One of the great benefits that the present war is working is that it is teaching young countries to do without continual drafts of fresh capital from the older ones. Instead of being able to finance themselves by fresh borrowing, they have had to close their capital accounts for the time being, and develop themselves out of their own resources. It is a very useful experience for them, and is teaching them lessons that will stand them in good stead for some time to come. For the old countries, when the war is over, will have problems of their own to face at home, and will not be able at once to go back to the old system of placing money abroad, even if they should decide that the experiences of war have raised no objections to their doing so with the old indiscriminate freedom.

It is easy, however, to exaggerate the effect of the war on our power to finance other peoples. Pessimistic observers, with a pacifist turn of mind, who regard all war as a hideous barbarism and refuse to see that anything good can come out of it, are apt in these days to make our flesh creep by telling us that war will inevitably leave Europe so exhausted and impoverished that its financial future is a prospect of unmitigated gloom. They talk of the whole cost of the war as so much destruction of capital, and maintain that by this destruction we shall be for some generations in a state of comparative destitution. These gloomy forecasts may be right, but I hope and believe that they will be found to have been nightmares, evolved by depressed and prejudiced imaginations. War destroys capital when and where actual destruction of property takes place, as now in Belgium, Northern France, and other scenes of actual warfare, and on the sea, where a large number of ships, though small in relation to the total tale of the merchant navies of the world, have been sunk and destroyed. Destruction in this sense has only been wrought, so far, in limited areas. In so far as agricultural land has been wasted, kindly nature, aided by industry and science, will soon restore its productive power. In so far as factories, railways, houses and ships have been shattered, man's power to make, increased to a marvellous extent by modern mechanical skill, will repair the damage with an ease and rapidity such as no previous age has witnessed.

In another sense it may be argued that war destroys capital in that it prevents its being accumulated, but this is a distortion of the meaning of the word destroy. If it had not been for the war, we in England should have been saving our usual three to four hundred millions a year and putting the money to productive uses, in so far as we did not lend it to spendthrift nations or throw it away on unprofitable ventures. If we had invested it well, it would have made us and the rest of the world richer. Instead of doing so we are spending our savings on war and consequently we are not growing richer. But when the war is over our material productive power will be as great as ever, except for the small number of our ships that have been sunk or the small amount of damage done to us by enemy aircraft. Our railways and factories may be somewhat behindhand in upkeep, but that will soon be made good, and against that item on the debit side, we may set the great new organization for munition works, part of which, we may hope, will be available for peaceful production when the time for peace is ripe.

It is a complete mistake to suppose that war can be carried on out of accumulated capital, which is thereby destroyed. All the things and services needed for war have to be produced as the war goes on. The warring nations start with a stock of ships and guns and military and naval stores, but the wastage of them can only be made good by the production of new stuff and new clothes and food for the soldiers and new services rendered as the war goes on. This new production may be done either by the warring powers or by neutrals, and if it is done by neutrals, the warring powers can pay for it out of capital by selling their securities or by pledging their wealth. In so far as this is done the warring powers impoverish themselves and the neutrals are enriched, but the world's capital as a whole is not impaired. If we sell our Pennsylvania Railroad bonds to Americans, and buy shells with the proceeds, we are thereby poorer and Americans are richer, but the earning power of the Pennsylvania Railroad is not altered. It may be, if we conduct the war wastefully, and refuse to meet its cost by our own self-denial—going without things ourselves so that we can save, money to lend to the Government for the war—that we shall pledge our property and sell what of it we can sell to neutrals, to such an extent that we shall be seriously poorer at the end of it. At present[9] we are not selling and pledging our capital wealth any faster than we are lending to our Allies; and if we pull ourselves up short, and exercise the necessary self-denial, seeing that we must pay for the war in the long run out of our own pockets, and that far the cheapest and cleanest policy is to do so now, and if the war does not last too long, there is no reason why it should impoverish us to an extent that will cripple us seriously.

[9]Written on New Year's Eve, 1915.

It is true that we shall have lost an appalling number of the best of our manhood, and this is a loss that is irreparable in many of its aspects. But from the purely material point of view we may set against it the great increase in the productive power of those that are left behind, through the lessons that the war has taught us in using the store of available energy that was idle among us before. We shall have learnt to work as we never worked before, and we shall have learnt that many of the things on which we used to waste our money and energy were unworthy of us at all times and especially at a time of national crisis. If we can only recognize that the national crisis will go on after the war, and will go on until we have made this old country civilized in the real sense of the word, that is, free from destitution and the vice and dirt and degradation and disease that go with it, then our power of recovery after the war will be illimitable, and we shall go forward to a new standard of wealth and national duty that will leave the dingy ideals of the nineteenth century behind us like a bad dream. This may seem somewhat irrelevant to the question of International Finance, but it is not so. We led the way in spreading our capital over the world, with little or no regard for the consequences of this policy on the condition of our population at home. We have now, in the great regeneration that this war has brought, and will bring in still greater measure, to show that we can still make and save capital faster than ever, by working harder and spending our money on improving our heritage, instead of on frivolity and self-indulgence. Then we shall still be free to lend money to borrowers who will use it well, and at the same time have plenty to spare for wise use at home in clearing the blots off our civilization.