British Experience for Americans
IT was Bismarck who once declared, when some one apologized for a mistake by saying that one must learn from experience, that he preferred to learn from other people’s experience. The United Kingdom is now completing its third year of quite unprecedented warfare, and it has had to learn a great deal from its own mistakes. The United States has even less experience of modern warfare than the United Kingdom had in August, 1914. It may save much by taking the fullest advantage of the British experience. The following suggestions have reference, not to military or naval operations, on which the public is necessarily imperfectly informed, but exclusively to the civil administration of a nation in war-time.
The Need for Personal Economy
Modern warfare proves to be quite extraordinarily expensive — not only much more costly than any previous warfare, but more so even than any one in Europe, statesman or economist, ever imagined. The great magnitude of modern armies and navies, the costliness of their pay and equipment, the unprecedented expenditure of munitions, the destructiveness of the guns and explosives employed, the extraordinary diversity and extent of the auxiliary services required — all this means a prodigious outlay by every belligerent government. Each month of the present war costs the governments concerned as much as the whole course of the Franco-Prussian War of 1870-71. In the first twenty weeks of the current year, the British government has paid out as much as the entire cost of its twenty years’ warfare against Napoleon a century ago. There is no help for it. The United States will presently find itself let in for an expenditure which would construct a new Panama Canal every six weeks. It will not have been at war many months before it will have spent as much as the whole cost of the Civil War of 1861-65. Hence the first, and in the long run the most important, question for the administrator is how, if the war lasts more than a few months, this colossal expense can possibly be borne.
Warfare has to be conducted strictly on a cash basis. This was the first lesson that the United Kingdom —which thought itself in 1914 unrivaled in financial strength, accumulated capital, and borrowing credit — had to learn. The power of governments to borrow does not solve the problem. War cannot be carried on by merely mortgaging the future, not because of any failure of credit in the ordinary sense, but because post-dated checks are neither food nor missiles. Even the wealthiest nation cannot feed the soldiers out of future harvests, clothe them in next year’s wool, or supply them with ammunition to be produced by a subsequent generation. What the armies and navies use and consume are the commodities which we have already in our possession, or which we are contemporaneously producing.
War involves, therefore, a diversion of consumption. What the soldiers and sailors eat and destroy is so much abstracted from the civilian population. This is the root of all war finance; and the nation which does not learn it is pulled up sharply, long before the government becomes unable to borrow, either by famine at home or by shortage of shells at the front. Germany, which found itself blockaded, has long since put its entire population on strictly limited rations, and has taken every scrap of rubber, oil, copper, and hundreds of other things required in war for the service of the army. It was a long while before the people of Great Britain, where such governmental restrictions would be much resented, could be made to understand that the only way in which the soldiers at the front could be kept supplied with food and munitions was by the civilian population at home voluntarily abstaining from spending its wages or profits, and thereby abstaining from consuming either the commodities needed by the troops, or the labor-force that might otherwise produce such commodities. It took a tremendous campaign of exhortation and instruction, carried on, not merely in the newspapers and by speeches, but also by house-to-house visitation of the people, rich and poor, before the British people could be convinced of the simple economic truth that every pound’s worth of food or clothes or petrol or service that was used by the civilian population, even if they ‘could afford it,’ was just so much abstracted from the supplies that were imperatively required at the front. Some people in all social grades still remain ignorant, and consequently unashamed of their spending. But taking the nation as a whole, it seems probable that the aggregate amount of its voluntary savings out of income is now three times as great as before the war. Whereas the nation then consumed, day by day, in mere living, four-fifths of what it produced, — the balance representing new investments of capital, — it is probably now consuming in civilian living not more than half of what it is producing — the balance going to the government, either in taxes or loans, to feed, clothe, and equip the army and navy, and provide the shells.
This is how it is that the unprecedented expense can go on. The question for America is, how soon will its hundred millions of people understand that they, too, will have to ‘do their bit’ by voluntarily restricting their customary personal expenditure on food, clothes, service, fuel, holidays, and so forth, however easily they can afford the expenditure. Only in this way, coupled with incessant production, can even the wealthiest nation maintain a great war.
Taxes or Loans?
To the government war means, not economy at all, but an endless and apparently limitless demand for money, to pay, not only the troops but also the ever-growing horde of contractors of all sorts, from whom it has to purchase the innumerable supplies that modern warfare requires. The government can get this money only by taxes or loans, and it always uses both resources. But it makes a most momentous difference to the future well-being of the nation to what extent war is paid for out of taxes or out of loans. Germany is paying for the war almost entirely out of loans, without increasing its taxation, except tardily and to a small extent. Russia, which began by very bravely sacrificing four hundred million dollars a year of spirit revenues, has been able only to put on new taxes to replace that income; and thus has had to rely on borrowed money for its fighting. France and Italy have striven valiantly to increase taxation, but have not been in a position to get much help from this source.
