The argument put forward in this paper assumes a point of view which it would be well to make clear at the beginning. Put briefly, it is that war today involves such a radical transformation of the economy that customary economic concepts which have been derived from peace-time experience, and even from the experience of earlier wars, no longer fit the facts. This war not only devours materials on an unprecedented scale, but it urgently imposes new and highly specialized objectives upon the whole scheme of economic activity, and with them new criteria and new methods. A new “war economy” has to be brought into being to meet these specifications.

I am concerned here simply with the role of financial policy in this war economy. As the questions which arise are to some extent questions of emphasis, it is desirable to avoid the misunderstanding which may easily occur if the emphasis is misplaced. It will not be disputed that fiscal policy and monetary policy are vital elements in the efficient conduct of the economy, in war as in peace, so far as their proper spheres of operation are concerned. But there is room for disagreement as to how far their proper spheres of operation actually do extend today. It is my thesis that as the organization of the war economy becomes more intensive, purely financial instruments of control necessarily yield diminishing returns, not merely in the literal and self-evident sense of the proportion of incomes which can be extracted from the pockets of the people, but in the sense of the objectives of organization which government policy may try by these means to achieve.