Economy Finance of Pi Go Rich

8/6/2019 Economy Finance of Pi Go Rich

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THE ECONOMYAND FINANCE OF THE WAR


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THE ECONOMYANDFINANCE OF THE WARBEING A DISCUSSION OF THE REAL COSTS

OF THE WAR AND THE WAY INWHICH THEY SHOULD BE METBY

A. C. PIGOU, M.A.PROFESSOR OF POLITICAL ECON'OMY IN" THEUNIVERSITY OF CAMBRIDGE

Author ofWealth and Welfare," " The Principles and Methods ofIndustrial Peace," " Protective and Preferential

Tariffs," etc.

LONDON. PARIS AND TORONTOJ. M. DENT C^ SONS LIMITED

1916


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PREFACEThe greater part of this little book is constructedfrom material used in two public lectures deliveredin Cambridge under the titles ** The Economic Costsof the War " and " The Distribution of the Costsof the War/' Some of the topics treated in it arealso discussed in articles which I contributed to theContemporary Review for December 19 15 and April1916; and a few passages from these articles are,with the kind permission of the Editor, reproducedverbatim. To obviate misunderstanding, it maybe well to say that, while the general lines ofanalysis here set out would probably be acceptedby most competent economists, I should not ventureto claim an equal measure of assent for all thepractical recommendations,

A. C. P.March iQi6>


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CONTENTSSection Page1. Introductory ga. The Money Costs of the War3. The Real Costs of the War4. Some Fallacies concerning the Nature of the Real

Costs5. The Effect on the Real Costs of the War of theWay in which Individuals economise6. Governmental Interference with the Way in

which Individuals economise .7. Future Resources and Present Resources8. Governmental Interference with the Choice between

Future and Present Resources9. The Foreign Exchanges ....10. Taxes versus Loans

11. After the WarAppendixA Table of Private Economies .

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THE ECONOMYAND FINANCE OF THE WARI. INTRODUCTORY

In setting out to discuss some of the economicproblems connected with the war, I wish to makeone preliminary remark. When any one under-takes to write a book about anything, he isusually supposed to consider that thing important.Compared with what this war has cost and is cost-ing in values outside the economic sphere theshattering of human promise, the accumulatedsuffering in wounds and disease of many who havegone to fight, the accumulated degradation in thoughtand feeling of many who have remained at home

" the storm.The darkness and the thunder and the rain "

of warcompared with these things the economiccost is, to my mind, trivial and insignificant. But,trivial as it is from this larger standpoint, the factremains that many people frequently talk about it,and a smaller number occasionally think about it.It is, therefore, desirable that we should try to dothese things in a spirit as cool and scientific as thestress of the time will allow.


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10 THE ECONOMY AND

3. THE MONEY COSTS OF THE WARIt is convenient at the outset to define the precisescope of my inquiry. The war involves a numberof costs of an economic kind which do not enterinto the purview of the Chancellor of the Exchequeror into his budget figures. A nation at war, infact, suffers large costs over and above those whichit has to meet through its Government. Forinstance, in a country invaded by an enemy anenormous amount of private property is destroyedin the actual operations of war. In a country likeour own, which is not invaded, great losses may beinflicted upon many people through the inter-ference with foreign trade which war involves.Furthermore, when men are killed or maimed, theeconomic value of these men to the country's futureproductive power is, in the one case wholly, in theother partially, destroyed. Some economists havemade estimates as to what they consider the economicvalue of the average soldier who is killed may beand, on this basis, have calculated the economiccosts to the country that are involved in the casualtylists. These costs are, in a sense, economic costs.


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FINANCE OF THE WAR iiI have no quarrel with the practice of so calling them.But they arc not among the costs which I propose todiscuss in this book. What I am concerned with arcthe costs that come into relation with governmentalexpenditure and the Chancellor of the Exchequer'sbudget. Concerning these costs the dry bones ofmoney fact can be set out very shortly. Duringthe year 1915-16, ending in March, it is estimatedthat the United Kingdom will require and willspend for the special purposes of the warincludingloans to aUies and othersa sum over and aboveher normal revenue requirements of about 1300million pounds. If the war continues for anotheryear beyond March 19 16an event which mayHeaven forfendthe amount required for that yearwill be even largerov^ 206 millions largerthanthe sum required this y^ar.- Those are the moneyfactsthe text for this discussion. My object is totry to throw a little Hght on what they mean andimply.


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la THE ECONOMY AND

3. THE REAL COSTS OF THE WARThere are some people still to be found who believethat the 1300 million pounds, of which I have spoken,actually constitute the sum of real things absorbedand used up in the war during the current year.They conceive these things to be really and essen-tially so much money, and they periodically confideto the public press the suggestion that, if only theGovernment would create 1300 million one-poundnotes, the whole problem of providing for our warneeds would be solved. Of course, the truth isthat the 1300 million pounds do not constitutet butonly represent^ the real things absorbed in the war.When we say that the war uses up 1300 millionpounds, what we mean is that it uses up 1300 millionpounds* worth of thingsof services rendered bymen, machines, and materials. These are the realthings absorbed in the war, and it is over these,through the symbol money, that the Governmentneeds to get command. This point is too obviousto need any further discussion. We may, therefore,pass at once to inquire in closer detail in what thereal things that are thus absorbed principally consist.


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FINANCE OF THE WAR 13They include, of course, first, the services of the

men engaged in the army and navy, whether at thefront or in reserve or in training. They include,secondly, the services of the people, the machinesand the materials employed in the manufacture ofmunitions of war. They include, thirdly, theservices of the ships and railways and motor cars andcarts, and of the people working them, that are em-ployed in transport work connected with the war.They include, fourthly, the whole of the organisa-tion, material and human, that has been built upfor dealing with the wounds and disease of the war.They include, fifthly, such extra equipment inrespect of clothing and of food as is required forpersons engaged in war services over and abovewhat would have been required for these personsin ordinary times. They include, lastly, a largemass of things of the same general character as theabove and amounting to an aggregate value of some430 million pounds, that we have contracted to lendduring the year to our colonies and to foreign nationswhich are or might be our allies.

It will have been noticed that I have been speak-ing so far of things absorbed for use in the war. Butthe things absorbed for use in the war and the realcosts of the war to the nation are not exactly identical.


