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Economics in the Shadow of the First World War

The Great War and the Genesis of Pigou’s A Study in Public Finance

La Grande Guerre et la genèse de A Study in Public Finance de Pigou
Nahid Aslanbeigui et Guy Oakes
p. 487-513


Cet article développe trois thèmes interdépendants. (1) Les arguments employés par Pigou dans son économie politique de la Grande Guerre pour appuyer ses conclusions concernant la meilleure façon pour la Grande-Bretagne de payer pour la guerre et de financer la dette engendrée. (2) Ses hypothèses sociologiques et institutionnelles plus générales : sa conviction, énoncée dès février 1916, que la Grande-Bretagne fera face, quelque vingt ans après la Grande Guerre, à une guerre totale nécessitant une mobilisation de l’économie pour atteindre les objectifs de l’État ; l’expansion et la réorganisation de l’État pour répondre aux impératifs de sécurité nationale ; ainsi que la nécessité d’un régime de finances publiques fondé sur une analyse économique qui permettrait d’identifier les moyens les plus efficaces de couvrir ces nouvelles charges. (3) La genèse de son traité A Study in Public Finance (1928) comme une généralisation et une reconfiguration de son économie politique de la guerre sur le plan de l’analyse des politiques.

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War is the father of all…

1. The Great War and the Rationalization of the British State

  • 1 Between 1902, when Pigou was awarded a fellowship at King’s College, Cambridge, and 1912, when he p (...)

1In the early 1920s, A.C. Pigou observed that before the Great War, British economists had seen economics from the perspective of the nineteenth century, regarding the Smithian system of natural liberty as a political economy for a pacific social order. Believing that the system was generally effective, even if not in all respects, they probed its structure, performance, and limits. The early Pigou contributed to this line of thought. In his magnum opus, Wealth and Welfare (1912), he identified flaws in a laissez-faire system and analyzed how they might be rectified by adjusting resource allocation, reducing income inequality, and stabilizing business fluctuations. However, he offered no account of the financial apparatus required to repair the defects of a free-market economy.1 Some fifteen years later, he published such an account: A Study in Public Finance (1928; hereafter, Public Finance), the several editions of which were used to train generations of students in the field. In this paper, we trace the genesis of Public Finance to Pigou’s engagement in the economic policy debates of World War I and its aftermath.

  • 2 Concerning Pigou’s position on ending the war, see Aslanbeigui (1992).

2Like many of his contemporaries in summer 1914, Pigou was taken by surprise when the July crisis of the European political order ended in a pan-European war. When the armies mobilized, he was vacationing in the Swiss Alps and found himself stranded in Zermatt. On returning to Cambridge, he joined an organization formed to provide relief to casualties behind the lines of the Western Front. During the inter-term vacation of 1914-15, he was at Ypres and Dunkirk, transporting the wounded and evacuating refugees. After this experience, he published a short piece in The Nation, warning of the immense costs and risks of prosecuting a war that would press Germany to the point of collapse. Instead of forcing an unconditional surrender on the Central Powers, Pigou counseled prudence, spelling out the dangers of attempting to batter Germany until it was crushed. If the Allies persisted in their intransigence, the Great War would be succeeded by a much more destructive European conflict. In the years of enforced German submission, “the seeds of another, and perhaps more terrible, conflict will surely and steadily grow.” Better to contract peace with a nation that was still strong and confident, a negotiated settlement that might even temper the bellicose spirit of European nations and encourage formation of an international commonwealth (Pigou, 1915a, 591).2

  • 3 We do not consider a third method of raising revenues for financing the war: printing money, which (...)
  • 4 For a survey of Pigou’s views on the political economy of the Great War, see Barber 1991.

3The reception of Pigou’s article was overwhelmingly hostile. Assailed for political naïveté, pusillanimity, Germanophilia, and traitorous disloyalty to the British people, he abandoned political commentary for the duration of the war. He also suspended his analyses of a peacetime British economy, instead writing prolifically on the political economy of the war. In 1914-17, he explored the main options, taxation and borrowing, available to the British state for funding a large military establishment—a strategy that had not been planned, or even envisioned, before August 1914.3 In 1918 and the years immediately following the armistice, he turned to the problem of how Britain’s immense wartime debt could be financed most effectively. What were the costs and benefits of repaying the debt by a one-time capital levy? Was a sinking fund, financed by taxes over several decades, perhaps a better solution?4

4In the sphere of public finance, the United Kingdom entered the war with a clear advantage over both its allies and adversaries (Strachan, 2004). The British institutional structure of resource extraction had a long history. Following the second Boer War (1899-1902), the tariff reform controversy, and the landslide victory of the Liberal Party in the general election of 1906, basic reforms addressed long-term increases in state expenditures on warfare and welfare, weaknesses in property-based taxes for funding local expenditures on education and public works, and the regressive properties of indirect taxes. Income taxes—introduced as an emergency measure during the Napoleonic wars and reintroduced as a peacetime policy by Sir Robert Peel in 1842—were differentiated to categorize incomes as earned or unearned. New taxes on land were levied, and taxes on inheritance were increased. Graduation made the tax structure much more progressive by taking into account the ability to pay. Small incomes were exempted, allowances were made for children, and super taxes were imposed on incomes above certain thresholds (Daunton, 2007, 460-474; 2001, 303-374; Stamp, 1932, 135-136).

5In August 1914, these reforms together with the status of London as the center of world finance and control of sea lanes by the Royal Navy—essential to maintain commerce with creditors, debtors, and the colonies and commonwealths of the British Empire—endowed Britain with wartime mechanisms of resource extraction that no other state could match. During the war, the successive governments of Herbert Asquith and David Lloyd George imposed new indirect taxes on luxury products. Exemption levels and thresholds for the super tax were lowered. The income tax system became more progressive at the same time that income tax rates were increased. Moreover, wartime profiteering was attacked by an excess profit duty that increased as the war continued. Despite these efforts, the government was unable to act on the imperative that governed British thinking on wartime finance during the previous century: pay for wars from current incomes. As expenses of the war quickly mounted, the government, judging that the public had reached the limits of its taxable capacity, resorted to debt as its principal instrument of war finance. The concept of the “normal year”—introduced by Reginald McKenna, Chancellor of the Exchequer (1915-16)—provided a financing principle: permanent tax revenues should be limited to cover only ordinary peacetime expenditures, debt service, and a sinking fund for debt redemption. Thus most of the costs of war would be met through borrowing. Because of its financial position at the beginning of the war, this policy was advantageous to the British state. Its national debt as a percentage of domestic product was low by European standards, allowing Britain to borrow at lower rates of interest than the other belligerents (Daunton, 2007, 474; 2002, 40-59; Horn, 2002, 83-87, 106-110, 171-172; Stamp, 1932).

