War Financing and the American Economy


By PAUL F. CADMAN, Economist for the American Bankers Association

Delivered at the Annual Convention of the New Jersey Bankers Association at Atlantic City, New Jersey, May 15, 1942

Vital Speeches of the Day, Vol. VIII, pp. 521-524.

CAPTAIN Eddie Rickenbacker went to France in 1917 as chauffeur for General Pershing. He came out of the World War as America's foremost aviator. In a recent speech he made a commonplace observation which contained a profound truth; namely, "Before you can win a war, you must stop losing it." Before we stop losing this war there must be an all-out American effort which has not yet been achieved.

The mobilization of men and materials and money is impressive. The courage of the fighting forces in the few areas where they have been engaged, is inspiring. The record of production in the essential materials of war can well be called miraculous. But wars are not won solely by men and materials; nor can victory be assured by governmental decrees. Morale is the soul of victory. All essential sacrifice stems from morale. It is a quality of mind and heart and spirit, in citizen and soldier alike, without which any war effort is doomed to defeat.

The most telling index of morale is the ability and willingness to sacrifice. In an interview not long ago, Madame Chiang Kai-shek answered the question as to how China, without money and with only meager equipment, has been able to hold out against the Japanese horde for so many years. She said that the epic story of China's defense is written in blood sacrifice.

Among the many complex factors which affect the morale of a people is the slowly dawning consciousness of the enormity of the disaster which has overtaken modern civilization. Sitting among the ashes of all he has wrought, modern man surveys a vast and desolate ruin. In an overwhelming sense of futility, he seeks refuge from the evil forces which have sprung from his own works. The immeasurable promise of science and learning has brought forth a dreadnought, a tank, and a bomber; the very healing which man has devised now multiplies the possibility of death; the very laws which he has made now destroy his liberty.

At the moment, America is in a heart-searching mood: Will our form of government, our economic institutions, and our manner of life survive the compulsions and restrictions of war? Have we unwittingly created a bureaucracy that will enslave us? Have we surrendered basic freedoms which we can with difficulty recapture? Such doubts are a part of our everyday thinking.

Unless we have faith to believe that real democracy, personal liberty, individual rights, private property, and political independence can survive, we are not likely to build up the morale which is necessary for victory. Unless we have full confidence that the vast machinery of government which we are now creating will be our servant and not our master, our morale will not sustain the burden which we are daily assuming.

Furthermore, the all-out effort essential to victory will not be made until we are willing to pay the total cost of freedom, not only in terms of wealth and materials, but in the blood sacrifice which ultimately every American home must share. If we expect young men to forego the promise of life and to die in their teens and their twenties by tens of thousands, we should ask a no less whole-hearted sacrifice of every citizen on whose efforts the armed forces depend. Morale is the measure and reflection of our ability to comprehend what it means, and what it costs to be free.

In such terms may we now contemplate a financial program which in any other language would spell bankruptcy and disaster. It is a little too glib to say that wars are fought with men and materials and that therefore only men and production are essential. Money and credit are more than mere tokens. They are the measure of the resources of a nation; the index of its ability to produce, maintain, and ultimately to conserve, vast stores of wealth. It is now clear that the American war effort will be counted in terms of not less than two hundred billion dollars, which sum is roughly equivalent to the value of all the wealth in America —its factories, farms, and all other instruments of production.

Since we are certain not actually to consume this vast store of wealth, we are now called upon to encumber it with an immense open-end mortgage—a mortgage the maturity of which is unknown; a mortgage which can be serviced only out of future production; a mortgage in which each and every American citizen, without exception, assumes a personal obligation which he can never escape. A two hundred billion dollar war debt is not owned by a government or an administration. It is owned by the people; it is their debt. They alone must face it; they alone can pay it. It is of the very substance of the sacrifice demanded for victory.

The announcement of a fifty-nine billion dollar budget to be expended by July, 1943, presented a conception of war operations too vast for the average citizen to understand. When that estimate was raised to seventy billions it began to be evident that the cost of the war would not be measured in any round sum; that there was in fact no limit; and that the totality of expenditures would be fixed by the extent of the need. Then, and only then, did our people begin to inquire where so vast a sum of money could be found.