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14 THE ECONOMY ANDIf there had been no war, the great bulk of the thingsthat are absorbed in it would not have come intobeing at all. The particular sorts of service whichsoldiers and munition makers render would nothave been rendered. The real costs of the war tothe nation, then, consist, not in the things that areactually absorbed in the war, but in the thingsincluding the leisure of some of its workpeoplewhich the community has to do without in order thatthese things may be provided. The real costs to thenation of making a million shells are not the servicesby which the shells are actually made, but the ser-vices which the men and machines who make themwould have rendered if there had been no war. Atfirst sight it may be thought that this distinction ismerely formal and academic. As a matter of fact,however, it is, as will presently appear, of greatpractical importance.


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FINANCE OF THE WAR 15

4. SOME FALLACIES CONCERNING THENATURE OF THE REAL COSTS

What has been said completes the direct analysiswhich it is necessary to undertake concerning thenature of the real costs of the war. In order, how-ever, that the matter may be fully understood, it isdesirable to draw attention to certain fallaciousopinions on the subject which have a fairly widecurrency.The first of these concerns the relation between

the costs of the war and the amount of the nationalincome as it stood before the war. The costs of thewar are represented by 1300 million pounds : thenormal national income as it stood before the warwas, according to the best estimates, representedby 2300 millions. Therefore, the popular argumentruns, the goods and services that make up the costsof the war during the current year amount to aboutthirteen-twenty-thirds of our pre-war national incomeof these things. This estimate is incorrect, becauseit ignores the fact that, since the outbreak of war.


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i6 THE ECONOMY ANDgeneral prices in England have risen till they arenow some forty per cent, higher than they were inthe previous peace. To allow for this change ofprice level, we ought no longer to represent thepre-war income of real things which has to be setagainst the 1300 million pounds of war costs bythe figure 2300 million. We ought to represent itby a figure raised in some rough accordance withthe rise in general prices. The proportion of ourreal pre-war income embraced in the Government'swar demand should, therefore, be put, not at thirteen-twenty-thirds, but, say, at thirteen-thirtieths of thewhole.The second fallacy is as follows. The facts, as

I have just stated them, may be granted. But, it isurgedand this is the fallacynot only do we haveto provide goods and services to the tune of 1300million pounds, but we have to provide them out ofa real income enormously diminished. If the realincome we had before the war is, at the present pricelevel, rightly represented by 3000 miUion pounds,now, when over 3,000,000 men have been withdrawnfrom industry for the army and over two millionmore for munition work and other duties outside thefield of ordinary productive employment, it must beenormously less than that. Thus, the 1300 million


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FINANCE OF THE WAR 17pounds' worth of goods which we have to providefor the war, while it amounts to thirteen-thirtiethsof what our income was before the war, must amountto a very much larger proportion than this of theincome which the war has now left to us. The realcosts of the war to the nation consist, on this view,not merely of the 1300 million pounds* worth ofgoods, but of this sum plus all the services whichthe soldiers, munition workers and others would,if there had been no war, have provided towardsthe general real income of the country. This viewhas been countenancedI do not say it has beenendorsedby at least one writer who is supposedto be a high authority on financial matters. It is avery gross fallacy. If five million men are with-drawn from ordinary industry for the service of theState, it is proper to say either that the community(considered as separate from its Government) haslost the services of five million men, or that the com-munity (considered as including its Government)has transferred the services of five million men fromprivate to public uses. But, if we say both that thecommunity has lost the services of five million menand that it has transferred the services of five millionto government purposes, we are using the termcommunity in one sense in the first clause and in a


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i8 THE ECONOMY ANDdifferent sense in the second clause, and are, inconsequence^ counting the same thing twice over.The point can easily be illustrated from privatelife. If a man with an income of 2000 spends1000 on a motor car, we can say either that he hasdevoted 1000 of his income to this purchase, orthat his income has been reduced by 1000 throughthis purchase. But it would be a ridiculous blunderto say that he has both devoted 1000 of his incometo buying a car and has also reduced his income by1000. If we say that he has devoted 1000 of hisincome to the car, we must envisage the income fromwhich he has taken this sum, not as an income alreadyreduced to 1000, but as one standing at its normallevel of 2000. In exactly the same way we mustenvisage the income from which the nation is askedto devote any given number of millions to warpurposes as its normal unreduced income of 2300millionsor, allowing for the high level of generalprices, of 3000 million pounds : and this withoutreckoning for the fact that a great amount of workis now being done by people who, before the war,were not employed, or were not fully employed, inindustrial operations.The third fallacy is that, when the size of the army

is given, the costs of the war to the nation may be


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FINANCE OF THE WAR 19made greater or less according as the rate of payto the soldiers is high or low, and according as alarge or small amount of money has to be paid inrespect of their dependants. For example, it isoften regarded as self-evident that Germany canconduct the war more cheaply than we can, becauseher soldiers, being conscripts, receive a merelynominal rate of paya very much lower rate thanours do. Again, it was and still is beheved by mostnewspaper writers that, because married men havedependants to whom separation allowances mustbe paid when the men go to the army, whereas, ingeneral, single men have not such dependants, amarried soldier involves much more real cost to thenation than a single soldier. I should not be sur-prised if ninety per cent, of the people of this countrybeheve this line of argument to be valid. But, if,as I have shown, the real cost of the maintenance ofan army, so far as the soldiers are concerned, con-sists in the productive services which these soldierswould have been rendering in industry if they hadnot been mobilised, it is plain that the rate of paygiven to them does not directly affect the real costsof the war to the nation in any degree. If more ispaid to them than they would normally earn, acertain transference of resources is made from the


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ao THE ECONOMY ANDrest of the community to them ; if less is paid tothem than they would normally earn, a certain trans-ference is made from them to the rest of the com-munity. The aggregate real costs to them and therest of the community combined, that is to say, tothe country as a whole, is the same in either caseit is equal to the sum of the productive services whichthey would have rendered if the world had remainedat peace.The fourth and last fallacy is closely connected

with the one of which I have just been speaking. Inthe denunciations in which newspapers indulgeabout the extravagance of the Government in theconduct of the war, every form of alleged extravaganceis lumped together under the same head, and it isassumed without inquiry that in every case alikethe face value of the extravagance represents thereal cost that it involves to the nation. For example,the alleged extravagance of continuing to pay 400a year to members of Parliament, of paying 1300 toa distinguished Cambridge man and ex-minister fortranslating extracts from German papers, of payingexorbitant and ridiculous prices to contractors, ofpaying exorbitant and ridiculous wages to work-people, of taking troops to some place at heavy costand then taking them back to the place from which


