
 
 Walker's contention that those with least prop- 
 
 •Book V, Chap. I, Part II, "Of the Expense of Justice."
 
 IV] WALKER ON SMITH 8i 
 
 erty require most protection for it almost looks as 
 if it had been dictated by a desire to pick holes in 
 the work of his illustrious predecessor. And his 
 argument that the physically weak, women and chil- 
 dren and the aged, need more protection for their 
 property is very little sounder. For if we went back 
 to a state of anarchy and everybody took what he 
 could get, the strong man would certainly have an 
 advantage, but he would not long enjoy much rev- 
 enue under such conditions, because production 
 would promptly be brought to a standstill. As to 
 the "reduction on taking a quantity" argument — the 
 view that the rich should buy protection more 
 cheaply because they need more of it, on the same 
 principle that enables a man to buy bread and meat 
 more cheaply by the car-load — here Walker is surely 
 quoting the principles of the market-place in a 
 sphere to which they cannot be applied. The mer- 
 chant with a big stock of an article, which he may 
 or may not be able to sell, is naturally willing to 
 make a concession in price to a buyer who will take 
 a line off his hands, though even in the market-place 
 this principle, or rule of thumb, does not work 
 always, or beyond a certain point. But a Govern- 
 ment providing its people with protection for their 
 property works under quite other conditions. It 
 knows exactly how much it means to provide, and 
 it ought to be able to find out which of its citizens 
 will be most benefited by this protection and appor- 
 tion the cost upon them accordingly by taxation. 
 So when Walker goes on:
 
 82 MONEY TAKEN BY TAXES [chap. 
 
 "Returning to the maxim of Dr. Smith, I ask, does 
 it put forward abihty to contribute, or protection 
 enjoyed, as affording the true basis of taxation? 
 Which? If both, on what principles and by 
 what means are the two to be combined in prac- 
 tice?"— 
 
 when he puts these posers we have an easy answer. 
 Ability to contribute, since it depends on revenue 
 enjoyed (when we have got at the right meaning 
 of that ambiguous phrase), involves also protection 
 enjoyed, so that both principles lead us to the same 
 end. And the two can be combined in practice and 
 are, in a halting manner that needs improvement 
 and expansion, in the system of taxation that has 
 been painfully evolved in English-speaking coun- 
 tries. Logically applied, Adam Smith's first maxim 
 would confine taxation to direct taxation, that is 
 taxation paid directly by the taxpayer to the State, 
 assessed on a graduated scale according to the tax- 
 payer's net income and differentiated according to 
 the source from which.it is derived. In other words, 
 by laying down this maxim he anticipated the beau- 
 ties of the income tax and death duties, and of the 
 principles of graduation and differentiation that 
 have been so slowly and tentatively introduced into 
 our fiscal systems. All these things are implied in 
 the prophetic musings of the great Scottish thinker. 
 Graduation is clearly implied, as was shown by 
 Walker's criticizing Adam Smith for having appar- 
 ently forgotten it, because he did not actually
 
 IV] WALKER ON SMITH 83 
 
 mention it. We cannot put the proof better than 
 in Walker's words : 
 
 "Is the ability [he asks] of two persons to con- 
 tribute necessarily in proportion to their respective 
 revenues? Take the case of the head of a family 
 having an income of $500 a year, of which $400 is 
 absolutely essential to the maintenance of himself 
 and wife and children in health and strength to la- 
 bor. Is the ability of such a person who has only 
 $100 which could possibly be taken for public 
 uses, one-half as great as that of another head 
 of a family similarly situated in all respects ex- 
 cept that his income amounts to $1,000, and who has 
 therefore $600 which could conceivably be brought 
 under contribution? Manifestly not." 
 
 Most true, but there is nothing to show that Adam 
 Smith thought that it was. Any one who has only 
 $500 a year, of which $400 is needed for the bare 
 necessaries of "health and strength to labor," 
 can hardly be said to enjoy a revenue at all, for 
 the whole of his margin is needed for the decencies 
 and comforts that must be had before he and his 
 children can be provided for in such a manner as 
 is necessary to make them efficient citizens of a 
 civilized state, with their intelligence cultivated to 
 a point that will enable them to exercise judgment 
 concerning public questions. Those only can be 
 said to enjoy a revenue who have a margin over 
 what is needed to maintain them and their depen- 
 dents in health and efficiency. To tax anybody 
 below that line is bad business from the State's
 
 84 MONEY TAKEN BY TAXES [chap. 
 
 point of view, because by injuring their health and 
 efficiency the State promotes the growth of a class 
 that is compelled to live, more or less, either on 
 private charity or public support, and by its lack of 
 efficiency impairs that of the nation at a time of 
 crisis. 
 
 This principle is recognized by the terms on which 
 an income tax is assessed. It would not be im- 
 posed on a man with $400 a year at all. Graduation, 
 the system by which no income tax is imposed below 
 a certain limit, and varies afterwards according to 
 ■ the size of the income, is the great advantage that 
 \ income tax carries with it. The release of small 
 *^- incomes has always, necessarily, been part of it. 
 When it was first introduced in Britain in 1798 it 
 vS, was only imposed on incomes of $300 and upwards, 
 V was graduated l^etween $300 and $1,000 and was 
 10% above that line *; in 1806 the limit of exemp- 
 tion was reduced to $250. Its medieval predecessor, 
 the poll tax, was first raised in 1377, and was gradu- 
 ated. Beggars paid nothing, ordinary folks 4c?. a 
 I head, and the rate varied from this level up to 10 
 \ marks (£6 13.?. 4c?.) on dukes. ^ The income tax 
 \ was, most unwisely, taken off after the Napoleonic 
 j wars, and when it was reintroduced in 1842 by Peel, 
 / it was imposed on incomes of $750 and upwards.^ 
 f This level was later raised to $800, and was reduced 
 in Mr. McKenna's first War Budget in 191 5 and 
 
 * Chisholm's Analysis, p. 424. 
 ^ Ibid., p. 416. 
 
 • Selignian, The Income Tax, p. 132.
 
 IV] DIFFERENTIATION 85 
 
 brought down to $650, which seems to be low 
 enough as it is at present assessed, but by no means 
 as low as it should go if and when the tax is rid of 
 a great anomaly that at present mars it, namely, its 
 great unfairness to those who have families to edu- 
 cate. But before we look further into this and other 
 drawbacks that at present clog an otherwise excel- 
 lent tax, let us consider its other beauty, that of 
 being differentiated according to the source of 
 income, whether "earned or unearned." 
 
