WHEN Hitler marched into Poland, he informed his subjects that since he came to power he had spent no less than 90 billion marks on war preparations. Even if we discount the elation with which he must have contemplated that historic moment, and reduce the estimate to 70 or 75 billions (the figure given by the best foreign experts), the total is still very formidable.[i] The probable expenditure on rearmament in Germany during 1938 was perhaps equal to six billion dollars, while that of Great Britain and France combined, in the same year, amounted to not more than three billions; and before that it was very much less. Since the war began, German expenditure has mounted even higher; any estimate under eight billion dollars would probably be on the low side. These figures give some idea of the amount of leeway which the Allies are having to make up and the magnitude of the burden which they will have to shoulder in the future. The object of this article is to try to show very broadly the nature of the British problem and the resources available for meeting it.


To do this it is perhaps desirable to go back a little and depict the situation as we know it to have been in the financial year 1938-39.

In that year, according to estimates based on the computations of Mr. Colin Clark, the gross national income was of the order of £5,700 millions.[ii] This total includes depreciation, wastage and transfer incomes such as pensions interest on the national debt and unemployment benefit, and is therefore considerably larger than the net value produced during the period. But for discussions of taxable capacity it is probably the best figure to keep in mind.

During roughly the same period government expenditure, central and local, was in the neighborhood of £1,300 millions, that is to say between a quarter and a fifth of the estimate by Mr. Clark. As his estimates are considered by many to err considerably on the generous side, it is perhaps not unreasonable to regard the proportion as being nearer a quarter than a fifth; and, as the taxable income includes so many elements which do not correspond to the net production of value, the real burden of expenditure viewed as a proportion must be regarded as heavier still.

For our purposes, it is the expenditure of the central government which is most significant. In the financial year 1938-39, this expenditure amounted in round figures to £1,000 millions. Of this total about £230 millions went for interest on the national debt and similar payments; about £425 millions for "civil" votes, i.e. non-military government expenditure such as centrally financed social services, subsidies and routine expenditures; and £400 millions on defense.

To meet this expenditure, some £128 millions were borrowed. The bulk of the remainder, about £890 millions, was met by taxes. Direct taxes (income tax, surtax, estate duties and national defense contribution) contributed some £500 millions. The rest came from customs and excise duties, stamp duties and motor vehicle taxation.


With the approach of war in 1939, central government expenditures mounted. The latest estimate before war actually broke out was for an expenditure of £1,453 millions in 1939-40, of which about £750 millions were for defense purposes. To meet this increase an extension of borrowing was planned -- something of the order of magnitude of £500 millions.

When war actually broke out, however, these figures had once more to be revised. Total budgeted expenditures rose to £1,933 millions, of which defense took about £1,250 millions, thus tripling the 1938 figure. Taxation was vigorously increased: the standard rate of income tax, for example, was raised 5/6 to 7/- in the pound for the current year and 7/6 for the next. But owing to the outbreak of war the net increase in revenue immediately expected was small. More than £900 millions remained to be met from reserves or from borrowing.

Since the outbreak of war the rate of spending has increased still further. According to the Chancellor of the Exchequer, we are now spending between £6 and £7 millions per day -- in a full year something like £2,500 millions. This figure is likely to grow. A conservative estimate for a full financial year would be £2,750 millions, with defense absorbing at least £2,000 millions. There are many who would be disposed to argue that something of the order of £3,000 millions, or more than half the national income of 1938, would be a more reliable estimate.

The main problem of British war finance is how this money shall be raised.


Before dealing with this, however, there is another matter subsidiary to the main problem, but nevertheless of critical importance, about which a word must be said -- the problem of external payments. It is true that the internal financial problem is on a larger scale; but the problem of financing necessary imports is in some ways a matter of greater anxiety.

In 1938 the total of retained imports into the United Kingdom was £858 millions. Exports during the same period were £470 millions. The excess of imports over exports was therefore some £387 millions. This deficiency in the commodity balance was made good by various "invisible" items, such as income from foreign investments and shipping, banking and insurance services. In very round figures, income from investments may be put at £200 millions, shipping at £100 millions, and other services at £30 to £40 millions. In this way, and by movements into Britain of gold and foreign balances, the balance of international indebtedness was made good.