6However, the duration of the war confounded most European statesmen. The exhaustion of resources and the need for replacements as well as new goods and technologies created an unanticipated problem: the immense magnitude of war debt. By the 1920s, Pigou concluded that the war had changed the British polity fundamentally, imposing new demands on the state and creating new bureaucracies, some of which would not be dismantled after the armistice. The result was a rapid expansion and rationalization of state agencies. The Treaty of Versailles confirmed his fears: The burdens imposed on Germany meant that the 1914-18 war would be the first act in a longer and more devastating tragedy. He expected the second act to begin within twenty years, a forecast remarkable for its prescience and accuracy. Following the armistice, therefore, four tightly coupled variables were critical to Pigou’s political economy of war: the prospect of a total war, requiring the mobilization of the economy to achieve military objectives; the institutional expansion and rationalization of the state in response to imperatives of national security, the need for a much more sophisticated regime of public finance; and the importance of an economic analysis that would identify the most effective methods of covering the costs of these exigencies. His response to the condition of Britain in the post-Versailles international system was to recast his wartime writings, elevating his analysis from a political economy of the war to a general theory of public finance.

7The ensuing discussion falls into four parts. In section 2, we offer remarks on Pigou’s views regarding the quite different responsibilities that economic normality and crisis impose on economists. In section 3, we examine his participation in British wartime debates on the most effective methods for financing the war. In section 4, we explore his recommendations on how Britain could retire its wartime debt most effectively. And in section 5, we show how Pigou moved from problems of wartime financing and debt payment, reconfiguring and generalizing his work in this area to develop a systematic analysis of public finance.

2. Normality and Crisis—the Political Responsibility of Economists5

  • 5 This section draws on Aslanbeigui and Oakes, 2015, 115-117.

8In Pigou’s thought, the metascientific norm of value neutrality in economics rests on the assumption of normality: the conditions under which it is sensible and responsible to act on the norm. Normality in this sense presupposes a stable social order in which economists can safely limit themselves to the analysis of policy. This assumption is warranted only if economists do not have substantial reasons to believe that the institutional bases of scientific research, democratic politics, and capitalist markets are threatened. In the event of such a threat, the premises of normality give way to the necessities of crisis, at the same time nullifying the default norm of value neutrality. If economists have scientifically compelling reasons to think that the policies implemented by the state or placed under consideration by political leaders will jeopardize the world of normality and precipitate a crisis, the restrictions on economic reasoning dictated by value neutrality are not only scientifically irresponsible but incoherent. The norm is suspended because the circumstances under which it makes sense—the conditions for normality—are not satisfied. In the face of a crisis, therefore, the professional calling of economics shifts markedly, requiring economists to undertake not only the work of analysis but also the task of advocacy in order to save the economy and the polity from destructive policies. This obligation is not merely a responsibility of citizenship but an ethical imperative entailed by the vocation of economics. If the economy and the polity fall, the sociopolitical infrastructure of economics as scientific pursuit and a career break down. When an imminent risk places the normal institutional order in grave danger, economics becomes a science of crisis resolution. In a crisis, economists should defend policies designed to forestall or end the crisis and return the polity and the economy to a state of normality, the world in which the value neutrality of economics again reigns.

9More than a decade before the Great War, Pigou considered the radically different requirements that normality and crisis impose on economists. On May 31, 1902, an unsigned article in The Speaker: The Liberal Review chastised British professors of political economy for failing to enlighten the public on the damaging consequences of the corn tax, which Chancellor of the Exchequer Michael Hicks Beach had imposed that same year. The tax, so the article claimed, had already increased the price of bread, filling the coffers of “agricultural landlords.” The fact that “so many clever and learned men should deliberately relinquish their profession and forget that it is their duty to teach Political Economy, is at this moment almost disastrous” (N.A., 1902).

10Pigou responded on June 14 with an article of his own, defending the relative silence of economists on two grounds: the political role of economics in developing a body of scientific expertise and the principle of value neutrality. Political economy, he insisted, provides an indispensable basis for politics in the classical sense of statecraft, “the supremely important art of improving, so far as may be, the general condition of the people.” Because of the different objectives of politics and economics and correspondingly different functions of economists and political leaders, it was not the task of distinguished professors of economics to “descend into the arena of politics and ‘give counsel’ to the Government through the public Press.” Although scientific experts might be tempted to enter the public domain whenever their field is under discussion, that temptation should be resisted. If academic scientists became journalists, they would quickly lose the expertise that qualified them as scientific specialists. Professors serve the public interest best by limiting themselves to “the difficult task of developing their science” (Pigou, 1902).

11In crises, however, the conventional normative order governing the relationship between economics and politics is rescinded. Suppose that economists, employing their professional expertise, are convinced that the state is taking a course that is not merely imprudent or mistaken, but likely to be economically catastrophic. In such a circumstance, the threat to normality imposes a quite different task on economists: “the work of advancing theory would have to stop in favor of rescuing the nation.” Pigou maintained that if political leaders were “fathering some scheme which, in light of the existing economic knowledge, ought to be condemned as a grave and undoubted evil to the nation, then our economic experts should leave their special work, and throw the whole weight of their authority into the scale against the scheme.” The corn tax, he argued, did not reach the threshold of a crisis and thus called for no extraordinary measures on the part of economists. To voice their views on this question in a public forum would cast doubt on their legitimate scientific authority (Pigou, 1902).

12Pigou believed that the war posed an existential threat to the British economic and political order. His thinking on this matter can be understood by considering the concept of the economic carrying capacity of the state: its competence to extract, mobilize, and distribute resources of a specified range of quantity and quality to preferred sites of use. Even in the first months of the war, the carrying capacity of the British state was severely tested. As the war continued, challenges to its ability to field armies and equipment that would meet Allied strategic requirements on the Western Front became more daunting.

  • 6 Production of military hardware is a useful index of increases in the scope, duration, and cost of (...)

13In September 1914, the rapid German advance on the Western Front was broken in the Battle of the Marne. When the German General Staff gave the order to retreat along a line of some 250 miles in order to fortify and defend positions already taken, the mobility that had marked the early weeks of the war ended and trench warfare began. The consequences of designing the theater of war as a huge site of industrialized killing followed quickly. After the First Battle of Ypres in October and November, unwounded members of the British Expeditionary Force (BEF) numbered less than half the men who had been sent to France. By this point, the BEF had exhausted most of its resources, both men and munitions (Keegan, 2000, 135-136). On August 7, 1914, when Lord Kitchener was appointed Secretary of State for War, he called for a vast expansion of the small professional British army to achieve the size of a continental force. The British could enable France to prevent a German victory in the West, Kitchener argued, only by forming armies on European models. One of the few British planners who anticipated a long war, he made a national appeal for 100 000 citizen volunteers to enlist for either three years or the duration of the war. The appeal, an immediate success, was followed by others, creating the New Army divisions. By spring 1916, the size of the British army had increased by a factor of ten over the force that planners had intended to deploy in the final days of the July crisis. It would, of course, be necessary to equip, house, train, transport, relieve, and resupply this army—increasing incalculably the burden of the war on the state (Keegan, 2000, 276).6

