Labour and the War Debt, 50 per cent. might be paid in Government securities. We have no figure for a levy of £3,000 millions, but we do not suppose that the proportion would be very much less.

214. As regards the balance of payment, we think that cash payments and the necessity for realisations could be reduced to a minimum, if the Government were to accept approved securities in payment and to negotiate the direct exchange of these with debt holders whom the levy is to repay-on the lines which were suggested by Mr. (now Lord) Arnold in the Economic Journal of June, 1918, and which appear to us practicable.

215. Realisation of securities might thus be virtually confined to those that were not approved for this purpose, such as industrial stocks. We think that a levy might well cause some depreciation in these, and that this fact would render a levy inopportune at a time when there was a marked depression in such securities, and salutary when there was a boom in industrials. Even in this case, however, two mitigating factors must be taken into account.

216. First, since the whole proceeds of the levy are allocated for debt repayment, against owners of capital wishing to realise for the purpose of levy payment must be set an exactly equivalent body of debt holders seeking fresh investments to take the place of their holdings of National Debt now repaid. Over the whole area of securities there must be buyers to the exact extent that there are sellers. Though former debt holders, as a class, are likely to give their first preference to gilt-edged securities, any relative appreciation in the gilt-edged market (due to the advantages attaching to securities" approved approved" for levy payment, and to the pressure of paid-off debt holders for fresh gilt-edged investments) and depreciation of industrials will certainly divert some part of their money and that of other investors to the support of the latter.

217. Second, disturbance in security values consequent upon a levy is necessarily of a temporary character. So far as realisations are necessary, they must be concentrated into a comparatively short period. We think that there is ground for the suggestion made to us in evidence by the Trades Union Congress that depreciation due to factors of such limited duration necessarily carries its own corrective within itself, inasmuch as there would be a speculative demand for securities thus depreciated, in anticipation of their revival as soon as the influence of these temporary factors had passed.

(vi) Effect of a Levy on Credit and the General Price Level.

218. We have had conflicting evidence as to the probable effect of a levy upon the issue of bankers' credits and, through this, upon the general price level. On the one hand it has been represented to us that the cancellation of so large a volume of

securities as upwards of £3,000 millions (nominal) of holdings of War debt must necessarily restrict the basis of credit and lead to a serious contraction.

219. On the other hand it has been submitted, first (e.g. by Mr. McKenna) that the volume of bankers' advances is determined not by the volume of good securities which borrowers have to offer, but by the funds which the banks themselves have at their disposal. Banks desire to maintain that proportion between their cash resources and their liabilities which maximises profit without endangering safety. If liabilities fall short of this proportion, credits will be increased; if the proportion is exceeded, credits will be diminished, without reference to the aggregate volume of National Debt or other securities in the hands of the public.

220. Second, there is evidence that the volume of securities actually pledged as a basis for credit is only a very small proportion of the total volume available for that purpose. If National Debt were cancelled, other securities could take its place. In this connection it is pointed out that the National Debt has increased since the War in far greater proportion than has the amount of bankers' advances, and that in consequence the greater part of the debt cannot in fact be actually in use as a basis of credits. Reference is made in this connection to the evidence given before the Select Committee on Increase of Wealth (War) by the Board of Inland Revenue.

221. In the third place, it is pointed out that, so long as this country is on a gold standard, our price level is necessarily determined by the world value of gold, and cannot diverge otherwise than temporarily and in a small degree from the level of gold prices throughout the world.

222. In the main we think that there is substance in these last contentions. At the same time we are not prepared to say that the imposition of a Capital Levy, particularly if opposed by the leading bankers, would be unaccompanied by any temporary disturbance of the price level. We are of opinion that the only safeguards against such a disturbance, and consequent effects upon employment, would be a wise choice of the moment of imposition of a Capital Levy, and sympathetic administration on the part of the banks.

223. We think also that, while the cancellation of some £3,000 millions of National Debt securities would not seriously affect the aggregate power of borrowers to obtain credit from the banks, it might materially modify the distribution of that power between. individuals. It does not follow that the second line " securities which are available to take the place of National Debt that is paid off are in the hands of the same individuals as were those holdings of debt. We think that this is one of the drawbacks

incidental to a levy as a means of debt repayment, and, though we do not regard it as sufficient by itself to outweigh the advantages to be derived from large scale repayment of debt, it must not be overlooked in the choice of the best means of attaining that end.

(vii) Payment of Capital Levy by Private Businesses, etc.

224. We have already indicated our view that a substantial portion of a levy could be paid either directly in British Government securities or by the exchange of other approved" stocks. There remain certain cases in which this would not be possible, of which that most frequently cited before us is that of the owner of a private business having sufficient wealth to be liable to make a contribution to the levy greater than could be met out of income, and without appreciable liquid resources outside his business.

225. Advocates of the Capital Levy have generally agreed that in cases such as that named, as also in the case of farmers and landed proprietors having little free wealth, payment of the levy would have to be made by instalments out of income. They have, however, also argued that such cases constitute a very small proportion of the whole, and have quoted in support of this contention the figures given by the Board of Inland Revenue in evidence before the War Wealth Committee in 1920, which showed that, even before the War, of the total national capital (excluding national and municipal property, and capital invested in non-income producing assets), probably not more than 9 per cent. was in the form of capital invested by individuals and partners in industry, trade and commerce.

