Sir Frederick Maurice said:—This problem of the reduction of armaments is one of the most urgent of the international and national problems of the day. It is urgent in its economic aspect, urgent also as regards its relation to the future peace of the world. The urgency of its economic aspect was proclaimed two years ago at the Brussels conference of financiers assembled by the League of Nations. These experts said quite plainly and definitely that, so far as they could see, the salvation of Europe from bankruptcy depended upon the immediate diminution of the crushing burden of expenditure upon arms. That was two years ago. Linked up with this question is the whole question of the economic reconstruction of Europe. Linked up with it also is that deep and grave problem of reparations. It is no longer the case to-day, if it has ever been the case since the war, which I doubt, that sober opinion in France considers it necessary for France to have large military forces in order to protect her from German aggression in the near future. For the past two years, however, it has been the custom of those who live upon alarmsto produce the German menace. There is a great body of opinion in France at this moment which feels that unless France is able to put the pistol to Germany’s head, it will never be able to get a penny out of Germany.
You have the further connection of the attitude of America to the problem. America said, officially through Mr. Hoover and unofficially through a number of her leading financiers, that she was not ready to come forward and take her share in the economic restoration of Europe so long as Europe is squandering its resources upon arms. The connection is quite definitely and explicitly recognised in the Covenant of the League of Nations. Article 8 begins: “The principles of the League recognise that the maintenance of peace requires reduction of national armaments to the lowest point consistent with national safety, and the enforcement by common action of international obligations.” These words were promulgated in 1919. Personally, I find myself in complete agreement with what Lord Robert Cecil said this morning, and what Lord Grey said a few days ago at Newcastle, that one of the prime causes of the war was Prussian militarism. By that I mean the influence of that tremendous military machine, which had been built up through years of labour in Germany, in moulding the public opinion of that country.
Well, how do we stand in regard to that to-day? We stand to-day in the position that the armaments of Germany, Austria, Hungary, Bulgaria, have all been compulsorily drastically reduced, but in their place you have a whole group of new armies. You have armies to-day which did not exist before the war, in Finland, Esthonia, Poland, Lithuania, and Czecho-Slovakia, and the sum total is that at this moment there are more armed men in time of peace in Europe than in 1913. Is there no danger that this machine will mould the minds of some other peoples, just as the German machine moulded the minds of the Germans? This is the position as regards the peace establishments of Europe to-day in their relation to the future peace of the world. What about the economic position? I have mentioned that certain Powers have had their forces drastically reduced, and that has brought with it a drastic reduction of expenditure, but I have before me the naval, military, and air force estimates of the eight principal Powers in Europe, leaving out Germany, Austria, and Bulgaria, whose forces have been compulsorily reduced.
At the economic conference of financiers in Brussels in 1920 it was mentioned with horror that 20 per cent. of the income of Europe was then being devoted to arms. I find that to-day 25 per cent. of the total income of these eight Powers is devoted to arms. I find, further, that of these eight Powers who have budgeted for a smallerservice, only one—Yugo-Slavia—has managed to balance her budget, and the others have large deficits which are many times covered by their expenditure on arms. And this is going on at a time when all these eight nations are taxed almost up to their limit, when the whole of their industries are suffering in consequence, and when the danger of bankruptcy, which horrified the financiers in 1920, is even more imminent.
That being the case, what has been done in the last few years to remedy this matter, and why is more not being done? As you all know, this question is in the forefront of the programme of the League of Nations. And the League began to deal with it at once. Lord Robert Cecil will agree with me that the framers of the Covenant, of which he is one of the chief, could not foresee everything, and they did not foresee at the time the Covenant was framed, that machinery would be required to deal with this extraordinarily complex question of armaments. They created an organisation then called a Permanent Military Command, still in existence, to advise the Council of the League on all military matters. But when these gentlemen got to work upon such questions as reduction of armaments, they at once found themselves dealing with matters entirely beyond their competence, because into this problem enter problems of high politics and finance, and a thousand other questions of which soldiers, sailors, and airmen know nothing whatever.