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FINANCE OF THE WAR 21they came, of making immense quantities of a cer-tain kind of shell which is afterwards found to beuselessall these things are supposed to be exactlysimilar in character and effects. This is a fallacy.From the money standpoint of the Treasury, itis, of course, true that they stand upon thesame footing. They all deplete the Governmentbalances and make necessary the raising of moremoney. But, from the standpoint of the communityas a whole, they comprise two quite disparate kindsof extravagance, the effects of which are whollydifferent. To make masses of shells of a kind thatwe do not want is a real waste of capital and labour :to transport troops from Egypt to the Dardanellesand then to transport them back again, because theships were not properly packed, is also a real waste.But to pay a man, whether he be a member of Parlia-ment, or a contractor, or a workman, much morethan his services are worth, that, undesirable thoughit may be, does not involve any waste of nationalresources. It is merely a transference of resourcesto one set of people in the countryof course pay-ments made to foreigners are differentat theexpense of another set. Since in war time muchextravagance and mismanagement must occur, notall of which can possibly be stopped, it is the more


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22 THE ECONOMY ANDdesirable that both the authorities who have moneyto spend and the people who criticise their spendingshould be able to distinguish between forms ofextravagance which do, and forms which do not,really deplete the resources of the community.


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FINANCE OF THE WAR 235. THE EFFECT ON THE REAL COSTS OFTHE WAR OF THE WAY IN WHICHINDIVIDUALS ECONOMISEI TURN now from matters of an elementary characterto a problem which presents greater difficulties. Itwill be remembered that the Chancellor of theExchequer's 1300 million pounds are expended inthe purchase of certain goods and services which areactually absorbed in war, and that the real costs ofthe war are made up of the goods and services whichthe community has to go without in order thatthese goods and services may be forthcoming. Theproblem is slightly complicated by the fact that, aseverybody knows, it is possible, up to a point, for theBritish Government, even in war time, to borrowresources from foreigners on the collective securityof the national credit. In this war, however, largelybecause of the immense area involved in it, thatdevice is only practicable to an extremely limitedextent. The main partvery nearly the wholeof what is required must be raised in one way oranother, either through loans or through taxes, fromthe people of this country. For the present purpose,therefore, we need not trouble about the Chancellor'sfifty million loan in New York or the foreign sub-


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24 THE ECONOMY ANDscriptions to the war loans issued in England^ butmay confine attention to the resources raised fromtaxes and domestic loans. By a combination ofthese two methods, the Government collects thesum of 1300 million pounds and expends it in thepurchase of war services. The 1300 millions, there-fore, represents, in a sense, both the things actuallyabsorbed in the war and the things sacrificed by thecommunity in order to provide them. It, therefore,seems at first sight that, when the amount of thingsactually absorbed is given, the amount of thingsthat have to be sacrificedthe real economic costto the communityis thereby rigidly determined.In whatever way individuals decide to make pro-vision for the money they have to hand over in loansor taxes, the aggregate amount of this real economiccost appears to be a fixed thing, wholly independentof their proceedings. Hence, apparently, so far asthe amount of the economic costs of the war is con-cernedI am not now concerned with its distribu-tion^it does not matter at all in what direction theindividuals who have to make payments to the Statechoose to economise their resources in order to dothis. That view, it will be generally agreed, is avery plausible one. But it is incorrect. Theamount of the real costs which lie behind the Chan-


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FINANCE OF THE WAR 35cellor*s 1300 millions can be affected in a large andimportant measure by the policy which individualtax-payers and subscribers to War Loan elect topursue.

In considering this matter we may, at the outset,rule out as irrelevant to our problem two methodsof providing funds that are likely in fact to bepractised on a considerable scale. I mean cuttingdown pensions or the wages of people whom wecontinue to employ, and borrowing from banks.These methods are irrelevant because they are notreally methods of providing resources at all; theyare methods of shifting the burden of providingresources on to other people. In the case of pen-sions and wage-cuts this is obvious. If I stop apension of thirty pounds a year to an old servant inorder to pay my extra taxes, I myself make nosacrifice either of consumption or of savings. Thesacrifice required is shifted away from me on toher, and the problem of how best to make it issimilarly shifted to her. In the case of borrowingsfrom banks, what really happens is less apparent tothe casual glance, and to explain it in detail wouldtake time. But, in fact, the effect is the same as inthe case of cutting down pensions. The task 01meeting the State*s requirements is not faced by


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a6 THE ECONOMY ANDthis device ; it is simply transferred to the shouldersof other people.

Furthermore, there is another reflection on theselines to be added. If a man meets his loanpayments or his taxes by cutting pensions or byborrowing, he transfers the whole of the burden.If he meets them by reducing his consumption ofcommodities on which duties are levied, he, inexactly the same way, transfers a part of the burden.For example, suppose that he reduces his consump-tion of tobacco and wine and tea and sugar, and, withwhat he saves by doing that, pays his dues to theGovernment. We will suppose that the saving heeffects on these forms of expenditure and the additionmade to his income tax and War Loan contributionare both sixty pounds ; and we will suppose furtherthat, on the average, one-third of the price of thethings that he has stopped consuming was due tothe customs duties laid upon them. The net effectof his action then is not to increase his contributionto the Government by an extra sixty pounds ; it is,with one hand to add that sum to his contribution,with the other hand to substract from his contribu-tion one-third of that sum, namely, twenty pounds.He has really shouldered forty pounds out of thesixty pounds burden, and has transferred the other


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FINANCE OF THE WAR 27twenty pounds by making it necessary for theGovernment to impose extra taxes to that amounton somebody else. I do not, of course, mean tosuggest by this that people ought not to reduce theirconsumption of dutiable articles. If a person doesthis and takes up War Loan, he, in some measure,helps the State to finance the war. What I do meanis that, if he has decided to help the State to theextent of a sixty pounds burden borne by him, afterhe has contributed sixty pounds saved in respect ofthese dutiable articles, he will need, in order tofulfil his resolve, to contribute twenty pounds moresaved in respect of articles that are not dutiable.

