i r-'S^t-i^?' 't'H';;';'- ' '■' ' W.KJJ,,,1.„ ECONOMIC STUDIES OF THE UNIVERSITY OF CHICAGO NUMBER I. IN PRESS ■ No. II. HISTORY OF THE UNION PACIFIC RAILWAY I Bv Henry Kirke White No. HI. THE INDIAN SIL\'ER CURRENCY By Karl Ellstaetter. Translated from the German by Professor J. Laurence Laughlin IN PREPARATION No. IV. HISTORY OF THE LATIN UNION Bv Henry Parker Willis THE SCIENCE OF FINANCE BY GUSTAV COHN TRANSLATED BY T. B. VEBLEN ITNIVERSITT CHICAGO ^Tfte Sanibersttp of OTijicaao ^ress 1895 Copyrighted by THE UNIVERSITY OF CHICAGO 1895 E\)c El luD c r B 1 1 J! of (ff 1j 11- a 11 JjJ r c g s AUTHOR'S PREFACE TO THE ENGLISH TRANSLATION. Under the auspices of the University of Chicago, Dr. Vcblen has made a translation of my System dcr Fhianzwissenschaft, which he is about to publish with the approval of the German publisher. In response to a wish expressed by the translator, I do not hesitate to say that a reading of the j)roof-sheets has satisfied me (so far as I am a competent judge) of the excellence of the translation. I can therefore only express the hope that my book may in this new form meet with as cordial a welcome beyond the sea as has alreadj_.heen accorded to many books of mine in the original. /^ ^ ci tmf ^ \ fUNIVERSITT) G. CoHN. GOTTINGEN, X^^^ Q.. ?^,-..: January 1895. TRANSLATOR'S PREFACE. This translation of Professor Cohn's System dcr Fi7ianzwissefi- scJiaft aims to be a faithful rendering of the original, without abridgment or alteration, except such as the exigencies of diction and the differences in terminological usage in the two languages have made unavoidable. In cases where the absence of an Eng- lish equivalent for a technical or quasi-technical term emploved in the German has necessitated an arbitrary rendering, as well as where the insertion of the corresponding German word or phrase would aid in conveying the exact sense of the original, the Ger- man words have been added in brackets. The Third Book, dealing with the German Tax Legislation of the Present Time, has been omitted ; the reason being that this Book is entirely historical in character, and as the German edition is now some six years old an English translation would not serve its purpose, as a description of contemporary German fiscal institutions, at all satisfactorily without extensive revision, such as the author finds it impracticable to undertake at the present time. Moreover, Professor Cohn's peculiar theory of finance and of the state, which it is the prime purpose of the translation to present to English readers, is complete without Book in. To facilitate reference, the numbering of the sections has not been changed, the section numbers comprised in Book III. being simply omitted. Section 173 has also been omitted, for the reason that the discussion at this point in the original turns on a nicety of language which is not reproducible in ^^\^%- lish. The omission, it is hoped, involves no substantial loss. (vii) viii TRANSLATOR S PREFACE. The dedication contained in the original has been omitted and an index has been added. In so far as the translation accomplishes its purpose, its suc- cess is in no small degree due to a careful revision of the proof- sheets by Professor Cohn, who has been good enough to read the whole and to make such emendations as might be necessary to bring it up to date. My thanks are due to Miss Sarah McLean Hardy for the correction of many obscurities and crudities in the translation and for assistance in reading the proofs while the book has been going through the press. I wish also to acknowl- edge the courtesy of Mr. Ferdinand Enke, the publisher of the German edition, in very cordially consenting to the publication of this English edition. T. B. Veblex. University of Chicago, March 1895. CONTENTS. INTRODUCTION. Chapter I. The Place of the Science of Finance in Economic Science. The Independent Cliaracter of the Science of Finance - - - - 3 The Relation of the Science of Finance to Political Economy - - ii Chapter II. The Historical Development of the Science of Finance. Cameralistics and Financial Science - - - - - - - I5 Modern Financial Science - - - - - - - - - 24 BOOK FIRST. The Public Economy. Chapter I. The State and the Public Business. The Evolution of the State ......... ^g The Development of the Functions of the State ----- 58 Chapter II. The Historical Development of the Public Economy. Private Economy and Public Economy ------- 77 The Public Economy in Process of Growth ----- ■ 82 The Public Economy in Developed Form- - - - - - - 103 Chapter III. Different Kinds of Public Contributions. Analysis of the Services Rendered by the Public Administration - - 128 The Various Kinds of Compensation - - - - - - 145 Chapter IV. The Structure and Financial Relations of Public Organizations. The Structure of the Commonwealth - - - - - - - 165 The Causes Affecting the Structure of Public Bodies - - - - 170 The Financial Relations of the Members of the Commonwealth - - 181 Chapter V. Self-Government and Voluntarism. The Nature of Self-Government - - ig^ The Finances of Self-Government 207 Voluntary Aids - -- - - - - - - - -215 (ix) X CONTENTS. Chapter VI. Order and Sequence in the Public Economy. Classification of Public Wants 222 The Defrayment of the Public Expenditures 227 The Formal Organization and Management of the Public Economy - - 246 Chapter VII. The Various Kinds of Public Requisitions and Expenditures. The Development of Contributions and Expenditures in Kind into Contri- butions and Expenditures in Money, and the Limits of Each - - 250 The Civil Service - - - - 253 The Financial Character of the Several Branches of the Administration - 268 BOOK SECOND. The Theory of Taxation. Chapter I. The Justice of Taxation. The Right to Tax and the Obligation to Pay Taxes . . , - 285 The Principles of Equitable Taxation - - - - 291 The Historical Growth of Equitable Taxation . . . . . 300 Conflicting Taxation ---------- 332 The Justice of Compensatory Taxes ------- 342 Chapter II. The Objects on which Taxes are Laid. The Sources of Taxes and the Objects of Taxation ----- 352 The Shifting of Taxation --------- 365 Chapter III. The Historical Forms of Taxation. The Single Tax and a Plurality of Taxes ------ 374 The Early Personal Taxes - - - - - - - • - 381 Tolls - - 389 The Excise ------------ 398 Stamp Taxes ------------ 422 Monopolies --------- . - - 4^1 Objective Taxes ---------- 458 The Income I'axes of the Nineteenth Century ----- 485 Chapter IV. The Tax System. Conspectus of the Various Kinds of Taxes - - - - - - 521 The Taxation of Earnings --------- 535 The Taxation of Property or Possessions -■---.- 566 Taxes on Consumption ---------- 576 Chapter V. Tax Administration. Administration of the Tax System by National and by Local Authorities - boo The Ascertainment of Taxable Objects - - - - - 612 The Collection of Taxes ---------- 524 Book Third, (merman Tax Legislation of the Present Time, is omitted from this translation. CONTENTS. XI BOOK FOURTH. Public Credit. Chapter I. History of the Public Credit. The Early Development of Public Debts in Europe - - - - • 6.^7 Outlines of the Evolution of the Public Credit . . . . . ()jq The Development of Public Credit as Reflected by Cuntemporaty 'I'heorv - 691 Chapter U. The Public Credit of the Present Time. The Present State of the Public Credit -.---. 727 The Various Kinds of Public Debts - - - - - 73S The Stock Exchange and the Management of the Public Debt - 754 Government Paper Money and the Resumption of Specie Payments - - 7S0 Index 795 INTRODUCTION. THE PLACE OF THE SCIENCE OF FINANCE IN ECONOMIC SCIENCE. or THE ^ UNIVERSITT CHAPTER 1. THE PLACE OF THE SCIENCE O^ FINANCE IN ECONOMIC SCIENCE. Literature. Lorenz von Stein, Lehrhuch der Finanz^vissenschaft , 5. Auf- lage (1885-86), Erster Theil, pp. 1-49. Adolph Wagner, Finanzwissen- schaft,3. Auflage (1883), Erster Theil, sees. 12-20. G.dotva, System der Natio7iaidkonornie, Erster Band {Grundlegtmg), 1885, pp. i\-ii, sees. 192-197, 213-216, 284, 290-292, 298-304, 329-333. 396-403. I. THE DEPENDENT CHARACTER OF THE SCIENCE OF FINANCE. § I. A consensus will gradually be reached as to the purport of science generally : what its sphere may be, what is its sub- ject matter, its content, its attainable goal. The doubts and misconceptions that arise in the course of a discussion of this kind, usually- — apart from tenets that simply negative all approach to an understanding — have their ground in peculiarities of the field of view with which the scientists occupy themselves. Not without difficulty, but still not without some ultimate result, may we seek to bring about a reconciliation between the ideas of the jurist and the physician, the historian and the natural- ist, the investigator and the systematician. These are, when all has been said, nothing but the refracted rays of which the perfect light is made up; and there is, after all, nothing needed beyond such an exercise of good will as shall enable each to view his own contribution to the whole from a more comprehensive standpoint. This has been the purpose of certain remarks that have been inserted in their proper place in the GniJidlegimg that forms part of the present work. The very general character of the point of departure, as well as the elucidation of the subject matter by means of material from outside, is due to the presence of such a purpose ; this applies especially to the chapter on The Method- 3 4 THE SCIENXE OF FINANCE. ology of the Social Sciences and of Political Economy in par- ticular \^Die MctJiodologie der Staatsivissenscliaften iind der National- okoHomie insbeso?idere^, and to the succeeding chapters on The Place of Political Economy in the Circle of the Sciences \^Dic Stellung der Natiofialokomie i?n Kreise der lVissetischaften\. More difficult is the question, What constitut es an indepen- dent science ? We might with a good conscience evade this difficulty if the question were an idle one. But that is not the case. The question of the dependence or independence of a given field in the general domain of science has somewhat the same importance as the analogous difference in the relations of states to one another. As, according to Aristotle, it is a characteristic of the state that it should be self-sufficing, so it must also be taken that an independ- ent science is such a portion of the aggregate of scientific knowl- edge as is complete in itself, and which therefore does not in its essential nature depend on support from without. Just as those commonwealths are in a sad plight, in process of disintegration or of becoming, whose existence depends on the tutelage of a greater state, or on the dissensions of their neighbors ; so also is that science on a precarious footing that is obliged to depend largely on resources of knowledge that lie outside its own domain. Such a science simulates independent existence, while it is in reality dependent, and should therefore properly abandon its boundary lines. Or worse still, it feigns life while it is in reality cut off from the source of life. § 2. The difficulty of the question as to the independence of a science is due to the causes mentioned below. I have already reviewed the course of historical development (vol. i. sec. 63) and shown how science only slowly and grad- ually frees itself from the interested thinking of every-day life and becomes an end pursued for its own sake. Every-day expediency does not concern itself with underlying principles but only with the ready applicability of its maxims, and the most immediate and pressing cares of life are j)recisely the ones INTKODUCTION. 5 which, as regards the principles involved, call for a union of the most divergent points of view. It is therefore this independent, practical purpose or need that urges to the establishment of an independent science. And this sort of independence has, more- over, the weight of a prior title in its favor ; inasmuch as it is the practical aim that first gives occasion for reflection. And so long as human inquiry remains under the jurisdiction of expediency, as in spite of all past progress it still does today, it will be exceedingly difficult to bring these venerable traditional sciences to a reckon- ing. The result is that we find the sciences ranged in groups, departments and branches, in a fashion that is altogether unin- telligible except in the light of this fact. The chief institutions devoted to the development and perpetuation of the sciences all bear the mark of this relation. And this bustling expediency stands ever ready to erect out of every fresh acquisition of knowledge new sciences, constructed after its own heart, whose lack of venerableness is made up for by the superabundance of popular applause awarded them. A second ground of difficulty is the fact that no science is independent in the sense suggested by the analogy of national autonomy. Under the harsh exigencies of national life as we actually find it, the ideal of the solidarity of mankind may have to give way before the boundaries of such national units as are possible for the time being. In science, whose office it is to bring about a progressively wider and profounder knowledge of all being, and so to gain an ever deeper insight into the funda- mental unity of all knowledge under a single comprehensive synthesis, — in science no such exclusiveness is ])racticable, and every considerable innovation in methods of research or of gen- eralization rudely upsets the complacent self-sufficiency of a hard and fast classification. But this factor of comprehensive generalization is constantly traversed by the other equally inevitable need of all advancement of knowledge, viz., increasing intensity of culture — to borrow a phrase from the vocabulary of industry. As in agricultural industry the magnitude of an estate is not to be measured by 6 THE SCIENCE OF FINAN'CE. a geographical, but by an economic standard, it being quite pos- sible to conduct a large industry within a relatively narrow space, if only a high development of human industry has been attained, — so also in science. A narrowing of the field of its labors, such as will correspond with the limitations of its intel- lectual gifts, is a condition prerequisite to profitable application on part of the average talent employed in the scholar's trade today. The absence of perspective in this bustling activity gives rise to independent sciences that contain but scant suggestion of the profounder unity of all knowledge. But so potent is the tendency that finds widespread and conscious expression in these phenomena, that any effort in behalf of more comprehensive synthesis of the particular under the general finds it exceedingly difficult to effect even a reconciliation of the part with the whole. § 3. Under these circumstances it follows that the concept of a science as an independent department of the aggregate of sciences will always be subject to variation. It varies with the point of view to which we may be accustomed, and it varies even within the same group of thinkers and in the same period of time. It is in a state of absolute flux if account is taken of the passage of time and the changing circumstances indicated by the divergent points of view above referred to. It is therefore bootless to attempt to draw hard and fast boundary lines between the sciences ; such lines cannot be maintained. But one thing is always possible, and is at the same time necessary. It is that every particular fragment of knowledge which puts forth a claim to rank as a distinct science, whether on grounds of the practical purpose it serves, or of usage, or of specialization, should not only be considered as belonging to the general domain of science, but its fundamental elements should "be brought into vital connection with the greater whole. Only in this way can the roots of a special science be kept from drying up. Only in this way can we insure to the special science that INTRODUCTION. 7 substantial vitality which is the essential object sought in this straining after an " independent" standing. Hence we see what we see during these latest times ; — that the advance of research and the profounder insigh-Lgaioe.d, by "titliploynienlof the latG^sTmHlTo'Js'are upsetting the fancied inde- pendence of whole groups of these special sciences and replacing it with a comprehensive relation of dependence. This is what modern Natural Science teaches, when the traditional boundary lines of Medicine, Botany, Zoology, etc., have to be readjusted after every new step in advance, when Chemistry and Physics draw closer together as the potent force of sweeping generalizations based on the great mass of material furnished by research comes to the front. Something similar, though hampered by the difficulties inher- ent m a complex subject matter, is to be remarked in the case of our own science. There is no contradiction in the fact — it is rather the f ruit of an improved method of research — that the latest developments of our science have been characterized on the oTTt: hand by an affectionate attention to the historical material bearing on economic life, and on the other hand — and at the same time — by a broader and more comprehensive view of the nature of all econoniv. An attempt has been made if\ the first vol- ume of the present work to form an estimate of the value of this evolution, and, so far as in me lies, to contribute some- thing towards its furtherance. We shall simply be contin- uing the work on the same line in doing the like for the Science of Finance and placing to its credit what has been accomplished for the science. Just as Political Economy has been traced back to its deeper-lying sources, and has therewith been advanced beyond its narrow traditional limits, so also the science of finance may claim the like within its field after its achievements have likewise been assimilated into the body of the profounder con- ceptions of all social life. § 4. That the Science of Finance is a part of Political Econ- omv is a long-accepted fact. 8 THE SCIENCE OF FINANCE. There is an objection of a trivial character that may be raised at this point, an objection based on the varying meaning attached to the term "'"^ToTitical Economy." Since the term has been applied now to economic science as a whole, now to the funda- mental (general) part of the science only, it has not rarely hap- pened that the Science of Finance and Political Economy have been contrasted with one another as parts of a greater whole. The like was done more intentionally and consciously by K. H. Rau and his contemporaries and followers when they contrasted the Science of Finance with Economic Science [ Volkswirthschafts- lehre^. Indeed, the contrasting of the two was in this case the result of a well-defined purpose, and was consistently adhered to ; Economic Science as a whole being designated " Political Econ- omy " \_Politisclie Oekonomie^ (similarly of late in the Handbuch der politisclien Oekonomie of Gustav Schonberg, 1882 ; 3. ed., 1 890-9 1 ) . The aim was to call attention to the difference between an ostensible " pure theory " and its application in the practical working of political affairs. Neither a purpose of this kind nor the varying usage of the terminology must, in view of the conclusions reached in the first volume of the present work, be allowed to mar the simplicity of the relation in vjrtue of which we have here to do with a general and a particular, a whole and its parts; — with parts, of which the Science of Finance is one ; with a whole, which is Political Econ- omy. For everything contained in the discussions that follow is but a more detailed elaboration of the general outlines that have already been laid down in the first volume. This view corresponds in the main with the views held at the time when an independent science of economic life first made its appearance. Even the creators of the new science, the Physio- crats, ' made the theory of taxation the corner-stone of their theory of economy, and so incorporated the Science of Finance indis- solubly into the structure of the system. Adam Smith devotes the fifth book of his Inqidry into the Wealth of Nations to The Revenue of the Sovereign or Commonwealth, and English manuals 'See vol. i. sees. 71-73. INTRODUCTION. 9 have to this day followed the tradition initiated by him. So John Stuart Mill, in his Principles of Political Economy, likewise devotes his fifth and last book to the same subject, and he even unmis- takably follows Adam Smith in his arrangement of details, only he introduces discussions of a general character on the influ- ence of the government upon industry. A separation of the part from the whole has not hitherto been attempted in England, for the reason that the slightness of the subsidiary structure has offered no temptation to a claim of independence. There has also been no work, worth mentioning, which treats separately of this subject.' § 5. The place of Financial Science in the general science of Political Economy has also been questioned on other grounds. A treatment of the subject that makes the distinction between " Social Sciences " and the " Political Sciences " its point of departure relegates Political Economy to the former head, the Science of Finance to the latter. My opinion regarding the con- trasting of these two great groups of sciences has been expressed in the proper place (vol. i. sec. 54). Among the consequences of making this distinction would be that the treatment of private law would come under the general head of the social sciences, and that of administrative and public law generally under the head of the political sciences, — a separation of things that belong together such as is manifestly untenable when we consider that precisely the latest advance in jurisprudence goes to show the impossibility of drawing any line between so-called private law and so-called administrative law. In like manner the latest progress of Economic Science places the state in such intimate relation to the factors of the social economy that any classifica- tion of the subject matter to be dealt with which places the State in contrast with Society becomes no less false in theory than it is in actual life. Such a distinction would be tenable only in case we had a science of the instinctive movements and activities 'C. F. Bastable's Public Finance (1892) has>«f|r5P'4.