How to Pay for the War

An Essay on the Financing of War

Evan F. M. Durbin

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9780367149895
• eBook ISBN: 9780429620331
• Edition: 1
• Topic: History
• Subtopic: World History
• Index: History

Originally published in 1939, this book examined how to finance the war, including chapters on the methods of industrial mobilisation and government borrowing and the growth of money income. During the course of the year 1936, when the probability of another war with Germany became exceedingly great, a group of six persons interested in the problems of financial policy began to meet, and the results of the discussions that took place between them are embodied in the present work.

CHAPTER 1
THE PROBLEM OF INDUSTRIAL MOBILISATION

§ 1. INTRODUCTION

MODERN warfare is a great industrial enterprise. The principles of scientific organisation, applied to production in the course of the Industrial Revolution, have spread over the larger part of the world and have deeply influenced the technique of war. Men fight with machines ; and the strength of their armoury depends, in large part, upon the quantity, the efficiency, the rapid mobilisation, and the wise economy, of their financial resources.

There is therefore no more important question than that of economic policy—no more important arm than that of industry, commerce, and finance.

Moreover, the longest and most ruthless wars do not last for ever and, despite the destructive power of the aerial arm, some form of industrial civilisation is likely to survive our present conflict. It is wise, therefore, to finance the war by methods that will reduce to a minimum the difficulties of resuming the normal economic life of the nations in time of peace.

The rapid increase of our belligerent effort to a maximum, and the future arrival, at however distant a date, of peace, are the two main considerations that should guide our choice of policy.

§ 2. THE PROBLEM OF INDUSTRIAL MOBILISATION

The main economic problem of war is simple to state. The nature of it is familiar to all economists.

The factors of production—men, raw materials and machines—possess in greater or less degree the quality of productive mobility. That is to say, they can be used to produce a number of different things. The fitter can mend a cradle or the fuselage of a bombing aeroplane. Raw cotton can be used for aprons or for dynamite. A shipping yard can build a pleasure steamer or a submarine. In order to prosecute the war efficiently the industrial resources of the nation must be diverted from the employments, and finished commodities, valued in time of peace to those that are useful in time of war. This diversion is the process of industrial mobilisation.

Two points of importance follow this simple reflection :

1. The cost of the war, measured in commodities, consists in the goods and pleasures that could have been produced by the economic resources of the nation had they not been mobilised for the struggle.

The true cost of war, it is scarcely necessary to say, is to be found in the immeasurable suffering of the unfortunate peoples who participate in it. But the price of fighting, in the narrow economic sense of which I am writing, appears in the contracted output, or reduced public consumption, of certain of the amenities enjoyed in peace-time. The saying that “you cannot have your cake and eat it too” summarises one of the most obvious, yet profound, conclusions of economic theory ; and epitomises my present point. The cost of war, so defined, is inescapable. Whatever the financial devices that we employ, this price will have to be paid.

There is one exception to this generalisation. In so far as the financing of war absorbs men or machines that, apart from the urgency of the times, would have remained in voluntary or in-voluntary unemployment, the munitions of war are obtained without any corresponding cost, except that of idleness. But, as we shall see in a moment, it is impossible to suppose that any important fraction of our needs could be met in this cost-less way. At the outbreak of war we had less than 10% of our registered labour out of work, and even if we added to this figure some reasonable estimate of those working upon short time, the creation of full employment could not provide more than 15–20% of our present real income for the prosecution of the highly industrialised warfare, in the first stage of which we stand.¹ We shall need to use a far larger proportion of our resources than that before any victory is gained.

We must therefore pay for the war, in real terms, by the loss of the products, consumption goods and machines, that our industrial resources could have produced if they had not been called away to the sorry manufacture of death.

2. A second consideration follows naturally at this point. The cost of war, just as it is largely paid out of commodities taken from normal consumption, must also in very great measure be paid for by the sacrifice of commodities in the present.

A great deal of nonsense was written in the last European war, and is already appearing again, about “spreading the burden of the war over time”, or “distributing the cost of the war between present and future generations”. Such a hope, if hope it is, is very largely illusory.

The war must be fought with weapons that are manufactured now. They must be made with the factors of production that would otherwise serve the needs of the present time. It is impossible to fill shells with the high explosives of the future, or to build aeroplanes with the hands of our grandchildren. We can only meet our own needs with our own goods.

Again there is an exception to this generalisation. Some of our current resources are used to replace the machines that are becoming physically or economically useless, and to add to our stock of new machines. These factors of production can all, in theory, be released for the purposes of war without reducing the consumption of those now living. In an advanced economy this margin of capital construction, corresponding to the desire of the public to save, may be very considerable. In so far as future generations are supposed to benefit from the accumulation of capital in the present, and in so far as they will have to utilise their own resources in the future to make good the impaired inheritance that we shall pass on to them, it is not wholly nonsensical to speak of sharing the burden of the war with them.

