Hayek’s 1940 book review, republished in the supplied 1997 version, offers a strong endorsement of Keynes’s proposal for financing wartime expenditure through compulsory saving, followed by a specific disagreement over repayment after the war. Its organizing problem is how to divert resources from civilian consumption without relying on inflation or imposing an inequitable permanent sacrifice. Hayek moves from the economic rationale for deferred pay to its political reception, supporting measures, and adequacy under rapidly increasing expenditure, before distinguishing his own proposal for converting deferred earnings into capital ownership from Keynes’s preference for cash repayment.
The opening presents an unusual convergence between Keynes and economists previously opposed to him. Keynes’s recognition that wartime scarcity could arise before all available labour had been employed removes, for Hayek, the immediate source of their disagreement. Hayek reports almost complete professional agreement with the proposal’s main outline, while noting that government employment prevented many economists from publicly expressing policy opinions. This endorsement is therefore both an economic judgment and testimony to a consensus that had not found adequate public expression.
Hayek reconstructs the argument from the limits of taxation. If deliberate inflation is excluded, the war must be financed through taxation and genuine borrowing. Confiscating the higher incomes cannot supply the required revenue: even reducing them to £500 annually would meet only two-thirds of Keynes’s earlier estimate, before allowing for damage to taxable income through disrupted commitments. Contributions from people earning below £500, and below £250, are consequently unavoidable. But the necessity of reducing their present consumption does not establish that they must surrender the corresponding income permanently.
The only choice we have is whether or not the inevitable sacrifice of the poor shall at least give them a share in our future income.
Deferred pay turns that unavoidable sacrifice into an advance repayable after the war through continued higher taxation of the wealthier classes. The distributive comparison is not between sacrifice and no sacrifice, but between alternative ways of imposing it. Inflation would also reduce workers’ consumption, with the poorest suffering most, while leaving them no compensating claim on future income. Hayek thus treats compulsory saving as a protection against an otherwise less visible and less equitable burden.
He finds working-class representatives’ limited enthusiasm disappointing, attributing it partly to the difficulty of explaining this dilemma. More pointedly, he rejects objections to compulsion:
They seem to overlook that the 'deferred pay' is a substitute for taxation which must bring in the sums required, even if it means a drastic reduction in standards of living, and that to leave this to the voluntary decisions of the individual is about as reasonable as to substitute voluntary contributions for taxation.
The comparison with taxation is decisive: these savings must perform a necessary fiscal function, not merely express individual thrift. If voluntary saving falls short, inflation supplies the missing restraint on consumption. Family allowances complement this argument rather than contradict it. Although they increase budget expenditure, cushioning households suffering disproportionately from rising living costs could reduce pressure for higher money wages and thereby ease war finance. Hayek also notes Keynes’s qualified support for minimum consumption rations.
The review then tests the plan against fiscal developments. Keynes envisaged £1,950 million in additional war expenditure, with £900 million financed by borrowing that Hayek considers approximately feasible without inflation. Sir John Simon’s subsequent budget projected lower additional expenditure, about £1,770 million, yet required £1,432 million in borrowing. The difference between the borrowing estimates nearly equals the £600 million Keynes proposed to obtain through deferred pay. For Hayek, the rejected scheme would have addressed the principal financing problem left unresolved by the budget.
By the time of the review, however, expected expenditure had risen enough to change the proposal’s status. Hayek estimates that deferred pay could yield scarcely 10 or 20 percent more than Keynes originally anticipated, whereas annual expenditure might be 50 percent higher.
It remains, however, one of the most potent weapons which we possess when it has become doubly necessary to curtail consumption of all classes.
Endorsement is therefore qualified by scale, not withdrawn. Measures Keynes had presented as unpleasant alternatives—heavy sales, wage, or income taxes—might now need to operate alongside deferred pay. Hayek briefly praises the pamphlet’s treatment of borrowing, inflation, rationing, and the loss of incentives under a complete excess-profits tax, but concentrates his final discussion on the disposition of accumulated savings.
Keynes had credited Hayek with suggesting a capital levy to repay deferred pay. Hayek clarifies that his intended mechanism was different: blocked balances should become equity claims on productive capital through a large holding company receiving assets transferred by the levy.
Mr. Keynes wants to use the capital levy to finance the cash repayment.
Hayek fears that releasing large cash balances would generate rapid spending and expose the timing of repayment to political agitation. Keynes, by contrast, welcomes that spending as a means of combating postwar depression. Both expectations rest on the assumption that recipients would spend much of their repayments promptly, an assumption Hayek explicitly admits could prove mistaken. The review’s importance lies in this sharply bounded agreement: shared wartime scarcity supports compulsory deferred consumption, while competing judgments about postwar spending produce different proposals for honouring the resulting claims.
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