The first step was to remedy an oversight in the machinery, and that was done at the first meeting of the Assembly. The first meeting of the Assembly created a temporary mixed commission on armaments, which was composed of persons of recognised competence in political, social, and economic matters. It consisted of six members of the old Permanent Commission, and in addition a number of statesmen, employers, and representatives of labour. This body started to tackle this grave question. Before it began the first Assembly of the League had suggested one line of approach—that there should be an agreement to limit expenditure; that an attempt should be made to limit armaments by limiting budgets; and nations were asked to agree that they would not exceed in the two years following the acceptance of the resolution the budgeted expenditure on armaments of the current year.
That proposal did not meet with great success. It was turned down by seven Powers, notably by France and Spain. On the whole, I think France and Spain and the other Powers had some reason on their side, because it is not possible to approach this problem solely from the financial standpoint. You cannot get a financial common denominator and apply it to armaments. The varying costs of a soldier in Europe and in Japan have no relation to each other. The cost of a voluntary soldier in Great Britain has no relation to the cost of aconscript on the Continent. Therefore, that line of approach, when applied too broadly, is not fruitful. I think myself it is quite possible that you may be able to apply financial limitations to the question of material, the construction of guns and other weapons of war, because the cost of these things in foreign countries tends much more to a common level. I think this is a possible line of approach, but to try to make a reduction of armaments by reducing budgets on a wholesale scale I do not think will lead us anywhere at all. I may safely say that for the present that line of approach has been abandoned.
The Temporary Mixed Commission got to work, and in its first year, frankly, I cannot say it did very much. It concerned itself very largely with the accumulation of information and the collection of statistics, bearing rather the same relation to world problems as a Royal Commission does to our domestic problems. By the time the second Assembly met practically nothing had been done by the Commission. But other people had been at work, and our own League of Nations Union had put forward a proposal—a line of approach, rather, I would say, to this problem—which I for one think is extremely useful. It began by inquiring as to what armaments were for, which after all is a useful way of beginning, and the inquiry came to the conclusion that nations required them for three purposes—to maintain internal order; as a last resort for the enforcement of law and order; and to protect overseas possessions. After these purposes were served there was a large residuum left. Thatresiduum could only be required for one purpose—to protect the country in question from foreign aggression. When you had gone thus far in your reasoning, you had obviously got into the zone where bargaining becomes possible, because it is obvious that by agreement you can get the force by which a nation is liable to become reduced. That line of approach received the general blessing at the second Assembly of the League of Nations. Things began to move, primarily because the Dominion of South Africa took a keen interest in this problem of the reduction of armaments, and South Africa appointed Lord Robert Cecil as its representative, and instructed him to press the matter on, and he did. The Assembly definitely instructed this temporary mixed Commission that by the time the third Assembly met plans should be prepared and concrete proposals put on paper.
Soon after that came the Washington Conference—a great landmark in the history of this problem. For reasons I need not go into in detail, the naval problem is very much easier than the military or air problem. You have as the nucleus of naval forces something quite definite and precise—the battleship—and it also happens that that particular unit is extremely costly, and takes a long time to build, and no man has yet ever succeeded in concealing the existence of a battleship. There you had three important points—a large and important unit in the possession of everybody concerned,very costly, so that by reducing it you make great reductions in expenditure. There was no possibility of avoiding an agreement about the construction of battleships, and it is to these facts mainly that the happy results of the Washington Conference were due.
But for the furtherance of the problem the point is this. The Washington Conference definitely established the principle of reduction of armaments on a great ratio. The ratio for battleships between Great Britain, the United States, Japan, France, and Italy, was settled as to 5, 5, 3, and 1.75. They all agreed on a definite ratio. All agreed to scrap a certain number of ships, to bring their tonnage down to a certain figure, and by doing that relatively they were left in the same position as before, with this advantage—that they at once obtained an enormous reduction in expenditure on armaments.
That opened up a new line of approach for the attack on this problem from the military and air standpoint. And the next development took place in February this year at the meeting of the Temporary Mixed Commission on armaments, when the Esher proposals were presented. There has been a great deal of talk about the Esher proposals, and I am glad of it, because the one thing wanted in this question is public interest. The Esher proposals were an endeavour to apply to land armaments this principle of reduction on a great ratio. And the line taken was this. It was necessary to find some unit in land armaments which corresponded with the battleships, and the unit selected by LordEsher was the 300,000 regular soldiers of the peace armies in France, England, and Spain. It was selected because it happened to be the number to which the Austrian army was reduced by treaty, and with that unit he proposed a ratio for the armies of Europe, which would leave everybody relatively in much the same position as before, but would obtain an immediate reduction in numbers of standing armies and a great reduction of expenditure.
