FINANCING WAR

Evening Star, Issue 23368, 11 September 1939, Page 11

FINANCING WAR

LOANS—^TAXATION —INFLATION AN ECONOMIST'S REVIEW Professor K- W. Souter spoke to the railway class of the W.E.A. yesterday afternoon on ‘ The Political Economy of War,’ basing his address largely on Professor Pigou’s ,book of the same title. In his preface Pigou had expressed'the hope: “Perhaps a little light may be thrown on what, if the human spirit is to remain sane and civilised society to endure, is the only political economy that will ever again have relevance to practical affairs—the political economy of permanent and assured peace among the great nations of the world.” Unfortunately, this hope had not been fulfilled; Dealing first with the economics of war preparations, Dr Souter said that at first sight the amounts spent in this way might seem relatively small'. Before the Great War the expenditure of leading countries on armaments had averaged about 20 per cent, of the State revenues, and in the case of Great Britain only 3 or 4 per cent, of the total national income, the proportions for France and Germany being similar; but the position was seen to be much more serious if ono took the proportion to available surplus after providing for the people’s minimum absolute needs. The recently published figures showing the prevalence of un-der-nourishment in Britain indicated that the real available surplus was not so large, but that the expenditure on war preparations represented a very serious drain. And the amounts had lately been increased. Dealing first with causes of war. Professor Souter quoted Pigou’s opinion that the two principal motives leading to war were desire for domination and desire for gain. Norman Angell’s attempt in ‘ The Great Illusion ’ to show that no gains were to be obtained from war was an over-state-ment. To make out the purely economic case against war it was only necessarv to show that it was highly improbable that the gain would be sufficient to remunerate any Government for the heavy expenditure. This was so, but it was not likely, in present circumstances, to influence people much. Pigou had listed the following as the three main economic causes of war:— (1) The very much exaggerated idea of traders that they and their nation would gain from national domination over certain areas; (2) the desire of certain financial interests to obtain concessions in conquered areas; (3) the existence of private ownership in the

armaments industry. Pigou had recognised difficulties in the way of complete nationalisation of armament manufacture, but in his more recent book, ‘ Socialism versus Capitalism,’ he had come out definitely for nationalisation of this industry. REAL WEALTH. Coming to the provision of the material means to war, Dr Souter said that economists made a distinction between the provision of finance and the “ real war fund ” —that is, the resources, goods, and services available. This real war fund could be increased by four means only—(1) Bv augmenting production j (2) by reducing personal consumption; (3) by reducing investment in industries not required for war-making; (4) by permitting deterioration of capital goods not required for war. Among methods for the increase of production were the reduction of leisure, both of the workers and of non-workers—although the increase of the hours of work beyond a certain limit would actually reduce output, and the reduction of the workers’ efficiency through overwork was a cost that might be carried on beyond the war period; so, too, if consumption were reduced beyond a certain point, it might mean drawing on the human capital of the nation. Considerable resources could be saved by reducing investment; the amount available from this source could be gauged from the fact that normal capital expansion in Britain in the prewar years was to the average value of between £300,000,000 and £400,000.000 a year, and a further saving could be made out of the amount set aside for depreciation, averaging, before the last war, £170,000,000 a year. Dr Souter went on to point out that, from the point of view of the real war fund, the payment of low wages to troops should not be regarded as a saving; differences of pay represented differences in the distribution of_ purchasing power, whereas if bad munitions were produced, that was real waste. Similarly, it did not necessarily follow that an increase of man-power should be obtained by taking people from luxury industries; the principal test was the workers’ suitability for war work. Econimies similarly should be effected mainly in the things most needed for war, and the same principle applied to the regulation of the use of plant and to reduction of the importation of things not required for war. RATIONING AND COMMANDEERING. As to the means of bringing about increase of production and economy in consumption, something could be achieved by patriotic propaganda. In actual regulation the choice was between taxes and duties on the one hand and rationing on the other. Duties and taxes fell heavily on the poor, and might even reduce their working capacity. Hence rationing was usually preferred., It was applied both to consumption goods and to capital goods. Britain in the Great War had controlled the price of home-grown wool, metals, and practically all foodstuffs, and had negotiated agreements for the control of prices of certain imports. Plant had been commandeered for tjie manufacture of munitions; labour had not been commandeered, but in some cases military conscription had been used as a lcvc;r to getneeded workers into munition industries and other necessary ser-

vices. Among the great advantages of commandeering was that it made it possible to keep prices down and to assure a steady supply of necessary goods. The greatest advantage was smooth and speedy transition to war conditions. The Government at war could not afford to wait for the private capitalist to make up his mind whether it was worth the risk to produce certain war goods for a problematical profit.

THE FINANCIAL SIDE.

Coming to the purely financial side of war-making, Dr Souter said that, even if the financing were done mainly by means of loans, taxation should bo increased at least to the extent of providing the additional interest. Even if a war were financed entirely by taxation, some of the burden would fall on future generations, because the taxation would reduce the amount spent on peace-time plant, and the community would be affected in other ways; but certainly the burden on posterity was greater when resort was had to loans. Borrowing for war, moreover, had tho objectionable feature that it tended to encourage great expansion of credit, and consequently inflation. In war time it was reasonable to take from each, not only his share, but the utmost he could give. Thus it was reasonable to tax the rich very heavily, and in short wars there was much to be said for financing by taxation, but this was not practicable in long wars, for the reason that the incentive to effort might be lost if taxation were carried beyond a certain point. Hence all Governments in the last war had thought it necessary to resort to loans and bank credits and to accept more or less inflation, including an expansion of the note issue, as well as bank credit. In the present war the British Government had already given authority for an increase of £280,000,000 in the fiduciary issue. Dr Souter considered that the criticism which economists had levelled against the British Government in the last war for financing so largely by loans and inflation was only partly justified. Halfway measures, with a larger proportion of taxation and less inflation would probably have been better. ECONOMIC COUNCIL NEEDED. At the conclusion of his lecture, Dr Souter expressed the opinion that there was imperative need for a national economic council to exercise co-ordinating functions and advise on long-term planning. Measures should be devised by experts not only to carry us through tho period of the war, but to avoid the worst feature of the aftermath—for instance, excessive currency inflation and tho boom in land speculation that had resulted from the high prices of primary products obtained during the last war. In reply to a question, ho agreed that a greater part of the cost to New Zealand could have been financed out of taxation, with the high prices ruling for our exports, hut he did not consider the financing could have been done wholly by taxation.