I see no possibility, therefore, of any final settlement with M.

Poincare in the immediate future. He has now reached the point of saying that he is prepared to talk sense in return for an enormous bribe, and that is some progress. But as no one is in a position to offer him the bribe, it is not much progress, and as the force of events will compel him to talk sense sooner or later, even without a bribe, his bargaining position is not strong. In the meantime he may make trouble. If so, it can"t be helped. But it will do him no good, and may even help to bring nearer the inevitable day of disillusion. I may add that for France to agree to a short moratorium is not a great sacrifice since, on account of the Belgian priority and other items, the amount of cash to which France will be ent.i.tled in the near future, even if the payments fixed last March were to be paid in full, is quite trifling.

A POLICY FOR THE LIBERAL PARTY

So much for the immediate situation and the politics of the case. If we look forward a little, I venture to think that there is a clear, simple, and practical policy for the Liberal Party to adopt and to persist in.

Both M. Poincare and Mr. Lloyd George have their hands tied by their past utterances. Mr. Lloyd George"s part in the matter of Reparations is the most discreditable episode in his career. It is not easy for him, whose hands are not clean in the matter, to give us a clean settlement.

I say this although his present intentions appear to be reasonable. All the more reason why others should p.r.o.nounce and persist in a clear and decided policy. I was disappointed, if I may say so, in what Lord Grey had to say about this at Newcastle last week. He said many wise things, but not a word of constructive policy which could get any one an inch further forward. He seemed to think that all that was necessary was to talk to the French sympathetically and to put our trust in international bankers. He puts a faith in an international loan as the means of solution which I am sure is not justified. We must be much more concrete than that, and we must be prepared to say unpleasant things as well as pleasant ones.

The right solution, the solution that we are bound to come to in the end, is not complicated. We must abandon the claim for pensions and bring to an end the occupation of the Rhinelands. The Reparation Commission must be asked to divide their a.s.sessment into two parts--the part that represents pensions and separation allowances and the rest.

And with the abandonment of the former the proportion due to France would be correspondingly raised. If France would agree to this--which is in her interest, anyhow--and would terminate the occupation it would be right for us to forgive her (and our other Allies) all they owe us, and to accord a priority on all receipts in favour of the devastated areas.

If we could secure a real settlement by these sacrifices, I think we should make them completely regardless of what the United States may say or do.

In declaring for this policy in the House of Commons yesterday, Mr.

Asquith has given the Liberal Party a clear lead. I hope that they will make it a princ.i.p.al plank in their platform. This is a just and honourable settlement, satisfactory to sentiment and to expediency.

Those who adopt it unequivocally will find that they have with them the tide and a favouring wind. But no one must suppose that, even with such a settlement, any important part of Germany"s payments can be antic.i.p.ated by a loan. Any small loan that can be raised will be required for Germany herself, to put her on her legs again, and enable her to make the necessary annual payments.

THE OUTLOOK FOR NATIONAL FINANCE

BY SIR JOSIAH STAMP, K.B.E., D.SC.

a.s.sistant Secretary Board of Inland Revenue, 1916-19. Member of Royal Commission on Income Tax, 1919.

Sir Josiah Stamp said:--In discussing the problem of National Finance we have to decide which problem we mean, viz., the "short period" or the "long period," for there are distinctly two issues. I can, perhaps, ill.u.s.trate it best by the a.n.a.logy of the household in which the chief earner or the head of the family has been stricken down by illness. It may be that a heavy doctor"s bill or surgeon"s fee has to be met, and that this represents a serious burden and involves the strictest economy for a year or two; that all members of the household forgo some luxuries, and that there is a cessation of saving and perhaps a "cut"

into some past acc.u.mulations. But once these heroic measures have been taken and the burden lifted, and the chief earner resumes his occupation, things proceed on the same scale and plan as before. It may be, however, that the illness or operation permanently impairs his earning power, and that the changes which have to be made must be more drastic and permanent. Then perhaps would come an alteration of the whole ground plan of the life of that family, the removal to a smaller house with lower standing charges and a changed standard of living. What I call the "short period" problem involves a view only of the current year and the immediate future for the purpose of ascertaining whether we can make ends meet by temporary self-denial. What I term the "long distance" problem involves an examination of the whole scale upon which our future outlay is conditioned for us.