We knew that the government held a vast store of gold and silver. Then, there was the paper money and the token coins which we use in everyday transactions. But when all of the money instruments were added together they did not total the seventy billions which are to be spent by July of 1943. In short, there was not that much money in America, and obviously there would not need to be, since every dollar could be spent many times in the fourteen remaining months. But the instant need for huge Treasury financing, the patriotic appeal to save and to lend, and the announcement of taxprograms in unheard of figures, the public discussion of inflation—what it meant and how it might be controlled—gave the nation as a whole a lesson in economics far more instructive than any classroom or textbook had ever been able to present.

The immediate problem of financing the war, then, is the government's inescapable necessity of raising at least seventy billion dollars during the next fourteen months. This is a matter which cannot be deferred. The money must be raised daily—hourly, since it is being spent daily and hourly. The main reservoir which is to be tapped is euphemistically called "national income." At best it is a vague term very little understood and very generally misapplied. To be a little naive, it could be called "that which everybody has to spend." Purchasing power is the technical term, and it is always represented in dollars. Whatever the American public has to spend in terms of wages, salaries, interest, dividends, rents, or any other form of income, goes to make up the national income. What the government pays to its employees, its soldiers, its sailors, and its suppliers, is included in the national income.

In times like these the national income does not necessarily represent wealth—in fact the great bulk of it at the moment is borrowed against an unknown and immeasurable future. Therefore, when we read that the national income is to be one hundred or one hundred and twenty billion dollars, we ought to remember that this means nothing except that there will be distributed that much purchasing power.

Actually the sources to which the government can resort to raise seventy billion dollars in fourteen months, are only three: taxation, saving, and bank credit. Taxation is the most painful, the most dangerous in the political aspects, and the most unpopular from the citizen's point of view; nevertheless, it is beyond peradventure—THE SAFEST. It should be applied so that every citizen is personally conscious of his contribution, and it should absorb as large a segment of the national income as possible without disrupting the national economy. But the limits of taxation have been understood for a great many centuries. The law of diminishing returns sets in, in the field of taxation, at the point where the levy discourages the effort to produce and the willingness to save. Even a war-conscious people with a social will to make real sacrifices, can be taxed to a point where effort and accumulation will begin rapidly to decline.

Obviously taxation cannot take all of the national income, for if it did men would have nothing with which to purchase the necessities of life.

The next great source to which the government has access are the savings of the people. Nevertheless, it is patent that the accumulated savings are not available. The dollars entered in the forty-seven million savings accounts in America have long since been invested, a considerable part in government obligations, a large part in real estate mortgages, and the remainder in other well known types of investment. If the government were to attempt to commandeer these funds, the investments which they represent would have to be sold on a non-existent market. Who would buy them, and with what?

The only savings which are and should be available to the government, are those which can now be made out of current earnings. Like taxation, saving takes another segment of the national income. Like taxation, it lessens the mass of purchasing power, and decreases the amount available to buy goods and services, the supply of which are steadily diminishing because of war activities.

Taxation and saving directly affect the standard of living of the people, but they are nevertheless the great factors of safety against inflation. They both require conscioussacrifice, and they are alike the safest and soundest means of financing the war. But we could not save all of the national income, or again there would be nothing with which to secure the absolute essentials. Obviously we cannot save that part of the national economy which the government takes in taxes, and it is equally clear that the total of taxation and saving cannot be more than a fixed percentage of the national income. The inescapable fact is that when taxation has been applied to the limits just short of diminishing returns, and the maximum of saving has been encouraged by patriotic appeal, or even by the undemocratic process of force, the government will still have to find something between twenty and thirty billion dollars before July, 1943.

The last source, and most unsatisfactory, is bank credit. Hazardous as it is, it must inevitably supply this huge sum of twenty to thirty billion in the next fourteen months. There are numerous dangers inherent in the practice of financing wars by bank credit, chief among which are the following: When the government borrows from a bank nobody sacrifices anything, nobody gives up that which they have accumulated by effort and abstinence. Furthermore the process is tantamount to creating new money, and, in the last analysis, does not greatly differ from the inflationary practice of printing additional money. When the government sells a war bond to you and me personally, it calls for our savings; it requests us to give up some part of our standard of living. But when it sells the bond to a bank, the bank opens a deposit in favor of the government; new "deposit money" is added to the total available supply of money. This is why the process is directly inflationary. This is why bank credit should be the last resort of a borrowing government. The demagogues and the soap-boxers will endeavor to show that banks ought to be willing buyers of government securities, but they will fail to state that the banks are the depositaries of the peoples' money. They will not mention the fact that the creation of deposits in favor of the government in exchange for the government's promise-to-pay, brings new money into the market which competes with existing money for the limited supply of goods available. It is not that the banks are unwilling lenders—ultimately they will absorb this vast sum of government borrowing which will remain when taxation and saving have wrung the last available dollar out of our standard of living.