 This, again, is a principle that has only fought 
 its way with the utmost difficulty into England's sys- 
 tem of taxation, though the logical soundness of it 
 / is obvious. It is clear that two men, each with 
 $5,000 a year, do not "enjoy" a revenue of this 
 amount in the same sense if one of them earns it as 
 ^ a salary by hard work, which will cease at any time 
 ^ if, owing to bad health or advancing years, he has to 
 . give his work up, while the other receives it in 
 ^ dividends on Government securities which he has 
 ^ inherited or bought out of his own savings, and is 
 therefore certain of enjoying it as long as he lives 
 and of being able to hand it on when he dies to his 
 children or any one else whom he may choose. It 
 has not yet been possible to differentiate still further 
 and impose a different rate of tax on the income 
 that a man receives from investments which he has 
 .' saved himself from that which is paid on an in- 
 . herited income. When a taxpayer has created, by 
 1 saving, his own "unearned" income, it is at first sight 
 ' unfair that it should be so called and so taxed. 
 
 ^
 
 86 MONEY TAKEN BY TAXES [chap. 
 
 But, even so, his enjoyment of it is clearly so much 
 the more secure, and moreover the principle of dif- 
 ferentiation is also at work through the British death 
 duties, which take a large and well-graduated slice 
 out of estates when the demise of their owner gives 
 the State its periodical opportunity. So that the 
 income of those who live on inherited wealth, besides 
 paying income tax, is either diminished every time 
 an owner of it dies and the State takes toll of the 
 capital, or is lessened each year by the provision 
 that the owner makes, through insurance or other- 
 wise, in order to provide against the death duties, 
 and maintain the capital of the estate intact. 
 
 It is commonly objected to the death duties that 
 they are a tax on accumulated capital and that, as 
 the State uses their proceeds for purposes of ordi- 
 nary expenditure, it is paying for current needs out 
 of capital and so doing a thing that is vicious in the 
 case of an individual or company. But is this 
 necessarily true ? The tax, it is true, is assessed on 
 capital, but I think it is paid, and that all taxes have 
 to be paid, out of current income, either of the 
 previous owner of the estate, if he insured in order 
 ,' to provide for it, or of its inheritors, if they do not 
 realize any portion of the estate to meet it, or of 
 those who buy, with saved money, any part of the 
 estate that is sold to meet the tax. In the last- 
 mentioned case, the saved money that is handed 
 over to Government to spend would otherwise have 
 ^^. gone into some other investment which would 
 perhaps have increased the community's produc-
 
 IV] TAXING CAPITAL 87 
 
 live power, but this possibility is attached to all 
 money that the Government takes out of our 
 pockets and is one of the reasons why we have to be 
 careful to see that the Government spends it well. 
 A graver objection to the death duties is that they 
 may tend to check the incentive to accumulation by 
 the individual, a point that will be dealt with later. 
 
 All taxation comes out of somebody's income. 
 If we try to tax capital, we can only do so if the 
 owner can pay the tax out of income or can sell a bit 
 of his capital to some one else who pays for it out 
 of his income. A tax on capital is thus only a way 
 of assessing income tax according to the amount of 
 capital possessed, and is a questionable way of 
 doing so because of the difficulty of knowing what 
 anybody's possessions are really worth until they are 
 offered for sale in a free market, and also because of 
 the great expense and delay involved by making any 
 such valuation. Moreover, the mistakes made by 
 Government valuers, when estates have to be 
 valued for purposes of taxation, are astonishing. 
 In a certain British colony a man once died who had 
 picked up, in the course of several visits to England, 
 a collection of beautiful and very valuable Turners 
 and other water-colors. The local official valuer 
 remarked to his heir, ''I see from the dates on these 
 pictures that they're all second-hand, so I've put 
 them in at half a crown "^ each." 
 
 But since all taxation falls on income, and since 
 the amount of the income, with due regard to its 
 ^ About sixty cents.
 
 88 MONEY TAKEN BY TAXES [chap. 
 
 source, is the obvious test of ability to pay, and since 
 this ability clearly grows with each increase in the 
 income above the sum required for the bare neces- 
 saries of life, it is evident that the income tax, if 
 we could get it into an ideal shape, is the most 
 equitable form in which taxation can be imposed. 
 Regard to the amount of the income involves 
 graduation, and regard to the source of the income 
 /involves differentiation, because it is easier to pay, 
 and more protection by the State is involved, in 
 the case of income from saved money than in the 
 case of earned money; and still more protection 
 from the State is involved in the case of income 
 from money that is inherited or received by gift, 
 since the secure transfer of wealth by legacy or 
 otherwise is one of the most obvious of the material 
 benefits granted by stable government. 
 
 The ideal form of an income tax would thus be 
 thrice differentiated, according to whether it was 
 imposed on — 
 
 ( 1 ) An income now being in the technical sense 
 
 earned, that is a wage or salary or pro- 
 fessional or business profits ; 
 
 (2) An income that is produced by savings 
 
 made by its owner; 
 
 (3) An income that is produced by inherited 
 
 wealth or wealth received by gift. 
 
 If this triple differentiation could be made, then Eng- 
 land would be able to do away with the death 
 duties, with the great unfairness that they involve,
 
 IV] THE IDEAL TAX 89 
 
 for example, when one estate changes hands fre- 
 quently owing to the accident of death, and another 
 escapes by being held for eighty or ninety years by a 
 specially tough owner who happened to inherit it 
 when an infant. If the death duties were thus com- 
 muted into the shape of a higher annual income tax 
 on those who got income from inherited wealth, 
 there would be a much greater chance, amounting 
 almost to certainty, that they would be met by sav- 
 ing on the part of the holder of the income. 
 
 Thus differentiated, the ideal income tax would 
 be graduated logically and steadily up to the highest 
 range of incomes, not as it is now in England with 
 a series of capricious jerks, and with the super-tax 
 as an excrescence on the top. It would also be 
 purged of the inequity which at present in Eng- 
 land lumps together the income of husband and 
 wife as one for assessment purposes, and of the still 
 worse vice that it now possesses of taking little or no 
 account of the children whom the taxpayer may have 
 to educate. The unfairness of an income tax which 
 is the same in the case of two brothers who each 
 earn $5,000 a year, but one of whom has eight chil- 
 dren and the other has none, is glaringly apparent, if 
 we apply Adam Smith's test of ability to pay. Al- 
 lowances for children were introduced during the 
 Napoleonic war, but were given up in 1806, as they 
 had "led to an astounding official increase of large 
 families." * Mr. Lloyd George made a small begin- 
 ning in his Budget of 1909 towards remedying this 
 ' Seligman, The Income Tax, p. 103.
 