^B^r~^H^e this was written. [Tr.] f^ '" c t^^ -^ ■ 10 • THE SCIEN'CE OF FINANCE. of society (such as Sociology actually claims is possible), which could then be contrasted with the ethical " ought " as applied to the state. This question, however, has been so fully discussed in the general portion of the present work as to leave nothing more to be said about it at this point. A much nearer approach to the real facts of the case is made in the observation that when the matter is viewed from the standpoint of the national administration we find ourselves con- fronted with a special phase of social life and a special problem, which require that the science should be treated as a political science in the narrower sense, and that hence arises a group of political sciences, in the narrower sense, which treat of the various phases of the political range of activities. But even if this be granted, a useful purpose will be served by this classifica- tion only in so far as the special science takes up a special subject matter for scientific treatment ; so that the political sciences, in this narrower sense, will accordingly have to take up the particular institutions that go to constitute the state and through which the state acts. It then becomes a question between these "political" sciences and the other special sciences, how far the latter are to be deprived of their substance for the benefit of the former. It results that a theory of the State, of the Constitution, of Administration, may be developed up to a given point out of the principles special to the State as such ; while beyond this point we pass to ground where these principles alone will no longer serve our purpose, and where recourse must be had to knowledge drawn from elsewhere. It is at this point that Jurisprudence, Economic Science, and Natural Science come in and demand recognition, the one or the other of them, accord- ing to the particular sphere of political activity under consider- ation. The like is true of the Science of Finance. We may approach the public economy from the summit of the political structure as well as from the lower-lying fields of the economic life of the people. But the knowledge required in order to a scientific treatment of the public economy remains the same, and it INTRODUCTION. I I depends, in a greatly preponderating degree, on an understanding of what goes to make up the economic life of the people. If, now, both these avenues of approach are open to us, the logic of our method decides us in favor of the one which affords the more vital connection between the fundamental elements of the problem. II. THE RELATION OF THE SCIENCE OF FINANCE TO POLITICAL ECONOMY. § 6. A few words will be necessary to justify the classification here insisted on. In the Introduction to the general doctrine of Political Econ- omy contained in the first volume of the present work, it is attempted to lead up to the general body of the science by means of the following named chapters : An Exposition of the Scientific Method necessary to the Attainment of Truth in our Branch of Knowledge, The Relation of Political Economy to the other Sciences, The Historical Development of the Body of Doc- trines, Fundamental Concepts. The unity of part and whole — of the Science of Finance with Political Economy — has been so fully pointed out in the Doc- trine of Method that there is no need of repeating here, in con- nection with this special point, what has already been said in discussing the general subject. It mav therefore be sufificient simply to refer back to the earlier discussion. The meaning and import of the general principles, set forth after the fashion of the old school of thought ; the relation of deduction to induction, of hypothesis to empirical knowledge ; and more especiallv the value of financial history and financial statistics for the purj)oses of the Science of Finance; — all this could be intelligibly dis- cussed only with the aid of appropriate illustrations, and bearing in mind what has already been said in the general portion of the work. But this would necessitate a great deal of repetition, which will best be avoided bv simply referring back to the general introduction for the whole matter. 12 THE SCIENXE OF FINANCE. I flatter myself that in this preliminary exposition, and more especially in those portions which touch the relation of what ought to be to what is in social life, I haye said much that may be of substantial assistance toward clearing up existing miscon- ceptions. This exposition has set aside that customary disrup-" tion of our science into a duality of problems, which is wont to insist on directing our attention at one time exclusiyely to the historical-statistical materials furnished by investigation and to their causal connection, and at another time to the solution of the questions of the day. The fallacy of this position has been exposed both as regards the Science of Finance in particular and as regards Political Economy in general. It has been set aside both in so far as its outcome is an historical quietism that ignores the presence in all the subject matter of history of a ceaseless drift in the direction of what is to be ; and it has also been set aside in so far as its meaning is a clamorous demand for innova- tion, which, under the pressure of the impulses of the moment, overlooks the continuity of the past with the future. The bring- ing of these conflicting elements into harmony in the science and in the affairs of life, is the reall}' conclusive test of the value of this preliminary methodological exposition which might seem to the superficial glance to be but an idle speculation. As in the second chapter of the general introduction we dealt with the position of Political Economy within the domain of science generally, so here we shall attempt to trace more in detail the connection between the general science of Political Economy and the Science of Finance. In so doing we shall indicate the place held by Finance in the group of sciences that treat of industrial life. In performing this task we shall find that the fundamental principles peculiar to the Science of Finance will come to light of their own accord in the course of establishing this connection of the part with the whole, some- what as was done for the general sciences of Political Economy in the fourth chapter of our general introduction. The historical development of the science, together with the necessary indication of tTie more important literature of the sub- INTRODUCTION. 1 3 ject will also claim a chapter in this special introduction to the Science of Finance, just as was found necessary for the Science as a whole in the general introduction. § 7. The lines of connection between Political Economy and the Science of Finance arc the following: In the first general subdivision of this work, which treats of the elements of industrial life, the central fact is The Wants of the People. Even at that point it was found necessary, in order not to leave unnoticed a factor of great consequence in the col- lective needs of any coi7imunity, to speak of The Demands of the Public Economy and to indicate their chief objects and aims (vol. i. sees. 213-216). The same chapter discusses the orderly relation and comparative importance of wants considered from the general economic standpoint, and at the same time, in dealing with the general problems of industrial society, it touches also upon the peculiar features of the public budget (vol. i. sees, 192- 197). These several lines are taken up in the first book, treating of the Science of Finance, the first chapter of which, under the head of The Nature of the Public Economy, treats of the state and its functions, while the sixth and seventh chapters of the same book treat of Order and Sequence \^Ord)mng\ in the Public Economy, and the Various Kinds of Public Expenditures and Demands \^Bedarf^. But there are also other points at which work done in the first volume will serve in the way of introduction to the discussions of this first book : as, c. g., the discussion of The Structure and Activ- ities of Industrial Society [^Gestaltung desWirthschaftslebe/is^, which takes up the state as a constituent factor in the moral svstem (sec. 284); and again, under the head of The Organization of Social Life S^Gliederung des Zusammenlebe7is\, where trade and other associations [ Vcrbdnde^ are treated of in connection with so-called free competition (sees. 298—304). Both topics are taken uji again in the first chapter of Book I. following. The question of voluntary action or coercion in public affairs is 14 THE SCIENCE OF FINANCE. dealt with, partly in the discussion of associations (sees. 301-302) partly in treating of business activity (sees. 290-292). The fifth chapter of Book I. is devoted to this question. In its treatment of self-government, it also connects with the discussions of the chapter on the Division of Labor (sees. 246-247). What has been said in the general portion of the work, under the head of The Disposition of Society into Groups, with respect to The Development of National Unity and of a Com- munity of Nations (sec. 329-335), is taken up again in the fourth chapter following, in discussing The Structure and Relations of Public Bodies \^Gliedertmg der dffefitliche?i Verbdnde^. Finally, the great problem that forms the main topic of every system of financial science, the theory of taxation, has already received due attention in the general theory of prices, under the head of The Determination of Value within Public Bodies \^Die WcrtJibestimrming in dc7i Verbdnde7i\ (sees. 396-403). The third chapter of Book I. connects with this discussion in treating of the various classes of contributions to the public expenditures. And two entire books of the Science of Finance (Books II. and III.) are occupied with the theory of taxation, general and special. While Book IV., finally, on Public Debts, is based on the general theory of credit previously discussed (vol. i. sees. 415-423). This then is the relation of the general to the special portion of the work. CHAPTER II. THE HISTORICAL DEVELOPMENT OF THE SCIENCE OF FINANCE. Literature. W. Roscher, Geschichte der Nationalokonomik in Deiitsch- land, 1874. A. V\I a.gntx, Finanswissensc haft, J. A ujf age, Erster Theil (1883), sees. 21-30. G. Cohn, Systetn, voL i. sees. 63-122. I. CAMERALISTICS AND FINANCIAL SCIENCE.' §8. It lies in the nature of things that the pre-scientific stages, preparatory to the development of a science, follow the inexorable law of growth which governs human thinking as well as the phe- nomena of life generally, and so present results that look paltry when viewed from the standpoint of later, fuller development. 'Grimm {W'6rterbuch,yo\. iii. p. 1639) has been unable to find the word "P'inanz" in German literature prior to the sixteenth century, and finds it constantly used in an evil sense, equivalent to cheating, deceit, etc. So used even by v. Seckendorf {^Der Teutsche Fiirstenstaat, 1656). Only in the seventeenth century did this evil meaning of the word gradually disappear, and only in the eighteenth did the term come to be narrowed down to designate the revenues of the state, — as, e. g., in Justi. While in the vernacular even today (in Germany as well as abroad) the broader meaning of early times, though not with the evil connotation, is still retained. The etymological derivation (Diez ; Etymolog. Worterbuch der romanischen Sprachen, 3. Aufl. 1869, vol. i. p. 180) is from finis, which in Low-Latin denotes end, peace, conclusion of any matter, and so payment ; — Old French yf«,- English fmQ^compositio. Hence in Low- Latin we have the dtr\\3i\.\\t financia^firastatio pscuniaria, money payment generally. Closely analogous to this etymology is that of pagare, payer from the Latin pacare= pa.c\iy= solvere (Diez, vol. i. p. 300). In English the signification of the word "finance" remains to this day, even in scientific usage, a very variable one. So, e. g., the widely-accepted Chambers' English Dictionary (edited by James Donald, 1872) defines "finance": "revenue from fines or compulsory payments, public money, the science of public revenue." But even very lately (1886) a well-known English econo- mist and statistician, Robert Giffen, uses the title "Essays in Finance" for a collection of papers which contain no financial matter whatever (in the sense understood by the Science of Finance), but which treat exclusively of such topics as Trade Depressions, Gold Imports, Bank Discount, Progress of the Laboring Classes, The Increase of Wages, and the like. IS 1 6 THE SCIENCE OF FINANCE. Human thought in its best estate, as knowledge of the world spontaneously sought for its own sake, comes within the horizon of mankind only at a relatively late date. And even when this point is attained, there are but a very few among any people to whom the consciousness of its presence penetrates. The great majority even of those who call themselves the cultured class ask what is the useful purpose of knowledge, and grow impa- tient if the practical application is not forthcoming ; while any such tangible utility is hailed with unquestioning enthusiasm, as may be seen in the case of the natural sciences today. During the early stages there is simply no mental effort put forth, save that which serves an immediate useful purpose, and the nearer we approach the beginnings of culture the more undisguised is this practicality of purpose. The thinking is but the employment of an untrained fancy on a scanty experience, but these deliverances of fancy bring out the homely practicality of its purpose in all the more glaring a light. Such has also been the course of development of our science. And, more especially, such has been the case with respect to that portion of the science with which we are here occupied. The last stage of this pre-scientific period of thinking is the outgrowth of a system of management which the supreme organ of practical life, the state, developed in order to carry out its purposes. It was the best intellects employed in this administra- tive work that prepared the way for scientific thought. The name which this system of thought goes by is the well- known term, "Cameralistics" \^Kamerahvissenschaft\. §9. Johann Heinrich Gottlob von Justi,the most important rep- resentative of Cameralistic Science,' in his StaatswirthscJiaft {ox Sys- ^Yox the earlier literature of Cameralistics I may refer again, as I have already done in the first volume, to Roscher's Geschichte der Nationalokonomik in Deittschlami. I have, at the proper place (vol. i. § 63 et seq.\ indicated the reason which has decided me not to take up this literature in detail. It is always possible, if one only approaches the task with a sufficient enthusiasm, to discover in the early Cameralists expressions of a pretty adequate insight into the nature of the economy of society and of the state. Still, even apart from the fact that such an accomplishment is a rare INTRODUCTION. 1 7 tematiscJic Abhaiidlung aller dkonomiscJioi und Kamcrahvissenschafte7i, die ziir Regicrung eincs Landcs crfordcrt iverdcn, 1755) speaks of Colbert as the greatest of finance ministers, probably, that has ever lived, and for the reason that, like the true-bred Cameralist that he was, he strove to improve the country and enrich it with commerce and manufactures, and so enable it to bear a heavier burden of taxes, he having actuallv increased the royal revenues threefold, as compared with what they were at the time when he entered on his ministry.' In all this Justi has simply reflected the ideas which domi- nated the times in which he lived. The wealth of the people and the people itself (which for its part was part and parcel of the state ^) was treated of solely from the point of view of the state's revenues. The furthering of the people's well-being is but a means to the ends of the state. Proceeding on this ground Justi divides his work into two parts, the first of which treats of The Theory \^Lehre^ of the Maintenance and Augmentation of the Wealth [^Vermogen] of the State ; the second, of The Theory of a Judicious Use of the Wealth of the State. The topics dis- cussed in the first part are : State-Craft, The Science of Public and Commercial Regulations, together with "Economics" \^HausJialtungskiuisf\\ the second part deals with "Cameral, or Financial Science proper." Here we find Cameral Science in the narrow sense con- trasted with the Cameralistic Sciences in the broader sense, and used as a synonym for Financial Science. and creditable deed, one ought to carry the investigation undertaken so far toward completion as not to leave oneself liable to too jarring blunders. Such a blunder seems to me to have been made by Lorenz von Stein in speaking of "Klock's potent personality" {Finanzarchiv, 1884, p. 30) as the creator of German financial science; when the earlier literature of the subject is at pains to say of him that "his greatest service is that he has looted and plagiarized Faust's Consilia in an altogether uncon- scionable fashion, without giving the man the slightest credit" (Karl Ileinrich Lang, Historische Entwickelung der Teutschen Steuerverfassungen, 1793, p. 10), a statement which is enforced by a series of citations, some of them covering as much as some forty-eight pages. This same Faust is to Stein's mind "of pretty slight consequence compared with Klock." 'Vol. i. p. 18. n'ol. ii. p. 5. 1 8 THE SCIENCE OF FINANCE. The subject matter treated of by this science is as follows : The first book, which occupies two-thirds of the whole work, treats of the procuring of means required for the expenses of the State ; the second book, of the expenditures of the State ; the third book, of Administration, that is to say, of the organ- ization and management of the cameral mechanism. In his discussion of his main topic, the procuring of revenue, Justi rejects the traditional distinction, based on a legal distinc- tion, between the exchequer [^Fiscus~\ and the treasury \^Aera- riujn\. The revenues of the exchequer, which included more particularly the crown lands and the royal prerogatives, were to be applied particularly to the maintenance of the sovereign's person and state ; the revenues of the treasury on the other hand were to serve for the public defense and to further the public welfare, the former being under the control of the exchequer, the second, as being the produce of contributions granted by the estates, being under the supervision of represent- atives of the nation. This distinction, which, in Justi's time, "was in nearly all countries treated with little or no considera- tion, has no substantial foundation in the nature of things, and is therefore of small consequence for the theory of the revenues of the state." All expenditure on the part of the state has but a single, common purpose, viz., the furtherance of the state's welfare ; and the personal maintenance of the sovereign falls under this head just as much as all other expenses. The ordinary revenues of the state may, according to Justi, be treated of much more in accordance with their true nature if we classify them according to their source and their purpose. The sources of revenue are four. The first consists of estates belonging immediately to the sovereign or the state (crown lands, domains); the second source of revenue is dependent on rights and privileges pertaining to the crown or to the state's sovereignty and attaching to property held by the state. These rights had their chief ground and purpose in the furtherance of the public welfare, but they had at the same time an important secondary purpose in the revenues to which they gave rise. INTRODUCTION. IQ These go by the name of Royalties [Regalia^ The third source is that of the contributions made by the subjects toward the great expenses of the government out of their private means (which at the same time are part of the aggregate wealth of the state). This contingent goes under the names of Contributions, Taxes and Imposts. The fourth source, finally, arises from cer- tain prerogatives whose purpose is not so much the revenue derived from them, but which nevertheless incidentally yield a revenue. As in his rejection of the formal, legal distinction between the exchequer and the treasury, so also in the great prominence he assigns to taxation as contrasted with domains and royalties, Justi stands forth as a leader of the new era. But also in point of theor}' he approaches closely to the true scientific standpoint of Financial Science, when he holds that the wealth of the state is mostly in private hands, and that this wealth would shortly be destroyed if its substance were applied to meet the expenses of the state; that accordingly the "usufruct" of this property, the "earnings" alone must be so employed ; and that, inasmuch as the subjects must also draw their livelihood from their earnings, only a part of the earnings can be appropri- ated to the expenses of the state. But if Justi has herein done his part toward supplying to the subject the systematic treatment which he felt the absence of (he expresses astonishment, in the introduction to his work, that philosophical minds had not previously concerned themselves with Cameralistics), his French contemporaries, the Physiocrats, took up the philosophical consideration of the matter with still more decided results. § 10. The Physiocratic theory of taxation has this much in common with the Camcralists, that in the one case as in the other the needs of the state furnish the point of departure for their economic speculations. In the one case as in the other the idea of the state is struggling to assert itself and seeking the means needed for its administrative work. The 20 THE SCIENCE OF FINANCE. Cameralists find that the way to accomplish their purpose is to enrich the country in order that it may the more readily bear an increase of imposts. The Physiocrats, as a consequence of the reactionary movement against the increase of national imposts, deny the necessity of any such increase. But in this matter they are not always consistent. Turgot, for example, had quite extravagant notions of the state's duties in the matter of public instruction ; so that in this respect he is well abreast of the mod- ern socialists. The Physiocrats recognize the need of the impost in each individual case and seek to so strengthen the national industry as to enable it, if not to bear an addition to its burdens, at least to afford the existing revenues without diminution. They therefore look upon the nation's industry with the eyes of a sovereign who, in the spirit of the shrewd manager of a private business undertaking, strives to get the highest and most per- manent net product possible from the business, and seeks to reach this result by dealing as gently as may be with the productive agencies under his control, and more especially with his work- men. Every sacrifice demanded of any one link in this chain of productive forces acts to the detriment of the aggregate pro- ductive power. Hence a view of taxation, the aim of which is to avoid such disturbances of the process of production by placing the burden, by means of the "single tax" [impot unique), directly on the surplus product of industry, on the net product. Plainl}^ according to this view, taxes which bear upon the personal necessities of the producers are obnoxious to the same criticism as holds against taxes that interfere with the process of produc- tion by putting the burden on raw materials, machinery or means of communication. But since, according to this view, the pro- cess of production includes among its elements the whole of the population engaged in industry in any way, save only the land- lords, the tax policy based on this view reduces itself to an indiscriminate rejection of all " indirect" taxes ; and in order that some "direct "tax maybe left, which, as the onh' permissible one, may afford the requisite funds for the commonwealth, the theory of a net product becom-es indispensable. INTRODUCTION. 