is wiser to draw upon for immediate war financing. In ordinary times the producing fund, which is to-day largely represented by the capital, surplus, and borrowed money in the hands of our business corporations and partnerships, is constantly replaced from the consuming fund. For if you buy something for another's use you quickly sell it to him and are repaid by him. But in war times, the principal consumer is the government, and you can only be repaid out of a new fund established for this purpose. Is the government to make up its fund out of the money in the hands of the consuming public for consumption or out of that in the hands of business for production? Is the government to replace some of the public's consumption by its own consumption and leave the producing fund intact? Or is it to add its new consumption fund without decreasing that of the public by making it up from the production fund? If it does the latter, it will decrease the power to produce by as much as it increases the power to consume.

But in war time a great demand is put upon the producing or capital fund. Production must be increased because all the special war material must be made, and the normal production of ordinary necessities must still be maintained as nearly as possible. In addition to this, inflation of prices necessitates a larger capital fund to transact what is really the same amount of business as before. Therefore apparent profits are really represented in increased values of the same stocks of goods and cannot be removed from the capital fund.

So long as the earnings from this capital fund are not divided up among its owners and do not thereby become part of the consumption fund, they are just as useful and just as productive as the original fund. In peace as well as in war these earnings are the principal source of new capital. If they are not distributed as dividends they go straight back into the business; and even of the part that is divided between the owners, a considerable share is re-invested.

Now, the capital fund of the community supplies the money that does the original financing of the war work. Its size absolutely governs the extent of war activity just as it governs all production. It is most essential, then, that this capital fund should not be impaired in war time.

During the war the real criterion for determining the kind and amount of taxes, is what effect the choice will have on the war efforts of the people. Since what we need is enhanced production and decreased consumption, let us see how these are affected by the different forms of taxation and by the issuance of bonds.

Excise taxes upon articles for consumption are added to the price of goods. In this way the real value of all fixed incomes, such as wages, rents, and interest, which are spent for these articles, is reduced. If the incomes remain fixed and are not merely raised to meet this increase in living cost, consumption is reduced; and, if the opportunity is offered, the individual will in this case try to equalize his loss by increased effort. The same effects are produced by individual income taxes. Within reasonable limits both these results are desirable in war times.

Yet if these forms of taxation are made too heavy, then the real value of wages, interest, and rents, is reduced too much. The wage earner's standard of living must not go below a safe minimum. Neither must the real income from property sink too far. As the value of property is based on a multiple of the income, excessive taxes undermine values. This results in a dangerous weakening of the nation's credit structure, which is based principally upon the values of fixed property and only secondarily upon gold. Since the successful financing of war is largely dependent upon the credit structure this hazard must be avoided at all costs. Taxes upon undistributed business profits, such as corporate income and excess profits taxes, hamper production because they remove part of the liquid capital upon which production is dependent.

But bonds, if they are properly placed so as to be paid for out of income and savings, operate exactly as do individual income or excise taxes. They induce economy and reduce consumption and, therefore, production of non-essentials. They also reduce the supply of new capital in the hands of investors and thus help to prevent misdirected production by using up the principal source of new capital. In practice, war bonds are largely financed by expanding the credit currency-the bank loans. Indirectly and gradually, this brings much the same results because it cheapens money, raises prices to correspond, depreciates the value of fixed income and thus enforces economy or increased effort or both. The consequent inflation of prices really has no effect on the expense of the war if the tax system is so devised that those who gain by it gain only temporarily and eventually surrender their gains in taxes. But, generally speaking, expansion of the credit currency is dangerous be

cause it lessens the soundness of the currency and may bring

baneful consequences in its trail; and for this reason excessive expansion should, of course, be avoided.

The application of taxes and the proportion of financing that is done in this way is, however, the principal force in the hands of the government by which it is able to solve the two problems of war finance. This force is an economic force, and it accomplishes its results indirectly and unobtrusively. The other means in the hands of the government, which thus far have been rather more relied upon, are propaganda and compulsion. They are direct in action, but not so effective. Economic force plays upon selfinterest. Propaganda plays upon patriotism and co-operation. Compulsion plays upon fear. Economic force induces a willing and universal reaction. The results of propaganda are willing but not universal. The results of compulsion are universal but generally unwilling. If the Administration proves as clever in using economic force as it has proved in using the two other methods and is as success

ful in avoiding the untoward effects, we may expect great results.

During the period of the war, it is the part of wisdom to assess the individual with his share of the war cost in a gradual crescendo, but to postpone so far as possible this assessment upon the corporation which produces necessities. This is expedient even if it seems unjust. Taxes upon the undistributed profits of business do not curtail consumption but do curtail production. It is a question whether such profits held and used in essential business are not serving the nation's purpose more effectively for the present than they would be if absorbed now by the "new partner." Government loans to private concerns to facilitate production are a poor substitute for profits, so far as the national credit structure is concerned. Earnings are the best source of new capital.

The worker's share in war is contributed in two ways. He must, as has been said, work more, and the real buying power of his wage must be less. Our war time experience with the manual workers, the laborers, shows what many have found in their individual experience—that, in general, labor can be stimulated to increased effort only by a decrease in the real value of wages. Labor desires ease more than comforts. Increased purchasing power is apt to act as a narcotic instead of a stimulant. A rise in wages too often results in a laborer's taking it easy or laying off for part time. Then, too, with the better class of skilled labor in this country the standard of living is higher than can be maintained in a modern war. If this class is not disposed to cut off its consumption of luxuries or non-essentials voluntarily and it was not for several years in England-then this consumption must be cut off by drastic taxation.

In dealing with capital on the other hand, conditions are different. Capital always responds to an opportunity for profits and can always be stimulated to increase its share in the effort of production in this way-and as a general rule

in no other. During the war it is expedient to give this stimulus where it will be useful for the purpose. Capital itself is not a consumer; and the individual owner can easily be prevented from consuming the distributed profits by drastic individual income taxes and taxes on all the luxuries of the well-to-do. This will have the two-fold effect of largely preventing the distribution of these extra profits and of preventing the expenditure of such as are distributed. After the war, when the stimulus to production is no longer needed, these profits can be reached by taxation as they are distributed and before they are spent. On the other hand, the profits of labor being received by the individual at once are for the most part consumed at once and will be beyond reach after the war.

Putting such a programme as this into practical effect is an extraordinarily difficult matter. It is out of the question to enter here into a detailed discussion of the means by which it may be done. Suffice it to say that the example of England may be followed in some respects since, up to the present, England has succeeded far better than the United States in accomplishing the desired results. Our taxes upon small incomes are ridiculously low and ineffective. And these taxes should yield the largest portion of our tax revenue. According to reliable estimates, the aggregate income received by individuals in this country is about thirty-eight billion dollars. Of this about twenty-six and one-half billions are in incomes of $2,000 or less per family. With the present exemptions this is almost entirely untaxed. There are about four billions in incomes between $2,000 and $5,000. This is subject to a tax which would average about three per cent on the part which exceeds the exemptions. The aggregate of incomes over $5,000, which amounts to about seven and one-half billions, bears nearly the whole of the personal income tax. Excise taxes on the luxuries of the people of moderate income are so small as to be insignificant. The result has been a great increase in the