With regard to the goods that we might have available for export, these were likely to be curtailed owing to the diversion of a large number of our industrial population into the ranks of the Army and into munition factories.  This curtailment, on the other hand, might to a certain extent be made good by a reduction in consumption on the part of the civilian population, so setting free a larger proportion of our manufacturing energy for the production of goods for export.  Otherwise the problem of paying for goods purchased from abroad could only be solved by the export of securities, and by borrowing from foreign countries, so that the shells and other war material that were required, for example, from America, might be paid for by American investors in consideration of receiving from us a promise to pay them back some day, and to pay them interest in the meantime.  In other words, we could only pay for what we needed from abroad by shipping goods or securities.  As is well known, we have financed the war by these methods to an enormous extent; the actual extent to which we have done so is not known, but it is believed that we have roughly balanced by this process the sums that we have lent to our Allies and Dominions, which now amount to well over 1300 millions.

If this is so, we have, in fact, financed the whole of the real cost of the war to ourselves at home, and we have done so by taxation, by borrowing saved money, and by inflation—­that is to say, by the manufacture of new currency, with the inevitable result of depreciating the buying power of our existing currency as a whole.  How much better could the thing have been done?  In other words, how much of the war’s cost in so far as it was raised at home could have been raised by taxation?  In theory the answer is very simple, for in theory the whole cost of the war, in so far as it is raised at home, could have been raised by taxation if it could have been raised at all.  It is not possible to raise more by any other method than it is theoretically possible to raise by taxation.  It is often said, “All this preaching about taxation is all very well, but you couldn’t possibly get anything like the amount that is needed for the war by taxation, or even by borrowing of saved money.  This inflation against which economic theorists are continually railing is inevitable in time of war because there isn’t enough money in the country to provide all that is needed.”

This argument is simply the embodiment of the old delusion, so common among people who handle the machinery of finance, that you can really increase the supply of necessary goods by increasing the supply of money, which is nothing else than claims to goods expressed either in pieces of metal or pieces of paper.  As we have seen, all that we have been able to raise abroad has been required for advances to our Allies and Dominions, consequently we have had to fall back upon our own home production for everything needed