effect, if only one-third of the levy were paid in War Loan, holders of debt to the extent of two-thirds of the levy would be in search of investments.

While the character of the demand cannot be altogether foreseen, it is certain that a large proportion held for trusts, etc., would seek reinvestment in the narrowed area of gilt-edged securities. There is a strong presumption that trustee and prior charge stocks would tend to appreciate at the expense of some fall in ordinary stocks (cf. paras. 767-8).

763. Conclusion as to effect on security values.-We assume that all trustee securities would be accepted in payment, and possibly certain company debentures, although we see great difficulty in the Government discriminating between one business and another. The machinery for payment of the levy and redemption of War Loan stock would require to be very carefully devised and handled. In order to allay apprehension it would seem necessary, on the first announcement of a levy, to make known in the clearest possible form the steps by which it was proposed to facilitate payment. It would be exceedingly difficult to do this effectively, if the levy proposal had to be carried in the face of strong opposition in the House of Commons, or if there were active propaganda in the country and in the Press. The task would be immeasurably easier, if the levy were to meet with a fair degree of acceptance from all parties.

764. If the first shock of the levy were successfully broken, we think it would be possible to carry out the whole operation without any serious slump in values. We assume that payment by instalments would be allowed in suitable cases, (cf. para. 801), and that the banks would do all in their power to assist levy payers who could offer reasonable security.* But there would still be some maladjustment between the kinds of stock which would be up for sale, and those for which there would be a demand; on this account some depression of ordinary stocks could hardly be avoided, although, if the general atmosphere were favourable, they might not take long

to recover.

765. The difficulties we have noticed in this section bring out very clearly the experimental nature of a levy, which renders any certain forecast of its results impossible. Success in the machinery of payment would be vital, for, if anything like a panic took firm hold on the market, the ill effects would radiate in all directions, and trade and employment would quickly suffer. Once again, everything would turn on the way in which the proposals were received by the taxpayer.

* This would hardly be consistent with the increased purchase of investments by the banks as suggested by the Trades Union Congress (cf. para. 754).

VI. EFFECT ON GOVERNMENT RATE OF

BORROWING.

766. Mr. Paine and the Association of British Chambers of Commerce anticipated no market effect on the terms on which the Government could raise loans. Professor Pigou thought that the wiping out of a large part of the debt would improve the credit of the Government, but that this would not have much effect as things are, though of substantial advantage in the event of another great war. (Ev. p. 437; E. in C., 13.) The Trades Union Congress anticipated a fall in the yield of gilt-edged stocks owing to the reduction in their volume. (Ev. p. 588; E. in C., 17.)

Professor Macgregor thought the influences on credit would show themselves in any future financial emergency; criticism would then be made, if the debt problem had not been firmly handled. But on this ground there was nothing to choose between a levy and an equally effective adjustment of taxation. (Ev. Appendix VIII, para. 19.)

767. The borrowing rate depends in the main upon the supply of and demand for capital, and the relative security, marketability, etc., of Government stocks as compared with other securities. As a single factor, the reduction of the area of gilt-edged securities effected by a levy would tend to lower the rates at which the Government could borrow. This tendency would be assisted by the demand of the repaid debt holder for investments of a similar character. (cf. para. 762.)

768. It is possible that the tendency would be checked by some increase in the amount of gilt-edged securities outside the debt. Mr. Keynes (giving evidence in May, 1925) expressed the belief that for the last year and a half, say, the new home trustee securities available, minus the debt paid off, are far short of the natural accumulations seeking an outlet of that kind." (Q. 7563.) The occasion of a levy might seem an opportune occasion for such borrowings, particularly by overseas borrowers (if no steps were taken to prevent this) and by municipalities, and thus to some extent counteract the stimulus to prices in the gilt-edged market. Some overflow might also go into mortgages on real property, well secured debentures, etc. On the whole, however, it seems likely that a large operation of debt repayment would result in some immediate benefit to the prices of Government securities, with perhaps a tendency also for the general rate of interest to fall, though no permanent benefit would seem to be assured.

This assumes, of course, that there would be no general slump affecting all securities.

VII. THE LEVY AND NATIONAL CREDIT ABROAD.

769. The ultimate effect of a levy on the attitude of foreign countries would be bound up with the whole complex of reactions at home. The views of witnesses on this question were, therefore, determined in the main by their estimate of the general home effects.

Professor Scott suggested that the lapse of time since the War made the prospects more unfavourable. He thought that, if a levy had been made within two years of the Armistice, it would have had some small chance of being accepted as part of the war disorganisation; now it was to be feared that it would be regarded as a proof that the country was unable to adapt itself to the new conditions (E. in C., 17). This is possible; on the other hand, if a levy had been imposed soon after the War, it might have been taken by the foreigner to indicate a situation so desperate as to call for extreme remedies. The danger of such a view would be less now, assuming a levy to be imposed with anything like general assent.

But a levy is a form of tax viewed with suspicion in many countries, and it would be apt to be regarded-the more so on account of its departure from British financial methods-as an indication of a state of necessity which had no existence in fact; an adverse reaction upon the country's credit must to that extent be anticipated. The position won since the War by steady and accepted methods of finance would, it is thought, be greatly imperilled, and confidence could be restored only by a high degree of success in the working of the scheme.