This preliminary matter being disposed of, wenow concentrate attention upon those persons whoactually shoulder the burden of war charges thatis laid upon themsimilar reasoning will, of course,apply to persons to whose shoulders a burden istransferred by othersand we inquire in what waytheir conduct can affect the aggregate amount of realcosts which the war involves. The Slate requiresfrom me a contribution in tax and loan that willenable it to buy goods and services represented bya value of, say, 1000 pounds. By handing overthat 1000 pounds, in whatever way I provide it, I

without, whether for consumption or


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28 THE ECONOMY ANDfor investment, goods and services valued at thatamount. That happens v/hatever I do. The Govern-ment gets 1000 pounds' worth of things and I lose1000 pounds* worth of things. Butand this isthe pointthough both what the Government getsand what I lose are approximately fixed, the realincome left to the general publicthe things thatthey are able to buy with their money incomeisnot fixed, but is liable to be seriously affected bythe policy which I choose to adopt. I can soarrange things that no incidental burden whateveris thrown upon them ; or I can so arrange thingsthat they suffer an additional loss of real incomepractically as large as that suffered by me. Thisdifference can be illustrated by two extreme cases.First, suppose that I am accustomed every year tobuy 1000 pounds* worth of shells and to explodethem for amusement on the front lawn of my College.To provide the money for my loans and taxes Idispense with this luxury. The Government thenspends the looo pounds it gets from me in buyingthose very shells which I should normally havebought. The whole of what has happened hasbeen that a given mass of shells is transferred frommy ownership to the ownership of the Governmentnobody else is affected at all. Secondly, suppose


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FINANCE OF THE WAR 29that I am accustomed to spend 1000 pounds in pur-chasing the most marvellous hand-made lace manu-factured by a person who is unable to do anythingelse whatever except make that lace. To providethe money for my loans and taxes I dispense withthat luxury. What is the effect of that < My ownlossI assume the two luxuries to occupy aboutthe same position in the general scale of my wantsis substantially equivalent to what it was in thecase of the shells. But the position of the pubhc isquite different. My lace-maker cannot transfer herservices to the Government. Ex hypothesi she cando nothing except make lace which I alone can absorb.She is, therefore, thrown completely idle and herservices are simply annihilated. The Governmentspends its thousand pounds in inducing other peopleto make shells and so withdrawing them fromwork on behalf of the civil community. In thiscase then the 1000 pounds' worth of services whichthe Government gets is balanced, not only by 1000pounds* worth of services lost by me, but also,over and above that, by a further 1000 pounds'worth of services lost by the general pubhc. WhetherI economise in shells or in this pecuhar and mar-vellous lace, what the Government gets is muchthe same. But, in the one case, the general public


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30 THE ECONOMY ANDoutside myself loses nothing ; in the other case itloses services valued at looo pounds.So much for my two extreme illustrations. Let

me now state the general principle implied in them.When I diminish consumption or investment to theextent of looo pounds in order to pay that sum tothe Government, I release from employment in myinterest the services of men and of machines thathave for me that value. If these men and machinesare of such a sort that they have for the work re-quired by Government an equal value, no extra realburden is thrown on the general pubhc. If theyare of such a sort that they have for the work requiredby Government no value, an extra burden equal tothe whole looo pounds paid by me to Governmentis thrown on the general public. More generally,to whatever extent the value of the services whichthese men and machines can render to Governmentfalls short of the value of the services they can renderto me, an extra burden over and above the burdenthat I bear is thrown upon the general pubhc. Inother words, the real costs, which are symbohsedby the looo pounds taken by the Government fromme, embrace services previously enjoyed by me tothe value of looo pounds, together with servicespreviously enjoyed by other people to the value of


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FINANCE OF THE WAR 31the difference between 1000 pounds and whateversum the services dispensed with by me are worthto a Government engaged in war.

That is the principle of the thing. It remainsto set out its practical implications. These mayconveniently be considered in two divisions, accord-ing as they affect our purchases of direct personalservices or our purchases of commodities. Letus consider them in turn. First, it is quite plainthat, in present conditions, the services of doctors,of men of mechanical knowledge, of chauffeurs, andof young able-bodied men fitted for mihtary serviceand not possessing any specialised skill are quite asvaluable to the Government as they are to privateemployers. On the other hand, the services oflawyers, of highly-skilled gardeners, of poets, ofmen learned in the ancient languages, of musicians,of young men medically unfit or with conscientiousobjections to combatant service, of midwives, ofwomen with special skill as children's nurses, ofballet dancers and of music-hall artistes are muchless valuable to Government than they are to privateemployers. Therefore, other things being equal,if we have to choose between dismissing our chauffeurand dismissing our elderly gardener, who knowsall there is to know about orchids, we should dismiss


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32 THE ECONOMY ANDthe chauffeur. If a University has to choose betweendismissing its professor of mechanical sciences andits professor of Chinese, it should dismiss its pro-fessor of mechanical sciences. If we are in doubtbetween the excitement of an operation on ourappendix and the excitement of an expensive law-suit, we should do without the operation. If ournursery maid is an indifferent nursery maid, butlikely to prove a genius in making munitions, weshould dismiss her ; whereas, if she is a genius inthe care of infants, but material objects, when shetouches them, are apt to ** come in half in herhand," then we may justifiably retain her services.For, by dismissing her and paying our taxes withthe savings so made, we should cause the aggregatereal costs represented by our taxes to be much largerthan they would be if we had dismissed somebodywho was capable of rendering to the Governmentservices approximating more closely to those thathe or she was capable of rendering to us.

Secondly, consider our purchases of commodities.The first and most obvious thing to say in this con-nection is that, since the services of ships are urgentlyneeded by Government, there is a strong prima faciecase for affecting our economies in respect of goodsthat have to be imported from abroad, rather than


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FINANCE OF THE WAR 33in respect of goods which are made, and the rawmaterials for which are made, at home. A similarremark applies to things a large part of the valueof which is made up of the cost of transport by railsuch things, for example, as coal. Next, thereare certain commodities which are wanted by theGovernment in exceptionally large quantities forthe use of the troopsthings such as meat andpetrol. Next there are certain commodities whichare made by the same kind of machines and work-people as are required for making things of highmilitary need. These commodities will include theproducts of engineering works, such as motor carsand the plant required for setting up new factories.All such things are obviously suitable objects forprivate economy. By paying loans and taxes out ofsavings made in respect of them, we hand over tothe Government a value which is approximately aslarge as the costs which we and the public jointlysubmit to in providing it. On the other hand, thereare a number of commodities which are not usefulfor war purposes, and v/hich are produced with thehelp of a large existing plant not useful for warpurposes. Such things are obviously, in compari-son with the others, unsuitable objects for private(or public) economy. Among them is included


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34 THE ECONOMY ANDwater, as supplied by a water company to a town,and, in a lesser degree, gas and electric light. Thereare also included the services rendered by museumsand art galleries. In these institutions, with theircollections, there is embodied an enormous capitalplant, quite useless or nearly useless for renderingwar service. If they are shut down and the savingin respect of their staffs is utilised by the State, thereceipts of the Government are measured by thissaving, but the real costs to the public include, notonly the services represented by this saving, but alsothe services of the capital estabHshment of theseinstitutions, the loss of which is balanced by nocorresponding gain to the Government.At first sight it might seem that the preceding

analysis exhausts the topic indicated in the title tothis section. In reality, however, there still remainssomething to be said. Hitherto, I have supposedthe choice open to a tax-payer or subscriber to WarLoan to lie between dispensing with different sortsof services, which have an equal value to himself,but which, if made available for Government, wouldhave for them various values. It has now to beobserved that the choice before him is somewhatless simple than this. For let us suppose that ourtax-payer or loan-subscriber is in doubt between


