ABSTRACT
Sir,—The main feature about the evidence given before Lord Colwyn’s Committee on National Debt and Taxation is its emphasis and agreement on the following points:—
That heavy taxation has the effect of restricting trade. That provision ought to be made for gradual reduction of the National Debt. That reduction of National Debt should be effected by reduction of Government
expenditure, accompanied, if possible, with reduction of taxation. This is all clear as far as it goes; but it is superfi cial and, consequently, rather misleading. First of all, let us be quite clear as to why heavy taxation has the effect of restricting trade. The reasons given before Lord Colwyn’s Committee are, briefl y, to the effect that such taxation increases the cost of production, and that, at the higher prices, there is a more restricted market both at home and abroad. This explanation, however, does not stand inspection. There cannot be a rise in the general price level unless an expansion in the total supply of money takes place in relation to the total quantity of commodities and services for sale; and, when such infl ation of money does take place, a proportionate depreciation in the monetary unit compensates, in markets both at home and abroad, for the higher price level. Thus, when there is no infl ation there can be no rise in prices to restrict trade, and when there is infl ation it is compensated for, as regards trade, by depreciation in the monetary unit. The truth is that taxation only restricts the total volume of trade when it causes defl ation, or a reduction in the supply of money in relation to the total quantity of commodities and services for sale; for, in this case, manufacturers and merchants, when suddenly faced with the necessity of selling their stock at lower prices, are unable or unwilling to continue trading to the same extent. It is defl ation, therefore, that restricts trade; and, although one of the principal causes of defl ation is the withdrawal of money from the people by means of taxation, whether it is caused in this way or in any other is rather immaterial as regards the effects on the total volume of trade. As regards the question of reduction of National Debt, gradually or otherwise, this can only be effected by means of the application of (a) money withdrawn from the people by taxation, and (b) money withheld from the public by the reduction
of Government expenditure. Nevertheless, be the money withdrawn or be it withheld, the application of such money to reduction of National Debt, other things being equal, causes more or less defl ation with restriction of trade. Further, reduction of National Debt accompanied by defl ation does not necessarily, in view of the lower prices that are the essential feature of defl ation, result in any reduction of the commodity value of the debt. Reduction of National Debt, therefore, can only be harmful in the circumstances described, regardless of whether it be effected by means of taxation or by means of reduction of Government expenditure. In circumstances, however, when the supply of money is being increased by the people independently of the Government, the required amount of money for reduction of National Debt can be either withdrawn from them by taxation, or withheld from them by reduction of Government expenditure, and still leave suffi cient money in their possession to obviate defl ation and its restricting effect upon trade. This might mean that reduction of National Debt should be commensurate with increased production of commodities, increased production of money, or increased prosperity; but whatever it means, it is much too vague. We must be precise about the matter. In order to consider the question clearly, it is necessary to appreciate the fact that the total supply of money does not vary as the total production of commodities and services for sale, the curves of each being quite different. Thus, earning and saving in respect of money, and in respect of commodities, are two different things with totally different effects as a rule. The manner in which they affect each other cannot be pursued here; but what is mainly involved in the question of reduction of National Debt is the principle that every loan from a banker creates a deposit and every repayment of a loan to a banker destroys a deposit of money. The National Debt is an obligation to pay money, not commodities, and, therefore, an increase in the quantity of money in relation to the quantity of commodities and services for sale is required, whereby the excess of money can be (a) withdrawn from the people by taxation, or (b) withheld from the public by reduction of Government expenditure, and applied to the reduction of the Debt. Reduction of National Debt, therefore, should only take place at times when there is a tendency for infl ation to take place as the result of (1) reduced production of commodities, or (2) increased supplies of money arising from the people obtaining larger quantities of credit from bankers. At such times, reduction of National Debt should, imperatively, take place in order to counteract the infl ation, by a reduction of expenditure by the people and the Government; because, in this way, (1) reduced production of commodities would be met by reduced consumption, or (2) an increase in the supply of money arising from an increase in the people’s loans from bankers could be accompanied by a corresponding reduction of the National Debt. Whether reduction of National Debt be achieved by means of increased taxation or by means of reduced Government expenditure makes little difference to the total volume of trade as a whole; but it is important for the welfare of the State
that the required economy be effected at the point where expenditure is least necessary or desirable, be it Government expenditure or certain classes of expenditure by the people. This last point, however, is a large subject of another kind.