21 It is of some importance for the j)ur|)oses of this brief sur- vey of the development of our science, to note how the philo- sophical acumen which was brought to bear on this theory of a net product became a creative force in the hands of the callow Economic Science, with its rudimentary logic. Now for the first time the fundamental principles that cluster about the concept of " productivity " found expression ; the practical problems of a newly reconstituted policy of taxation hastened in this way the birth of a new science of finance and industry. In its original form, according to the theory as held by the Physiocrats, the available net product of industry makes its appearance exclusively in the rent of private land owners. Accord- ing to the theory in its improved form, as it stood after half a century of elaboration, it occurs in both rent and profits. It took still another half century for the theory to work itself clear of the traditional point of view which took account of industry only as an elaborative process for the production of taxability ; that is to say, to dismiss the doctrine of the net pro- duct definitively, after it had served the purposes of the science. ^11. But while it is true that the practical problem which influenced the thinking of this first school imposed on political economy the point of view of taxation and for a long time held it to that point of view, there was after all a more potent factor to which this school owes its importance. This was the body of philosophical speculations from which this economic science was an offshoot, or rather into which it incorporated reflections on economic and financial matters. This other, higher factor that goes to the creation of a new science, besides the progress of practical knowledge, — the mother science out of which the affiliated science grows, played a pre-eminently impor- tant part in the genesis of the first scientific system of political economy. Now, from the fact that it was in this case Moral Philosophy that in this way assisted at the founding of the new science, it resulted that this new science also attained quite another field of 22 THE SCIENCE OF FINANCE. vision than that of a well ordered tax policy. It is accordingly possible to trace back to this initial point that broader view, which took a century to find its way to a full and conscious acceptance, and which makes the structure and functions of economic society the main object of the inquiry, finance being but one of its sub- divisions. As is well known, it was not the French Political and Moral Philosophy alone that exerted such an epoch-making influence on science ; the nearly related English-Scotch Moral Philosophy exerted a like influence at the same or a slightly later point of time. Adam Smith's Inqiiiry into the Nature and Causes of the Wealth of Nations (1776) assigned to the Science of Finance the place in the system of Political Economy which it has held for a hundred years. And just as it is true of this work as a whole that the position it takes is distinctly more moderate and conservative than that of the Physiocrats and is more in accord with the facts of the time, so also is it true that its utter- ances on the theory of finance are so far in consonance with the then existing state of things as to contain the essential feat- ures of the theory as held by the different peoples of today. The theoretic structure of the science in Germany owes its characteristic features to the fact that it combines the legacy of the Cameralists with the new theory. If we compare Justi's Science of Finance with Karl Heinrich Rau's Grundsdtzen der Fituifizwissenschaft, published nearly eighty years later ( 1832), and if we then follow this latter work down into its last edition ( 1 864-1 865), we shall find that the heritage of the Cameralists has lasted on in a practically unchanged form over a period of one-hun- dred-and-ten years. The leading principles of Adam Smith have found a place beside it, it is true, and they may even have come to be the guiding principles. But a process of approach on the part of the fundamental principles of Financial Science to facts of actual life, and therefore to the empiricism of Cameralistic Science has been going on, in part due to a gradual weakening of the radicalism of these principles themselves, in part to the fact that the cameralistic science itself had absorbed into its sub- INTRODUCTION. 2$ stance a good deal of the radicalism of the period of the enlight- enment. So we find Justi, in the introduction to his Financial Science, declaring it a truism that the sovereign must not be per- sonally interested in any sort of trade or business (vol. ii. p. 63) ; so also he pleads for a gratuitous administration of justice (vol. i. \). 118) and condemns fiscal royalties in the strict sense, and will allow only an incidental fiscal aim to attach to institutions calculated to serve the jiublic welfare. ^ 12. When contrasted with the abstract dogmatism of the school of Smith, as represented in Germany by the Kantian, Lud- wig Heinrich von Jakob [Siaats-Fina/iz^i'issenschaft, 1821), the influence of Cameralistic Science on the develoj)ment of the theory in the nineteenth century appears of great value. And in this connection it may be noted as a significant fact that the men who have done such good service to the science have been prac- tical financiers and have approached the subject from the stand- point of the practical life of the time. So for example. Fried- rich Nebenius, the Baden statesman, in his work on the public credit (1820; 2nd ed. 1829); likewise von Malchus, Finatrz- prdsidcnt of Wurtemberg ( Handbiicli der Finanzwissejischaft und Finanzverwaltwig, 1830); likewise, and more distinctly, the Prus- sian State Councillor, J. G. Hoffman {^Die Lelire von den Steiiern, ah Anlcitung zu gribidlicheti UrtJicilen iiber das Stcuenvescn, mit besoiidcrer BczieJiMig auf deu prciissischen Staat, 1840); and finally, the Austrian financier, Karl von Hock {Die dffentliciicn Abgabett Hfid Scladdefi, 1863). Thanks to this influence exerted by {practical experience, a broad realism has come to displace the doctrines of the eighteenth century, as is notably shown in the case of J. G. Hoffmann. Still it must be apparent that the development of the science is at best a paltry one so long as it oscillates between doctrinairism and empiricism in this fashion. The real element of progress is to be sought, on the one hand, in the broadening and deepening effect due to the philosophic basis afforded the youthful science of the last century ; on the other, in the fact that the material 24 THE SCIEN'CE OF FINANCE. offered by financial and political life has been vitalized by the employment of an improved method of handling. Here again I must content myself with referring to the gen- eral part of this work, and to the bibliographical discussions contained in its introduction. I can at this point only discuss quite briefly the special features of the later literature of the science of finance. II. MODERN FINANCIAL SCIENCE. § 13. We shall first have to speak of Lorenz von Stein. If we compare his Lehrbuck der Fijianzwissenschaft (i860 ; 5th revised edition 1884-86) with that of K. H. Rau, which it was intended in a way to replace, and which it actually did to some extent replace, the contrast is as great as could well be imag- ined. No work, whether compendium or other book, can offer definitive conclusions, but it can present with approximate faith- fulness the accepted body of scientific doctrines in a relatively definitive form. Herein lies the strength of Rau's work. A complete disregard, or rather an evident ignorance of the pro- founder problems of the science, and therefore of all that gives charm and significance to the later developed science, brings it about that the novice accepts with a pleasing sense of security the superficial exposition which the book affords; — an easily comprehensible classification, sensible and preferably common- place truths, backed by a painstaking presentation of legislative and statistical material, together with its bearing on practical life. This is what the common sense of the learner will most kindly take to and what he can most easily grasp. He has no occasion to complain of being called on for severe mental effort. Lorenz von Stein, on the other hand, is to be counted as the one who, more distinctly than anyone else, has written a com- pendium of the opposite kind. The importance of his book lies by no means in its presenting a resume of the aggregate of pre- vious investigations. Rather, he makes use of the form of the compendium as a vehicle for some bold constructive work that goes far beyond the bounds of an cxi)osition of scientific doc- INTRODUCTION. 2$ trine and erects new and independent doctrines. These con- structions may in some part be compared to the rockets of a pyrotechnic display, which momentarily shed a dazzling light, only to leave us in a still profounder darkness the next instant. Stein's doctrinal edifice is all the less calculated to inspire a feeling of security and habitability, since the architect himself presently replaces it with further developments, designed on still bolder lines and of a still more problematical character. Much less can his treatment of positive materials, of the literature, of legislation, of statistics, contribute to a feeling of security. These matters of detail, too, are disposed of at one bold stroke. And still, we should be devoid of all intelligence, and be possessed of a very finical conception of the development of all science, our own included, if we entertained a doubt as to the desirability of having a Lorenz von Stein replace a K. H. Rau. Not that anything new has been erected which the new era may accept in place of the earlier structure, but a ferment has been introduced into the science which has been at work for a genera- tion past, and which serves to stimulate, if not to excite, every reflecting reader of Stein's works unto this day. It is a charac- teristic fact that the man's lengthening years and the successive editions of his book bring results the opposite of what we should expect of any other author under like circumstances. Instead of further establishing and reinforcing the truths attained, there is a continual extension of the structure. From the original single volume there presently develop two, and finally four. In close con- nection with this is the fact of a continual widening of the scope of the work, — something of doubtful v^alue by itself considered, and more than doubtful for the purposes of a compendium. In consequence we have in the treatment of the subject, a signifi- cant accentuation of insignificant matters, as also frequent reasser- tion of what is itself quite open to question. According to the conception of the science which I have advocated above, the profounder and more far-reaching relations subsisting between the financial system and the state by no means recjuirc that the later expositions of the Science of Finance 26 THE SCIENCE OF FINAN'CE. should submerge themselves in a sea of general economic con- siderations. It is rather 'to be accounted a mark of an over- wrought propensity to systematization, which works confusion for the development of the science and especially for the purposes of a compendium of the science, if each new branch of Econom- ics is sought to be built up on an independent and wide-reaching foundation, as is done bv Stein when, in consonance with his gen- eral dialectical method of contrasting state and society, he treats So- cial Economy, Administrative Science, and the Science of Finance as distinct and separate subjects. The lucidity of this method is further obscured by employing the same concepts with a differ- ent value in the differsnt branches of the discussion ; as happens in the latest edition of the Fuia^izivissenscJiaft, where great emphasis is laid on the distinction between " Financial Consti- tution" \^Fitianzvcrfassimg\ and "Financial Administration" \_Finanzverzvaltufig], and this distinction is permitted to traverse at discretion the concepts of " Constitution " and "Administra- tion" as commonly accepted both by Stein and others. I shall have to refer again, at this point, to what has already been said, both of an encyclopedic and a methodological nature with respect to the relation of Law \^Recht^ to Economy [^JVirth- scJiaft\. It is only by reaching a clear and dispassionate com- prehension of the elements entering into the inquiry that we can hold our ground against this imposing mass of fog reared out of a superabundance of statelv words. § 14. Nothing more than a brief mention can be made of Karl Umpfenbach's LehrbucJi der Fi?ianzivissenschaft (1859-60), which appeared simultaneously with Stein's book. It attacks the accepted doctrines at many points, with a good deal of incisix'c- ness' (among other things the theory of the Regalia). In its externals, the work of Adolph Wagner connects directly with that of Rau. While Wagner was the one to whom Rau himself chose to intrust the elaboration of the sixth (post- humous) edition of \\\s Fiimnzzvissenschaft (1870) there is none ' A new edition appeared in 1887. INTRODUCTION. 2/ among the later generation of German economists on whom the conviction has so deeply impressed itself as on Wagner that the Science of Finance must be brought into a closer and profounder relation with general Political Economy and that this result is to be attained by means of a profounder acquaintance with the facts of economic life. The reconstruction of the science which this involves differs essentially from that attempted by Lorenz von Stein. It is not attempted to erect a spacious structure of a gen- eral political-scientific character. Rather, what is sought to be effected is a thoroughgoing reorganization of the general theory of Economics, a theory which Stein did little or nothing to alter — apart from the great indirect influence which his work has exerted, but which he has not allowed to affect his own economic theory. It was a remarkable coincidence that this conflict between the traditions of Cameralistics — the complacent self-sufficiency of cameralistic therapeutic dexteritv — and the impatient onset of the new spirit, strongly charged with socialism, should come to a head within the same house. Wagner's efforts, directed solely to an elaboration and extensive emendation of Rau's work, presently led to the need — perfectly characteristic of the new epoch — of finding a new basis on which to erect a new and inde- pendent science of finance. This work on the general principles' (first published in 1875 ! 3- ^^•' ^ 892-95). was not entirely com- pleted before Wagner's great energies were again bent on the Science of Finance in a work planned on such broad and profound lines as to unite views widely different from Rau's on general questions with what was best in Rau's work — painstaking com- pilation and indefatigable application to the preparation of a compendium — and that in improved and augmented form. To this is to be added that Schonberg's Haiidbucli dcr poli- tischen Oekonomie (1882; 3. enlarged edition, 1890-91), with all its numerous array of contributions, had among its collaborators no more powerful supporter than Wagner. In unselfishly lend- ing his aid, in the way of exhaustive monographs on Direct 'Cf. Nationaldkoiiomische Studieti, hy the present writer (iS86), pp. 679-720. 28 THE SCIENCE OF FINANXE. Taxes and on Public Credit (as also on Credit, Banking, and Insurance), the motive was ever present of making his own treatment of finance all the more exhaustive. In this way, when his Gnmdlegiing is counted in as a necessary substructure to the system, Wagner's FiiianzwisscnscJiaft comes to be a work which, for volume and energy, has no rival in the literature of the subject. And it is only to be hoped that the author may be permitted soon to complete this great work, and may then return to the prosecution of the work on his Gnmd- legiwg. So far there has been made public the first part (2. ed., 1877; 3- c^M considerably enlarged and revised, 1883), con- taining : the Introduction ; The Organization of Fiscal Adminis- tration \^Ordnung der Finanzwirthschaft\\ Fiscal Demands [^Fina?iz- bedarf\\ Industrial-Fiscal Institutions \^Privaterwerb\. Further, the second part (1880), containing: Fees, and the general theory of Taxation (2. enlarged ed., 1890). Of part third, which gives a history of taxation in different countries, there have (1889) appeared three instalments (1886, 1887, 1888). To judge by the elaborate treatment of the tax legislation of the principal countries which these contain, the conclusion of the work is not yet near at hand. § I 5. The reason for not having mentioned Wilhelm Roscher's work earlier is perhaps rather a formal than an intrinsic one. It is only quite lately that the fourth and nearly the last' volume of his System der Volkswirthschaft, containing the Fhianzwisse)i- schaft, has been made public. The first was published in 1854. Below the city of Zurich, the waters of the Sihl pour into the Limmat, but long after the two streams have united it is possible to distinguish the colors of the two currents flowing side by side in the same channel. Very similar is the case with the process of assimilation brought about by the advancing development of life and science. In Roscher's work the juxtaposition of the tra- ' The concluding portion of the work is to deal with Poor Relief (part second of vol. iv.) INTRODUCTION. 29 ditional, half English half cameralistic body of doctrines and the newly acquired philological-historic elements is particularly striking. The Columbus's Egg which we find in the Grundriss of 1843 (vol. i. sec. iii.) has remained to this day the egg of Columbus ; the development of what it suggests is reserved for later generations. And what yet remains to be worked out on the lines of this suggestion, as also what is unattainable in it, has been briefly indicated in the first volume of the present work. Roscher's System der Finanzzvisscnschaft, ein Hand-und Lesebuch fiir Geschdftsmdnner imd Studirende (1886) has, just as was the case with the preceding, third part of his course in Political Economy, met so widespread a demand that a second edition was necessary immediately after its first appearance. Yet Roscher thinks necessary in his preface to offer an apology for his "venture," inasmuch as the works of Lorenz von Stein, Adolph Wagner, and Leroy-Beaulieu were already "in posses- sion of the literary market." From the standpoint of the literary market this apology would be manifestly uncalled for if it were true that this work — as contrasted with the earlier works named above — had carried the germ contained in the his- torical method out to an adequate development. But unfortunately that is not the case. Precisely as in the other volumes of the course, or perhaps even more distinctly, we here again meet with the old subdivision and method of treatment, in much the form in which it was handed down from the Cameralists. In the one case, just as in the other, the peculiar features of the work are to be found mainly in the notes — peculiarities lying not in the multitude of citations which are drawn from first, second and third hand sources quite after the traditional method of the compendium, but in the attractive method of treatment, which brings a great mass of polyhistoric material to bear on the cameralistic maxims. When employed in this direction Roscher's talent is at its best ; whereas, when his great industry is applied to the new ideas and problems of the science his efforts, though worthy of respectful attention, are not always valuable for their results. ^jjr^gE LIBrT^ 30 THE SCIENCE OF FINANCE. It is to be mentioned, among the good features of this book, that it is of such a character as to render it accessible even to the most moderately gifted intellect. And this office, of a text- book for beginners, it will probably continue to perform for some time to come. ^ i6. It is not only as a part of our duty of enumeration of eminent services rendered the science that we have to call atten- tion to particular monographic works, as well as to the compen- diums ; it is also a characteristic fact in the development of any energetically progressive science, and especially as regards the latest methods of research employed in our science, that a con- tinually greater volume and variety of work will assume this form. Mention is to be made, in the first place, of certain works which, both as regards date and as regards spirit and point of view, belong to the earlier period. Such are the painstaking writings of K. G. Kries, which penetrate deeper into the funda- mental principles of taxation than his predecessors had done ; as instance his discussions of the tax on land ( Vorschldgc ziir Rcgclung der Grundsteiier i?i Preusse?i (1855), as also his papers, of the same date, treating of the English local taxes, the New York property tax, the Prussian income tax {^ZeitscJirift fiir die gesammtc Staatswissenschaft, 1855). These labors have been con- tinued in a like spirit and with similar industry and insight, but unfortunately in a very inaccessible form, by F. J. Neu- mann {^Die progressive Einkommcnsteiicr in Staats- wid Gemeinde- hatishalt, in the Scliriften des Vereins fiir Sozialpolitik, 1874; also several unfinished papers in various scientific journals ; and finally. Die Steuer iind das offentliche Inter esse, 1887). The later years of the development of our science have brought forth chiefly works of an historical character. Partic- ular mention is to be made of Gustav Schmoller's investigations in Prussian financial history {^Die Epochcn der PreJtssischen Finatiz- politik, 1877 ; Stiidien iibcr die wirthschaftlicJie Politik Friedrichs des Grossen U7id Preussens iiberliaiipt von j68o-iy86, in Schmoller's Jahrbuch fiir Gcsetzgebting, I'^envaltung und Volkswirthschaft im INTRODUCTION. 3I Deutsche n RcicJic, 1884 to 1887). Further is to be mentioned Gustav Schocnberg's FiuanzverJuiltnissc der Stadt Basel im vier- zeh/ite/i und funfzehnten JaJirJiundcrt (1879). Also the yet unfinished work of Karl Buecher, of which one bulky volume has already been published ; Die Bcvolkcntng von Frnnkfitrt am Main im vierzehnten iind fnnfzchntcn JahrJiundert ; Sozialstatistisclie Shidien (1886), the second and third volumes of which, still to be published, are to discuss more particularly the finance-historical material contained in the Bede books of the archives of Frankfort. In addition to historical research, very efficient service has also been rendered the science of finance by statistics. In some directions official sources have been of great service. So, for example, the work of Ernst Engel, in his ZcitscJirift des Konigl. preussisclien statistische n Bureaus; likewise the related work of Herrfurth in Prussian communal statistics ; likewise the work carried on at the instance of the International Statistical Con- gress. The prospective arrival of a hitherto remote ideal seems to be promised in the announcement by K. Buecher of a presenta- tion of the rich materials in the Frankfort archives, treated by a method which is to unite the statistical with the historical. k § 17. As it always happens that the most notable currents in the development of any special science find expression in the journals, so it also happens in this case that the exuberant growth of German political economy is most immediately reflected in our periodical publications. And it is accordinglv also true that the special branch of the science of which the present volume treats, just at present manifests its vitality in this way in an especial degree. It is not only that the journals occupied with economic and political science generally give evidence of a developing activitv {Jahrbiicher fiir Nationalokonomie und Statistik, edited bv Johannes Conrad ; JaJirbucli fiir Gesctzgebung, Verivaltuiig und Volksivirthscliaft im Deutsclien Reie/i, edited by Gustav Schm oiler ; ZcitscJirift fiir die gesammte Staatswissenschaft, edited by Albert Schasffle ; Schriften des Vereins fiir Sozialpolitik : Staats- und SozialivisscnscJiaftlichc For- 32 THE SCIENCE OF FINANCE. schungen, edited by Gustav Schmoller). As indicative of the con- siderable division of labor already attained, we have, in the Fiiiaiiz- Archiv, a special journal devoted to Financial Science, edited by Georg Schanz (beginning with 1884), and we have further, in the Aiinaloidcs DciitscJicn RcicJies fiir Gcsctzgcbimg, Verwaltung unci Sta- tistik, a progressive compilation in the form of a periodical, which is at the same time occupied with a variety of materials bearing on matters of taxation and tariffs, and which also admits scientific dis- cussions. While the work of this last named journal is in the nature of the case confined to the legislative and administrative affairs of the German Empire, at the same time that it gives some attention to matters of a different character lying within the same geographical area, the Fiiianz-Archiv on the other hand aims to give a continuous and comprehensive view of the financial affairs of all countries of importance, from a general point of view or through discussion of special problems. Valuable auxiliaries are also the periodically published man- uals that give in condensed form the statistical data of finance from year to year. Such is the Ge/icalogische Hofkalcnder of Gotha, with its vjoW-X^no^n Diplomatisch-statistisches Jahrbuch. So also, latterly, the Statistisclies Jahrbucli fiir das Dcu^che Reich, published by the Statistical Bureau of the German Empire, in imitation of the Statistical Abstract of the United Kingdom dating back a generation earlier. This gives in a brief form a comprehensive view of the more important political and financial data of Germany. § 18. It holds true even in a more eminent degree with respect to the Science of Finance than with respect to the general science of Political Economy that the literature of other countries at the present time ranks below that of Germany. This is owing to the antecedents of the science in Germany. Cameralistic Science has afforded a broader area of cultivation for the subject, and this breadth has been cultivated, under the guidance of the later scientific movement, with great historical and philosophical depth. INTRODUCTION. 