After all, this problem of the war debt, in so far as it is held at home, is not one that ought to terrify us if we look at it steadily.

People talk and write as if when the war is over the business of paying for it will begin. That is not really so. The war has been paid for as it went on, and, except in so far as it has been financed by borrowing abroad, it has been paid for by us as a nation. Whatever we have used for the war we have paid for as it went on, partly with the help of loans from America and from other countries--Argentina, Holland, Switzerland, etc.--that have lent us money. These loans amount, as far as they can be traced from the official figures, to about 1300 millions. Against them we can set our loans to our Dominions, over 200 millions (a perfectly good a.s.set), and our loans to our Allies, perhaps 1500 millions, which the Chancellor proposes to write down by 50 per cent., and might perhaps treat still more drastically. To meet this foreign debt we shall have to turn out so much stuff--goods and services of all kinds--for sale abroad to meet the interest and repayment. We have further impoverished ourselves by selling our foreign securities abroad No figure has been published giving any clue to the amount of these sales, and we may perhaps guess them at 1000 millions. If the pre-war estimates of our overseas investments at 4000 millions were anywhere near the mark. It thus appears that we shall end the war still a great creditor nation.

In so far as the debt was raised at home, the war was paid for by those who bought the securities offered, and we have now to pay them interest and set about repaying them the capital. This process will not diminish the national wealth, but will only affect its distribution. It will not diminish the amount of available capital, but may even rather increase it by gathering into the hands of the debt-holders--who are ex-hypothesi folk with an inclination for saving--money that might, if left in the hands of those from whom it is collected, have been squandered. The payment of the debt charge merely means that those who came forward with their money when they were asked to subscribe to war loans, have, according to the extent of the effort that they then made, a set-off against the subsequent taxation involved by the war debt. It would have been a much simpler and more businesslike proceeding to have taken, instead of borrowing, a much larger proportion of the war"s cost during the war; but it is too late now to rub in this plat.i.tude which is now pretty generally admitted. Mr h.o.a.re showed in last month"s Journal that the creation of the War Debt has caused a huge addition to what he has called Rente--the gross income of the propertied cla.s.ses; and there is much logic in his contention that this income is the source from which the debt charge should be met. At the same time both justice and economic expediency seem to demand that his wider interpretation of Rente, to make it include the earnings of those whose special qualifications (or, we may add, special luck) put them in a position to earn more easily than the struggling majority, should be applied to taxation involved by the debt charge.

How, then, shall we deal with the debt? In the first place we want a good Sinking Fund--1 per cent. at least--and all realisations of a.s.sets in the shape of loans repaid, ships, etc., sold, should be used for reduction of our foreign debt. For the home charge we want a special form of income tax that will fall as lightly and indirectly as possible on industry; that is, that it should be imposed on the individual taxpayer direct. So that what we want is an extended, reformed and better graduated form of the super-tax brought down so low that every one who is not merely rich but comfortable should pay his share, For example, any single man or woman with any excess over 500 a year of unearned income, or over 800 a year of earned income might well pay super-tax on that excess. The exemption limit might well be raised by 50 per cent. for married couples (if their joint incomes are still to be counted as one), and by 100 a year for each child between the age of five and twenty-five. But all these figures are mere suggestions, and the details of the scheme would have to be worked out by Inland Revenue officials, whose experience and knowledge of the practical working of such matters qualifies them for the task.

The broad principle is a special tax for the debt charge to be raised direct from individual incomes with skilful differentiation, according to the circ.u.mstances of the taxpayer, in the matter of the number of his dependants, and also according to the source of the income, whether it is being earned by exertions which illness might terminate or received from invested funds, and therefore beyond the reach of the "slings and arrows of outrageous fortune." That portion of the tax that is required for Sinking Fund might be made payable, at the option of the taxpayer, in Government securities at prices giving some advantage to the holder. This form of special debt-charge super-tax would enable the ordinary income tax to be reduced considerably at once. Mr Edward Lees, secretary to the Manchester and County Bank, has put forward a scheme by which taxpayers can buy in advance immunity for so many years from so much annual income tax. If this suggestion could be worked it might provide a means of quickening the debt"s repayment, though it looks rather like exchanging one form of debt for another. But, in any case, it is urgent that the long promised reform of income tax should be set in hand at once, so that it may be purged of its present inequities and anomalies and set to work in peace to redeem debt on a new and more scientific basis.

