WAR LOAN QUIZ
HONORABLE JAMES L. ILSLEY
Canada’s Minister of Finance, answers a 21-question quiz on war finance. Why such high income taxes? Why compulsory savings? Why not borrow from the banks? Can we pay our war debt? Here are the answers from the man who has to pay the bills
(1) Question—How much money will it take to run the war and pay for the ordinary costs of the Dominion Government during the fiscal year 1942-43?
Answer—The Budget for the financial year ending March 31, 1943, calls for a total outlay of $3,900,000,000—an amount equal to nearly $1 a day for every man, woman and child in Canada— an amount nearly eight times the level of pre-war budgets which averaged around $500,000,000.
(2) Question—For what specific purposes will this money be spent?
Answer—Direct expenditures for war during this year are estimated at $3,330,000,000—and other expenditures at $570,000,000.
Included in the war expenditures are about $260,000,000 for the Navy, $1,000,000,000 for the Army, and $585,000,000 for the Air Force. There is included also $1,000,000,000 covering the gift of war supplies to Great Britain.
(3) Question—By what means do you propose to obtain this money?
Answer—The Budget provides for the raising of $2,050,000,000—equal to fifty-two per cent of total expenditures—from taxation and other revenue, and $1,850,000,000 from borrowing.
Compulsory Savings of individuals and corporations will take care of only $95,000,000 of borrowing needs, leaving $1,755,000,000—equal to ninety-five per cent of total borrowing needs—to be covered by the sale of Victory Loan Bonds, War Savings Certificates and Stamps, and other securities.
(4) Question—Who handles the borrowing of this money?
Answer—The National War Finance Committee handles all government borrowing from the public through the sale of Victory Loan Bonds, War Savings Certificates and Stamps.
This Committee was established early this year through the merger of the former War Savings and Victory Loan Committees. It has local units throughout the whole of Canada It is staffed almost entirely by volunteer workers who are doing this work as part of their war effort.
During campaign periods such as Victory Loan drives, the staff of the organization, both voluntary and paid, is expanded in order to handle the tremendous volume of work involved.
The job of selling the forthcoming Third Victory Loan is the responsibility of the National War Finance Committee.
(5) Question—What proportion of our national production will he used for war?
Answer—Over the whole year from April 1, 1942, to March 31, 1943, expenditures for war will probably consume about forty-five per cent of Canada’s output of goods and services. As war production is increasing throughout the year, this means we will be close to the fifty per cent level before the year ends.
By way of comparison, expenditures for war in any year during the conflict of 1914-18 did not exceed ten per cent of Canada’s output at that time.
(6) Question—Ilow does spending on this war compare with the costs of the last war, and why are this war’s costs so much greater?
Answer—The total cost of the war of 1914-18, including demobilization expenses, was $1,670,000,000 — a sum equal to about one half the expected expenditure for war in this year alone.
In the first World War, Canada’s expenditures consisted mainly of maintaining a large Army in the field. In this war, not only has Canada built up her armed forces from 11,000 men in September, 1939, to more than 600,000 today, but these forces —on sea, on land, and in the air—are provided with tremendous quantities of costly equipment. This is essentially a war of machines—machines which are expensive to make and expensive to maintain.
Faced with the mightiest array of armed forces in the history of mankind, Canadians must not only equip and maintain our own armed forces, but we must produce everything we can to help equip the armed forces of our Allies.
(7) Question—Ilow are wars paid for?
Answer—In this question I take it we are thinking of the material or financial costs of the war—and not of the greater costs in human lives and personal misery and suffering.
The material or “real” costs of war consist of the goods and services we must go without in order that the maximum of men and materials may be put into the fight. To make this possible, most of us must work harder and longer hours, and wartime production for civilians must be cut down in ever-increasing degree.
In the main these real costs must be met while the war is going on—for it is then that manpower,
materials and machines are needed for the armed forces and for war production. •
The financial costs merely reflect the real costs. No matter how we meet the financial costs, we cannot escape the real costs. In fact any method used to get the dollars to pay for the war is just a means of sharing these real costs.
So far as possible these costs are met once and for all by heavy wartime taxation. In so far as the money is raised by borrowing, the costs are borne by the people who save and thus forego consumption of goods and services for the time being, but we postpone the decision as to who shall ultimately bear the costs. To those who lend their savings to Canada, we give a financial claim as a reward for the real costs they bear now. They or their children will receive payment of this claim after the war either from taxpayers or from others willing to lend dollars to the Government at that time.
Whatever financial methods are used, the real costs of the war effort remain unchanged, and remain a current burden on Canadians as a whole.
(8) Question—Why not make succeeding generations pay a greater share of the cost of a war to maintain freedom for them?