This proposal was subjected to a great deal of criticism, and I am sorry to say nine-tenths of the criticism appears to emanate from persons who have never read the proposal at all. It is a proposal which lends itself to a great deal of criticism, and the most effective criticism which could have been applied at the time it was presented was that it put the cart before the horse, and approached the problem from the wrong direction, for, as Lord Robert Cecil has said here this morning, what nations require is security. Some of them have clear ideas as to the way of obtaining it, but they all want it, and before you can expect people to reduce their armaments, which are, after all, maintained mainly for the purpose of providing security, you must give them something that will take the place of armaments.
In June an important development took place in this Temporary Commission. It was increased by the addition of a number of statesmen, and,amongst others, of men who ought to have been on it long ago. Lord Robert Cecil was added, and he at once proceeded to remedy what was a real difficulty in Lord Esher’s proposals. He put forward a plan for providing security in the form, as the Assembly of the League had asked, of a definite written proposal—really a brief treaty. The purport of that treaty is included in the form of resolutions, which are roughly as follows:—No scheme for the reduction of armaments can be effective unless it is general; that in the present state of the world no Government can accept the responsibility for a serious reduction of armaments unless it is given some other equally satisfactory guarantee of the safety of its country; such guarantee can only be found in a general defensive agreement of all the countries concerned, binding them all to come to the assistance of any one of them if attacked.
A general defensive pact, with a proviso! It is obviously unreasonable to expect the States of the American continent to be ready to come over at any moment to help in Europe. It is obviously unreasonable to expect the States of Europe to bind themselves to come and fight in Asia. Therefore, there was this proviso added that an obligation to come to the assistance of the attacked country should be limited to those countries which belonged to the same quarter of the globe. Thus, you see, you are getting the obligation of the League into regional application. Personally my own conviction is that this is the line upon which many of the functions of the League will develop.
The main point of the situation as it is to-day is that you have got a committee working out in detail a general pact, which when it is formulated will be far more complete and satisfactory than the very general and vague Clause 10 of the Covenant. We have reached the position when practical proposals are beginning to emerge. What more is wanted? How can we help on this work? You will have gathered from what I said that it is my own conviction that with this problem of reduction of armaments is so closely linked up the problem of economic reconstruction and reparations that the whole ought to be taken together. I believe one of the reasons why so little progress has been made is that the economic problems have been entrusted, with the blessing of our and other Governments, to perambulating conferences, while the disarmament problem has been left solely to the League of Nations. I believe if you could get the whole of these problems considered by one authority—and there is one obvious authority—progress would be far more rapid.
There is another matter which concerns us as citizens—the attitude of our own Government to this question. I was delighted to see recently an announcement made by a Minister in the House of Commons that the Government was seriously in favour of a reduction of armaments on a great ratio. I was delighted to read the other day a speech, to which reference has already been made, by the Prime Minister. We have had a great many words on this question. The time has come foraction, and quite frankly the action of our Government in the past two years with regard to this question has been neutral, and not always one of benevolent neutrality. Our official representatives at Geneva have been very careful to stress the difficulties, but up to the present I am unaware that our Government has ever placed its immense resources as regards information at the disposal of the one Englishman who has been striving with all his power and knowledge to get a definite solution. I believe there is going to be a change; I hope so. In any case, the best thing we can do is to see that it is changed, and that Lord Robert Cecil is not left to fight a lone battle.
There is something more. There is something wanted from each of us. Personally, I am convinced myself that this problem is soluble on the lines by which it is now being approached. I speak to you as a professional who has given some study to the subject. I am convinced that on the lines of a general pact as opposed to the particular pact, a general defensive agreement as opposed to separate alliances, followed by reduction on a great ratio, the practicability of which has been proved at Washington, a solution can be reached. Given goodwill—that is the point. At the last Assembly of the League of Nations a report was presented by the Commission, of which Lord Robert Cecil was a member, and it wound up with these words: “Finally, the committee recognises that a policyof disarmament, to be successful, requires the support of the population of the world. Limitation of armaments will never be imposed by Governments on peoples, but it may be imposed by peoples on Governments.“ That is absolutely true. How are we going to apply it? Frankly, myself, I do not see that there is a great deal of value to be got by demonstrations which demand no more war. I have every sympathy with their object, but we have got to the stage when we want to get beyond words to practical resolutions. We want definite concrete proposals, and you won’t get these merely by demonstrations. They are quite good in their way, but they are not enough. What you want in this matter is an informed public opinion which sees what is practical and insists on having it.