XVI

THE CURRENCY REPORT _December_, 1918

Currency Policy during the War--Its Disastrous Mediaevalism--The Report of the Cunliffe Committee--A Blast of Common Sense--The Condemnation of our War Finance--Inflation and the Rise in Prices--The Figures of the Present Position--The Break in the Old Relation between Legal Tender and Gold--How to restore it--Stop Borrowing and reduce the Floating Debt--Return to the Old System--The Committee"s Sane Conservatism--A Sound Currency vital to National Recovery.

Among the many features of the late war (how comfortable it is to talk about the "late war"!) that seem likely to astonish the historian of the future, perhaps the thing that will surprise him most is the behaviour of the warring Governments in currency matters. It is surely, a most extraordinary thing after all that has been thought, said and written about monetary policy since money was invented that as soon as a great economic effort was necessary on the part of the leading civilised Powers, they should all have fallen back on the old mediaeval dodge of depreciating the currency, varied to suit modern needs, in order to pay part of their war bill, and should have continued this policy throughout the course of the war, in spite of the obvious results that it was producing in the shape of unrest, suspicion and bitterness on the part of the working cla.s.ses, who very naturally thought that the consequent rise in prices was due to the machinations of unscrupulous capitalists who were exploiting them. It is even possible that the historian of a century hence may ascribe to this cause the beginning of the end of our present economic system, based on the private ownership of capital, for it is very evident that we have not yet seen the end of the harvest that this bitterness and discontent are producing.

A less important but still very objectionable consequence of the flood of currency and credit that the Government has poured out to fill a gap in its war finance is the encouragement that it has given to a host of monetary quacks who believe that all the financial ills of the world can be saved if only you give it enough money to handle, oblivious of the effect on prices of mere multiplication of claims to goods without a corresponding increase in the volume of goods. These enthusiasts have seen that during war a Government can produce money as fast as it likes, and since they think that producing money makes every one happy they propose to adopt this simple method for paying off war debt, restarting trade and generally creating a monetary millennium. How far their nostrums are likely to be adopted, no one can yet say, but some of the utterances of our rulers make one shudder.

Into this atmosphere of quackery and delusion the report of the Committee on Currency and Foreign Exchanges breathes a refreshing blast of sound common sense. Everybody ought to read it. It costs but twopence; it is only a dozen pages long, and it is described (if you want to order it) as Cd. 9182. In view of the many attacks that have been made on our banking system--especially the Bank Act of 1844--by Chambers of Commerce and others before the war, it is rather surprising that so little criticism should have been heard of this Report, which practically advocates a return, as rapidly as possible, to the practice and principles imposed by that Act. It may be that peace, and all the preoccupations that have followed it, have absorbed men"s minds so entirely that questions of currency seem to be an untimely irrelevance; or possibly the very heavy weight of the Committee"s authority may have silenced the opposition to its recommendations. Presided over by Lord Cunliffe, the late Governor of the Bank, and including Sir John Bradbury and Professor Pigou and an imposing list of notable bankers, it was a body whose opinion could only be challenged by critics gifted with the most serene self-confidence.

