TRANSACTIONS OF SECTION F. 613 



peace outlay, it seems as if vigorous financial administration, sparing no spcwal 

 interests or classes, would supply over 300,UUt),(A»0/. for each year of a limited 

 war period. The tax revenue, jus;:'; indicated as possible, has evidently to be 

 supplemented by the use of loans. It is, or ought to be, recognised that there 

 are large funds which cannot be brought in by the pressure of the tax-collector, 

 but which will how in to the Exchequer if the inducement of adequate interest 

 is afforded. We may perhaps assume that by this means an amount equal to that 

 gained from taxation is obtainable, year by year, for a war period of several 

 years. The compulsory contribution of the taxpayer is balanced by the 

 voluntary payments of the saving class. 



' The general result of the foregoing estimate shows an annual fund of over 

 700,000,000^. available for the cost of war. Taking the total of this cost as 

 approximating towards 1,000, 000,OOOZ., there remains a sum of over 250,000,000/. 

 to be supplied, and here the use of an external loan is manifestly prescribed. 

 By a<lopting the sound policy of exempting the interest on such a loan from 

 British taxation the raising of the required amount would be facilitated. In 

 addition to the immediate financial relief there would be the important effect 

 on the Foreign Exchanges (it need hardly be said that the United States would 

 be the chief field of contribution) and the beneficial political bearing through 

 the financial interests becoming attached to the side of the borrowing country. 

 As the struggle proceeds, the need of some such arrangement will, I believe, 

 become plainer; but delay will mean heavy financial loss and greater diflSculty 

 in bringing about the needed adjustments.' 



We are inclined to think that with taxation of over 300,000,000?. more than 

 350,000,000/. could be raised by loan, even without trenching (as was done in the 

 Napoleonic Wars with the result of a suspension of cash payments) upon those 

 bankers' funds which should be keipt liquid. But to do that we must call upon 

 our reserve supply of labour and produce more goods, particularly for export. 

 Therefore the nexus of ideas is public and private economy together with 

 increased production; unless we accomplish the last, we are not making the most 

 of our command of the sea. Probably if war expenditure does not exceed 

 1,000,000,000/. per annum this country could finance this almost altogether, if 

 not altogether, by taxation and loan, but the national income would need not 

 to fall below 2,000,000,000/. ; we should have to take over 20 per cent, of that, 

 and under the conditions indicated we could lend, say, 450,000, 00<J/. per annum, 

 possibly more. But the sacrifice involved in the marginal taxation would be 

 extremely great and the marginal borrowings would be raised at a high cost, 

 thus it would probably be cheaper on the whole to float external loans of 

 moderate amounts. The problem is, in fact, whether there is a balance of 

 advantage in obtaining the marginal 150,000,000/. or 200,000,000/. of annual 

 war expenditure (in the event of a long war) from British or from external 

 sources. 



VI. The War and the Foreign Exchanges. 



The inquiry into the effect of the War upon the Foreign Exchanges may 

 conveniently be divided into two periods. The first of these covers the few 

 weeks immediately succeeding the outbreak of war, when the exchanges 

 throughout the world with hardly an exception suffered complete disorganisa- 

 tion, from which they gradually recovered as the first shock spent itself and 

 emergency measures were taken to ameliorate the existing financial stress. 

 The second period displays the gradual cumulative effect of war conditions 

 and war expenditure upon the financial relations of each of the combatant 

 nations with its Allies and with the principal neutral countries, an effect which 

 in the case of this country has only now begun to attract serious attention. 



With regard to the first period it is beyond doubt that if everyone had kept 

 his head and had correctly gauged the future, the collapse of the exchange 

 machinery could have been avoided. When we remember, however, that the 

 outbreak of war took the financial world by surprise and that there were few 

 precedents to guide men in such an emergency, it is not surprising that mis- 

 takes were made. 



Two circumstances have contributed to make London the financial centre 

 of the world : (1) it ha-s been for generations the one absolutely free gold 

 market, and (2) tho Bank of England has always been willing to cash its notes 