But the point is not of great importance. By whatever method the war is financed, heavy inroads will be made upon the savings of the community and the resources that we shall need will greatly exceed their total. Moreover the machinery that will be bought with the money obtained from current savings will be available, at least in large part, for the uses of peace and the benefit of those who come after us. The quality of mobility that makes it possible to organise our industries to meet the needs of war will enable them to be adapted once again, when the war is finished, to the requirements of peace. Industrial mobilisation, if wise policies prevail, can be made a reversible process.¹

It is of some importance, however, to establish this point clearly, since it is frequently used to confuse the discussion of the relative merits of the methods whereby the industrial mobilisation might be organised.

Whatever method is finally chosen, the heart of the economic problem of war will remain the same : to mobilise the industrial resources of the nation behind the balanced war effort of our armed forces, and to bear the cost of reduced consumption in the present time.

§ 3. THE PROBABLE DIMENSIONS OF THE NECESSARY MOBILISATION

Before I discuss the relative merits of the methods available for economic mobilisation, it is of interest to consider, for a moment, the size of the movement that may be necessary.

The only available evidence is that arising from the last war.

It is, of course, quite impossible to know whether the present war will require a larger or a smaller fraction of the economy to be brought to its service. The increased complexity of the weapons with which it will be fought suggest that a larger proportional mobilisation will be necessary. On the other hand, it is at least possible that the armies in the field will be smaller and that their maintenance will be less costly now than then. As there is no basis for accurate prophecy we can only assume that the necessary industrial effort will be of roughly the same size.

The industrial mobilisation effected by this country in the last war can be roughly assessed by estimating the proportion of the national money income spent by governmental agencies, directly and indirectly, upon the prosecution of war. The sources for such an estimate are set forth in detail in the Statistical Appendix.¹ They are far from complete and the calculation is therefore exceedingly uncertain. I simply offer it as a mere guess, but the only guess that can reasonably be made.

The money income of Great Britain was estimated to have been £2,250 m. in 1914² and £5,000 m. in 1919.³ Supposing that there was a smooth rate of growth throughout the period 1914–1919—itself a large assumption—we get a total income of £14,000 m. for the period of hostilities (1914–1918), and a total of £19,000 m. for the full period of war finance (1914–1919).

During these years the National Budgets— accounting for the expenditure of the central government on all purposes—amounted to £7,000 m. for the period 1914–1918, and to £9,500 m. for the period 1914–1919. In each case they are just one-half of the total income of the nation. If we take a narrower definition— that of war expenditure, as distinct from public expenditure—the total outlays on the supply services came to £6,300 m. and £8,550 m. for the two periods.¹ These sums represent 40% of the national income in the years of war, and 45 % during the whole period of war finance.

We shall not be wildly wrong therefore if we proceed upon the assumption that Government expenditure was ultimately responsible for the direction of half our economic life during the war of 1914–1918; and that the military campaigns of those years required 40% of our productive power to support them. This conclusion is borne out by a cursory examination of the figures of employment. At the time of our greatest enrolment we had 6 millions in the armed forces of the Crown and the services auxiliary to them.² At the same time we employed $1\frac{1}{4}$ millions in the direct manufacture of munitions.¹ We had therefore mobilised $7\frac{1}{4}$ millions for the immediate execution of military plans. The total number of persons gainfully employed, as an average through the war years, was 18 millions. Once more we arrive at a figure of 40% as a measure of the scale of mobilisation required by modern warfare.

It is an impressive total.

In making any application of these figures to the problem now confronting us, one important difference between our position then and now must be briefly considered.

In 1914, despite the fiercely contested Budget of 1909, public expenditure only accounted for about 12% of the national income. In the years before the present war, that percentage had been doubled. The payments of central and local governmental authorities amounted to nearly 25% of our money income.²

The arithmetical consequences of this fact look rather terrifying. If we must mobilise 40% of our income for this war ; and if no substantial economies can be effected in the expenditure upon non-military activities by the State, then the government must absorb and emit 65% (25% + 40%) of all our income payments!

The position is not, however, quite as bad as it looks. In 1914 private individuals directed the expenditure of approximately 90% of our money income. During the course of the war they were persuaded or forced to sacrifice 4...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Dedication
• Table of Contents
• Table of Section Headings
• Preface and Introduction
• 1. The Problem of Industrial Mobilisation
• 2. The Methods Of Industrial Mobilisation
• 3. Government Borrowing and the Growth of Money Income
• 4. How to Finance the War
• 5. The External Problem
• Conclusion
• 1. New Forms of Taxation. H.T.N.G.
• 2. Statistical Evidence About the Nature of British Finance in the Last War (1914–1918)