Such was the spirit with which the Government of that day had to deal.  A spirit in all classes earnestly patriotic, and so thoroughly frightened of the economic consequences of the war that it would have been ready to face any sacrifices that the Government had asked of it.  How, then, would the Government have dealt with this spirit if it had taken the trouble really to think out the problem of war finance on a long view instead of proceeding along a haphazard line, adjusting peace methods to war without any consideration as to their adequacy?  If the problem had been really thought out beforehand the Government must have seen clearly that the real economic problem in war-time is not merely a question of raising money, since that can at any time be done easily by means of a printing-press, but of diverting the industrial energy of the nation from peace to war purposes, that is to say, transferring from the enjoyment of the individual citizen the goods and services that used to contribute to his comfort and amusement, and turning them over to the provision of the things needed for the war.  War’s needs can only be met out of the current production of the world as it is at present.  All the warring powers begin a war with certain accumulated war stores consisting of battleships, ammunition, guns and all other forms of war material.  Apart from these stores with which they begin, the whole work of providing the armies with the fighting materials that they require, and the food and clothes that they consume, has to be done during the course of the war, that is to say, out of the current production of the moment.

Therefore the real economic problem that any Government has to face in war-time is that of inducing its citizens to reduce their purchase of goods and services, that is to say, to spend less, so that all the things required for the Army and Navy may be obtained by the Government.  It is true that some of the goods and services required for carrying on war can be obtained from foreign countries by any belligerent which is able to communicate with them freely.  In that case the current production of the foreigner can be called in to help.  But this can only be done if the warring country is able to ship goods to the foreigner in payment for what it buys, or if it is able to obtain a loan from the foreigner, or some other foreign country, in order to pay for its purchases abroad, or again, if, as in our case, it holds a large accumulation of securities which foreign countries are prepared to take in exchange for goods that they send for the purposes of the war.  By these two last-named processes, raising money abroad, and selling securities to foreign nations, the warring country impoverishes itself for the future.  When it borrows abroad it pledges itself to export goods and services in future to meet interest and sinking fund on the money so raised, so getting no goods and services in return.  When it ships its accumulated wealth in the form of securities it gives up for the future any claim to goods and services from the debtor country which used to come to it to meet interest and redemption.  It is only by shipping goods in return for goods imported for the war that a country can keep its financial staying-power on an even keel.