 ^.i 
 
 90 MONEY TAKEN BY TAXES [chap. 
 
 great blot on this tax by giving an abatement of $50 
 (from the income assessed) for each child under six- 
 teen in the case of incomes under $2,500. Since 
 then the amount of the abatement has been raised to 
 $125 for each child, and this relief is given to in- 
 comes up to $3,500. Even so it is pitifully inade- 
 quate. The proposal made by Mr. Sidney Webb and 
 his fellow- Fabians in their book on How to Pay for 
 the War is much more efficacious, if it could be put 
 into practice. They suggest that the basis of assess- 
 ment in the case of families dependent on one income 
 should be the income divided by the number of those 
 . dependent on it ; that is to say, that if a man had 
 $5,000 a year and a wife and eight children, he 
 would be assessed on ten incomes of $500 each, and, 
 as incomes of $500 each are at present exempt, he 
 would be free of all income tax, while his bachelor 
 brother would pay the full amount on his $5,000.^ 
 "But wait a minute," says the bachelor. "I 
 
 • The full text of the Fabian suggestion is as follows : 
 
 "What is suggested is that, so far as incomes not exceeding 
 £2,500 a year are concerned, whether earned or unearned, it 
 should be open to any person assessed to ask that all the 
 taxable receipts of all the members of his family, living in the 
 same household with him and sharing in its expenses, or main- 
 tained elsewhere wholly or partially at his expense, should be 
 aggregated for assessment as a Family Income ; and that Fam- 
 ily Incomes so arrived at should, for income tax purposes, be 
 divided by the number of members of the family (husband, 
 wife, children, stepchildren, father and mother, or grandpar- 
 ents only) actually maintained therefrom. There could then 
 be allowed from the combined Family Income, in respect of
 
 IV] THE IDEAL TAX 91 
 
 don't quite see why I should be penalized for 
 choosing, or perhaps being obliged by a hopeless 
 passion, to live in single blessedness. If you let 
 my brother off, it is clear that I shall have to be 
 taxed higher. But why? He chooses to spend his 
 income on the joys of bringing up a family and the 
 delights of an uproarious nursery. Why should he 
 therefore be let off while I, because I prefer keeping 
 a yacht, and collecting blue china, and living a life 
 of peace and comfort, or perhaps, if you knew 
 all, giving up my spare cash to good works, am 
 to pay more to encourage his philoprogenitive 
 proceedings?" 
 
 The answer is obvious to all but confirmed 
 bachelors, and it lies in the fact that the State wants 
 citizens and wants them brought up under the best 
 possible conditions. To penalize income-tax payers 
 who are bringing up families, promotes that ten- 
 dency to small families, or none, among the profes- 
 sional classes, which leaves the business of bringing 
 up the heirs of the race to those who are least likely 
 to give them the good air, good food, good clothes, 
 and good teaching in their early years that are all- 
 each person maintained therefrom, whatever Abatement each 
 portion of such income would justify if it were that of one 
 person only."— How to Pay for the War, pp. 237-8. 
 In order to prevent the suggested abatements and allowances 
 from exempting too many people altogether from income tax, 
 these writers suggest that "nothing in them should be allowed 
 to reduce the tax actually payable below the minimum of, say, 
 a penny in the pound on the income prior to the deduction of 
 any abatement or allowance."
 
 92 MONEY TAKEN BY TAXES [chap. 
 
 important to their efficiency wlien they are grown 
 up. Economically and in every other respect, a na- 
 tion can only thrive if it is composed of citizens 
 sound in mind and body, and any taxation that 
 makes the middle class sterile is a bad economic 
 blunder. 
 
 And since we are only chasing the rainbow of 
 the ideal, we may also add that, in order to make 
 the income tax perfect, it would, though assessed 
 on the whole income, only be imposed on that part 
 of a man's income which he spends, and he would 
 be allowed abatement in consideration of any part 
 of it that he invested and not only, as now in Eng- 
 land, on that part invested (within certain limits) 
 in life insurance. This further exemption would 
 be made, under an ideal system, because a State 
 cannot make economic progress unless its citizens 
 continually produce more than they consume on 
 immediate enjoyment, so that there may be a 
 margin of savings continually available for capital 
 purposes, that is, for increasing future production 
 by putting labor and energy into new equipment 
 instead of into luxuries and amusements. This 
 can only be done if we save, and it is therefore 
 obvious that no tax can be called ideal which does 
 not encourage investment. In time of war, how- 
 ever, this abatement might have to be modified. 
 
 An income tax adorned by the improvements 
 above suggested would be so evidently equitable 
 that it might be imposed on wage-earners' incomes 
 considerably below the limit which it touches at
 
 IV] THE IDEAL TAX 93 
 
 present, and might be used for raising the greater 
 part of the national revenue, however great the 
 extent of the revenue required. There would be 
 no need then to talk about widening the basis of 
 taxation, for taxation would be based on the widest 
 possible foundation, the aggregate income of all 
 citizens above the poverty line. Under ideal con- 
 ditions it would be collected, no longer "at the 
 source," but from the individual citizen, on his 
 declaration of all the particulars required. It 
 would not be payable by companies and firms, but 
 only by their creditors, shareholders, and partners 
 as they received interest due and profits distributed. 
 Thereby all the evil effects on company finance that 
 are now produced by the close watch that the Brit- 
 ish Inland Revenue authorities keep on their inter- 
 pretation of profit would be abolished. Any com- 
 pany or firm that preferred the strait path of good 
 finance and took a generous view of the claims of 
 depreciation and upkeep would no longer be deterred 
 by the consideration that it would have to pay 
 income tax on som.e of the money that it was putting 
 into the maintenance and improvement of its busi- 
 ness. Moreover, British companies with a large 
 number of foreign shareholders, and whose profits 
 are earned abroad, would no longer be impelled, as 
 they are by the present high rate of income tax, to 
 shift their seat of domicile to a foreign clime, be- 
 cause only that portion of their profits would be 
 taxed which is paid into the pockets of British credi- 
 tors and shareholders. So devised, taxation would
 
 94 MONEY TAKEN BY TAXES [chap. 
 
 not fall directly upon industry at all, but only on 
 those who spent the proceeds of industry. We need 
 not pretend that it would not affect and hamper in- 
 dustry, since all taxation must do so more or less; 
 but, I think, we can claim that it would do so less 
 than any other. 
 
 Such a tax would meet and fulfill all the require- 
 ments laid down by Adam Smith or added to them 
 by the light of modern experience. We should all 
 know exactly what we were paying for the mainte- 
 nance of the State; graduation and differentiation 
 would do all that can be done by human fallibility 
 to make the tax work according to the ability of 
 the taxpayer with due regard to the degree of pro- 
 tection that the State has to give to secure him the 
 enjoyment of his revenue; if the tax were payable 
 in monthly installments it would cause no incon- 
 venience to the man with a small income ; every 
 penny of it would go straight into the coffers of the 
 State, less the cost of collection; and the monthly 
 collection of it would ensure a comparatively regular 
 revenue against the nation's outlay. 
 
 How far is all this mere rainbow chasing and 
 straining our eyes after an impossible ideal? Not 
 so far as it looks, perhaps, though the acceptance 
 of such a tax in its entirety requires a degree of 
 economic education and of common honesty in the 
 community that we may not yet have attained. 
 In England it has long been an argument against 
 all schemes of graduation and differentiation of the 
 income tax that we thereby lose the great hold over
 
 IV] THE IDEAL TAX 95 
 
 the would-be evader which is given to the tax-gath- 
 erer by collection at the source. And yet graduation 
 and differentiation have been introduced without 
 any sign of loss to the revenue, and during the war 
 the British Treasury has gone a step further and is- 
 sued a loan the interest on which, so far as it is held 
 by registered or inscribed holders, is to be paid with- 
 out deduction of the tax, the holder being left to 
 include it in his own declaration of the extent of 
 his liabiHty. 
 
