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MONETARY POLICY 
371 
As the War proceeded, difficulties increased. It has been shown in 
the foregoing pages that there was no hope of meeting any consider- 
able part of the war expenditure by taxation, since any increase in 
taxation was absorbed in making good the deficit caused by the aboli- 
tion of the Spirit Monopoly, formerly one of the principal sources of 
revenue of the “ordinary” budget. It is true that the distinction 
between the “ordinary” and the “war” budgets was largely artificial, 
for the “ordinary” budget comprised, besides a section entitled “ex- 
traordinary revenue and expenditure,” a number of receipts and 
expenses entirely due to the War—for instance the increased interest 
payable on government loans, and the proceeds of various taxes and 
duties specifically imposed for the duration of the War.* In so far, 
therefore, as the “ordinary” budget met out of ordinary revenue 
expenses directly due to the War, it may be said that the cost of the 
War was met, but only to a very limited extent, by taxation. The 
survey given above of general conditions in Russia makes it clear 
that the War had to be financed almost entirely by borrowing at home 
and abroad and by the issue of paper money. The ideal course under 
such conditions would have been to arrange that the excess of notes 
issued should be constantly withdrawn from circulation by the flota- 
tion of internal loans; in no country, however, has this ideal course 
proved practicable, and Russia was certainly very far from being 
able to attain it. This policy could have been adopted only if the 
whole of the notes issued had remained in a “visible” state—i.e., held 
on current account in the banks—none being hoarded, as in fact they 
were by the Russian peasants. In that case, it would have been com- 
paratively easy to withdraw the excess of notes from circulation in ex- 
change for government bonds and to repeat this operation whenever 
the money raised had been expended by the Treasury. The increase 
of notes in circulation would then not have been excessive. This state 
of affairs would not indeed have prevented the War from impoverish- 
ing the population, for the Government would still have been in pos- 
session of increased purchasing power, and would have used it to 
acquire an ever increasing share of the commodities and services of- 
fered in the market. It would, however, have obviated, in a large 
measure. the disorganization of the currency, and the public would 
* See monograph by A. M. Michelson, Chapter 11. 
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