HOW TO PAY FOR THE WAR By JOHN MAYNARD KEYNES PRICED NET MACMILLAN AND CO., LIMITED ST. MARTIN'S STREET, LONDON 1940 GRE SHAM'S A.. D D.L M o- M&F/5" SCHOOL BOOKS HOW TO PAY FOR THE WAR A RADICAL PLAN FOR THE CHANCELLOR OF THE EXCHEQUER By JOHN MAYNARD KEYNES MACMILLAN AND CO., LIMITED ST. MARTIN'S STREET, LONDON 1940 Brethren, Friends, Countrymen and Fellow Subjects, What I intend now to say to you, is, next to your Duty to God, and the Care of your Salvation, of the greatest Concern to your selves, and your Children; your Bread and Gloathing, and every common Necessary of Life entirely depend upon it. Therefore I do most earnestly exhort you as Men, as Christians, as Parents, and as Lovers of your Country, to read this Paper with the utmost Attention, or get it read to you by others; which that you may do at the less Expence, I have ordered the Printer to sell it at the lowest Rate. It is a great Fault among you, that when a Person writes with no other Intention than to do you good, you will not be at the Pains to read his Advices : One Copy of this Paper may serve a Dozen of you, which will be less than a Farthing a-piece. It is your Folly that you have no common or general Interest in your View, not even the Wisest among you, neither do you know or enquire, or care who are your Friends, or who are your Enemies. (From the Drapier's First Letter—1724) PRINTED IN GREAT BRITAIN PREFACE This is a discussion of how best to reconcile the demands of War and the claims of private consumption. In three articles published in The Times last November I put forward a first draft of proposals under the description of "Compulsory Savings". It was not to be expected that a new plan of this character would be received with enthusiasm. But it was not rejected either by experts or by the public. No-one has suggested anything better. That public opinion was, as yet, not ready for such ideas, was the usual criticism. And this was obviously true. Nevertheless a time must come when the necessities of a war economy are realised; and there is much evidence for the belief that the public are not so behind-hand. Amongst the manifold comments provoked there were some valuable suggestions. In the revised draft here set forth in ampler detail I have taken advantage of these. In the first version I was mainly concerned with questions of financial technique and did not secure the full gain in social justice for which this technique opened the way. In this revision, therefore, I have endeavoured to snatch from the exigency of war positive social improvements. The complete scheme now proposed, including universal family allowances in cash, the accumulation of working- class wealth under working-class control, a cheap ration of necessaries, and a capital levy (or tax) after the war, embodies an advance towards iii iv PREFACE economic equality greater than any which we have made in recent times. There should be no paradox in this. The sacrifices required by war direct more urgent attention than before to sparing them where they can be least afforded. A plan like this cannot be fairly judged except against an alternative. But so far we have had no hint what alternative is in view. The Chancellor of the Exchequer has recently explained to the House of Commons that he is seeking to prevent a rise of wages by subsidising the cost of living. As an ingredient in a comprehensive plan, this is a wise move; something of the kind is recommended in what follows. As a stop-gap arrangement to gain time it is prudent. But taken by itself it is the opposite of a solution. In making money go further it aggravates the problem of reaching equilibrium between the spending power in people's pockets and what can be released for their consumption. The Chancellor has expressed agreement with this conclusion. I hope, therefore, that he will look with sympathy on an attempt to work his policy into a consistent whole. I have canvassed these proposals in many quarters and comment has reached me from all shades of opinion. I confidently believe that, put forward with authority, they would not be unpopular. No one is expecting to get off scot-free. The fault of my plan is that it asks, not too much, but too little; and it may look, a year hence, too feeble a beginning for a heavy task. Since one cannot rule out the possibility that we shall drift or adopt half-measures, I will PREFACE v venture on a prediction of the result of this. I discuss below the mechanism of inflation; and that, I suppose, is what most people are expecting if we shirk. But except at a slow rate and as the second stage of deterioration, this is not my immediate expectation. There is a passage in the "Golden Bough" where the proneness of primitive man to generalise on the basis of a very few experiences is amusingly illustrated. Men like dogs are only too easily "conditioned" and always expect that, when the bell rings, they will have the same experience as last time. But the psychology which provoked previous price-inflations is not present to-day. So far from there being a natural tendency to raise prices in response to an unsatisfied demand, manufacturers and retailers are as reluctant to charge higher prices except in response to an actual rise in cost as the public are to pay them. They have no desire to flout public opinion and what appears to be the intention of the authorities. They are doubtful how they stand under the Anti-Profiteering Act. With the Excess Profits Tax they have less inducement than usual to maximise profits. In short, it eases their consciences, saves them trouble, and does not even cost them much, to clear their shelves and leave the next customer unsatisfied rather than raise their prices to the level which would equate supply and demand. Thus the first stage, I suggest, will be a shortage of supplies rather than a runaway price level. This will be a singularly unfair, inefficient and irritating method of restricting consumption. vi PREFACE And if it provokes, as it probably will, more widespread rationing, the waste and inefficiency will be aggravated for reasons, explained below, due to the diversity of men's needs and tastes. The right plan is to restrict spending power to the suitable figure and then allow as much consumer's choice as possible how it shall be spent. Moreover, gradually the pressure of spending power will bring in the tide of inflation, which is nature's remedy and the only genuine alternative. But a further, and even less satisfactory, consequence is also probable. A shortage of supplies relatively to consumers' spending power will exert an unfavourable pressure on our balance of trade. For it will divert goods from export and give a stimulus to the use for current consumption of imports, and home production too, which might otherwise have been employed for war purposes. Thus we shall be prevented from putting forth our full war effort and we shall run down our foreign reserves faster than is prudent. A reluctance to face the full magnitude of our task and overcome it is a coward's part. Yet the nation is not in this mood and only asks to be told what is necessary. It is a fool's part too. For victory may depend on our making it evident, that we can so organize our economic strength as to maintain indefinitely the excommunication of an unrepentant enemy from the commerce and society of the world. J. M. Keynes King's College, Cambridge February, 1940 CONTENTS CHAPTER PAGE I. The Character oe the Problem . 1 II. The Character op the Solution . 8 III. Our Output Capacity and the National Income...... 13 IV. Can the Rich pay eor the War? . 20 V. A Plan for Deferred Pay, Family Allowances and a Cheap Ration . 27 VI. Details...... 34 VII. The Release of Deferred Pay and a Capital Levy ..... 44 VIII. Rationing, Price Control and Wage Control ...... 51 IX. Voluntary Saving and the Mechanism of Inflation . . . . . 