The United Kingdom alone among the belligerent nations has enormously increased its taxation from nearly all its sources of revenue, so that the government receipts for the ensuing year will be nearly three times those for the year before the war. To give only one example, a man with profits or dividends yielding him £3000 ($15,000) a year pays (a) an income tax (quite strictly enforced) of five shillings in the pound, or 25 per cent; (b) a supertax of about 5 per cent more; (c) deathduties on the capital value passing at death, averaging about 10 per cent, which is equivalent roughly to a 5 or 10 per cent additional income tax; and (d), if his income is derived from business, either an excess-profits tax amounting to 60 per cent of all the profit made over and above that of prewar times, or, in the case of an establishment making ships, guns, or munitions for the government, the whole of the profit in excess of 20 per cent above pre-war conditions. The income tax is now payable by persons getting as little as £130 ($650) a year. And the taxes on tea, coffee, cocoa, alcoholic drinks, mineral waters, sugar, petrol, and what not, are equally heavy.
Nevertheless, it is the very decided opinion of economists and financiers of all shades of political opinion, that the British government has made the mistake of not sufficiently increasing the tax-revenue, and of relying too largely upon loans. This mistake, it is very commonly held, will make the financial burden far more onerous, and far more crushing upon the country’s industry, than it need have been. It has also been unfair. ‘In my opinion,’ writes Professor Pigou, who succeeded Dr. Alfred Marshall in the Chair of Political Economy at Cambridge University, ‘the government has committed a very serious mistake in taxing so little and borrowing so much. When young men are compelled to give their lives, I see no reason why old men should not be compelled to give — and not merely asked to lend — their money; and I do not believe that, had the government dared to make that claim, it would have been widely resented or opposed.’
Indeed, the press has repeatedly made a similar demand. We have had the unprecedented spectacle, with the tax-revenue trebled, of newspapers reproaching the government for not taking more — not merely that organ of enlightened Collectivism, the New Statesman, but also the bankers’ own journal, the Economist, and the Times itself.
What every government needs to do in war-time is to pare down personal expenditure to the barest minimum that each social class can be induced to endure; and then to gather in, for the maintenance of the war, the whole of everybody’s surplus above that barest minimum. Theoretically, taxation should be so adjusted as to take from everybody all this surplus and no more. Practically, no system of taxation can be contrived to shave so accurately; and, accordingly, in order to avoid intolerable personal hardship, the taxes must fall well within this limit. But the nation at war is imperatively called upon, by all considerations of economy as well as equity, to put on a steeply graduated series of taxes, so devised and adjusted as to avoid trenching on the standard of life of the mass of the people while penalizing their luxuries; and, from the rest of the nation, to shave off, class by class, as much of the expenditure above bare subsistence at the class-level as can be secured without undue evasion or hardship — this taxation rising to 80 or 90 per cent of the income of the millionaires. Even the most drastic tax-system will leave many individual pockets of surpluses untouched, and it is these alone that the government ought to attract by offering favorable terms for loans. To borrow at high interest what could and should have been secured by an equitably graduated system of taxation is to rob the mass of the people for the benefit of the wealthy; and to put a double charge on the next generation in order to allow the rich men of the present to utilize the war to increase their possessions. This is the great economic mistake that all the European belligerents have made in their several degrees — most of them because their peoples would not or could not stand increased taxation; but the United Kingdom, in a lesser degree (though more inexcusably), because the Cabinet Ministers have been too closely in alliance with the wealthy classes to be willing to decide (or even to be able to understand the need) for the more onerous taxation that would have been alike equitable and economically profitable to the nation as a whole.
It is now for America to profit by the European experience. It will not be enough to double, or even to treble the Federal revenues from taxation. If America is wise, it will insist on the whole daily cost of the war being as quickly as possible levied as current taxation, — at least up to the amount that would be yielded by the heaviest possible taxation of luxuries, and a scientifically graduated income tax rising to 90 per cent of the largest incomes, — and thus pay for the war once only, and not also a second and even a third time in interest.
War Profits
Governments in war-time are the prey of every person who can become a contractor. They want, in a hurry, unprecedented quantities of every kind of commodities; they never know how to buy economically, and they have no time to think; and they are always made to pay through the nose. ‘No price is too high,’ said Mr. Asquith, ‘when honor is at stake’; and this was instantly made the motto of the contractors in a sense other than had been intended.
To check this extortion the British War Office has found itself compelled calmly to assume possession of all the wool, leather, and other materials that exist within the land; to supply these raw materials to manufacturers to be made up on a strictly defined scale of prices; and to control the entire output of the factories. A separate Ministry of Munitions has put up a hundred huge national factories, run by the government itself, for the production of every kind of munitions; and has made nearly five thousand of the most important shipyards and factories into ‘controlled establishments,’ working under strictly limited profits according to government directions.