One of the most interesting--especially to advocates of sound finance--points in its Report is the implied condemnation that it p.r.o.nounces on the methods by which the war has been financed by our rulers. It points out that "the need of the Government for funds wherewith to finance the war in excess of the amounts raised by taxation or by loans from the public has made necessary the creation of credits in their favour with the Bank of England.... The balances created by these operations pa.s.sing by means of payments to contractors and others to the Joint Stock banks have formed the foundation of a great growth in their deposits, which have also been swelled by the creation of credits in connection with the subscriptions to the various War Loans.... The greatly increased volume of bank deposits, representing a corresponding increase of purchasing power and, therefore, tending in conjunction with other causes to a great rise of prices, has brought about a corresponding demand for legal tender currency which could not have been satisfied under the stringent provisions of the Act of 1844." Here we have the story of bad war finance put as clearly as it can be. Because the Government was not able to raise all the money needed for the war on sound lines--that is, by taxation and loans to it of money saved by investors--it had recourse to credits raised for it by the Bank of England and the other banks against Treasury Bills, Ways and Means Advances, War Loans, War Bonds, and loans to customers who were taking up War Loans, etc. Thereby as these credits created fresh deposits there was a huge increase in the community"s purchasing power; and since the supply of goods to be purchased was stationary or reduced, the only result was a great increase in prices which made the war, perhaps, nearly twice as costly as it need have been and produced all the suspicion and unrest that has already been referred to.

Considering that the Committee included an ex-Governor of the Bank and the Permanent Secretary to the Treasury it could hardly have been expected to use much plainer language concerning the failure of our rulers to get money out of us in the right way for the war and the vigour with which they made use of the demoralising weapon of inflation.

It followed as a necessary consequence that the volume of legal tender currency had to be greatly increased. As prices rose wages rose with them, and so much more "cash" was needed in order to pay for a turnover of goods which, fairly constant in volume, demanded more currency because of their inflated prices. As the Committee says in its Report (page 5): "Given the necessity for the creation of bank credits in favour of the Government for the purpose of financing war expenditure, these issues could not be avoided. If they had not been made, the banks would have been unable to obtain legal tender with which to meet cheques drawn for cash on their customers" accounts. The unlimited issue of currency notes in exchange for credits at the Bank of England is at once a consequence and an essential condition of the methods which the Government have found necessary to adopt in order to meet their war expenditure."

The effect of these causes upon the amount of legal tender currency (other than subsidiary coin) in the banks and in circulation is summarised by the Committee in the following table:--

"The amounts on June 30, 1914, may be estimated as follows:--

"Fiduciary Issue of the Bank of England 18,450,000

"Bank of England Notes issued against gold coin or bullion 38,476,000

"Estimated amount of gold coin held by Banks (excluding gold coin held in the Issue Department of the Bank of England) and in public circulation 123,000,000 ___________ "Grand total 179,926,000 ___________

"The corresponding figures on July 10, 1918, as nearly as they can be estimated, were:--

"Fiduciary Issue of the Bank of England 18,450,000 Currency Notes not covered by gold 230,412,000 ___________ "Total Fiduciary Issues [1] 248,862,000 Bank of England Notes issued against coin and bullion 65,368,000 Currency Notes covered by gold 28,500,000 Estimated amount of gold coin held by Banks (excluding gold coin held by Issue Department of Bank of England), say 40,000,000 ___________ "Grand total 382,730,000

"[Footnote 1: The notes issued by Scottish and Irish banks which have been made legal tender during the war have not been included in the foregoing figures. Strictly the amount (about 5,000,000) by which these issues exceed the amount of gold and currency notes held by those banks should be added to the figures of the present fiduciary issues given above.]

"There is also a certain amount of gold coin still in the hands of the public which ought to be added to the last-mentioned figure, but the amount is unknown."

It will be noted that the gold held by the banks (other than the Bank of England) and by the public has declined from 123 to 40 millions, according to the Committee"s estimate, while, on the other hand, the circulation of bank notes has risen by 27 millions and the issue of currency notes has taken place to the tune of 259 millions (at the date of the Report; it is now nearly 300 millions), making a net addition to legal tender currency of over 200 millions. When we also remember that there has been a very heavy coinage of silver and copper, that the Bank of England"s deposits have risen by over 100 millions and the deposits of the other banks by nearly 700 millions, and all this at a time when most of the industrial activity of the country was going into the production of destructive weapons and the support of those who were using them, the behaviour of commodities of ordinary use in rising by nearly 100 per cent. seems to be an example of remarkable moderation. With all this new buying power in the hands of the community there is little wonder that some people should think that we have enormously increased our wealth during this most destructive and costly war, and should then feel hurt and disappointed when they find that this new buying power is robbed of all its beauty by the fact that its efficiency as buying power is seriously diminished by its mere quant.i.ty.

