In the first place a reserve sufficient to meet such an emergency as war could not be accu mulated; the people would not submit to the present real sacrifices involved for the sake of warding off a future imaginary danger. More over, in a democratically governed country such a fund would be exposed to constant assaults for diversion to other uses which could probably not always be successfully resisted. But if the fund were kept intact it would result in con tinuous loss, for it would subtract just that much from the nation's money supply if it existed in the form of specie. While if it took the form of securities the situation is still more absurd, for to realize upon these when the emergency arose would compel their sale in a falling market, and would after all differ in no essential respect from the sale of the gov ernment's own securities. The policy of a re serve fund as an alternative to public borrowing must, therefore, be dismissed as ineffectual and unwise. In practice it is so little used to-day that we need give it no further consideration.
Another method by which a state might raise considerable sums in order to meet a sud den emergency, which is closely analogous to that just described, is ,the sale of public prskern entm owned enterpiqes. In sti=Tike russia, or New Zealand, which owns much of the land, considerable sums might be realized in this way. These states have accumulated a fund of wealth not specifically as a war chest, but it is sug gested that this capital might be used rather than go into debt; utilize past accumulations rather than mortgage the future. But aside from the fact that most nations do not have large amounts of disposable wealth this method is open to the same objection as in the previous case, that such sales would be effected in a fall ing market. In times of sudden emergency, like war, it would involve a tremendous .loss and might bring in returns quite incommensurate with the sacrifices made.
Another method of meeting the urgent de mands of a sudden fiscal emergency is-tem.:hex th ate of some existi so as to bring iie.e• a itional reverur an illustration the English procedure with the in come tax may be cited. The machinery for col lecting this tax is always kept in good working order, but the rate of the tax is kept purposely low; then when a sudden emergency occurs additional revenue may be quickly secured by the simple expedient of raising the rate. °That is to writes Prof. H. C. Adams, this policy establishes a war-chest whose funds are deposited with the people, and assigns a par ticular tax to serve as its key?) Exception may possibly be taken to the use of the income tax solely as an emergency tax, for the income tax should form an integral part of any scientifi cally constructed scheme of taxation, and its full use should not be reserved for special needs.
But theprinciple is unimpeachable and was i invoked in this country when the sudden need of greater revenue in 1914 led to the emergency taxes of that year, which consisted simply of an i extension of the internal revenue system. On the other hand the lack of such an easily expan sible system of taxes was keenly felt at the be ginning of the War of 1812 and again when the Civil War began. This method, however, is not always feasible at the beginning of a fiscal emergency when funds must be had at once; it takes time for new taxes to become remunera tive, and a sudden or large increase in the rate of existing taxes may introduce greater evils and injustices in a well-adjusted tax system than would be involved by a resort to bor rowing.
A fourth method by which a nation, in case/ of a fiscal emergency, could avert recourse to 1 bor • might be the issue of saner money.
ut so serious a - c i ects of this that the use of its credit in this fashion is generally resorted to by a modern nation only in the last extremity. Perhaps the best example of a war financed by the issue of paper money rather than by taxes or loans is the American Revolution against England. As the Continental Congress was not clothed with power to levy taxes and did not have the financial standing and prestige to enable it to borrow money at the beginning of the struggle, it was forced to resort to the only alternative open to it, namely the issue of bills of credit. The necessity of issuing large amounts with consequent over issue, depreciation in value, derangement of prices with accompanying injustices as between debtors and creditors, and the final practical re pudiation of its obligations by the government itself, constitute a story which has been re peated in essentials in almost every case where the government has resorted to this method. In the present European War practically every bel ligerent has issued paper money, though it has so far been kept within manageable limits, but the fall of foreign exchange with neutral nations marks the extent, in part at least, of the over issue and consequent inflation which has occur red in each country. The use of paper money may indeed be regarded as involving the credit of the issuing country so that it is only another and less defensible method of borrowing, and in fact is of ten called a °forced loan? We are, therefore, thrown back upon the final alterna tive, that of public debts, as the only feasible method of meeting a sudden fiscal emergency, at least at the beginning.