All these protective devices will have to be resorted to by the American government in one or other form, whatever the Constitution may prescribe. But drastic as they are, they have not prevented the most extraordinary profits being made out of the government’s necessity. The American government has made itself acquainted with all the experience of the British government, and knows the need of saving itself from the most unscrupulous ‘profiteering.’ The American government knows, also, at what points these expedients have fallen short of success; and what the British government believes would stop the leaks. The nation ought to support the President in the most drastic action in the way of summarily assuming possession of all thematerials, products, mines, factories, ships, railways, shipyards, and machinery of all the kinds needed for supplying the government; leaving to be subsequently assessed and paid such equitable compensation (recouping only actual outof-pocket loss, and never paying for any foregone opportunity of making profit) as may be conceded.
But, after taking every known precaution, the American government will, nevertheless, find an enormous number of people making enlarged profits, as a result of the industrial and financial dislocations caused by the war. The British government — herein followed by the French, Italian and German governments — has accordingly imposed an excess-profits tax. Every person or corporation domiciled in the United Kingdom, making in any year profits more than £200 in excess of the pre-war average, is required to yield to the Exchequer 60 per cent of the excess, besides paying income tax and supertax on all that is left to him or to the stockholders. As an alternative, the shipyards and munition-making firms, nearly 5000 in number, are compelled to pay over to the Exchequer — as ‘controlled establishments’ — the whole of their profits in excess of the pre-war average increased by one fifth.
These taxes have been very successful, but their administration demands the highest official qualities, in scrutinizing accounts, in preventing hiding of profits in depreciation, new equipment, and reserves, and in determining the allowances to be made in respect of increased capital and the like. And, do what we may, we cannot prevent a large number of people from making fortunes out of the nation in its hour of need. Such conduct is now stigmatized in the United Kingdom as disgraceful; but it is nevertheless done by ‘ business men’ whom we have hitherto thought of honorable standing.
Soaring Prices
What makes war financially so calamitous to the wage-earners — who constitute everywhere from two thirds to four fifths of the whole community— is not so much the taxation as the way in which it enhances prices. In the United Kingdom food-stuffs are now, on an average, just twice as dear as in July, 1914, while bread has more than doubled. Rents of working-class dwellings were starting to rise in the same way, but — a useful hint to Congress — Parliament stopped this by making it a penal offense for any person to ask or attempt to enforce any higher rent for a dwelling under a specified annual value than had been charged for the dwelling before the war. Altogether, the cost of living for British wage-earners is officially computed to be from 60 to 70 per cent higher than in July, 1914. A dollar in Great Britain goes only as far as 60 cents did three years ago.
The trouble is that wages never rise either so promptly or so much as prices, so that the wage-earners always suffer in war the pecuniary loss of a larger percentage of their incomes than even the most heavily taxed capitalists. This means, to many millions of them in America as in Europe, a very serious encroachment on the actual necessaries of life. There is no economic calamity that a nation can suffer which is so disastrous to the community as a whole, so far-reaching and so lasting in its ruinous results, as a lowering of the standard of life of its wage-earners. Yet this is the national calamity which, in war-time, is perpetrated daily, as a matter of course, by the whole business world. It becomes therefore an imperative duty of the government to see to it that this dire peril into which war always brings a nation is, so far as possible, averted.
The British government has taken action, first, by raising wages, and secondly, by seeking to arrest the rise of prices. By public exhortation and private counsel, by governmental influence and social pressure, and finally by Act of Parliament, the British government has intervened actually to compel employers in nearly all industries to concede rises of wages, war-advances and war-bonuses — to the railway workers, to the workers in shipyards and munition factories, to every person employed in the whole engineering industry, to the couple of million women employed on all kinds of war-stores, to the million coal-miners, to all the government employees getting less than £150 ($750), a year, to the schoolteachers, the farm-laborers, and the rest. Altogether, it is estimated that the rate of wages has been increased in Great Britain, taking the whole wage-earning class, by about 20 to 25 per cent on an average. This falls far short of the increase in the cost of living; so that the rate of wages, measured by what it would purchase, has fallen considerably, under the influence of the war.
This will undoubtedly be the experience of America also if prices continue to rise. The intervention of the government to secure an adequate increase in wages otherwise than by strikes will certainly be required. If, as Mr. Gompers and other labor leaders have patriotically agreed, there are to be no strikes, it becomes imperative that the American government should intervene, and it is important, in order to prevent both a ruinous degradation of the standard of life and the spread of dangerous labor discontents, that enlightened public opinion, far from opposing such action by the government, should call on it to intervene promptly and effectively.