57 X. The System adopted in France. . 74 APPENDICES I. The National Income. ... 79 II. The Extent of our Resources Abroad 82 III. The Cost of Family Allowances . 86 IV. The Formula for Deferred Pay . 87 Acknowledgments . . . . 88 vii HOW TO PAY FOE THE WAR CHAPTER I THE CHARACTER OF THE PROBLEM It is not easy for a free community to organise for war. We are not accustomed to listen to experts or prophets. Our strength lies in an ability to improvise. Yet an open mind to untried ideas is also necessary. No-one can say when the end will come. In the war services it is recognised that the best security for an early conclusion is a plan for long endurance. It is ludicrous to proceed on a different assumption in the economic services;—which is what we are doing at present. On the economic front we lack —to borrow a phrase of M. Reynaud—not material resources but lucidity and courage. Courage will be forthcoming if the leaders of opinion in all parties will summon out of the fatigue and confusion of war enough lucidity of mind to understand for themselves and to explain to the public what is required; and then propose a plan conceived in a spirit of social justice, a plan which uses a time of general sacrifice, not as an excuse for postponing desirable reforms, but as an opportunity for moving further than we have moved hitherto towards reducing inequalities. 1 2 HOW TO PAY FOR THE WAR More lucidity, therefore, is our first need. This is not easy. For all aspects of the economic problem are interconnected. Nothing can be settled in isolation. Every use of our resources is at the expense of an alternative use. And when we have decided how much can be made available for civilian consumption, we have still to settle the thorniest question of all, how to distribute it most wisely. We shall, I assume, raise our output to the highest figure which our resources and our organisation permit. We shall export all we can spare. We shall import all we can afford, having regard to the shipping tonnage available and the maximum rate at which it is prudent to use up our reserves of foreign assets. From the sum of our own output and our imports we have to take away our exports and the requirements of war. Civilian consumption at home will be equal to what is left. Clearly its amount wiU depend on our policy in the other respects. It can only be increased if we diminish our war effort, or if we use up our foreign reserves. It is extraordinarily difficult to secure the right outcome for this resultant of many separate policies. It depends on weighing one advantage against another. There is hardly a conceivable decision within the range of the supply services which does not affect it. Is it better that the War Office should have a large reserve of uniforms in stock or that the cloth should be exported to increase the Treasury's reserve of foreign currency? Is it better to employ our shipyards to build war THE CHARACTER OF THE PROBLEM 3 ships or merchant-men? Is it better that a 20-year-old agricultural worker should be left on the farm or taken into the army? How great an expansion of the Army should we contemplate? What reduction in working hours and efficiency is justified in the interests of A.R.P. ? One could ask a hundred thousand such questions, and the answer to each would have a significant bearing on the amount left over for civilian consumption. We can start out either by fixing the standard of life of the civilian and discover what is left over for the service departments and for export; or by adding up the demands of the latter and discover what is left over for the civilians. The actual result will be a compromise between the two methods. At present it is hard to say who, if anyone, settles such matters. In the final outcome there seems to be a larger element of chance than of design. It is a case of pull devil, pull baker—with the devil so far on top. But it makes no great difference to the problem we are now discussing whether the final result is arrived at wisely or foolishly, by chance or by design. On the assumption that our total output is as large as we know how to organise, a definite residual will be left over which is available for civilian consumption. The amount of this residue will certainly be influenced by the reasonable requirements of the civilian population. If an acute shortage develops in a particular direction, baker's pull will become stronger and devil's weaker; and something will be done to 4 HOW TO PAY FOR THE WAR allow a larger release. But unless we are to fall far short of our maximum war effort, we cannot allow the amount of mere money in the pockets of the public to have a significant influence, unjustified by other considerations, on the amount which is released to civilians. This leads up to our fundamental proposition. There will be a certain definite amount left over for civilian consumption. This amount may be larger or smaller than what perfect wisdom and foresight would provide. The point is that its amount will depend only to a minor extent on the amount of money in the pockets of the public and on their readiness to spend it. This is a great change from peace-time experience. That is why we find it difficult to face the economic consequences of war. We have been accustomed to a level of production which has been below capacity. In such circumstances, if we have more to spend, more will be produced and there will be more to buy. Not necessarily in the same proportion. Supply for immediate consumption may not increase as much as demand, so that prices will rise to some extent. Nevertheless, when men were working harder and earning more, they have been able to increase their consumption in not much less than the same proportion. In peace time, that is to say, the size of the cake depends on the amount of work done. But in war time the size of the cake is fixed. If we work harder, we can fight better. But we must not consume more. THE CHARACTER OF THE PROBLEM 5 This is the elementary fact which in a democracy the man in the street must learn to understand if the nation is to act wisely—that the size of the civilian's cake is fixed. What follows from this? It means, broadly speaking, that the public as a whole cannot increase its consumption by increasing its money earnings. Yet most of us try to increase our earnings in the belief that we can thus increase our consumption,—which is usually true. Indeed in a sense it is true still. For each individual can increase his share of consumption if he has more money to spend. But, since the size of the cake is now fixed and no longer expansible, he can only do so at the expense of other people. Thus, what is to the advantage of each of us regarded as a solitary individual is to the disadvantage of each of us regarded as members of a community. If all alike spend more, no one benefits. Here is the ideal opportunity for a common plan and for imposing a rule which everyone must observe. By such a plan, as I hope to show, the wage and salary earner can consume as much as before and in addition have money over in the bank for his future benefit and security, which would belong otherwise to the capitalist class. Without such a plan we shall consume no more than otherwise, but will have spent all our money and have nothing over. For prices will rise just enough for the money we spend to be used up by the increased cost of what there is to buy. 6 HOW TO PAY FOR THE WAR If all earnings are raised two shillings in the £ and are spent on buying the same quantity of goods as before, this means that prices also will rise two shillings in the £; and no one will be a loaf of bread or a pint of beer better off than he was before. Unless the whole cost of the war were to be raised by taxes which is not practically possible, part of it will be met by borrowing, which is another way of saying that a deferment of money expenditure must