How War Expenditure Was Met—Subject to the difficulties of calculations and estimates already referred to, the statistics prepared by the Bankers' Trust showed that on the basis of currency, not of 1913 values, the entire war expenditure was met as to about 69% in borrowings at home in one form and another, as to a further i o% in loans from Allies, and as to about 1% in loans from foreign neutral countries, the balance being obtained from taxation. In the case of the Continental Central Powers, however, the percentage of borrowing was greater than in the case of Great Britain or the United States. In fact, apart from Japan, the only Governments which had the courage to ask their nationals to pay very heavy taxes during the greater part of the war period were Great Britain and the United States. Even in Great Britain there was a curious reluctance to impose taxation during the earlier stages of the war, the idea apparently prevail ing in all countries that the war must be made popular at all costs. In Great Britain, indeed, there was the curious experience of the people actually inviting an increase in taxation, deputations waiting upon the chancellor of the exchequer at quite an early stage of the war requesting that there should be an increase in direct and indirect taxation. Throughout the whole period of six years covered by the calculations concerning the cost of the war, Great Britain was the most heavily taxed country, although she was also during the war itself the largest borrower, having to finance the greater part of the conflict on behalf of herself and her Allies. At one time, the income tax of Great Britain rose to 6s. in the while a prolific source of revenue to the exchequer during the war period was the excess profits duty, a tax which was levied from 5o up to 8o% on all business profits exceeding the pre-war level. Some idea of the exacting nature of the tax, and incidentally of the profiteering which went on during the war, may be gathered from the fact that from this source alone the British Treasury received within a period of five years no less than well over ii,000,000,000. Indeed, the tax may be said to have yielded not far short of 25% of the total war revenue from taxation. Never theless, it is generally believed to have brought some evil conse quences in its trail and was among the influences leading to de mands for higher wages and to inflation both in credit and in currency. From the outset Great Britain was fortunate in possess ing in her income, super tax and death duties, a machine ready to hand which greatly aided the immediate application of war taxa tion, so that in addition to the revenue from excess profits tax, income and super tax, which had yielded about 47,000,000 in the pre-war year, rose in 1917 to £250,000,000, in 1918 to £291,000, 000, in 1919 to 1359,000,000, and in the following year to 000,000. In Great Britain, however, as in other countries, a large percentage of the war expenditure was met by loans, and at the outset the borrowing method was practically universal with all the belligerent countries. Moreover, as was natural, the first step taken in most of the belligerent countries was in the direction of short-term Treasury bills. In Great Britain these bills, which, beginning in small amounts, rose at one time to over A,200,000, 000, were placed in the London money market with the banks and discount houses through a system of tendering, thus to some extent minimising their inflationary effect, but in other countries the usual procedure was for the bills to be taken by the national or central banks and either held by them or placed gradually in other quarters. In many cases these bills were converted later into short-term bonds, but the war was not far advanced before long-dated borrowing became necessary, one of the first instances being the flotation in Great Britain in Nov. 1914, of a i5-year loan for L35o,000,000 in 31 per cents at 95. In spite of the stern necessities of the case, the loan was not too well applied for, a part being taken temporarily by the Bank of England, thus involv ing at the outset a further stimulus to inflation. At the time of the flotation, the loan was the largest ever offered at one time, but it was destined to appear almost a small operation compared with some which followed, the climax being reached in 1917, when, including conversions effected at the same time, the total amount issued was no less than £2,000,000,000. Altogether the extent of Britain's war borrowings may best be expressed by say ing that the total amount of funded and unfunded debt, which previous to the war totalled about £650,000,000, had risen by the end of 192o to £7,830,000,000. To quote figures after that date would be misleading because debt conversions were often carried through on lines involving a saving in the service on the debt but an increase in deadweight debt owing to the loans being issued at a material discount. In considering Great Britain's methods of payment for the war, it must also be mentioned that contempo raneously with the immediate issue of Treasury bills after the com mencement of the conflict, currency or Treasury notes were authorized for LI and los. and these notes at one time attained a maximum circulation of over £300,000,000. As against the notes, however, British Treasury bills were issued and must be reckoned amongst the high total attained by those bills.