I am speaking to you as one who for a great many years believed absolutely that preparation for war was the means of securing peace. In 1919—when I had a little time to look round, to study the causes of the war and the events of the war—I changed my opinion. I then came quite definitely to the conclusion that preparation for war, carried to the point to which it had been carried in 1914, was a direct cause of war. I had to find another path, and I found it in 1919. Lord Robert may possibly remember that in the early days of the Peace Conference I came to him and made my confession of faith, and I promised to give him what little help I could. I have tried to keep my promise, and I believe this vital problem, upon which not only the economic reconstruction of Europe and thefuture peace of the world, but also social development at home depend, can be solved provided you will recognise that the problem is very complex; that there is fear to be overcome; that you are content with what is practical from day to day, and accept each practical step provided it leads forward to the desired goal. I therefore most earnestly trust that the Liberal party will take this question up, and translate it into practical politics. For that is what is required.
Mr. Keynes said:—I do not complain of Lord Balfour’s Note, provided we assume, as I think we can, that it is our first move, and not our last. Many people seem to regard it as being really addressed to the United States. I do not agree. Essentially it is addressed to France. It is a reply, and a very necessary reply, to the kites which M. Poincaré has been flying inThe Timesand elsewhere, suggesting that this country should sacrifice all its claims of every description in return for—practically nothing at all, certainly not a permanent solution of the general problem. The Note brings us back to the facts and to the proper starting-point for negotiations.
In this question of Reparations the position changes so fast that it may be worth while for me to remind you just how the question stands at this moment. There are in existence two inconsistent settlements, both of which still hold good in law. The first is the assessment of the ReparationCommission, namely, 132 milliard gold marks. This is a capital sum. The second is the London Settlement, which is not a capital sum at all, but a schedule of annual payments calculated according to a formula; but the capitalised value of these annual payments, worked out on any reasonable hypothesis, comes to much less than the Reparation Commission’s total, probably to not much more than a half.
But that is not the end of the story. While both the above settlements remain in force, the temporary régime under which Germany has been paying is different from, and much less than, either of them. By a decision of last March Germany was to pay during 1922 £36,000,000 (gold) in cash,plusdeliveries in kind. The value of the latter cannot be exactly calculated, but, apart from coal, they do not amount to much, with the result that the 1922 demands are probably between a third and a quarter of the London Settlement, and less than one-sixth of the Reparation Commission’s original total. It is under the weight of this reduced burden that Germany has now broken down, and the present crisis is due to her inability to continue these reduced instalments beyond the payment of July, 1922. In the long run the payments due during 1922 should be within Germany’s capacity. But the insensate policy pursued by the Allies for the last four years has so completely ruined her finances, that for the time being she can pay nothingat all; and for a shorter or longer period it is certain that there is now no alternative to a moratorium.
What, in these circumstances, does M. Poincaré propose? To judge from the semi-official forecasts, he is prepared to cancel what are known as the “C” Bonds, provided Great Britain lets France off the whole of her debt and forgoes her own claims to Reparation. What are these “C” Bonds? They are a part of the London Settlement of May, 1921, and, roughly speaking, they may be said to represent the excess of the Reparation Commission’s assessment over the capitalised value of the London Schedule of Payments, and a bit more. That is to say, they are pure water. They mainly represent that part of the Reparation Commission’s total assessment which will not be covered, even though the London Schedule of Payments is paid in full.
In offering the cancellation of these Bonds, therefore, M. Poincaré is offering exactly nothing. If Great Britain gave up her own claims to Reparations, and the “C” Bonds were cancelled to the extent of France’s indebtedness to us, France’s claims against Germany would be actually greater, even on paper, than they are now. For the demands under the London Settlement would be unabated, and France would be entitled to a larger proportion of them. The offer is, therefore, derisory. And it seems to me to be little short of criminal on the part ofThe Timesto endeavour to trick the people of this country into such a settlement.