be made by someone. This will not be avoided by allowing prices to rise, which merely means that consumers' incomes pass into the hands of the capitalist class. A large part of this gain the latter would have to pay over in higher taxes; part they might themselves consume thus raising prices still higher to the disadvantage of other consumers; and the rest would be borrowed from them, so that they alone, instead of all alike, would be the principal owners of the increased National Debt,—of the right, that is to say, to spend money after the war. For this reason a demand on the part of the Trade Unions for an increase in money rates of wages to compensate for every increase in the cost of living is futile, and greatly to the disadvantage of the working class. Like the dog in the fable, they lose the substance in gaping at the shadow. It is true that the better organised sections might benefit at the expense of other consumers. But except as an effort at group selfishness, as a means of hustling someone else out of the queue, it is a mug's game to play. THE CHARACTER OF THE PROBLEM 7 In their minds and hearts the leaders of the Trade Unions know this as well as anyone else. They do not want what they ask. But they dare not abate their demands until they know what alternative policy is offered. This is legitimate. No coherent plan has yet been put up to them. I have been charged with attempting to apply totalitarian methods to a free community. No criticism could be more misdirected. In a totalitarian state the problem of the distribution of sacrifice does not exist. That is one of its initial advantages for war. It is only in a free community that the task of government is complicated by the claims of social justice. In a slave state production is the only problem. The poor and the old and the infant must take their chance; and no system lends itself better to the provision of special privileges to the governing class. The aim of these pages is, therefore, to devise a means of adapting the distributive system of a free community to the limitations of war. There are three main objects to hold in view: the provision of an increased reward as an incentive and recognition of increased effort and risk, to which free men unlike slaves are entitled; the maximum freedom of choice to each individual how he will use that part of his income which he is at liberty to spend, a freedom which properly belongs to independent personalities but not to the units of a totalitarian ant-heap; and the mitigation of the necessary sacrifice for those least able to bear it, a use of valuable resources which a ruthless power avoids. 8 HOW TO PAY FOR THE WAR CHAPTER n THE CHARACTER OF THE SOLUTION Even if there were no increases in the rates of money-wages, the total of money-earnings will be considerably increased by the greater number of insured men engaged in the services and in civilian employments, by overtime, and by the movement into paid employment of women, boys, retired persons and others who were not previously occupied. It will be shown in the next chapter, what is fairly obvious to common sense, that in a war like this the amount of goods available for consumption will have to be diminished,—and certainly cannot be increased above what it was in peace time. It follows that the increased quantity of money available to be spent in the pockets of consumers will meet a quantity of goods which is not increased. Unless we establish iron regulations limiting what is to be sold and establishing maximum prices for every article of consumption, with the result that there is nothing left to buy and the consumer goes home with the money burning his pocket, there are only two alternatives. Some means must be found for withdrawing purchasing power from the market; or prices must rise until the available goods are selling at figures which absorb the increased quantity of expenditure,—in other words the method of inflation. THE CHARACTER OF THE SOLUTION 9 The general character of our solution must be, therefore, that it withdraws from expenditure a proportion of the increased earnings. This is the only way, apart from shortages of goods or higher prices, by which we can secure a balance between money to be spent and goods to be bought. Voluntary savings would serve this purpose if they were sufficient. In any case voluntary savings are wholly to the good and limit to that extent the dimensions of our problem. No word should be said to discourage the missionary zeal of those who campaign to increase them or the self- restraint and public spirit of those who make them. Nor is there anything in the plan which follows to make voluntary personal economy useless or unnecessary. I aim at a scheme which will achieve the bare minimum; and by the time it has been qualified by practical concessions nothing is more likely than that it will fall short of the bare minimum, and wiU not be sufficient by itself. Every further economy in personal consumption beyond what is prescribed will either ease the position of some other consumer or will allow an intensification of our war effort. But the analysis of the national potential and of the distribution of the national income, which will be given in the next two chapters, shows clearly enough how improbable it is that voluntary savings can be sufficient. Those who allege otherwise are deceiving themselves or are victims of their own propaganda. Moreover, many people would, I think, welcome a prescribed plan which indicates to them their minimum duty; and those B 10 HOW TO PAY FOR THE WAR who feel moved to do more can rest assured that their effort is not useless. A minimum plan will not close the way to the voluntary self-sacrifice of individuals for the public good and the national purpose, any more than our system of taxation does. The nation will still need urgently the fruits of further personal abstention,—always bearing it in mind that some forms of economy are much less valuable than others. But I also reckon it a merit of a prescribed plan that it reduces for the average man the necessity for a continuing perplexity how much to economise and for thinking about such things more than is good. An excessive obsession towards saving may be more useful than lovely; it is not always he who decides to save who makes the real sacrifice; and public necessity may sometimes become an excuse for giving fuU rein with self-approval to an instinct which is also a vice. The first provision in our radical plan (Chapters V and VI) is, therefore, to determine a proportion of each man's earnings which must be deferred; —withdrawn, that is to say, from immediate consumption and only made available as a right to consume after the war is over. If the proportion can be fixed fairly for each income group, this device will have a double advantage. It means that rights to immediate consumption during the war can be allotted with a closer regard to relative sacrifice than under any other plan. It also means that rights to deferred consumption after the war, which is another name for the National Debt, will be widely distributed amongst THE CHARACTER OF THE SOLUTION 11 all those who are foregoing immediate consumption, instead of being mainly concentrated, as they were last time, in the hands of the capitalist class. The second provision is to provide for this deferred consumption without increasing the National Debt by a general capital levy after the war. The third provision is^to protect from any reductions in current consumption those whose standard of life offers no sufficient margin. This is effected by an exempt minimum, a sharply progressive scale and a system of family allowances. The net result of these proposals is, to increase the consumption of young families with less than 75s. a week, to leave the aggregate consumption of the lower income group having £5 a week or less nearly as