XVII. The Nature of the Plan.

In concluding this part of our report there are several points which we desire to emphasize.

In the first place we regard our report as an indivisible whole. It is not possible. in our opinion, to achieve any success by selecting certain of our recommendations for adoption and rejecting the others, and we would desire to accept no responsibility for the results of such a procedure nor for undue delay in giving execution to our plan.

In the second place, as we have remarked earlier, our plan is strictly dependent upon the restoration of Germany's economic sovereignty and it is important to observe that the operation of the plan will be proportionately postponed if there is a delay in effecting that restoration. The various dates which mention in the report must be interpreted in the light of the above remark.

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From the standpoint of the taxpayer in creditor countries the plan means in due course an annual relief to the extent of 21% milliards, plus such additional amount as the index of prosperity may provide.

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On the other hand, from the standpoint of the taxpayer in Germany the plan means direct burden of only one-half this sum, viz., 14 milliards per year and the transport tax, plus such additional amount as may represent Only relatively small share in increased prosperity. The German taxpayer can look without anxiety upon the remainder of the payment of 21⁄2 milliards, for it represents a relatively small burden on German industry. which has been the beneficiary of substantial special profits, and only a modest return on a large capital invested in railroads which are yielding him no relief in taxation in his budget at present, such capital having been accumulated prior to the war. We are satisfied that the contributions from railway and industrial debentures will not be reflected to any substantial degree in a burden to the individual German taxpayer; as regards the railways it will only require the same kind of return as exists in similar enterprises in many countries.

1. The Currency Position.

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value of German currency had been stable for some two months. It would not have been pretended, however, by any authority that German currency had been stabilized. would perhaps be juster to apply the term "unstable equilibrium" than the term "stability" to this transition period, which has fortunately continued to the present day. The elements of permanent stability, even if the repercussions of the budget situation are mo mentarily left out of account, were then and are still wanting.

One of the first steps which the committee took was to request Dr. Schacht. the governor of the reichsbank, and the currency commissioner of the reich, to give evidence before them with a view to their being fully informed of the existing currency situation.

Quantity of currency-The total circulation. although so enormous in nominal values, was. when reduced to its gold equivalent at that date, something over 3 milliard gold marks only, whereas the prewar circulation in Germany had amounted to 6 milliard gold marks. Prima facie, therefore, the amount of currency seemed deficient rather than excessive. and not likely in itself to be a cause of fur. ther depreciation. In proportion as the German mark dwindled in value and became less and less utilizable for the threefold function of standard of value, instrument of payment and medium of saving, foreign currencies naturally became by force of circumstances more and more sought after in Germany. The Germans resorted increasingly to the currencies of countries with a comparatively stable exchange, not only to invest their savings but also to define and even settle their transac tions, and the presence of such currencies in Germany increased ever more as the mark depreciated further.

In spite of this extended use of foreign currencies in Germany, the shortage of purchasing power made itself increasingly felt. leading first the German government, then the states and municipalities, and finally the great industrial and agricultural organizations and even private firms to supplement the currency shortage by new instruments of payment. These token currencies, expressed in gold or paper marks, sprang up in Germany in the summer of 1922, at a moment when the need became urgent to find new means to meet the requirements of current transactions, the old mark on the verge of its collapse

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no longer answering such require

At the end of 1923 we find in Germany an absolutely heterogeneous monetary circulation. which included-besides the foreign money in circulation or hoarded (dollars, pounds, florins gulden. Swiss francs. French franes. Scandinavian crowns, etc.)-the old paper marks, dollar treasury bonds (dollarschatzanweisungen), bonds of the gold loan (wertbestandige anleihe), 6 per cent treasury bonds (6 per cent schatzanweisungen). rentenmarks. and. lastly, a whole set of odd emergency currencies (notgeld) expressed either in gold or in paper marks.

