Part
II: The Mechanism of the Classical Ideal
CHAPTER V
WHY
TAXATION IS HEAVY
IT has already been suggested that there is extant in the
world, a common, if somewhat nebulous, idea that whoever,
for instance, grows a ton of potatoes, grows thereby in some
mysterious way, the purchasing-power equivalent to a ton of
potatoes. This idea, while not specifically expressed in words,
is sedulously fostered by the Press, and by the other media
of propaganda which are employed to convince the public that
our economic difficulties proceed from insufficiency of production.
It is significant that the peculiar brand of economics popular
amongst Marxian-Socialist and Communistic propagandists is
at one with apparently more orthodox economists, in suggesting
the comparative unimportance of money in the economic system;
that it is nothing but a reflection of the economic facts
beneath it.
If
I grow a ton of potatoes and exchange those potatoes for five
currency notes of one pound each, held at the moment by my neighbour
next door, all that has happened is that I have five pounds
which he had before. My ton of potatoes has not increased the
number of pounds, although it may have, but probably has not,
increased the purchasing-power of each pound. If we imagine
this five pounds to be the only five pounds in existence, and
money to be the only effective demand for goods, no one will
be able to exchange any goods until I part with, at any rate,
a portion of my five pounds. Now the distinguishing feature
of the modern co-operative production system, depending for
its efficiency on the principle of the division of labour, is
that the production of the individual is in itself of decreasing
use to him, as the sub-division of labour and process is extended.
A man who works on a small farm, can live (at a very low standard
of comfort and civilisation) by consuming the actual products
of his own industry. But a highly-trained mechanic, producing
some one portion of an intricate mechanism, can only live
by casting his product into the common stock, and drawing from
that common stock a portion of the combined product through
the agency of money.
There
are some deductions of major importance which can be made from
these premises. The first is that money is nothing but an effective
demand. It is not wealth, it is not production, and it has no
inherent and indissoluble connection with anything whatever
except effective demand. That is the first point, and it would
be difficult to overrate the importance of a clear grasp of
it. It lies at the root of the question as to the true ownership
of credit-purchasing-power. The second point is that, so far
as we can conceive, the co-operative industrial system cannot
exist without a satisfactory form of effective-demand system,
and the result of an unsatisfactory money system (that is to
say, a money system which fails to function as effective demand
to the general satisfaction) is that mankind will be driven
back to the distinguishing characteristic of barbarism, which
is individual production. And the third point, and the point
which is perhaps of most immediate importance at the present
time, is that the control of the money system means the control
of civilised humanity. In other words, so far from money, or
its equivalent, being a minor feature of modern economics, it
is the very keystone of the structure.
Now,
the amount of legal tender in Great Britain amounts to roughly
four hundred millions sterling. That is to say about nine
pounds per head. If, on a given day every description of effective
demand, other than legal tender, was effectively demonetized,
a number of interesting things would no doubt happen, but
amongst them would be this: if this four hundred million pounds
was to function as effective demand for the whole of the production
of the country, the purchasing-power of each single pound would
have to increase at the same rate as any increase in the rate
of production. That would mean that prices would have to fall
in proportion as the rate of production rose, or shortly, prices
would be inversely proportional to the rate of production.
This statement is independent of any questions in respect of
the ownership of the legal tender.
But
supposing someone discovered a method of increasing the legal
or customary tender, either by counterfeiting notes, or in any
other way; then this process of increasing the amount of legal
or customary tender would operate in the reverse direction to
a process of increasing the rate of production, and if the increase
in legal tender, while continuing to function as effective demand,
paralleled the increase in productive rate, prices would remain
constant per unit of productivity, assuming (what would not
be true) that costs did not rise in such a manner as to drive
out the willing seller.
We
know of certain things in connection with the productive system
as matters of fact and not of theory. We know that the productive
rate per man-hour has increased enormously, in some cases as
much as one hundred times in comparison with the productive
rate one hundred and twenty-five years ago. We know that prices
over a period of years, not only have not fallen, but that they
are rising. We know that there are many other forms of effective
demand other than legal tender. And it does not appear to require
much acumen to deduce that all these facts have some relation
to each other.