high as before the war (whilst at the same time giving them rights, in return for extra work, to deferred consumption after the war), and to reduce^the aggregate consumption of the higher income group with more than £5 a week by about a third on the average. The fourth provision (Chapter VIII), rendered possible by the previous provisions but not itself essential to them, is to link further changes in money-rates of wages, pensions and other allowances to changes in the cost of a limited range of rationed articles of consumption, an iron ration as it has been called, which the authorities will endeavour to prevent, one way or another, from rising in price. This scheme, put forward in the light of criticism and after further reflection, is more 12 HOW TO PAY FOR THE WAR comprehensive than the plan for deferment of income which I proposed in the columns of The Times last November. Nevertheless this original proposal is the lynchpin of the whole construction, failing which the rest would be impracticable. Without this proposal the cost of family allowances would aggravate the problem of consumption by increasing it in one direction without diminishing it in another; and would merely make the progress of inflation more inevitable. The same is true of an iron ration at a low price. Unless we have first of all withdrawn the excess of purchasing power from the market, the cost of subsidising consumption will lead the Treasury deeper into the financial bog. But if a deferment of earnings is agreed, the whole construction stands solid. A general plan like this, to which all are required to conform, is like a rule of the road—everyone gains and no one can lose. To regard such a rule as an infringement of liberty is somewhat silly. If the rule of the road is imposed, people will travel as much as before. Under this plan people will consume as much as before. The rule of the road allows people as much choice, as they would have without it, along which roads to travel. This plan would allow people as much choice as before what goods they consume. A comparison with the rule of the road is a very fair comparison. For the plan is intended to prevent people from getting in one another's way in spending their money. OUTPUT CAPACITY AND NATIONAL INCOME 13 CHAPTER III OUR OUTPUT CAPACITY AND THE NATIONAL INCOME In order to calculate the size of the cake which will be left for civilian consumption, we have to estimate (1) the maximum current output that we are capable of organising from our resources of men and plant and materials, (2) how fast we can safely draw on our foreign reserves by importing more than we export, (3) how much of all this will be used up by our war effort. The statistics from which to build up these estimates are very inadequate. Every government since the last war has been unscientific and obscurantist, and has regarded the collection of essential facts as a waste of money. There is no one to-day, inside or outside government offices, who does not mainly depend on the brilliant private efforts of Mr. Colin Clark (in his National Income and Outlay, supplemented by later articles); but, in the absence of statistics which only a government can collect, he could often do no better than make a brave guess. The basis of what foUows is given in more detail in Appendix I, prepared with the assistance of Mr. E. Rothbarth. The money measure of our output capacity will, of course, vary according to the levels which are 14 HOW TO PAY FOR THE WAR reached from time to time by wages and prices. To avoid this complication the following figures are all given in terms of pre-war prices. In the year ending March 31, 1939, the value of our output, measured at cost, including invisible exports, was about £4,800 million. Of this amount £3,710 million was the current cost (inclusive of the cost of maintaining plant) of the consumption of the public; £850 million was the current cost (inclusive of the cost of maintenance) of the services provided by the Government, excluding "transfer" payments to pensioners and holders of the national debt, etc., since these are merely out of one pocket into another, but including capital expenditure; £290 million was devoted to increasing our privately owned capital equipment in the shape of buildings, plant and transport. £4,850 million This output can be increased (1) by absorbing a considerable proportion of the 12f per cent of insured workers who were unemployed in that year, (2) by bringing into employment workers from outside the insured population, including boys, women and retired or unoccupied persons, and (3) by more intensive work and overtime (a lengthening of working hours by half an hour would, for example, yield an increase of about 7£ per cent). On the other hand, there will be a loss of efficiency from withdrawals to the armed forces (whose output should be measured, if it is to tally with the other side of the balance-sheet, by the cost OUTPUT CAPACITY AND NATIONAL INCOME 15 of their pay, allowances and keep), from shortage of raw material and shipping, and from A.R.P. On balance an increase in output of 15 to 20 per cent should be practicable when our organisation is working properly. Taking an intermediate figure of just under 17| per cent, let us assume an increase of £825 million in the value of output measured at pre-war prices. It is important to add that no such rise in output has taken place as yet. There are two other sources from which government requirements can be met. Included in the cost of public and private consumption there is a figure of £420 million for the cost of making good current depreciation, in addition to about £300 million spent on additions to capital. Some of this output, costing £710 (£420+£290) million altogether, could be diverted to government purposes. Let us put the contribution from this source at £150 million from depreciation funds and £300 million from normal new investment, making £450 million altogether. The second and only remaining source is from selling our gold and foreign investments and borrowing abroad. If we are to be prepared for a prolonged war, we must be strict with ourselves in limiting the rate at which we expend these resources. I put the maximum contribution which we can safely take from this source in a year at £350 million. 1 Altogether this yields us resources for additional government requirements and current private 1 Some details in justification of this figure are given in Appendix II. 16 HOW TO PAY FOR THE WAR consumption of £1,625 (£825+£450+£350) million a year. What relation does this bear to present facts? The Chancellor of the Exchequer announced in the late autumn of 1939 that the rate of government expenditure already reached represented an increase of somewhere in the neighbourhood of £1,500 million a year. Thus if we had already reached the increased rate of output assumed above, we should have had at that time a small margin (of £125 million) out of which private consumption' could be increased. But everyone knows that we were, and still are, a long way from having organised output on this scale. Indeed it is certain, in my opinion, that the existing rate of government expenditure leaves no margin for increased private consumption; and that the maintenance of consumption is already leading to a reduction in stocks of commodities and of foreign reserves at a higher rate of depletion than that assumed above,—at a higher rate, that is to say, than is safe. Moreover it is certain that our war expenditure has not yet reached its maximum. Let us assume that in the next year government expenditure rises by no more than a further £350 million above the estimated level of last autumn, and that we are successful in raising our output to the maximum suggested above, which is an optimistic view of the prospects. This will involve a reduction of £225 million below the pre-war