For the truth is that families and governments have a great deal more in common than most politicians and economists like to accept. Although the consequences of flouting fundamental rules are somewhat different for states than for households, they are still ruinous.
—Margaret Thatcher. Thatcher, The Path to Power.
The best way to finance war involves imitating the approach a wise family uses to manage its finances during a crisis:
- During good times, the family saves and invests a significant portion of its income. The family does not squander its entire income on consumption, nor does it go into debt during good times.
- When a crisis hits, the first thing they do is drastically reduce spending. They cut out luxuries like movies, vacations, restaurants, buying lunch at work, games, fashionable clothing and decorative items. They also stop buying capital items such as couches, dining tables, swimming pools and cars. They do not delude themselves into thinking they can go on as before. They understand that the more quickly and deeper they cut, the better.
- Bread-winners increase their income by working harder. Either they take on overtime or work a second job. The mother or eldest daughters mind other people’s babies for extra money. They convert the back section of their house into a small apartment and rent it out to a little old lady.
- Favors are called in. Grandparents and other relatives are asked to look after the children so the parents can work extra hours without paying for childcare. The family might even temporarily move in with relatives so their house can be rented. Relatives might be asked to pay school fees or a portion of hospital bills.
- Assets need to be sold: shares, holiday houses, the second car, the house, jewelry.
- Borrowing is avoided where possible.
- Every nerve and fiber is strained to reach a point where incomings exceed outgoings. Once this is achieved it means the struggle can be kept up indefinitely and therefore recovery becomes inevitable.
This approach can be translated to a nation at war as follows:
- During times of peace, the nation should invest part of its tax revenues in a contingency reserve to help carry it through periods of war or natural disaster. It should not squander all its tax revenues on welfare and other socialist diversions, nor should it run budget deficits.
- When war begins, the government must cut back on all non-essential spending. State and local governments should be required to do the same so they can lower taxes, leaving room for more federal taxes to finance the war.
- Sales taxes should be raised, so as to transfer consumptive power from the individual to the war effort without distorting economic activity or disproportionately damaging investment. There should be no excess-profits taxes, as excess profits attract investment and increase supply in shortage areas.
- Allies should be asked to take over security obligations, (For example, a New Zealand warship took over the patrol of a British warship in the Gulf so it could take part in the Falklands War.) provide logistical support, (As the United States did for the British during the Falklands war.) or provide intelligence, (As the French did for the British concerning Exocet missiles during the Falklands war.) and to pay for some of the cost (As the Japanese did for the Allies during the First Gulf War). Support can also be sought in the form of war material without payment (The way the United States assisted Britain with Lend-Lease during World War II).
- Assets need to be sold; this means foreign currency reserves, foreign and domestic gold reserves, and property from the contingency reserve. As an extreme measure private property held overseas can be requisitioned and liquidated with the promise, after the war, of recompense with interest.
- Borrowing should be avoided where possible.
- Every nerve and fiber should be strained to reach a point where incomings exceed outgoings. This means the struggle can be kept up indefinitely and therefore victory becomes inevitable.