Backing-The security of the rentenmarks is a mortgage on real and to some extent on personal property. The so-called gold loan is repayable in legal tender on a gold basis but has no gold backing. The various forms of emergency money were for the most part based on no security at all. The gold reserve of the reichsbank amounted to some 467 milliards, but 200.000.000 thereof was specifically earmarked as security for the dollar loan issued by the reich in 1923.

Taken as a whole, therefore, the liquid back. ing of the currency is wholly inadequate for

Interchangeability - The rentenmark is not actually legal currency within the country nor available for any purposes of foreign trade. The old currencies with their vast denominations remain the legal currency, but prices are everywhere expressed in rentenmarks. It is therefore obviously necessary that payments should be made indifferently either in reichmarks or in rentenmarks at a fixed relation between them. The reicasbank accordingly accepts rentenmarks at the rate of 1 rentenmark for 1,000,000,000,000 paper marks, and lentenmarks are also accepted in payment of taxes at the same rate.

The present tranquillity-As the committee have remarked, the elements of currency stability were not to be found in such a situation. The temporary equilibrium of the German exchange has been ascribed to various causes by different authorities; some lav stress upon psychological factors, and in particular a renewal of confidence, the exact basis of which it would be difficult to determine, but which took account of the efforts being made by the German government balance its budget, and of the appointment of the committees of experts by the reparation commission; others refer to a decrease in internal consumption which with the lack of credit, accompanied by what was probably an excessive restriction in importation, reduced the demands both for the circular medium and for foreign currencies.

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Credit facilities-The exportation of the rentenmark is prohibited. Its existence was of no assistance in the maintenance of foreign trade. The reichsmark was too discredited to

be any longer available for the purpose of meeting foreign obligations. Credit was only obtainable abroad at dangerously high rates of interest.

At the same time, the currency depreciation and its secondary effect had produced a serious dearth of liquid capital in Germany itself. The stringency may be indicated by the fact that (according to figures furnished to us) the savings bank deposits had fallen from 10.700,000,000 at the end of 1913 to 760 gold marks at the end of 1922: the credit accounts in the eight large Berlin banks amounted to 7.400.000.000 at the end of 1913 and to about 1.000.000.000 at the end of 1922. The figures for 1923 are not yet available but can scarcely exhibit an improvement. Leaving for the moment out of account capital which in one form or another had been exported, liquid capital in monetary forms liable to depreciation had been steadily converted into fixed assets with a permanent intrinsic value. The private individual had purchased consumable commodities, while industrial enterprises had largely extended their plant and equipment. The motor was in good. perhaps in unusually good, condition. but the motive power and lubrication were apparently lacking.

Immobile credit resources - On the other hand, there was general agreement that not inconsiderable resources were available in the shape of German balances abroad and foreign currencies in the pockets of the population in Germany itself. This latter item alone has been estimated at 1.2 milliard gold marks by the committee appointed to consider the means of estimating the amount of German exported capital. It was reasonable to suppose that a large proportion of these resources would be available if complete confidence in the stability of German currency could be restored and maintained.

As stated in part I., the committee consider that this end can best be secured by the institution under proper safeguards of a w bank which should absorb the existing encies, liquidate the rentenbank, and trans

form the reichsbank, and provide, against recognized banking, cover the foreign currencies necessary for the revival of Germany's languishing trade. Psychological considerations seem imperatively to require an institution which should be so far new in its policy and its administration as to detach it entirely from the errors of the recent past and restore the older traditions of German banking.

The interim bank-While coming to this conclusion and while reducing the general plan to details, the committee had to deal with an actual change in the situation as it originally presented itself. The committee were informed that a scheme for a gold bank was in preparation. It was expressly and admittedly limited to providing the means of carrying on foreign trade. When first submitted it contained some features which the committee would not have recommended, and it omitted others which seemed to the committee to be essential to any permanent settlement of the problem as a whole. Moreover, an attempt to settle particular difficulties in isolation and without reference to other essential requirements appeared to the committee to involve certain risks.