Personally, I do not think that at this juncture there is anything whatever to be done except to grant a moratorium. It is out of the questionthat any figure, low enough to do Germany’s credit any good now, could be acceptable to M. Poincaré, in however moderate a mood he may visit London next week. Apart from which, it is really impossible at the present moment for any one to say how much Germany will be able to pay in the long run. Let us content ourselves, therefore, with a moratorium for the moment, and put off till next year the discussion of a final settlement, when, with proper preparations beforehand, there ought to be a grand Conference on the whole connected problem of inter-Governmental debt, with representatives of the United States present, and possibly at Washington.
The difficulties in the way of any immediate settlement now are so obvious that one might wonder why any one should be in favour of the attempt. The explanation lies in that popular illusion, with which it now pleases the world to deceive itself—the International Loan. It is thought that if Germany’s liability can now be settled once and for all, the “bankers” will then lend her a huge sum of money by which she can anticipate her liabilities and satisfy the requirements of France.
In my opinion the International Loan on a great scale is just as big an illusion as Reparations on a great scale. It will not happen. It cannot happen. And it would make a most disastrous disturbance if it did happen. The idea that the rest of theworld is going to lend to Germany, for her to hand over to France, about 100 per cent. of their liquid savings—for that is what it amounts to—is utterly preposterous. And the sooner we get that into our heads the better. I am not quite clear for what sort of an amount the public imagine that the loan would be, but I think the sums generally mentioned vary from £250,000,000 up to £500,000,000. The idea that any Government in the world, or all of the Governments in the world in combination, let alone bankrupt Germany, could at the present time raise this amount of new money (that is to say, for other purposes than the funding or redemption of existing obligations) from investors in the world’s Stock Exchanges is ridiculous.
The highest figure which I have heard mentioned by a reliable authority is £100,000,000. Personally, I think even this much too high. It could only be realised if subscriptions from special quarters, as, for example, German hoards abroad, and German-Americans, were to provide the greater part of it, which would only be the case if it were part of a settlement which was of great and obvious advantage to Germany. A loan to Germany, on Germany’s own credit, yielding, say, 8 to 10 per cent., would not in my opinion be an investor’s proposition in any part of the world, except on a most trifling scale. I do not mean that a larger anticipatory loan of a different character—issued, for example, in Allied countries with the guarantees of the Allied Government, the proceeds in each such country being handed over to the guaranteeing Government,so that no new money would pass—might not be possible. But a loan of this kind is not at present in question.
Yet a loan of from £50,000,000 to £100,000,000—and I repeat that even this figure is very optimistic except as the result of a settlement of a kind which engaged the active goodwill of individual Germans with foreign resources and of foreigners of German origin and sympathies—would only cover Germany’s liabilities under the London Schedule for four to six months, and the temporarily reduced payments of last March for little more than a year. And from such a loan, after meeting Belgian priorities and Army of Occupation costs, there would not be left any important sum for France.
I see no possibility, therefore, of any final settlement with M. Poincaré 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 entitled in the near future, even if the payments fixed last March were to be paid in full, is quite trifling.
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. Poincaré 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 pronounce 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. TheReparation Commission must be asked to divide their assessment 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 principal 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 anticipated 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.
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, illustrate it best by the analogy 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 accumulations. 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 removalto 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.
Now a national budget may consist of two parts, one of which I will call the “responsive” and theother 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 illustration. 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 thetransaction 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.
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 theNapoleonic 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 mass of figures, but I would just give you one or two selected periods. You can find more details in my recent book onWealth and Taxable Capacity. We had a total debt of—
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:—
Here you will see that the reduction from 32 to 24 was 25 per cent. or a much greater reduction than the reduction of thetotalcapital 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 therealburden 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:—
In the year 1920 the charge per head was £7.16 and my purchasing power index figure 629. You will see that therealburden in commodities moved down much less violently than themoneyburden, 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 ofour 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.
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 willexamine 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 assumptions. 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-repetition. I have not seen anywhere any scheme by which we can feel politically insured against its repetition. 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 Iam 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 classes 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 likelihoodof 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.”
