somewhere near 100 per cent. above the pre-war level, the national income two or three decades hence might quite well be double the figure mentioned, which would make the American debt charge per cent. of the national income.

But we should perhaps consider the payment in relation, not to the total national income, but rather to the surplus of production over consumption, for, unless there is a sufficient margin, additional taxation (except when, as in the case of taxation to pay interest on internal debt, it represents mainly a transfer from one group of persons to another) will press down the standard of consumption. The comparison would be somewhat as follows: The surplus available for addition to the national capital, after meeting the cost of government, was about 350,000,000l. some years before the war-representing, at a 50 per cent. higher price level, over 500,000,000l. This surplus has to meet the additional cost of government in addition to providing new capital. At present these government costs absorb an unduly large proportion of this surplus. But as pensions automatically fall, and government economies are realised on the one hand and the national income grows on the other, the margin will increase. Looking at the matter from the point of view of taxation, I per cent. of the national income could be met by fourpence in the pound on the income tax, with an equivalent on indirect and other taxes. If the burden falls to

per cent., the income tax figure would be twopence, with a similar amount from indirect taxation. This is putting the best face on the situation, and involves some very large assumptions; but it is mentioned to show that the burden may in favourable and quite probable conditions become a comparatively light one. It illustrates, however, that-as is the case with all national debts-the burden depends upon economic progress and upon the level of prices in the currency medium in which it has to be paid.

As regards the ability to convert our income at home into payments abroad, it has to be remembered that this country is in a better position to do this than any country in the world. Our overseas investments amounted before the war to something like 4,000,000,000l., of which the Chancellor of the Exchequer estimated some little time ago that we had disposed of 1,000,000,000l. to help us to pay for our essential imports from abroad during the war. In 1913 we were adding to our overseas investments at the rate of nearly 200,000,000l. a year, and, though the reduction in our holding of foreign capital and in the interest thereon has somewhat reduced the possible surplus, it is estimated that even in 1922 we had a surplus of 120,000,000l. available for payment abroad-though out of this, of course, we had to find the payment which we actually made on our VOL. XCIII-No. 553

foreign war debts. We can, of course, only count upon having a continued surplus for foreign investment if something like pre-war conditions continue as between Great Britain and the rest of the world. But upon this assumption Great Britain could meet the charges involved overseas without any fundamental change in our trade balances, with the effect only of reducing the increase that would have otherwise occurred in our holdings of foreign capital.

But these investments have recently been made in the main in other countries than America, and there remains the problem how the transfer should be made to that country. The simplest solution, which would have the least disturbance on the world's trade, would be if Americans would take over a corresponding amount of capital in the developing countries of the world. At present the United States has not developed either the machinery or the habit of foreign investments as we have in this country, and to ensure at once that 35,000,000l. of foreign capital which would normally have been found in Great Britain should be raised in New York would require that the rate of interest in New York should be substantially lower than in London, and would involve a disturbance of the money market situation. But the change has not to be made in a day, and it is not unreasonable to suppose that, as time goes on, a wealthy country like the United States of America will naturally develop the habit of foreign investment and play an increasing part, not merely in the world's foreign trade, but in its finances and commerce. The change suggested may, therefore, take place without any further undue disturbance, so that when the debt is all redeemed we shall have rather less, and America rather more, of the world's capital in foreign countries.

But to the extent that the payment cannot be dealt with in this way, the receipt of the money must involve a change in America's foreign trading account. If we consider the volume of America's foreign trade, the modification required is not a very enormous one. Before the war her imports amounted to 370,000,000l. sterling, and her exports to 470,000,000l. sterling. In the boom year of 1920 these figures rose to 1,050,000,000l. and 1,620,000,000l. respectively, while in 1922, the year of depression, they were 520,000,000l. and 750,000,000l. A one-sided payment of 35,000,000l. could be received either by an increase of imports or by a reduction of exports; and in view of the fact that Great Britain's surplus available for foreign payment is acquired for goods or services supplied to or interest receivable from all parts of the world, the payment can be achieved by a modification of any part of America's imports or of her exports. In view, however, of the unfortunate efforts which America is making to