3. How to Pay for the War, 1915-1918

14Pigou considered the economic costs of the war “trivial and insignificant” compared to the non-economic damage it inflicted: “the shattering of human promise, the accumulated suffering in wounds and disease of many who have gone to fight, the accumulated degradation of thought and feeling of many who have remained at home” (Pigou, 1916b, 9). Following the reception of his article in The Nation, he limited his role as public intellectual to educating the lay public and statesmen—“in a spirit as cool and scientific as the stress of the time will allow” (Pigou, 1916b, 9). In public lectures, newspaper and magazine articles, and pamphlets written in language devoid of scientific jargon, Pigou analyzed the economics of the war and methods of financing Britain’s increasingly ambitious military campaigns. In assessing proposals for raising revenue by taxing or borrowing, he drew on conclusions he had reached in Wealth and Welfare. The soundness of an economic policy—its advancement of economic welfare—depended on three criteria: the extent to which it was likely to (1) increase the size of the national dividend, (2) distribute the national dividend more equitably by raising the share allocated to the poor, and (3) reduce fluctuations in aggregate output and income (Pigou, 1912, 20-32). Although Pigou did not make this assumption explicit, he supposed that the third criterion had no bearing on war finance. Early in the war, he was primarily concerned with how distribution of the burden of taxes and loans would affect the poor. In its last two years, he laid more stress on the first criterion, for reasons we explore below.

15Pigou agreed that in a hypothetical utopia of economic egalitarianism in which everyone enjoyed equal levels of wealth, social position, and income, the choice of methods of war finance would be immaterial. If the state decided to increase taxes, the consequences would be the same for all citizens. The same results would follow from a policy of borrowing. Individuals would hold identical loan portfolios, which would be paid off by raising postwar taxes. For example, citizens would be taxed £ 100 to finance £ 100 in interest to which they had a claim (Pigou, 1916b, 67-68). In the real world, however, inequality reigned, and the poorer classes had very narrow income margins for either tax increases or subscription to war loans.

Of the money needed by the State the rich man must provide in one way or another more than the poor man, and the very rich man more than the moderately rich man; and the amount provided must increase, not merely proportionately, but progressively as wealth increases (Pigou, 1916b, 69).

  • 7 Both during the war and after the armistice, Pigou gave little consideration to external debt. In h (...)

16In the real world, the consequences of the two policies of war finance for total economic welfare also differed.7 In his first pamphlet on the subject, The Economy and Finance of the War (Pigou, 1916b), Pigou held that the fundamental principle of war finance should be distributional: “the root principle, in accordance with which the Government should decide how far to finance the war by taxes and how far by loans, is the judgment that it forms concerning the right ultimate distribution of war costs between people of different grades of wealth” (Pigou, 1916b, 70). For a host of reasons, he believed that this principle favored taxation over loans.

17In Pigou’s view, the British public regarded the basic premise of peacetime taxation—extraction of equal proportions of welfare from every citizen—as “reasonably proper.” Suppose that extraordinary war expenditures were financed on the basis of the same premise. In that case, he expected the following outcome: since income tax rates of the poor could not be increased dramatically, tax rates imposed on the rich would increase “in a more or less similar proportion.” On this premise, the resulting revenues would be modest at best; thus the state would be compelled to borrow in order to cover most of its wartime costs. The interest on wartime loans would be paid out of general taxes, raised in accordance with the premise of peacetime taxation (Pigou, 1916b, 68-72; 1916a, 10-11). Pigou believed that the British policy of wartime finance accorded “fairly well with the practical conclusion” of this reasoning: favoring loans over taxes. On the basis of three objections, he found this reasoning “incorrect, and the practical conclusion not in the best interests of the country” (Pigou, 1916b, 72).

  • 8 In predicting the magnitude of the postwar real interest rate, Pigou considered two scenarios. If t (...)
  • 9 In his long career, Pigou wrote papers for more than one conference. However, evidence suggests tha (...)

18(1) Applying peacetime criteria for revenue extraction in wartime assumed that the war had not changed the relative positions of the poor and the rich. This assumption did not hold. Financing the conduct of the war and covering postwar debt would weaken the relative position of manual workers and their families—the social class that Pigou called ‘the poor.’ Regardless of the method of finance, resources spent on the war were drawn from “industrial capital.” In order to secure these funds, the state was obliged to pay interest rates considerably higher than “normal.” The real postwar interest rate would be even higher. During the war, the state borrowed money at high prices. The peacetime boom that would follow, Pigou predicted, would quickly be succeeded by a slump and deflation, benefiting the holders of government loans (Pigou, 1916b, 84-88).8 What were the prospects of the poor? During the war, they faced a regressive inflation tax, partly due to the extravagance of the wealthy: instead of meeting the demands of war finance through economies in consumption or leisure, the rich borrowed from rapacious bankers. Inflation reduced the purchasing power of workers, because nominal wages did not keep pace with prices. Massive wartime destruction of resources would benefit the wealthy by increasing real interest rates. Lack of funds, on the other hand, would reduce the stock of tools and machines, also reducing the productivity and wages of the poor (Pigou, 1916b, 73-76). In a paper written for a conference on postwar economic transition held at Ruskin College, Oxford, in July 1916, Pigou underscored a further serious problem. Workers had fought in the war and labored hard in industries that supported the war effort. Yet when the war ended, they faced unemployment of indefinite duration due to demobilization and permanent shifts in relative demand across industries (Pigou, 1916a, 6-7; 1916d).9

19(2) In explaining his second objection to applying the premise of peacetime finance in wartime, Pigou performed a thought experiment. Suppose that the rule of proportionate sacrifice in public finance requires a poor man to pay an income tax rate of 20 percent (£ 10 from an income of £ 50) and a wealthy man to pay a tax rate of 22 percent (£ 110 from an income of £ 500). Suppose also that a sudden event, such as a major war, requires the government to quadruple its expenditures, creating a tax liability of £ 40 for a representative poor man and £ 440 for a representative wealthy man. Pigou argued that although both individuals bear similar objective burdens—the same percentage increase—the subjective burden for the poor individual far exceeds that of his wealthy counterpart. In addition, quadrupling taxes of the rich man would reduce only his capital accumulation. Quadrupling taxes on the poor man, on the other hand, would disproportionately reduce his consumption and leisure, with ruinous consequences for his nutrition and long-term health that would sap “the vital sources of the nation’s strength.” Thus it would be most imprudent for the state to distribute financial burdens of the war proportionately across socioeconomic classes (Pigou, 1916b, 77-80).