The limit of further economies on the lines of the "Geddes" cut" that can become effective in 1923, would seem to be some 50 or 60 millions, because every 10 per cent. in economy represents a much more drastic and difficult task than the preceding, and it cuts more deeply into your essential national services. On the other side of the account one sees the probable revenue diminish to an almost similar extent, having regard to the effect of reductions in the rate of tax and the depression in trade, with a lower scale of profits, brought about by a lower price level, entering into the income-tax average. It looks as though 1923 may just pay its way, but if so, then, like the current year, it will make no contribution towards the reduction of the debt. So much for the "short period." Our worst difficulties are really going to be deep-seated ones.

THE TWO PARTS OF A BUDGET

Now a national budget may consist of two parts, one of which I will call the "responsive" and the other the "non-responsive" portion. The responsive portion is the part that may be expected to answer sooner or later--later perhaps rather than sooner--to alterations in general conditions, and particularly to price alterations. If there is a very marked difference in general price level, the salaries--both by the addition or remission of bonuses and the general alteration in scales for new entrants--may be expected to alter, at any rate, in the same direction, and that part of the expense which consists of the purchase of materials will also be responsive. The second, or non-responsive part, is the part that has a fixed expression in currency, and does not alter with changed conditions. This, for the most part, is the capital and interest for the public debt.

Now the nature and gravity of the "long distance" problem is almost entirely a question of the proportions which these two sections bear to each other. If the non-responsive portion is a small percentage of the total the problem will not be important, but if it is larger, then the question must be faced seriously. Suppose, for example, that you have now a total budget of 900 million pounds, and that, in the course of time, all values are expressed at half the present currency figure.

Imagine that the national income in this instance is 3600 million pounds. Then the burden, on a first approximation, is 25 per cent. Now, if the whole budget is responsive, we may find it ultimately at 450 million pounds out of a national income of 1800 million pounds, _i.e._ still 25 per cent. But let the non-responsive portion be 400 million pounds, then your total budget will be 650 million pounds out of a national income of about 2000 million pounds, or 33-1/3 per cent., and every alteration in prices--or what we call "improvement" in the cost of living--becomes an extraordinarily serious matter as a burden upon new enterprise in the future.

Let me give you a homely and familiar ill.u.s.tration. During the war the nation has borrowed something that is equivalent to a pair of boots.

When the time comes for paying back the loan it repays something which is equivalent to two pairs or, possibly, even to three pairs. If the total number of boots produced has not altered, you will see what an increasing "pull" this is upon production. There are, of course, two ways in which this increasing pull--while a great boon to the person who is being repaid--must be an increased burden to the individual. Firstly, if the number of people making boots increases substantially, it may still be only one pair of boots for the same volume of production, if the burden is spread over that larger volume. Secondly, even supposing that the number of individuals is not increased, if the arts of production have so improved that two pairs can be produced with the same effort as was formerly necessary for one, then the debt may be repaid by them without the burden being actually heavier than before.

Now, coming back to the general problem. The two ways in which the alteration in price level can be prevented from resulting in a heavier individual burden than existed at the time when the transaction was begun, are a large increase in the population with no lower average wealth, or a large increase in wealth with the same population--which involves a greatly increased dividend from our complex modern social organism with all its mechanical, financial, and other differentiated functions. Of course, some of the debt burden is responsive, so far as the annual charge is concerned, on that part of the floating debt which is reborrowed continually at rates of interest which follow current money rates, but, even so, the burden of capital repayment remains. An opportunity occurs for putting sections of the debt upon a lower annual charge basis whenever particular loans come to maturity, and there may be some considerable relief in the annual charge in the course of time by this method.

What are the prospects of the two methods that I have mentioned coming to our rescue in this "long distance" problem? It is a problem to which our present "short distance" contribution is, you will admit, a very poor one, for we have not so far really made any substantial contribution from current revenue towards the repayment of the debt.

A CENTURY OF THE NATIONAL DEBT

Historical surveys and parallels are notoriously risky, particularly where the conditions have no precedent. They ought, however, to be made, provided that we keep our generalisations from them under careful control. Now, after the Napoleonic wars we had a national debt somewhat comparable in magnitude in its relation to the national wealth and income with the present debt. What happened to that as a burden during the 100 years just gone by? If it was alleviated, to what was the alleviation due? I would not burden you with a ma.s.s of figures, but I would just give you one or two selected periods. You can find more details in my recent book on _Wealth and Taxable Capacity_. We had a total debt of--

850 million pounds in 1817 841 " " " 1842 836 " " " 1857 659 " " " 1895 800 " " " 1903

and before this last war it had been reduced to 707 million pounds. In 1920, of course, it was over 8000 million pounds. Such incidents as the Crimean and the Boer wars added materially to the debt, but apart therefrom you will see that there is no tremendous relief by way of capital repayment to the original debt. Similarly, in a hundred years, even if we have no big wars, it is quite possible we may have additions to the national debt from smaller causes. Yet the volume of the debt per head fell from 50 to 15.7, so you will see that the increasing population made an enormous difference. The real burden of the debt is of course felt mainly in its annual charge. I will take this, therefore, rather than the capital:--