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 onhis expectation (on which he paysannualinterest) 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 class 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 assessments will simply shout at you for adjustment. There are other types of difficulty in assessment 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, asthe 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 classes 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 assessment 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.
I do not rule the Capital Levy out as impracticable by any means, but as a taxation expedient I cannot be enthusiastic about it. It is a desperate remedy. But if our present temper for “annual” tax relief at all costs continues, we mayneeda desperate remedy. Without a levy what kind of position can you look forward to? Make some assumptions, not with any virtue in their details, but just in order to determine the possible prospect. If in fifteen to twenty years reparation payments have wiped out 1000 millions, debt repayments another 1000, and ordinary reductions by sinking funds another 1000 millions, you will have the debt down to 5000 millions, and possibly the lower interest then effective may bring the annual charge down to some 200 or 225 million pounds. If the population has reached sixty millions the nominal annual charge will be reduced from £7 16s. by one-half, but if prices have dropped further, sayhalf-way, to the pre-war level, the comparable burden will still be £4 10s. per head.
It is no good talking about “holidays from taxation” and imagining you can get rid of this thing easily; you won’t. We are still in the war financially. There is the same need of the true national spirit and heroism as there was then. Thus hard facts may ultimately force us to some such expedient as the levy, but we should not accept it light-heartedly, or regard it as an obvious panacea. Perhaps in two or three years we may tell whether economic conditions are stable enough to rob it of its worst evils. The question whether the burden of rapidly relieving debt by this means in an instalment levy over a decade is actually lighter than the sinking fund method, depends on the relation of the drop in prices over the short period to the drop over the ensuing period, with a proper allowance for discount—at the moment an insoluble problem. I cannot yet with confidence join those who, on purely economic and non-political grounds, commend the scheme and treat it as “good business for the income-tax payer.”
Mr. Robertson said:—At an early stage of the war Mr. H.G. Wells published a newspaper article to the effect that while we remained Free Traders we were determined in future to accord free entry only to the goods of those States which allowed it to us. The mere state of war, no doubt, predisposed many to assent to such theses who a few years before would have remembered that this was but the nominal position of the average protectionist of the three preceding generations. War being in itself the negation of Free Trade, the inevitable restrictions and the war temper alike prepared many to find reasons for continuing a restrictive policy when the war was over. When, therefore, the Committee of Lord Balfour of Burleigh published its report, suggesting a variety of reasons for setting up compromises in a tariffist direction, there were not wanting professed Free Traders who agreed that the small tariffs proposed would not do any harm, while others were even anxious to think that they might do good.
Yet the policy proposed by Lord Balfour’sCommittee has not been adopted by the Coalition Government in anything like its entirety. Apart from the Dyestuffs Act, and such devices as the freeing of home-made sugar from excise, we have only had the Safeguarding of Industries Bill, a meticulously conditional measure, providing for the setting up of particular tariffs in respect of particular industries which may at a given moment be adjudged by special committeesad hocto need special protection from what is loosely called “dumping.” And even the findings of these committees so far have testified above all things to the lack of any accepted set of principles of a protectionist character. Six thousand five hundred articles have been catalogued as theoretically liable to protective treatment, and some dozen have been actually protected. They have given protection to certain products and refused it to others; according it to fabric gloves and glass and aluminium goods and refusing it to dolls’ eyes and gold leaf.
Finally, the decision in favour of a tariff on fabric gloves has evoked such a storm of protest from the textile manufacturers who export the yarns with which foreign fabric gloves are made, that even the Coalitionist press has avowed its nervousness. When a professed protectionist like Lord Derby, actually committed to this protectionist Act, declares that it will never do to protect one industry at the cost of injuring a much greater one, those of his party who have any foresight must begin to be apprehensive even when a House of Commons majority backs the Government, which, harddriven by its tariffists, decided to back its Tariff Committee against Lancashire. Protectionists are not much given to the searching study of statistics, but many of them have mastered the comparatively simple statistical process of counting votes.