20(3) Pigou also pointed out a fact he regarded as obvious: £ 1 of income produced more satisfaction for a poor individual than for a wealthy person because it satisfied more urgent wants. By parity of reasoning, taking £ 1 of income from a rich man would entail a smaller sacrifice than for a poor man because it would have been spent on less urgent desires. It followed that loss of aggregate welfare would be minimized if all resources required by the state were drawn from rich citizens, leaving everyone with relatively equal incomes. Economists did not advocate such a scheme, chiefly because of disincentives. During the war, however, these disincentives were trivial. Capital was immobile, and Pigou did not expect German Zeppelins to destroy much British capital stock (Pigou, 1916a, 8). Moreover, higher tax rates for the rich would be regarded as temporary, “levied on an exceptional occasion for the purpose of financing an unprecedented war” (Pigou, 1916b, 81). Because these rates would not be expected to continue after the war, they seemed to be a harmless method of wartime finance. The conclusion for policy was “plain”:

in the present cataclysmic and exceptional war, the very rich and the rich ought to bear a proportion of the objective burden very much larger than that [in peacetime]. There is one way, and one way only, in which this result can be brought about. The ratio in which the war is financed with money borrowed from people with large incomes should be much diminished: and the ratio in which it is financed with money collected from them under some form of progressive taxation should be much increased (Pigou, 1916b, 82-83).

21As the war continued and its expenses mounted, Pigou’s hope of imposing steep taxes on the wealthy was dashed. Nevertheless, believing that the British government had “committed a serious mistake in taxing so little and borrowing so much” (Pigou, 1917, 20), he continued to plead for higher income tax rates. He also held that the tax base should be expanded: all people exempted from war service—and not merely conscientious objectors—should pay higher tax rates. The question of whether they were exempted on the basis of health, age, gender, or special skills—Pigou himself was exempted because Cambridge maintained he was indispensable to the economics curriculum—was immaterial. However, such measures would not deliver the vast revenues needed for the war. A steeply progressive tax structure was necessary (Pigou, 1916e). The financial crisis created by the war justified extreme taxation, leaving rich and poor with equal after-tax incomes. Because both the weak and the strong were required to make equal sacrifices of life and limb, the premise of peacetime taxation was nullified (Pigou, 1916f).

22Early in the war, Pigou had assessed wartime finance policies on the basis of a single criterion: their impact on income inequality. In the main, he ignored their consequences for productivity and growth. As the war continued and the nation turned against taxation, he was moved to take productivity more seriously, albeit to argue that this criterion also demonstrated the superiority of taxation as a method of wartime public finance. After the Economist published two letters in which Pigou extolled the virtues of higher tax rates (1916e; 1916f), Sir Graham Bower, a former colonial secretary in Mauritius, responded that high taxes would reduce incentives to save and invest, leading to capital flight (Bower, 1916). Pigou answered by distinguishing the immediate impact of taxation and its expected consequences. Although the former could not affect incentives, the latter could. However, he argued that because wartime tax increases were believed to be temporary, disincentives would not materialize (Pigou, 1916g). In contrast, borrowing to pay for the war would create legitimate fears that postwar tax rates would be increased to service debt, reducing the “future productivity of the country.” Thus borrowing was objectionable on grounds of both productivity and distribution (Pigou, 1917, 19; also see Pigou, 1918a).

4. Financing the National Debt, 1918-1925

23Beginning in 1918, Pigou turned from the question of how to pay for the war to the problem of the massive internal postwar debt the nation would confront. He considered two methods for paying the war debt: a one-time capital levy (hereafter levy) that would retire all or most of the debt; and a scheme—he called it “the orthodox method”—that would raise tax rates for at least five decades to finance interest payments on the debt and establish a sinking fund to retire the principal. In analyzing the costs and benefits of both methods, he explored issues that were heatedly debated by the general public, economists, and policy makers.

24Pigou rejected the orthodox method. It would be necessary for postwar tax revenues to pay for normal government expenses and also cover annual principal and interest payments. In his calculations, these payments amounted to some £ 350 million annually over fifty years (1920a, 11). He had two major objections against the orthodox method. Because high income tax rates were expected to continue for decades, they would discourage work, saving, and capital accumulation, an economic dynamic with potentially calamitous consequences for productivity (Pigou, 1919b, 622). A second consideration was no less important. If the Treaty of Versailles inaugurated an era of continental peace, it might be reasonable to take a benign view of the debt overhang. Pigou expected a much darker European future. As he put it, he was “obsessed” by the prospect that “there might quite well be a war in 20 years.” In the event of another pan-European war, a large outstanding debt would reduce the credit rating of the British state, making it extravagantly difficult to borrow at sustainable interest rates (Pigou, quoted in HMSO, 1927, 444). Pigou’s assessment of a levy was much more favorable. His writings on a levy are located in a tradition with a long history in British political economy. Even before David Hume’s Political Discourses (1752), British economic thinkers had recognized the fiscal risks that its wars posed to political and economic stability. In the eighteenth century, British governments legitimated the Hanoverian succession to the monarchy by supporting institutions that were believed to promote commerce, manufactures, and the rule of law. Foreign policy was designed to secure domestic prosperity by maintaining a balance of power among the great European powers: France, the Habsburg monarchy, and Spain. This policy, although not inherently belligerent, led to several long and costly wars. In consequence, questions of wartime finance troubled British writers on economics long before Adam Smith argued that a military solution to the American colonial rebellion was not worth the candle.

  • 10 The war began in 1701 and ended in 1714. England, which included Wales, began military operations i (...)

25After the War of the Spanish Succession,10 the United Kingdom had a public debt of £ 45 million. In 1714, Archibald Hutcheson, a member of parliament representing Hastings, proposed several measures designed to reduce the national debt or perhaps eliminate it. His most prominent recommendation was a 10 percent levy on the value of all land and other personal assets (Seidl, 2010, 198). Although this proposal won little support at the time, the idea of a levy was later analyzed by heavy-weights of British political economy such as Hume, David Ricardo, and John Stuart Mill.

26Hume regarded a levy for payment of the national debt as both impracticable and inequitable. Although the working classes could not pay a proportionate share immediately, he argued that they would pay a “considerable part” through indirect taxes on consumption. Because liquid assets could easily be concealed, visible assets such as land and houses would bear the immediate brunt of such imposts. Although Hume did not believe that the British public would submit to a policy marked by such egregious “inequality and oppression,” he did not consider it improbable. Debt levels might reach heights that the public would not tolerate, creating political space for “visionary schemes” such as a levy that could jeopardize national credit. Even if all allowances were made for collective amnesia—the assumption that public credit could be restored shortly after the imposition of a levy—he stressed the long-term damages inflicted by such a measure: the loss of European trust in the strength of the British economy, the relative decline of British power, and ultimately the “violent death of our public credit” (Hume 1742; Dome, 2004, 2-3; Gottleib, 1953, 40-41).