Answer—As you ask me “why,” let me say firstly that while future generations will benefit from our victory, and the defeat of Hitlerism, it is those who have lived during the past twenty-five years who are responsible for permitting this terrible menace to arise. Faced with this reality, it’s clear our generatum is bearing no more than its share of the costs of this war.
However, whatever may be our views on this subject, the-fact is that we really have no choice.
The choice between paying for the war out of taxes and paying for it out of loans is frequently represented as a choice between putting the burden on the present generation and putting it on the future.
Nothing could be more wrong. The costs that matter—the real burdens and sacrifices—are laid on us today. The men who fight today must live today—the materials we use for war in 1942 must be denied to us in 1942.
In short, the war effort must be a current effort —the real costs cannot be shifted to the future nor borrowed from the past.
If we obtain dollars to pay war expenses by loans rather than by taxes, it is true these loans must be paid by future generations. But, when these loans are repaid, it is not a burden on that future generation as a whole, because the repayment merely involves a transfer from some members of that generation to others who live at that time.
We leave future generations a debt, it is true, but,
as we are apt to forget, we also leave them the bonds, the claims to that debt. The members of these future generations must manage to pay one another. But, taken as a group, it is obvious they will be neither richer nor poorer.
In contrast, our generation as a whole is poorer to the extent our consumption of goods and services is reduced by the transfer of men and materials to war use. Nothing future generations do in dealing with debt accumulated during this war will enable us to escape the real and immediate burden of total war.
(9) Question—Why not collect all the money needed for the war through taxation?
Answer—It is humanly impossible to find all the money needed for war purposes out of taxes alone.
If the personal circumstances of everybody in Canada were identical, it would be possible to find all the money needed through a system of taxation which would involve equal sacrifices by all. However, as the personal circumstances of people in different income levels, and more important, the circumstances of people in the same income level, are widely different, it is impossible to devise a system of taxation sufficient to meet our total war costs without causing unbearable hardship to thousands and thousands of people.
In addition to these considerations of fairness, there is the important question of incentive—that is, the danger that too high taxes will discourage many from working as hard as they should.
All that can be done is to increase taxation as far as possible without creating undue hardship or impairing incentive to work.
(10) Question—Why not get all the necessary savings by compulsory methods?
Answer—The answer to the previous question in ^regard to fairness applies with equal force in this case.
It is impossible to set up a full-scale system of Compulsory Savings to be administered, let us say, like Income Tax, which would take into account all variations in personal circumstances.
To meet all our borrowing needs out of Compulsory Savings we would have to call every family before some sort of tribunal, examine their circumstances, and then tell them how much they would have to save before their next examination. In addition, we’d probably have to freeze people’s assets, and establish moratoria on many types of debts. This “means” test would be a cumbersome and expensive way of attacking the problem—even if the public would stand for it.
It is far better to follow our present system. Under it Canadians are asked to make an all-out savings effort based on their knowledge of their own
special circumstances. The amount of our present Compulsory Savings is simply the minimum level of savings we can require from everybody. Our main savings effort must be a matter of individual responsibility.
(11) Question—How much does a Victory Loan campaign cost?
Answer—In the First Victory Loan, in June, 1941, total costs of all kinds amounted to a little more than one cent for each dollar raised. The costs of the Second Victory Loan, last February, were just under one cent for each dollar obtained.
These costs include expenditures for the preparation and delivery of the bonds, office stationery and supplies, publicity, organization expenses, including payments to investment dealers and brokers who give up their regular business and give full or part time service to the Loan organization, remuneration for the services of banks and trust companies, and commissions to salesmen.
(12) Question—Why is it necessary for the Government to borrow money from the public through salesmen who have to be paid commission ?
Answer—Commissions to salesmen amount to only a small part of the costs of the Loan. They are paid only on relatively small individual subscriptions where the canvassing work is comparatively difficult. Commissions are not paid on orders from larger investors, such as businesscorporations and life insurance companies, nor on Bonds sold to employees in medium and large size business organizations.
The salesmen who receive commissions generally give up their regular jobs during the period of the Loan. The mcr.ey they receive as commission replaces the money they otherwise would make at their regular work. In many cases this means financial sacrifice by those who do the hard work of selling Victory Loan Bonds to small subscribers.
(13) Question—Why doesn’t the Government issue more money instead of borrowing so much?
Answer—I wish we could—it would make my task much easier if we could simply issue more money. And it would relieve the National War Finance committee of the hard job of getting people to save their money and lend it to us. But we can’t afford to do it because of the danger—the certainty—of inflation if we followed that course.