33 It is well known that during the period of its prime, and the period following its prime — from Adam Smith to the close of John Stuart Mill's activity, that is, for fully one hundred years — English political economy treated the science of finance as nothing better than a scanty appendage. It is a significant fact that no work worth mentioning on the science of finance has yet (1889) been published in the English language (though some considerable contributions have been made to financial history, as, c. g., by Sinclair, and later by Dowell ' ). In this respect, too, the latest phase of the development of economic science in Eng- land serves to give greater promise.^ The restless activity of the Americans, their gratifying participation in the development of the science in Germany, which speaks so well both for them and for it, will no doubt in due course of time bring forth good fruit, as it has indeed already yielded some excellent things. This is evidenced more particularly by the new scientific journals that are now published at so many of the American seats of learning. So we have the Political Science Quarterly (published by the faculty of political science in Columbia College, New York, beginning with 1886) devoted to the political sciences generally, but also occupying itself at the same time with topics of an economic and financial character. Also the Publications of tJie America?i Economic Associatio?i, which likewise date back to the year 1886. Also the Quarterly Journal of Economics (published for Harvard University, beginning with 1886). Gratifying as have been the results of the influence exerted by German science on American students, the painstaking indus- try which it has inspired in Italian students has been no less so. The latter country has the advantage of a longer period of pre- paratory growth and a great number of universities and schools. Hence the presence, for a long time past, and more particularly recently, of an exuberant literary productivity. But the most characteristic feature of the new science in the new Italy is, after ^History of Taxation and Taxes (1884, 2d ed. 1887). ^"Die heutige Nationalokonomie in England und Kmcnka.,'' Schmoller's Ja/trbuc/t, 1889. 34 THE SCIENCE OF FINANCE. all, its leaning on the German school. There is a very general familiarity with the German language (a knowledge of which the younger generation of Italian scholars acquire by residence in Germany) which they are accustomed to read and write, while they also eagerly study German publications. Hence a faithful adoption of the German method and assimilation of the German point of view. The outcome of this frank acceptance of the best result obtained elsewhere will be, in this case as in so many others, the ultimate attainment of an independent standing. Just as we find that in modern German art a thorough-going deterioration, or rather extinction of all true taste, has given place to norms borrowed from other ages and other peoples, and that the taste so regenerated is working itself clear and express- ing itself in creations of its own, — so also will the science of Italy, through its unreserved acceptance of foreign norms, one day find itself rewarded with splendid achievements. It is a notable fact that at the same point of time with the appearance of the above-mentioned North American journals a similar, but more comprehensive organ of our science has made its appearance in Italy, the Gior?iale degli Economisti (edited by Alberto Zorli), in which Carlo Ferraris, a disciple of Wagner, takes a specially active part. § 19. We know what a peculiar position France holds in the development of Political Economy. It has already been reviewed under the head of the History of Political Economy, from the earliest school of the Physiocrats down to the time of the Social- ists and the later scientific movement. As regards the science of finance, however, certain peculiar circumstances, outside of the general science of Political Econ- omy, have had their influence. While their general Economic Science, and with it their financial speculations, are yet confined, in that country as in England, within the limitations imposed by the old school, the situation is, after all, quite different from what it is in the latter country. France is and has been possessed of a large and well- INTRODUCTION. 35 educated class of administrative officials, to whom the country owes a financial literature of like character with that dealing with the other branches of her administrative system. It is true, this literature occupies a middle ground between compilation and science proper (I may refer to what has already been said of the relation of Law and of Administrative Law to our science). Still it is to be recognized as a fairly effective preparatory work for the establishment of a vital relation between the science and the affairs of practical life ; and in any case it is a great advance over the wide chasm that exists in England. So far as a real French economist has applied himself to the treatment of the Science of Finance (as Leroy-Beaulieu has lat- terly done) the result has been a combination of the facts offered by this financial administration with the theoretical views peculiar to the old school, in which matters of fact have at times so far asserted themselves as to bring into consonance with this ortho- doxy financial institutions which economists of the same faith in England or Germany hold to be entirely incompatible with it (such as the tobacco monopoly). And conversely, the French economists, in harmony with the body of legislative enactments and all the dominant political parties far out towards the left, are for the most part inclined to condemn those kinds of tax legislation which orthodoxy in England and Germany has long ago given in its adherence to, and they have reached unanimity on this matter from the standpoint of this same school. The income tax may be cited as an example. The common ground in all these contradictions is a habit of thought which shows a narrowness that is incapable of passing the boundaries of their own country — the lack of such a reason- ing faculty as would find its way through the data of practical life and arrive at a general truth. Or it is the inexpensive pro- fundity of the " practical man," who carries his point on the ground that what exists here and now is and must be all right. Of the literature which I have thus characterized the follow- ing works may well be particularly mentioned : Esquirou de Parieu, Traitc dcs impots, considcrcs sous Ic rapport 36 THE SCIEN'CE OF FINANCE. historique, cconomiqiie et politique en Frafice et a Vctranger (2nd edition, 1866, 4 vols.). Paul Leroy-Beaulieu, Traite de la science des finances (1877, 4th edition, 1888, 2 vols.). Ame, Etudes sur les tarifs de dojiancs et sur les tarifs de com- merce (1876, 2 vols.). Vuatrin et A. Batbie, Lois administrative s fra?i^aises ; premiere partie : organisation administrative ; seco?ide partie : matieres adminis- trative s — finances, travaux publics (1876). Dictionnaire des Finances ; public sous la direction de Leon Say par L. Foyot et A. Lanjalley (began to appear in 1887; now nearly finished). An idea of the great volume of this class of literature may be got from Baron von Reitzenstein's paper on " Indirekte Verbrauchsabgaben der Gemeinden " {^Conrad's Jahrbiicher fiir Nationalokonomie Jind Statistik, 1884 ; Ne7ie Folge, vols. viii. and ix.), and from Wagner's chapters on French taxation in the third volume of his Science of Finance (1889). BOOK I. THE PUBLIC ECONOMY. (37) CHAPTER I. THE STATE AND THE PUBLIC BUSINESS. Literature. Bluntschli, Allgemeines Staatsrecht, j. Aiiflagc, 1863. Ru- dolph von Ihering, Geist des romischen Rechts auf den verschiedenen Stiifen seiner Entwickehing, vol. i., j.Auflage, 1873. Rudolph Gneist, Das Englische Verwalhcngsrecht, j . Auflage, 1883. Lorenz von Stein, Handbuch der Veriualttmgslehre, 2. Auflage, 1876. Adolph Wagner, FinanLwissenschaft, Erster Tkeil,j. Auflage, 1883. sees. i-ii. I. THE EVOLUTION OF THE STATE. § 20. There are few points at which the historical conception of social life has so completely carried the day against the notions of natural right as in the debate about the beginnings of the state. It is true the favorite analogy of a plant-like or " organic " growth is not to be taken too literally. Also, it is undoubtedly true that after a certain advanced stage of culture has been reached the foundation of a state by contract is not only possible, but is substantiated by historical fact. But the essential point is not touched by such objections as these. The essential fact is that long before a "contract" in the sense required by the abstract conceptions involved in the notion of natural right, could have been entered into, that is to say, long before the peoples had attained the stage of culture at which such a conscious recogni- tion of the developed idea of a political organization is possible, an instinctive banding together is brought about bv the pressure of the natural course of development, — a banding together of kindred for protection against common danger and common enemies. This is the fundamental fact in the formation of all states. The principle of self-preservation which urges every living being to defend himself against every other being from whom danger threatens, leads, through the action of the natural bond existing 39 40 THE SCIENCE OF FINANCE. between individuals connected by ties of blood, to concerted action in defense of a common existence. All that comes to pass in the long course of the subsequent development of the state is traceable, finally, to this fundamental fact. None of the higher developed civilized states has yet been able to eradicate the traces of its childhood in respect of the fundamental importance which the need of a common defense and a common organization of force continues to claim. And in this fundamental fact there is given the primarily democratic character of every primitive political body. This is not a national characteristic and does not distinguish any one people above others — a view which for obvious reasons has been acceptable to our historical school, whether they have been pleased to find that this peculiar feature characterized the Roman or the German people — but it is something that arises by universal neces- sity from universally efficient causes. What is related by African travelers, as for example by Henry M. Stanley,' concerning the peoples of the interior of Africa, agrees, as respects this funda- mental characteristic, with what we know of the earliest stages of development of the Romans and of the Germans, however great may have been the difference in point of race descent and later culture. What Tacitus relates of the Germans is therefore something that holds true without regard to national lines of demarkation, and describes in its essential features a typical fact. Here we find the state a living identity of people and army. Army and People were not discrete concepts in the early davs.* The army was nothing more than the people under arms. The population, constantly armed as they were,^ when they were assembled, also constituted the army. Therefore the words which denote the army were used, even in later times, to desig- nate simply the populace. Accoutred with their weapons they congregate in the ' Throtigh the Dark Continent (1876). *Georg Waitz; Verfassiing der Deutschen Urzeit, 3. Auflage, 1 880. 3 Nihil autem neque publicas neque privatas rei nisi armati agunt. — Germ, cap. 13. THE STATE AND THE PUBLIC BUSINESS. 4 1 popular assembly where they transact such business as may be necessary even in the primitive commonwealth, in addition to the use of arms : determination on war or peace, punishment of offences and the like. Only matters of lesser importance are decided by the leaders alone ; the more imj)ortant by the whole body. This participation of the individual members of the communitv in public affairs is so profound that their life-activity may be said to be made up of war and the popular assembly. Between whiles they sleep and eat and idle, while house and fields are left to the care of the women, the aged and the infirm. Such is the life of these men.' § 21. For the purposes of a discussion introductory to the Science of Finance the meaning of this primitive form of the political structure may be indicated as follows : It is the embryonic form of public obligation which con- tains the germs from which the various elements of the devel- oped public economy are evolved by a process of differentiation. In the first place, the personal factor is, at this rudimentary stage, still undifferentiated from the material \^sachliche^ factor. The individual member of the community not only contributes his personal service in the army, he also brings with him into the field whatever is required in the way of arms and accoutre- ments ; for these he carries as his own from the day when, hav- ing reached manhood, he is publicly invested with them in the assembly of the people as a symbol of his public dignity and obligation — as a mark that he has become part and parcel of the state. =" A second fact is closely related to this first. The man's participation in the affairs of the commonwealth has not yet been differentiated into honor or privilege on the one hand and burden or obligation on the other. It is true, we are told by the writers on law that public law is distinguished 'Tacitus, Germ. cap. 15. *Ante hoc domus pars videntur, mox rei publicae. — Tacitus, Germ. cap. 13. 42 THE SCIENCE OF FINANCE. from private law by the fact that in the former every right on part of the individual is at the same time a duty, and every duty a right. It follows from the nature of an abstract conception of the state which is guided by the requirements of certain accepted ideals rather than by the facts, that it should more or less con- sciously blur the clearest distinctions that are brought home in a very sensible degree to the men of the modern state. In the pri- mitive state this distinction is not present, or at any rate it is but faintly perceptible. The great functions through which the state becomes a living entity in the activity of its members — military service and the popular assembly — are still, at this point of devel- opment, both privilege and obligation alike. The opening of the assembly may be subject to delay for some two or three days because the men do not assemble punctually at the appointed time (this is evidence of a lack of discipline according to Tacitus, a result of liberty, of the absence of authority) , — but so little does this go to show the contrary, that the significance attached to participation in the popular assembly by the free men of that time is to be taken as evidence of its being considered both an honor and a burden. Later on we find that the laws of the Ger- man people impose severe penalties for absence from the popular assembly, relics of which have survived down to modern times ; but this again is but evidence to the same effect, though it does at the same time indicate a decreasing appreciation of the element of honor and privilege involved. § 22. Finally there is the third fact, of a division of labor in the work of the State — if we may employ the expression in its broadest sense — which comes in to disturb the primordial type of the primitive commonwealth and develops differences and contrasts which are absent at the outset, or at most are present only as imperceptible beginnings. There are elected leaders, there are illustrious families, but there are no rulers and no subjects. The element of authority finds its field within the household of each individual citizen. The head of the household rules over wife and child, over the THE STATE AND THE PUBLIC BUSINESS. 43 aged and infirm, over servants and slaves, but in the state there is no such sovereign authority. What there is of authority and subordination is nothing more than that necessary minimum of order that is indispensable even under conditions of the greatest and crudest freedom, if anything in the way of a commonwealth is to be possible at all. On all hands there are visible the initial stages of a differen- tiation that speaks of future culture, and without which even a very low form of social life is impossible. But the fundamental and characteristic fact remains that the work of the community is done directly by the members of the community, and without separation into a class to whom service is rendered and another class by whom the work is performed. Incipient differentiation is perceptible in the consideration shown the priests, as also in the influence exercised in the popu- lar assembly by those who are distinguished for deeds of valor or for superior sagacity. The decisive word, however, still lies with the assembly as such ; the speakers are listened to and the decision is then made.' In war there is of course a leader at the head of the expedi- tion, but the leader and those whom he leads compete on com- mon ground for the palm of bravery. It is a lifelong disgrace to outlive one's leader— "the leaders fight for victory, the follow- ers for the leader." § 23. No doubt this delineation of a primitive commonwealth, even apart from the Roman historian's studied contrasts, has a charm for any thoughtful observer of political and social life. It appeals to us with all the bracing vigor of a breath from the primeval forest. Unfortunately it is impossible — it is contrary to the nature of all normal, historical evolution that this primitixc community should ever meet the demands of advancing culture. Let us first take up the point last mentioned. If it is true, as our best thinkers claim, that history is to be con- ceived of as a record of the education of the human race, then ' Auctoritate suadendi niagis ciuam juhendi potestate. — Genu. cap. Ii. 44 THE SCIEN'CE OF FINAN'CE. there is little hope that any autonomous association of peasants should ever be able to rise from their primitive rudeness to the full fruition of the potentialities immanent in humanity simpl}' by a spontaneous exercise of their sovereign will. Stanley^ relates of Mtesa, the despot of Uganda, that he stood high above the plane of culture occupied by his people. To him alone was it due that a stranger could enter the kingdom of Uganda, as his people had not the slightest regard for human life or human right. The revolting atrocities of the despot were necessary in order to hold the plundering, thieving, bloodthirsty people in check. As a companion piece we have the account given by another traveler,^ of the cannibalism raging in the free republic of Hayti, against which the authorities were afraid to take any measures because of the republican institutions of the country. More fortunate circumstances in the way of culture or of natural surroundings may have availed to raise one people to a plane of development as much above the plane of others as the Germans of Tacitus stood above the Negro tribes of Africa; but the interval is never so wide that the salient fact expressed in this contrast loses its significance for any people whatever. That is to say in other words : the relation of ruler and sub- jects is a condition indispensable to any people that has an his- toric mission to fulfill. § 24. While this contrast may originate in the difference everywhere observable between the higher endowments or nobler descent of certain individuals than of the majority of the people, it is also true that a progressive division of labor takes place, to correspond with the growth of the mass and the increase of the duties of the commonwealth, beyond what may suffice for the first crude beginnings. Every widening of the extent of a small commonwealth of itself gives rise to the problem of the state, in that it removes the ' Through the Dark Continent, vol. i. p. 408. == Spencer .St. John, Ilayti (1885). THE STATE AND THE I'UBLIC BUSINESS. 