27Ricardo was more sanguine. He maintained that there was no significant difference in principle among financing wartime expenditures through a levy, loans that were serviced annually but never paid off, and loans that were eventually retired through a sinking fund financed from taxes. In practice, however, Ricardo regarded a levy as the most prudent option. A perpetual tax to cover interest on war debt would diminish the “national capital.” British experience had demonstrated that sinking funds were often misappropriated, encouraging profligate state expenditure. A levy would not damage capital accumulation because it merely redistributed capital inside the country. It discouraged expensive wars, entailed lower administrative costs than alternatives, and might lead the state to reduce other taxes such as tariffs and excise duties. Addressing the injustice of levy in targeting property owners, he argued that the benefits of an exemption enjoyed by self-employed professionals and salary and wage earners would be largely insignificant. A fiscal system that benefited the non-propertied classes would improve their relative economic status, encouraging more people to enter the salariat and the wage labor force. Under competitive conditions, an increased supply of these workers would lead to reduction in their pay (Ricardo, 1888 [1820]; Dome, 2004, 134-137).

  • 11 However, Mill insisted that budget surpluses in countries with robust growth rates had more pressin (...)

28Mill sided with Hume on the issue of a levy. Although he saw the wisdom of eliminating the national debt, he held that its gradual reduction by using government budget surpluses was the preferred method of redemption. A levy would be practicable if it were based solely on assessments of property. However, practicability in this sense violated a principle of justice. Property owners were not the exclusive holders of government debt, nor were they the sole beneficiaries of government policies financed by debt. Considerations of justice dictated that “whatever is the fitting contribution from property to the general expenses of the state, in the same and in no greater proportion should it contribute towards either the interest or the repayment of the national debt.” If the state retired the entire national debt by imposing lump-sum taxes on the non-propertied classes, they could not meet their tax obligations without borrowing in private capital markets. With no collateral, they would be encumbered by high interest payments. Mill suggested a two-fold policy for managing the national debt: liquidation of property owned by the state but devoid of “public utility;” and, as noted above, the incremental use of budget surpluses (Mill, 1848; Dome, 2004, 194-195).11

  • 12 In 1920, the levy morphed into a proposal for a special tax on wealth created during the war. A Sel (...)

29A proposal for the “conscription of wealth”—a levy on capital to settle the war debt—resurfaced during World War I. Endorsed by the War Emergency Workers’ National Committee, the Trade Union Congress, the Labour Party, and the Fabian Society (see Webb, 1919); it followed the introduction of military conscription in January 1916. The initial strength of the proposal lay in the fact that conscripted workers in the hundreds of thousands were risking their lives to protect their country. Even if they survived the war without disabling injuries, their prospects after demobilization were not attractive: the threat of unemployment and the obligation as taxpayers to fund principal and interest payments on war debt. In short, conscripted workers would bear the weight of supporting rentiers, a practice comparable to outdoor relief for the rich. A levy imposed on the value of all private property would distribute the costs of the war more evenly (Arnold, 1918; Comstock, 1920, 400; Daunton, 2002, 50). The idea of a levy found national traction. The plan of Labour MP Sydney Arnold (Arnold, 1918), details of which were published in the Economic Journal along with articles by Pigou (1918) and A. Hook (1918), was discussed in the House of Commons in spring 1918. Although the Commons did not accept Arnold’s proposal, variants of a levy continued to engage labor leaders, Chancellors of the Exchequer, property owners, business representatives, and economists—including Pigou, Francis Edgeworth, J.A. Hobson, and Josiah Stamp. Arguments focused on a range of issues, including disincentives, fairness, feasibility, and administrative costs. In his writings on the question of a levy, Pigou addressed all these matters.12

30As noted above, during the war Pigou had discounted the effects of high income tax rates on productivity. He also had reasons to discount the effects of a levy on incentives. However, when a few members of parliament circulated a memorandum maintaining that different variants of a levy—a levy on all property or on wealth created by war profiteering—would have disastrous economic consequences, he considered the matter of incentives more carefully (Pigou, 1920e). The fears of MPs, he concluded, were legitimate.

If a large class from whom the State demands payments is convinced that the demand will ruin industry, this opinion must tend in some degree to promote its own fulfilment. Fear that a panic will happen itself breeds panic. Fear that the Government’s fiscal policy will discourage enterprise itself discourages enterprise. It would be foolish to ignore these psychological reactions (Pigou, 1920a, 61).

31Pigou argued that the force of these convictions—later called self-fulfilling prophecies—should not be exaggerated. A levy would not change the total amount of capital but merely transfer it from one set of wealthy individuals to another. Since a levy would eliminate or substantially reduce war debt, it would reduce the need for increases in government revenues and therefore cut income tax rates (Pigou, 1920e; 1920a, 14-22). But would a levy not cause an exodus of capital from Britain? Pigou answered this question by observing that higher tax rates under the orthodox method posed the same problem. He also reminded opponents that if the gold standard was restored at the prewar parity rate, considerable deflation would follow, making the value of the war debt much larger and necessitating even higher income tax rates to cover principal and interest payments (Pigou, 1920a, 21-22). How could the government that imposed a levy convince British citizens that a subsequent government would not resort to another levy? Pigou’s response was weak. Another levy was quite improbable; it would occur, if at all, only in the remote future. Under the orthodox method, however, higher income tax rates would follow quickly and with certainty (Pigou, 1920a, 23). In replying to skeptics who questioned the government’s resolve in reducing income tax rates after imposing a levy, he countered that servicing the debt over many decades would compromise the ability of the state to fund productive expenditures on education and old-age pensions. Failure to retire the national debt constituted “resistance to wise and desirable spending.” Thus Pigou concluded that on balance, the weight of argument favored a levy (Pigou, 1920a, 26).

  • 13 The suggestion that potential, not actual, income be subject to a levy was ridiculed by George Bern (...)

32Distributive arguments based on fairness and equity also supported a levy, which would tax only wealthy persons. The orthodox method would tax both rich and poor in order to pay off the debt through general tax revenues. Critics argued that a levy would not differentiate citizens who had fought in the war or economized on consumption from those who had been exempted from conscription or had indulged in a wartime life of profligate expenditure. Pigou responded that taxing incomes under the orthodox method was bedeviled by the same inequities. In countering criticism that a levy unfairly taxed accumulated physical capital, leaving human capital untouched, he considered a tax on the rewards to human capital—prospective incomes—but concluded that they were unimportant. Owners of “material capital,” who were generally over 45 years old, had not served in the war. A decision to exempt from a levy incomes of young men who had served in the war actually rectified a gross injustice. Moreover, a tax on prospective incomes would generate little revenue, making no substantial difference in the size of the national debt. If, however, fairness required that future incomes also be taxed, Pigou did not find it difficult to devise an annual tax on lifetime income, actuarially equivalent to the special levy but paid in instalments (Pigou, 1918b, 147-148).13 He was certain that a levy could be made more equitable by exempting small sums of capital or residual profits after payment of dividends. Fairness could be enhanced even more if a levy were imposed on institutional entities that did not have shareholders but owned significant amounts of capital such as wealthy universities and colleges, trade unions, friendly societies, and cooperatives. Finally, a levy could be made steeply progressive, targeting those who could afford to pay the most (Pigou, 1920a, 34-35).