In a sense, there are new fiscal “circumstances.” But I can assure my young friends that they are just the kind of circumstances which were foreseen by their seniors in pre-war days as sure to arise when any attempt was made to apply tariffist principles to British industry. As a German professor of economics once remarked at a Free Trade Conference, it is not industries that are protected by tariffs: it is firms. When a multitude of firms in various industries subscribed to a large Tariff Reform fund for election-campaign purposes, they commanded a large Conservative vote; but when for platform tariff propaganda, dealing in imaginative generalities and eclectic statistics, there are substituted definite proposals to meddle with specified interests, the real troubles of the tariffist begin. You might say that they began as soon as he met the Free Trader in argument; but that difficulty did not arise with his usual audiences. It is when he undertakes to protect hides and hits leather, or to protect leather and hits boot-making, or to help shipping and hits shipbuilding that he becomes acutely conscious of difficulties. Now he is in the midst of them. The threat of setting up a general tariff which will hit everybody alikeseems so far to create no alarm, because few traders now believe in it. Still, it would be very unwise to infer that the project will not be proceeded with. It served as a party war-cry in Opposition for ten years, and nearly every pre-war Conservative statesman was committed to it—Earl Balfour and Lord Lansdowne included. Even misgivings about Lancashire may fail to deter the tariffist rump.
Some of the people who even yet understand nothing of Free Trade economics are still found to argue that, if only the duty on imported gloves is put high enough, sufficient gloves will be made at home to absorb all the yarns now exported to German glove-makers. They are still blind, that is to say, to the elementary fact that since Germany manufactures for a much larger glove-market than the English, the exclusion of the German gloves means the probable loss to the yarn-makers of a much larger market than England can possibly offer, even if we make all our own gloves. In a word, instead of having to furnish new Free Trade arguments to meet a new situation, we find ourselves called upon to propound once more the fundamental truths of Free Trade, which are still so imperfectly assimilated by the nation.
So far as I can gather, the circumstances alleged to constitute a new problem are these; the need to protect special industries for war purposes; and the need to make temporary fiscal provision against industrial fluctuation set up by variations in the international money exchanges. Obviously, the first of these pleas has already gone by the board, as regards any comprehensive fiscal action.One of the greatest of all war industries is the production of food; and during the war some supposed that after it was over, there could be secured a general agreement to protect British agriculture to the point at which it could be relied on to produce at least a war ration on which the nation could subsist without imports. That dream has already been abandoned by practical politicians, if any of them ever entertained it. The effective protection of agriculture on that scale has been dismissed as impossible; and we rely on foreign imports as before. Whatever may be said as to the need of subsidising special industries for the production of certain war material is nothing further to the fiscal purpose, whether the alleged need be real or not. The production of war material is a matter of military policy on all fours with the maintenance of Government dockyards, and does not enter into the fiscal problem properly so called. But to the special case of dyes, considered as a “key” or “pivotal” industry, I will return later.
How then stands the argument from the fluctuations of the exchanges? If that argument be valid further than to prove thatallmonetary fluctuations are apt to embarrass industry, why is it not founded on for the protection ofallindustries affected by German competition? The Prime Minister in his highly characteristic speech to the Lancashire deputation, admitted that the fall of the mark had not had “the effect which we all anticipated”—that is, which he and his advisers anticipated—and this in the very act of pretending that thefurtherfall of the mark is a reason foradhering to the course of taxing fabric gloves. All this is the temporising of men who at last realise that the case they have been putting forward will bear no further scrutiny. The idea of systematically regulating an occasional tariff in terms of the day-to-day fluctuations of the exchanges is wholly chimerical. A tariff that is on even for one year and may be off the next is itself as disturbing a factor in industry as any exchange fluctuations can be.
Nor is there, in the nature of things, any possibility of continuous advantage in trade to any country through the low valuation of its currency. The Prime Minister confesses that Germany isnotobtaining any export trade as the result of the fall. Then the whole argument has been and is a false pretence. The plea that the German manufacturer is advantaged because his wages bill does not rise as fast as the mark falls in purchasing power is even in theory but a statement of one side of a fluctuating case, seeing that when the mark rises in value his wages bill will not fall as fast as the mark rises, and he is then, in the terms of the case, at a competitive disadvantage.
