A Fraudulent Standard

CHAPTER XII

HOW THE WAR MIGHT
HAVE BEEN FINANCED



IN the light set forth in the preceding chapters, it would be difficult to conceive a more fantastic system than the Governmental methods of finance.  Let us put the situation in simple language.  A vast amount of money, credit and securities are found necessary to buy war material, food, clothing, munition workers’ labour, and other labour charges, and to meet soldiers’ allowances, pensions, etc., etc.  These necessities may be divided into three different classes.  First, something is needed to pay neutral countries for war material, food, and other commodities.  This may be (a) gold, (b) American and other foreign securities, bonds, shares, etc., (c) services, such as shipping, etc., (d) exports, i.e., commodities, cotton and wollen goods, etc.  Second, material assistance is needed by our Allies.  This assistance is mainly in munitions, coal, metal and other goods, as well as maritime services.

A certain amount of general purchasing power is also required, which is probably paid in gold or orders on the Bank of England.  Third, by far the greatest sum is required for settling home accounts, paying munition workers, manufacturers, shippers, merchants, etc., etc.

How is all this obtained ?  There are three methods.  First, taxation ;  second, the use of the national credit in the form of Treasury bills which are discounted at the bank :  these are exchanged for bank credit and are chequed out as required ;  third, loans.

Now, what resources does the Government have with which to finance its obligations ?  The Government has at its disposal the whole of the national credit !  In other words, the pledges it gives in the forms of bills, bonds, certificates, in return for the loans it is asking, are merely different forms of the national credit.  And this credit is represented by the national wealth, which prior to the war was estimated at somewhere between £15,000,000,000 and £20,000,000,000.

It is precisely the same credit against which the Bank of England has been allowed to issue £18,000,000 in legal-tender notes for many years past and which have circulated on a parity with gold.  Would not a Government cheque drawn on the Government bank be as good as that of any of our Joint Stock banks ?  But it may be asked, “ What is at the back of such a cheque ? ”  Precisely what is at the back of the cheque of any subscriber to the War Loan who borrows credit from his bank on Government securities.  Government bonds, Consols, Treasury bills and Treasury notes are nothing more than evidences of the national debt and credit.  If our bankers are willing to issue their credit on such securities, is there any reason why the Government should not use its own credit direct for carrying on the war and save the nation £300,000,000 per annum ?  The Government is to-day using second≠hand credit, viz., bank credit issued against the national credit.

Of course, in the settlement of foreign accounts, we must pay in what is acceptable abroad, viz., gold, goods, securities, or services.  But for all domestic accounts, we could have employed the national credit, which would be redeemed gradually by taxation, just as it must be in any event.  But we should have saved ourselves the enormous burden of interest charges !

We have already seen that the War Loan, when stripped of all its disguises, is in reality a contribution donated by the British people.  Both subscribers and non-subscribers will eventually be compelled to pay the loan and interest charges in taxation, they, their children, their children’s children to the third and fourth generation, and possibly much longer.  And until the principal is re≠paid or reduced considerably, the nation will pay the amount of the loan every twenty years in interest charges without reducing the original debt by a single penny !  This would be no particular hardship if every taxpayer had the same income, was taxed at the same rate, and had contributed equally to the loan, and provided also that the loan had been entirely subscribed by the British taxpayers.  If all these conditions existed, the interest paid to each subscriber would constitute merely the repayment of his special War Loan taxes, and, as I have shown, it would have been cheaper in the long run for the people to have subscribed to a non-interest bearing loan.  But none of the conditions mentioned exist.  Both here and in the U.S.A. wealth and taxation are the limit of inequality.  Nowhere are they more unequal.  And the Government have accepted millions of money from foreign subscriptions.  Hence the loan will constitute a very heavy tax upon British trade and industry, and the whole burden must be shouldered directly and indirectly by the producing classes.  Our great insurance and credit institutions have subscribed enormous sums to the present loan.  The Prudential Assurance Company is stated to have subscribed £25,000,000, the interest on which will amount to £1,250,000 per annum—probably for the next century—until the principal is paid.  Now the Government’s participation of the national credit would have meant the taking of a proportional amount of everybody’s credit, or rather that of the collective productive capacity of the whole nation.  So that no one firm or individual could possibly have said, “ I subscribed so much, hence I am entitled to so much interest.”

But it may be asked what other means of financing the war were available ?

The war means a vast consumption of wealth, goods of every description which some one must provide.  How could the Government procure them except by borrowing ?  Let us take a somewhat analogous case.

Let the reader suppose himself a constant creditor or shareholder in one of the great departmental stores where every conceivable commodity which he requires for his house and his family is kept on sale.  Let us suppose that the annual sum due to him by the said store is £2,000, which is usually paid him at the end of each year.  Now there are two methods by which his income may be paid to him.  First, wholly in cash, and second, partly in commodities and the balance in cash.  For it is unlikely he would wish to spend all his income in goods.  Through extravagance and difficulties, he finds himself in the month of January short of money.  He consults his two friends, one Mr. Orthodox Finance and the other Mr. Common Sense.  Finance offers to discount his friend’s note for twelve months to tide him over.  “ You’ll have £2,000 by the end of December next and can then repay me.  As you only need £1,000, the loan will cost you a trifle—say £50.  Give me a bill for £1,050 and you can have the £1,000 at once ! ”

He then consults Common Sense, who asks him what he needs the money for.  “To buy food and other things for my home,” is the reply.  “ Where do you deal ? ” asks his friend.  “ At my own stores, where I own many shares and am a constant creditor.”

