Opinions vary greatly as to the proper method of war finance. Some contend that the entire burden should be met from taxes, while others go to the opposite extreme and conclude that the proper method to pursue is to rely entirely upon borrowing to secure the necessary funds. Many others would adopt some combination of the two processes as the most logical course of procedure. It will be profitable to review some of the advantages and disadvantages arising with the use of each method, which should be kept in mind in formulating a fiscal system.
Produces Revenue Quickly. - The demands made by war upon the Treasury will likely be greater than the ordinary sources of revenue can provide unless the entrance into it has been premeditated and proper provision has been made for the needed funds. Recourse must be had to some plan that will provide funds quickly, and borrowing is adapted to meet this need. This is true because, in making a loan, the individual does not feel the sense of sacrifice which is involved in the payment of taxes. Loans to the government are looked upon as investments - an annual return is paid in the form of interest, while the principal is also payable in the future. In the mind of the individual, the bond which he has purchased simply represents his property in another form. Taxation, on the other hand, even if adequate machinery were in existence to secure results, would be felt by the individual as a burden from which no remuneration would be received.
Borrowing likewise possesses the advantage of quickly mobilizing idle capital and putting it to work in the prosecution of the war. At any time there is more or less idle capital seeking investment, but because of the uncertainties which exist at the time of a declaration of war, the amount is likely to be larger than usual. The government can secure this idle capital by a proper appeal to the investment it offers, supplemented, perhaps, by the appeal to patriotism, and can much more quickly put it to serving the needs of war than through the use of any other policy. The more idle capital which can be secured, the less will be the necessary demands upon existing industry, and to that extent the derangement of business caused by the war will not be so keenly felt.