the argument during the war, when it was a question of defraying the expenses of army and navy. The same argument is now advanced when it comes to supplying some of the population with cheap foodstuffs, covering the operating deficits of public enterprises (the railroads, etc.) and arranging for reparations payments. The truth is that inflationism is resorted to when raising taxes is considered disagreeable and when borrowing is considered impossible. The question now is to explore the reasons why it is considered disagreeable or impossible to employ these two normally routine ways of obtaining money for government expenditures.
2. Financing Unpopular Expenditures
High taxes can be imposed only if the general public is in agreement with the purposes for which the funds collected will be used. In this connection, it is worth noting that the higher the general burden of taxes, the more difficult it becomes to deceive public opinion as to the fact that the taxes cannot be borne by the more affluent minority of the population alone. Even taxes levied on property owners and the more affluent affect the entire economy. Their indirect effects on the less well-to-do are often felt more intensely than would be those from direct proportional taxation. It may not be easy to detect these relationships when tax rates are relatively low, but they can hardly be overlooked when taxes are higher. However, there is no doubt that the present system of taxing “property” can hardly be carried any farther than it already has been in the countries where inflationism now prevails. Thus the decision will have to be made to rely more directly on the masses for providing funds. For policy makers who enjoy the confidence of the masses only if they impose no obvious sacrifice, this is something they dare not risk.
Can anyone doubt that the warring peoples of Europe would have tired of the conflict much sooner, if their governments had clearly, candidly, and promptly presented them with the bill for military expenses? No war party in any European country would have dared to levy any considerable taxes on the masses to pay the costs of the war. Even in England, the printing presses were set in motion. Inflation had the great advantage of creating an appearance of economic well-being, of an increase of wealth. It also concealed capital consumption by falsifying monetary calculations. The inflation led to illusory entrepreneurial and capitalistic profits, which could be taxed as income at especially high rates. This could be done without the masses, and frequently even without the taxpayers themselves, noticing that a portion of capital itself was being taxed away. Inflation made it possible to turn the anger of the people against “war profiteers, speculators and smugglers.” Thus, inflation proved itself an excellent psychological aid to the prowar policy, leading to destruction and annihilation.
What the war began, the revolution continues. A socialistic or semi-socialistic government needs money to operate unprofitable enterprises, to subsidize the unemployed and to provide the people with cheap food supplies. Yet, it cannot raise the funds through taxes. It dares not tell the people the truth. The pro-statist, pro-socialist doctrine calling for government operation of the railroads would lose its popularity very quickly if a special tax were levied to cover the operating losses of the government railroads. If the Austrian masses themselves had been asked to pay a special bread tax, they would very soon have realized from whence came the funds to make the bread cheaper.
The decisive factor for the German economy is obviously the payment of the reparations burden imposed by the Treaty of Versailles and its supplementary agreements. According to Karl Helfferich,1 these payments imposed on the German people an annual obligation estimated at two-thirds of their national income. This figure is undoubtedly much too high. No doubt, other estimates, especially those pronounced by French observers, considerably underestimate the actual ratio. In any event, the fact remains that a very sizeable portion of Germany’s current income is consumed by the levy imposed on the nation, and that, if the specified sum is to be withdrawn every year from income, the living standard of the German people must be substantially reduced.
Even though somewhat hampered by the remnants of feudalism, an authoritarian constitution and the rise of statism and socialism, capitalism was able to develop to a considerable extent on German soil. In recent generations, the capitalistic economic system has multiplied German wealth many times over. In 1914, the German economy could support three times as many people as a hundred years earlier and still offer them incomparably more. The war and its immediate consequences have drastically reduced the living standards of the German people. Socialistic destruction has continued this process of impoverishment. Even if the German people did not have to fulfill any reparations payments, they would still be much, much poorer than they were before the war. The burden of these obligations must inevitably reduce their living standard still further—to that of the thirties and forties of the last century. It may be hoped that this impoverishment will lead to a reexamination of the socialist ideology which dominates the German spirit today, that this will succeed in removing the obstacles now preventing an increase in productivity, and that the unlimited opening up of possibilities for development, which exist under capitalism and only under capitalism, will increase many times over the output of German labor. Still the fact remains that if the obligation assumed is to be paid for out of income, the only way is to produce more and consume less.
A part of the burden, or even all of it, could of course be paid off by the export of capital goods. Shares of stock, bonds,2 business assets, land, buildings, would have to be transferred from German to foreign ownership. This would also reduce the total income of the people in the future, if not right away.
These various means, however, are the only ways by which the reparations obligations can be met. Goods or capital, which would otherwise have been consumed within the country, can be exported. To discuss which is more practical is not the task of this essay. The only question which concerns us is how the government can proceed in order to shift to the individual citizens the burden of payments, which devolves first of all on the German treasury. Three ways are possible: raising taxes; borrowing within the country; and issuing paper money. Whichever one of the three methods may be chosen, the nature of its effect abroad remains unaltered. These three ways differ only in their distribution of the burden among citizens.
If the funds are collected by raising a domestic loan, then subscribers to the loan must either reduce their consumption or dispose of a part of their capital. If taxes are imposed, then the taxpayers must do the same. The funds which flow from taxes or loans into the government treasury and which it uses to buy gold, foreign bills of exchange, and foreign currencies to fulfill its foreign liabilities are supplied by the lenders and the taxpayers through the sale abroad of commodities and capital goods. The government can only purchase available foreign exchange which comes into the country from these sales. So long as the government has the power to distribute only those funds which it receives from tax payments and the floating of loans, its purchases of foreign exchange cannot push up the price of gold and foreign currencies. At any one time, the government can buy only so much gold and foreign exchange as the citizens have acquired through export sales. In fact, the world prices of goods and services cannot rise on this account. Rather their prices will decline as a consequence of the larger quantities offered for sale.
However, if and as the government follows the third route, issuing new notes in order to buy gold and foreign exchange instead of raising taxes and floating loans, then its demand for gold and foreign exchange, which is obviously not counterbalanced by a proportionate supply, drives up the prices of various kinds of foreign money. It then becomes advantageous for foreigners to acquire more marks so as to buy capital goods and commodities within Germany at prices which do not yet reflect the new ratios. These purchases drive prices up in Germany right away and bring them once again
