If the conditions of this assumption were true, and realized, very little
popularity would be attached to the purchase of bonds.
Shifting Burden of Payment. The future is discounted
to such an extent that the sale of bonds might still be
popular even if it were realized that there could be no
shifting of the burden of payment. There exists, how-
ever, the possibility of shifting the burden of payment to
different individuals or to a different class of society from
the purchaser of the bonds. As already indicated, bonds
must eventually be paid from some form of taxes. If, in
the coming generation, the plumber class can be taxed
to pay the interest and principal of the bonds which the
carpenter class owns, then there is a shifting of the burden
from one class of society to another. The plumbers are
made to recoup the carpenters for the burden they have
shouldered. The bond which the carpenter 's son inherited
from his father represents that much claim upon the pro-
ductivity of the sons of plumbers.

Shifting of this nature represents a situation, moreover,
which is very likely to occur. When the war is on and the
feeling of patriotism is high, a call for loans meets with a
generous response from the wealthy class. This is as it
should be, because of the evident ability to carry burdens.
When taxes are levied to pay the interest and principal,
however, they are not likely to fall upon the wealthy class
in nearly the same proportion that it has subscribed to
loans. Customs duties and excise taxes have been exten-
sively used, and because of the influence of the wealthier
classes in legislative bodies, the fiscal system may be so
framed that an undue part of the taxes will fall upon the
poorer classes. To the extent that this is true, borrowing
causes the burden of war to be regressive.

228. The Extensive Use of Taxes Has Much to Com-
mend It. Opposed to those who advocate the extensive
use of loans for financing a war are the advocates of the
extensive use of taxation. Since the burden must be met
from taxes eventually, whatever the method adopted at



FINANCING AN EMERGENCY 455

the time, the extensive use of taxes from the beginning is
considered to have many advantages. Since loans, in a
material sense, do not decrease the burden which falls
upon a people engaged in conducting a war, the taking of
the necessary amount by taxation would not cause a
greater burden than borrowing. One significant result of
postponing taxes by borrowing is to make them much
heavier in the end.

Taxation and Prices. The extensive use of taxes, on
the other hand, will be conducive of much good. The bur-
den to the government and its citizens will be materially
lessened. The probability of inflation which comes from
loans is lessened, consequently the resulting rise in price
does not occur, and neither the government nor individ-
uals must pay increased prices for the products which
they demand. It may be possible to use the tax system
also as a means for stabilizing prices. Before the advent
of war, individuals have been accustomed to spend their
incomes for certain classes of goods. After the advent of
the war they cannot buy as many goods because produc-
tion has been deranged to supply the materials necessary
for the prosecution of the war. The result is likely to be
an increase in price for the materials which are available
for individual consumption. If, however, taxation were
increased in proportion as the available goods were de-
creased, then prices would tend to remain the same and
no burden would be felt. The individual gets just as
many goods, the only difference being that he does not
have to turn over more money to get them.

Drastic taxation at the beginning of a war may accom-
plish other benefits for its prosecution than the supplying
of revenue. One of the necessary adjustments, and one
which must be made quickly, is the transfer of men and
women workers from nonessential industries to the pro-
duction of war materials. A taxation so severe that little
would be available to be spent for nonessentials, would
cause the production of such commodities to cease, and



456 OUTLINES OF PUBLIC FINANCE

their producers to seek places where there is a demand for
their services. This would not only supply the needed
workers, but would take them from those industries from
which they can best be spared.

Exaggerated Objections. Some objections to the exten-
sive use of taxes are frequently exaggerated. Much is still
made, in some quarters, over the fact that borrowing is
the time-honored method of financing a war. But with
the successive breaking of historic precedence during the
Great War, this statement bears no weight, unless reasons
be advanced for continuing the policy. The objection
that taxation will have a deterrent effect upon industry,
at a time when it needs all possible encouragement, is more
searching. As to this situation, however, much will de-
pend upon the kind of the tax, the height of patriotic
zeal, the possibilities of evasion, and similar considera-
tions. War is a period of prosperity for the industries
which survive, and they are, to an increased extent, able
to meet the burden. Large returns are received from war
contracts, prices are rising, and profits are swelling, while
the derangement of industry causes hesitation in the in-
vestment of the newly created capital. A tax which is
wisely imposed may take a large part of this war-created
wealth without causing any check upon the exertions of
labor or capital. Taxes may, indeed, often be a spur to
greater effort, so as to secure a larger differential margin
after the tax is paid.