33Critics pointed out “insuperable difficulties” posed by both property valuation and levy collection (Pigou, 1918b, 148). Pigou was not impressed. A sound valuation of properties required data on the types of capital held in the country and the relative importance of each type. Since reliable data were unavailable at the time, he made estimates using statistics on prewar assets subject to death duties, introducing modifications in light of war securities issued by the government. In his estimates, 60 percent of the country’s capital was held as “stocks, funds, shares” and so on. Cash held in homes and banks, mortgages, and insurance policies amounted to another 10 percent. Homes, business premises, and agricultural land comprised an additional 16 percent. He saw no difficulties in the valuation of these properties, which could be based on market value or income tax returns. The remaining assets—which could be as high as 20 percent of the total if tax evasion were taken into account—were very difficult to value. It was unfair to exempt them from a levy but costly to estimate their value. He suggested a solution that he regarded as imperfect: wait until the assets in question were passed to younger generations as inheritance, giving owners ample time to devise ways to evade a levy. However, he did not consider this imperfection a “fatal obstacle to a special levy on capital, any more than the evasion of death duties and income-tax that now takes place is a fatal objection to these means of raising revenue” (Pigou, 1918b, 148-149).

34Concluding that the valuation process was free of significant problems, Pigou addressed the issue of collecting a levy. Would the state demand cash, forcing property owners to place vast parcels of property on the market and cause a collapse in their values? In that event, cash collected was cash disbursed. Owners of war bonds paid with levy revenues would increase the demand for assets that were liquidated, thereby restoring market prices. But why should the state require payment exclusively in cash? Highly reputable securities, for example, were good alternatives to cash. If owners of illiquid assets—such as business and land owners—faced difficulties meeting levy obligations, they could pay in instalments, a method similar to instalment plans on death duties. Pigou’s conclusion: “On the whole, therefore, it seems that the problems of actually collecting the levy, as well as the problem of valuation, can be adequately solved. The plea that a special levy on capital would be unworkable in practice cannot be sustained” (Pigou, 1918b, 150).

35As public enthusiasm for a capital levy waned, Pigou’s confidence in the wisdom of the policy also faded. In a 1923 letter to the editor of The Times, he asked whether a capital levy was advisable under current conditions. The answer required both theoretical “considerations of principle” and practical “considerations of technique.” Economists had expertise in considerations of principle. The latter issues dealt with the “administrative difficulties of valuation, the degree of disturbance of various sorts which the actual conduct of a levy would involve, the measure of importance attaching to the disappearance of a large volume of securities that are convenient collateral for bank loans, and so on.” Bankers and Inland Revenue officials were experts on these matters. In order to arrive at a sound decision on a levy, it was necessary to balance both sets of considerations. Because few people had expertise in both areas, Pigou called for “a properly constituted Royal Commission” to hear evidence from all concerned parties. The commission would decide whether to recommend a levy on all capital, a levy on war wealth, or debt service over a long period. By the time Pigou gave testimony to the Colwyn Committee on the National Debt and Taxation, he no longer regarded a large levy as feasible, and for several reasons. It would encounter powerful organized resistance from various quarters. It would encourage fears that reliance on a levy might become a routine tactic in the fiscal armory of the state and exacerbate existing pessimism caused by postwar British industrial depression. Finally, his initial assessment of the advantages of a levy had assumed that future revenues from income, super, and death taxes would not be significantly diminished. However, new research, including Josiah Stamp’s work on the economic consequences of a capital levy, persuaded him that this assumption was mistaken: “I have not, until within last year, realised how very large a proportion of a levy at steeply progressive rates—and the rates would have to be steeply progressive—would be used in repairing ravages in the future revenue consequent upon the levy itself” (Pigou, quoted in HMSO, 1927, 436-437).

5. The Genesis of A Study in Public Finance

  • 14 For a summary of Pigou’s cost-benefit analysis of taxes in the first edition of The Economics of We (...)

36The Great War made public finance a critical field in British economic policy. The expenditures over the four years of the war required revenues on a scale the British state had not experienced for a hundred years. Much of the funding was undertaken through floating debt and long-term loans. More importantly, the British government had to modify the structure of the income tax system, changing existing exemption levels and tax rates and introducing taxes in new areas. Should the wartime tax system be retained in the postwar era? Shortly after the armistice, the government decided to answer this question by forming the Royal Commission on the Income Tax, also chaired by Lord Colwyn. Pigou was appointed to the Commission, which began meeting on May 7, 1919, and issued its report on March 11 the following year. The brief of the Commission, as Pigou saw it, was to resolve the following problem: How could “the various anomalies and unfairnesses and complications of the tax, which have necessarily grown up with its growth, be best cured or palliated, so as to make this tremendous engine of revenue—probably the most powerful that the world has ever known—more equitable and less burdensome, but not less effective, than before” (Pigou, 1920f, 607)? The first edition of The Economics of Welfare (1920b) included some 100 pages on public finance. Here, Pigou evaluated a range of taxes—on windfalls, land values, consumption goods, earned and unearned incomes, property, and inheritance. Following the brief of the Commission, his analysis considered methods for reducing economic inefficiencies or burdens of various taxes and improving their fairness.14 In emphasizing efficiency—the impact of taxes on the size of the national dividend—and fairness, he employed the criteria he had tacitly developed in his writings on war finance.

  • 15 Pigou closely followed the resolutions of the Brussels Conference as well as other publications of (...)

37In autumn 1920, the newly formed League of Nations organized an international financial conference in Brussels, establishing four committees to investigate postwar problems in “(a) public finance, and (b) currency and exchange, (c) international trade and commerce, and (d) international action with special reference to credits” (League of Nations, 1920, 231). Although Pigou did not contribute to the Committee on Public Finance—he was asked to write a memorandum on currency and exchange—there is evidence that he gave careful thought to its recommendations, which took positions that approximated his own.15 The Committee stressed the importance of balancing the budget and limiting new borrowing. Continuation of deficit financing, a method used liberally during the war, was a slippery slope toward “general ruin.” It also recommended re-examination and reform of methods of raising revenue before taking other measures, regardless of how important they might seem. Normal expenditures, including debt service, should be curtailed to a level that could be covered by tax revenues. Hence many projects would be abandoned due to lack of funding. Even countries that had sustained extraordinary damage during the war should severely restrict their expenditures on reconstruction (League of Nations, 1922, vi). And if it were impossible to limit routine expenditures to levels determined by tax revenues? The Committee advised governments to shun new borrowing in favor of imposing new taxes: the “process must be ruthlessly continued until the revenue is at least sufficient to meet the full amount of the recurrent ordinary expenditure.” The relative merit of various taxes depended on “special economic conditions obtaining in each country, and each country must decide for itself on the methods best suited to its own internal economy” (League of Nations, 1920, 233). The importance of the role of the economist in this enterprise needs no elaboration. The Committee’s recommendations constituted a tacit request for a book that would qualify as a solid analysis of the field of postwar public finance. In the next few years, Pigou, who had not concealed his own recommendations for financing the war and the national debt, moved from the sphere of wartime public finance policy to public finance policy analysis, “setting out both sides fairly and not as a partisan” (Pigou, 1920a, 10).

