December 20, iqi; . LAND & WATER 
The Finance of the War 
By Harold Cox 
13 
IN' the first War Budget which was submittod to the 
House of Commons Mr. Lloyd George, who was tlicu 
Chancellor of the Exchequer, made au eloquent speech 
on the necessitv for raisini; a very large proportion of the 
cost of the war out'of re\enue to avoid the disaster of having 
to impose fresh taxation in time of peace to meet the burden 
of war debt. He followed up this appeal by proposals which 
in the then current financial year, u:)i4-i5, did not provide 
even suflicient additional revenue to cover the anticipated 
falling off in revenue owing to the war. Tln^ following Ma\- 
Mr. IJoyd George i)roduced a second War Budget, and made 
another" speech on the necessity for immediate financial 
sacrifice on the part of those at home in order partly to 
balance the sacrifice of those who had gone to fight. Mr. 
j.lovd George apparentlv thought that these excellent senti- 
ments aloue sufticed to meet the whole financial situatimi, for 
he proposed no further additions to ta.xation. 
.\fter that nothing was done for many months, though the 
Citv of London and manv private people pressed the Govern- 
meiit to take adequate steps to deal with the finance of the 
war. It was not until September i()i5, that the- new Chan- 
cellor of the Exchequer, Mr. McKenna, introduced a new 
War Budget. The country was then fully prepared for a 
\ery high rate of taxation. An income-tax of 5s. in the I 
was anticipated ; Mr. McKenna proposed 3s. (xl. His other 
l)ropo5als, though iminensely in ad\'ance of those oi his pre- 
decessor-;, were still inadequate. His first Budget was, how- 
ever, followed by a second Budget in April i()i(), which made 
good some of the deficiencies of the pre%-ious September. The 
two together raised a very substantial \olume of revenue. 
The income-tax was brought up to 5s. in the /, with corre- 
sponding additions to the super-tax : the scale of exemption 
v.-as lowered from £'rbo to /1.30, so as to obtain a very consider- 
able increase in the number of income-tax payers ; and abpve 
all there was established the Excess Profits Duty, which has 
proved one of the mainstays of our war revenue. In the 
current year, without the addition of 20 per cent, to the rate 
made by Mr. Bonar Law in May last, the E.xcess Profits Duty, 
as established by Mr. McKenna, is estimated to yield 
/i8o,ooo,ooo. In addition, very considerable increases were 
made in September, 1915, and April, 1916! to. some of the 
taxes on popular forms of cxptmditurc. i ' " 
Apart from Mr. McKenna's two Budgets, practically nothing 
has been done to give effect to the principle so eloquently 
laid down by Mr. Lloyd George that the present generation 
ought to provide, out of current revenue, a substantial 
portion of the cost of the war. Instead, during the past twelve 
montlis, the Government has been pursuing a policy which, 
has greatly added t(> the cost of the war, while at the same- 
time encouraging nnnecessarj' pri\-ate ex]>enditure. This 
•statement does not refer only or primarih- to the hideous 
waste involved in the needless multijilication of Government 
officials. It refers especiallv to the policy of financing the war 
by .means of currency inflation instead of imt of th(! savings 
f<f private individuals obtained either by taxation or by 
borrowing, h'or reasons which it is impossible to explain 
in detail here, when the Go\ernnient liorrow^. through the 
Bank of England or through })rivate bankers, the jMocess 
tends to expand the effective currency of the country, and by 
thus making more money available tends to force up prices. 
The same results ensue when the cmrencv is inflated through 
the issue of currency ncHes. The public generally has not 
vet observed that nearly jr2oo,ooo,ooo cuiTi'ncy notes have 
now been issued with an extremely meagre backing of gold. 
By making money cheap the Go\ernment makes comniodities 
even dearer than they would have been if the currency had 
not been ijjflated. 
Equally mischievoiis has been the way in which the 
Government has dealt with the claim of wage^arners 
for additional wages to meet the additional cost of living. 
This claim is a thoroughly sound one so far as the 
)joorer wage-earners are concerned. It would be . a cruel 
thing if viiile the country taken as a whole is extremely 
rich, tjie \ery poorest cla.sses should be reduced 
almost to star\'ation point by the rise in the cost of 
ll\ing. This problem ought to have, been met, and has 
indeed partly been met, by dealing specifiially with the very 
poor. Old-age pensions have; bi'en increased by 50 per cent., 
and in certain branches of the Civil Service the lower wages 
have been raised, while leaving the higher \\ages as they 
stood before. A minimum wage has been decreed for farm 
labourers. I'nffjrtunately, this sound principle has not been 
followed in dealing with large bodies of workpeopli' — muni- 
tioners, miners, and railwaymi-n. In their cases the increased 
'•c<<i of livintr has been met. not bv giving the largc'^t lionus 
to the poorest persons wlio suffer most, but by gi\ing a bonus 
in the shape of a percentage on wages, with the result that the 
best paid men get the biggest po\erty allowance. The result 
has been an enormous and entirely unneces^avv increase on 
the civilian side of the cost of the war. 