We
have already seen that the result of a loan by a bank is to
increase the amount of collective deposits on which the bank's
customers can draw; which deposits, of course, function as money.
The repayment of these loans destroys these deposits, and thus
destroys effective demand. This process of creating purchasing-power
by means of book entries has, however, a further extension of
far-reaching importance, which can perhaps be grasped by a consideration
of the methods by which Great Britain financed the War of 1914-1919.
War
is a consumer whose necessities are so imperative that they
become superior to all questions of legal and financial restriction.
Inter arma silent leges. That is why legalists and financiers,
although their existing systems tend inevitably to produce wars,
are so afraid of them, and why war, terrible in itself, has
so often released humanity from bonds which threaten to strangle
it. As a result of this situation, the bounds which are placed
upon production for war purposes are defined by intrinsic forces
and not by artificial limitations. That is to say, in order
to maintain a connection between finance and production, finance
has to follow production instead of, as in the normal case,
production having to follow finance. The extension of production
to its utmost intrinsic limits, therefore, involves an extension
of finance at a rate out of all proportion to that which obtains
in the normal course of events, and this extension at once reveals
the artificial character of normal finance. It has been pointed
out at some length, and probably sufficiently, that the Gold
Standard, on which British finance was supposed to be based,
broke down within a few hours of the outbreak of war. That is
important; but it is only the first step, just as the Gold Standard
itself is only one aspect of a system of finance in which
currency is the basis of credit. What is more fundamentally
important, is to observe that immediately production is expanded
at anything like its possible rate, the idea that the financial
costs of that expansion can be recovered in prices is seen
in its full absurdity.
It
will be understood that by far the major portion of the muniments
of war (including not only warlike weapons and munitions, but
the million articles required by the supply services of the
armies engaged) were produced by so-called private undertakings,
and paid for by the Government. Now, the normal method by which
a Government obtains the money wherewith to pay for its purchases,
is by taxation, and a balanced Budget means that the proceeds
from taxation at least cover the expenditure on public services.
Under these conditions, costs and profits of production are
recovered by the Governments (through the medium of taxation)
in prices; that amount of taxation which is represented by the
supply services, representing the price of the goods delivered
to the Government with all costs included.
The
National Debt rose between August 1914 and December 1919 from
about six hundred and sixty millions sterling, to about seven
thousand seven hundred millions sterling. And this rise represents,
on the whole, the expenditure over that period which it was
deemed impracticable to recover in current taxation. That is
to say, if we take the average taxation for supply purposes
over that period 1914-1918, as being about three hundred millions
per annum, the amount paid by the public as consumer for the
goods and services supplied to it for war purposes, was about
thirteen hundred and fifty millions, and the financial cost
of those goods and services was about eight thousand three hundred
and fifty millions, a ratio of cost to price of about roughly
1 : 6.2 . In other words, goods were sold to the public at one-sixth
of their apparent financial cost, and no one lost any money
over it at the time. How was this done?
A
considerable amount of this money (some of which may be in excess
of the figures just mentioned) was created through what are
known as the Ways and Means Accounts, and the working of this
is described in the first report of the Committee on Currency
and Foreign Exchanges, 1918, page two. Paraphrased, the process
may be shortly explained as follows.
If
ten million pounds credit is advanced at the Bank of England
to the credit of Public (i.e. State) Deposits (which simply
involves the writing up of the Public Deposits account by this
amount), this amount is paid out by the Spending Departments
to contractors in payment for their services, and when the cheques
are cleared, passes to the credit of the contractors' bankers
(joint Stock Banks) account with the Bank of England. The joint
Stock Banks are accustomed to regard their credits with the
Bank of England as cash at call and, therefore, ten million
pounds is credited to the depositors of the Joint Stock Banks,
and ten million pounds to the Joint Stock Banks' cash account.
As
a result of this, the joint Stock Banks, working on a ratio
of one to four between so-called cash and short-date liabilities,
are able to allow their customers (working on Government contracts)
overdrafts to the extent of forty millions, a portion of which
their customers may devote to taking up Treasury Bills or War.
Loans. The banks themselves may take up about eight millions
of Treasury Bills or War Loan, out of their additional "deposit"
balances, or they may lend about eight millions to the Bank
of England to lend to the Government. Eventually, the result
is the same, namely that the Government owes forty millions
to the banks, through the Bank of England.