 The fact that if the income tax were worked on 
 these lines everybody who was believed to be within 
 its scope would be obliged to make a declaration of 
 his income would be a drawback in the eyes of 
 those who still object to the "inquisitorial" require- 
 ment implied by it — that the State should know the 
 details of everybody's income. This old-fashioned 
 objection is, I think, out of date. As it is, the major- 
 ity of British income-tax payers have to declare de- 
 tails of their incomes, either in order to secure 
 abatement, or differentiation, or for super-tax pur- 
 poses. Seeing that the alleged "inquisition" is al- 
 ready applied to so many, there would be little or no 
 hardship in clapping it on in all cases, as was actu- 
 ally done in 1798.^^ Like all the other suggestions 
 made above, it is only a further development of a 
 principle already recognized and acted on in Eng- 
 land. 
 
 ""All persons being required to make returns of the whole 
 of their income, from whatever source derived." — Chisholm's 
 Analysis, p. ,425.
 
 96 MONEY TAKEN BY TAXES [chap. 
 
 This is true even of the proposal, though it seems 
 at first sight revokitionary, that the tax should only 
 be imposed on that part of the income which is 
 spent instead of on what is earned. This principle 
 is already recognized in England in the case of life 
 insurance, and it is hard to see why it should not be 
 applied to all other forms of thrift into which the 
 taxpayer likes to put his savings. That income tax 
 should be so imposed was urged, over half a century 
 ago, by John Stuart Mill, and the suggestion also has 
 the authority of Professor Pigou behind it, though 
 he admits that there are technical difficulties to be 
 overcome. ^^ These difficulties are obvious enough, 
 until the day comes when every citizen can be 
 trusted to make an honest declaration, or when at 
 least — as may be the case now — the general level 
 of honesty is high enough to ensure that the amount 
 of evasion by tax-cheaters would be small enough 
 not to count. Such an arrangement would, of 
 course, carry with it its contrary; if the tax were 
 not imposed on the net amount invested, it would 
 have to be imposed on the net amount of any invest- 
 ments realized in those years in which the taxpayer 
 sold out more than he invested; because otherwise 
 any one could escape the tax by investing all his in- 
 come in one year and selling the securities in the 
 next. If the thing could be worked, its effect in 
 cheapening capital, increasing the capital fund of the 
 country, and so adding to its power to produce the 
 good things of the earth, would be excellent, and it 
 
 " Wealth and Welfare, p. 371. 2.
 
 IV] THE IDEAL TAX 97 
 
 taxation now imposed in England on what is called 
 "imeanied" income. It might be possible to do it by 
 means of evidence in the shape of stockbrokers' con- 
 tracts, and certificates from lawyers in the case of in- 
 vestments in mortgages. The thing is not neces- 
 sarily a pedantic aspiration on the part of academic 
 dreamers, for I have heard it urged, not only as 
 a good thing if it could be done, but as a good thing 
 that could be done, by a very practical man of busi- 
 ness; and if the ingenious taxgathering experts 
 were to decide that it was worth doing, they could 
 probably devise the ways and means. 
 
 The suggestion that the income tax should be 
 paid by the individual citizen and not by the com- 
 panies which earn his income for him as stockholder 
 may be criticized, apart from its parting from the 
 principle of collecting at the source, as giving the 
 power to companies to escape taxation by refraining 
 from paying dividends and putting profits into 
 improvement of their plant or into investments. 
 This criticism falls to the ground at once if the 
 principle is admitted that income tax should not 
 be paid on saved money, because money that com- 
 panies put into depreciation is saved money in 
 every sense of the word. The economic progress 
 of the community is helped by every dollar that 
 companies keep back from their stockholders and 
 put into their plant or invest well otherwise ; and any 
 encouragement that a fiscal system can give to this 
 process has something to be said for it, though there 
 would be an equitable set-ofif to put against the high
 
 98 MONEY TAKEN BY TAXES [chap. 
 
 may be countervailing drawbacks. If ever a time 
 came when the productive capacity of the whole 
 world were fully equipped and there were a real 
 glut of capital, this need to encourage saving would 
 no longer exist. But we are not likely to see that 
 happen just yet. There would, perhaps, be a dan- 
 ger that some companies might try to distribute 
 profits by devious means — issues of bonus stock and 
 so on — in order to enable their stockholders to es- 
 cape taxation. But the keen blades of the Revenue 
 Department could very well be trusted to deal faith- 
 fully with any such buccaneering. 
 
 Still greater is the difficulty involved in making 
 the range of the income tax run lower and embrace 
 all the wage-earners who are a fit subject of taxa- 
 tion. In their case (in England, at least) the pre- 
 cariousness of their earnings is much greater than 
 in that of the salary-earner or even of the more 
 precarious professional workers, such as the free- 
 lance journalist. Moreover, they cannot, thanks to 
 the education that has been given, or denied, them 
 for many generations, be expected to keep count of 
 their earnings with any regularity, and they would 
 be likely to resent being pestered about them. It 
 may take a long time before they are ready to rec- 
 ognize that an income tax applied more vigorously 
 to wages would be fairer to them, if they would 
 take the necessary trouble to tackle it, than the heavy 
 charge of indirect taxation that they now bear. 
 Economic education of all classes is the only way in 
 which the path of the tax-gatherer can be made
 
 IV] INDIRECT TAXATION 99 
 
 smooth and easy. The more this education grows, 
 the faster will be the movement towards graduated 
 and differentiated direct taxation as the fairest way 
 by which the State can take our money. 
 
 It is sometimes said that the income tax pun- 
 ishes and fines the hard and successful worker. 
 This is so, but what system of taxation does 
 not? Whatever device you use, you can only 
 tax those who are getting and spending money. 
 But a system which taxes more lightly those who 
 are earning than those who are getting interest 
 on saved or inherited money, which makes due 
 allowance for family liabilities and taxes what is 
 V spent and not what is saved, seems to give the 
 ^ hard and successful worker a better chance than 
 most others. 
 