But the worst absurdity of all in the tariffist reasoning on this topic is the assumption that in no other respect than wage-rates is German industry affected by the fall of the mark. The wiseacres who point warningly to the exchanges as a reason for firm action on fabric gloves never ask how a falling currency relates to the process of purchasing raw materials from abroad. So plainly is the falling mark a bar to such purchase that there isprima facieno cause to doubt the German official statement made in June, that foreign goods are actually underbidding German goods in the German markets, and that the falling exchange makes it harder and harder for Germany to compete abroad. We are dealing with a four-square fallacy, the logical implication of which is that a bankrupt country is the best advantaged for trade, that Austria is even better placed for competition than Germany, and that Russia is to-day the best placed of all.
The argument from the exchanges, which is now admitted to be wholly false in practice, really brings us back to the old tariffist argument that tariffs are required to protect us against the imports of countries whose general rate of wages is lower than ours. On the one hand, they assured us that a tariff was the one means of securing good wages for the workers in general. On the other, they declared that foreign goods entered our country to the extent they did because foreign employers in general sweated their employees. That is to say—seeing that nearly all our competitors had tariffs—the tariffed countries pay the worst wages; and we were to raise ours by having tariffs also. But even that pleasing paralogism did not suffice for the appetite of tariffism in the way of fallacy. The same propaganda which affirmed the lowness of the rate of wages paid in tariffist countries affirmed also thesuperiorityof the rate of wagespaid in the United States, whence came much of our imported goods which the tariffists wished to keep out. In this case, the evidence for the statement lay in the high wage-rate figures for three employments in particular—those of engine-drivers, compositors, and builders’ labourers: three industries incapable of protection by tariffs.
Thus even the percentage of truth was turned to the account of delusion; for the wages in the protected industries of the States were so far from being on the scale of the others just mentioned, that they were reported at times to be absolutely below those paid in the same industries in Britain. For the rest,costs of livingwere shown by all the official statistics to be lower with us than in any of the competing tariffed countries; and in particular much lower than in the United States. There were thus established the three facts that wages were higher in the Free Trade country than in the European tariffed countries; that real wages here were higher than those of the protected industries in the United States, and that Protection was thus so far from being a condition of good wages as to be ostensibly a certain condition of bad. All the same, high wages in America and low wages on the Continent were alike given as reasons why we should have a protective tariff.
There stands out, then, the fact that the payment of lower wages by the protected foreign manufacturer was one of the tariffist arguments of the pre-war period, when there was no question of unequal currency exchanges. To-day, the argument from unequal currency exchanges is that in the countrywhere the currency value is sinking in terms of other currencies the manufacturer is getting his labour cheaper, seeing that wages are slow to follow increase in cost of living. Both pleas alike evade the primary truth that if country A trades with country B at all, it must receivesomegoods in payment for its exports, save in a case in which, for a temporary purpose, it may elect to import gold. But that fact is vital and must be faced if the issue is to be argued at all. Unless, then, the defender of the occasional tariff system contends that that system will rectify trade conditions by keeping out goods which are made at an artificial advantage, amounting to what is called “unfair competition,” and letting in only the goods not so produced, he is not facing the true fiscal problem at all. Either he admits that exports and freight charges and other credit claims must be balanced by imports or he denies it. If he denies it, the discussion ceases: there is no use in arguing further. If he admits it, and argues that by his tariff he can more or less determinewhatshall be imported, the debate soon narrows itself to one issue.
The pre-war tariffist argued, when he dealt with the problem, that tariffs would suffice at will to keep out manufactured goods and let in only raw material. To that the answer was simple. An unbroken conversion of the whole yield of exports and freight returns and interest on foreign investments into imported raw material to be wholly converted into new products, mainly for export, was something utterly beyond the possibilities.It would mean a rate of expansion of exports never attained and not only not attainable but not desirable. On such a footing, the producing and exporting country would never concretely taste of itsprofit, which is to be realised, if at all, only in consumption of imported goods and foods. It is no less plainly impossible to discriminate by classes between kinds of manufactured imports on the plea that inequality in the exchanges gives the foreign competitor an advantage in terms of the relatively lower wage-rate paid by him while his currency value is falling. Any such advantage, in the terms of the case, must be held to accrue to all forms of production alike, and cannot possibly be claimed to accrue in the manufacture of one thing as compared with another, as fabric gloves in comparison with gold leaf. In a word, the refusal of protection to gold leaf is an admission that the argument from inequality of currency exchanges counts for nothing in the operation of the Safeguarding of Industries Bill. In the case of any other import, then, the argument falls.