WARTIME: CONSCRIPTION OF CAPITAL IF NECESSARY, BUT NOT NECESSARILY CONSCRIPTION, 1940-1945
INDEED, THE CRUCIAL PROBLEM OF WAR FINANCE, is to dislodge money from its customary channels and guide it into the public treasury, in a manner that provides enough income incentive to shift resources and nevertheless avoids undue hardship for any group. 1
During the Second World War, all sectors of the economy grew dramatically, most notably the government sector that, by 1943-44, accounted for nearly one-half of the national income as opposed to one-third during the First World War. 2 By 1942, the share of national income controlled by the agricultural sector had been almost restored to its pre-Depression level and profits were growing at the expense of the wage-earning population.
The challenge facing Dominion officials in wartime was to increase national income, to bring the country towards full employment, and to encourage investment without immediately raising taxes so high as to retard the growth of national income. Hence, resort was made to bank financing in the autumn of 1939 for "its expansive effect," the uncertainty of a successful public offering of bonds, and as a stopgap to allow the market to adjust to new conditions. 3
Officials and ministers were consistent in their view that the war could be financed employing three methods: inflation, borrowing or taxation. 4 By positing the question of war finance in this way, these three alternatives were effectively reduced to two--borrowing and taxation. During the First World War, when financing became unavailable from Great Britain, resort was made to bank credit there being insufficient savings to finance the necessary expenditures. In 1917 and 1918, bank notes and bank deposits rose by 40 percent. Not surprisingly, the cost of living rose by 34 percent between 1916 and 1918. This policy penalized wage earners and those dependent on annuity income. Beneficiaries were debtors, frequently large corporate borrowers and