In 1817 the charge was 32 million pounds " 1842 " " " 28 " "

" 1857 " " " 28.8 " "

In 1895 the charge was 25 million pounds " 1903 " " " 27 " "

" 1914 " " " 24 " "

Here you will see that the reduction from 32 to 24 was 25 per cent. or a much greater reduction than the reduction of the _total_ capital debt, and this, of course, was contributed to by the lower rates of interest which had been brought about from time to time. When we take the annual charge per head the fall is much more striking. In the hundred years it decreased from 37s. to 10s. This, however, was a money reduction, and the _real_ burden per head can only be judged after we have considered what the purchasing power of that money was. Now, the charge per head, reduced to a common basis of purchasing power, fell as follows:--

Index figure 1817 260 1842 242 1857 191 1895 210 1914 118

In the year 1920 the charge per head was 7.16 and my purchasing power index figure 629. You will see that the _real_ burden in commodities moved down much less violently than the _money_ burden, and the relief was not actually so great as it looks, because prices were far lower in 1914 than they were early in the nineteenth century.

In view of the fact that our debt is approximately ten times that of the last century, let us ask ourselves the broad question: "Can we look forward to nothing better than the reduction of our debt by 450 millions in thirty-seven years?"

The nineteenth century was one long contest between two opposing forces.

The increase in the population, together with the power to make wealth, were together enormously effective in decreasing the burden. Against them was the ultimate tendency to lower prices, and the former of these two forces slowly won the day.

I hesitate to say that we can expect anything at all comparable with the wonderful leap forward in productive power during the early Victorian era. I hope that in this I may prove to be wrong. Anyway I do not think that in our lifetime we can expect these islands to double their population.

THE CAPITAL LEVY

If we cannot look forward to any great measure of relief through these channels, to what then must we look? By far the most important alternative remedy which has been put to us is that of a Capital Levy; it has the enormous virtue that it would repay on one level of prices the debts incurred at that level; in short, it would give back one pair of boots at once for every pair it has borrowed, instead of waiting and stretching out over future generations the burden of two pairs. It is so attractive that one cannot wonder there is a tendency to slur over its less obvious difficulties.

Advocates of this scheme fall into two camps, whom I would distinguish broadly as the economist group and the Labour Party, and if you will examine their advocacy carefully, you will see that they support it by two different sets of contentions, which are not easily reconciled. The economists lay stress upon the fact that you not only pay off at a less onerous cost in real goods, but that it may, considered arithmetically or actuarially, be "good business" for a payer of high income-tax to make an outright payment now and have a lighter income-tax in future.

Very much of the economists" case rests indeed upon the argument drawn from the outright cut and the arithmetical relief. It will be seen that this case depends upon two a.s.sumptions. The first is that the levy in practice as well as in theory is an outright cut, and the second, that it is not repeated, or rather that the income-tax is really effectively reduced. But if you look at the programme of the other supporters of the Capital Levy you will not find any convincing guarantees of its non-repet.i.tion. I have not seen anywhere any scheme by which we can feel politically insured against its repet.i.tion. You will find plenty of indication that some intend to have both the levy and a high tax as well, the new money to be employed for other social purposes. The arguments based upon arithmetical or actuarial superiority of the levy for your pocket and for mine may therefore rather go by the board. But I am not going to discuss either the question of political guarantees or the possible future socio-financial policy of the Labour Party. I will merely ask you to consider whether the levy is likely to be in practice the outright cut that is the basis of the chief and most valid contention for it. Please understand that I am not attempting to sum up all the many reasons for and against this proposal, but only to deal with the particular virtue claimed for it, bearing upon the increasing burden of the debt as prices decline.

Any taxation scheme dependent upon general capital valuation, where the amount to be paid is large--say larger than a year"s revenue--falls, in my judgment, into the second or third rate category of taxation expedients. Whenever we are living in uncertain times, with no steadiness of outlook, valuation of many cla.s.ses of wealth is then a tremendous lottery, and collection--which takes time--may be no less so.