If the government were its own banker, it would fare no better; in fact, it would be certain to fare infinitely worse. For if the government were creating its own deposits against its own promises, the inflationary nature of the practice would be far more evident and the controls far less effective.

From the above mentioned facts, it follows that banking is a war industry, as essential as any other war industry. Banks have not only sold 80 per cent of the war bonds and stamps to date; they have not only taken care of the immense increase in the volume of transactions due to the war boom; they have not only carried their facilities into the defense, training, and garrison areas; but they have supplied the government with the funds to fill the gap between the total available from taxation and saving, and the total expenditures necessary for the operation of the war. Thus far the banks have not been generously placed in priorities; little, if any, consideration has been given to their personnel in drafting man power; only limited consideration has been given to their need for supplies and equipment. They are nevertheless a war industry par excellence, serving their government as faithfully and effectively as any major branch of manufacture or agriculture.

This may be a simplification of the outlines of war financing, but at least the high points have been reviewed. There remains now the question as to what effect this vast out-pouring of wealth, this mortgaging of the future, will have upon the American economy. In the stark realism of such analysis it is very easy to find a good deal of pessimism. Nevertheless I cannot subscribe to the prevailing theory, that at the close of this war we shall witness one of the worst depressions in history. On the contrary, there is a good deal of evidence to substantiate the opinion that we may enjoy the period of our greatest economic development, of our greatest world influence, and of our greatest social gains. If such a forecast rested only upon the conceit of opinion it would be worthless. The forces now at work can be observed even if their ultimate effect cannot be appraised.

Unless the United States is invaded by land, we shall emerge from this war with our productive capacities at an all-time high. The raw materials from our mines, quarries, oil wells, and forests, will be more extensively developed than at any time in our history. We shall have more factory capacity, more machines, tools, and electric power, than ever before. Perhaps of greater significance is the fact that we shall have the largest supply of skilled labor which any country has ever enjoyed in the entire history of the world.

One of the great books of the modern era which has survived with undiminished influence for well over a century, was written by a relatively obscure Scotsman who called his study, "An Inquiry into the Nature and Causes of the Wealth of Nations." In this famous treatise, Adam Smith showed that the greatest wealth a nation could possess was an abundant labor supply and that the productive capacity of workers could be greatly increased by the specialization of labor. He was the prophet of mass production and he gave us not only a vision of our own industrial age, but of the future for a great many years to come. His argument might be summarized as follows: If a nation has an abundant labor supply with specialized skills, its economic development will be limited only by the supply of capital and the extent of the market.

The problem of supplying capital has already been solved. We are only now on the threshold of developing markets with huge buying power. In the United States our markets for automobiles, mechanical equipment, comforts, and conveniences, will be virtually exhausted. The pent-up demand of a machine-conscious public will be immense. Should we emerge from the war without invasion, we may also serve world markets of tremendous "demand." Nations with immense populations will be confronted with the problem of rebuilding cities, transportation, factories, farms, mines, oil fields, and all the productive forces that have come under the devastating influence of actual battle. Literally millions of people will look to the United States for the food supplies which will stand between them and starvation.

There will be enough to do in the reconstruction period to keep all the facilities of the modern world working to capacity for twenty years. But there remains the important question: How is all this to be paid for? So far as the United States is concerned, our financial instruments will rest upon a gold reserve approximating twenty-five billion dollars, the largest by many times of any ever before accumulated. Despite all the speculation to the contrary, gold is still the world-wide measure of value. It constitutes the best and most generally accepted medium of exchange and there is no convincing evidence that its importance has diminished in the slightest degree. Although this gold is now essentially a part of our total monetary supply, it could be used by a wise statesmanship to finance the recovery of our customers throughout the world.