Such being the state of affairs--a great ma.s.s of new credit and currency based on securities--it is clear that our currency has been deprived for the time being of that direct relation with its gold basis that used in former time to regulate its volume according to world prices and our international trade position. As the Committee says, "It is not possible to judge to what extent legal tender currency may in fact be depreciated in terms of bullion. But it is practically certain that there has been some depreciation, and to this extent therefore the gold standard has ceased to be effective." Very well, then, what has to be done to get back to the old state of things under which there was a more or less automatic check on the creation of credit and the issue of currency? This check worked by a system which was elastic and simple. It was not entirely automatic, because its working had to be controlled by the Bank of England, which, by the action of its discount rate, could, more or less, quicken or check the working of the machine. Legal tender currency could only be increased by imports of gold; and exports of gold reduced the available amount of legal tender currency; and since a stock of legal tender currency was essential to meet the demands upon them that bankers made possible by creating credits, there was thus an Indirect and variable connection between the country"s gold stock and the extent to which bankers would think it prudent to multiply credits. If credits were multiplied too fast, our currency was depreciated in value as compared with those of other countries and the exchanges went against us and gold either was exported or began to look as if it might be exported.

If it was exported the legal tender basis of credit was reduced and the creation of credit was checked. If the Directors of the Bank of England thought it inadvisable that gold should be exported they could, by raising the rate of discount and taking artificial measures to control the supply of credit, produce, without the actual loss of gold, the effects which that loss would have brought about.

The keystone of the system was the rigid link between legal tender currency and gold. This was secured by the provisions of the Bank Act of 1844, which laid down that above a certain line--which was before the war roughly 18-1/2 millions--every Bank of England note issued should have gold behind it, pound for pound. In other words, the Bank of England note was, for practical purposes, a bullion certificate.

The legal limit on the fiduciary issue (that is, the issue of 18-1/2 millions against securities, not gold) could only be exceeded by a breach of the law. The many critics of our banking system seized on this hard-and-fast restriction and accused it of making our system inelastic as compared with the German arrangement, under which the legal limit could at any time be exceeded on payment of a tax or fine on any excess perpetrated. These critics might have been right if legal tender currency had been the only, or even the predominant, means of payment in England. But, as every office boy knows, it was not. Legal tender--gold and Bank of England notes--was hardly ever seen in commercial and financial transactions on a serious scale. We paid, sometimes, our retail purchases of goods and services in gold; and Bank notes were a popular mode of payment on racecourses and in other places where transactions took place between people who were not very certain of one another"s standing or good faith. But the great bulk of payments was made in the cheque currency which our bankers had developed outside of the law and could create as fast as prudence--and an eye to the supply of legal tender which every holder of a cheque had a right to demand--allowed them to do so. While cheques provided the currency of commerce, another form of "money" was produced, again without any restriction by the Act, by the pleasant convention which caused a credit in the Bank of England"s books to be regarded as "cash" for balance-sheet purposes by the banks. These advantages gave the English system a freedom and elasticity, in spite of the strictness of the law that regulated the issue of paper currency, that enabled it to work in a manner that, judged by the test of practical results, had one great advantage over that of any of the rival centres. It alone in days before the war fulfilled the functions of an international banker by being ready at all times and without question to pay out the gold that was, in the last resort, the final means of settling international balances.

