8.—6.

A state of war must necessarily subject the economic structure of a country to severe strains and stresses. Men and women must be withdrawn from particular activities and occupations for service overseas or for diversion to pursuits more in keeping with wartime requirements. Various types of raw materials and other goods which we have to import are in short supply and difficult to obtain, while shipping services are partially diverted and disorganized. Much material and the services of thousands of men are required for building and equipping camps and other training centres for the forces to go overseas and for home-defence purposes. Our factories to an increasing extent will be occupied in making boots, clothing, equipment, and munitions. We are compelled to extend the volume of labour and material required to feed and generally maintain the men in uniform and also the men and women engaged in a hundred different ways in providing for their requirements. In all, a substantial proportion of our productive effort is required for war purposes, but in the present grave situation all will agree that nothing must be allowed to stand in the way of building up our fighting power. Except to the extent that it can be offset by additional production through hard work and better organization, the diversion of effort to war purposes must be at the expense of civilian consumption of goods and services. In other words, all must share in varying degree in the sacrifices. There is no escape from that, and the problem is to adjust the burden as equitably as possible over the whole community. In doing so it is important that normal economic activity should be kept going as much as possible—firstly, to provide the sinews of war, and, secondly, to maintain the civilian population on as high a standard as is practicable; in fact, strengthening our economic structure to withstand the terrific strain of war, keeping up the morale of the people, and generally maintaining stability on the " home front " is a national duty, for it is a vital factor in any sustained effort on the fighting front. The real costs of war, apart from borrowing overseas, must come from current production, for the material and services are required now. For such a destructive purpose as war the obvious method of finance is taxation, and there is no doubt that we should pay as we go for the war to the limit that is practicable. The limit is fixed by the necessity already explained of keeping the economic system intact and functioning to capacity. One man's expenditure is another man's income, and experience has shown that when any appreciable number of people cannot meet their obligations the result is a chaotic state of affairs such as would not be conducive to a sustained war effort. Another factor to be considered is that certain classes of saving under long-term contracts would not only involve loss and hardship in the future if interrupted, but would inevitably retard our production and economic development. Thus to make use of our full resources there is a considerable amount accruing from current production that must be borrowed by the State or some one else. Tt is, of course, sound in principle to restrict borrowing as far as possible to productive purposes and thereby avoid a relatively increasing burden of debt charges for the future. As the war progresses and its costs continue to mount we may be forced to utilize Reserve Bank credit to some extent. Bank credit is a normal and sound method of financing additional production, but to issue additional money to purchase for war purposes a portion of an existing volume of production must mean leaving civilian consumers with the present volume of purchasing-power to buy the much smaller volume of goods that remain available for them. That involves progressive inflation, and experience in other countries has shown that the disastrous effects which follow, fall most severely upon the rank and file of the people. Except to the extent by which production is expanded we must inevitably consume or use less luxury products if we are to provide all that is required for a maximum war effort. It is infinitely better for everybody that the measure of the sacrifice required from each and every one to carry on the war should be made out of our current income either by way of taxation or by savings.

Diversion of productive effort to war purposes.

War costs met from current production.

Utilization of Reserve Bank credit.

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