Individual Attitude. If patriotism is running high,
there is scarcely a limit to the tax burdens which individ-
uals and industry will willingly bear. If the motivating
force hi production is patriotism rather than private gain,
there need be no fear of seriously handicapping produc-
tive enterprise by heavy taxes. After the war, however,
this patriotic motive will have passed, and it may be
much more difficult to put into effect a satisfactory
scheme of taxes. Those who are most able to bear the
burden will be much more concerned about shifting it to



FINANCING AN EMERGENCY 457

other shoulders. To be successful during a war, a tax
system should be accompanied by an efficient adminis-
trative machine, so that justice can be secured in reaching
all the sources which should contribute. Not only should
all the sources be reached, but evasion of the tax should
be made difficult, and it should be made difficult for the
burden to be shifted to others than those who should bear
it. To accomplish this in its entirety, of course, is impos-
sible, but the more nearly the ideal is approximated, the
more just and successful will be the use of taxes.

Equalization of Burden. The extensive use of taxes
tends to equalize the burden of a war upon the different
classes of citizens to a much greater extent than the use
of extensive borrowing. Not only is this true of the civil-
ian classes, but the burden is more equally divided be-
tween the soldier and the civilian. Suppose, for instance,
two citizens, at the beginning of a war, each of whom is
receiving a salary of $10,000. One goes to the front and
gives up his salary; the other remains at work and buys
bonds with all above mere living expenses. As far as
monetary sacrifice is concerned, each is giving up the same
amount. The situation changes, however, after the war.
The returned soldier enters his old position, and both are
taxed to pay for the bonds held by the one who remained
at his job. To have equalized the burden, the amount
taken from the civilian should have been in the form of
taxes rather than loans.

Consideration of Expediency. Much care must be used
in formulating a tax system which will meet both the re-
quirements of justice and expediency. That system will
most nearly approximate justice which imposes an equal
burden upon all classes. To go the limit which justice
might sanction, however, might not be expedient. A
government, for example, might be justified in taking all
the returns of industry which have arisen from war ac-
tivities, or even all returns which are not specifically
needed for reinvestment in essentially war activities. The



458 OUTLINES OF PUBLIC FINANCE

effect of such a policy on economic activity might be dis-
astrous, and so expediency suggests an approximation of
justice through the use of steeply progressive tax rates.
A more extensive use can be made of taxes upon business,
with less burden, than upon other bases, because there is
less risk in business undertakings. A larger percentage of
necessities is being produced for which the market is more
assured, than for other classes of goods. Expediency
would sanction, also, the use of taxes upon commodities,
but because of their regressive nature their use should be
tempered by the requirements of justice.

229. Borrowing Usually Has a Legitimate Place in
Emergency Financiering. The case for the extensive use of
taxes in financing a war is strong, yet various circumstances
usually exist which make it impracticable to attempt
to raise all the needed revenues from this source. The
important thing to be kept continually before the minds
of the fiscal authorities is that a policy must be adopted
which will see the war through. The source of the revenue
must not be used up, so that the treasury will find no
more funds available when the conflict is only partially
finished, but the source must be kept intact so that each
successive demand will be met with a forthcoming supply.
The tree must not be cut down to get the fruit, but must
be left to produce more fruit as it is needed to supply the
recurring wants.

Administrative Machinery. The revenue system which
is in existence at the outbreak of a war is a consideration
of first magnitude when proposals are made to increase
many fold the amount secured from taxes. If the policy
of taxation is contemplated, it is most certainly true that
preparation for war should be made in tune of peace. In
order to meet the excess demands, the revenue system
must be one which is capable of rapid expansion. This
can be done only when the revenue system of peace times
is broad in its scope; and if its rates are less than the maxi-
mum revenue rates. If this be true, all that needs



FINANCING AN EMERGENCY 459

to be done when the crisis comes is to increase
the rates up to the maximum revenue yield, if neces-
sary. If, however, the maximum revenue is already
being received, the officials are confronted with the task
of devising new taxes and new administrative machinery,
both of which are tune-consuming propositions. New
taxes, moreover, are generally unpopular, and a period
of education is necessary before people will pay them
willingly. The needs of the government will not wait,
and while an adequate tax system is being arranged it
may be necessary to resort to borrowing.

Importance of Personal Element. Human nature is an
important factor with which fiscal authorities must always
reckon. It has already been indicated that individuals
discount the future. The fact that taxes must at some
time be levied to the full amount of all loans does not
weigh heavily enough upon the present generations to
induce them to shoulder the entire burden in taxes at
present, in order to avoid the future tax payments. While
the material sacrifice may be just as great in lending an
amount as if it had been taken in taxes, the personal loss
is much less in the case of the loan. To the individual
the bond merely represents his property in another form.
The use of borrowing, therefore, will generally result in
a much heartier response, and will secure more adequate
returns when funds are needed quickly, because it appeals
to human nature.

Confidence in Government. The confidence which the
citizenship has in its government, and the strength of the
sentiment in favor of the undertaldng, will be somewhat
of a guide to the authorities in determining the sources of
revenue. If the cause is close to the hearts of the people,
and the patriotic zeal at a high pitch, greater personal
sacrifices will be willingly borne, and consequently taxes
can be used more extensively than if the interest were
merely lukewarm. As long as the administration of the
government has been conducted in such a way as to



460 OUTLINES OF PUBLIC FINANCE

strengthen the confidence of the people, great sacrifices
will be made to support it in its undertakings. An ad-
ministration which possesses the absolute confidence of
its citizenship, and which embarks upon a cause which
meets with their undivided approval, can rely extensively
upon taxes to secure the needed revenue.