The fair face of the outright and graduated levy would be marred in many ways. First, there are cases affected by valuation. The valuation of a fixed rate of interest on good security is easy enough. The valuation of a field or a house in these days presents more difficulty, but is, of course, practicable. In practice, however, people do not own these things outright. They have only an interest in them. This is where the rub comes. A very large part of the property in this country is held in life interests, and on reversions or contingencies. It is not a question of saying that a given property is worth 10,000 and that it forms part of the fortune of Jones, who pays 40 per cent. duty. The point is that the 10,000 is split between Jones and Robinson. Jones maybe has a life interest in it, and Robinson a reversionary interest. You value Jones"s wealth by his prospect of life on a life table, and Robinson has the balance. But the life table does not indicate the actual likelihood of Jones"s life being fifteen years. It only represents the actuarial average expectation of all the lives. This may be useful enough for insurance dependent on the total experience, but it may be a shocking injustice to the individual in taxation. Only some 10 per cent. of the Joneses will live for the allotted time, and for the rest your valuation and your tax will be dead wrong, either too much or too little. Jones will be coming to you two years after he has paid, or rather his executors will come to you and say: "We paid a tax based on Jones living 15 years, and he has died; this ought, therefore, to be shifted to Robinson."

DIFFICULTIES OF VALUATION

People often say that a Capital Levy merely imagines everybody dying at the same time. This parallel is wrong in degree when you are considering the ease of paying duty or of changing the market values by a glut of shares, and it is still more wrong when you are thinking of ease of valuation. When a man is dead, he is dead, and in estimating the death duty you have not to bother about how long he is going to live! But every time you value a life interest and take a big slice of it for tax you are probably doing a double injustice. The charge is incorrect for two taxpayers. On a flat rate of tax this difficulty might be made less, but the essence of any effective levy is a progressive scale. Moreover, whether you are right or wrong about Robinson"s tax, he has nothing in hand with which to pay it. He has either to raise a mortgage on his expectation (on which he pays _annual_ interest) or pay you by instalments. So far as his burden is concerned, therefore, there is no outright cut. You will be getting an annual figure over nearly the whole cla.s.s of life interests and reversions. It is difficult to see how one can escape making adjustments year after year for some time in the light of the ascertained facts, until the expiry of, say, nine or ten years has reduced the disparities between the estimated valuations and the facts of life to smaller proportions.

Next come those valuations which depend for their accuracy upon being the true mid-point of probabilities. A given mine may last for five years in the view of some experts, or it may go on for fifteen in the view of others, and you may take a mid-point, say ten, and collect your tax, but, shortly after, this valuation turns out to be badly wrong, _though all your valuations in the aggregate are correct_. While the active procedure of collecting the levy is in progress for a number of years these a.s.sessments will simply shout at you for adjustment. There are other types of difficulty in a.s.sessment which involve annual adjustment, but you will appreciate most the necessity for care in the collection. Enthusiastic advocates for the levy meet every hard case put forward where it is difficult to raise money, such as a private ownership of an indivisible business, by saying: "But that will be made in instalments, or the man can raise a mortgage." But the extent to which this is done robs the levy of all the virtues attaching to outrightness, for each instalment becomes, as the years roll on, different in its real content upon a shifting price level, and every payment of interest on the mortgage--to say nothing of the ultimate repayment of that mortgage--falls to be met as if reckoned upon the original currency level. Then those cla.s.ses of wealth which are not easily realisable without putting down the market price also require treatment by instalments, and those who wish to put forward a logical scheme also add a special charge upon salary-earners for some years--a pseudo-capitalisation of their earning power.

A really fair and practicable levy would certainly be honeycombed with annual adjustments and payments for some period of years, and one must consider how far this would invalidate the economic case of the "outright cut," and make it no better than a high income-tax; indeed far worse, for the high income-tax does at least follow closely upon the annual facts as they change, or is not stereotyped by a valuation made in obsolete conditions. Imagine three shipowners each with vessels valued at 200,000, and each called upon to pay 20 per cent., or 40,000. One owning five small ships might have sold one of them, and thus paid his bill; the second, with one large ship, might have agreed to pay 8000 annually (plus interest) for five years; while the third might have mortgaged his vessel for 40,000, having no other capital at disposal. At to-day"s values each might have been worth, say, 50,000, but for the tax. The first would actually have ships worth 40,000, so he would have borne the correct duty of 20 per cent. The second would have 50,000, bringing in, say, 5000 annually, and would be attempting to pay 8000 out of it, while the third would be paying 2000 a year out of his income and still be faced with an 80 per cent. charge on his fortune! His a.s.sessment is computed at one point of time, and liquidated at another, when its incidence is totally different.

If one cannot have a levy complete at the time of imposition, it clearly ought not to be launched at a time of rapidly changing prices. But that is, perhaps, when the economic case for it is strongest.

A DESPERATE REMEDY