BY K. T. SHAH

The financing of a great war in modern times, of the scale of the one now raging in Europe, is a most complex problem. All past precedents are of little avail in solving that problem in our own day. For war expenditure today is not merely payment for troops and their maintenance and equipment while on active service; it also involves a whole series of industrial activities and utility services, mobilised and directed for purposes of prosecuting the war, for which very little past experience of previous wars would provide any analogy. The production of munitions, including guns and shells, ships and planes, cars and wagons, food and clothing, drugs, medicines and hospital appliances of all sorts, transport and communications of all types, and actual equipment of fighters and their auxiliaries of innumerable kinds, presupposes a vast network of modern industrial organisation, which is further emphasised by the methods of totalitarian warfare adopted by the enemy. And even that does not comprise, at least so far, the requirements of chemical and bacterial warfare, and the measures of defence needed against them, which must be held in reserve, in case the other side makes one more in-road upon solemn international conventions. It is possible, moreover, on the background of a highly industrialised community, which can produce all or as large a section as possible, of its requirements, from its own resources leaving the minimum to be acquired or imported from outside. The problems, again, of this acquisition or imported from outside are a material part of modern war financing; as much as the industrial re-orientation that may be necessitated by the war is part of the same problem.

For this variety and complexity of the problem, figures, such as we frequently see published regarding war expenditure in England today, hardly convey anything like a fraction of the facts involved. For instance, in the financial year just closed, Britain is reported to have spent an aggregate of over £ 3800 million of which more than two-thirds may well be said to be for purposes directly connected with the conduct of active hostilities. Of these £ 3800 million, over £ 1400 million, or a little over 40%, is said to have been raised from the current resources of revenue; while the balance has had to be obtained in one way or another from local or outside borrowing. What proportion this outlay represents of the total national income is difficult to estimate, not only because of the statistical uncertainties regarding a Census of Production nowadays; but also because, thanks to the disturbance in the price-levels brought about by the War and its attendant reactions upon money and credit, and thanks also to our expressing this effort in terms of money, the figures given above have become misleading. To illustrate, the pre-war estimates placed England’s total national income at somewhere about £4000 million per annum; while today the corresponding figure is nearly £6000 million on the same basis of calculation. An overwhelmingly large proportion of this output is for purposes of destruction only; while in pre-war times a fair proportion of the national income represented a surplus of production over consumption, which was available for re-investment in further production effort. In the last pre-war year, roughly about £1100 million–or a little over 25% –were reported to been taken for purposes of expenditure by the National Government. A large proportion of this was really a mere transfer within the community itself from one set of pockets to another; Another considerable amount was also raised by local governing bodies, which also ended in the same manner–an internal transfer. At the present time, according to the statistics now made available, the outlay of £3800 million, out of a total national income roughly estimated at about £6000 million, without counting local taxation, represents nearly 65% of the total national income, disbursed through the National Government, and the bulk of it for destructive purposes. While in the last pre-war year somewhere about £3000 million may be said to have been left in the hands of the public for their own consumption, little over £2200 million may be said to be similarly left now to the public for their own use. In terms of percentages, while in the pre-war year about 75% of the national income may be said to have been left for everyday consumption by the public, now not more than 35% can be said to be so left. This means that not only is production controlled in all branches; but also consumption has had to be rationed and regulated in all items to facilitate the prosecution of the war.

But even these do not express the real state of affairs. A good deal of the £3800 million spent now, as against a good deal of the £1100 million spent in the pre-war years, is returned, in one form or another, to the British public, by providing services of employment expended by war needs. What is thus provided yields income to the people, which could legitimately be said to add to the people’s ability for consumption, or to improve the quality and utility of their consumption. The only portion which can be said to be strictly used up or lost; and so become a net deduction from the people’s own consumption, could only be that portion which is actually destroyed in war, and which was paid for by incurring foreign debt. As the debt due to America on account of the last war had ceased to be paid for since 1931, no item on this head could be regarded as a net deduction from the resources of the British people, in their pre-war national finance.

In the course of the present war, there is, no doubt, considerable destruction of property or income-yielding assets, like houses, factories, ships, and other means of production of new wealth. But a good deal of it may be said to be capital destruction, which, no doubt will react on the income-earning capacity of the people so affected; or which may manifest itself in the reduced consumption capacity of the same community. Such destruction of capital assets will leave a legacy far beyond the actual war, and cripple the productive capacity of the community in the years to come, of which little account can be taken at the present time.

On the other hand, even this may be a blessing in disguise–though very much disguised. Just because of this destruction, whatever is reconstructed to replace the assets so lost would be much more up to date, and, therefore, presumably more efficient and effective, than that has been destroyed. To take but one illustration: The great destruction of house-property in the East End of London largely affects that slum area which was a disgrace to the City of London. Its replacement, whenever it comes, would, it may be hoped, be of a much more decent and human kind. And the same may be said, following the analogy of German industrial reorganisation after the last war, of such industries and other means of production which are today suffering destruction because of the war, and which will have to be replaced, when the War comes to an end, by the most efficient equipment for the purpose then devisable.