Industrial Considerations. The effect of the fiscal policy
on the productive capacity of the country must always be
kept in the foreground. The appeals must be made in
such a way that each will bring results in the form of
revenue, and yet always act as a spur to increased energy
in production, and never as a discouragement. This is
particularly true in the first stages of the conflict, when
industry is burdened with discouragements. Some have
endured a hard transition from unessential lines of en-
deavor to the production of war materials. Industry,
moreover, has likely been hard hit by the withdrawal of
labor to the army. The precipitation of any unexpected and
unprepared-f or heavy tax burden upon industry under such
conditions could scarcely help having a deterrent effect.
In order to keep up the productive capacity under these
circumstances, a resort to borrowing may be preferable.

The general economic and industrial condition of the
country, as compared with the magnitude of the demands,
is a factor to be kept in mind. It would be suicidal to
attempt to collect in taxes an amount greater than the
national income. It may be true, however, that the
necessary revenue will exceed this sum. In the case of a
life and death struggle it may become necessary to spend
many tunes as much as the national income. In such
cases borrowing must be resorted to, from a foreign coun-
try, if possible, and the loan be repaid gradually from the
income of succeeding years.

230. The Proper Combination of Loans and Taxes
Forms the Best War Finance Policy. The foregoing dis-
cussion points to the conclusion that, while an extensive
pr exclusive reliance upon taxes is theoretically advisable,



FINANCING AN EMERGENCY 461

yet the practical aspects of the case nearly always make
some use of loans desirable. The problem of the revenue
administrators is to hit upon the proper combination in
the use of these two sources. It will usually happen that
greater reliance must be placed upon loans at the begin-
ning of the emergency. Revenue systems are not usually
in operation which will permit of sufficient expansion to
meet the immediate demands. Public sentiment, likewise,
may have to be developed before individuals are willing
to endure the feeling of sacrifice. At the beginning, then,
the extensive use of the borrowing power may be the
proper solution. This does not mean that it should be the
permanent policy. The authorities should at once begin
to develop new taxes and to expand the old where it is
possible. As time goes on, the habit of paying more taxes
will be formed, and little opposition will be encountered.
As public sentiment becomes more favorable, taxation
can be pushed more rapidly, until it may be made the
chief source of revenue.

If any policy for the proper procedure of officials were
to be formulated it would be something like this: use
taxes at the beginning as much as possible, but not to
such an extent as to antagonize individuals or discourage
industry; introduce taxes as rapidly as possible, so that
as time goes on the majority, if not all, of the needed
revenue shall come from this source. In the light of the
underlying principles which have been discussed in the
preceding pages, it will be instructive to review some of
the methods which have been used in financing wars, to
see how closely they have adhered to these principles,
and to note the degree of success which was attained.

231. Earlier Wars of the United States Were Financed
Largely Through Borrowing. Between the Revolutionary
War and the Great War, only two conflicts have appeared
in American history which have placed any real burden
upon the people. These were the War of 1812 and the
Civil War. The fiscal measures of the Revolution do not



1
represent a predetermined and definite plan, but are ex-
amples of a government of little power attempting to
secure funds in any possible manner. The issue of paper
money was extensively relied upon at the beginning of
the struggle, but its rapid depreciation proved the in-
effectiveness of this plan. Many attempts were made to
requisition both money and materials from the states,
while borrowing, both at home and abroad, was pressed
to the limit. Attempts to establish a national system of
taxation proved unsuccessful, and resort was finally made
to the establishment of a bank to extend aid to the gov-
ernment. In the War of 1812 and the Civil War, however,
an attempt was made to adhere to a more definite policy.

The War of 1 812. Secretary of the Treasury Gallatin
was responsible for the plan used to finance the War of
1812. Congress heartily consented to the plan which he
proposed, while only an occasional individual member
voiced an objection. Reliance was to be placed entirely
upon borrowing to meet the increase of expenditure be-
cause of the war, and an earnest attempt was made to
adhere to this policy. The Secretary advised that taxes
be increased sufficiently to meet the interest upon the
loans, but Congress was unwilling to digress from the
policy of borrowing even to this extent.

The flotation of the first loan was not accompanied by
any marked degree of success. This was attributed to
the fact that the provisions of the bonds were not attrac-
tive enough. The response to successive issues, however,
was even worse, and the depreciation on the market con-
tinued to increase, until in 1814 the government had
practically reached its limit in the expansion of long-time
credit. The failure of the loans to produce the desired
amount led to the frequent and extensive use of treasury
certificates. The policy clearly demonstrated the fact
that borrowing cannot be conducted successfully unless
some inclination is shown to provide a means for the
redemption of promises.