The figures of a year of peace and depression are naturally liable to considerable change. They do, however, illustrate the nature of the problem with which we are now confronted. On the one hand, the items on which we rely for financing the excess of imports are liable to shrink. Shipping earnings in particular may be reduced very considerably by the difficulties of war, and if foreign assets are sold in order to finance extraordinary purchases, the income from that source must shrink too. On the other hand, due to the expansion of employment and the necessity for making extraordinary purchases of war material abroad, there will be a tendency for imports to rise. The excess of imports over exports may therefore tend to increase.

Now fortunately in this respect the Government of the United Kingdom has very considerable reserves of strength. British investments abroad are extensive. The gold reserve, too, is very great. For reasons which should be obvious, I will not attempt to give any exact figures for these different resources here; but it would probably not be an overestimate to put the reserves of gold plus fairly easily realizable foreign assets at round £1,200 millions. We are thus very adequately equipped to meet any immediate emergency. A deficit of £350 millions in the foreign balance could be financed from reserves for at least three years and probably for more.

Nevertheless, our position cannot be regarded as free from anxiety. It would be a very serious thing for Britain to draw on foreign assets, because that would mean that at the end of the war substantial inroads would have been made into her sources of income from abroad. For, although the pressure may not be felt while they are being spent, yet when they have been spent, not only is that important reserve gone but the income from it is gone also. The resultant postwar readjustments to the new conditions of supply and demand for sterling would necessitate changes in internal incomes and costs which, coming after the strain of war, might involve the gravest embarrassments.

For this reason, therefore, we may expect that the greatest efforts will be made to prevent the gap between imports and exports from leading to this kind of loss. On one hand, the most determined attempts will be made to increase the volume of exports, even if for the time being they involve some form of government subsidy. On the other hand, imports of goods other than essential war materials will be cut down, partly by rationing consumers and by taxing (or borrowing) their surplus incomes, and partly by direct restriction of shipping space. Also attempts will probably be made, in conjunction with our Allies, to divert purchases of imports other than war materials from areas with independent currencies to areas having more intimate monetary relations with the pound or the franc. Such diversions will be regretted by all who, like myself, believe that in the long run the maximum freedom of commerce is in the interests of all parties. But in an emergency in which the reserves of free foreign exchange are likely to be limited by our gains from trade and our limited stock of foreign assets, it is not easy to see how they can be avoided.


We may now return to our main problem of how the receipts of the central government are to be enlarged so as to permit the expenditure of at least £2,000 millions for military purposes.

The yield, for the present year, of the new rates of taxation imposed by the war budget is anticipated to be somewhere around £1,000 millions, leaving about £900 millions to be met in other ways. In a full year, perhaps another £250 millions would be forthcoming. This still leaves, however, a gap of £1,500 millions if we accept the conservative estimate of a total expenditure of £2,750, or of £1,750 millions if we accept the more probable figure of an expenditure of £3,000 millions. These are formidable figures, but I do not think that anyone who has studied the facts would be likely to call them seriously in question.

How shall we meet these stupendous obligations?

Let us look first at the most obvious reserves. An exact estimate of the yearly savings of the national community is not easy to make, but we would probably not be far wrong in assuming that at least £400 millions per annum has in recent years been made available for expanding equipment and stocks. While it would be a mistake to think that all of this can be safely diverted to war purposes, clearly a large proportion could easily be canalized in this direction. Let us assume that £350 millions could be so diverted.

In addition to the sums laid aside for increasing equipment, there are also sums which go to provide for wastage and depreciation. For the years immediately preceding the outbreak of war, these might be put at perhaps £400 millions. Obviously funds of this sort cannot be diverted so easily from their normal destination, for it is important that the capital equipment of the community should not be allowed to become seriously obsolete or worn out. Some, however, could be spared -- perhaps £200 millions.

Finally, under the general heading of capital reserves we may take account of our holdings of gold. As we have seen already, the utmost prudence in the use of such reserves is desirable. Nevertheless, we may expect that even under the most conservative policy they will be drawn on to some extent -- let us assume the low figure of £150 millions. Thus from existing flows of savings and capital reserves we may hope for a sum of some £700 millions. But this is not yet half of the figure that we want if the gap between receipts and expenditure is to be bridged without inflation.

So far, we have taken no account of an expansion of production; yet some increase in total production is to be expected. This may come about in two ways: by the absorption of unemployed and female labor, and by longer working hours.