Limiting Prices 
Equally serious in its results lias been the policy adopted 
of trying" to limit prices. Even to a politician it-ought to be 
obvious that when supplies arc falling short, the sounil mcthoil 
of dealing with tlie situation is to allow prices to rise as high 
as they \\ ill, both in order to check consunii)tion and in order 
to stimulate production. The resulting hardships to the very 
poor can and ought to be dealt with as abo\e indicated bv 
special measures" on their behalf. The well-to-do, whether 
thev be wage-earners with increased wages or professional 
men with reduc.'d incomes, ought to be ccjntent to face the 
increased cost as part of their share of the burden of war. 
h'or if the other method— the method of the Government- 
is followed, the inevitable result is to increase consumption 
and reduce production, thus aggravating the evil. The 
shortiige from which we are suffering to-day, and which will 
probablv be followed by a still greater shortage in the near 
future, is partl\- the result of the policy of checking prices in 
obedience to popular outcry, and regard.loss of the true 
interests of tlK' nation. 
The truth of this proposition is plainly visible wheir we look 
at articles of home production like milk. The reduction in the 
ouJ;put of milk is the direct result of the folly of tlie Govern- 
ment in fixing milk prices at so low a figure that farmers 
prefer to sell their cows rather than to go on producing milk. 
The same sceiuence of cause and effect, though less clearly 
visible, has been operative in commodities imported from 
abroad. It may be added that this policy of price limitation hUs 
not even achie\ed a paper success, which is jierhaps the only 
kind of success its authors hoped to secure. In a recent 
speech in the House of Lords, Lord Milner chanted a song of 
triumph wliile fl(>scribing the achievements of the Food Con- 
troller in the previous three months in bringing down the 
general average of prices by some minute percentage as com- 
pared with the earlier figure. \Mien, howe^•er. at the end 
of the debate he was challenged to justify his figures, he had 
to confess that the whole of the average reduction which he 
attributed to the achievements of the Food Cpntroller, was, 
in fact, attributable to the expenditure of £40,000,000 out of 
the public exchequer in artificially lowering the price of 
bread. It is a \?i^ price for the nation to pay in order that a 
Minister may boast of a fractional reduction in average prices. 
Undoubtcdh- the Government was compelled to dcil with 
the political situation created by the outcry against " pro- 
fiteering," an outcry largely stimulated by some of the 
members of the Cabinet. But theright way to deal with that 
problem would have been to examine, through the mechanism 
of the income-tax and the excess profits duty, the profits 
made by all dealers in food, wholesale and retail, and to com- 
pel them to yield np to the State tlie greater part of what would 
otherwise flow into their private pockets as a result of tlid 
economic situation created by the war. If this course Imc 
been pursued, the rise t)f jirices would have checked con- 
sumption ; it would also have increased i)roduction ; and 
it would in the third place, have yielded a large r<-venne to 
the State, more than suflicient to cover any necessary allow- 
ances to the poorest classes. 
Owing to the fact that the Government has preferred 
popularity-himting to sound finance, the financial situation 
of to-day is perhaps worse than at any jx-riod since the war 
began. 'Mr. Bonar Law makes. repeated statements to , the 
House of Commons, in the course of which he reels off multi- 
tudes of figures which do not tally with one another. But 
he has done nothing more; During the twelve months that 
he has been Chancellor of the Excjiequer, the daily expendi- 
ture upon the war has increased by well over a million 
]-)ounds a 'dkv, probablv not- less than £400,000,000 a 
year- towards meeting "this increase Mr. Bonar l^aw has 
provided extra taxation which he estimates will yield the 
miserable sum of <;2(),ooo,ooo a year. 
.\s to what is the proper i>roportioii of war expenditure 
to be met out (/f current re\enue as compared with that 
raised by borrowing, interminable discussion is i)ossible. 
No final conclusion can ever be reached because no solid basis 
exists for forming a judKinent. But this can be saul with 
c(mfidence. that as a war continues the amount of money to 
' be raised by taxation ought i)rogr(;ssively to be increased. 
In the early days of war a \ery high scale of taxation might 
