Paying the Bills of Modern War
THE ECONOMICS OF WAR FINANCE
By DR. ALBERT H. BURROWS, Northern Michigan College of Education, Marquette, Mich.
Broadcast sponsored by the Sixth War Loan Campaign Committee of Marquette County, Mich., Over Station WDMS, November 22, 1944
Vital Speeches of the Day, Vol. XI, pp. 136-138.
FRIENDS of freedom, my talk this evening is in the interest of our country, our democracy, and our brave sons and daughters around the world. I am asking you to buy as many one hundred dollar bonds as possible to bring our boys home in victory. We are now engaged in a total or "all out" global war in which human and individual values are at stake.
This mechanized war is very expensive. During each month our government spends seven and one-half billion dollars to destroy oppression. Every ten days this war costs more than the entire Civil War. Every six months it costs us more than the total cost of World War I. Many of these modern mechanized war monsters of the land, sea, and air literally cost us hundreds of thousands and even millions of dollars per machine. Yet, if they save the blood of one American boy they are worth every cent. We now have a yearly expenditure of ninety-five billion dollars. Nearly ninety billions of this goes to the war program. This is two hundred and fifty million dollars per hour. Approximately 95% of every dollar invested by you in war bonds goes into the war effort. Yes, goes to prevent bonds on our ankles—goes to prevent the throttling and lashing of free men—goes to hasten victory and aid your boy and your neighbor's boy.
Let us analyze some of the economic problems of a war program. The first and major problem of a war economy is to maximize the land, labor, and capital goods going into War materials and conversely to minimize the amount of the same factors of production that go into non-war production. The war machine must be the number one consumer of goods and services. Our country is now consuming in the execution of the war over one-half of the goods and services produced by the American people. The war cost of ninety-five billions of dollars comes from a gross national income of about one hundred and eighty billion dollars, or a net income of one hundred and fifty billion dollars. Thus, approximately one-half of all our productive effort and factors of production are now going into the task of defeating tyranny. A second and related problem of war administration is how to secure and maintain for the war output this one-half of our productive effort and materials, i. e. how to pay for the war.
There are only five theoretically possible methods by which any country can finance a war. These methods are as follows: (1) War Treasure Chest, (2) Expropriation, (3) Fiat Money, (4) Taxation, (5) Borrowing.
Let us now examine and evaluate in turn each of these possible methods of war finance. First, the Treasure Chest method is not now available to the United States. We had planned no war and had established no war chest—unless the gold at Fort Knox could be considered as such. But had a nation such a chest of money equal in amount to its money already in circulation then release of the treasure chest money into the monetary stream and its use by the government would cause the price level to double and would rob every outstanding dollar of one-half its value. Such a method would cause untold and unnecessary economic disorganization, imbalance and hardship and must therefore be eliminated for some superior war finance method.
The next method is that of Expropriation or outright confiscation of the actual goods and manpower or services. This expropriation method would bear very unequally on the ability of the people. Furthermore, many of the essential war goods would not be in existence to be expropriated. Therefore, a system of forced labor and outright conduct of the economic processes would be necessary to implement such a system. Thus, the method of expropriation, confiscation, commandeering, or whatever we may christen it is an unsatisfactory method for securing the war materials. It does not induce the production of necessary goods without the destruction of liberty and the introduction of forced labor. Also, it does not equate the burden to the ability of the expropriatees. This is the Hitlerian method in the ravished European countries, but we must reject it.
The method of the Printing Press or Fiat Money was used in our Revolutionary and Civil Wars. We still say "not worth a continental" as a memorial to the Printing Press Money of the Continental Congress. To state that money has become worthless is the equivalent of saying that prices have skyrocketed by the thousands. During the Civil War the money of the Union depreciated due to the issuance of fiat money and prices trebled as each dollar was robbed of two-thirds of its value. We have 347 millions of these Civil War "greenbacks" in our money today. Germany during and following World War I, when prices mounted a trillion times, is the best example—or should I say, the worst example—of the tragic results of financing a war by means of the printing press. No, we do not want
our government to have to resort to this Printing Press Method. Every dollar raised by this method subtracts fifty cents of the value from some dollar already in existence, and furthermore, the old fifty cent dollar still competes with the new fifty cent one for goods and services and the price level may be quadrupled ad infinitum according to how many times the original monetary supply is equalled or matched by the new printing press dollar. Such a method is a sure road to economic post-war crisis. It, too, must be dismissed as unsatisfactory.
Taxation is theoretically the proper method of war finance. In theory a war could and should be financed by taxation. This is true because in reality a nation, unless it secures materials from others outside its own borders, must bear the real costs of war as it is being fought. There can be no postponement or supposed "passing on to future generations" of the real burden of producing the materials of war. There can be no postponement in the production of goods, machinery and instruments of death. Yes, how thoroughly we in the United States learned during those long months following Pearl Harbor that planes, tanks, subs, shot and shell, cannot be used until the people have first undergone the real cost of expending the labor and furnishing the materials necessary to turn out the finished fighting equipment. This is what is meant by "tightening our belts." There are only the following three ways by which future generations may be considered to bear any of the economic burden of a previous war: Reduction of inventions, depletion of capital equipment and durable consumers goods, and destruction of natural resources. Not one of these "burden passers" has any relation to the financing of a war.