226. In order to test the validity of this contention, the Committee sought from the Board of Inland Revenue further particulars relating more nearly to the present time. The Board accordingly repeated for the same firms in 1923 an enquiry which they made in 1919 into the position of some 216 manufacturing and trading concerns of a private character, owned by 454 individuals. They find that out of total assets of £273 millions representing the private and business resources of these individuals, only 48 per cent. or a little over £13 millions were accounted for by business assets.

227. If these figures are representative, we think it is clear that the proportion of free wealth not "locked up in the business in the hands of proprietors of private concerns must be much larger than is often supposed, and that the advocates of a Capital Levy are therefore justified in their view that payment by instalments would be necessary only in a minimum number of

cases.

THE LEVY AND UNEMPLOYMENT.

228. We find that the fear that a Capital Levy would cause widespread unemployment has played a great part in the writings and speeches of opponents of a Capital Levy; though we

think that this aspect of the matter has been more generally stressed in discussion elsewhere than in evidence before us. If this fear were well grounded, it would, in our judgment, be by itself sufficient ground for rejecting the Capital Levy as a means of debt repayment. The chief evil of the debt is the burden which it imposes on the majority of the working population. It would be worse than futile to propose to get rid of this evil by any means which involved consequences which are justly dreaded in the highest degree by that same population.

229. We do not, however, think that there is reasonable ground for this view, and our reasons for this conclusion are implicit in what we have already said as to the effects of a levy upon prices and upon private businesses. The most potent

We

cause of unemployment is a general fall in the price level. have already given reasons for supposing that no such fall need accompany a levy. Or again, unemployment would be caused by any factor which gravely restricted the resources which employers have for use in their businesses. By far the greater part, however, of our trade and industry is now in the hands of joint stock companies, which would not be liable to or affected by a levy; and, so far as private businesses are concerned, we have already given evidence for supposing that the resources in the hands of proprietors outside their own businesses would normally be more than adequate to cover their levy obligations.

230. At the same time, though a levy need not, in our view, be a cause of unemployment, we do not doubt that it might have this effect, in consequence of misunderstanding of its purpose, or of panic, or of a mere obstructive desire to discredit the whole attempt. We do not wish to minimise this risk, which in our judgment might be sufficient seriously to jeopardise the proposal.

CONCLUSIONS AS TO A CAPITAL LEVY.

231. We are now in a position to state our conclusions in regard to the Capital Levy. We regard the levy as equitable and, in accordance with the statement of the Board of Inland Revenue, as practicable also, provided that it is accepted with general good-will.

232. Throughout our discussion of the practical difficulties likely to be encountered in the working of a levy, it has indeed been apparent that these would be at a minimum if the nature of the operation were understood, and its purpose endorsed, not only by the majority of the citizens, but also by the greater part of those liable to the levy, and by the banks and others whose assistance in the financial operations incidental to it would be of material value. In this respect conditions were evidently much more favourable in 1919 and the early part of 1920 than they are to-day. We have no hesitation in saying that a Capital Levy at that time could have been carried out comparatively easily and that it is a matter for great regret that no levy was

then imposed. We feel this the more strongly in view of the heavy fall in prices which, as already pointed out, has so materially increased the real burden of the debt since that date.

233. A Capital Levy would still in our judgment be the best method of dealing with the debt, provided that it were generally approved and assured fair treatment by the taxpayers, and were not obstructed by artificial multiplication of appeals, or by deliberate attempts to create panic in the minds of the public. Parliamentary Government indeed always requires the faithful acceptance by all concerned of measures constitutionally carried.

234. In any case, we hope that by the analysis contained in this Report we may ourselves have done something to create the very conditions of understanding and good-will which are requisite for the successful working of a levy in practice. If these conditions are fulfilled, the nation may yet turn to the Capital Levy as a wise and practicable measure offering the best road out of its difficulties.

ANNEXE TO PART IV.

Certain Aspects of the Difference between the Gross and Net Saving from a Capital Levy.

We think that attention should also be given to another aspect of the gross and net saving from a levy, which, however, we do not notice to have been considered by witnesses either for or against the Capital Levy. It is generally agreed that payment of interest upon the internal debt, though it increases the total nominal money income of the nation, adds nothing to the real national income out of which, in the last resort, taxation is paid. Similarly, the cancellation of debt interest consequent upon the repayınent of debt reduces, it is true, the money yield of taxation at a given rate, e.g., of Income Tax at a standard rate of 4s. in the £. But it reduces also the proportion of the total real national income which is absorbed by taxation at a given rate, and thus lightens the real burden of such taxation.

Thus, we may suppose that the present annual value of our output of goods and services is £3,500 millions per annum, and that of this sum £300 millions per annum is transferred from taxpayer to debt holder by way of interest, giving a total nominal money income liable to taxation of £3,800 millions per annum. An Income Tax at, say, an average rate of 2s. in the £ over the whole of this taxable income would yield £380 millions per annum, and would absorb 109 per cent. of the total national real income. If the whole debt were repaid, and £300 millions per annum thus written off the total taxable money income, Income Tax at 2s. would, it is true, give a money yield of only £350 millions per annum; but this rate would absorb only 10 per cent. instead of, as formerly, 10'9 per cent. of the total national real income. After repayment of debt an