Not too much can be expected from net increases in the labor force, since the figures of the unemployed exaggerate considerably the margin which can be absorbed. Perhaps 600,000 or 700,000 of the existing total can be reëmployed. In addition to this, very considerable numbers of women are expected to be drawn into employment. But against this must be set the effects of the withdrawal from industry of the men serving with the fighting forces. If the British Army is raised to anything like the size anticipated, the greatest possible absorption of women and unemployed will be needed to make good the loss.

Much more significant, in my judgment, are the possibilities of overtime. If the existing labor forces were to work on an average one hour more per day, production could be increased by at least ten percent. Such an increase is not at all out of the question. There is indeed reason to suppose that it will actually take place. At 1938 prices this would raise the national income to well over £6,000 millions, perhaps even to £6,500 millions, though this is on the optimistic side.

The problem, however, is not solved by such an increase. The rise in incomes may indirectly swell the proceeds of taxation at existing rates; it may even expand the volume of voluntary savings and hence the volume of lending to the Government. But the maximum increase in government receipts which may come about in this manner must fall far short of the amount which is necessary if the Government is to meet its expenditures. The fact that production increases, makes the ultimate restriction of consumption less than otherwise would be necessary. But it does not obviate the necessity for some further restriction of consumption; and it does not solve the immediate financial problem.


That problem, as we have seen, is to raise anywhere from £750 to £1,000 millions in addition to what may be expected from the yield of existing taxes and the diversion of gross "normal" savings to government uses. In principle there are three main ways in which this may be done. The Government can create the necessary purchasing power by bank loans or by printing paper money -- that is to say, it can inflate. It can also borrow more from the public. Or it can increase taxation. Which of these ways will it follow?

Now there will almost certainly be some creation of money. Given the present technical situation, it is almost certain that sooner or later forces will come into operation which will tend to raise prices through "monetary" influences. This will itself have some beneficial effects on the revenue unless costs rise as fast as prices. Profits will be raised and the yield of the excess profits duty increased. But the indirect effects of inflation are so harmful that it is safe to assume that every effort will be made to reduce this sort of thing to the smallest possible proportions. Any inflationary rise of prices would not be allowed to go very far before there was immense public outcry.

The main problem therefore is how to raise the money without inflation -- that is, how to induce the public to surrender enough purchasing power to the Government to obviate the necessity for creating any more.

At first sight all the arguments would seem to point to increased taxation. This is certainly the cleanest and most logical method for meeting a problem of this sort: it leaves behind it no burden of debt; it is capable of being adjusted to the taxpayer's ability to pay. If the citizens have decided to make war and to shoulder the burdens which war involves -- and there is no doubt that we have never fought a war on which the opinions of the main body of the people were so unanimous -- then surely they should prefer that it be financed by an appropriate increase in taxes.

Unfortunately, things are not quite as simple as that, for raising the necessary money by taxation involves increases at points in the income scale which for traditional reasons are notoriously difficult. The amount which can. be squeezed out of the higher incomes by steeper rates is capable of enormous exaggeration. The Economist has calculated that if all that is left of the incomes over £2,000 a year after paying existing taxation were to be absorbed by further increases, it is doubtful whether it would bring in more than an additional £60 millions. Whether this is exactly correct or not, it may be confidently stated that the bulk of the increase of revenue which is needed must come from incomes below £2,000 -- from the middle classes and the wage earners. But, though some additional revenue may be obtained by increasing the rates on the middle classes, it is quite clear that not nearly enough can be raised from these sources. For, as Mr. Keynes and others have shown, nearly two thirds of the total national consumption is by persons who earn less than £250 a year.

Here we reach the real crux of the problem of war finance. The British income tax does not touch the main body of wage earners, who are affected only by indirect taxes. Now an income tax on wages would be very unpopular; and a turnover (sales) tax touching the consumption of the working classes would be sharply regressive. There can be no doubt that to attempt to raise the whole of the extra revenue by taxation would encounter severe difficulties.

What, then, are the possibilities of increasing saving?

These are probably more extensive than is sometimes thought. A patriotic drive for subscriptions to a War Loan is capable of evoking considerable volumes of extraordinary savings. But it is highly improbable that by itself it would suffice, for, as we have seen, a large part of the reduction in consumption must come from the working classes; and it is difficult to believe that subscriptions from such quarters to war savings certificates and the like would be enough.