 When once the beauty and fairness of graduation 
 and differentiation are seen and appreciated, it 
 becomes clear that all indirect taxation is to a 
 certain extent unfair, because graduation and differ- 
 entiation cannot be applied to it. It might be pos- 
 sible, though very difficult, to graduate indirect tax- 
 ation by increasing its rate according to the quanti- 
 ties of goods purchased; but this system, if applied 
 to necessaries of life, would evidently involve hard- 
 ship by taking no account of the taxpayer's ability 
 to pay. That the amount of taxation paid by the 
 buyer of a pound of tea should be the same (as it 
 is in England), whether the tea is to be consumed 
 by one living on an inherited million, or by a 
 widowed charwoman with five children and earn-
 
 100 MONEY TAKEN BY TAXES [chap. 
 
 iiig, with luck and when in good health, perhaps 
 ten dollars a week, is a gross fiscal blunder and 
 a serious practical injustice. But there is no way 
 round it, and this unfairness is necessarily attached 
 to all forms of indirect taxation. It is true that, 
 as Adam Smith pointed out, taxes upon "such con- 
 sumable goods as are articles of luxury can be 
 avoided by the taxpayer, as he is at liberty either 
 to buy or not to buy as he pleases." But so many 
 things, such as clothes, are necessaries up to a 
 point, and become luxuries when that point, so 
 difficult to decide on, has been passed, that taxing 
 luxuries is not nearly as easy as it is desirable. 
 And even in the case of admitted luxuries, such as 
 alcoholic drink, the absence of graduation makes 
 the tax unfair. Why should I, if I drink a glass 
 of beer in the course of a country walk, pay no 
 more taxation on it than a mechanic who partakes 
 of a similar indulgence after working eight hours 
 in front of a furnace? Ability to pay is quite 
 different in these two cases, but the amount paid 
 is the same. And yet this inequity attached to 
 indirect taxation, that is so evident as soon as the 
 principles of graduation and differentiation are 
 admitted, has been so slowly recognized, and is still 
 so much ignored, that it was once observed by the 
 late Sir Robert Giffen that "on the whole an equal 
 amoimt of indirect taxation causes perhaps only 
 the half or the third of the privation and suffering 
 entailed by an equal amount of direct taxation." 
 Mr. Gladstone's ponderous joke, in which he com-
 
 IV] STUPIDITY'S PRICE loi 
 
 pared the two forms of taxation to two attractive 
 damsels, to both of whom, ''whether it be due to 
 a lax sense of moral obligation or not," he paid his 
 addresses impartially, is well known to all students 
 of the subject,^^ and only shows how little the 
 equities of taxation were studied in the days of that 
 enlightened fiscal reformer. 
 
 Nevertheless, if it be a fact that direct taxation 
 hurts while indirect does not, it is natural and 
 inevitable that the practical politician who has to 
 raise revenue for the State should prefer the latter. 
 If we are really so stupid as to prefer to be bam- 
 boozled out of our money by paying, on a necessar- 
 ily inequitable basis, for government, while we think 
 we are paying for groceries or tobacco, instead of 
 being assessed directly according to our ability and 
 the source of our income and knowing exactly what 
 we are paying, then we deserve what we get and 
 get what we deserve, which is unfair taxation. In 
 a democratic country in which all have political 
 responsibility, it is clear that all, except those who 
 have only the barest necessaries of life, should pay 
 taxes and so have some share in fiscal responsibil- 
 ities. To do this in a manner which is specially de- 
 signed to veil the fact that taxes are being paid, is 
 hardly facing the problem squarely ; but until educa- 
 tion has gone far enough to make everybody ready 
 to pay his fair share by means of direct taxation, it 
 is the only way that can be hit on. The inequities 
 connected with indirect taxes are manifold; not only 
 
 " Seligman, The Income Tax, p. 165.
 
 I02 MONEY TAKEN BY TAXES [chap. 
 
 can they not be graduated or differentiated, but it is 
 impossible to impose them generally, in a country 
 like England, because taxes on the necessaries of 
 life are clearly bad, from the national point of view, 
 in a community in which many people have not 
 enough to eat. So that in days before the war any 
 Englishman who escaped income tax and did not 
 smoke or drink alcohol or tea contributed practically 
 nothing to the Government under whose protection 
 he lived. Since the war, taxes on cocoa, mineral wa- 
 ters, and entertainments have widened the fiscal net. 
 The proportion of British revenue contributed by in- 
 direct taxation has steadily declined. In 184 1-2 it 
 was 73%; in 1912-13 it was 42.4%,^^ and during 
 the war it is generally assumed to have declined still 
 further, though it might be argued that the excess 
 profits tax is an indirect tax, since most of it has 
 been ultimately paid by consumers through the high 
 prices that caused the excess profits. 
 
 Indirect taxation, being paid by those who buy 
 certain articles for consumption, has one great ad- 
 vantage, which justifies its position in England's 
 fiscal system until such time as she is able to impose 
 income tax only on that part of the income which 
 is spent. It hits us when we spend and not when 
 we earn or save. In time of war, when there is 
 not enough labor and energy to do all that is needed 
 for the fighting forces and for the export trade and 
 for providing necessaries, any tax that checks in- 
 dividual spending, or takes part of the sum spent 
 
 " British Budgets, by Sir B. Mallet, pp. 105 and 493-
 
 IV] IMPORT DUTIES 103 
 
 for the Government, is clearly useful and beneficial. 
 And this is almost equally true in time of peace, 
 for then also wasteful spending is economically un- 
 sound, checks the material progress of the nation, 
 makes the hard lot of the poor still harder, and 
 lessens the demand for lalx)r.^* So that if only 
 we could graduate and differentiate indirect taxa- 
 tion, it would have advantages over direct as the 
 latter is at present imposed. As we cannot, it has 
 to be left in its present unsatisfactory state, pressing 
 heavily, in England, on the poorest consumers of 
 such articles as tea, tobacco, and alcohol, while pa- 
 triotic ladies who give $15,000 for a fur coat in time 
 of war pay no taxation in the process except the 
 penny stamp on a cheque. A graduated invoice 
 stamp on all retail purchases of $2^ and over is a 
 way round this problem, but there are many practi- 
 cal difficulties in the way of it and if, as is likely, 
 both shopkeepers and their customers united in re- 
 I senting and detesting the tax, it is highly probable 
 that there would be much evasion. 
 
 Of all forms of indirect taxation, the worst, ac- 
 cording to the pure principles of taxation, is that 
 imposed on imported goods of a kind that is pro- 
 duced in the country, unless a home tax (or excise 
 duty) of the same amount is imposed on goods pro- 
 duced inland. Because the effect of the import 
 \j duty is to raise the price of the article and, if the 
 
 ^ home producer is not similarly taxed, this means 
 
 '^fX, "I have developed this platitude in a book called Poverty 
 and Waste, published in 1913. 
 
 l 
 
 .T 
 
 t^
 
 I04 MONEY TAKEN BY TAXES [chap, iv 
 
 that part of the higher price will go into his pocket 
 instead of into the coffers of the State. Nearly- 
 all nations, including the British colonies, make 
 free use of this method of taxation, because they 
 think it pays them in the long run, or think it nec- 
 essary to the dignity or security of the State, that 
 certain industries should be thus protected at the 
 expense of the consumer ; or because they hope thus 
 to maintain the standard of comfort of their wage- 
 earners. Some people think that when the war is 
 over England also will adopt the system of a pro- 
 tective tariff. We shall see. It is beyond the scope 
 of this work to enter on this highly controversial 
 ground. Ever}^ one will admit that, if Protection is 
 the only or the best means of keeping alive in the 
 country an industry that is essential to national 
 safety, then the most bigoted Free Trader must 
 agree to it. It must also be admitted that many 
 great, rich nations — including England's richest en- 
 emy and her richest ally — have flourished under 
 Protection. On the other hand, it warps and ham- 
 pers trade, as a whole, and introduces an artificial 
 complication into a matter which is naturally quite 
 complicated enough ; but perhaps the strongest argu- 
 ment against it is its tendency to make questions 
 of taxation, especially in a democratically governed 
 country, an unclean welter in which politics and 
 business cover one another with dirt.
 