770. Whatever the final effect might be, the first announcement of a levy would be likely to cause disturbance. Mr. Paine anticipated that, although the levy was intended to fall only on nationals of this country, it would cause serious misgivings on the part of foreign investors and depositors, who, at the first intimation of a levy being likely and before its terms were finally settled, would probably remove their investments and deposits, in the fear that they might in some way be affected (E. in C., 27). We think there is substance in this argument. The Government would no doubt make their intentions as clear as possible, but, even if everything were done to reassure the foreigner, we do not think that the danger of money being removed could be wholly averted.

VIII. EFFECT OF A LEVY ON BANK ADVANCES.

771. In considering this question, we have to deal with a tax which avowedly would fall upon, and be paid out of, capital (in the sense in which that term is usually employed by the individual in regard to accumulated wealth) except, perhaps, in certain cases where special provision might be made for payment by instalments. Individual wealth, as commonly understood

(not, of course, real wealth in the economic sense) would therefore be reduced, and it is frequently asserted that a huge deflation or restriction of credit would result.

772. From a banking point of view, the purely automatic results of debt repayment, whether of large or small dimensions, are essentially the same, although, where the repayment is large, there is presumably a greater likelihood of bank holdings (particularly of short-term debt) being repaid. Such an operation as a Capital Levy might set up many important influences affecting the readiness and ability of the banks to grant credit. These are, however, distinct from the automatic results which we now mean to consider.

773. The immediate effect of the levy would be to deprive the taxpayer of a part of his resources, and to replace the War Loan of the repaid debt holder with cash. In the course of the transaction a loan instrument would disappear. It would, of course, frequently happen that the transaction would be short circuited by the tender of Government stocks direct by a taxpayer who was also a debt holder. It is in this case that the effect upon credit is most easily seen.

774. Important evidence in support of the view that there would be a great restriction of credit was given by Mr. Paine, who prefaced his argument by pointing out that, to a large extent, subscriptions to War Loans had diverted money from the normal uses of capital-from the creation of new wealthto almost wholly unproductive purposes. In consideration of this transfer the State had given the individual an obligation which would replace his capital and enable him to carry on his business. He suggested that by this means a new fund of capital had been brought into play, and he argued that the people who held War Loan in place of their diverted real capital, really held, from their point of view, capital. He agreed, however, that the State as a community was no richer. But by the loss of these instruments of credit under a Capital Levy the citizens' capital was reduced by £3,000,000,000, and he thought, therefore, that there was much more involved in the levy than the mere question of disturbance caused by the transfer of £3,000,000,000 from one set of pockets to another (Q. 5218). It was, he stated, the practice of banks to assess the credit which might be granted to customers in the light of their known capital (but without the actual deposit of collateral to the amount which would otherwise be required), and the reassessment which would necessarily follow a levy would entail a reduction of their power to obtain credit (Q. 5236).

775. As an example, Mr. Paine quoted the case of a cotton merchant, known to be worth £100,000, who desired a credit of £300,000, i.e., three times the amount of his capital, to import cotton. It was granted readily, against the documents, because of the margin provided by his capital. In the course of a year the transaction might be repeated three times and if,

under a levy, £30,000 was taken from the merchant, his credit for the purpose of his business would be reduced by £270,000 (Q. 5238). Mr. Paine added that he had tried to obtain statistics of the number of private firms engaged in importing staple commodities, and their average capital. While he could not get this information, he said he was generally told that to put the number of firms at 500, with an average capital of £50,000, would be an underestimate. Even on that basis, in the light of the example he had quoted, he anticipated an enormous restriction of credit (Q. 5240).

776. In the course of his examination Mr. Paine agreed that the restriction of credit, which might follow a levy, was confined to the reduction of securities in the hands of levy papers only, and did not extend to limited companies (Q. 5222). He hazarded the conjecture that about £1,000,000,000 out of a £3,000,000,000 levy would represent capital which might be used from time to time for credit facilities (Q. 5242).

777. The example quoted by Mr. Paine was, presumably, that of a merchant borrowing up to the maximum justified by his wealth, whose capacity to borrow would be reduced by the levy. While the advance was made against documents, his known capital was relied upon as the margin for the loan, since it was sufficient to cover fluctuations in the price of cotton. The more general case, and the case usually quoted, is that of a borrower who is actually required to deposit security to an amount sufficient to provide an adequate margin. This aspect was developed by the Federation of British Industries (E. in C., 35 et seq.). Mr. Paine's illustration is of importance in showing that, even if the amount of actual collateral deposited by all borrowers were known, it would not give a complete measure of the individual wealth which figures as a basis of credit.

778. It may be convenient at this stage to attempt some definition of the area of a possible restriction of credit. In the first place, since public companies would not fall within the ambit of the levy, it is obvious that they would suffer no immediate disability in their power to claim credit, although their powers of expansion might be affected in other ways. In the second place, so far as the levy were paid in cash, or in securities which had not been pledged as security for advances or taken into account in the assessment of eligibility for credit, no difference in the volume of credit need result. It seems, therefore, that the range of direct restriction would be limited to cases in which either securities had been deposited as collateral, or known wealth had been taken as a basis of credit, to such an extent as would be affected by the levy payment. On the other hand, so far as a restriction operated to reduce a particular trader's activities, there might be a tendency for other traders less affected by the levy to enlarge their business and to require additional credit facilities.