War-induced "belt tightening" has been less noticeable because our industrial machine was in low gear or, in some cases, dead center when the war program began. Thus, by doubling the output of our industrial machine in the United States we have been able to supply the war materials and still undergo a surprisingly small amount of "belt tightening." However theoretically possible it may be to finance a war entirely by the method of taxation it is probably impossible in practice. It is impossible quickly to place in operation a tax system adequate to finance much more than about two-thirds or three-fourths of the costs of war. It is impossible for taxes to be so perfectly adjusted and administered to taxpaying ability as to call out all of the free funds as readily as borrowing without at the same time bearing too heavily on some and thereby, causing undue hardship and economic disorganization. Also, some milk warm patriotism won't stand the strain of "all out" war taxes as readily as war borrowing. At present 46% or nearly one-half of the war cost is covered by taxation. This is much improvement over World War I finance, when just over one-fifth of the cost to the United States was borne by taxes. Thus, the United States is now making its best war record in tax receipts. But still the taxes are only high enough to raise about one-half of the necessary funds. How shall the other 54% be raised?
The final of the five possible methods of financing a war is by Borrowing. It is the best coordinate method with taxation to finance a war. This is the supplementary method which the United States is using and in which you and I with our pens and ink and our signatures play the leading roles. Borrowing by our Government is generally referred to as the selling of bonds. We are now engaged in the Sixth War Loan Drive. This method must now carry just over one-half of the war finance burden. World War I was financed nearly four-fifths by the sale of government securities, i. e. borrowing. However, in addition to not taxing adequately a mistake was also made in that no effort was made to have those bonds purchased by non-commercial banking sources and from the consumption funds of the people. Instead the bonds that were purchased by individuals were used as collateral for further individual borrowing and expansion of demand deposits. Therefore, the price index mounted to 240 in May, 1920. Thus the dollar lost nearly 60% of its pre-war value. This "run away" price structure incited an enormous speculative boom and over capitalization of business and agriculture with the inevitable economic crash of the thirties—which had been slightly retarded by the yearly billion dollar international loans of the twenties. The mistake in the World War I bond sales was that they were used as a method of expanding bank deposits subject to check, i. e. demand deposits. Their sale therefore had the effect of adding to the total amount of purchasing power medium and therefore catapulted the price level. In order to avoid the mistake of World War I our Government is now asking that each of us buy bonds from our funds that might otherwise be spent for consumption goods or for real savings in the form of capital equipment. The Treasury asks that six and one-third billions of the fourteen billion dollars of bonds, now offered be purchased by individuals and the other seven and two-thirds billions by insurance companies, brokers, and non-financial corporations. As the American people buy these bonds from funds that otherwise would go into current consumption expenditures or into capital goods, then there is no inflation of the purchasing power medium and no resulting upward pressure on prices. Thus, the next depression is prevented through preventing a present boom! These dollars that go into Freedom Bonds are not then competing with our Government for goods and services. Also, we are building a "back log" for post-war purchases, prosperity, and security which will help to prevent an economic debacle similar to that of the thirties.
In a democracy everyone must cooperate in the program adopted by the people and their representatives. The American people have responded splendidly in the preceding five War Loan Drives. From December, 1942 through July, 1944 non-banking sources have purchased seventy-seven and two-thirds billion dollars worth of bonds, and $21,920,000,000 of these were purchased by individuals. Our country and our boys are now asking us to continue to finance them by buying War Bonds. We have a long and proud record. We have never failed. We have always gone over the top. The 37,000,000 families and households in the United States must buy on the average a little over one hundred dollar bond per household in order to raise the funds asked of individuals. This means that many of us with incomes above the average must buy several $100 bonds. Those whom Providence has favored with no sickness or disaster can show especial thanks on the morrow by buying an extra $100 war bond.
In our grand democracy and land of freedom no one is telling you how many bonds you have to buy—no one is ordering, snooping or dictating. You and you alone before your conscience, before your creator, and before the spirit of your boy and your neighbor's boy, must make your own decision. Americans have always, in crises, responded to the demands for greatness. We have always shown our appreciation of and readiness for democracy by voluntarily doing what duty and our sense of freedom demanded. I know that every citizen—yes, every American—will buy bonds until it hurts and hurts greatly. And even then it is a small contribution compared to that of our own flesh and blood. We cannot compare our small sacrifice to thatof those grand heroics represented by the gold stars in our service flags, nor to the devotion of those medically discharged boys already coming back with life scars on their bodies.
Some time ago I spoke to a group of men in a machine shop and one of them followed me out and said, "I have two sons in the service, I told them that I would buy bonds to send them guns, I am buying $150 of bonds regularly every month." No, your sacrifice and mine will be very small even if we put one-half or two-thirds of our income into war bonds and taxes. Ask yourself, how much could I give if the Gestapo were applying the lash? Am I hungry, or naked or cold? How many bonds could I buy and still have more food than the Poles, the Danes, the Norwegians, the Belgians, and the French. Go ask the poor Jews of Europe how much you can and should buy of these shares in Democracy! Go ask the poor Greeks how little they have to eat and how many war bonds they think Freedom is worth! Go ask the dispossessed and enslaved laborers and violated women and children of Europe—yes, and of China and the Philippines—how many war bonds Freedom is worth!
No, friends, howsoever much we may invest in our Democracy it will still be a very small token in return for the perpetual dividends which will be received by the generations of free people—our children and our children's children—who follow. Don't let Uncle Sam down! Don't let yourself down! Respond totally to the call of your country! Invest in Freedom's Bonds. Purchase your shares in Liberty now. Be a partner in this struggle for liberty and freedom of mankind. Tomorrow is Thanksgiving and as you sit in comfort about a bounteous table—promise your country, your boy out there, and your God, that you are truly thankful for all the blessings of love and liberty which they have given to you—and that you will never let them down!