In considering the payment by the belligerent countries for the war, concealed taxation through the effect of inflation upon prices has to be remembered. It was in the Continental countries that the full effect of inflation, resulting from excessive borrowing and insufficient direct taxation, was most strikingly revealed. There
fore, it is far more difficult in the case of the Continental and Central Powers to assess in terms of currency the cost of the war than in the case of Great Britain and the United States. In most instances, however, the greatest depreciation in currencies occurred of ter the war was concluded. In Germany this was due to the fact that fully 90% of the war expenditure was met by internal borrowing, Austria also raising about 87% of its war expenditure in loans either at home or from Allies. In France over 76% of the expenditure was raised in loans at home, with fully 17% in loans from Allies and foreign countries, but chiefly from Allies. In the case of France, war expenditure was naturally prolonged for a considerable period after peace owing to the re building of devastated areas, and although Germany was not in a similar position, her supplies of foodstuffs, raw materials, manu factured goods and machinery were so exhausted that heavy bor rowings were necessary to meet the situation.
Speaking broadly, and taking for the most part, the calculations of the Bankers' Trust company of New York, Belgium raised practically the whole of her war expenditure in loans from Allies, Italy raised about 5r% of the costs in loans at home and 21% in loans from Allies, while Portugal and Russia raised about 75% and 95% respectively in loans.
External Borrowings by the Belligerents.—No feature of war expenditure was more remarkable than the difficulty ex perienced by the belligerent countries in Europe during the first three years of the war in making payments for goods and services to the United States and other neutral countries. The problem was one of exchange, and no description of the methods of paying for the costs of the war would be complete without a reference to this particular aspect of war finance. In the paragraph dealing with the cost of the war to the United States a table is given showing the indebtedness of various belligerent countries to the United States Government and the United States nationals. It is the origin of those loans which, in the main, may be regarded as one of the concrete expressions of this special difficulty. In the first three years of the war Great Britain and other belligerent countries were largely dependent upon the United States and other neutral countries for foodstuffs and for war materials. Owing to the effectiveness of the naval blockade by Great Britain some of these countries were virtually cut off from outside sup plies. The problem of the countries purchasing from abroad, however, was that of making payments in the currencies of the supplying countries. The greater part of the strain—especially during the period of the war—fell upon Great Britain, which was financing its own necessities and a large part of those of its Allies. Out of its own resources, which were supplemented later by amounts taken from the central banks of France and Russia, many millions of gold were shipped from London to the United States to save the strain on the exchange. In spite of such shipments, however, the greatest difficulty was experienced in preventing the American exchange on London from collapsing al together. At that time the nationals of Great Britain were the holders of about I r,000,000,000 in American securities of various kinds and the greater part of these securities were finally com mandeered at the price of the day by the British Government, which then made arrangements with Morgans in New York for the marketing of the securities and for the fixing of the exchange on London. That is to say, the securities were supplied with sufficient rapidity to ensure the necessary amount of dollars being in the hands of Morgans to maintain the exchange. In addition, loans to the extent of at least £200,000,000 for Great Britain and one or more loans for Great Britain and France jointly were placed with American nationals. This was before the entry of the United States into the war. After that date, which was in April 1917, the financ ing of the requirements of the Allies in the United States was ar ranged on wholly different lines. America came into the war just when, in spite of the methods described, the sterling exchange ap peared again to be on the eve of breaking down. Under the new system, however, the U.S. Government gave dollar credits to the Allies for all goods and services supplied in the United States, and that process went on not only during the war but for some time afterwards when the exchanges were still maintained by America continuing to finance the post-war requirements of the Allies and of France, in particular, by the credits referred to. The net result of these loans is shown in the table giving the debts of the Allied and Associated States to the United States. Thus, in the case of Great Britain, it will be seen that in addition to parting with some hundreds of millions of pounds in gold to meet war expenditure for goods and services supplied from that country, she also remitted nearly Li,000,000,000 of her holding of American railroad securities and incurred a debt of nearly the same amount.