Friedrich August von Hayek’s journal book review of J. M. Keynes’s How to Pay for the War endorses compulsory deferred pay as a means of financing wartime expenditure without inflation, while distinguishing Hayek’s preferred method of postwar repayment from Keynes’s. The review moves from the unusually broad agreement among economists to the distributive logic of the scheme, its compulsory character, its relation to welfare measures, and its adequacy under rapidly increasing expenditure. Its final section identifies a disagreement about whether accumulated claims should be redeemed in cash or converted into ownership of productive capital. Hayek’s approval is substantial, but it does not erase differences over postwar economic policy.
Hayek presents Keynes’s recognition of wartime scarcity as removing the disagreement that had previously divided him from more orthodox economists. The immediate problem is no longer simply to increase employment: military demand constrains civilian consumption even before all available labour has been employed. Hayek reports almost complete agreement among economists on the proposal’s main outline, while explaining that government employment prevented many of them from expressing their support publicly. This is an assessment of professional opinion, not evidence that every detail commanded agreement.
The review reconstructs the proposal from the limits of taxation and genuine borrowing. Even drastic reductions in higher incomes could not provide the required revenue; disruption of existing commitments would further diminish taxable income. Lower-income households must therefore contribute, but their necessary surrender of present consumption need not become a permanent loss of income. Deferred pay would make their contribution an advance, repayable after the war through continued higher taxation of the wealthy.
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.
The distinction is between an unavoidable material sacrifice and the financial arrangement governing it. Inflation would also reduce poorer households’ consumption, but without giving them an equivalent claim on future resources; it would fall most heavily on the poorest. Deferred pay makes that sacrifice explicit and compensable. Hayek’s defence thus combines the requirements of war finance with a distributive argument: rejecting the scheme does not remove the burden but changes how it is imposed.
Its compulsory character follows from the same reasoning. Hayek treats deferred pay as a substitute for taxation, not as an ordinary invitation to save.
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.
Voluntary saving cannot guarantee the withdrawal of purchasing power required by wartime scarcity. Hayek accordingly accepts Keynes’s warning that reliance on voluntary contributions means reliance on inflation for whatever remains unfunded. Compulsion here serves a specified fiscal purpose; the review does not turn that endorsement into a general programme of economic control.
Hayek also considers Keynes’s family allowances and qualified support for “iron rations.” Although allowances increase budget expenditure and might appear an ill-timed social reform, relieving households disproportionately affected by rising living costs could reduce pressure for higher money wages. Social protection therefore enters the argument as an instrument of war finance as well as a response to unequal hardship.
The budget comparison gives the endorsement its immediate political force. Keynes envisaged additional war expenditure of £1,950 million, with £900 million raised by borrowing. Sir John Simon’s subsequent budget projected only about £1,770 million in additional expenditure but left £1,432 million to borrowing. The difference between those borrowing requirements approximated the £600 million Keynes proposed to obtain through deferred pay. Hayek doubts that voluntary savings could fill that gap without inflation and argues that the proposal could have addressed the budget’s central unresolved problem.
By the time of the review, however, expenditure had risen so far that the scheme could no longer suffice on its own.
In the present situation these are probably no longer alternatives. We shall probably have to employ all, or at least most, of these methods simultaneously.
The methods are deferred pay alongside heavier sales, wage, or income taxation. Hayek distinguishes a policy’s continuing usefulness from its ability to solve a worsening problem unaided. He also commends the pamphlet’s discussions of borrowing, inflation, rationing, and the incentive effects of excess-profits taxation, without developing those topics into separate arguments.
The closing qualification concerns the capital levy that Keynes attributes to Hayek’s suggestion. Hayek explains that he proposed it to avoid large cash repayments: a levy would transfer equity titles to a holding company, which would issue shares to holders of blocked balances. Keynes instead proposed using the levy to finance cash redemption, viewing subsequent spending as a remedy for postwar depression.
But if we are both right in this common assumption, there remains a fundamental difference with regard to the purpose of the capital levy.
Their shared assumption is that recipients would spend much of the released money promptly; their disagreement concerns whether that outcome is desirable. The review’s significance lies in this combination of wartime agreement and postwar divergence. Hayek supports compulsory restraint of consumption and protection of poorer households’ future claims, yet prefers repayment through capital ownership to the release of spendable cash. He postpones resolution until abundance returns rather than allowing that disagreement to weaken his immediate endorsement.
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