rate of consumption for the community as a whole. We have, therefore, to withdraw from consumption £825 million of OUTPUT CAPACITY AND NATIONAL INCOME 17 increased incomes plus £225 million of incomes previously spent. That is a modest statement of the problem. Some would say that it is a serious understatement, which allows inadequately for the magnitude of the war effort which will be needed. This may be true. Moreover, unless we mend our ways quickly, it greatly overstates our rate of output. Nevertheless, to establish my present argument it is not necessary to go beyond what is already plain. If a greater decrease in consumption proves necessary, that will reinforce all that I have to say. Now we can see what the problem is and how it comes about. Even if there are no increases in wage-rates or in prices, incomes will rise by an amount equal to what is earned in producing the increased output, namely £825 million a year on the above assumptions. Yet in spite of these increased incomes, those who receive them must consume less than before. Whilst earnings will be increased, consumption must be diminished. That is the conclusion to hammer home. It is beyond dispute. And it is gradually penetrating to the general consciousness. But we have become so accustomed to the problem of unemployment and of excess resources that it requires some elasticity of mind to adapt our behaviour to the problem of full employment and of resources which are no longer adequate to supply our needs. In war we move back from the Age of Plenty to the Age of Scarcity. Moreover the imminence of the new problem has been obscured from our eyes by the fact that 18 HOW TO PAY FOR THE WAR after nearly six months of war there still persists a substantial volume of statistical unemployment. This is due to a failure of organisation, partly unavoidable in so short a space of time, partly avoidable if there was more energy and intelligence in the government. But anyone who argues from this that we are still in the Age of Plenty makes a mistake. The nature of unemployment to-day is totally different from what it was a year ago. It is no longer caused by a deficiency of demand. There is no longer a potential surplus supply of the things we want. The transition to full employment is hindered by two obstacles. The first is due to the difficulty of shifting labour to the points where it is wanted. The second— and, for the time being, the chief—obstacle is caused by the difficulties, other than the shortage of labour, in the way of existing demand becoming effective. For example, there may be a demand for cloth on the part both of exporters and of home consumers and there may be less than full employment in the woollen industry, and yet this demand will remain ineffective if the manufacturers cannot—for one reason or another, good or bad— obtain raw wool for the purpose of meeting these demands. Shortages of essential raw materials due to shipping delays and other causes, and artificial shortages due to the inefficient workings of our newly-born controls who cannot learn their unaccustomed job all at once, are in many cases a more limiting factor than the shortage of labour. And in other cases there is a shortage of plant. But I repeat that this does not mean we are OUTPUT CAPACITY AND NATIONAL INCOME 19 still in the Age of Plenty. It means that the Age of Scarcity has arrived before the whole of the available labour has been absorbed. I am not saying that our output cannot be increased beyond its present level. Surely it can and must be so increased as our organisation improves. But we are already making all we know how. We have to learn how to make more; and that takes time. Our ability, for the time being, to draw on stocks is another factor which is obscuring from our eyes the transition to the Age of Scarcity. There can be little doubt that during the first months of war our rate of private consumption has exceeded our surplus of production on a scale which cannot be continued indefinitely. Government demand has been greatly increased. There is no reason to suppose that private consumption has been sufficiently diminished. It is by drawing on our stocks of commodities and foreign resources and on our working capital that the deficiency has been met. The task of adjusting private expenditure to the supply which will be available is, therefore, more urgent than appears on the surface. It is not true that we can postpone action until after full employment has been reached. The magnitude of the problem is now stated. The reader will appreciate that there is unavoidable guess work and crude approximation in the figures which I have given. If anyone knows better, his criticism will be welcome. But I believe that the size of the result is roughly right and that more accurate details would not change the broad outline of the picture. 20 HOW TO PAY FOR THE WAR CHAPTER IV CAN THE RICH PAY FOR THE WAR? We have shown that, quite apart from war increases in rates of wages, the earnings of the country as a whole should increase by as much as £825 million merely as a result of the increase in output and employment. At the same time private consumption will have to diminish by at least £175 miUion, taking a moderate estimate. Thus altogether £1,000 million of private incomes must be withdrawn from consumption. This figure has been reached on the basis of pre-war wages and prices. Since significant rises in these have already occurred, all our figures should be somewhat increased in terms of present prices and wages. By the end of January 1940, wholesale prices had risen by 27 per cent, the cost of living (seasonally corrected) by 10 per cent, and wages by perhaps 5 per cent; which means that the aggregates I am using should be increased by nearly 10 per cent to conform to the wage and price levels current at that date. I have heard it argued that, whilst these figures may be correct, they do not prove that the working class need be asked to make any sacrifice. Admittedly they will work harder. But if so their consumption must be increased proportionately. If the cost of living rises, wage-rates, and not merely total earnings, must be increased to the CAN THE RICH PAY FOR THE WAR? 21 same extent. The whole of the real cost of the war, it is claimed, should be borne by the richer classes. Nay, more. The increased demand for the services of labour due to the war, offers a much-needed opportunity for increasing working-class consumption above what it was previously. Do the workers really claim that they alone should be war-profiteers, taking advantage of the war to increase their consumption, and that more than the whole of the burden of the war should be borne by others? Or is it only some of their leaders who are claiming this on their behalf? This is a political question to which I am not competent to give an answer. Nor is it necessary that I should do so. For, from the practical point of view, I doubt if this is one of the alternatives offering. At any rate, it is not something which will come about automatically as a result of having no policy and doing nothing. If we drift without a comprehensive plan, not this but inflation or shop- shortages will result. And inflation, as we shall see, will be to the clear advantage of the richer class and will result in this class bearing not more, but less, than their fair share. I shall have to urge more than once before I have finished, that my proposals should be compared, not with some imaginary alternative, but with actual alternatives which are happening, or about to happen, before our eyes. Let us, however, examine the facts. Once again the figures which I use are no better than 22 HOW TO PAY FOR THE WAR rough approximations of the truth. We do not know accurately how the national income is distributed between different income-groups, although this is clearly a matter of the first