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FINANCE OF THE WAR 35economising 100 pounds in two alternative ways,the adoption of either of which would release forthe use of Government services of exactly equalvalue to them. In such a case one is naturallytempted to conclude that the aggregate real costsof the war must be affected in exactly the samemanner by the selection of the one or the other ofthese economies. This, however, is not necessarilyso. The reason is that the conditions of productionof some commodities and services are such that areduction in the amount of them that is consumeddiminishes the real cost per unit of providing them.By economising in respect of things of this kind, weenable ourselves and other people to obtain so muchof them as we continue to consume at the cost of adiminished expenditure of the nation's capital andlabour. In this way we set free for other forms ofproduction some quantity of capital and labour overand above that which used to be employed in pro-ducing that part of the commodity or service whichwe have ceased to consume. The product of thisreleased capital and labour must, therefore, be seton the credit side of the national balance sheet,thus indicating a corresponding diminution in thereal costs of the war.Even in normal times the production of staple


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56 THE ECONOMY ANDfood products and raw materials is apt to be con-ducted in conditions such as I have described. Intechnical language, the production of these thingsis subject to diminishing returns, and it is acommonplace of economic theory that economy inthe consumption of them on the part of thosewho can afford it is, in all circumstances, sociallyadvantageous. In the special circumstances of war,however, when certain classes of goods are requiredin exceptional quantities with such urgency that anorganisation appropriate to the new demand hasnot yet been built up, the range of commodities andservices affected by conditions of diminishing return,and the intensity with which these conditionsoperate, are much greater than usual. There is,thus, considerable scope for a selection, along theselines, of economies that will react more favourablythan others upon the aggregate mass of the realcosts of the war. Economies in bread, meat, sugarand petrol have obvious advantages in this respect.So alsoand the argument is not injured by the factthat this category overlaps with one already employedhave economies in respect of the general body ofimported goods, because a reduction in the amountof any sort of import tends to reduce freights, andfreights are a part of the cost of all sorts of imports.


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6. GOVERNMENTAL INTERFERENCE WITHTHE WAY IN WHICH INDIVIDUALSECONOMISE

The discussion of the preceding section has made itplain that individual tax-payers and subscribers toloans can materially affect the amount of the realcosts of the war by the way in which they choose tomake provision for their payments to the State.Evidently, then, their personal duty is to direct theireconomies into those channels which affect thesereal costs most favourably. About this there needbe no difl&culty or dispute. But a more comphcatedquestion is raised when it is asked whether theGovernment ought, by fiscal or other measures, toenforce the performance of the above duty ; forthe fact that the country will be advantaged if aman does something voluntarily does not necessarilyimply that it will be advantaged if the State attemptsto make him do it. Nevertheless, there is clearlya prima facie case for the imposition of high taxesfor the period of the war upon commodities inrespect of which economies are more than usuallyadvantageous. Special duties upon petrol as used


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38 THE ECONOMY ANDin private touring cars, and general duties upon im-ported goods other than those of prime necessityhave, therefore, not unnaturally, many advocates.There are, however, two serious difficulties in theway of any widely-extended use of this device, andboth these difficulties demand close attention.The first of them has to do with the fact of sub-

stitutes. When a commodity serves a purposewhich people are fairly ready, at need, to leave un-satisfiedin technical language when the demandfor the satisfaction of that purpose is fairly elastic

the effect of putting a tax on the commodity willalways be to release capital and labour from em-ployment in the interests of that purpose. In thesecircumstances, therefore, the tax will achieve itsobject. But, if the comm.odity serves a purposewhich people will not rehnquish readilythe demandfor the satisfaction of which is inelasticthe effectmay be quite different. In so far as they continuebuying the commodity as before and paying thetax upon it, nothing happens beyond a transferenceof resources from them to the State, and, from thepresent point of view, neither harm nor good isdone. It is, however, often the case that a purposecan be served, not only by the commodity whichnormally serves it, but also by some alternative


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FINANCE OF THE WAR 39commodity which can do the same thing somewhatless effectively. In these circumstances, unlesstaxes are imposed on all the alternative means ofsatisfying the purpose in question, the impositionof a tax on one among them may cause people, notto stop satisfying the purpose, but to satisfy it in adifferent way at a cost of capital and labour whichis actually greater than before. Herein is a seriousobjection to such a piecemeal policy as the closingof museums and art galleries. May not the resultbe merely an expansion in the services which thepublic demand from picture palaces and publichouses i Herein, too, is the great difficulty in theway of import duties unaccompanied by correspond-ing excise duties. Instead of causing people toemploy less capital and labour in respect of theneeds they used to satisfy by importation, the im-position of such duties may cause them to satisfythese needs through the manufacture of identicalor similar things in a more expensive manner athome. Any attempt to utilise fiscal machinery todirect individual economy into advantageous channelsmust be executed with very great care if it is to besuccessful in meeting this class of difficulty.The second difficulty is equally important. It

is obvious that the imposition of a tax of any given


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40 THE ECONOMY ANDamount upon a commodity will be a much moreserious matter to a poor man than to a rich man.An increase of price, which may make Httle differenceto the amount consumed by the rich, may place acommodity wholly outside the poor man's reach.It may well be, however, that a poor man, whonormally purchases a small quantity of something,satisfies thereby more urgent needs than are satisfiedby some part of the larger purchase of a rich man.In so far as this is the case, the imposition of dutiesis a very clumsy method of bringing about economies.It checks consumption a great deal on the part ofpeople among whom a check causes most suffering,and only checks it a httle where a large check wouldbe easily borne. The inevitable inference is that,apart from administrative difficulties, a pohcy of** rationing,** such as the German Government hasattempted to initiate, is greatly preferable to a pohcyof dutiesat all events in respect of articles thatform a part of the staple food of the poor. Such apohcy cuts down consumption in the right place,namely, where it is a relatively unimportant con-tributor to well-being. Rationing, however, isobviously impracticable except over a somewhatnarrow field of commodities. Furthermore, thedifficulty against which it is designed to guard is


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FINANCE OF THE WAR 41not of great importance except in regard to massgoods of general consumption. What has beensaid, therefore, must not be taken to imply thatthere are no cases in which duties upon particularcommodities may be usefully employed as an instru-ment for directing the economies of the communityinto socially advantageous channels. It does imply,however, that such duties are a two-edged weapon,the successful wielding of which demands knowledgeand skill.