45 individual farther from the periphery of the agg-regate. The problem lies in the (juestion, whether the individual, from the standpoint of his own daily life, is capable of comprehending the interests of the aggregate. All the past experience of humanity has gone to enforce the fact that whenever a common- wealth of free citizens has made any approach to a realization of its ideal, the indispensable condition of success has been that of small extent, and that everv increase beyond the original nar- row limits has also carried with it a dissolution of the primitive constitution of the state. Such has been the course of events in Greece and Italy ; such also in the countries of Germanic Europe. This distance between the individual member and the environ- ment of the community is further increased by the changes that take place at the other end of the scale, in that the course of evolution of the life of the individual results in an intensive culture. The indolent hunting tribe, which has not yet achieved steady habits of labor and knows no other activity than that of war and the chase, finds in this crudest form of participation in the affairs of the commonwealth the gratification of its impulse to action. An agricultural people with habits of industry, which has mingled its sweat with the soil and which guards house and home with a jealous hand, has therewith made so much of an investment, and this the interested individual balances against the claims of the commonwealth. An intenser culture and an increase in the extent of the commonwealth accentuates the problem of the identity of the state and its individual members. The result is that with every step in the growth of these two factors the inherent contrast between man and the state finds expression in corresponding institutions calculated to bridge the interval. The sentiments, capacities, services, which the state requires are, as it were, segregated out from the body of citizens as such, and make their appearance as a plastic precipitate in the form of distinct classes and professions which the state sets apart for its own purposes. It is true, they continue to be constituent parts of the people ; but they are parts specialized for j)olitical functions, and differen- 46 THE SCIENCE OF FINANCE. tiate themselves continually more and more from the mass of the people, who for their part continually lose more and more of their civil character. § 25. The course of the resulting development varies from one period to another and from one people to another, but the essential features are everywhere the same. To the extent to which the conditions are present, to that extent the consequences will also follow. In every case it is a gradual transformation in which certain features of earlier times long continue recognizable, in spite of constant change, but in which the successive stages are always closely linked together. Whether we pass in review the thousand years between the founding of Rome and the final full development of the bureau- cracy of the Roman Empire, or trace the permutations of the Germanic constitution in the states of Europe from the fall of the Roman Empire down through the Middle Ages to modern times ; whether in the one case we examine in detail the con- trast between the plebeian and the patrician classes of Rome, between the optimates and the mass of the people, between the emperor, senators and bureaucracy on the one hand and the pop- ulace of Italy and the Roman provinces on the other ; or whether in the other case we watch the development of the aristocracy and the professional official class out of the germ of nobilitas and principes among the Germans of Tacitus as organized in the service of the king after the Roman model, or bound to the glebe in the legal bonds of the feudal state, or under the form of the profes- sional of^cial class of the oncoming regime of absolutism, in peace or war, in judicial or executive ofifice ; — all is but the outgrowth of a single fundamental idea. A consideration of all these facts brings out two points of importance to the modern state : first the necessity of a high degree of division of labor in the work of the state, which results in a constantly increasing separation between the body of citi- zens and the actual, effective political activity ; second the inex- THE STATE AND THE PUBLIC BUSINESS. 47 tinguishable reminiscence of a primordial union of citizen and state. The historical development has brought about a progress- ive evolution of the former, at the same time that the latter has never ceased to be present to the eyes of humanity. During the verv same centuries of the Middle Ages when the way was being prepared for the monarchical state and professional officialism, there arose in the mountains of Switzerland a reconstructed model of the primitive democratic commonwealth, while at the same time a different type of a free community, more nearly approaching the requirements of modern life, grew up in the mediaeval towns. § 26. Viewed from the financial standpoint, the division of labor in the work of the state results in a relation of the individ- ual to the commonwealth in virtue of which the individual figures as the beneficiary of a number of services rendered by the state ; services which in the primitive form of organization are performed directly by the individual members of the commu- nity. It now becomes a problem how these oflfices of the state which serve the needs of each individual citizen, are to be com- passed by extraneous means, after the direct and spontaneous participation of the citizen in public affairs has apparently ceased. These extraneous means may be of various kinds. The simplest is the adoption and consistent application of the method which the division of labor has brought into vogue in indus- trial intercourse in all the economic relations of life : paid service for which a compensation is rendered in economic goods. As a matter of fact this simplest of all methods, consistently with the general course of economic development, does find an ever wider acceptance as time goes on. Every highly developed commonwealth gives evidence of the presence of this relation of bargain and sale in an ever increasing degree. But this is not all. For one thing, there are to be found at every epoch certain 48 THE SCIEiNCE OF FINANCE. survivals of direct political activity by the body of citizens. In the midst of that process of erosion by which a professional army grows out of the folk-army, some remnant of the universal liability to military service continues to assert itself. In the midst of state absolutism which negatives all participation by the citizen in the affairs of the commonwealth, the idea retains its vitality in the towns that it is the business of the entire body of citizens to decide on the management of municipal affairs.' Where the antecedents in the wav of race character and histor- ical experience of the people have favorably influenced the development of a commonwealth, the element of primitive pop- ular autonomy retains a larger share of power and asserts itself in the struggle against the progressive division of labor. Especially, the element of initiative and direct participation on the part of the body of citizens is awakened to a new life by any popular movement, — -which is at its best nothing but an awakening on a large scale of the national spirit that has long lain dormant. And precisely this is the characteristic phenom- enon of the present century. Not that this national sentiment has already attained a full consciousness of its own significance — we shall find in what follows that one of the chief difficulties of our finances consists in the inadequacy of that sentiment — but it can at any rate be said that a beginning has been made in our modern states which must either be a false step or must lead to further development in the direction indicated. § 27. The political activity of the body of citizens in the modern state ramifies itself in the following manner. The substructure consists, significantly enough, of the group of activities which proceed on the supposition that the relation of the state to the citizen is that of an apparatus created to perform certain services for him. These activities are an exercise of the rights of suffrage and election, which can have no effect beyond a controlling interposition, and whose immediate office is simply ' Ernst Meier, Die Reform der Venvaltungsorganisatiou tinier Stein und Hardenherg (1881), p. 7Q. THE STATE AND THE PUBLIC BUSINESS. 49 to afford the aggregate of citizens a means of supervising the course of political affairs through the agency of their representa- tives. But a rational exercise of the suffrage and the right of election, and more especially an adequate supervision of the affairs of state through their representatives, does not necessarily follow from the bare fact of the possession of civil rights by the body of citizens ; as a matter of fact the capacity for an ade- quate exercise of these functions has to be acquired. This fun- damental fact of political action therefore leads naturally up to a consideration of the facts relating to participation in the con- duct of the every-day business of the state. This brings us to that broad field of activity which we are accustomed to call " self-government." Within this field the citizen of the modern state is actually directly occupied with a multitude of public duties, quite in contravention of the principle of division of labor that dominates both private and public life, or at least his activity supplements the action of that principle.* The simpler the duties, the more moderate the requirements in the way of capacity and energy on the part of the citizen, and the more independent the working of self-government ; the more serious the duties, the greater the requirements, the more will the local self-government have to depend on the skilled and organized forces of the national administration. The administra- tion of a small rural commune to this day rests in, or has at the present day reverted into the hands of men chosen from among the inhabitants of the place. In the administration of an urban commune, the larger the commune the more help does the ele- ment of self-government require from the highly differentiated professional element, and the greater, consequently, the demands on its administration. A third field is the great and burdensome one of military ser- vice. All the way down from the beginnings of German antiq- uity, with its folk-armv gradually transformed by elevation and depression of classes, differentiated into a contrast of armed free- men and unarmed bondmen, then developed into a military pro- • See vol. i. sees. 246-247. 50 THE SCIENCE OF FINANCE. fession for the upper classes, followed in turn by an epoch of mercenary armies and professional soldiers, — through all these mutations in the development of the state, military service has remained a duty incumbent on the entire male population. Only, with the new era it has been reclaimed from its lowly and degen- erate state, transfused with a new life and invested with a new dignity. After it had for centuries served to characterize the lowest social class, it has become again what it originally was — a universal duty of all able-bodied citizens. In view of the difficulty of the problem involved in securing the defense of a modern state, the relation of this portion of the citizen's public duties to the unavoidable demands of a division of labor is naturally a very peculiar one. A juryman or a justice of the peace on whom the local self-government devolves the administration of justice, is, according to the premises of local self-government, endowed with an average capacity for the office simply in virtue of his character as citizen. The conscript on the other hand is so far subjected to the demands of a division of labor and of the professional nature of military service, as to be held for a long series of years to the strict discipline of the army very much after the fashion of the professional soldier. Division of labor in the work of the state here trenches so far on the domain of division of labor in private life as to take the citi- zen away from house and home for years together, simply in order to teach him what belongs to the adequate performance of military duty. ^ 28. While this enumeration covers the chief kinds of per- sonal services rendered the state by the modern citizen, there are certain further considerations to be brought out in the same con- nection. In the first place there really is in the modern state, as in the states of the past, a sphere within which what we have held up as contraries are to be found united. It happens even to this day, under a peculiarly favorable conjunction of circumstances, that the demands of modern public life in the way of professional THE STATE AND THE PUBLIC BUSINESS. 5 1 devotion to the public service, meet with sentiments and condi- tions such that this vocation is not only adequately recognized to be the logical consummation of the duties of citizenship, but this recognition is also adequately carried out in practice. Where- ever there exists an aristocracy which is possessed of an adequate comprehension of its own mission — the devoting of its energies to the conduct of public affairs — and is at the same time pos- sessed of such economic means as will enable it to put forth its energies, not in the character of a paid official class, but with the independence that goes with an " honorary office," there the point is attained where the primitive ideal of civic duty coincides with the intensity of application required in the work of the modern state. While among the rude men of the commonwealth of Tacitus the charm attaching to adventuresome deeds of violence was a dominant factor in determining the direction taken by the peo- ple's activity, it may surely be hoped that at our present advanced stage of culture habituation to work through a period of a couple thousands of years has extended this charm to other activities as well. In point of fact, amidst the great complexity and intricate gradation of activities in the modern state it is not to be overlooked that there is a decided variation in attractive- ness as between the different kinds of activities. I may here refer back to the conclusions reached in the gen- eral portion of this work (vol. i. sees. 135-137.) The intrinsic attractiveness as well as the dignity attaching to the work varies according to the nature of the occupation. The " honor- ary office " \^Elirenamf\ will therefore begin only at a point where a certain measure of this element is reached. The office of member of parliament, or of the head of the affairs of state will partake of this character ; whereas the designation can have but a negative application when the office of juryman or justice of the peace is spoken of as an honorary office, — that is to say, negative in the sense of denoting the absence of compensation rather than implying a positive sense of dignity that leads the citizen to seek the office. Still lower in the scale of occupations, 52 THE SCIENCE OF FINANCE. in the services performed by the constable or policeman, no efficacy whatever can be ascribed to the pleasure or dignity of office. And even of the grave duty of the defense of the fatherland an effective sentiment of this sort can be counted on, if at all, onlv in seasons of patriotic exaltation, certainly not through the tedi- ous years of preparation and training. The consequence is this. The aggregate of personal services required of the citizen by the commonwealth must appeal to different psychological motives according to the different tastes and sentiments of the citizens. § 29. As to details we find considerable variation from one country to another. Political usages, inherited differences in the tenure of property and in the social features connected with it, the form of the constitution of the state and the administrative mechanism, and other like causes, have resulted in variations which come to figure in the eyes of the one state as national peculiarities attaching to other states. The practical working of the state mechanism within the lines imposed by these pecu- liarities, then, suggests the question whether this or that existing institution is the more serviceable. But after allowing for these national variations there remains for any given epoch a certain essentially common ground, in consequence of which services of a similar character come to be performed by means of similar contrivances. The great contrast in point of psychological motives that is brought out in political institutions is the contrast between vol- untarism and coercion. Not that the system of voluntarism on the one hand and that of coercion on the other comprehend each a homogeneous mass of sentiments ; there is no such uniformity either as regards the sentiments of the individual citizen or as regards the different classes of activities. But this much is true, that there are cer- tain comprehensive groups of activities with respect to which we can say that in order to a given result a given pressure is required, whether the motives appealed to be external or subject- THE STATE AND THE PUBLIC BUSINESS. 53 ive. And just as the subjective motive has at its disposal im])ulses of greater or less intensity, so also may the appeal from without, the factor of coercion, be of different degrees of energy. In the former case we have the great attractiveness of the foremost ofifices of the state contrasted with the feeble inducements offered by obscure honorary positions in the every- day service of the community ; in the latter case we have the slight penalties attaching to neglect of jury duty as contrasted with the severe penalties of the military code against deserters. The exacting coercive measures adopted as regards the fundamental — and the greatest — duty of the citizen contrast sig- nificantly with the conditions that prevailed during the early stages of political development. In the early days war was the man's chief occupation, invested as it was with all the charm which its contrast to steady work lends it during those ruder stages of culture ; while today peaceful industry is the central fact of life, and military service is an unusual employment which the peace- able citizen avoids as far as may be. The exacting demands of a highly developed military art also require a strictness of discipline which cannot at this day be enforced without forcible coercion, except in cases where an unusual degree of national sentiment is present. § 30. It is moreover highly characteristic of the develop- ment of the social substructure of a modern state, that the exer- cise of precisely this most important of all the functions of citi- zenship cannot be required at the hands of the modern citizen without the intermediation of an economic factor. True, the new era, with its rehabilitation of citizenship, has infused a new spirit into the duty of military service handed down from past centuries. Liability to cantonment on part of the lower classes of the population has, by virtue of the new demo- cratic ideas, been developed into the general liability of all citi- zens to bear arms. But the development of this ignoble service into a duty of citizenship, the conversion of what was a one- sided burden into a privilege belonging to all citizens alike, has 54 THE SCIENCE OF FINANCE. not altered the traditional economic basis on which the structure of modern life in state and society rests. The altered spirit, the altered sense of dignity with which the majority of the people meet the requirements of the common defense today, still leaves the fact unaltered that this same majority are economically incapable of rendering their personal service to the state, unless the livelihood for which they usually depend on a society organ- ized on a basis of division of labor is furnished them by a similarly organized state. At this point, therefore, the material factor enters as a men- struum into the system of civil activities and duties. Only for a small portion of the aggregate body of citizens is it possible to offer their personal service to the state on the basis of their own possessions, as is seen in the so-called volunteer service. For the great majority, who are accustomed to live by the labor of their own hands and who lose their livelihood as soon as their labor ceases, means of subsistence furnished by the state must be supplied. We have, consequently, a combination of the personal serv- ice of the citizen with a material factor which has to be drawn from contribution made by the entire body of citizens. This is the point at which the modern concept of democracy diverges from that of antiquity. The early, original view con- ceived, the state to consist in the equal participation of all men ; this equal participation being possible on the basis of an equal- ity of social conditions. The modern concept of a democracy on the other hand sets out with the undeniable fact of social inequality, the fact of the pecuniary feebleness of the majority, and those measures are now-a-davs called "democratic" bv which the state seeks to come to the aid of this economic inca- pability. Where the ancient concept of democracy, owing to specially favorable circumstances, has maintained itself down into modern times, as in the cantons of Switzerland, the ancient usage has continued in force down to the present, the man who is liable to do military duty being required to provide his own equipment, and only very lately has the old usage yielded before THE STATE ANT) THE PUBLIC BUSINESS. 55 the neo-democratic principle. In ancient Rome it was, signifi- cantly enough, the Gracchi who were the advocates of this neo- democratic reform. While the senate had enacted, in laws dat- ing from the years 406, 403, 401 B.C., that citizens serving in the infantrv were to be paid out of the j)ublic funds, it is a law of Caius Gracchus that for the first time directs that the clothing of citizens liable to militarv service is to be furnished them gra- tuitouslv bv the state.' i^ 31. This undermining of the earlier democratic concept of the state by the modern social organization and its division of labor comes out even more distinctly when we consider that not only has the great body of the lower classes become unable to contribute their service to the state without pay, but that even for the higher classes a system of payments for all kinds of jjub- lic service gains ground continually more and more, in so far as this service interferes with the everyday business of private life beyond a brief occasional interruption. Hence the payment (allowances, mileages) even for the highest and most honorable activ^ities in political life, — a payment due to the exigencies of modern society which continually leaves a relatively smaller num- ber of its members the leisure required for the business of the state, at the same time that it finds it desirable to afford a con- tinually larger number of its members access to a participation in the state's business. Modern society has not yet passed through the final stage of this development, though antiquity has done so in the decline of its republican institutions, both in Rome and Greece. The point is reached when even the last shriveled residue of public activity, the bare attendance in the jjopular assembly, is paid for out of the public funds ; when the place of the privileges of citi- zenship is finally usurped by a j)ublic alms. Modern states will be wise enough to avoid this final conse- (juencc of deterioration. But in the situation as we find it, the 'See a paper by the present writer on "Ehre und Last in der yolkswirthschaft " Volkswirthschaftliche Aufsdtze, 1882, p. 350). 56 THE SCIENCE OF FINANCE. unavoidable necessity for any modern state of employing a system of material compensation in order to insure the exercise of the per- sonal duties of .citizenship is manifest. This material compensa- tion is nothing but the economic equivalent of those personal activities which, having themselves come to bear an economic character, require an economic return. § 32. The considerations brought out in the last few pages bring us face to face with that great system of economic ways and means \^Leistungeii\ on which all modern states rest. How- ever imperative the need of participation in political affairs in the present century may be ; however indubitably every reason- able gratification of this demand may lead and may have led to a progressive development of the citizens' political activity ; the fact remains after all that the growth of the economic character of modern state activity comes constantly more and more into the foreground. In other words, the state is developing a con- stantly growing public economy, based on the exchange and circulation of economic goods. It lies in the nature of the division of labor that it acts con- stantly and progressively to erect each particular form of activity that serves the purpose of society into a distinct trade stand- ing in economic relation to all other occupations. And the state itself partakes of this development, in that the special services it renders are offered in the form of professional per- formance of the work of the public economy, in exchange for all other kinds of work. But since the underlying principle of industry requires that these services be paid, there arises the need of material wealth (money) that will serve as an equivalent for this work in this as in any other business transaction. But this covers only one category of the of^fices incumbent on the state. A second category is constituted by the material apparatus required in order to the proper exercise of the personal activities that make up the state's work. It is onlv in the early beginnings of political organization that courts of justice are held under the THE STATE AND THE PUBLIC BUSINESS. 