WAYS AND MEANS.
THE financial position remains serious enough, but
it has improved in certain respects during the last
three months. Broadly, one may say that while
the pressure of the enormous war expenditure con-
tinues to increase, our machinery for dealing with it
has received important developments, and is work-
ing as smoothly as could be expected. The purpose
of this article is to consider one or two points of
immediate interest, upon which more or less differ-
ence of opinion exists, in regard to the details of this
machinery.
A glance at such estimates as are available will
give some idea of the burden the nation has to bear,
and may help us to judge how far it can be met by
taxation, and what will remain to be raised by borrow-
ing. We shall begin the next financial year with our
debt more than trebled by the war, at about 2,400
millions, subject to an interest charge increased to
fourfold, say 80 millions, or, perhaps, if adequate
1 An article contributed to the Economic Journal for March, 1916.
34
WAYS AND MEANS 35
sinking funds are provided, standing at 100 millions.
For the current year, 1915-16, the national expen-
diture is estimated at 1,590 millions, of which about
one-fifth may come from taxation. The estimate
is for a revenue of 305 millions, but this may be
exceeded by some 20 millions. For the next fiscal
year the expenditure is estimated at 1,825 millions ;
some think it will reach 2,000 millions. Taxation,
as at present fixed, is expected to account for 387
millions, or hardly one-fifth of the increased charge.
If revenue continues to be in excess of estimate, 1
this figure might be put at 400 millions. It should
be noted that more than one-fourth of the current
year's expenditure represents loans to Allies, and
that similar loans enter into the estimates for next
year.
The figures may be given per day and week, which
for some purposes is more convenient. In 1916-17
we shall probably spend from 5 to 5| millions a day,
35 to 40 millions a week. An increase of 15 per cent,
in the taxation now arranged for that year would
give us 460 millions, or Ij millions a day, say
9 millions a week as an outside estimate. If
taxation could be increased 37 per cent., say to
550 millions a year, it would give us Ij millions a
day, or 10 J millions a week. Perhaps this is more
than we can expect at present : but we ought not
1 Both revenue and expenditure may be expected to increase above
estimates in consequence of rising prices.
36 PAPERS ON CURRENT FINANCE
to be content with much less. For if the war lasts
till the close of the year 1917-18 the gross debt 1
will be about 5,000 millions, and the total charge to
be defrayed out of revenue, when interest, sinking
funds, pensions, etc., are taken into account, hardly
less than 600 millions. Whatever the necessary
taxation may be, the limit must be reached before
the artificial prosperity of the war ends. It will be
impossible to increase taxation in the trying period
of the transition to peace conditions.
These figures are necessarily very rough, and will
no doubt be made more precise in the coming Budget
statement. But they go to show that we shall not
be safe in assuming that the amount remaining to
be raised, otherwise than by taxation, will be less
than 26 millions a week in the next fiscal year.
It may very well be 30 millions. There seem to be
only three ways in which this sum can be raised
(for a favourable balance of trade is out of the ques-
tion). It must be raised by loans placed at home,
by loans placed abroad, or by the sale of securities.
It is estimated that the balance of international
indebtedness will be 600 millions against us for
next year. To rectify the exchanges, then, we
must raise loans abroad, or sell securities, to the
extent of 600 millions. This is probably the ex-
treme limit of what can be obtained. Of this sum
1 Loans to Allies must be deducted to get at net debt, but Great
Britain is immediately responsible for the gross amount.
WAYS AND MEANS 37
it lias been estimated that not more than 250,000,000
will be available for Government, as distinguished
from commercial, purposes. Call it 5 millions a
week. We are thus left with from 21 to 25 millions
a week to be financed at home.
The national savings before the war were supposed
to reach 400 millions a year. Some think that in
the current fiscal year they will reach double that
amount, or, say, 16 millions a week. It is not clear
whether in this estimate the sale of securities to
purchase War Loan is regarded as " saving." Per-
haps, for our present purpose, it may be. We are
certainly able to save more than was saved last year.
But the margin to be made up in the next fiscal
year, if these estimates are at all correct, is from 5
to 9 millions a week, or nearly as much as our total
savings in normal times. It comes to this, then,
that next year's saving, like next year's taxation,
must increase by the whole amount obtained in
normal years. It seems well within our power to
secure each result, but only by a very serious
exertion of economy and thrift. The available
machinery, both of loan and taxation, requires
careful consideration.
The methods by which the English Government
usually borrows are well known. Important sums
were raised by issues of funded debt, carrying no
obligation of repayment ; really, in fact, permanent
annuities. Smaller amounts, which it was not desired
38 PAPERS ON CURRENT FINANCE
to fund, were raised by Exchequer Bonds (five-year,
as a rule) ; and temporary deficiencies in Supply by
Treasury Bills, of which there were seldom more than
20 millions running. At the time of the South
African War, Lord St. Aldwyn (then Sir Michael
Hicks-Beach) made a new development, more on
French lines, by issuing a 30-million ten-year loan,
redeemable at par, taking the form, at the option
of subscribers, of either inscribed stock or bonds
to bearer. This loan was a great success, and was
subscribed more than eleven times over. In 1910
its place was taken by Exchequer Bonds, which
reached a maximum of 26 millions in 1911. Even
these maxima for Treasury Bills and Exchequer
Bonds, modest as they now seem, were considered
by many to be excessive. The normal method of
borrowing was assumed to be by way of Funded
Debt.