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THE ECONOMY AND

7. FUTURE RESOURCES AND PRESENTRESOURCES

Up to this point attention has been concentratedupon the amount of the real costs of the war. Wehave now to observe that the people upon whomthese costs are imposed have it in their power todraw them from either of two broad groups. Theseare, respectively, future resources and present re-sources. The choice between them, which individualtax-payers or subscribers to War Loan make, deter-mines how far the real costs of the war are borneby the present generation and how far they are thrownupon future generations. It is, therefore, desirableto consider in some detail in what the two groups ofresources thus distinguished principally consist.To draw upon the future for war purposes means

to trench upon actual or potential capital, thusleaving current income intact but reducing theincome of after years below what it would otherwisehave been. The ways in which this can be donefall into two divisions, one dependent upon themaintenance of communication with the outsideworld, the other available for all countries. Each


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FINANCE OF THE WAR 43of these divisions may in turn be separated intoseveral sub-groups.Of the ways dependent upon the maintenance of

communication with the outside world, the firstand most obvious is the selling abroad in exchangefor immediate income of existing stores of capitalgoods. It is conceivable that even such things asland, houses and reservoirs might be made use ofin this way ; for, though they could not be takenout of the country, there is nothing, either in thenature of things or in the law of the land, to preventthem from being sold to rich Americans in theirpresent sites. Practically, however, for the purposeof obtaining resources in a hurryand, of course,the essence of our war needs is urgency in pointof timethis resource does not amount to much.The capital goods that can be effectively utilisedby sale abroad are confined, broadly speaking, tothose which are capable of physical export, namely,jewellery, works of art and gold and silver bullion.By the sale of these things in neutral countries, aconsiderable fund of real income could, no doubt,be obtained.The second way is the selling abroad of securities

held by Englishmen in foreign enterprises. It wasestimated before the war that English holdings of


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44 THE ECONOMY ANDsuch securities amounted to some 3500 millionpounds, of which perhaps 600 millions were derivedfrom American railways. In practice, in the pre-sent world war. New York is the only market inwhich any large amount of securities can be disposedof, and New York is not ready to buy non-Americanstocks and shares. Even so, however, it is evidentthat, at the beginning of the war, citizens of theUnited Kingdom had in their foreign holdings avery large quantity of reahsable resources. Thereis reason to believe that some use has already beenmade of these, and that an appreciable proportionof our American securities has already been sold.There can be no doubt, however, that large holdingsstill remain in our hands.Of the ways of drawing upon the future that are

available for any country, whether or not the meansof communication with other countries are keptopen, the one that naturally suggests itself first isthe direct utilisation within the country of portionsof its capital wealth. This wealth, it is said, in thecase of the United Kingdom, amounts to about15,000 milhon pounds ; a sum so immense that,by resort to it, we could, if we chose, finance thewar for a very long time. But this point of viewignores the fact that the capital wealth, which is


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FINANCE OF THE WAR 45valued at this sum, consists for the most part insuch things as the land of the country, the build-ings upon it, its railway lines, its reservoirs, and soforth. These things, fixed in space as they arc,are obviously incapable of being used directly forany war purpose. The only part of our capitalwealth that is capable of being so used consists inthe stores of food, of raw materials, and of certainselected finished goods that constitute the customarystocks of shops and warehouses. This way ofdrawing upon the future is not, therefore, of verygreat practical importance.A second way is the drawing out, as it were, of

resources from existing industrial plant by refrain-ing from the expenditure required to make goodwear and tear and to replace obsolescent machinery.It has been estimated that the aggregate cost ofmaintenance, in this sense, of the plant of the UnitedKingdom amounts to some 170 million pounds ayear. By allowing plant to depreciate, we havethe power, if we choose to exercise it, to add goodsand services roughly equivalent to this sum to ourprovision for the war. It is obvious, however, thatvery serious after-consequences would result if thedepreciation of plant were allowed to go far.A third way is refraining from new investments.


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46 THE ECONOMY ANDIt has been estimated that, in the ordinary course,Englishmen invest about 400 million pounds a year.A complete stoppage of such investment would,therefore, yield some such sum as that,or, allow-ing for the change of price levels, thirty or fortyper cent, more than that,towards war costs.

I now turn to the second of the two main divisionsinto which ways of meeting war levies are separated,namely, drawing upon the present. To draw uponthe present means to leave the income of afteryears intact and to bear the whole burden at themoment. This can be done in two principal ways,by creating extra income through extra exertionsand by economising consumption. There can beno doubt that the device of creating extra incomeis being resorted to at the present time in very con-siderable measure, at all events among the poorerclasses. Many men are working longer hours andmore overtime than usual ; artificial rules designedto restrict output have been markedly relaxed inindustries directly connected with the war ; thereports of the Labour Department show that thepercentage of persons unemployed is very muchsmaller than usual ; stoppages of work on accountof industrial disputes are very much less numerous ;many women and some men, who were formerly


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' FINANCE OF THE WAR 47enjoying a more or less leisured life, have turned tosome form of productive labour. What these extraservices amount to in the aggregate it is impossibleto say^ but they are certainly considerable and mustinvolve an appreciable increase in real income toset against the extra costs of war. It is probablethat in Germany this resource has been invokedin greater measure than in the United Kingdomand, if we so desire, it is in our power to make anincreased call upon it. The alternative form ofdrawing on the present is the economising of con-sumption. The general character of this is obviousand requires no explanation.To the above analysis one qualifying consideration

must be added. Hitherto it has been tacitly assumedthat the distinction between drawing upon the futureand drawing upon the present is always clear-aitand sharp. In fact it is, in some circumstances,blurred. After we have descended a certain distancealong the scale of wealth, a check to consumptionor to leisure no longer affects the present alone.It reacts injuriously upon the general efficiency ofthe people affected, and, hence, strikes indirectlyat their future productive power. At a later stageof our inquiry this fact will be seen to have animportant bearing upon practical policy.


