TRANSACTIONS OF SECTION P. 591 



position will be something intermediate between confidence and credit in the 

 fullest sense of the word. In fact, the progress towards a normal return to 

 credit will bo marked by the gradual recall of successive Emergency Measures. 

 When credit is sound, just as in the case of a healthy man, it does not need 

 tonics, nor is it conscious of its own state. It works largely intuitively. All 

 questioning, even a demonstration of ' its inherent soundness,' is an evidence 

 that there is some danger of a failure of complete confidence at one or more 

 points. The sound state of credit is that which needs no external help. 



III. Public Borrowing for the War as Affecting Credit. 



(i) General Effects of Public Borrowimj on Credit. 



Public borrowing may be regarded from two points of view. From the 

 first or abstract point of view. Credit is based on claims to goods and services; 

 from the second or concrete point of view, Credit is measured by prices on the 

 iStock Exchange or by the rates of interest current in the Money Market. 



Loans imply interest, and interest implies taxation in future years. The 

 actual subscription of War Loans involves the handing over to the Government 

 of claims to consumable goods and services tor the destructive purposes of war, 

 in return for which the Government gives the subscribers a transferable lien 

 on future goods and services. 



Extensive borrowing by Governments reduces the mobility of existing credit; 

 because the payment of calls, as well as the expectation of further loans, reacts 

 9n the previous state of credit. As already shown, the outbreak of hostilities 

 tends to contract credit not only within the area directly affected but in 

 adjoining areas. In a great war the uncertainty extends to almost every market 

 for capital. Thus war results in a general rise of interest. That rise is accen- 

 tuated in a belligerent country both by the risks of war to it and by the con- 

 traction of its usual production through the calls on its productive power and 

 also by the necessity for public borrowing. The State now exerts an urgent 

 demand for capital in competition with, or even to the exclusion of, the remain- 

 ing demands for industry. That demand is supplied from various sources. 

 First, most of the floating supply of capital (namely, that capital which has 

 not as yet been definitely committed to specific production) is subscribed, then 

 circulating capital which has been diverted from its usual uses owing to the 

 industries employing it having ceased or being contracted through tlie existence 

 of hostilities. Further, sums are found by the postponement of repairs and 

 renewals which were required to maintain the full efliciency of production. 

 Foreign investments are sold to a greater or less extent. The latter source of 

 supply can only be tapped by an increase in the rate of interest on Government 

 loans lessening the disparity between the yields on home and foreign investment. 

 The increase in the rate of interest offered by the Government has the further 

 effect of being a direct incentive to new savings. It is to be remembered 

 that the Government not only borrows but it also disburses the capital it raises. 

 Many of these disbursements are made within the country, and a high rate of 

 interest acts as a direct incentive to the saving of a considerable part of these 

 as well as to increased economy amongst the remainder of the community. In 

 the first War Loan of a series, the larger proportion of the subscriptions will be 

 drawn from floating capital, but later issues depend for their success to an 

 increased degree on new savings ; and, in the present instance, these must be in 

 excess of those made in time of peace. Hence the rate of interest offered in 

 order to induce such additional savings will be high and will tend to increase. 

 Thus the most evident effect of extensive Government borrowing, as has been 

 shown by the two War Loans, is the tendency towards a rise in the price to be 

 paid for each successive loan, i.e., the rate of interest will rise, not only for 

 Government loans, but for all borrowing. This is no new fact in English his- 

 tory, and this tendency may be illustrated by a table giving the average price of 

 Government Stock before, during, and after the Napoleonic Wars. 