“ And do you mean to tell me that you think of borrowing money to pay for goods from your own stores ?  Why on earth don’t you have an account opened since you are a constant creditor, and give receipts for all the goods you need ?  At the end of the year your share of the profits will be paid you, less the amount of goods you have ordered.  Instead of having to borrow and pay £50 interest, you need borrow nothing and thus save your income ! ”

Now the Government stands in the position of a constant creditor towards the people to the extent of whatever expenses are needed to govern and safeguard the country.

I need hardly say that because Mr. Orthodox Finance has been the British Government’s sole adviser since the days of Pitt, the British taxpayer has been compelled to pay untold millions uselessly, for which the nation has received no equivalent in return.  The Bank of England has been like Mr. Orthodox Finance—always ready to advise and discount the Government’s bills—for a consideration !

My illustration is, I am well aware, crude and faulty in certain ways, but it may serve to give the reader some faint idea of the costliness of our tortuous financial methods.  Our war expenses are doubtless more than could be fully paid out of current income, necessitating a postponement of the settlement of a large portion.  But the system has always been the same in times of peace.  If the Treasury ran short before the end of the fiscal year, instead of employing national credit direct, the Treasury has had its bills discounted at the Bank of England, and the bank shareholders have benefited at the expense of the taxpayers.

This is mainly because the Government has never provided itself with a proper national banking system, and has therefore left the nation a prey to the financial wolves.

Supposing at the time of the great bank crisis in July, 1914, the Government had taken over the Bank of England and converted it into a real National Bank.  It had as much right—indeed, a far better right and reason—than it had to take possession of the railways and munitions works.  The nation would then have had all the machinery and organization necessary for utilizing the national credit.  The bank would have issued all the Treasury notes required for trade and business generally, and could have called in all the gold in circulation in exchange for the notes.  It would then have been stronger in every way than all the Joint Stock banks throughout the country.  The Government could have gone further and absorbed every bank in the United Kingdom, bringing the entire system under one central control.  This would have minimized the necessity for legal tender and enabled the nation to conduct all its home trade by cheques.

Now I have shown that the War Loan must necessarily consist of bank credit, mere book entries, backed of course by the wealth of all the subscribers.  But since the Government has—under present emergencies at any rate—the right to commandeer the whole of the nation’s wealth for the defence of the country, all it had to do was to open credit accounts in the banks’ books against the whole of our national wealth.  The entire loan would then have been created without spending a penny upon advertising, without having to pay a penny in interest charges, and without shaming the British people by such pitiful appeals as those in Trafalgar Square, in which the whole world was informed that “ Germany is watching,” one interpretation and a most obvious one being, that British patriotism is at such a level that we need watching, above all by our enemy !

One wonders what kind of people the Government advisers must be to hold the British public at such a low estimate !  There are doubtless thousands of people in the country who would refuse to subscribe to a national loan, even during the present crisis, without the offer of some bribe in the shape of interest.  But it is unthinkable that a nation whose sons, brothers, husbands, and fathers, have offered their lives and fortunes by the million, would refuse to contribute their wealth, or a substantial portion, freely without a cent of interest had they been asked.  It sounds incredible that a father would give his sons’ lives for the defence of his country and refuse to part with a portion of his bank account !  The priests in the Temple of Usury cannot imagine any one placing his property on the same low level as human life, and therefore regard the contribution of property without the interest≠bearing bond as unthinkable, even where the contribution is wholly for self-preservation.  They are like the lady in the farce who, when held up by the highwaymen, cried, “ Take my life, but spare, oh, spare my diamonds ! ”

Now, by creating the loan as I have suggested, the country would have avoided the enormous annual interest charges, which will probably exceed £300,000,000 before the war is over.  Less than one year’s savings would have sufficed to buy out the whole of our banks and give the nation supreme ownership of a system worth more than all the gold mines of the world !  And the national ownership of the banks would have provided the people with the most effective means of victory for the coming economic war, they could possibly possess !  It would have settled the question of a Trade Bank, which the bankers are doing their best to shelve, for ever.  It would have been a mine of wealth for this and future generations, enabling us to repay the war costs within an appreciably short time.  How great a mine the Bank of England has been to its founders and shareholders may be gathered from the sums paid it by the nation for its services and interest on loans.  In addition it has been granted the privilege of issuing notes against a certain part of the National Debt, and has the use of the Treasury balances.  One hundred years ago Mr. Grenfell, a member of the House, called attention to the enormous profits made by the Bank in advances to the Government and in the management of the public funds.  In twenty years (since 1797) he said, their profits had been not less than £27,000,000 sterling !