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48 THE ECONOMY AND

8. GOVERNMENTAL INTERFERENCE WITHTHE CHOICE BETWEEN FUTURE ANDPRESENT RESOURCES

Just as in Section 6 we inquired whether and howfar it was desirable for the Government to intervenewith a view to directing the choice of individualsbetween different sorts of economies^ so now wehave to inquire whether and how far it is properfor them to interfere with the choice that individualsmake between drawing on the future and drawingon the present. Before, however, this inquiry canbe successfully undertaken, it is necessary to disposeof a wide-spread popular error. Many personsbelieve that, so soon as the method of collectingmoney for the State is decided upon, the choice ofindividuals between drawing upon the future anddrawing upon the present is absolutely and finallydetermined. Whatever part of the cost of war ismet by taxes is, they hold, necessarily paid for inthe present ; while whatever part is met by loansis necessarily thrown upon the future. What hasbeen said in the preceding section should, however,already have made it plain that this opinion is in-


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FINANCE OF THE WAR 49correct. The fact, that, when the Governmentraises money by a tax, it does not afterwards payinterest, is no proof that the future is not burdened ;for the person who pays the tax may have takenit from funds which would otherwise have beenemployed in creating productive capital. In hkemanner, the fact, that, when the Government raisesmoney by a loan, it does afterwards pay interest, isno proof that the future is burdened ; for theperson who subscribes to the loan may have devotedto that purpose funds which would otherwise havebeen used up in immediate consumption. Ofcourse, it is true that, when interest is contractedfor, the tax payers of the future will find themselvesmulcted to provide it. But the burden thus thrownupon them is offset by the advantage conferred onthose of their fellow-citizens who hold loan-stockand to whom the interest is handed over. Thepayments niade, therefore, afford no evidence of theexistence of any net burden to the nation as a whole.In short, the question, how far the burden of warexpenditure is borne by the present or the future,depends on the choice made by individual con-tributors to the Government's need of the sourceupon which they will draw. The notion that thepart drawn from the present must be equal to the


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50 THE ECONOMY ANDtax revenue and the part drawn from the future tothe loan revenue is without foundation.Though, however, the Government cannot deter-

mine the distribution of war costs between thepresent and the future in the simple way thatpopular thought supposes, it can undoubtedly exertconsiderable influence upon that distribution. Ofthe indirect influence which is exerted by the policyadopted as regards the proportion of the burden tobe thrown upon people of different grades of wealth,I shall speak later on in another connection. Butthere is also scope for direct influence. Thus, inso far as the Government dehberately impedes con-sumption by ** rationing ** the people in respect ofarticles of food, by forbidding or restricting the im-portation of consumable goods (or the raw materialsof such goods) for which there are no obvious sub-stitutes, and by imposing duties upon consumptiongenerally, it encourages people to meet the demandsof war by drawing upon the present. In so far, onthe other hand, as it deliberately impedes investment,as it has done by the Treasury Order, which forbidssuch investment in foreign countries, restricts it inoutlying portions of the Empire, and controls itwithin the United Kingdom itself, it encouragesthem to meet these demands by drawing upon the


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FINANCE OF THE WAR 51future. These two sorts of policy, therefore,produce contrary effects.

In view of the power which the Government isable to exercise through the above devices andother similar devices which could easily be formu-lated, it is evidently important to determine whatkind of distribution of costs between present andfuture resources it ought to try to bring about. Inthe case of the choice between different sorts ofeconomies discussed in Section 6, the conceptionof the ideal to be aimed at presented no difficulty.Other things being equal, it was obviously desirablethat those economies should be encouraged mostwhich tended most effectively to minimise the suratotal of real war costs. In the present case, how-ever, the matter cannot be decided in any suchgeneral way. Rather, it would seem that the pro-portion in which the present and the future oughtto be drawn upon depends on the detailed circum-stances and character of the particular war in whichwe are engaged. The future ought to be mulctedjust in so far as the war is of such a kind that posteritycan fairly be asked to contribute towards the costof it, and the present ought to be mulcted for what-ever is necessary beyond this.The above result is not definite enough to form


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52 THE ECONOMY ANDthe basis of any very confident practical inferences.But it warrants one rough generalisation. Tax-payers and contributors to loans are not likely tounderestimate the importance of their own well-being as compared with the well-being of posterity.On the contrary, if they are left to themselves, itis probable that they will draw upon the presentless than it is desirable, in the interests of presentand future combined, than they should do. Hence,if the Government so acts as to influence theirchoice in either direction, it certainly ought not toweight the scales against the interest of the future.It certainly ought not to discountenance investmentwithout at the same time adopting at least equallyforceful means to discountenance extravagant andunnecessary consumption.


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9. THE FOREIGN EXCHANGESHitherto the distinction upon which we have beenworking is that between drawing upon the futureand drawing upon the present. This distinction,however, is not the only one which has practicalimportance. The costs of the war can be meteither by disposing abroad of saleable propertywhich, for the present purpose, practically meansgold and American securitiesor by utilising currentcapital and labour. The choice between these twomethods is not equivalent to the choice betweendrawing upon the future and drawing upon thepresent. For, on the one hand, if saleable propertyis disposed of abroad, the future will not be drawnupon in so far as equivalent investment is made innew capital at home ; and, on the other hand, ifthe alternative method is adopted, the present willnot be drawn upon in so far as the capital and labourutilised are capital and labour that would normallyhave produced, not consumable goods, but machines.Hence, the distinction between resort to saleableproperty and resort to current capital and labour is


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54 THE ECONOMY ANDa new and independent distinction. The purposeof this section is to examine some questions of im-portance to which it gives rise. Since, however,as will presently appear, these questions are asso-ciated with the general problem of the foreign ex-changes, it is necessary, before they are examined,to clear away certain popular misconceptions con-cerning the meaning and significance of exchangemovements.

There is a very wide-spread opinion to the effectthat, when the foreign exchanges move againsta country in a given proportion, this necessarilyimplies that the real cost to her (in terms of herown goods) of obtaining foreign goods has movedin the same sense and in the same proportion.This, however, is an error ; and the nature of theerror can be illustrated from recent happenings inGermany. The rate of exchange between thatcountry and, say, Holland measures the amountof Dutch money in Holland which people are willingto give in exchange for a claim to a given quantityof German money in Germany. Consequently,when it is said that the Dutch exchanges have movedagainst Germany, as they have now done, to theextent of some twenty-seven per cent., what ismeant is that Dutchmen in Holland are offering


