The War Illustrated, Volume 2, No. 31, Page 332, April 5, 1940.

Here we have a chapter on the financial aspect of the war-on the all-important subject of how it is being paid for, or will be paid for in the future. Written by E. Royston Pike of The War Illustrated, it is based on a series of valuable articles that have recently appeared in the "Economist."

This war is a very expensive business, much more expensive than the last. Between 1914 and 1918 the cost of the Army worked out at about £340 per man per annum, whereas each man in the Army of today costs nation on the average £600 per annum. The Navy, Army, Air Force and Ministry of Supply are spending at the daily rate of nearly £4 million. Almost another million a day is being spent on Air Raid Precautions, evacuation, shipping and the stabilization of food prices. The whole of the war expenditure is therefore close on £5 million a day, out of a total Government expenditure of between £6,500,000 and £7,000,000 a day.

Already then, when we are still only half-way through the first year of the war, we are spending at the rate of nearly £2,500 million a year-and this when the war in the air has hardly begun and that on land is still in the future. Before the end of war’s first year we may be spending £8 million a day, which is at the rate of nearly £3,000 million a year; if the war continues expenditure may rise to £9 million a day or £3,285 million a year, or even ten million a day, when the truly terrific figure of £3,650 million a year would be reached.

So much for expenditure; what of the receipts? The Chancellor of the Exchequer has estimated that in the year 1939-1940 he will receive £995 million, and in the financial year 1940-1941 he may, if he is lucky, receive as much as £1,250 million. Expenditure, on the other hand, is likely to reach at least £3,200 million. Between the two there is a difference of £1,950 million-say, £2,000 million. How is the gap to be closed?

Increased taxation is the first resort which will spring to mind, and the increases would have to be borne by every class in the community except perhaps the very poorest, for even if all incomes over £2,000 a year were completely confiscated the national revenue would be increased by only about £60 million a year. If the standard rate of income tax were raised from 7s and 6d. to 10s. in the pound, excess profits tax were made to yield its last pound, "fancy taxes" of one kind and another were imposed, and direct taxation stiffened, the estimated revenue might reach a figure of £1,750 million, i.e. a further £500 million a year. There would still be a gap of £1,500 million per annum, and this gap could be closed only by borrowing of one kind or another.

At the outbreak of war it was estimated that the gross savings of the community cannot have exceeded about £750 million a year at most, and this figure included amounts necessarily set aside for the depreciation of existing capital. As the nation’s war effort expands, the growth of employment and the increased sums paid in wages must increase the nation’s savings, and the National Savings campaign will no doubt lead to the saving of huge sums which would otherwise have been frittered away. In the first hundred days of the National Savings campaign the public subscribed, through the medium of War Savings Certificates and 3 per cent War Bonds, to the extent of £100 million, and perhaps this rate of progress may be maintained or even increased. But it is difficult to believe that the additional amount which can be secured from genuine savings will be more than £750 million a year-in other words, £1,500 million a year is the maximum that may be received from savings.

Thus we now have a total of Government receipts of £3,250 million, made up of £1,750 million from taxation and £1,500 million from borrowing-about what the war is expected to cost during the coming year. If the war develops in intensity on the land and in the air, then its cost will be tremendously increased-as suggested above, it may approach a figure of £4,000 million a year-and so there will develop an ever-widening gap. When the war is at its height this gap might amount to between £500 million and £1,000 million a year.

Is Inflation Inevitable?

How will this fresh gap be closed? Judging from the experience of the last war, by a borrowing which will be, in effect, hardly distinguishable, if at all, from inflation. If in wartime, as the "Economist" very clearly puts it, for every pound that the Government spends some private individual (or institution) has forgone the expenditure of a pound which he would otherwise have spent, then there is no inflation, no matter whether the private individual devoted the pound he did not spend to the payment of taxes, to subscription to war loan, or merely to the increase of his cash reserves.

But if the Government expenditure on the war increases without a corresponding reduction in the expenditure of the public, then there is inflation-if, for instance, the citizen subscribes to war loan, not out of cash set free by the limitation of his expenditure but out of advances made to him by his banker for the purpose and possibly on the sercurity of the loan to which he is subscribing.

This is the method of increasing subscriptions to war loans which was adopted in the last war, and it may well compel its adoption in the course of this struggle if it should continue more than a year or two.