importance. There is some fairly good evidence of the proportions belonging to those with less than £250 a year and to those with more than £2,000 a year; but for the important intermediate groups the information is defective. But whilst many details in the following are probably inaccurate, I do not think that the picture as a whole is misleading. As before, we shall use pre-war prices and wages as our measuring rods; for, if we depart from these, we are on shifting sands. We will begin with the sum-total of personal incomes before the war, (See Appendix I for the basis of this total), add to this the prospective war increase, and take away the rates and taxes which were already being paid in the pre-war years: Income group 1 Below £250 £250-£500 Above £500 Total £ £ £ £ million million million million Pre-war 2,910 640 1,700 5.250 War increase 425 100 300 825 Total war in- incomes 3,335 740 2,000 6,075 Pre-war rates and taxes 390 50 780 1,220 £2,945 690 1,220 4,855 1 The groups are to be interpreted to cover those who were in these pre-war, even though war increases may be moving them into higher income groups. CAN THE RICH PAY FOR THE WAR? 2S The last row of figures leaves us with the incomes out of which the increased war expenditure has to be met either by additional taxes or by borrowing, after allowing for what can be provided out of existing capital. (The manner in which the income-group from £250 to £500 is at present escaping its proper share of taxes is strikingly brought out. They actually paid a much smaller proportion of their pre-war incomes than the lower income-group below £250, namely 7'8 per cent compared with 13-4 per cent.) The figure which we have taken in Chapter III for the increased expenditure of the Government is £1,850 million, of which £150 million could be taken out of accruing depreciation not made good at home and £350 million from assets and borrowing abroad before allowing anything for normal saving. This leaves £1,350 million to be raised from additional taxes and from new savings (including normal savings) voluntary or involuntary. We can rely in present circumstances on at least £400 million of voluntary savings, even if taxation is raised to a high level and if the proposal for deferred income made below is also adopted. Indeed I believe that this figure is considerably below the most probable expectation which might be put as much as £150 million higher; and I am reserving this margin against errors in the opposite direction elsewhere in the calculation. I include in this at least £100 million accruing in the hands of the Government in the Unemployment Fund, Health Insurance and Pension Funds, War Risk Funds and the like; which is best regarded as 24 HOW TO PAY FOR THE WAR diminishing the net Government demands on the public by this amount, since it cannot easily be allocated to the personal savings of any group. In addition fully £300 million are likely to accumulate through Building Societies, Life Offices, Superannuation Funds, the undistributed profits of companies (which alone were estimated at £300 miUion pre-war) and other institutional channels, even if individuals make no voluntary savings in addition to the other demands made on them. If this sum is allocated somewhat arbitrarily (for exact information is lacking) between the different income groups, we are left with the following: Income group Below £250 £250-£500 Above £500 Total £ £ £ £ million million million million War incomes less pre-war taxes 2,945 690 1,220 4,855 Minimum voluntary savings 50 75 175 300 2,895 615 1,045 4,555 out of which £950 million has still to be found for the Government. Even allowing for a wide margin of error in this calculation, it shows that if everyone with more than £500 a year had the whole of his income in excess of that sum taken from him in taxes, the yield would not be nearly enough, 1 being £625 million or only two-thirds of the Government's requirements. 1 There are about 840,000 heads of households with more than £500 a year and their aggregate war incomes, after deducting pre-war taxes and minimum saving, is put above at £1,045 million, which leaves £625 million after deducting £500 per head. CAN THE RICH PAY FOR THE WAR? 25 Yet this suggestion is a wild exaggeration beyond what could be expected from our fiscal system. Indeed taxation on this scale would involve such wide-spread breaches of existing contracts and commitments that the taxable incomes themselves would be largely reduced. An important part of these incomes is spent on rates and other purposes which do not increase personal consumption, on current resources, the alternative uses of which are much less valuable, and on payments to dependants. It follows that an important contribution must be obtained one way or another from the income group below £500 a year. Nor is it practicable to put the exemption limit at £250 a year. There are about 2,430,000 persons with incomes above this level. If the whole of the excess of their remaining incomes above £250 was taken from them, namely £1,050 million 1 and if this caused no reduction in the incomes by repercussion (which is far from the truth), it would only just exceed the Government's requirements. If the cost of the war is to be met by the income group above £250 a year, it would mean taking from them in savings and taxation (new and old) about three-quarters of their total war-time incomes, leaving them with less than a quarter of their incomes for their own consumption. In the light of these figures it is not sane to suppose that the war can be financed without putting some burden on the increased war incomes 1 Total available incomes of this group £1,660 million less about £610 million (in respect of 2,430,000 at £250 each). 26 HOW TO PAY FOR THE WAR of the class with £5 a week or less. For this income group accounts for about 88 per cent of the population, for more than 60 per cent of the total personal incomes of the country after allowing for war increases (due to greater output but allowing nothing for higher wage-rates) and deducting pre-war rates and taxes, and for about two-thirds of current consumption. Moreover the incomes of this group will have been increased on the average by some 15 per cent as a result of the war. Is it seriously expected that those with less than £5 a week will be allowed to increase their average consumption by 15 per cent, while all those with more than £5 a week will be left on the average with only a quarter of their incomes to consume? The only question is, therefore, how large the contribution of this class must be, and how it can be obtained with least sacrifice and most justice. If we have a deliberate plan, considerations of social justice can be weighed and considered. Without such a plan (as at present) they go by default. As a basis of discussion I offer in the next two chapters a proposal, capable, I expect, of amendment and improvement in a hundred details, but embodying a principle which will achieve more social justice than any other plan. It should be judged by comparison, not with some imaginary alternative or unattainable counsels of perfection, but with what is actually happening before our eyes. DEFERRED PAY, ALLOWANCES AND RATION 27 CHAPTER V A PLAN FOR DEFERRED PAY, FAMILY ALLOWANCES AND A CHEAP RATION I have now reached a stage in the argument where I have to choose between being too definite or being too vague. If I set forth a concrete proposal in all its particulars, I expose myself to a hundred criticisms on points not essential to the principle of the plan. If I go further in the use of figures for illustration, I am involved more and more in guess-work; and I run the risk of getting the reader bogged in details which may be inaccurate and could certainly be amended without injury to the main fabric. Yet if I restrict myself to generalities, I do not give