We will have to lend courageously—perhaps heroically—as England did at the close of the Napoleonic Wars when she set about building an economic empire. Happily, in our post-war period, isolationism will have completely expired. The present conflict has proved conclusively that isolationism is and always has been a myth. We shall therefore sit in the international councils where world recovery is programmed and instrumented. We shall invest in the municipal bonds issued to rebuild the city of London and Coventry and other great centers. Strange as it may sound, we will supply the machinery and equipment to build up our competitors throughout the world, with the full knowledge that our own skill and energy and scientific genius will thrive on competition.

In all likelihood, we shall be in the market heavily for imports of rubber, tin, and the more than a hundred significant commodities which are an essential part of our daily life. It is conceivable that the modern world could exhaust itself, consume its wealth, and bankrupt its resources in this conflict, but when peace comes again, men will still need not only the necessities of life, but their energy and genius will find comforts, conveniences, and, ultimately, luxuries.

In less than four hundred years, the immense wealth of America has been created out of the efforts and sacrifices of a relatively small population. In the hundred and fifty years of the commonwealth, we have built a material prosperity unmatched in history. In truth, we got so absorbed in the process that we forgot a number of essentials so far as life itself is concerned and we were quite literally blind to the forces within and without that were driving us toward the present crisis.

Forecasting our material recovery is an interesting speculation, but on the spiritual side we are shortly to feel the purifying and ennobling influence of sacrifice. Man's spiritual senses are not quickened by comforts and luxuries. The courage and the dare of life are aroused by adversity. Into the fiber of our American character is woven the struggle which the pioneer had with the flood, the drought, the heat, the cold, the mountains, and the desert, for more than 2,000 miles of westward movement. Out of such stuff was America built and with such stuff she will survive.

The war is going to put a tremendous strain on our economy and on our political institutions and on our spiritual resources. It is going to consume a large part of our wealth; it is going to curtail most of our liberties. But, by the very negative process which all war implies, it is going to teach us how quickly government can become tyranny, how easily freedom is lost, how great are the deceits of prosperity, and how dangerous it is for any people to give themselves over for a century to the business of getting rich.

Financing the war is a stupendous undertaking. It canbe done with a considerable margin of safety provided we bring to the effort the impeccable integrity which will maintain the confidence of every taxpayer and every saver who makes his or her contribution. We had better start liquidating such pernicious doctrines as the one which holds that the size of the federal debt is unimportant since we owe it to each other. This is tantamount to saying that we are going to use the federal debt as an agency for the redistribution of wealth. If this were true, who will knowingly invest in repudiation?

And we had better stop talking about an economy in which the only essentials are men and production. For a good many thousand years men have used money and credit, not only as media of exchange and measures of value, but as instruments for storing value. Any attempt to discount the worth of money and credit or the functions of these financial agents, or to belittle the role that they play today and that they have played throughout history, can only hinder the government in its effort to raise the necessary sums—can only weaken the confidence of those to whom the government must look for the sacrifice inherent in saving.

A considerable number or modern economic theories are now in the process of liquidation. Sound finance is like sound government; it rests upon the integrity of the promisor. One reason we can bear a two hundred billion dollar debt is that those who put up a large part of the money have unlimited faith in the contract under which it is borrowed. Another reason we can support a two hundred billion dollar debt is that we have the productive capacity to produce enough wealth after the war to service that debt, to meet the interest charges on it, and, ultimately, to pay it. But that task envisages an industrial and agricultural output greater than anything heretofore achieved. It means world markets, as well as domestic markets. It means a new economic statesmanship fully conscious of the fact that the ghost of isolationism has been laid. It means an independent American people, released from the dead hand of bureaucracy—freed from the multiplicity of executive controls which are a necessary but nonetheless un-American adjunct of war.

It means the rebirth of initiative, courage, and dare, in the field of enterprise. It means a re-assertion of character as evidenced in finance by the concept of solvency. For an insolvent state and an insolvent economy can be no more successful than an insolvent citizen and, in the last analysis, solvency is an unmistakable evidence of character.

Of a truth, at this moment, "We have all of life to win or all to lose." We shall never win it by pessimism or despair. We can surely win it by faith and confidence in our destiny.