It is the object of Lord Cunliffe"s Committee to restore as quickly as possible the system which, has thus been tried by the test of experience, "After the war," they say in their Report, "our gold holdings will no longer be protected by the submarine danger, and it will not be possible indefinitely to continue to support the exchanges with foreign countries by borrowing abroad. Unless the machinery which long experience has shown to be the only effective remedy for an adverse balance of trade and an undue growth of credit is once more brought into play there will be very grave danger of a credit expansion in this country and a foreign drain of gold which might jeopardise the convertibility of our note issues and the international trade position of the country.... We are glad to find that there was no difference of opinion among the witnesses who appeared before us as to the vital importance of these matters." The first measure that they put forward as essential to this end is the cessation at the earliest possible moment of Government borrowings. "A large part of the credit expansion arises, as we have shown, from the fact that the expenditure of the Government during the war has exceeded the amounts which they have been able to raise by taxation or by loans from the actual savings of the people. They have been obliged therefore to obtain money through the creation of credits by the Bank of England and the Joint Stock banks, with the result that the growth of purchasing power has exceeded that of purchasable goods and services." It is therefore essential that as soon as possible the State should not only live within its income but should begin to reduce indebtedness, especially the floating debt, which, being largely held by the banks, has been a cause of credit creation on a great scale. "The shortage of real capital must be made good by genuine savings. It cannot be met by the creation of fresh purchasing power in the form of bank advances to the Government or to manufacturers under Government guarantee or otherwise, and any resort to such expedients can only aggravate the evil and r.e.t.a.r.d, possibly for generations, the recovery of the country from the losses sustained during the war." With these weighty words the Committee brushes aside a host of schemes that have been urged for putting everything right by devising new machinery for the manufacture of new credit. That new credits will be needed for industry after war is obvious, but what else are our banks for, if not to provide it?

They can only be set free to provide it on the scale required if, by the necessary reduction of the floating debt, they are relieved of the locking up of their funds in Government securities, which has been one of the bad results of our bad war finance.

It goes without saying that the Committee does not recommend the continuance in peace of the differential rates for home and foreign money that were introduced as a war measure with a view to lowering a rate at which the Government borrowed at home for war purposes. It would evidently be too severe a strain on human nature to attempt to work such a system, except in war-time, when the artificial conditions by which the market was surrounded made it both feasible and desirable to do so. With regard to the note issue, the Committee proposes a return to the old system and a strictly drawn line for the amount of the fiduciary note issue, the whole note issue (with the exception of the few surviving private note issues) being put into the hands of the Bank of England, all notes being payable in gold in London only and being made legal tender throughout the United Kingdom. These suggestions are subject to any special arrangements that may be made with regard to Scotland and Ireland. An early resumption of the circulation of gold for internal purposes is not contemplated. The public has become used to paper money, which is in some ways more convenient and cheaper; and the luxury of a gold circulation is one that we can hardly afford at present. Gold will be kept by the Bank of England in a central reserve, and all the other banks should, it is suggested, transfer to it the whole of their present holdings of the metal. In order to give the Bank of England a closer control of the bullion market the Committee thinks it desirable that the export of gold coin or bullion should, in future, be subject to the condition that such coin or bullion had been obtained from the Bank for the purpose. This measure would give the Bank of England a very close control of the bullion market, so close that there is a danger that if this control were too rigorously exercised, gold that now comes to this country might be diverted, with a view to more advantageous sale, to other centres. The amount of the fiduciary issue is a matter that the Committee leaves open to be determined after experience of post-war conditions. They "think that the stringent principles of the Act (of 1844) have often had the effect of preventing dangerous developments, and the fact that they have had to be temporarily suspended on certain rare and exceptional occasions (and those limited to the earlier years of the Act"s operation, when experience of working the system was still immature) does not," in their opinion, invalidate this conclusion. So they propose that the separation of the Issue or Banking Departments should be maintained, but that in future if an emergency arose requiring an increase in the amount of fiduciary currency, this should not involve a breach of the law, but should be made legal (as it is now under the Currency and Bank Notes Act of 1914), subject to the consent of the Treasury.