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FINANCE OF THE WAR 55twenty-seven per cent, less Dutch money thanusual in exchange for a claim to a German mark,and that Germans in Germany, when they requireclaims on Dutch money in Holland, have to paytwenty-seven per cent, more marks than usual. Ifthe general level of prices in Germany and also thegeneral level in Holland had remained unaltered,or if both levels had changed in the same proportions,this twenty-seven per cent, fall in the value ofGerman money relatively to Dutch money wouldnecessarily mean also a fall of twenty-seven percent, in the value of German goods relatively toDutch goods, and, therefore, an increase of twenty-seven per cent, in the quantity of German goodsthat Germany had to give in order to obtain a givenquantity of Dutch goods. But, if the general levelsof prices have not remained constant relatively toone another, this implication does not hold good^For example, suppose that prices in Holland haveremained unchanged, but prices in Germany haverisen twenty-seven per cent., then the value ofGerman money relatively to Dutch money hasfallen twenty-seven per cent., but the value ofGerman goods relatively to German money hasrisen twenty-seven per cent. In these circum-stances, the value relatively


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56 THE ECONOMY ANDDutch goods is unaltered, and the quantity ofGerman goods that has to be given in exchange fora given quantity of Dutch goods is the same asbefore. It follows that movements in the moneyexchanges cannot be used as an index of movementsin the real rate of interchange between domesticand foreign produce, until their prima facie indica-tions have been reviewed in the light of concurrentprice changes. Nor need we be content with thisgeneral caveat. For a very striking example of itspractical importance is immediately at hand. Whilethe value of the German mark on neutral exchangeshas fallen over twenty per cent, more than the valueof the English pound, prices in Germany have risensome forty per cent, more than prices in England.This imphes that the real cost of foreign imports interms of domestic produce has risen in a smallerdegree in Germany than it has done in England, Thisimportant fact is not realised by those who con-centrate their attention upon the money exchanges.But, when we recollect, on the one hand, thatEngland's demand for foreign goods has enormouslyincreased while the war has cut off a large part ofthe foreign (belligerent) demand for her ejiports,and, on the other hand, that the import and exportbranches of Germany's foreign trade have both


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FINANCE OF THE WAR 57been enormously restricted by the British blockade,it is seen to be one that need cause no surprise.^

There is a second very wide-spread opinion,which a study of the present situation in Germanyalso suffices to correct. This opinion is that, ifthe exchanges move against a country to such anextent that a claim held by a Dutchman to an ounceof gold in Germany becomes worth less in Hollandthan an ounce of gold minus the cost of carrying anounce from Germany to Holland, Dutchmen hold-ing these claims, instead of selling their bills inHolland, will encash them in Germany and exportthe gold. And the corollary to this opinion is thatit is impossible for the exchanges on a country tostand for any long period at a level below the exportspecie point, without the main part of that country'sreserve of gold being drained away from it. Inview of the fact that, from a very early stage in thewar, the German exchange on neutral countrieshas stood far below the export specie point, while

> To obviate misunderstanding, it should be added that analysison the above lines cannot by itself yield a measure of the alterationwhich has occurred in the absolute rate of interchange betweenEnglish (or German) and neutral goods. In order to obtain sucha measure, we should need also to take account of the rise of freightsand of the change which has presumably taken place in neutralcountries in the relative prices of export goods and of goods ingeneral.


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58 THE ECONOMY ANDthe Reichsbank still possesses an enormous goldreserve, these opinions are evidently in need ofqualification. The required qualification is thatthey hold good only in respect of a country in whichthe banks allow gold to be taken freely for exportin exchange for notes encashed at their face value.Germany was never a perfectly free market for goldin this sense, and since the war began, it may beassumed that the Reichsbank has almost entirelystopped the withdrawal of gold for export. Inthese circumstances, the normal " corrective " oflarge adverse movements in the exchanges is notat work. There is nothing to prevent a stronglyadverse position being permanently maintained in acountry which still enjoys the consoling spectacleof a mountainous gold reserve.The preceding discussion of popular misconcep-

tions was designed to prepare the way for a studyof the more special " problem of the exchanges,"which the progress of the war has made it necessaryfor this country to confront. The general situationis sufficiently plain. In normal times the UnitedKingdom is accustomed to import large quantitiesof food and raw materials, and to pay for them outof her claims for interest upon loans formerly madeby her and out of the proceeds of the sale of current


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FINANCE OF THE WAR 59exports of coal, manufactured articles and shippingand banking services. As a result of the war ourdemand for imports has enormously increased, onaccount of our great need for munitions and otherforeign goods, both for our own use and for the useof our allies ; while the amount of labour and capitalavailable for making exports to pay for these thingshas diminished. It is true that the gap thus madebetween our requirements and our means of paymentis partly filled by the utilisation of that proportionof our claims to interest which we were formerlyaccustomed to devote to capital investments abroad.But, even so, the conditions are plainly such as tomake it extremely difficult for us to find means ofpaying for tlie enormous extra purchases which wedesire to make. These conditions embody two gravedisadvantages. First, the great enhancement inthe quantity of imports that we demand cannot beprovided by foreign sellers except at a considerablyincreased real price in terms of British goods. Sincewe want more foreign commodities than before, weare compelled to give (or promise) more of our ownexports than before in exchange for a unit of them.Secondly, tlie shortage of capital and labour avail-able for use in foreign trade threatens to make it

exports


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6o THE ECONOMY ANDand, if this is impossible, it may also be impossiblefor us to secure that provision of food, materialsand munitions which is absolutely essential tosuccess in the war. Herein lie the real problemsof the foreign exchanges. The position of the moneyrate of exchange with New York, Amsterdam andthe rest does not constitute, but merely symbolisesand represents them.The most obvious ways in which these problems

can receive a practical solution are as follows. Wemay rigorously cut down a great part of those ofour normal imports which are not strictly necessary ;or, we may divert resources from making commodi-ties for home use and turn them into making morecommodities for export. Both these ways areforms of meeting war costs by the utilisation ofcurrent capital and labour. For, if we cut downunnecessary imports to balance the extra imports ofmunitions, we are diverting the capital and labourwhich formerly made exports from the work ofindirectly yielding imported motor cars to that ofindirectly yielding imported shells : and, if weincrease our exports, we are diverting capital andlabour from directly yielding consumables andmachines for home use to indirectly yielding theseshells. The utilisation of current capital and


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FINANCE OF THE WAR 6ilabour constitutes then one principal way of financingthose of our war costs which have to do with imports.Over against this there stands a second principalway, namely, the utilisation of saleable property inthe form of gold and American securities. If thingsare left to take their course, the play of economicmotives, acting through movements of prices andmovements of the exchanges, will presumably causeresort to be had in some measure to both theseprincipal ways. Some unnecessary imports willbe cut off, some capital and labour will be turnedfrom other employments to making goods for export,and some gold and some securities will be soldabroad. The question we have to ask is : is thisnormal individualistic solution of the exchangeproblem satisfactory, or is it desirable in the generalinterest that the Government should interfere tomodify it

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