57 open sky ; a civilized state requires extensive structures for the purposes of the administration of justice. It is onl v in the first rude beginnings (of which, it is true, survivals niav be found here and there in our civilized communities to this day) that offenders are punished with the summary severity that dispenses with the expensive structures and maintenance of prisons. It is onlv the folk-army of primitive days that is acquainted with no breast- works but what are thrown up on the spur of the moment ; the progress of the art of war, and more distinctly still the stupend- ous development of military science in modern times, involves the sinking of a continually greater portion of the nation's wealth in fortifications, strategic roads, naval vessels. The mod- ern phase of public economy is characterized throughout by an increase of the capital invested in material appliances, and these serve to indicate what is the current conception of the state's function. Our schools, universities, museums, libraries, archives, etc., may be called to mind. § 33. We shall accordingly have to conceive of the public economy after a fashion analogous to what we already know to be true of the economy of the people in general. In the fore- ground we find a great mass of industrial goods, industrial exchange, industrial capital, growing greater with every fresh advance of civilization ; in these latest times so markedly occupying the foreground that current popular opinion sees nothing but this phase of the matter. Beside this and diffused through it, barely manifest, or at any rate quantitatively incon- spicuous, we have that multitude of non-economic potentialities which derive their force from motives of a higher order and figure as the gratuitous effects of civilization. It is also not progress simply as such that fosters this relatively great development of the economic factor in the state ; this phenomenon is referable to a one-sided progress within the particular epoch of cultural development in which we live. A development of a higher form, which shall leave this stage behind, is not onlv possible; it lies within the sweep of the modern conce}:)t of the state, and it 58 THE SCIENCE OF FINAN'CE. is even distinctly foreshadowed bv the contradictions existing in modern national life. However, for all practical purposes, and for any period of time that it is necessary here to take into consideration, the pub- lic economy remains the central fact of national life. Indeed, the most immediate problem in actual practical affairs concerns the inculcation of such an intelligent insight as shall comprehend the reasonableness and the necessity of this traffic on the part of the state, in order that the individual citizens may come to live up to their duty as loyal members of the commonwealth. For, spite of all declamation about political liberty and the dignity of citizenship with which our century resounds, the modern man still falls so far short of the true political disposition and political insight, that it will j'-et for a long time continue a difficult and necessary task to impress on his stubborn spirit the utter necessity of the state, and, since he is neither willing nor able to devote his energies to the service of the state, to bring him to an honest recognition of the economic consequences for the state, that result from the modern system of division of labor in private and public affairs. The following pages are an attempt to contribute what I mav ''^^oward this end. II. THE DEVELOPMENT OF THE FUNCTIONS OF THE STATE. § 34. A discussion of the functions and the purpose of the state from the point of view of the underlying principles may quite as well start from the question as to what classes of activity the state should leave to private initiative, as from the correlative question stated from the opposite point of view, viz., what func- tions the state should assume in order to refund out the individual life of its members. Ever}' investigation that proceeds from the historical stand- point sees in the state a process of growth, in the course of which both the structure of the state itself and the trend of development in the social life of the community undergoes a progressive adaptation to the requirements of the unfolding THE STATE AND THE PUBLIC BUSINESS. 59 national life. The meaning of the state's activity, the bearing of the so-called encroachment of the state upon the private life of the society which it comprises, is ever conditioned in the course of this historical development by the stage of culture already attained at any given point of time. So that the degree of culture attained at the same time indicates the height and amplitude of the state's proper activity ; a scanty culture expresses itself in a scant measure of national development. For this reason any discussion which aims at an elucidation of the general principles which are to govern the limits between state action and private initiative will be futile if it does not take account of this pro- cess of historical growth. It is only on the basis of a definite consciousness of social aims, and therefore only on the supposi- tion that a certain definite stage of culture has been attained, that we are able to say anything as to where and why the line should be drawn. We must also not allow ourselves to be deceived by the pos- sibility of fluctuations to one side and to the other in points of detail as to what matters the requirements of advancing culture may intrust to private initiative on the one hand, and to state action on the other ; the main fact remains that what wc have to do with is an ever swelling stream which irresistibly carries forward the progressive development of the functions of the state, — provided only that the general culture continues to advance. It may very well happen that in matters of detail the state will withdraw its hand from a variety of activities, or at least that the hand of the state may not continue to bear upon a given point with the same weight as before ; but this is nothing more than such an alteration or contraction in the aggregate functions of the state as is much more than compensated for by the multi- plicity of new duties which an advancing culture is continually urging upon the state on every side. It is therefore true that a comparison of our own times with the state of the last century gives the impression that a prepon derance in the degree of state activity and state control rests 60 THE SCIENCE OF FINANCE. now on one side, now on the other, — here with the earlier, there with the later era. Which term of the comparison is to carry off the palm will depend on the point of view from which we con- template the old times and the new. The preponderance seems to belong with the earlier state in so far as regard is had to the recklessness with which, in the earlier times, the life of the individual was constrained by the superior discretion of the administrative authorities — the degree to which, in the thousand and one petty affairs of everyday life, of business and pleasure, of morals and religion, the magistracy meddled with pedantic hand. But the picture changes as soon as attention is called to the fact that the space afforded by the widening of the sphere of private life and the corresponding lightening of the duties of the state has been filled by a body of new state functions, which may, in principle, have been contained in the theory of the earlier state, but which still are of so novel a character and of such considerable magnitude that, taken altogether, the ancient state and its economy are dwarfed by comparison with the state of the present. § 35. But magjiae molis erat romatiam condere gente?n. From the beginnings of national development to the stage at which we stand — even though that point is very far short of the con- summation of development — is a long and irksome way. J. G. Hoffmann, in the introduction to his Lehre vofi den Steiiern, very aptly says : "The delusion that security of life and property, the productivity of labor, and the consequent possibility of acquisition and enjoyment, and even the elevation of the spirit- ual and the ennobling of the moral nature — that all these good gifts come to man in the guise of gratuities, is itself a proof of the advanced stage of culture which the greater part of Europe at present occupies. As the grown man has long since forgotten the pains it cost him to learn to speak, so have the peoples, in the days of the mature growth of the state, forgotten what was required in order to free them from their primitive brutal savagery." In point of fact, how significant was the involuntarv testimonv THE STATE AND THE PUBLIC BUSINESS. 6l which the eighteenth century, with its repudiation of the historic state and its yearning after the primordial state of nature, bore to the blessings of the inherited culture which it ungratefully enjoyed. For the yearning after a state of nature was possible only on condition that all those achievements which separate man from the real state of nature were assumed as spontaneously existing. The craving was for an escape from the refinement of a civilization which had turned its back upon nature, but by no means for a return to the actual conditions of primitive culture, to the "primitive state of Nature, where man is man's enemy" ; it was a craving for a paradise of amiable innocence and sim- plicity, such as had for thousands of years filled the childish day- dreams of the peoples. It was in fact an instance of that oft- noticed optical illusion of the human spirit, by means of whcih the images seen by poetic fancy in the remote future are reflected back into the remote past ; an illusion which was made possible by, and which will ever recur as an outcome of, a method of his- torical study that sees in the past not so much what has actually taken place as what it is thought desirable should have taken place. Accordingly it also came to pass that the word "Nature" acquired such a shifting, iridescent sense as to leave it uncertain whether it was not employed rather as an expression of the demands of the new departure than as a serious claim with respect to the character of what lay in the past. And as a matter of fact we have come to see in the course of our Gnmdlegtmg (vol. i.), that the concepts of "Nature" and "Natural" as employed in Political Science have long been in an unsettled state, and have only lately acquired a substantial consistency through the means of profounder research. § 36. It lies not within our power to reverse the current of history. But each succeeding period in the course of history contains in itself the whole stupendous difference between one epoch and another, in that it comprehends a variety of races and of state organizations. 62 THE SCIENCE OF FINANCE. The eighteenth century was by no means without a knowledge of and an interest in this sort of comparative study. And all the more remarkable is the dominant influence exerted by the veil through which they were wont to see these obvious facts -and in virtue of which their affections went out toward the fancied innocence of the "children of nature." An historical research of such abundant fruitfulness has by this time so prepared the way for our study that the daily increasing wealth of observation of primitive stages of culture which now offers itself affords us a veritable laboratory of ethnology. And this not only speculatively. An increasing commercial intercourse with such primitive races, in which also the German people is now daily coming to be more and more concerned, affords abundant opportunity in practical life for modern civilized man to rid himself of the illusions which have veiled the actual course of national development from his eyes. It is brought home to him immediately in his own person — as a matter of life and limb — what a debt of gratitude he owes for the security afforded by that ancient fatherland from which he has taken his way out into the outlying regions of humanity as it exists in a state of nature. The horrors of primitive savagery which threaten him, and which make all life precarious from day to day, help him to appreciate the enormous interval between his home and his foreign environ- ment. Here, in the absence of state organization, he learns to understand the hard necessity out of which sprang the earliest efforts of mankind in the direction of order and security. § 37. This primary need, which so laboriously lays the foundations of all human development, furnishes an explanation of the fact that the culture of all peoples is for many centuries of its -earlier stages occupied with the establishment of authority and order. These are the necessary conditions of growth for any higher or more complex culture. Such is the case even under the exceptionally propitious circumstances of that favored branch of the human race which has occupied the foreground, or rather THE STATE AND THE PUBLIC BUSINESS. 63 has alone occupied the stage of history. In the meantime the great number of other peoples have never succeeded in establish- ing this primary condition, but on the contrary, in their attempt to lay a secure foundation for an orderly social life, have been toiling and struggling in vain from the very beginning down to the present under the never-ending curse of pristine violence. European humanity, destined to the attainment of a highl}- developed culture, has, during these last centuries, reached an amplitude of national development which seems very far removed from the rudeness of primitive times. But this European humanity has also passed through a protracted struggle, and the sole effort of their states for a long time past has been directed to the establishment of that reign of order under which each individual citizen rejoices in the security of person and property. §38. The well-worn concept of a "civil- (legal-) state" \^Rcchtsstaat\ is sometimes contrasted with the other concept of a "police-state" or a state organized for the public welfare, or again, with the "culture-state." This shifting of the contrast shows that the content of the idea is a variable one. In the form in which it has been handed down to us by the philosophy of the last century, the idea covers simplv that fundamental function of the state which secures to each member of the social organism the enjoyment of his rights. The second meaning of the " civil- state " which has been brought into the foreground in our own time on the contrary has come to terms with the more compre- hensive modern range of state activity, and has accordingly no quarrel with the " welfare-state " or the " culture state," but quarrels only with the " police -state," and even this only in the more objectionable sense of the word ; that is when it is used to denote a state that rules by the method of arbitrarv discre- tion as contrasted with a state that governs under the forms of law. Even our political terminology has been at great pains to emancipate the concept of the earlier "civil-state" from the 64 THE SCIENCE OF FINANCE. restrictions of its narrow meaning ; still the service rendered by history in exhibiting to us the civil-state in this narrower sense is none the less important. The most -primitive institutions of the Germanic common- wealth with which we are acquainted do after all mean nothing further than a coincidence of law with force. The individual member of the commonwealth enjoyed security for his own person and possessions just in so far as he, being an able-bodied man, could make his claim good. The coincidence of the fran- chise with the ability to bear arms is a simple consequence of the conditions in which the primitive state is placed. What the modern poet expresses in high-flown words and in meta- phorical language — " He alone deserves liberty, as well as life, who daily has to conquer it" — holds true literally of these peoples. Advancing human culture has not stood its final test until it has successfully abolished the necessity for this union in the same person of order and the force which secures it. So long as that has not been accomplished there is but this single alternative offered : either every man must put all his energies into the struggle for the prime necessaries of life, or he will have to submit to living without these prime necessaries and at a correspondingly degenerate level of existence. The course of history teaches that the solution of this problem calls for a process of many centuries' duration, in which progress seems impossible except by passing through apparent regressions. § 39. The progress and regress which we have in mind mani- fest themselves in the following manner. In the first place there is always present a tendencv to dif- ferentiation. In point of fact even the franchise belonging in com- mon to all able-bodied men stands out in harsh Contrast with the disfranchisement of menials, slaves and all who are physically infirm. Further development widens the chasm through the opportunities afforded by an increasing differentiation. The growth of population, the stationary character of settlements, THE STATE AND THE PUBLIC BUSINESS. 65 the limited extent of the available land, the intensification, through growing complexity of social life, of the agencies tend- ing to produce a rise or fall in the social scale, and not least the commendable habituation to steady and peaceful labor, — all these alienate the man more and more from an obligation which is held to consist in standing ready daily to assert one's right to life and property with armed hand. In consequence there arises a separation of that part of the population which by inclination and aptitude continue to bear arms, from the others who by inclination or of necessity take to a peaceful life. Now since the possibility of such a life of peace is as vet a desideratum the conditions for which are wanting, inasmuch as a defenseless, peaceable element in the midst of this rude environment is at anv instant exposed to an armed, unpcace- ful element ; therefore there is but a single expedient at hand, namely, the submission of the peaceable element to the force of those who bear arms. Nothing sheds so clear a light on this matter as the connec- tion subsisting between two different kinds of allegiance which, it seems to me, have been conventionally placed in too sharp a contrast to one another : the relation of villenage and that of citizenship in the medieval towns. Not only that the duties of the lord in relation to the villein were expressed in the same form of words that served to describe the relation of the bur- gess to the town (the lord was to defend and champion the cause of the poor man, to succour and shield him); it is also to be noticed that the burgesses who removed from the town into the country accepted villenage as a substitute for the municipal franchise which they lost, or while still retaining the rights of the burgess they sometimes (perhaps on account of having fre- quent occasion to pass back and forth o\'erland) acquired allegi- ance to some neighboring lord, in contravention, it is true, of the inhibition by the municipal council. And bv preference allegiance was sworn to whomsoever was the most lawless in all the land, and men were wont to change masters according as they expected more efficient protection from one than 66 THE SCIENCE OF FINANCE. from another. And all this took place as late as the fifteenth century.' Peace and the security of person and property therefore appear here as a service which was tendered to and acquired by private persons as a matter of bargain and sale. The conse- quence of the situation was, as follows naturally from the char- acter of the service rendered, that the one offering" the service was the powerful party, the purchaser the feeble one. ^ 40. Evidently progress will consist in rendering possible the secure enjoyment of a peaceful life without the dependence of the weak on the strong. This can be fully attained only in that the superiority of the strong over the weak disappears through the growth of a peaceful disposition. But inasmuch as this would require an infinitely long course of progress from the beginnings of human social life to a millennium of peace, the question comes practically to concern itself only with particular stages of this progress, within which the purpose is in each case to widen the sphere of the peaceable activities and as it were to remove the element of violence to the margin of this widen- ing field. The City of the Middle Age is the prototype of a peaceable community in the respect that here for the first time, within very narrow limits (made possible by the adoption of industrial occupations), the interests that make for peace combine and fence themselves off by means of fortifications from the violence of the surrounding country. Wall and moat which serve to render a peace-needing, industrious community secure, are really the foundation of the state organization the end of which is the establishment of peace. There is of course still a demand for able-bodied burghers who are to man the breastworks and defend the town against the enemy ; and also, of course, the peaceable- ness of the life within the walls is only relative, as contrasted with the turbulent world outside ; but in this way alone is it pos- ' Karl Biicher, Die Bevolkerung von Frankfurt am Main iin /4. um/ /_<;. Ja/ir- Ziiinderl (I'i'ib), vol. i. pp. 480-97. THE STATE AND THE PUBLIC BUSINESS. 