The committee, therefore, without expressing any opinion on the plan as given to them in outline, assured themselves in consultation with the authorities responsible for Germany's monetary policy that the bank would be so organized as to facilitate its absorption into a new bank of issue which might be set up in accordance with the recommendations of the committee. II. Considerations Regarding the Measurement of Germany's Burden.

(a) Commensurate Taxation.

In part I. we refer to the fact that we have taken full account of this principle. But it is necessary for us to make some further observations thereon.

The principle of the commensurate burden," as it has been called, unimpeachable in abstract statement, is exceedingly difficult to translate into quantitative measurement as a basis for practical action. While obviously sound and just, it does not easily admit of precise and arithmetical calculation. What at first sight seems to be a simple conception, on examination is found to be complex and in some respects not reducible to exact definition.

Now the ordinary expenditure which has to be provided for in the German budget is reduced in part by the restriction upon her military preparations, but above all by the practical extinction of her internal debt.

If Germany had sustained the burden of her own debt, as the allies have done, and not obliterated it by inflation. she would have had to raise 4 to 5 milliards per annum in addition to her domestic expenditure.

This would make it both just and practicable to add a provision in her budget which should bear some correspondence to the provision made in the allies' budgets for their war expenditure.

But the raising of any particular sum from one section of her inhabitants, to be paid back to another section within her borders. is a "burden" in a different sense from the payment of such a sum by the whole popillation to people abroad-different in more than the economic sense-and it is difficult to bring such a task into direct relation with the problem of reparations. It is a measure of what individual taxpayers, rather than a nation, may be capable of bearing.

In the first case the interest paid forms a part of the national income; as it is expended

it provides profits and a stimulus for internal trade and so increases further the income of the country, and in particular it is itself an important source of internal taxation.

A payment in respect of a debt to foreigners has no comparable advantages to the country making it. The extinction of the German debt has, after all, been at the expense of her own nationals, who are her taxpayers; they have sustained as holders of German bonds not only the burden which they have already escaped as taxpayers but that which they would have borne in future years to meet the service of the internal debt if its value had not been destroyed by depreciation. The process of extinction has indeed (except in its incidence as between different individuals and classes) had the same results both to the tresury and to the German taxpayer regarded collectively with a capital levy devoted to debt extinction.

The loss incurred by individual holders of debt is exactly offset by a corresponding profit accruing to the taxpayers as a whole.

It renders both practicable and just a greater charge for other war debts than would otherwise have been possible. A large proportion of the richest taxpayers of the country have obtained the relief without themselves sustaining the cost. They are a proper source of taxation commensurate with that weighing upon the corresponding classes in allied countries and in particular upon the industrial classes. To them as individual taxpayers a tax is a tax whether its ultimate destination is the payment of a war debt due to fellow citizens or to foreigners. And under the system we propose it may be regarded as a tax in internal currency without the complications which result from the question of how sums so received can be converted into foreign exchange. For this special problem we provide special safeguards. The German taxpayer should regard a payment in respect of war debt exactly as an allied taxpayer regards a similar payment. Its ultimate destination need not concern him, and is certainly no justification for him to attempt to evade it. The facts as to the burden actually being borne by the allies for debt service are perhaps a better approach to the actual problem. If the German burden per head for debt were as onerous as the burden for debt existing upon the inhabitants of Belgium, France, Great Britain and Italy taken together, then the German debt charge would approximate to 6 milliards. But in this case, again, the charge is to a considerable extent in the nature of a redistribution of annual wealth among the members of each nation and has little relation to the problem of a national burden in the collective sense.

In the third place, it may be said that if the German people were burdened as heavily as the members of the most heavily taxed of the allied countries are taxed for all purposes, excluding debt charge, we should have an expression of the commensurate burden principle in a limited and strictly defensible sense. But even here theoretical and practical difficulties prevent exactness.