In the course of the present war this system of
borrowing has undergone changes of the utmost im-
portance, amounting almost to a complete trans-
formation of our financial machinery. Borrowing
on Perpetual Annuities has been discarded for good,
let us hope and its place taken by redeemable
loans (1925-8 and 1925-45) ; there has been a very
large resort to Bills and Bonds ; large advances have
been obtained from banksj especially from the Bank
of England ; the convenience of the investor has
been considered in the variety of options offered ;
WAYS AND MEANS 39
and for the first time appeal has been made to those
of small income, by whom in France the national
Rentes are so largely supported. Above all, the
plan of continuous borrowing has largely superseded
the old methods of borrowing by large loans at long
intervals. This latter change deserves careful con-
sideration.
In the early months of the war it was financed
either by Treasury Bills or advances from the Bank.
The Treasury Bills, in the absence of the usual supply
of commercial and international paper, were readily
taken up. By November 14th, 1914, over 100
millions were current. The issue of the First War
Loan, on November 17th, 1914, made further sales
of Bills unnecessary for the time, and the amount
dwindled a little ; but it was over 100 millions
again on February 25th, 1915. The issue of some
30 millions (net) of five-year Exchequer Bonds, on
March 6th, 1915, brought with it a second decline in
the amount of Bills ; but on April 13th they again
exceeded 100 millions. On April 14th a radical
change was made in the method of issue. Hitherto
Bills had been issued at irregular intervals, in fixed
amounts and maturities, and sold by tender. After
April 14th, 1915, they have been issued continuously
and without limit, at rates of discount announced
by the Bank, and subject to variation at intervals.
At first only three months', six months', and nine
months' maturities were offered ; on May 8th, 1915,
40 PAPERS ON CURRENT FINANCE
twelve months' maturities were added. The new mode
of issue was very well received. In the first three
months, up to July 10th, 1915, the amount of Bills
current had increased to over 250 millions : at the
rate therefore of 1*65 millions a day, or 11 J millions
a week. The issue of the Second War Loan on this
date naturally caused a decline ; but the lowest
point reached (in October, 1915) was only 30 millions
below the previous maximum. In November and
December the applications increased rapidly, and the
year 1915 ended with a total issue of nearly 400
millions (395,565,000).
Here we must stop to notice a further application
of the same principle of continuous borrowing. On
December 16th, 1915, the Bank announced a new
issue of 5 per cent. Exchequer Bonds, for which
applications would be received until further notice,
in denominations of 100, 200, 500, 1,000, and
5,000 ; such Bonds to be receivable at their face
value for subscription to any further loan, and to
be repayable at par December 1st, 1920. Thus a
five-year security is now put on the same footing
as the Treasury Bills ; and there is no reason why
ten-year bonds should not be offered in the same
way, if longer term loans are desired.
Both Bills and Bonds have been well taken up.
In the forty-three weeks from their first issue to
February 12th, 1916, the Bills, notwithstanding the
set-back caused by the second War Loan, have
WAYS AND MEANS 41
brought in 428| millions, say 10 millions a week :
while the Bonds up to the same date have realised
lOOf millions in eight weeks, say 12 J millions a
week. The issue of the Bonds in December seems
to have somewhat checked the issue of Bills, and
both had to contend against exceptionally heavy
revenue collections in January and February of this
year. Still, if we take the total yields of each since
the Bond issue began, we find that in the eight weeks
ending February 12th the Bills yielded 57^ millions,
or 7^ millions a week ; and the Bonds lOOf millions,
or 12 J millions a week. This gives a joint yield of
about 19 millions a week, or 1,027 millions a year ;
supposing that the issues proceed at present rates.
In view of this remarkable result of the system
of continuous borrowing, it must be admitted that
it is working very well ; it is hardly too much to
claim that it is the most successful financial device
yet adopted. We have seen that the revenue re-
quired to be raised by loan at home, supposing that
we can increase the yield of taxation by 37 per cent.,
is from 21 to 25 millions a week. It looks as if we
might depend on the system of continuous borrowing
to provide this amount, and that in a fashion most
convenient to investors, and causing the minimum
of disturbance to the banking system. 1
1 As these sheets are passing through the press (Feb. 1916), both
Bill and Bond subscriptions are declining. But this seems to be largely
due to anticipations of a New Loan at higher rates. It furnishes another
example of the unfortunate effects of the big loan system.
42 PAPERS ON CURRENT FINANCE
Yet we hear talk on all sides of the necessity for a
new War Loan ; and it is not obscurely hinted that,
if the new loan is to succeed, it must be offered at
a higher rate than the last : which means, of course,
that this higher rate will also apply to the Second
War Loan and to the new Bonds, for these may be
subscribed as cash for their par value into any new
loan. It also means that we should see another
heavy depreciation in securities. These and other
objections to a new loan are so serious that one ex-
pects to find some solid considerations in its favour.