67 sible to make a beginning and redeem an oasis of peace from the waste of all-prevailing turbulence. Further progress for centuries consists in what is equivalent to progressive extension of these town walls so as to create ter- ritories, states, kingdoms, whose essential nature in so far as concerns their relation to the towns expresses itself in the secur- ing of a correspondingly wide field within which the peace is kept. While at one time a community of interest in the securing of a peaceable existence led people to shut themselves up within the narrow space of the town and so secure themselves against dis- turbance from without, there has, by slow degrees, grown out of these beginnings a domain of peace such as includes a common- wealth of thirty, forty, fifty millions of people ; people whose life interests centre in peaceful labor, in peaceful industry and enjoyment, and who no longer are exposed to a disturbance of peace at the limits of the town but only at the boundaries of the nation. And this again is not the result of a process of nature, but a heavy piece of forge-work from the workshop of history, in which it lies to rise through progressive trans- mutation of the commonwealth to higher forms and wider spheres. § 41. Precisely because the serious hardships which were necessary in order to bring about the possibility of a peaceful organization of life are not tangibly present to the senses of the modern man, or because — fortunately for him — disturbances occur but infrequently to remind him of what he ungratefully enjoys in the placid flow of existence ; for this reason he is, in good human fashion, inclined to take the good that comes as a matter of course, and only find fault with and feel the absence of whatever may still be lacking. But the central fact of this evolution is to be sought at a point which lies without the conscious life of the modern man and citizen. To him it seems natural that he should inhale the atmosphere of peace every moment of his life, just as he inhales the oxygen of nature,^ in truth it is the grand achievement that 68 THE SCIENCE OF FINANCE. has come of the protracted efforts of culture in its struggle with primitive human nature. But while this unconscious acceptance of the attained security furnishes a striking testimony to the achievements of civilization, there is needed, in order to a theoretical insight into the intimate relation subsisting between public sacrifice and benefit, a consciousness which shall grasp the significance of past expenditures and more particularly of such expenditures as are still requisite to further this purpose. Great as is the advance already accomplished along this line, it can be maintained only at the cost of further continued great sacrifices. Indeed, the habitual bearing of heavy burdens in order to secure the peace, grave as they may seem, constitutes but a relatively easy burden in comparison with the more painful and dangerous disturbances which would result in case these burdens were not submitted to. § 42. We have now seen how protracted a piece of work it is to elaborate the mechanism of a commonwealth which shall maintain tranquillity among men in place of the rude savagery of the state of nature — which creates such organizations as will suppress every disturbance of the peace within the bounds of the community, and erect an iron circle of defense against the threats of hostile forces from without. It is evident that this preliminary work will have to be accomplished before the state can turn its energies to other, higher, nobler purposes, which will thrive only under the shelter afforded by a state of peace. However, when this fundamental prerequisite has been com- passed there are innumerable agencies in the developing civiliza- tion which will climb and spread over the walls of these great institutions established for the keeping of the peace. There is at hand the organized force which first came into being as an authority established to suppress the disturbing forces, but which, being present, is ever a powerful means for other purposes which may likewise need the aid of such a force. This intimate connection of the fundamental function of the THE STATE AND THE PUBLIC BUSINESS. 69 state with all ulterior purposes of the "culture-state" is suf- ficiently obvious. It is something in the way of a miracle, this segregation of a superior authority which, though itself originat- ing from the multitude, still compels this multitude into the ways of an amelioration that runs counter to their natural instincts. But from the accomplishment of this segregation there follows as a matter of course a necessity that this superior power should take all tendencies for good under its protection. A state of peace, however, is the soil in which such tenden- cies rapidly and plentifully increase. Indeed, it is worthy of remark how these tendencies venture out into the light of day even in the midst of an age when this preliminary work is not yet accomplished; as, e.^., already in the depth of the Middle Ages, in the midst of bloody feuds and daily deeds of violence, universities arose and arts and sciences were cultivated which pre- saged the coming of a happier era. And even more remarkable ! We find that through all the centuries which separated the down- fall of the classic world fromthe close of the Middle Ages, in the midst of the preliminary work required when the state was only beginning to take shape and emerge out of the rudimentary stage, the attempt was constantly renewed to recall to life the relics of ancient splendor. A series of attempts at reawakening into broad daylight the spirit of Rome and Athens, which have attained their results only after the state of later times has long ago trodden out its mediaeval baby-shoes. § 43. A second point is worth noticing in this connection. We speak of the centuries of the Middle Ages as an evolution out of the beginnings of Germanic nation-making simply. But the influence of the civilization of antiquity affects the process from the first. These influences were not lost to European cul- ture. Indeed, there evolved out of the bosom of antiquity an institution whose ofUce it was to take into its care, and to instill into the new civilization in process of becoming, the sum of all past achievements in religion, morals, art and science. This was the Church. 70 THE SCIENCE OF FINANCE. The church is one of the most intelligible means for solving the riddle of the elevation of refractory man from a state of nature to a state of peaceful civilization. Indeed, taken in a gen- eral sense, this is the means by which the nobler impulses of crude human nature are awakened to life, by which the heritage of earlier culture, fortified by authority, is transmitted to the peoples of a later day. Through the church, then, comes about an habituation to the ways of peace ; through the church comes also the fostering care of all those things which are first made valuable by a state of peace. Nearly every branch of activity of the modern state in so far as concerns that fostering, furthering, helping activity which bears upon the processes of productive industry, on science and art, on the higher and lower education, on charities and the care of the sick, was either exercised or out- lined in the activity of the mediaeval church. For centuries together it has been the church alone that pos- sessed adequate power, and at the same time occupied the requi- site standpoint for enterprises of this rank. And it is only after the church has brought it to pass that such duties are understood and such forces engendered in the world outside, — then only does the state undertake to supplant the church. The co-ordinate position which the church of the Middle Ages occupied beside the state is due to this fact. The mediae- val church performed duties for civilization which served not only to supplement the yet incomplete state, but also, by its appeal to a higher court, to reach out beyond the state's sphere of action. But so soon as the state has itself become possessed of these elements of civilization it comes to refuse acknowledg- ment of the need of any such supplemental agency or of any authority which transcends its sphere. The state does not deny the significance of the ecclesiastical functions nor the authority to which the church appeals, since it transfers both to its own domain. § 44. It is a characteristic of the state, in the form in which it has developed since the sixteenth century, that it reaches out THE STATE AND THE PUBLIC BUSINESS. 7I with a long arm and takes all the activities of life under its care. The state of classic anticjuitv, tyjMfied by the Greeks and devel- oped by the Romans into the powerful bureaucratic state of the later empire, has also become the model for the modern state. The state is again becoming or is about to become what it then was, — the highest organ of human social life. Herewith we have already seized the position that whatever is a vital factor in the existence of the individual citizen is also a proper object of state action. It is not the difference in aims or interests that serves to distinguish the sphere within which the state administration should further the life purposes of the citi- zen, but the distinction between the two spheres, of state and of private activity, depends on causes which, under the particular circumstances of an age or a people, serve to give the one sj^here a preponderance over the other. I may here refer to the state- ment of these reasons in the first volume (sees. 213-216), as also to the examination of the circumstances which lead " free competition" and corporate activity mutually to supplement one another (sees. 293-304). If the state is constituted by the combined forces of the units which it includes, then its action will properly reach wherever the purpose sought to be accomplished is of such a character as to call for this consolidated force. We have satisfied ourselves that such a contingency is present in an extreme form as regards the great fundamental work of laying the foundations upon which that authority is erected which establishes peace and security, the prerequisites of all the other ends of life. In close relation to this, and in dependence on it, is that further function which goes to secure or reinstate the peace of the land by decisions with respect to a violated or a disputed right. The institution of a superior tribunal which is to deter- mine the objective right of a case as between the wrangling contradictions of private life, is essentially a matter requiring organized spiritual and moral forces. With this convergence of spiritual forces it also becomes pos- sible to establish such institutions for the development of the 72 THE SCIENCE OF FINANCE. spiritual life as will realize as high a level of culture as is possi- ble under the circumstances, and such as for this very reason over- passes the horizon of the individual. Hence arises the important function of public instruction. The grounds for the consolidation of powers which the state brings about may also sometimes be found in the technical character of the contrivances which are to meet certain wants of society. In this connection we may call to mind the communal management of roads, inclusive of the means of transportation, whose peculiar nature makes it expedient to have a single concern minister to a considerable group of wants. In so far as great mechanical progress has latterly created a great extension of the work to be done in the direction last spoken of, the aggregate progress due to these improvements carries with it a tendency to concentration of forces which will affect the sphere of state activity, at least indirectly through its conse- quences. The greater, e.g., the consolidation of powers under the management of individuals, the more urgent becomes the necessity for bringing the mass of these interests into harmony with the interests of the community. But after the state has created whatever institutions are thought desirable, there still remain a great variety of directions of individual activity, which ma}' each in its own wa)- serve toward advancing the consummation of human effort. Therefore does the superior spiritual and physical power of the state have to do with these also, so far as there may be need of help, support, prohi- bition, relief. Herewith we have indicated the whole domain of the controlling action of the state, which is in an especial degree^a varying one and which in principle comprehends every sphere of individual life. §45. I have already (vol. i. sees. 187-212) discussed the development of wants as a fact incident to advancing civilization. In this discussion it is not the range of wants — which is infinite — but rather the rational disposition and regulation of them in THE STATE AND THE PUBLIC BUSINESS. 73 detail and the rational character of the aggregate selected that constitutes the central point. With respect to the state, as concerns its various lines of activity, we are led to the application of the same principles which we have already become accjuainted with in the general part of the work. The characteristic feature of the state in resj^ect of the development of its wants consists in the superior rationality of the state as compared with the private economy of the individual. In the life of the individual the motive to a development of his wants springs directly from the natural impulses ; it is only on the broad foundation furnished by supplies sufificient to cover the essentially primary wants that a higher culture can bear fruit in the form of nobler wants. On the other hand, it is inherent in the nature of the state that its demands, taken as a whole, go through a clarifying pro- cess, or are the outcome of intelligent deliberation. Food, drink, clothing, shelter, amusement, social intercourse — these are the primary wants with the covering of which private economy is mainly occupied ; peace, order, security, culture, relief, — these are the higher needs which are mainly served by the public economy. While the state has for a long time past felt called upon to prune the superfluous growths of the system which serves the primary wants, it has on the other hand also become an awakener of the higher wants, in that it has created institutions for educa- tion, science, art, charity, sanitation, etc. And not only has it awakened such higher wants, but in peculiarly urgent cases, as e. g., school attendance and legislation for protection of laborers, it has even made use of its power of coercion in order to create a general demand for the institutions which it has established. ^ 46. The increased range of public demand in modern times is especially due to two causes : progress in technical efficiencv, and the spread of democratic ideas. In the first place as regards technical efficiencv. This is of peculiar significance for that branch of state activitv which is pri- 74 THE SCIENCE OF FINANCE. mary and fundamental, namely, provision for self-defense. This provision and solicitude comprehends in itself two distinct pairs of contrasted factors : the contrast between the means available for offense and for defense, on the one hand ; and that between dif- ferent commonwealths that stand opposed to one another, on the other hand. As a consequence of this relation, advancing tech- nical efficiency means a progressive incitement to the achieve- ment of further improvements on the basis of the improvements already achieved. Every improved means of defense calls for an improved means of attack ; every advance in weapons of offense calls forth an advance in the means of defense. Technical knowledge, however, after it has once entered upon the course of development into which progressing natural science has carried it, serve's the purposes of either side alike. It serves equall}- each of two opposing peoples, for it is a common possession of the age, and an}- advantage which one nation may todav possess above another will tomorrow be surpassed by a fresh advance achieved by that other nation. This race, kept up as it were by an automatic regulating appa- ratus so long as progress in technical knowledge goes on, of course presumes continually increasing sacrifices. And these sacrifices, as also the continued progress of the technology of war, is made possible by the ever increasing productivity of peaceful industrial knowledge. As fast as an advance is made in the tech- nical knowledge of peaceful industry the technology of war stands ready to claim any new resource made available. This fateful inseparability of the two movements might be broken only by means of a radical change in the bearing of peoples, originating from within. And this inseparability of war and progress, it is to be remarked, is therefore a fact necessary to be taken into account for the present and for the future ; for alterations so radical and profound as that referred to can take place only very slowly. It is possible to contemplate with less mixed feelings those advances of technical knowledge which serve the manifold improvements and comforts of a peaceful existence. Compare the modern accommodations of an American house or of the Amer- THE STATE AND THE PUBLIC BUSINESS. 75 ican metropolis with the ineptitude of a German provincial town ; compare the contrivances for cleanliness, lighting, water-supply, street-management, etc. Notice the great progress which our cities have made or are on the point of making in this direction. Espe- cially noteworthy is what our larger German cities have accom- plished in this respect during the last generation, and the changes they are engaged in today. The progress of technical knowledge so intimately touches the primary demands of civilized life that also within this domain of peaceful industry the improvements of technology give rise to an increasing influx of new wants. § 47. Inasmuch as the class of improvements in technology last spoken of has to do mainly with amelioration of the condi- tions of life for the community, it will naturally come about that the democratic ideas of the new era will exert their influence in the same direction to hasten and heighten the effect. The more widespread the concepts of human rights and human dignity are among any modern people, the more readily will the public bodies undertake to supplement the customary rights of suffrage with such social machinery as shall serve to elevate the culture-plane occupied by the lower classes. It is not only a fact of great financial significance for our age that the common schools, the care of the poor, sanitary regula- tions, insurance of laborers, and other like enterprises have come to be recognized as properly public business. How great this significance may be depends, in the case of each commonwealth and at every epoch, on whether they comply more or less willingly with the ever growing demands made for these purposes. The subventions to the common schools, the care of paupers, etc., are evidently of a very extensile nature ; and we may see how this . extensile quality is put to the test under circumstances where the force of democratic tendencies is highly developed. But since the age is everywhere permeated with this class of ideas, in one country as in another, the continual increase of this class of expenditures is unavoidable and unmistakable. 76 THE SCIENCE OF FINAN'CE. If it is true that the idea of equality achieves in the course of history a slow but ever progressing realization (cf. vol. i. sees. 312—16), and that our century constitutes a segment of distinct advance in this direction ; then are these contrivances whose purpose is the elevation, physically and spiritually, of the lower classes by means of the fulfillment of certain fundamental condi- tions requisite for all culture, an essential feature of the process. CHAPTER II. THE HISTORICAL DEVELOPMENT OF THE PUBLIC ECONOMY. Literature. A. Wagner, Finanzivissenschaft (j>. Aiiflage, 1883), voL i. sees. 2 1 2-2 1 7, and especially vol. iii. (i 886-88). Lorenz von Stein, Lehrbuch der Finanzivissenschaft, ^. Alt flage, 1885, vol. i. pp. 103-174. Karl Heinrich Lang, Historische Entwickehmg der Teutschen Steuerverfassiing seit der Karolinger bis auf iinsere Zeiten, 1793. 0&ox^,\^z\\.z, Deutsche Verfass- ungsgeschichte, vol. viii. (1878). Rudolph Gneist, Das englische Verwalt- iingsrecht mit Einschliiss des Heeres, der Gerichte und der Kirche, vol. i. 2. Auflage, 1868. The Same, Englische Verfasstingsgeschichte, 1882. Gustav Schmoller, " Die Epochen der preussiscrhen I^inanzpolitik " [Jahr- buch fiir Gesetzgebung, Verwaltung und Volkswirthschaft im Deutschen Reich, 1877). The Same, " Studien iiber die wirthschaftliche Politik Friedrichs des Grossen und Preussens iiberhaupt von 1680-1786 " (/a/zr- buch, 1884-87). Sigmund Adler, Die Organisation der Zentrah'erwal- tung unter Kaiser Maxijnilian, vol. i., 1886. K. G. Kries, Historische Entwickehmg der Steuer^ierfassung in Schlesien, 1842. A. F. Riedel, Der brandenburgisch-preussische Staatshaiishalt in den beiden letzten Jahrhunderten, 1866. I. PRIVATE ECONOMY AND PUBLIC ECONOMY. § 48. The purpose and scheme of this book require that the discussion must no more here than elsewhere be allowed to lose itself in a multiplicity of details. All we can expect to do will be to describe the main lines of the historical development by which the public economy and administration has come into existence, and demonstrate the necessity of what has resulted ; this will enable us to enter into the spirit of the resulting institutions and to understand how they have come to be what they are. Early writers on the Science of Finance ' distinguish the revenues of the state into those earned bv the government and ' Rau, Lehrbuch, vol. iii. (5. Auflage) sees. 84-87. 77 78 THE SCIENCE OF FIXANXE. those levied by the government. The former are subdivided into the revenues from "purely private business" carried on by the government, domains, and receipts from government monop- olies {regalia) ; the latter are divided into imports which are levied in case of particular transactions taking place between government and citizens (Fees), and imposts which are levied on the body of citizens simply on the ground of their obliga- tion as citizens and without any special return service on the part of the government (Taxes). Later writers on the Science of Finance have reduced this scheme to a gradation in conformity with historical develop- ment, in such manner that the course of development of the last few centuries — whereby the modern concept of the state as a public institution has grown out of the earlier legal concept of the state as a matter of private right and privilege — -shall be reflected in the course of the progress of fiscal administration from its earlier status of personal income to its modern status of national revenue. As a matter of fact, such a gradational advance from manorial revenues to taxes is traceable. We may notice how in the first place the business enterprise of the state came to assert a privilege above private enterprises of a related character in virtue of the prerogative attaching to the affairs of the commonwealth. Then, before attaining to taxation as the means of revenue proper to the fully developed fiscal administra- tion, there intervened a transitional stage of fees, which, indeed, are of a nature akin to the tax, but which still retain some feat- ures of the system of industrial income in their dependence on the relation between special service and special payments. The unsatisfactory feature about this conception of the mat- ter lies in its attempting to compass at one and the same time a presentation of the history of finance and an exposition of the modern methods of finance. This advance from the status of private economy to that of public economy may correctly describe the actual line of development in the course of the centu- ries ; but the attempt to make the modern system of finance intelligible as a structure whose foundations are of the character HISTORICAL DEVELOPMENT OF THE PUBLIC ECONOMY. 