There will arise, in America as in Europe, a popular outcry that the rise of prices should be prevented. The British government has, like all other belligerent governments, actively intervened to prevent further advances by fixing maximum prices by law. It has been demonstrated, alike in Germany and in Great Britain, that this fixing of maximum prices is neither quite so futile as the economists have asserted, nor anything like so effective or advantageous as the man in the street believes. Alike in Germany and in Great Britain, it has been proved by repeated trial that any attempt to fix by law or by police action any maximum price short of what may be called the normal market value under the actual conditions of cost of production or supply and demand, is promptly nullified by a withdrawal of supplies from market, and by secret sales to those customers who are able and willing to pay more than the legal maximum. The shortage, so far as the mass of the people is concerned, is thus merely aggravated.
On the other hand, it has been equally proved that we cannot assume that commercial competition, if let alone, will insure that the rise in price shall nowhere be in excess of what is indispensable. The experience of the whole world has shown the advantage of a legally prescribed tariff for the fares charged by hackney carriages, in order to protect the customer, who happens to be imperatively in need of conveyance, from being mercilessly exploited. The same is true of food-stuffs in a time of scarcity. Thus, wherever the government controls the production or stocks, or can otherwise insure continuity of supply, there is a distinct advantage in fixing a maximum price, so as to prevent either the wholesale dealer or the retail distributor from adding more to the cost than the actual expenses of distribution. The British government has accordingly successively assumed the control of the railways and mines, of all the flour-mills, of all the merchant shipping, and of all the munition factories; it has made itself the sole importer of sugar and wheat, and has become an importer on a huge scale of meat, rice, and many other things; it has taken over all the wool, leather, copper, and other raw materials; its Ministry of Munitions is now three times as great in its turnover as the largest single industrial enterprise in the world, not excluding the most extensive American trust. And wherever the government controls the supply, it fixes in one way or another both the wholesale and the retail price of the commodity, so as to limit the advantage that any dealer can take of the urgent needs of the consumer. No one doubts that this policy has been extremely successful in preventing prices, at particular times and in particular places, from soaring sky-high; nor does any instructed person imagine that a ‘law of maximum,’ without control of supply, would be otherwise than ruinous to the poorer consumers.
We cannot learn that the systems of compulsory rationing which have been drastically imposed in Germany — the sugar-card, and the bread-ticket, the clothes-ticket, the boot-ticket, and all the other attempts to prevent persons with money from getting more than an equal share of scarce commodities — have had any success in preventing intolerable hardship among the poor, or in seriously interfering with the power of the rich to get whatever they choose to pay for. Experience does not warrant either Great Britain or America in resorting to this expedient, without government control of the supply. What has been successful in Great Britain in economizing supplies has been a widespread appeal to the whole nation to limit its consumption of wheaten bread (4 pounds per week), meat (2 1/2 pounds per week), and sugar (3/4 of a pound per week) to a prescribed maximum per person in the household; and to make up the necessary subsistence by the use of substitutes, such as fish, other cereals than wheat, and other vegetables than potatoes, of which the crop throughout all Europe has largely failed. More efficacious still has been the absolute government monopoly of sugar, secured at the very beginning of the war, and the drastic restriction of the total quantity allowed to be issued from store, the aggregate reduction being thus infallibly secured, and the retailers being left to share what sugar they obtained among their customers. It has been found useful, too, to make the wheaten flour go further by compelling all the millers to include both an increased proportion of bran and a certain proportion of other cereals. More drastic measures are near at hand.
In the main, however, the government has been unable to prevent a staggering rise in prices of food-stuffs, which now reaches close upon 100 per cent all round; and consequently its obligation to secure an adequate increase of wages has been recognized. The average increase of 20 to 25 per cent, to which the employers have been compelled, has been eked out by (a) the liberal scale of separation allowances paid to the dependents of all men called to the colors, and of pensions given to the discharged men, these two items now amounting to five hundred million dollars a year of direct government subvention; (b) the absorption into wage-earning industry, not only of all the unemployed men, but also of a large number of youths of either sex from 12 or 13 upwards, of women married and unmarried, and even of old men who had been superannuated — thus greatly increasing the number of separate wage-earners in the average household; and (c) the rapid spread of piece-work in place of time-work, and a general increase in the hours of labor, resulting, at the cost of greatly increased effort and strain, in a considerable increase in total earnings apart from any change in the wage-rate.
The outcome seems to be that, in contrast with all previous wars, and with all other governments, the British government has this time been, up to the present, fairly successful in staving off any general fall in the standard of life of its people — a notable result of the advance in the United Kingdom of economic knowledge and of democratic influence. It will be interesting to see with what success America tackles the very similar economic problem with which it is now confronted.
(To be concluded)