This is, of course, not to say that War does not bring any real destruction! Or that it does not affect the productive capacity,–and, therefore, the general well-being,–of the community engaged in the war. But a nation in arms,–and that is what the British people as a whole are to-day,–has a potential fighting capacity, far more considerable than may be evident from a mere study of figures such as those given above. If the people as a whole are determined to make sacrifices of their personal comforts; if they are resolved to devote every spare ounce of their energy and capacity for waging the war to a successful end; if they have made up their mind to put up with any losses, or accept any substitutes for what they were accustomed to before the war; and if they do not object to the gradual though silent elimination of money economy from among them, it would be extremely difficult to say how long, in those conditions, a well-established community like the British may keep up the fighting operations, even though occasionally some such operations go against them. Needless to add, the psychological value of successful warlike operations is, of course, much greater for keeping up the morale and maintaining the fighting capacity, as was evident in the case of Germany last year.

In the case of Britain, moreover, a very considerable proportion of what is said to be spent for war today is only a transfer of the surplus wealth of the community through the channels of Government Departments from one set of pockets to another. Payments made on account of wages or salaries to the fighting troops, or allowances given to their families, or to civilian defence forces, or by way of insurance against destruction of shipping, factories, houses, etc., or even on account of such items as building up of new factories and workshops, needed for the conduct of the war and engaged for the present exclusively in war work, is really no loss, in the ultimate analysis, to the community collectively–except, of course, so far as any capital asset has literally been destroyed as a consequence of warlike operations. The only real deduction which must be made from the British national income of today–apart from the loss of capital assets, which may be provided for by some sort of insurance arrangement, and the loss spread over a much larger space of time,–is in connection with the amounts spent in buying warlike ‘material’ from outside. Wherever an actual payment of such a kind has to be made, and the commodities thus acquired are intended for and used up in destructive operations, that would represent a net deduction from the national wealth, which must affect the aggregate wealth of the community un-questionably.

If the national ability to produce new wealth in the future is not to be unduly affected by this inevitable destruction, payment for this foreign import must be made, either from Britain’s own current production, or from her accumulated wealth of the past. The former course is now not feasible in any considerable measure, not only because of Britain’s own war needs; but also because of the immensely increased scale of such foreign imports. Even the "invisible exports" from Britain of pre-war days are not now available. The latter is thus the only course open to obtain such of the war requirements as cannot be produced within her own frontiers. It was for this purpose that, almost at the commencement of the present war, legislation was enacted in Britain to acquire, compulsorily, the foreign securities held by British citizens, so as to make them available for paying for such imports, and so maintain the exchange value of the British currency unit. The protraction of the struggle, however, and the size and intensity of the demand, make even this course inadequate.

The scale of effort now needed would be excessive, even for a wealthy community like the British, and its effort may show signs of flagging, but for arrangements of the kind recently expedited on a large scale on the so-called Lease and Lend legislation of the United States. The details of payments, if any, which will have to be made, eventually, by Britain for the war material lent or leased by the United States, are not known. But it may be surmised, without too much violence to commonsense, that the actual process of liquidating these obligations would be far more novel and indirect than any that has ever been attempted in the past. Paymems in kind such as the recently effected lease of naval bases for the United States on British possessions in the Atlantic may assume very much larger dimensions; and so modify the incidence of the burden now being incurred by lease or loan. If moreover, we are to trust the recent declarations of such personages as the Duke of Windsor, it seems unlikely that the bill would either be presented by America in full; or if presented, that it will be liquidated in cash in the old-time orthodox manner.

Whatever that may be, war-financing, as carried on in England today, has attempted to raise as large a portion as could conveniently be raised from the current revenues of the country by sharp increases and extensions in taxation. Only that part of the war expenditure, which could not be so covered by tax increases, is met from borrowing, or by passing on a portion of the burden to the generation to come. This is, of course, not to say that every possible penny is being raised from the current income of the community by means of taxation, while only the unavoidable is raised by borrowing, or by passing on a portion of the burden to the next generation. Such margin as there still remains in the current income of the community, which may be acquired by taxation for purpose of the National Government, will very likely be trenched upon in the next budget to be presented to Parliament after Easter. On the other hand, the scale of operations is growing; and so too its costliness. Borrowing may, therefore, have to be resorted to in a like or even greater measure in the next year of the War. Those, however, who have the conduct of the British war finance in their hands cannot be unmindful of the fact that, however necessary such borrowing may be at the present time for meeting part of the war expenditure, borrowing would still more be needed for post-war reconstruction, not only because of the absence of any capital reserves under war-time necessity; but also because of the need for industrial reorganisation and replacement of destroyed income-yielding assets, to which reference has already been made above. If, therefore, the post-war problems of reconstruction are not to be complicated unnecessarily by war-finances today, every care must be taken to see that the national effort, in the years following the war, is not burdened unnecessarily because of the exacting needs of the present moment.

March, 1941.

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