Hitherto these have not been forthcoming. Sir
Felix Schuster made an interesting reference to the
subject in his address on January 27th, 1916. He
thought that " if the public response to the issue
of Exchequer Bonds now being made was large, a
further loan might be delayed for a little while ;
but the amount of Treasury Bills now in circulation
was so considerable that it would hardly seem advis-
able to add to that form of indebtedness, convenient
though it might be to both the Government and the
market. The probabilities, then, pointed to the issue
of another large loan." The rate should be " attrac-
tive/' and the instalments spread over a long period.
In other words, the amount of short paper now issued
is excessive, and it is desirable to convert some of
it into Bonds or funded debt running for longer
terms. But if this be so, and Sir Felix Schuster's
opinion naturally carries great weight, the difficulty
WAYS AND MEANS 43
can surely be met without disturbing the system
of continuous issue.
The fact is, that while the system is sound, the
present terms of issue are open to criticism : they
are exactly calculated to bring about the result of
which Sir Felix Schuster complains. Since November
12th, 1915, the Bills have been issued at a "flat
rate " of 5 per cent, for all maturities, and the same
nominal rate is payable on the new Bonds. If the
rate really were as " flat " as it looks, the three-months'
Bill would still be a more eligible investment for
bankers and financiers than the five-year Bond.
But owing to the way in which the discount is cal-
culated, the nominal 5 per cent, rate yields 5 Is. 4d.
on a three-months' Bill, 5 2s. 7d. on a six-months'
Bill, 5 5s. 3d. on a twelve-months' Bill. What is
much more important, while income-tax is deducted
at the source on the Bonds, it is only the profits
made on investments in Bills which are liable to
tax ; and these profits may very well be only half,
or less, of the gross yield. This adds at least J per
cent, to the nominal yield of the Bills, and increases
their real cost to the State by the same amount.
It is clear, then, that the present " flat " rate puts
a heavy premium on investment in the shorter paper ;
and there have been signs lately that even the small
investor, who cannot directly buy a 1,000 Bill,
has contrived to make indirect investments in them
to secure the advantages they offer over Bonds.
44 PAPERS ON CURRENT FINANCE
No wonder if the amount of the Bills is excessive.
But it would be easy to correct any excess by a
suitable adjustment of the rates. A British Govern-
ment Treasury Bill has always ranked as the most
coveted banking investment in the world. Four
and a half per cent., or even 4 per cent., would be
an ample rate for these Bills. At 4| per cent, the
twelve-months' Bill would yield 4 14s. 3d. ; at 4
per cent., 4 3s. 4d. Even so, with income-tax at
present rates, the Bill would probably be preferred
to the Bond by large classes of investors.
But when it is proposed to lower Bill rates, objec-
tion may be made. One of the objects aimed at
when the continuous issue was first introduced was
the control of the market rate of discount. In the
early part of 1915 that rate had been unduly low.
The terms conceded to subscribers to the First War
Loan had put the Bank at the mercy of the market. 1
On February 23rd, 1915, 20 millions of six-months'
Treasury Bills were allotted at an average rate of
l 12s. 4d., having been tendered for three times
over. The exchanges, which had been in our favour
in 1914, were beginning to set against us, and it
was obvious that the market rate indicated by such
a tender was dangerously low and required to be
raised. But it does not follow that we need now
1 Subscribers to this Loan were given the right, extending to
March 1, 1918, to obtain advances from the Bank, to the amount of
the issue price of Loan stock deposited, at 1 per cent, below bank rate.
WAYS AND MEANS 45
maintain a minimum rate, for the shortest Govern-
ment paper, of over 5 per cent. This is to go to the
opposite extreme. New York rates seem to be
fully a point below ours. On December 24th, 1915,
ten days' paper was at three per cent., ninety days'
at 4 per cent. 1 On January 27th, 1916, 25 million
dollars of New York State 4 per cent. Bonds were
placed at a price yielding only 3*85 per cent, to the
investor, though here the low rate may be partly
due to considerations connected with domestic taxa-
tion. 2 Again, it is just cabled as we write that an
issue of some 3J millions of Argentine One- Year
Treasury Notes has been well received in New York
on a 4*70 per cent, basis. On the other hand, we have
the suggestion by the City Editor of the Morning Post
that in October, 1915, American balances had been
withdrawn in gold because 4 per cent, investments
were not obtainable (presumably for call money,
since 4J per cent, was then obtainable on Treasury
Bills). So, too, Mr. E. F. Davies stated (November
30th, 1915) that there was reason to think that a
recovery of the exchanges had been due " to a cer-
tain extent " to remittances for the purchase of
Treasury Bills. Neither statement is very positive.
Evidently caution is required ; but it is a question
of the amount of remittances affected and of the
balance of advantage.
Upon the whole this seems
in favour of a lower rate for short paper ; in fact,
for all Treasury Bills. 1
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