 CHAPTER V 
 
 THE LIMITS OF GOVERNMENTAL SPENDING 
 
 So far we have considered the means by which the 
 State takes our money from us for public purposes^ 
 
 ( 1 ) By borrowing it, and then taxing us to pay 
 the lenders; 
 
 (2) By diminishing the buying power of our 
 money by increasing its volume, with or 
 without the help of bankers; 
 
 ^~- (3) By taxes. 
 
 There is yet another way by which some very clever 
 people who have studied the question with great 
 care and diligence think that the State might earn 
 a great revenue, and that is by gathering money 
 from us that we now pay to private undertakers of 
 enterprise, and they believe that the State would 
 do us a great benefit at the same time by giving 
 us better service than these private undertakers. 
 And many very earnest and high-minded people, 
 who hate the waste and ugliness involved by the 
 competitive system, have long believed that, if the 
 work of growing, making, and distributing the 
 
 105
 
 io6 THE LIMITS OF SPENDING [chap. 
 
 goods that we need were in the hands of the State, 
 all the miserable squalor that blots our economic 
 system might be washed away, man's labor would 
 be made much more effective, and we should all of 
 us, instead of wasting most of our lives in a chaotic 
 struggle to earn our livings which ends in ill-spent 
 affluence at the top with degraded destitution at 
 the bottom, be free to live as civilized human be- 
 ings; with time and energy to bring out all that 
 is best in ourselves and others, and to enjoy the 
 endless store of joy and beauty that Nature ever 
 spreads before us, often to be buried under the 
 mass of moral and physical ugliness that is heaped 
 over it by our misguided efforts to better our lot. 
 
 If these views are right, they have now a better 
 chance than ever before of winning their way to 
 action. War has shown us, first, how astonishingly 
 great is our power to make and do things if we 
 really want and mean to. Man has put all the 
 prophets wrong who said that a great war could 
 not last more than a few months, by proving that 
 he could concentrate his energies on destruction 
 with results that have appalled and astounded us, 
 while at the same time producing all that was re- 
 quired for his material welfare; so much so that 
 during the first two years of the war the general 
 level of well-being in England was actually im- 
 proved, owing to the more even distribution of 
 the output, which was an economic incident of the 
 war ; so great was her margin of unused productive 
 power and so great was the proportion of her prq-
 
 V] WAR'S LESSONS 107 
 
 ductive power that was put into turning out things 
 that were not necessary to the nation's welfare. 
 Secondly, the war has shown how short-sighted 
 it is for any great and rich nation to allow a large 
 part of its population to be stunted in mind and 
 body. The voice of the social reformer is now 
 raised in harmony with that of the recruiting ser- 
 geant, who wants sturdy men for the Army, of the 
 employer, who wants strong and intelligent workers 
 and of the statesman, who wants a nation behind 
 him every member of which can understand the 
 tremendous issues for which we are fighting and 
 see and act on the need for the measures taken to 
 secure victory. Never has there been a time when 
 it has been seen more clearly that a nation, to be 
 strong, must be strong from top to bottom. In 
 other words, the war has shown us how much we 
 can do and how much needs to be done. But the 
 question still remains, whether what needs to be 
 done can be best done by the development of the 
 individual's sense of national duty in work and 
 spending, or by handing over to the State a con- 
 tinually growing share of the task of producing and 
 distributing. 
 
 At a time when a brighter era is undoubtedly 
 dawning for mankind, though it is only too possible 
 that much turmoil and struggle may yet lie between 
 us and its achievement, there seems to be some- 
 thing squalid in dwelling on the purely material 
 side of the matter. After all, the human soul is 
 the only thing that really counts. If everybody
 
 io8 THE LIMITS OF SPENDING [chap. 
 
 were pleasant to live with, all other things would 
 be added unto us; if we were all honest and kindly 
 and courteous and fair-minded and intelligent and 
 unselfish, there would be no need to fash ourselves 
 about output and distribution, because we should all 
 be doing our best to make things better, and all these 
 sordid problems would solve themselves. But as 
 things are, material considerations are of the great- 
 est possible importance, because it is so much easier 
 for the necessary qualities to be acquired by people 
 who are not expected to spend most of their lives 
 in trying to get a better share of the world's goods 
 than their neighbors. If we can produce plenty 
 for all and can prevent people from believing that 
 getting more than plenty for themselves is the 
 chief object of life, then there would be some chance 
 for the rudimentary and atrophied human soul, 
 which is now often treated very like the vermi- 
 form appendix — ignored if possible, and if not, cut 
 out. 
 
 If, therefore, it is the fact that, by handing over 
 great industries to be worked by the State for profit, 
 we can make the State a great revenue earner, and 
 at the same time do away with some of the competi- 
 tion that is a source of much waste and mendacity, 
 without thereby producing a system of organized 
 and hidebound efficiency that would kill all freedom 
 and initiative, it is clear that we shall be relieving 
 the taxpayer's burden and perhaps clearing a way 
 towards a social system that will stand daylight 
 better than our present one.
 
 V] A FABIAN SCHEME 109 
 
 A great scheme of nationalization has been put 
 before the British public by Mr. Sidney Webb and 
 his Fabian lieutenants, in a book, already referred 
 to, called How to Pay for the War, published in 
 19 1 6. They propose to increase very greatly the 
 scope of the activities of the Post Office, making it 
 do much of the work that is now done by bankers, 
 and to nationalize the railways, the coal industry, 
 and life insurance; and they urge, with a wealth 
 of detail that is evidently the result of laborious 
 investigation, that, if these things are done, the pub- 
 lic will get a better and cheaper service, the work- 
 ers employed will get better treatment, and the 
 State will earn a revenue that will supply a mouth- 
 filling number of millions for paying off the war 
 debt. This attractive argument, of course, is only 
 a development of the Socialist contention and an 
 application of it to the needs of the moment; and 
 for this reason will be refused a hearing by many 
 to whom the mere name of Socialism is a terror. 
 But a Httle later, as if to show how widely and in 
 what unexpected quarters the idea of collectivist en- 
 terprise is being stimulated by war problems, there 
 arises a new portent in the British economic sky in 
 the shape of a body called the Empire Resources 
 Development Committee, which also wants to help 
 to pay off the war debt by means of State enterprise 
 in industry and production, chiefly applied to over- 
 seas enterprise, though one of its manifestos also 
 includes the coal and light and power industries at 
 home among the means by which the after- war debt
 
 no THE LIMITS OF SPENDING [chap. 
 