In the search for the "commensurate" it is not enough to compute the burden as a per capita charge, it must be related to per capita wealth or income: it is considered by many that justice requires a "minimum of subsistence" to be first deducted from such per capita income: the amount of the minimum is not exactly determinable and it seems to vary as between different countries of different climates. different economic develop. ment and different customs, e. g., as between Spain and the United States; it may even vary between different periods in the same country. As a rough working assumption,

such a minimum may be regarded as varying in proportion to the per capita income of different countries. Futhermore. over any period of time this burden per head in the allied countries must change and what might be a valid comparison to-day in taxation in those countries may be quite different in ten years' time. The comparison of statistics of total taxation, national and local, in each country presents many technical difficulties. Moreover, statistics of total national income and income per head are at present either very defective or wholly lacking. Notwithstanding these difficulties it is possible to compute roughly what total budget charge would be borne by the German people if they were subject to taxation (central and local) on the same scale per unit of income as in Great Britain, and by deducting from the result the necessary domestic expenditure to derive an arithmetical balance which could be, theoretically at any rate, assigned to the payment of reparations.

Combining these various aspects, we have reached the view that the "commensurate burden" principle for Germany, when she is fully restored to economic prosperity, would more than justify all the practical conclusions we have set down and that they are in every way morally defensible.

There are, of course, good reasons of a political, economic and psychological charac ter for confining the actual requirements of budget accumulation within Germany to limits well below the figure that would be arrived at from the consideration of this principle by itself. Different individuals will differ in the degree of importance they assign to such reasons. It is perhaps unnecessary to state these aspects in detail and sufficient to register our united conviction that all our recommendations and suggestions are well within what can be morally justified on the principle of "commensurate burden," whatever limitations may be placed upon that principle. In this sense, therefore, the justice and moderation of our proposals ought to be fully recognized by the German people themselves.

the question of railway profits. In the above discussion we have disregarded Inasmuch as budget revenue is not derived from profits whether railway profits are a burden (in the on railways elsewhere, no question arises as to sense of a tax). tries form a part of the ordinary, profits of Such profits in other counit may be said therefore that in Germany the private concerns, accruing to individuals, and position of the taxpayer is the same, whether such profits go to individuals or to the allies as reparation.

On the other hand, the German railway profits might go in relief of taxation burdens if they were not applied to reparations. Moreover, it is difficult to say that the ab. straction of the profits of so important an undertaking as the railways of a country from that country, instead of leaving them there to be enjoyed individually or collectively by the inhabitants, is not a "burden" in the international sense, even if it is not a part of the individual commensurate burden of taxation.

(b) Export Statistics as an Index of

Prosperity.

In part I. we have suggested an index of prosperity and indicated that in our opinion it was a fairer test than the existing index: namely, export statistics. The use of the latter in isolation has certain definite defects. to some of which we desire to draw attention.

1. Foreign trade only covers part of the area of total trade, and if foreign trade at a given moment only covers a small part of the

area, total trade may be moving in a direction opposed to that of foreign trade.

2. Artificial conditions, such as alterations in transport charges, may affect the trade figure in the absence of any real change in the value or volume of exports.

3. The export statistics, more especially when no export duty is in force, may be subject to changes in presentation and frequently furnish material for controversy.

be reached, especially in a matter which to the Germans themselves is full of difficulty and doubt. Nevertheless, we believe that the ground has been explored to a sufficient extent to justify us in feeling that even a prolonged examination could not substantially alter our conclusions. To some of the more salient points we shall make particular reference.

The conditions under which the budget, estimates were made-It should, however, be first remarked that in general the budget must nec

5. In a country with an economic life such as that of Germany invisible exports may increase more rapidly than physical exports, and there may be a growing prosperity which is not reflected in export statistics.