It is not proposed at present to secure the circulation of paper instead of gold by legislation. The Committee considers that "informal action on the part of the banks may be expected to accomplish all that is required." If necessary, however, it points out that the circulation of gold could be prevented by making the notes convertible, at the discretion of the Bank of England, into coin or bar gold. The amount which, in the opinion of the Committee, should be aimed at for the central gold reserve is 150 millions (a sum which is already almost in sight on its figures quoted above); and "until this amount has been reached and maintained concurrently with a satisfactory foreign exchange position for a period of at least a year," it thinks that the policy of reducing the uncovered note issue "as and when opportunity offers" should be consistently followed. How this opportunity is going to "offer" is not made clear; but presumably a reflow of notes from circulation can only happen through a fall in prices or a reduction in bank deposits by the liquidation of advances made to the Government, directly or indirectly, by the banks.

Concerning the difficult problem of replacing the Bradbury notes by Bank of England notes of 1 and 10s., an ingenious suggestion is made by the Committee. It observes that there would be some awkwardness in transferring the issue to the Bank of England before the future dimensions of the fiduciary issue have been arrived at; and it suggests that during the transitional period any expansion in Treasury notes that may take place should be covered, not as now, by Government securities, but by Bank of England notes taken from the Bank. By this means any demands for new currency would operate in the normal way to reduce the reserve of the Banking Department, "which would have to be restored by raising money rates and encouraging gold imports," and so a step would have been taken to getting back to a business basis in the currency system and away from the profligate printing-press policy of the war period.

Such are the suggestions made by this distinguished body for the restoration of our currency. Little has been said against them in the way of serious criticism, but their conservative tendency and the fact that they practically recommend a return to the _status quo_ has caused some impatience among the financial Hotspurs who proposed to begin to build a new world by turning everything upside down. In matters of finance this process is questionable, interesting as the result would undoubtedly be. To get to work on tried lines and then, when once industry and finance have recovered their old activity, to amend the machine whenever it is creaking seems to be a more sensible plan than to delay our start until we have fashioned a new heaven and earth, and then very probably find that they do not work. If the machine is to be set moving, it can only be done by close co-operation between the Bank of England and the other banks which have grown by amalgamation into inst.i.tutions the size of which seem likely to make the task of central control more difficult than ever. On this important point the Committee is curiously silent. But it recommends the adoption of a suggestion made by a Committee of Bankers, who proposed that banks should in future be required "to publish a monthly statement showing the average of their weekly balance-sheets during the month." (Will this requisition apply to the Bank of England?) This is a welcome suggestion as far as it goes, but unless something is done by co-operative action to make the Bank rate more automatic in its influence on the actions of the other banks, the difficulty of making it effective seems likely to be considerable.

Getting the currency right is a most important matter for the future of our financial position. Another is the question of our debt to foreigners. Most of this debt we owe to America, and we only owe it because we had to finance our Allies. We surely ought to be able to arrange with America that anything that we have to do in giving our Allies time before asking for repayment they also should do for us--within limits, say, up to thirty years. In view of all that they have made and we have lost by this war waged for the cause of all mankind, this would seem to be reasonable concession on America"s part.

XVII

MEETING THE WAR BILL

_January_, 1919

The Total War Debt--What are our Loans to the Allies worth?--Other Uncertain Items--The Prospects of making Germany pay--The Right Way to regard the Debt--Our Capital largely intact--A Reform of the Income Tax--The Debt to America--The Levy on Capital and other Schemes--The only Real Aids to Recovery.