 charge can be met without anybody having to pay 
 it; because the State will be able to do business 
 so cleverly that it will find the money out of net 
 profits. The really interesting thing about this Com- 
 mittee is that it bristles with names that have been 
 hitherto renowned for Imperialist rather than for 
 Socialist zeal, such as Mr, Rudyard Kipling, Sir 
 Starr Jameson, Lord Grey (not the late Secretary 
 for Foreign Affairs), Lord Selbome, Lord Desbor- 
 ough, and Mr. H. Wilson Fox, M.P., a distinguished 
 officer of the Chartered Company of British South 
 Africa; and with them is Mr. Vassar-Smith, the 
 highly respected chairman of Lloyds Bank. That 
 names such as these should be found on a manifesto 
 advocating what one used to think was pure So- 
 cialism shows at least how people's minds have 
 been shaken up by the war. The gist of their con- 
 tention is that the immense latent resources of the 
 British Empire can be worked for State purposes 
 and under State auspices in such a way that we shall 
 be able to "lift from the peoples of the Empire the 
 burdens caused by the war." And they, like Mr. 
 Webb and his colleagues, think that the State can 
 not only perform this financial feat, but at the same 
 time cheapen the cost to consumers of articles that 
 it provides and distributes. 
 
 It is a most alluring prospect and, if there Is any 
 chance of its being realized, the most bigoted In- 
 dividualist will hardly Ifet his dislike of State en- 
 terprise stand in its way. But is it not an enor- 
 mous assumption to suppose that the State can
 
 V] A LARGE ASSUMPTION iii 
 
 manage an enterprise with so much more success 
 than a private undertaker that it can afford to buy 
 him out, then provide a better service or a better 
 article, pay everybody better, and finally make a 
 thumping net revenue? In the case of new Im- 
 perial enterprises, there might be no one to be 
 bought out, though vested interests sometimes are 
 discovered in the most unlikely corners when a 
 chance of compensation arises. The Imj>erial De- 
 velopment Committee expressly states that the pro- 
 posed enterprises should not be managed by Civil 
 Service Departments; but it does not explain how 
 the managers can help becoming civil servants and 
 so being involved with the attributes of those who 
 work the State machine, so admirably within cer- 
 tain limits, but not so admirably when it is a mat- 
 ter of conducting business enterprise at a profit 
 and with satisfaction to customers and employees. 
 They make a profit out of the Post Office? Yes; 
 but in discussing the tangled question whether what 
 Englishmen pay for postal service should be consid- 
 ered as taxation or payment for services rendered, 
 at least one distinguished economist has decided that 
 postal revenue is taxation only in so far as they 
 pay more for this service than we should if it were 
 managed privately. Every one agrees that it is im- 
 possible to gauge this amount, but no one seems to 
 -^ doubt that it exists, and that postal facilities would 
 be cheaper if they were provided by private enter- 
 prise. Mr. Harold Cox, that stern, unbending foe of 
 State enterprise, dealt faithfully with the proposals
 
 112 THE LIMITS OF SPENDING [chap. 
 
 of the Imperial Development Committee in an edi- 
 torial in the Edinburgh Reviezu for April 19 17, and 
 incidentally gave two examples of cases in which 
 the State had taken over profitable enterprises and 
 had totally failed to work them at a profit : 
 
 "In 1870 the State acquired possession of the elec- 
 tric telegraph system of the country, which had been 
 built up by various private companies. The pur- 
 chase was recommended to the House of Commons 
 as a splendid bargain for the State. The permanent 
 officials who prepared the scheme assured the House 
 that the whole of the capital cost would be repaid 
 in fifteen years out of profits and that after that period 
 there would be an ever-increasing revenue to relieve 
 the burdens of the taxpayer. That was the prom- 
 ise. What actually happened was that the whole of 
 the profit disappeared after the second year of work- 
 ing by the State ; that year by year the financial po- 
 sition has grown worse, till in the last years of peace 
 the telegraphs were costing the taxpayer a sum which 
 cannot be put at less than £1,400,000 per an;: 
 num. 
 j-"' "Meanwhile, the telephone had been invented. Dur- 
 ing many years the State, in order to protect its 
 I I telegraph monopoly, did its utmost to stifle the de- 
 J I velopment of the new invention. Finally, the State 
 J I bought up the telephones, completing the purchase 
 A in the year 191 1. Again there were the prophe- 
 S^\ cies — though in a somewhat minor key — of a lucra- 
 tive bargain. These prophecies have gone the way 
 of the old ones. The whole of the handsome tribute 
 of over £350,000 a year, which the National Tele- 
 phone Company was gratuitously paying to the State,
 
 V] A DOUBTFUL POLICY 113 
 
 vanished at once, and within three years the income 
 collected by the State barely covered outgo- 
 ings." 
 
 With these actual examples before them English- 
 men may well hesitate before embarking on a large 
 policy of State enterprise, especially if it is to be 
 directed to the provision of necessaries of life such 
 as food and coal. Posts and telegraphs and tele- 
 phones hardly touch the life of the very poorest, and 
 though if they are bad and dear they are a hindrance 
 and burden to business, their extra cost is a small 
 item in the expense of industry; but it would be a 
 different matter if the actual cost of living were 
 raised through an attempt at revenue-earning by 
 State enterprise in a country in which the test of 
 experience has shown it to be dear and inefficient. 
 
 Nevertheless, we have no right to shut any door 
 on a possibility of economic reform. We know that 
 there are countries in which the State can manage 
 some enterprises well and profitably, and even in 
 England certain municipalities have earned good 
 profits for their ratepayers and also served their 
 customers well with comparatively simple busi- 
 nesses, such as tramway transport. It may be that 
 Government departments, like the rest of us, have 
 learnt much from the war and may now be able to 
 tackle problems of enterprise with a new freedom 
 and success. Strongly divergent views are ex- 
 pressed on this point, and no one who has not been 
 in touch with the facts has any right to be sure
 
 114 THE LIMITS OF SPENDING [chap. 
 
 about it. Some say that the British Munitions De- 
 partment has been a miracle of official competence 
 and success; others that it was a costly chaos, only 
 saved by the efforts of the business men, trained in 
 the school of competitive enterprise, whom it called 
 in to help it. But since there is a doubt and a new 
 atmosphere, and since imaginative folk with big new 
 ideas want to give England a lead, there seems to be 
 no reason why they should not be allowed to try an 
 experiment on a small scale, to be widened if the 
 experiment succeeds. Freedom and individual in- 
 itiative have so long been the life-blood of her na- 
 tional development that one is loth to see them 
 encroached on even by the most efficient form of 
 machine-made bureaucratic enterprise ; and the ideal 
 of progress through the improvement of the individ- 
 ual, and a widening and deepening of his sense of 
 national duty, seems to be a much higher and more 
 hopeful one than through the expansion of State 
 regulation to a point which implies the crippling of 
 the soul of the citizen. Some of us hope that when 
 the war is over we shall get rid of Government con- 
 trol as far and as fast as possible, except where pre- 
 vious experience had shown it to be necessary in the 
 interests of thejyeaker parties to economic bargains. 
 