Now
the first point to notice is that the result of this complicated
process is exactly the same as if the Government itself had
provided forty millions, in Currency Notes, with the important
exception that the public pays 4 or 5 per cent per annum on
the forty millions, instead of merely paying the cost of printing
the Currency Notes. The effect on prices, while the forty millions
is outstanding, is the same, and the contractors pay 6 or 7
per cent for their overdrafts instead of getting the use of
the money, free. But if the forty millions is redeemed through
taxation, or a Capital Levy, the public pays not only the 5
per cent per annum, together with the contractor's 6 or 7 per
cent, plus a profit on both of them, but it pays the whole of
the forty millions out of money which has been received in respect
of wages, salaries, and dividends. So far as I am aware, no
one has ever suggested that Currency Notes should be retired
by taxation. It is true that when this forty millions has been
repaid, both the original debt and the repayment cancel each
other, and only the interest charges go to the Profit and Loss
Account of the Bank. But since, as we have seen, the repayment
of bank loans means the immobilisation of an equivalent amount
of price-values, this only means that a fresh loan with fresh
interest charges has to be created. A consideration of these
facts will make it easy to understand the implacable opposition
of bankers and financiers to Government paper money and their
insistence on the importance of what they term redemption. The
payment in current taxation of only one-sixth of the price of
war stores, etc., meant, therefore, that a credit grant of the
other five-sixths of the price was made to the Public. The
repayment of this credit is only justifiable on the assumption
that banks own Public Credit.
The
average banker, if confronted with the foregoing statements,
would, while being obliged to admit the facts, probably say,
"Yes, but printing paper money has no finality. Once you begin,
you have to go on." Without admitting his contention, let
us see what is his alternative.
Since
bank loans create bank deposits, it will be seen without difficulty
that the process which has just been described would either
produce a fantastic array of depositors' accounts, or else would
necessitate the calling in of such large amounts of overdrafts
as would make it impossible for the manufacturer to carry on
his business. It therefore became necessary to fund these unwieldy
sums. That is to say, to convert them from something which will
operate as currency into "Capital Securities," the interest
only of which will operate as currency; and it will still be
fresh in the memory, that every inducement, including loans
up to 80 per cent of the face-value, was offered by the banks
to their depositors, to convert such deposits into Government
Stocks of various descriptions. The result of this was to convert
a large portion of their unsecured overdrafts into loans against
Government security. Observe what happened. The Government loans,
80 per cent of the value of which originally represented nothing
but bank overdrafts created by a stroke of the pen, were held
by the banks as security for this same overdraft. At the close
of the War, or rather about a year after the close of the War,
the banks began to call in these overdrafts. Had they called
in the whole of them, there would have been no money in the
country except the four hundred millions of legal tender, most
of it already in the banks. As a consequence of the partial
extinction of existing credits, and the reduction in the rate
of issue of new credits, Government Stocks of all descriptions
were thrown upon the market, to obtain money wherewith to meet
the bankers' calls. Their value declined until the margin of
their market price over the amount which had been lent upon
them had disappeared, and, as a result, the stocks came into
the hand of the banks; so that it is probably true to say that
90 per cent of the holdings of Government War Securities were
under the ownership or complete lien of the banks and financial
houses by about the middle of 1922. From this time on, a process
of reselling these stocks to the public at enhanced prices began,
fostered by the stagnation of trade, which forced any available
money in the country into fixed interest-bearing securities.
Owing to the comparatively small amount of money available for
this purpose, and the fact that a large amount of Government
Stock was acquired by the direct creation of bank credits on
bank account, it is probable that even yet 75 per cent of the
total issue of Government Securities is still in the hands of
the banks,* or is held by them under a lien; sufficient only
being in individual hands to ensure the protection of the loan
as a whole. The net result of the process, is that the public
pays the sum of three hundred and twenty-six millions sterling
per annum as interest on an immobilised loan of which it has
not the use as money, but which it has to repay in the form
of sinking fund. Such sinking fund must either be collected
out of the costs distributed in respect of future production,
the public being thus further prevented from purchasing home-produced
goods, or by the creation of a fresh debt in an open or disguised
form.