(c) Measurement by Yield of Particular Taxes. We have laid some stress in part I. on the fact that certain revenues were chosen strictly as guaranties and that fluctuations in their yield were not to be regarded (save in 1926-27 and 1927-28 exceptionally) as determining the payments due by Germany. The following are the broad principles justifying this standpoint:

1. It is desirable that the German government and the German people should be themselves interested in increasing the yield of the controlled revenues and should be under no temptation to discriminate against these taxes in favor of others.

2. The year's liability, which under our plan includes an allowance for increased prosperity, will already have been established by one test, in which, moreover, the yield of the controlled revenues indirectly forms one element. Having applied one test, it would be unfair to apply a second and to choose whichever gives the higher result.

3. The year's liability ought not to vary with the fortuitous yield of particular taxes. The character and level of these taxes should be chosen with a view to their suitability as security and not with a view to their appropriateness for fixing obligations.

Unless the liability of the year is definitely fixed and unless the German government can proceed to estimate its resources by referenc to the whole and not part of the taxable field the difficulties of forming satisfactory budget are aggravated and German credit is affected.

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4. Common sense requires that the reparation liability ought not to rest even indirectly upon the rate of particular taxes, or otherwise every change in rates or methods of collection. even when thoroughly justified by social or political reasons. must be scrutinized with such a degree of care and perhaps su3picion that it becomes a fruitful source of friction and dispute.

the individual items in it somewhat arbitrary estimates. At the time of our investigation Germany was passing through an acute economic crisis, the direct result and the culminating point of a depreciation of the currency so catastrophic as practically to destroy the currency and reduce the budget to all but a shadow. The habit of saving has been destroyed, and it will require time and the restoration of confidence to re-establish it. The existing wealth is maldistributed in an almost unparalleled degree. The cessation of depreciation, with the consequent removal of the premium on export and the stabilization of prices at a level which is momentarily at any rate above that of the world level, has had important reactions. Finally, the state of employment and the fiscal and economic machinery of Germany have been violently deranged by the events of 1923: a return to normal conditions in this respect cannot be effected overnight.

Assumption underlying the budget-It should be most carefully noted that the budget is not made up to represent the financial expectations of actual existing conditions. As we have remarked above, the general budget as presented anticipates a credit balance, and the German finance minister appeared to be reasonably confident of his ability to live up to these estimates, provided three essential conditions were fulfilled:

1. That

the bank of issue which would serve as a basis for the grant of credits would be established.

2. That the full development of German economic life should not be restricted by the severance of the Ruhr and the Rhineland.

3. That Germany enjoyed complete freedom in her economic relations with other countries. The first and second of these conditions will be fulfilled if our recommendations are accepted, and they appear to us to be essential to budget equilibrium. As regards the third. we understand that Germany's commercial freedom is restored under the terms of the treaty in less than twelve months' time.

We are not. however, satisfied that the budget as framed is not exposed to a real risk of deficit. The German fiscal year begins on the 1st of April, and even if our recom mendations are accepted a certain lapse of time will be necessary before an absolutely normal administrative situation can be re

established.

For this, if for no other reason, we con

Fiscal System.

The 1924-25 budget-The German government prepared and submitted to us the outline of a provisional budget for 1924-25 which estimates a small excess of receipts over the ordinary administrative charges of the country.

While the committee have spent a great deal of time upon the details of this budget. and have put many questions in writing to the government and in oral cross-examination of the officials upon its chief features. the subject is so vast in its ultimate implications. especially having regard to the constitution of the reich. that no finality could possibly

the estimated revenue may not be realized. even allowing for certain possible underestimates under particular headings.

On the expenditure side, the only item on which a saving may emerge of any great significance relatively to the possible deficit is the provision of relief for unemployed. The sum allocated to this purpose (500.000,000 gold marks) is estimated on the assumption that the existing amount of unemploy ment will continue throughout the year. It appears to us that this is unduly pessimistic and any reduction in the number will both relieve the expenditure, and the revenue side of the budget, inasmuch as the wages earned