the reader enough to bite on; and am in fact shirking the issue, since the size, the order of magnitude, of the factors involved is not an irrelevant detail. I propose to run the risk of giving too many details and estimates rather than too few,—relying on the reader's benevolent understanding of my method. But I may help him to distinguish between principles which are essential and details which are illustrative if I begin, in this chapter, with some generalities (though not entirely divorced from figures), leaving to the next one the blueprint. We have reached the broad conclusion that allowing for the increase in war output and taking 28 HOW TO PAY FOR THE WAR credit for the pre-war yield of taxes and for those savings on which we can rely in any case, there remains about £950 million of incomes in private hands which must not be spent but must be diverted to the finance of the war. I suggest that perhaps as much as one half of this, namely £500 million, can be raised by taxation. Indeed in a full year and disregarding time- lags in collection the war taxes already imposed in Sir John Simon's emergency budget may provide £400 million towards this. I include in this at least £100 million from Excess Profits Tax even if we avoid any significant degree of inflation. Inflation would, of course, greatly increase the yield of this tax; but the yield should be substantial even without this adventitious aid, partly as a reflection of the higher level of output and partly on account of the distribution of profits between individual businesses being materially different from what it was in the base year. Other fiscal devices, including a sales-tax on certain classes of non-necessities, should be capable of finding another £100 million. But it would not be easy for our fiscal machine to raise much more than this with due regard to justice and efficiency, except by a general sales-tax, a wages-tax or the use of inflation as a tax-gatherer. The idea of bridging the remaining gap of £450 million, in addition to the £400 million for which we have already taken credit, by voluntary savings without any aid from inflation is chimerical. It must be remembered that we have already assumed an annual subscription by the DEFERRED PAY, ALLOWANCES AND RATION 29 public to government loans of £900 million (£350 in exchange for foreign assets, £150 from depreciation funds and £400 from new savings) less such amount as accrues for investment in government funds etc., from overseas borrowing and from the proceeds of sales of gold; for the total increased expenditure of the Government is not £950 million a year but (on our assumptions) £1,850 million. For reasons we have already given, the additional savings would have to come largely from the income group with £5 a week or less and would require a change in their habits of expenditure for which there is no evidence. For these same reasons the amount by which the potential expenditure of the lower income- groups has to be curtailed will be more or less the same whichever method is adopted. Inflation will be the most burdensome alternative, since this will inevitably bring some advantage to the entrepreneur class, and might cost the worker 20 per cent in terms of the real value of his earnings. Inflation will also be the most burdensome on the smallest incomes,—a defect it shares with a general sales-tax. New taxes, such as a sales- tax or a wages-tax, or old taxes aided by inflation are alike in that they finally deprive the workers of the benefit of their earnings from their heavier burden of labour. They will work harder, but, as a group, they will never derive any personal benefit from it. That is what will happen, will inevitably happen, if the Treasury and the Trade Union leaders agree on the one thing where they will find agreement easiest, namely to drift 30 HOW TO PAY FOR THE WAR along without a definite policy, following the usual methods and rejecting new ideas. Is there no better way? We have seen that it is physically impossible for the community as a whole to consume now the equivalent of their increased war effort. That is obvious. The war effort is to pay for the war; it cannot also supply increased consumption. Those who make the effort have, therefore, only two alternatives between which to choose. They can forego the equivalent consumption altogether; or they can 'postpone, it. For each individual it is a great advantage to retain the rights over the fruits of his labour even though he must put off the enjoyment of them. His personal wealth is thus increased. For that is what wealth is,—command of the right to postponed consumption. This suggests to us the way out. A suitable proportion of each man's earnings must take the form of deferred pay. With this general principle established, the practical difficulties of our task begin. If we were to apply the principle in the crudest possible way by deferring, let us say a level 20 per cent of all income remaining after payment of pre-war taxes, it would still be much better than the alternative of inflation. But public opinion requires, justly perhaps, that a deliberate plan, and particularly that a new plan, should not merely be better than doing nothing, but much better. A new plan is required to meet objections, which apply equally to the old plan, but which in the case of the DEFERRED PAY, ALLOWANCES AND RATION 31 latter custom has caused us to forget. The new plan is required to satisfy ideals of social justice much higher than we have been attaining without it. Let us welcome this demand. If we can make the upsetting of established arrangements, which the exigencies of war finance require, the opportunity to improve the social distribution of incomes, all the better. With this object in view we can add a second and a third principle to the first principle of deferring a proportion of current earnings. We have suggested that about a half of what is required can be obtained by outright taxes, leaving a half to be supplied by deferment of earnings. Let our second principle provide that the bulk of the new taxes shall fall on the income groups of £250 or more, and that the main part of the contribution of the lower income groups shall take the form, not of foregoing income outright, but of merely deferring it. The third principle must be directed to the maintenance of adequate minimum standards,— better and not worse than have existed hitherto. Thus, whilst the second principle puts heavier burdens on the richer classes, the third principle allows special reliefs to the poorer. To carry out the third principle requires two distinct proposals. In the scheme which I first put forward in The Times I attempted to deal with the problem by proposing a minimum exempt income, this minimum to be increased for a married man in accordance with the size of his 32 HOW TO PAY FOR THE WAR family. This proposal was rightly criticised on the ground that the resulting allowance was inadequate. The foUowing scheme goes much further and is, I venture to think, a great improvement. For some years past the weight of opinion has been growing in favour of family allowances. In time of war it is natural that we should be more concerned than usual with the cost of living; and as soon as there is a threat of a rising cost of living and a demand for higher wages to meet it, the question of family allowances must come to the front. For the burden of the rising cost of living depends very largely on the size of a man's family. At first sight it is paradoxical to propose in time of war an expensive social reform which we have not thought ourselves able to afford in time of peace. But in truth the need for this reform is so much greater in such times that it may provide the most appropriate occasion for it. I share the view held by many others that this is so. I recommend, therefore, that a family allowance of 5s. per