 "My experience [said Sir Alfred Booth to the Cu- 
 nard Company's shareholders in April 1917] of Gov- 
 ernment control has only served to convince me more 
 firmly than ever that individual enterprise is the only 
 spirit which can quicken the dead bodies of capital 
 and labor into life. . . . But I am not at all alarmed;
 
 v] THE DOUBTFUL FUTURE 115 
 
 When the war is over, commercial freedom will 
 win in England just as political freedom has won 
 in Russia, and we shall be quite content to leave 
 the bureaucrats and the Romanoffs to cultivate 
 their roses Ibgether in some suitable rural atmos- 
 phere." 
 
 But with taxation what it will have to be, all is 
 fish that comes into the net, and if the State can 
 learn to produce and distribute better and more 
 profitably than private enterprise, no prejudice 
 should stand in its way. But it ought to win its 
 spurs, if it can, in a fair field and not with the 
 support of privileges and monopolies and subsidies, 
 still less with the help of tariffs. 
 
 Apart from this possible source of revenue, con- 
 cerning which one is justified in doubting whether 
 it will ever be realized and in feeling sure that in 
 any case it will be slow in growth, taxation is the 
 means by which the State will have to divert from 
 our use so much of our annual output of stuff and 
 work that has to be devoted to national purposes. 
 As to the extent to which it can do this, there are 
 conflicting opinions. Some say that, owing to the 
 enormous weight of the after-war debt charge and 
 our impoverishment by war, it will not, for years to 
 come, be possible to find any money, that is divert 
 any part of our output, to purposes of social im- 
 provement. On the other hand, there is the opinion, 
 which the huge figures of our war spending have 
 helped to stimulate, that now that we have learnt 
 to think in millions and in hundreds of millions, the
 
 ii6 THE LIMITS OF SPENDING [chap. 
 
 State will never again be checked by any considera- 
 tion of a few millions more or less in the cost of 
 any reform that is accepted as needing to be done; 
 and that the reformer will henceforward have a 
 bottomless purse to draw on since he will always, 
 when the war is over, be able to say, "What I ask 
 is only the cost of one day, or one week, or one 
 month — as the case may be^ — of the late war, and 
 just consider how much good it will do!" 
 
 As to the first and pessimistic view, we cannot 
 know how far it will be right until we know how 
 much capital equipment will have been impaired and 
 how much is owed to foreign nations by the time 
 the war is over. If by the destruction of ships and 
 the depreciation of industrial plants and of the soil's 
 fertility, the State's output is seriously diminished, 
 and if at the same time, owing to borrowings abroad 
 and sales of securities, the country has a much 
 smaller sum to receive every year on balance from 
 foreigners in interest, which comes in the form of 
 imported goods ; then the total income, in the shape 
 of goods produced at home and received from 
 abroad, will be less, and any part of it diverted to 
 national needs will involve a greater sacrifice than 
 before. In so far as it is held at home debt involves 
 no absorption of the national output, but only a 
 transfer of part of it, by taxation, to the use of 
 certain members of the nation who hold the debt. 
 It is therefore only necessary to be sure that the 
 taxation involved by it is imposed on the people who 
 ought to have subscribed to the loans. Then those
 
 V] THE IMPORTANCE OF TEMPER 117 
 
 who did their duty in subscribing will get their taxes 
 back, those who pinched themselves and did more 
 than their duty will get more than their taxes back, 
 and those who did not do their duty will get nothing 
 back, which is just as it should be. This arrange- 
 ment is easier to describe as desirable than to put 
 into practice, which is one of the objections to 
 finance by borrowing. 
 
 But even if the State's total income, in goods pro- 
 duced at home and by its debtors abroad, is ma- 
 terially less, which has yet to be proved, it does not 
 follow that the amount of it available for national 
 purposes will be less if we are resolved to make a 
 greater sacrifice for them. Everything will depend 
 on the temper and state of mind with which we set 
 to work and turn out goods in the first place, and 
 in the second, regard the claim on our work that 
 the State may make for purposes of national de- 
 velopment and improvement, such as health, educa- 
 tion, housing, and the dozens of other things that, 
 in the opinion of some, need to have work put into 
 them. If we go to work in a bad temper and have 
 strikes, lock-outs, and quarrels about methods of 
 production and distribution of the output, then it is 
 likely that our output will give us little chance of 
 drawing on it for social reform. And there is also 
 another enormous question to be answered. Shall 
 we have to spend in future a much greater amount 
 on defense, or will swords be hammered into plow- 
 shares ? The hope, which was so strong in the early 
 days of the war, of secure peace and freedom from
 
 ii8 THE LIMITS OF SPENDING [chap. 
 
 the burden of armaments has lately looked sickly, 
 but the intervention of the United States has cer- 
 tainly revived it, and it seems now at least possible 
 that the League of Honor may ripen into a League 
 of Peace that will rid mankind of war's nightmare. 
 These considerations apply also to the optimistic 
 view which holds that we shall never again be 
 stopped by lack of money. It is only true if the 
 taxpayers are persuaded that the objects for which 
 they are asked to make sacrifices are a national need 
 and ought to be paid for out of the national purse. 
 If a people makes up its mind that a thing is worth 
 paying for, it can and will pay for it, up to the 
 extent of half its income and more, as the war has 
 shown. But this cannot be done if the burden of 
 taxation is unfairly imposed, or if a considerable 
 minority — especially if they are those who are asked 
 to pay most — are opposed to the objects for which 
 taxation is raised. "Taxing the rich" looks easy, 
 but it cannot be done indefinitely unless the rich 
 pay willingly. The taxpayer's power to strike, re- 
 ferred to in Chapter I, is still a real one. If the 
 rate of taxation takes more from the producer and 
 from the owner of accumulated or inherited wealth 
 than they believe to be just, then the incentive to 
 production and accumulation will be checked, and 
 the tree which bears the plums will have been killed, 
 or weakened in its fruitfulness. For national de- 
 fense every one is ready to have his money taken, 
 and in war-time there is much less tendency than 
 usual to grumble about the manner in which the
 
 V] NO SHORT CUTS 119 
 
 money is raised. For national improvement and 
 for what Mr. Lloyd George once called a "War 
 Budget against poverty and squalidness" there may 
 some day be the same cheerfulness and readiness on 
 the part of those who pay. It may be that war will 
 have taught them this lesson. If so, in spite of 
 all its horrors, the war will have opened the way to 
 a great stride forward along the road of progress. 
 But there are no short-cuts on this road, and only 
 by the education of the individual to a just view 
 of his duty as a producer and worker, and of the 
 claim of the State upon his product for national 
 needs, can full use be made of wealth for purposes 
 worthy of any nation that intends to be a leader in 
 human progress. 
 
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