To meet this difficulty, Mr. Keynes has made a most ingenious proposal.[iii] He has suggested that the necessary reduction in consumption should be effected by the deduction from all incomes above a very low minimum of a levy graduated according to income and family circumstances and which should be credited to the payer as a loan to the Government. It would resemble a tax in that it was compulsory, a loan in that it was repayable. Mr. Keynes estimates that at least £400 millions would be forthcoming, if the scale of graduation were used which he has assumed by way of illustration. This expedient, together with further increases in other taxes and a small turnover tax on nonessentials would, he suggests, cover the extra war expenditure.

Mr. Keynes' proposal does not, however, exhaust the possibilities of increasing the volume of lending. A similar result might be attained by a system of rationing so extensive as to leave the citizens little else upon which to spend their surplus cash except government securities. Such a system has of course been applied in its most drastic form in Germany; and it is not improbable that a milder variant may be employed in Great Britain. Even the blackout, which curtails so extensively the opportunities for spending on amusements, has probably had something of this effect already. It is not at all difficult to conceive of an extension of rationing and of shop and amusement regulations which would carry the process much further. The Economist has gone so far as to suggest that perhaps an additional £750 millions might be added to voluntary savings in this way. If so, it would almost bridge the gap by itself. But that estimate probably errs considerably on the optimistic side.


Which of these methods will be adopted?

Most economists in Great Britain would probably favor some form of Mr. Keynes' alternative. A system of compulsory savings has many of the advantages of taxation. Yet at the same time, it allows greater elasticity in exceptional cases (under Mr. Keynes' plan the savings could be converted into cash in special cases of hardship), and it offers to the citizen the promise that if he cannot realize the fruits of his increased efforts now, he may hope to do so later on.

But it is perhaps doubtful whether any solution quite so clear cut and logical is likely to be adopted in the near future. If Mr. Keynes had from the outset employed the more euphemistic description "deferred pay" which he substituted as an afterthought for the original "compulsory savings," its reception might possibly have been better. As it now stands, his scheme suffers both from novelty and subtlety, and this may prevent it from being adopted in its entirety.

Much more probable, in my opinion, is the adoption of a greater variety of expedients. As I see it, there is likely to be some rise of prices. There will also be some slight easement through inflation. But it is unlikely that this will be allowed to go very far: too many people have heard already of what they love to call "vicious spirals." By the time the cost of living has risen appreciably, the public will be prepared for the more stringent measures which are necessary to arrest it. And these measures I imagine are likely to involve a mixture of principles. There will be a further stiffening of income tax, surtax and excess profits duty. There will probably be some kind of turnover tax, arranged however to exempt certain necessities. There will be a considerable extension of rationing, and much high pressure borrowing from small investors. And in the end there may be either some extension of the income tax into the lower income brackets or some form of Mr. Keynes' forced levies.

In what proportions these suggestions are likely to be followed I do not know. But of one thing I am reasonably certain: the problem is not of unmanageable dimensions. Whether we put the gap at £750 or £1,000 millions or even more, I have no fear that it cannot be bridged. Wars are not lost because of internal financial difficulties, provided that the necessary resources are available to finance essential purchases from overseas. They are lost for lack of man power or materials or for lack of will to see them through. There is not much reason to suppose that we shall lack man power or materials, and I do not think that we shall lack the will to go on. Given that, the internal financial problem is not likely to prove an overwhelming obstacle. The will to win includes the will to take whatever financial measures are necessary.

[i] Author's Note: The various estimates in this article must be regarded as illustrations of orders of magnitude rather than exact statistical computations. The statistics of such things as national income accumulation in Great Britain are unfortunately extraordinarily inadequate, and any estimate is subject to a very large margin of error. Where my estimates differ from those of other economists they must not be thought to rest upon esoteric sources of information or special computations, but rather upon attempts to strike a suitable mean between divergent estimates according to a purely qualitative judgment of the likelihood of an optimistic or a pessimistic inclination on the part of their original authors. The leading sources of information which I have used are to be found in articles in the Economic Journal by Mr. Keynes and sundry articles and tables in The Economist. I should also express indebtedness to various conversations with Mr. Thomas Balogh, whose important studies on the war potential of Germany have done much to clarify our knowledge of this very difficult subject.

[ii] At the time this article goes to press, the pound is quoted in New York at around $3.95.

[iii]The Times, November 14, 15 and 28, 1939; summarized in The Economic Journal, December 1939, p. 635-38.

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  • LIONEL ROBBINS, Professor of Economics in the University of London; author of "The Great Depression," "The Economic Causes of War" and other works
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