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them is more important—it’s a matter of getting dollars in ways that don’t create inflation. Taxation and borrowing are simply methods to cut down private spending. Unless we make this cut—a cut which enables the substitution of government war spending for private spending— there will be a scramble for available supplies with inflation the result.
The war demands a lion’s share of our production, and there is not enough goods and services left over to satisfy all the demands of consumers if they do not cut down their spending very substantially and lend their money to the Government. When we borrow from the men and women of Canada, it means they spend that much less. To that extent they do not compete with one another and with war demands for a limited supply of goods. But if we simply issue what additional money we need for war purposes, and leave consumers to spend their money rather than save it, then their extra expenditure
on the limited supply of goods forces prices up, and makes it harder and more expensive to get what we need for war purposes. No “ceiling” could withstand the upward pressure this would put on prices.
Some new issue of money is necessary as opr production and incomes expand. This limited expansion can take place safely—but only if we make the most strenuous efforts to obtain the bulk of our requirements by taxes and by borrowing directly from the savings of the public.
Every substantial war in the past has been financed very largely by the issue of money, and inflation has been the almost inevitable result, adding much to the other horrors of war. This time we know the dangers and have methods of avoiding them. But we cannot rely on the issue of money if we are to succeed.
(14) Question—Why do you try to secure large numbers of small j loan subscriptions when it is less i
costly to borrow all the money from the banks?
Answer — Borrowing from the banks is the modern, streamlined way of issuing additional money, and amounts to much the same thing in the end. We have just seen, in answer to question 13, that wecannot dothis instead of borrowing from the public if we are to avoid inflation or the slowing down of our war effort.
When the banks lend large sums to the Government, they create additional deposits in the process. In the first instance, the new deposits are turned over to the Government by the banks when they make the loan. But the Government spends these deposits by drawing cheques against them—and they arrive in the hands of the public in exactly the same way as if the Government had printed more dollar bills to pay its expenses.
These bank deposits are the commonest and most important form of money these days, and the increase in them produces the same inflationary effects, and must be subject to the same sort of limits, as the issue of money described in question 13 above.
It is far better and cheaper, all things considered, to borrow, even in relatively small individual amounts, from the millions of subscribers to Victory Bonds and War Savings Certificates. Any extra cost in selling expense or higher interest rates is far more than outweighed by the value of such borrowing in keeping down the danger of inflation.
(15) Question—What do you mean by inflation?
Answer—As far as you and 1 are concerned, inflation means only one
thing—runaway prices and a constantly rising cost of living.
To those of us whose income would not keep up with the increase in prices—and that means most of us, particularly persons with small or fixed incomes — inflation simply means our consumption of goods and services is reduced because we cannot afford to pay the prices they sell for. Inflation means a forced cut in our consumption without any regard to our individual ability to stand this reduction.
In order to build our war effort to peak strength, civilian consumption, as a whole, must decrease. However, since the very outset of the war, the Government has shunned inflation as the means to achieve this end, because it is the most unfair, the most wasteful, and the most dangerous way of doing things.
Taxation and borrowing reduce civilian consumption by taking
money out of the pockets of people before they can spend it. Inflation lets them spend as much as before, but sees they get less for it.
(16) Question—Why is it necessary tohavesuch high taxes and so much borrowing when we have a price ceiling to prevent inflation ?
Answer—The price ceiling alone cannot prevent inflation.
If the buying power of the public were not kept under control by taxes and saving, the price ceiling would soon be blown to pieces.
The fundamental problem issimple.
The Canadian people have far more money to spend than ever before—because we are all working and most of us are getting higher rates of pay. On the other hand, more and more of our production is being used for war purposes. This means there is less and less for the consumer. Somehow our spending must be held down to the level of supplies that are available for consumers.
By the price ceiling we can, to some degree, hold back the pressure of extra spending power which otherwise would force prices up and up. But the strength of the ceiling is limited—and it is a fearful job to hold it down and keep it from cracking, even with high taxes and savings campaigns designed to mop up the threatening flood of consumer spending.
If we didn’t have these taxes, if we didn’t all make an effort to save and postpone our buying until after the war, no power on earth could keep the lid on prices and prevent black markets and inflation. We
must fight inflation on many fronts. Price control is just one of these fronts.
(17) Question—IIow are people with medium and small incomes going to be able to buy Victory Loan Bonds after paying the new heavy Income Taxes and Compulsory Savings?
Answer—The taxes and Compulsory Savings are not as heavy as many people think. I have met a great many people who forget the fact that the tax increase is lightened by the credit for National Defense Tax paid in this year up to the end of August, and by the reductions they can make in the amount of Compulsory Savings payable to the Government if they are making savings in the form of life insurance premiums, pension fund payments and payments of mortgage principal. Each of us should look carefully at
his tax situation and not jump to conclusions on the subject.
