War costs and their financing; a study of the financing of the war and the after-war problems of debt and taxation

Front matter

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Preface

The effort has been made in this volume to present in broad outline the salient features of war finance and some of the financial problems now confronting the United States and the leading nations of Europe. Although it is still too early to assess accurately the relative importance of various economic and financial measures and events, there is a certain gain in recording them while they are still fresh in mind. Many events were so extraordinary, and the measures taken to cope with them so unprecedented, that much time and study will be required finally to determine their part in the World War. But that they played an important role in determining the outcome of the struggle is clear. The ^'silver bullets'' were equally decisive with those of lead or steel in deciding the victory. Never before were the differences between a good and a vicious theory of war finance so important and so far-reaching, for never before have war expenditures reached such stupendous figures.

It had been hoped that the wide ramifications of international credit and trade would constitute an effectual guarantee against war, but this hope was rudely dashed. Again, when war actually began, it was confidently predicted that the financial exhaustion of the belligerents would bring it to an end after a few months, but events proved these prophecies also false. A constantly recurrent problem throughout the whole war was the question as to whence came the enormous sums which were expended with such reckless prodigality. The important part played by the banks in financing the war, the enormous loans made by all the belligerents, the unprece-

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PREFACE

dented inflation as a result of the increase in note issues and the subtler credit expansion, and the more limited resort to taxation, all presented problems of paramount interest and importance. These are discussed in the following pages.

For us the most significant result of the war is the emergence of the United States as a creditor nation and its present dominating position in foreign trade and international finance. The changes in the movements of foreign trade, and in the commercial, industrial, and financial life of the United States,- are briefly described. The final chapters of the book present the problems of financial reconstruction — problems of inflated currency, of staggering debts, of crushing taxation — and of the measures taken by the leading belligerents to meet these problems. In conclusion, the cost of the war, so far as this is reducible to money values, is stated.

With regard to the statistics of war finance a word of explanation is needed. For convenience foreign currencies have been converted into dollars at pre-war rates of exchange, but in round numbers rather than in precise equivalents. Thus, the pound sterling ($4.8665) has been converted at $5; the ruble ($0.5146) and yen ($0.4985), at 50 cents; the florin ($0,402), at 40 cents; the krona ($0,268) and mark ($0.2385), at 25 cents; the krone ($0.2022), the leu and leva ($0.1946), the drachma, lira, and franc ($0,193), at 20 cents. This has resulted in a slight overstatement in the case of some of the countries and a slighter understatement in the case of others, but as many of the figures are themselves still open to correction, it was thought that the convenience of this method more than offset the slight variations involved.

In writing this book the author drew upon material used in the preparation of a companion statistical study, ''The Direct and Indirect Costs of the Great World

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PEEFACE

War ' * ; most of the tables and other statistical data incorporated in Chapters IV, V, VI, and VIII of this volume have been drawn from that source. To the Carnegie Endowment of International Peace, by whom this studywas published, the author begs to make acknowledgment for their kindness in permitting the use of this copyrighted material. In other respects the present volume is an independent study.

Friendly counsel and assistance have been received by the author from many quarters, but his obligations are so manifest in certain instances that he desires to make public acknowledgment thereof. To Miss Constance Agnes McHugh his indebtedness is especially great for her untiring and capable assistance in collecting and assembling the material, in preparing most of the tables, and in giving information and advice upon many points. Sincere thanks are also tendered Dr. Constantine E. McGuire for the onerous task of reading the manuscript and for many valuable suggestions. For errors which yet remain and for the views herein expressed on disputable points, the author alone must be held responsible.

Ernest L. Bogart.

Contents

PAGE

PREFACE vii

INTRODUCTION . XV

Chapter I The Basis Of National And International Credit

Industrial development furnishes a supply of capital — Development of credit and financial institutions provide a money market — Political democracy creates a willingness to lend — The growth of public debts — Opportunity for profit in the exploitation of undeveloped countries — Investments in foreign countries — London an international money market and center of credit ... 1

Chapter II Financial Readjustments At The Outbreak Op War

Germany 's preparedness — The Entente Allies caught unaware — Panic and temporary breakdown of credit — Eemedial measures — Safeguarding the gold reserves — Issue of additional money — Adjustment to war conditions 21

Chapter III

Situation in the United States at the outbreak of the war in Europe — The expansion of foreign trade — How Europe paid its bills — The shipment of gold — Foreign loans placed in the United States — Purchase of American securities held abroad — Is New York to be the financial center of the world? ■ .... 54

Chapter IV

The cost of past wars — Expenditures in the United States — Expenditures in Great Britain — Expenditures in France, Russia, and Italy — Expenditures in Germany and Austria-Hungary — Comparative estimate of total war expenditures 82

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CONTENTS CHAPTER V

PAPER MOXEY AND BANK CREDIT

Large use of banks in financing the war — Direct issues of paper money in Europe — Services of the Federal Reserve System in the United States — Treatment of gold . lO'i

Chapter VI

General characteristics — British war loans — Use of loans in France, Russia, and Italy — The German theory of war finance — German banks and loan bureaus — Loans in Austria-Hungary, Bulgaria, and Turkey .... 146

Chapter VII

War-finance program of the United States — The First Liberty Loan — The Second Liberty Loan — The Third Liberty Loan — The Fourth Liberty Loan — The Victory Liberty Loan — War savings and thrift stamps — Advances to the Allies 199

Chapter VIII

Vigorous use of taxation in England — ■ Slight results in France, Russia, and Italy — Reasons therefor — Inadequacy of taxation by the Central Powers . . . 234

Chapter IX

A new era of Federal taxation — Revenue Act of October 3, 1913 — Outbreak of the European War — Emergency Revenue Act of October 22, 1914 — Act of September 8, 1 916 — The taxation of wealth — Act of March 3, 1917 — Declaration of war by the United States — War Revenue Act of October 3, 1917 — Income and excess-profits tax provisiona — Act of February 24, 1919 — Analysis of the measure 264

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CONTENTS

Chapter X

HOW SHOULD A WAR BE FINANCED? THE LESSON OF THE CIVTI.

WAR

The problem of financing the Civil War — Chase 's loan policy — Inadequacy of taxation — Issue of legal-tender notes — System of short term loans — Bond acts — Conclusions — Financial management of the World War — Inability to meet current charges — Loans vs. taxes — Arguments for a loan policy — Disadvantages of heavy taxation — Arguments for a tax policy — Evils of excessive loans 297

Chapter XI

Foreign trade of the United States as a belligerent — Exports and imports by regions — The balance of trade — Europe 's need for capital — Greatest supplies to be found in the United States — How can this be made available? — Machinery by v^-hich loans can be advanced to Europe — Proposals for the extension of short-time credit — Long-term credit — Conclusions . . . 326

Chapter XII After-war Problems Of Currency And Debt

Inflation of the currency a world phenomenon — Its effect on prices — Why should inflation have been permitted ? — The remedy for inflation — Difficulties — The distribution of gold — Financial situation of the principal countries — Comparison of wealth and debt — Can the burdens be carried? — American and European theories as to debt payment — Problem of funding the floating debts — The capital levy — Problem of refunding — Will the debts be paid? 351

Chapter XIII

Economic strength of the leading nations — The financial outlook in the United States — The situation in Great Britain — The situation in France and Italy — Germany 's position — Proposed revenues of five leading nations — Probable development of principal taxes . . . 391

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CONTENTS CHAPTER XIV

Who pays for a war ? — Material costs — Depletion of capital — The burden on future generations — Direct and indirect costs — Immaterial costs — Diversity of losses — Some factors of advantage — Indefensibility of war . 413

APPENDICES

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