week should be paid in cash for each child up to the age of fifteen. I am estimating the net cost of this at £100,000,000 the basis for which is explained in Appendix III. Is this provision enough? We have to consider the fairly large class with small incomes which will not be increased by the war, or at any rate not sufficiently to keep pace with the increase in the cost of living. And there is the demand of the Trade Unions for some security against the risk that the rise in prices will outstrip the level DEFERRED PAY, ALLOWANCES AND RATION 33 of wages, even if a scheme for deferred pay or the like is agreed to. To meet this an important section of opinion, which has received the weighty support of Sir Arthur Salter, Mr. R. H. Brand and Prof, and Mrs. Hicks, recommends that a minimum ration of consumption goods be made available at a low fixed price, even though this might involve subsidies. If I were advising the Treasury, I should look with anxiety on such a proposal taken by itself, since it might in certain circumstances place an almost insupportable burden on the Exchequer. But if it were made part of a comprehensive scheme, including the deferment of a proportion of earnings, agreed with the Trade Unions, I would welcome it. The minimum ration should not comprise all the articles covered by the cost of living Index, but should be restricted to a limited list of necessaries available in time of war. Nor should any absolute undertaking be given as to future prices. It should be agreed, however, that in the event of any rise in the cost of the minimum ration, the Trade Unions would be free to press for a corresponding increase in wages. But it should be an absolute condition of such an arrangement that a scheme for deferred pay should be accepted at the same time, and that the Trade Unions should agree, subject to the above safeguard, not to press for any further increases in money wages on the ground of the cost of living. Without these conditions the weight of purchasing power available in the hands of consumers 84 HOW TO PAY FOR THE WAR would render any attempt at price fixation excessively dangerous. The low prices for the minimum ration would merely release more purchasing power for use in other directions, which would drive up other prices to an excessive disparity with that of the fixed ration. To attempt to fix consumption prices whilst allowing an indefinite increase of purchasing power in the hands of consumers would be an obvious error. For the Trade Unions such a scheme as this offers great and evident advantages compared with progressive inflation or with a wages tax. In spite of the demands of war, the workers would have secured the enjoyment, sooner or later, of a consumption fully commensurate with their increased effort; whilst family allowances and the cheap ration would actually improve, even during the war, the economic position of the poorer families. We should have succeeded in making the war an opportunity for a positive social improvement. How great a benefit in comparison with a futile attempt to evade a reasonable share of the burden of a just war, ending in a progressive inflation! CHAPTER VI DETAILS I have avoided in the previous chapter precise figures of the proportion of earnings to be deferred and of the minimum standard which should be DETAILS 35 free from deferment. Those who agree on the principle may differ on the details. It is better, therefore, to separate them so far as is possible. I put forward the following as a basis of discussion. The details are a question of degree and of opinion. If these proposals err, it may be in the direction of making concessions to the income-group below £5 a week, greater than it will be easy to maintain —concessions which are, I believe, still possible on the assumption that output is adequately increased and that government expenditure does not exceed the estimate given above, but no longer possible if either of these assumptions fail. The basis on which the details have been arrived at is the following:— (1) The aggregate real consumption of the group with £5 a week or less should be maintained for as long as possible at or near the pre-war level. (2) Those who remain in the lower half of this group are likely to have benefited least, or not at all, from the aggregate increase in war incomes, and cannot afford, therefore, to have any important part of their current earnings deferred if they are to maintain their standard of life. (3) Since some rise in the cost of living relatively to wage-rates (though not to total earnings) is inevitable, and since it is impossible under any scheme to avoid individual inequalities of treatment, we should make sure by means of family allowances that the inequality will work out in favour of households with families, so that these will be for certain better off. (4) Since the increased war incomes of the lower 36 HOW TO PAY FOR THE WAR income groups probably represent increased work to a greater extent than in the case of the higher income groups, the contribution of the former should be mainly in the form of deferment of earnings and the contribution of the latter mainly in the shape of increased taxation. (5) The increase in the cost of imports is likely to involve an increase in the cost of living relatively to wages of not less than 5 per cent, even with the existence of subsidies. There remains the question whether we can hope to provide the whole of the £950 million required, or rather £1,050 million including the cost of family allowances, by taxation and the deferment of pay. The proposals, which I put forward in The Times and the Economic Journal, were a little fainthearted in this respect and avowedly fell short of what was required. It now seems to me better to start with a scheme which aims at being adequate, even if this is a counsel of perfection. For subsequent concessions are sure to whittle away the yield; so that a scheme which is moderately less than adequate at the start will be seriously inadequate at the finish. Since various concessions recommended in the next chapter are likely to cost at least £50 million, I shall aim, therefore, at a scale of deferment which should yield £600 million gross. Whether the actual scales proposed below will in fact achieve these objects, it is impossible to forecast with accuracy. They aim at carrying out the above principles. If it is shown that they would fail to do so, they can be amended accord- DETAILS 87 ingly. Put into figures the distribution of the burden aimed at is the following:— Income-Group Below £250 Above £250 Total million million million Increased Taxes 1 £150 £350 £500 Deferment of Earnings 250 350 600 Loss through relative rise in the cost of living 125 50 175 £525 £750 £1275 Less increase in war incomes 425 400 825 £100 £350 £450 Less family allowances 2 . £100 — £100 Decrease in real consumption .... nil £350 £350 The loss, estimated above, due to a rise in the cost of living relatively to wages, allows for a cost of living 10 per cent above pre-war only partially offset by a 5 per cent rise in wages. This is, roughly speaking, the present position. The estimate assumes that the higher income-group will be somewhat less affected by this factor than the lower. In terms of pre-war real consumption the final result means, very roughly, that the aggregate consumption of the higher income group will be reduced by fully a third and the aggregate consumption of the lower income group not at all. 1 Including increased yield of pre-war taxes. 8 For the sake of simplicity, I am assuming that the existing income tax allowances for children already cost on the average 5s. per child for the income group about £250, which may or may not be correct. Probably it is an overstatement, since the allowance works out at 3s. 9d. per child up to about £400 earned income, gradually rising thereafter to 7s. 6