A table published week by week by the _Economist_ shows that from August 1, 1914, to November 9, 1918, the Government paid out 8612 millions sterling. From this we have to deduct an estimate of the amount that the Government would have spent if there had not been a war, so that we are at once landed in the realm of conjecture. The last pre-war financial year saw an expenditure of 198 millions, and it is safe to a.s.sume that this figure would have swollen by a few millions a year if peace had continued, so that we may take at least 860 millions from the above total as normal peace expenditure for the 4-1/2 years. This gives us 7752 millions as the gross cost of the war, as far as the period of actual fighting is concerned. From this figure, however, we are able to make some big deductions. There are loans to Allies and Dominions, and some other much more readily realisable a.s.sets than these. We do not know the actual figure of the loans to Allies and Dominions during the war period, because they are not included in the weekly financial statements. The amount that we borrow abroad is set out week by week--at least, that is believed to be the meaning of the cryptic item "Other Debt"--but the amount that we lend to Allies and Dominions is hidden away in the Supply Services or somewhere, and we only get occasional information about it from the Chancellor in the course of his speeches on the Budget or on Votes of Credit. In his last Vote of Credit speech, on November 12, 1918, Mr Bonar Law gave the chief items of the loans to Allies, and a very interesting list it was. The totals up to October 19, 1918, were 1465 millions to Allies and 218-1/2 millions to Dominions. The Allies were indebted to us as follows:--Russia, 568 millions; France, 425 millions; Italy, 345 millions; smaller States, 127 millions.[1]

[Footnote 1: Parliamentary Debates, Vol. 110, No. 114, p. 2560.]

Some of these debts may be written off at once, and that cheerfully, seeing that they have been lent brothers-in-arms who have been hit much harder than we have by the war, and had nothing like our financial strength. The question is, what figure ought we to put on this a.s.set in deducting it from gross war expenditure in order to arrive at a guess at the real cost? We take our loans to Dominions, of course, as good to the last penny. Mr Bonar Law, in his Budget speech last April, took our loans to Allies at half their face value. Strict bookkeeping would probably demand a lower figure than 50 per cent.; but let us follow the ex-Chancellor"s example and take loans to Allies, which we will estimate at 1480 millions up to November 9th, as good for 740 millions, and loans to Dominions at 220 millions up to the same date, a total of 960 millions, to be deducted from gross war cost. Concerning 740 millions of this sum, however, there is a certain amount of doubt. No one questions for a moment the solvency of France and Italy, but in view of the pressure that the war has exercised on their producing power, and, in the case of France, the complication added by the uncertainties of the position in Russia, in which French investors are so deeply interested, one cannot feel sure that they will be able at once to make interest payments. Much will depend on the sums that they are able to recover from Germany against their bill of damages, on which more anon. But in any case it seems likely that a general scheme of interest funding, as between the Allies, may have to be adopted for some years to come.

As to the other a.s.sets that we have to set against our gross expenditure during the fighting period, they were enumerated by the Chancellor in his Budget speech last April in the following terms;--

Balances in agents" hands, debts due, foodstuffs, etc 375 millions.

Land, securities, buildings and ships 97 "

Stores in Munitions Department (cost price 325 millions) taken at 100 "

Additions this financial year 100 "

Arrears of taxation 500 "

--- Total[1] 1172

[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, pp. 698-699.]

It will be remembered that in his Budget speech the Chancellor was proceeding on the a.s.sumption that the war would last till March 31st next--the date at which our financial year ends--and would then be convenient enough to stop. Happily for us, the valour of our soldiers and those of our Allies, the splendid success of our Fleet and our merchantmen In bringing over American troops and their food and equipment with astonishing speed, and the straightforward diplomacy of President Wilson, combined to achieve victory nearly five months earlier than the most sanguine had dared to expect. With the very pleasant result--though it is a small matter when compared with the end of the killing of the best of our manhood--that the financial position is very greatly improved. With regard to the figures given above, it should be observed that the "debts" are advances to Dominions, but on quite a different basis from our loans to them, being money owed by them against goods and services supplied.[1] They and the balances in the hands of agents are both as good as gold.

Concerning the others, one is ent.i.tled at first sight to feel a good deal of scepticism, since such articles as land, buildings, ships and stores, bought or built by Government during a war, are likely to find an extremely sluggish demand when the war is over. However, Mr Bonar Law a.s.sured the House that his valuation of these amounts had been arrived at on a conservative basis, and, what is better still, in his Vote of Credit speech on November 12th, he was able to state that revised estimates had shown that their value would be "far greater"

than he had previously expected. So perhaps we are ent.i.tled to take them at 1300 millions.