  • 16 A former student and a life-long friend, Philip Baker—Noel-Baker beginning in 1943 when he adopted (...)

38In A Capital Levy and a Levy on War Wealth (1920a), Pigou observed that the war had changed state extraction of resources so fundamentally that the problems posed by public finance were “different, not merely in degree, but in kind from what they had been before the war” (Pigou, 1920a, 7). In the introduction to The Political Economy of War (1921), which systematized his writings on the economics of war, he explained what he meant in making this claim. For some 150 years, economists had been engaged in analyzing the routine workings of a free-market economy, “a complex system of mutual exchange built round the motive of private money profit.” They had shown that despite its flaws—inefficiency of resource allocation and “weariness, discontent, hunger, and pain” for many—the system worked. Economists were hopeful that their type of analysis would be of use to statesmen in the task of devising policies that corrected market imperfections and failures (Pigou, 1921, 1-2). Although that task was undoubtedly incomplete, Pigou and his fellow economists were at work fashioning the analytical machinery of economics in many of its subfields. The economics and finance of modern war was a field they had neglected. How did economic structures designed for peacetime respond to wartime demands? The political economy of peace required a companion volume, The Political Economy of War, which examined the economic causes of the war, its costs and financing, and state appropriation of certain market functions such as price determination and rationing. In the years following 1914, Pigou had published on all these issues. However, two chapters of the book set out new material. They were clearly influenced by his friendship with the future Nobel Peace Prize Laureate Philip Noel-Baker and provided a window into Pigou’s thinking about public finance.16 Here he investigated a peacetime British economy transformed by the war and the rationalization and expansion of the state. Although he did not make an explicit case for a systematic examination of public finance, an argument for such an analysis was implicit in the book.

39Pigou held that in the postwar era, European nations were at a crossroads: to live in a shadow cast by the war, perpetually preparing for another large-scale war; or to coexist peacefully, cooperating within the norms and parameters of the League of Nations. He believed that European states would take the more belligerent course, devoting a high percentage of expenditure to preparation for war. Direct expenditures would allocate resources to maintain and expand the military sector of the economy—the Brussels Conference had estimated that even in the immediate postwar period, 20 percent of government expenditures were devoted to military maintenance and war preparation. Indirectly, states would manage resource allocation in the interest of increasing military power, at the same time reducing efficiency and growth rates. In Britain, for example, special legislation banned foreign sailors from working on British ships and foreign pilots from flying British planes. A tunnel under the English Channel had been vetoed on national security grounds. Pigou anticipated legislation that would modify the design of merchant ships and commercial aircrafts so that they could be quickly retrofitted for war. To ensure the availability and safety of wartime food supplies, the state might be required to regulate food production and storage. Industries necessary to produce munitions might also expect state support: iron and coal mining, steel production, ship building, chemical manufacturing, and other critical industries such as optical glass, magnetos, and dye. State support could take a variety of forms: tariffs, subsidies, or price guarantees (Pigou, 1921, 4-14).

40Powerful interests in the UK promoted a permanent war economy. British political culture was dominated by an imperial ethos, a passion for acquiring more territory and dominating more colonies. Manufacturers and exporters favored “self-assertion” by their government in regions of the world where they could access cheap raw materials and hospitable export markets. Financiers welcomed opportunities for concessions from weak governments by bribing officials and underwriting loans to expand railways, extract oil, or establish rubber plantations (Pigou, 1921, 19-22). The influence of the armaments industry was striking. An international network, it funded propaganda and manipulated the media to encourage “war scares and international competition in armaments” (Pigou, 1921, 23).

41Dissatisfied with his treatment of public finance in the first edition of The Economics of Welfare, Pigou deleted it from the second edition (1924). Shortly after publishing The Political Economy of War, he began his first lecture course on public finance at Cambridge. With the exception of the academic year 1925-26—he was struck by several episodes of heart fibrillation while climbing the Swiss Alps in July 1925—he lectured on the subject from Michaelmas 1922 to the Lent term in 1927. In September of the latter year, he wrote his publisher Macmillan that he was planning to publish a book entitled A Study in Public Finance, which would “complement” The Economics of Welfare and Industrial Fluctuations. Taken together, the three books would cover “most of the subject matter of general economics” (circa September 1, Macmillan Archive).

42Public Finance drew heavily on both The Economics of Welfare and The Political Economy of War. The latter two books represent a conspectus of Pigou’s work on public finance to 1920-21. The innovative dimension of the new book lay in its reconceptualization of his earlier work in this area in order to produce a general account that explored the conditions for the analysis of public finance. Following the path of maximum abstraction that he had taken in both Wealth and Welfare and The Economics of Welfare, he elided empirical details ruthlessly—the specifics of cases and the historical conditions that formed them. In framing the structure of an analysis of public finance, he highlighted the fundamental premise of his theory of economic policy originally stated in Wealth and Welfare: the ultimate objective of economic policy as the promotion of the welfare of citizens “in the highest possible degree.” A corollary of this premise in the sphere of resource extraction is the principle of minimum aggregate sacrifice (Pigou, 1928, 59): the imperative to ensure that public finance inflicts minimum damage on the public. He also drew on three additional principles that he had employed repeatedly in his writings on the war but had never made explicit. A principle of least economic distortion: devising taxation regimes with a view to affecting the size of the national dividend as little as possible. A principle of equitability: placing similar burdens on those with similar economic profiles but heavier burdens on those with a greater capacity to pay. And a principle of administrative efficiency—in a later parlance, minimum transaction costs: designing taxation mechanisms that would be intuitively simple, inexpensive to operate, and difficult and costly to evade. Employing these principles, Pigou recast the results of his previous writings on public finance, most of which had been occasioned by the war.

43For most of his career, Pigou was prepared to suspend his academic research and enter the arena of partisanship if he was convinced that the viability of British institutions was at stake. The Great War constituted the most perilous threat to British institutions since the wars of the Napoleonic era. Thus Pigou became a public economist for the duration, circulating and advocating his views on how to pay for the war and finance the debt incurred in waging it. When the crisis ended—or was it suspended?—the owl of Minerva spread its wings. The hour for economics as positive science returned, and Pigou transposed his extensive writings on financing the war into a general analysis of public finance. The result was A Study in Public Finance.

Our thanks to Marianne Johnson, two anonymous referees, and the chief editor of the Journal for their constructive suggestions on earlier drafts of this essay. Research was generously supported by a sabbatical grant and the Jack T. Kvernland Chair, Monmouth University

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1 Between 1902, when Pigou was awarded a fellowship at King’s College, Cambridge, and 1912, when he published his Wealth and Welfare, he wrote widely on two policy debates with a bearing on public finance. In the tariff reform controversy of 1903-1906, he contested the wisdom of abandoning free trade in favor of forming an imperial trading bloc based on protective and preferential tariffs (see for example, Pigou, 1903; 1906). And when the Liberals proposed to tax land values on returning to power in 1906, he published The Policy of Land Taxation (1909). Because Pigou did not consider questions of public finance in Wealth and Welfare, he presumably supposed that at the time of writing, the British economy did not require serious examination of these issues.