keep out European goods by a high tariff, it seems most probable that the modification will be made through an increase in that proportion of her imports which represents materials that her tariff is not attempting to exclude, together with some check upon her exports. But in any case, in view of the volume of her trade-which is already very large and is likely to grow-the receipt of British payments is not likely to have any radical effects upon her trade situation. Mr. Hoover has recently referred to the possibility of part at all events of the payment being made in the form of increased supplies of rubber, tin, sugar, etc., from British East and West Indian possessions, and undoubtedly this will, in fact, to a considerable extent occur. It is, however, unfortunate that the American Government should have chosen this moment to make our payments more difficult and complicated by endeavouring to put a hindrance in the way of the simpler and more direct method of payment by goods from Great Britain.

In conclusion a word may be said as to the political effects of the settlement and its reaction upon the European situation. The agreement removes a possible cause of offence between Great Britain and America, and as such is of the very utmost political importance. To attain this end is worth a very substantial sacrifice. On the other hand, it can hardly be doubted that, rightly or wrongly, the prospect of paying interest for nearly two generations to America will not tend to make the British public more ready to take a liberal attitude towards the debts of our European Allies. Passing reference has been made to the cogent reason why we should not import into these relations the pure business atmosphere that has obtained in the American negotiations, and at the same time I have endeavoured to suggest that we should not be frightened by exaggerating the magnitude of our task into putting a monetary screw upon our Allies through fear of our own financial position. The European debts should be considered on a basis of equity. It is not within the province of this article to discuss whether the hopes of a European settlement must finally be abandoned in view of recent European developments, nor to discuss whether the existence of these debts. should be used as a lever for enforcing our particular political views in Europe. But it is pertinent to urge that if and when the time comes for a general settlement in Europe, and provided such a settlement is one which will make it possible to restore among the Allies the old community of outlook on the international situation, the fact that we have made this settlement with the United States of America should not be allowed to stand in the way of a liberal and even generous treatment of our Allies. Such

a settlement should, I suggest, be based on the principle that out of whatever sums Germany is able to pay, the first charge

It

should be the cost of the restoration of the devastated areas. would be a calamity if the possibility of reaching such an agreement were wrecked by a demand from this country to set on an equal footing with this reparation claim a counterclaim to balance the payments which we are committed to make to America.

W. T. LAYTON.

1923

LINES OF FURTHER RETRENCHMENT

A COMMONPLACE of political phraseology for generations, the demand for 'Retrenchment' has taken a very different significance since the war, and especially since the short-lived trade boom of 1919. When 'Peace, Retrenchment and Reform' was a political creed, retrenchment meant, in those days of steady progress in prosperity and wealth, little more than thrifty nursing of public funds so as to leave every possible sovereign to fructify in the hands of the manufacturer, trader, and consumer. It was at most a matter of a few millions here and there during the gradual growth of expenditure from fifty millions in 1850 to the 100 million mark in 1897, the period including the Crimean War and the Indian Mutiny, an increase of approximately one million per annum, which did no more than keep pace with the increase in the national wealth. The threefold more rapid increase to 200 millions in the seventeen years that followed, which included the South African War, the growth in military expenditure caused by the menace of Continental armaments, and the Budget of 1910, though then astounding, was borne with resignation as an insurance against foreign or internal perils, as each party liked to attribute it.

To-day, with an annual State Budget approaching 1000 millions sterling, taxation is still at something like war level, for though the Sinking Fund for the repayment of debt has now been suspended, the only effective reduction is the shilling off the income tax, the removal of the excess profits duty coinciding with its ceasing to produce a return. This weight of taxation is falling with dire effect upon most classes of the community. But its principal effect upon the condition of the nation has been in its bearing upon trade and unemployment. Manufacturers and

traders have been handicapped in their efforts to regain our lost or diminished foreign markets by want of capital. The possible reserves which they might have accumulated during the period of high prices were intercepted by the excess profits duty and the 6s. income tax, and there is no margin of current profits out of which they can make up the shortage. The working classes, with the exception of those in public or quasi-public employ,