When all this is taken into account, the taxes are not light, but we’ve got to win this war. To do this, each of us must willingly bear his share of the load. This is not a war that can be won with small change—it requires a real effort and sacrifice from those on the home front—as it does from those in the front lines.
I am not suggesting people should cut their spending below decent wartime living standards, but I am saying we must cut our spending to that level. This means we must have savings from practically everybody, including people with medium and small incomes. The savings of people with modest incomes may not seem large to them, even if they do their utmost—but, in total, they will amount to a huge sum.
The Second Victory Loan in February last achieved an all-time record, both in number of dollars
raised and in number of persons who lent savings to the country for war use. On average, one out of every seven people in Canada was a subscriber to this Loan.
In the coming Victory Loan we must get more people to buy Bonds than ever before, and each person must buy more Bonds than ever' before.
(18) Question—Why do you object to people cashing their W ar Savings Certificates, and why do you urge them not to sell the Bonds they already own?
Answer—The Government of Canada does not object to people cashing their War Savings Certificates or selling their Victory Loan Bonds, if they urgently need the money for some emergency, such as sickness. Faced with an emergency of this kind, people realize how good it is to have Victory Loan Bonds and War Savings Certificates to fall back on.
WTe do object and, I believe, every thinking Canadian objects, to people who sell their Bonds, or who have their Certificates redeemed, simply to get money to spend on things which are not absolutely essential to them. People who do this are withdrawing the support they gave to the war effort when they first bought the securities.
Urgent need is the only justifiable reason for turning holdings of war securities into cash.
(19) Question — Is there any likelihood of regulations being issued preventing people from cashing their War Savings Certificates or selling their Bonds?
Answer—No. Rumors to this effect have been in circulation in some parts of Canada recently. They are sheer nonsense.
People will be able to sell their Victory Loan Bonds in the future just as they always have been able to in the past. War Savings Certificates will be redeemable in the future just as they always have been.
(20) Question — Will we be bankrupt after the war as a result of having gone so deeply into debt ?
Answer—We shall certainly not be bankrupt after this war—even if it lasts years longer then we expect. Of course our debt is increasing and will go on increasing while the war lasts, but we can manage to carry it nevertheless.
The main problem to be faced is the interest on the debt. But this is kept within manageable limits by the reasonable interest rates which now prevail, and which will not be peri mitted to rise. The average rate paid now on our debt is less than three per cent. In the last war we were borrowing at rates as high as five and one half per cent—and, in most cases, the interest was tax free. Today no bonds carry tax free interest, and as our interest payments grow, we get back a substantial part of them in Income Tax.
Our total interest payments at present are less than one tenth of our revenues—so, even with a heavy decrease in revenue and a large increase in debt we would still have plenty of margin to spare after the war.
Moreover, our debt is becoming more and more widely distributed— there are now millions of holders of Victory Loan Bonds and War Savings Certificates—so the interest is going more and more into the hands of the same people who pay the taxes.
People sometimes ask me how we are going to pay our debt when it falls due. They seem to think everyone will want their money all at one time. The fact is that most people want to renew their investment when their government security matures, and there are always others with savings to invest in government securities. Therefore, as each of our loans matures we shall be able to replace most of it with new bond issues, paying everyone in full and giving spot cash to those who want to spend after the war the money they are saving now. That spending will itself maintain employment and create incomes from which others will be saving in the normal way, savings they will want to invest in good government securities.
The important thing after the war, as I think nearly allof us realizenow,is to maintain a healthy, vigorous prosperity in which all can find useful work. We are developing new skills, new sources of power, new factories during the war, and we shall be able
to produce more after the war than ever before it. We shall be able to manage our debt all right—and we shall manage the more important, fundamental tasks as well.
(21) Question—How is it we can finance production for war when we could not finance production for peace—and why do we have to have a war to put everybody to work?
Answer — During wartime the people of Canada are seized with one common and all-important aim— to win the war. We are all prepared to spend any amount for this purpose. We are willing to provide all the money that is needed by paying taxes at high levels and by lending a lot of our money to our country. Again, we are prepared to put up with many forms of control and interference in our daily lives and business activities.
This all means that in wartime the affairs of the country can be so organized as to provide full employment. Developments in the United Kingdom and United States have contributed also to this result.
Given the same unity of purpose and the same strength of determination, and assisted by favorable conditions abroad, results of the same kind could be achieved in peacetime. Whether this unity and determination can be achieved in peacetime, and to what extent they can be reconciled with the preservation of liberty for the individual, only the future can tell.