2 Concerning Pigou’s position on ending the war, see Aslanbeigui (1992).

3 We do not consider a third method of raising revenues for financing the war: printing money, which Pigou discussed but rejected as utterly foolhardy. For his analysis of the consequences of monetizing the war debt, see Aslanbeigui and Oakes, 2015, 117-135. In the decade before 1914, Britain made plans for a major European war, although not for the war that was actually fought. In considering the possibility of a war with Germany, the strategic assumptions of British planners were ad hoc and informal. Their main premises were approximately as follows. Britain’s continental allies, France and Russia, would confront Germany on the battlefield. The small British professional army would provide support in France. Britain would supply munitions, other supplies, and financing. Germany would be fought chiefly by French and Russian troops firing British ordinance and financed by the Bank of England and the City of London. The Royal Navy would sweep German vessels from the seas in order to secure international trade, indispensable for the viability of the British economy. It would also blockade German ports, forcing Germany to choose starvation or surrender. Before that point was reached, the German economy would be reduced to impotence, ensuring a swift Allied victory. Given these premises, the war would be short—a few months to a year—and cheap. In August 1914, therefore, the British Cabinet had no plan for state mobilization of the economy, and of course no plan for how to fund it, because it did not anticipate these contingencies. See French, 1982.

4 For a survey of Pigou’s views on the political economy of the Great War, see Barber 1991.

5 This section draws on Aslanbeigui and Oakes, 2015, 115-117.

6 Production of military hardware is a useful index of increases in the scope, duration, and cost of military campaigns in World War I. In his research on the logistic requirements of the major combatants, Martin van Crefeld (2000, 66) has estimated that between 1914 and 1918, British production of cannon increased from 91 pieces (1914) to 4,314 (1916) and 8,039 (1918); tanks from 0 (1914) to 150 (1916) and 1,359 (1918); machine guns from 300 (1914) to 35,500 (1916) and 120,900 (1918); aircraft from 200 (1914) to 6,100 (1916) and 32,000 (1918). Stephan Broadberry and Peter Howlett (2005, 210-219) show that the percentage of British GDP spent by the government on goods and services increased from 8.1 (1913) to 31.2 (1915), 35.6 (1916), 38.7 (1917), and 37.7 (1918). In 1913-14, the final fiscal year of peace, current resources funded all state expenditure. In the first fiscal year of the war, they covered only 40 per cent, calculated as a percentage of GDP. Budget deficits increased from 14 per cent of GDP (1914-15) to 43.1 per cent (1915-16), 47.9 per cent (1916-17), and 46.9 per cent (1917-18). The national debt as a percentage of GDP increased from 26.2 (1913-14) to 40.6 (1914-15), 64.4 (1915-16), 99.9 (1916-17), 116.3 (1917-18), and 127.5 (1918-19).

7 Both during the war and after the armistice, Pigou gave little consideration to external debt. In his assessment, British debt was held mainly by British citizens, and the credit and debit sides of external debt were roughly equal.

8 In predicting the magnitude of the postwar real interest rate, Pigou considered two scenarios. If the state prohibited exports of British capital, the interest rate would exceed the prewar rate by a small margin. On the assumption of free capital markets, however, he anticipated that the rate “will almost certainly be very much higher than it was before,” perhaps a gilt-edged real rate of 5 to 6 percent over three to four years (Pigou, 1916c, 421).

9 In his long career, Pigou wrote papers for more than one conference. However, evidence suggests that this was the only conference he attended.

10 The war began in 1701 and ended in 1714. England, which included Wales, began military operations in 1702. The United Kingdom—formed in 1707 by England and Scotland—exited the war in 1712.

11 However, Mill insisted that budget surpluses in countries with robust growth rates had more pressing uses in eliminating “very objectionable imposts.” Surpluses should not be employed to reduce debt until such taxes had been abolished (Mill, 1848).

12 In 1920, the levy morphed into a proposal for a special tax on wealth created during the war. A Select Committee of the House of Commons inquired into its feasibility, concluding that although such a tax was possible, it was not expedient. In the next few years, the movement lost popularity even among its early supporters. When Labour came to power in 1924, the government formed the Colwyn Committee on the National Debt and Taxation to ascertain the most effective way to retire the war debt. By the time the Committee published its majority and minority reports in 1927, the levy was dead. The majority rejected it: Even with large popular appeal—which was not the case at the time—the idea was a grand but hazardous experiment. The minority suggested an alternative scheme: a heavily progressive surtax to compensate for the fact that the nation had “‘missed the tide’ for a massive redemption of debt” (quoted in Comstock, 1928, 15). For a theoretical discussion of the levy, see Eichengreen (1990). On the origins and fate of the levy in Britain, see Comstock (1920, 1928), Daunton (2002, 49-74), and Eichengreen (1990).

13 The suggestion that potential, not actual, income be subject to a levy was ridiculed by George Bernard Shaw, who criticized articles favoring a levy by Pigou, Arnold, and Hook. Accusing them of knowing little more than stockbrokers, he insisted that a government could not tax incomes that did not yet exist (see Pigou, 1918b; 1918c; Shaw 1918).

14 For a summary of Pigou’s cost-benefit analysis of taxes in the first edition of The Economics of Welfare, see Aslanbeigui and Oakes, 2015, 111-114.

15 Pigou closely followed the resolutions of the Brussels Conference as well as other publications of the League of Nations. For a discussion of his memorandum, see Aslanbeigui and Oakes, 2015, 127-130.

16 A former student and a life-long friend, Philip Baker—Noel-Baker beginning in 1943 when he adopted his wife Irene’s maiden name—had been principal assistant to Lord Cecil, who participated in drafting the Covenant of the League of Nations at the Paris Peace Conference in early 1919. Later he served as principal assistant to Sir Eric Drummond, the first secretary general of the League (1920-22), and private secretary to the British representative on the League’s Council and Assembly (1922-24). Noel-Baker also had an important role in the formative years of the United Nations, serving on the British delegation. A firm believer that the armaments industry was responsible for World War I, he was awarded the Nobel Prize for Peace in 1959 for his life-long work on disarmament (, N.D.a,b).

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Nahid Aslanbeigui et Guy Oakes, « The Great War and the Genesis of Pigou’s A Study in Public Finance »Œconomia, 6-4 | 2016, 487-513.

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Nahid Aslanbeigui et Guy Oakes, « The Great War and the Genesis of Pigou’s A Study in Public Finance »Œconomia [En ligne], 6-4 | 2016, mis en ligne le 01 décembre 2016, consulté le 20 mars 2023. URL : ; DOI :

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Nahid Aslanbeigui

Leon Hess Business School, Monmouth University, West Long Branch, NJ 07764.

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Guy Oakes

Leon Hess Business School, Monmouth University, West Long Branch, NJ 07764.

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