79 of private industrial enterprise, while its upper stories are of the nature of public business, contradicts the requirements of that logic which conceives of the modern public economv in a manner analogous to that in which we are accustomed to conceive of the modern state as seen from the standpoint of public law. Precisely as in the case of public law certain fundamental concepts — sovereignty, citizenship, etc. — constitute the premises out of which, in logical sequence, there follows the essential character of the modern state, so likewise must the fundamental principles of the modern public economy be sought, not in the gradation and stratification of the historical development of pub- lic wants, but in the logical relation of parts to a whole. § 49. The designation itself, which is in vogue even in the most recent works on finance, betravs the absurdity to which we have called attention. How is it admissible, we may well ask, to speak of a Privatenverb on the part of the government of the modern state? The following objections present themselves. In the first place there is the obvious reflection that in the modern state the concept "private "has a meaning only as opposed to "the state," and that it must accordingly be onl}' in a special meaning of the word that anything which the state acquires can be called a "pri- vate income." What the government today acquires it accpiires not only not as a private person, but not even from the motives or with the purposes which determine a private person in his pursuit of gain. For the difference of purpose and of point of view here indicated constitutes the characteristic fact of govern- mental action, and an appreciation of this disparity results in an analysis which immediately excludes the portions of government activity in question from the domain of finance. Domains and royalties are facts belonging in the financial history of the form- ative period of the public economy. In the fully developed eco- nomy of the modern state these institutions can continue to exist only on condition that some other basis be assigned for their retention than the fact that they yield a revenue. They must be 80 THE SCIENCE OF FINANCE. viewed and justified from the point of view of public expediency : a point of view which differs radically from that which character- izes private economy. In the second place, it is precisely the latest developments of socio-political and socialistic views that invert the whole stand- point of this so-called " private enterprise." So that the mode of looking at things which gives rise to this concept of a "private enterprise " on part of the state is completely turned around in the discussion between the advocates of private ownership and the friends of collective ownership. For if it is really to be the mission of the present and the future — to a greater or less extent — to widen the sphere of state ownership, then we are directly confronted with the fact that what has lately, simply in virtue of the incompatibility of its name with the requirements of the modern state, been figuring as a relic of the past, comes forward as the essential characteristic of the new social and economic order. From this we have the following consequences. A syste- matic discussion of the public economy must either take for its point of departure public ownership and public enterprise as the basis of the satisfaction of the public demands : in this case the concept of " private enterprise " disappears altogether, not only as applied to the government, but also within its proper sphere as a means of livelihood for the body of citizens, since it rests on private ownership and private industry. Or conversely, the discussion of the public economy must start from the private property and private industry of the citizens — as happens at present ; in which case the public economv comes to rest on the receipts which the private productive industry of the individual citizens will afford it. ^ 50. It is necessary to call to mind at this point that in the economy of the modern state private property is the fundamental fact on which — more or less consciouslv — the whole structure of the relations of the bodv of citizens is based. This by no means excludes the possibility of a mass of public HISTORICAL DEVELOPMENT OF THE PUBLIC ECONOMY. 8 1 property being held in public ownership, whether it be as a sur- vival of the past or due to the new era and its tendencies. But even in the face of the undeniable fact that such public property exists in our modern states and communities ; even though it is in fact, from a varict}' of causes, on the increase ; just on this account it is necessarv to avoid an ambiguity which could onlv serve to obscure the relation subsisting between pub- lic ownership and the decisive, fundamental fact of private own- ership. There are only two starting points ])ossibIe. Either we must start from the basis of common ownership, or from that of private ownership. If the state is the common owner, and if the social economv is accordingly the public economy of the state in the sense of Rodbertus's ideal, then it follows as regards the fiscal system that the whole economy of the state proceeds on a rad- ically different basis. The immediate consequence is that there no longer exists any contrast of the sort we have been accustomed to accept as a matter of course as subsisting between the revenues of the public economy and those of private life. For the collec- tive revenue will in this case come to occupy the central position, and private individuals will draw their incomes from it as officers and operatives in the employ of the state establishment. They, the officers and emplovees, who are in this case the aggregate body of citizens, then draw their incomes from the state, instead of, as is the case under the existing system, the state drawing its income from the incomes of the citizens. That is the alternative. Contrary to what is once in a while insisted on in these later times, this contrast is not sublated by the presence of state establishments for the management of pub- lic industries, such as are distinctlv on the increase in the modern state. These facts rather confirm our claim, in that this manage- ment is obliged to appeal for a justification of its methods to social facts' which owe their existence to the institution of private property. The stratification of society, which rests on private property and private industry, furnishes the basis on which the fiscal management of public instruction, public means of com- 82 THE SCIENCE OF FINANCE. munication, etc., proceeds. Indeed, many of the comprehensive state establishments are really nothing but a contrivance for col- lecting from private industries the contributions wanted for state purposes, as e. g., the fiscal monopolies. II. THE PUBLIC ECONOMY IN PROCESS OF GROWTH. § 51. The whole historical development of the public economy has hitherto consisted of nothing but an increasing differentiation between the private economy of the individual citizens and the public economy of the commonwealth to which they all belong. The strength of our modern concept of the state lies in the con- sciousness of a developed individuality on the part of the body of citizens, which, however, is in turn supposed to lend a power- ful support to the whole. But as is necessarily the case in all human development, a long and arduous course of historical growth is needed to bring this to pass. In the first place it is to be remarked as we have already seen, that at the beginning of national development this contrast is entirely absent. The primitive populace is the visible mani- festation of the primitive state. This crude primitive type, which, significantly enough, closely resembles a certain high- strung ideal of the free state, sinks the individual man in the state, and also at the same time sinks the state in the simple aggregate of men. But all this changes. The crude equality of the earliest times (even imperfect as that equality is) gives place to a differen- tiation in the course of which arises an hereditary monarchy, an hereditary nobility, then a nobility of service which in turn develops into an hereditary nobility, repeated changes in the dis- tribution of property by the fortunes of conquest, rise and fall of different industrial classes accompanied by a greater contrast in property relations; all these causes, together with a great many others, conspire to bring about a manifold gradation of society in place of an equality.' ' G. Waitz, Deutsche VerfassungsnescJiiclite {2. Aiiflase, 1^70), vol. ii. pp. 300 //;/^ prepared the way even while temporarily lead- ing farther awa}' from the truth at the outset. § 72. Ludwig Heinrich von Jacob, the theoretical writer on Finance, may be taken as exemplifying this latter fact. His Staatsfinanzwisse'uschaft (1821) takes a position with respect to the regalia which may be characterized in the following propo- sitions. If the state surrenders all industries to free competition, says Jacob,' it will (i) result in increased production, since free com- petition yields the same product at a less cost; (2) the state is freed from all special interest in industry, and so loses the false motive it otherwise has to restrict competition or to favor monoj)- olies, etc. For these reasons we are constrained to discounte- nance all income from monopolistic industries owned by the state. Vol. i. sees. 3151?/ seq. Il6 THE SCIENCE OF FINANCE. If there are certain monopolies which the public good requires should be managed by the state, then these should at all events be administered, not as sources of revenue, but rather as institu- tions of public utilitv. In that case, however, it would verv soon appear that private enterprise could much more advantageously undertake their management and that the state could in this latter case exercise a much better and more thorough supervision of them than if it undertook to manage them directly. Such state industries as are administered as monopolies by the state simply for the sake of gain are under all circumstances detri- mental to the national prosperity, and are accordingly to be put aside. In conformity with this opinion, Jacob is of opinion that the postal service would gain very greatly both in point of cheap- ness and of public convenience if it were left in private hands ( under government control ) . But even while the postal monopol v is retained, the state should cover no surplus into its exchequer from the post-office revenues, since it would serve the public utility to better purpose to lower postal rates to the necessary extent and so still further facilitate communication, or else apply the surplus to improve the postal service. Malchus (1830), indeed, opposes Jacob's position, and in his Handbuck der Fhianzivissejischaft und Finanzvenvaltimg'' he brings the results of his experience as administrator and financier in the government of Wurtemberg to bear against the abstract dogmat- ism of the dominant school of his time. The view that in case the royalties were surrendered to private enterprise the state would be able to raise as large, or even a larger sum by taxing them, rests on an arbitrary assumption which is contradicted b}' experience. Malchus cites, among other instances, the example of the French tobacco monopoly of 18 10 and its fiscal results, as contrasted with the scanty revenue and the oppressive character of the French tobacco tax of 1804-1809. But when he goes on to defend the postal revenue against Jacob by classing it under a separate category (it is not to be regarded as a tax but only as compensa- tion for special services and benefits) he succeeds only so far as ' Vol. i. pp. 109 et seq. HISTORICAL DEVELOPMENT OF THE PUBLIC ECONOMY. II7 to make this dubious means of defense do service in bridging the chasm and carrying him over to •' the general principle that the Post is in its nature and essential character not adajjted to become a source of revenue, but is to be looked on simply as an institution established for purposes of the national economy (/. e., for economic purposes) and is devoted to a class of services which the government is in dutv bound to undertake, even though the income from the service should not cover the expenses." i^ 73. How nearly the position of K. H. Rau coincides with that of the old-fashioned Cameralists comes out with striking distinctness in his manner of dealing with the royalties, in his Lehrbiich dcr Finajizivissenschaft (5th ed. 1864). Not only is the formal classification of state revenues the same as that of Justi, but the topsy-turvy lumping together of undigested facts con- cerning the ro3'alties also recurs quite in the manner of Justi's discussion. Mining royalty, salt royalty, game royalty, tobacco royalty, postal royalty, etc. The only difference is that the toll royalty is thrown out of this promiscuous assemblage and is replaced by the telegraph and railway royalties, which have been discovered and added to the list. If anyone today enter- tains any doubts as to whether our science has made progress these late years, let him come face to face with the spiritual equanimity that goes with this manner of thinking, and if he has learned any part of what would (jualify him to pass an opinion on the present position of the science, he will be affected by this juxtaposition of coinage royalty, tobacco royalty, postal royalty, precisely as a musical ear is affected by a succession of false notes. If kindred spirits exist who feel themselves at home in Rau's range of ideas, they arc welcome to it ; they probably have their own reasons. At the same time these purely sub- jective sentiments can in no way prevent the latest popular- izer of Rau's Science of Finatice from deserving the credit of having done a scientific piece of work, in that he paused before that wooden structure and sought to lay a deeper foundation before going on. Il8 THE SCIENCE OF FINANCE. Rau was quite right in thinking that the Science of Finance is authorized, regardless of what the public law may recognize under the head of regalia, to proceed according to its own principles. But he does not carry out his position to its legitimate conclu- sion. He restricts this privilege of the science so far as to retain the regalia as a branch of the public revenues. In achieving an historic sense of the polity in which the royalties properly belong there was also achieved the scientific dissolution of this idea for the purposes of our time. In his estimate of the royalties for the financial purposes of the modern state, Rau does not greatl}' diverge from the position of his predecessors, Jacob and Malchus ; although he agrees with Jacob as to the line of thought (that is to say, with him he lies under the spell of the individualistic school of Smith), still, in consequence of his innate attitude of moderation, he is favorably inclined to existing institutions and so approaches the practical position of the experienced financier, Malchus. Nevertheless^ in proportion as existing usage and institutions are made the standard and guide of scientific thought, the science degenerates into a mere reflex of existing facts and falls short of its true ofifice. Rau's definition of Royalties is cautious, but it is also corre- spondingly superficial : "A prerogative of the national authority with respect to an occupation which would, in the absence of special legal enactment, belong among the ordinary means of livelihood of the citizen" (sec. i66). He goes on to say : Only a few occupations may properly be subject to a royalty ; otherwise the enterprise of the people would be unduly encroached upon. Individual undertakers are, as a rule, able to obtain greater results and to reduce expenses to a lower figure (sec. i68). The continued retention of a royalty is proper (i) as regards a given industry, if by exception it is capable of being managed as economically by the government as by individual enterprise; (2) with respect to the profits of a monopoly, if it conforms to the requirements of a good tax, that is to say, if it neither interferes with the production of HISTORICAL DEVELOPMENT OF THE PUBLIC ECONOMY. , II9 goods nor narrows the chances of acquiring a livelihood, and if, further, the net income so obtained is not obtainable by means of taxation; (3) from other considerations of statecraft (sec. 169). In the succeeding discussion of particular royalties, Rau adopts not the indifferently tolerable classification here indicated, but the genuine cameralistic one (sec. i/i): The objects of a royalty are (i) industries that deal with the land (mining, salt- works, game, etc.) ; (2 ) manufactures (coinage, tobacco manu- facture, gunpowder and, once more, salt); (3) trade (again salt) ; (4) services which afford immediate profit or pleasure (freight and express \^Fo}isc]iaffungsgciverbe\ post, telegraph, railways; also lotteries). In view of the party-colored character of his presentation I may, or rather I must spare myself the hopeless task of search- ing for a consistent point of view in Rau's discussion of royalties. § 74. J. G. Hoffmann has a clearer insight into the historical character of the royalties than does Rau. Since the constitution of modern states has undergone a substantial change, says he,' there is no longer any reason for regarding any contributions toward the public expenditure as of a nature different from other taxes merely because the government secures their pa3'ment by reserving to itself exclusively the trade in the commodities on which the tax is levied. The royalties now surviving are, how- ever, anything but a form of taxation ; they are not kept up for the sake of the revenue flowing from them ; the revenue being, on the contrary, simply incidental to certain kinds of business which the government has reserved to itself for the reason that the unhindered pursuit of the occupations in cjuestion by the subjects would jeopardize their own interests, — as, for example, in the case of the letter-post, coinage, ownership of rivers. Twenty years later we are told by Umpfenbach : It is high time the hobgoblin of royalties that has haunted the Science of Finance for so long were laid. ^ Die Lehre von den Steuern (1840), p. 25. 120. THE SCIEN'CE OF FINANCE. However, Umpfenbach's changing the style and title of the royalties into "fiscal prerogatives" is not of itself sufficient to achieve this result. Lorenz von Stein' sets out with the curious assumption that it is the task of modern financial science to subject the concept of royalties to such a revision as will give it a new lease of life. Neither the ground of this assumption nor the results of his efforts in this direction are readily discernible. The Royalty and the fact of Regality are in Stein's opinion two categories which are not contained in the abstract notion of the state, but are the historical outcome of the gradual develop- ment of an independent administration on part of the state. Hence it comes that these words have had different meanings at different times, as also that their meaning is not fixed even today. But what has giv^en them their standing in the theory of adminis- tration is, after all, the concept of the state's industrial sovereignty. What serves to bring them within the jurisdiction of financial science is the fact that in them the industrial sovereignty takes form in independent establishments belonging to the State, with state-owned capital and state management, and that these state establishments are also in part capable of yielding to the state a revenue, based on their industrial service and collected in the form of fees paid for their use. There is no proof whatever offered to show why "the notion of the industrial sovereignty of the state" is connected in any peculiar manner with "the idea of royalty" ; or why, if the idea of royalty is to be conserved at all by a process of dialectical permutation, it is the State's industrial sovereignty alone that is to be permanently connected with that idea. Stein goes on to conclude : " Royalties are, therefore, onlv to be considered as a particular, definite portion of the fiscal revenues of the state. They are an outgrowth of that industrial sovereignty in virtue of which the state, as the organ of the common interest, not only undertakes the performance of certain special services by means of its own capital and under its own '^ Finanzunsseiischaft, 5. ed. vol. ii. pari i. pp. 307 ft seij. HISTOKICAI, DEVELOPMENT OF THE PUBLIC ECONOMY. 12 1 immediate direction, but also obtains an income in the form of a business profit. The form under which this income is received is the fee ; its rate, however, is not fixed bv the fiscal standard of the highest possible net income, but is in part regulated bv the requirements of the general industrial development and the principles of political economy ; or the net income may even disappear entirely." Adolph Wagner' is at one with Stein to the extent that he divides the royalties of Rau into two great classes : those in which the form of a royalty is adopted simply as a convenient method of taxation ; and those which primarily are made to serve an " administrative " purpose. In matters of detail Wagner's criticism is the more searching and thorough, in that he differs from Stein in recognizing that the Royalty as it occurs in the lottery is also nothing but a form of taxation. On the other hand, Wagner discards the definition of Rovalt\' set up by Stein, and sums up the revenues classed under that head partly under "fees" (post, telegraph, coinage), parti}- under "quasi-private" \^privatzvirthschaftliclie^ revenues (railways). In this way he argues from the position introduced by Rau and Hoffmann that the fiscal royalty is an historico-legal conception which serves no purpose in the modern public economy or in modern financial science.^ What this conclusion of Wagner's leaves as matter for discus- sion is his view of the so-called " quasi-private receipts " and "fees." ^75. The foregoing attempt at indicating what efforts have already been made toward placing the developed exchequer in its true theoretical position, as opposed to the narrow views of the past, could not well be avoided if we are to reach a clear conception of what the problem before us is. The aim is to establish a clear distinction between the administrative office and the fiscal office of the modern state (see sec. 65 above). ' FitiaHzwissenschaft, voL i. 3. ed. sec. 207. = Likewise H. von Scheel, "Die Erwerbseinkiinfte des Staats," in Schonberg's Handbiich der politisiiien Oekononiie (3. ed. 1885), vol. iii. pp. 63 et seq. 122 THE SCIENCE OF FINANCE. Let US now, with this in mind, examine the position of royalties in the scheme of the traditional Science of Finance ; and in order to deal with the matter in its integrity as it stood while yet untouched by criticism, we shall select for examination the view of Rau (it recurs, by the way, in a very similar form in Roscher). Rau classifies royalties on two different principles: (i) according to their degree of adaptation to the purposes of the modern state; (2) according to the group of industries in which they belong. The latter classification has the merit of a com- plete naivete, in that it presents the historical data of the earlier state in a simple mechanical order for the purpose of discussing them according to the principle of adaptation laid down in the former canon of classification. It is worthy of remark how the material at this point bursts the thin shell of the " royalty" as of its own motion. The discussion of the salt royalty (sec. 186) develops into a comparison of the system of salt taxation employed by different states. The tobacco royalty is treated in the same way ; although, as being the most important example of the "indus- trial and commercial royalties," it is treated of in another place in compan)- with the gunpowder royalty, and then again in com- pany with the brandy royalty, which, by the way, is not treated in the same fashion, apparently for the reason that it is not so obtrusive a fact as the tobacco royalty. As a consequence of this method the chapter on taxation of spirits goes over into the theory of taxation (sec. 438 et seq.), as is also the case with a fraction of the discussion of the tobacco tax. The need which finds expression in this unwieldy manner in Rau's discussion has now more and more come to receive the recognition which was expressed in J. G. Hoffmann's words : " Since the constitution of modern states has undergone a sub- stantial modification, there is no longer any reason for regarding contributions toward the public expenses as of a nature different from other taxes simply because the government secures their payment by reserving to itself exclusively the trade in the com- HISTOKICAI. DEVKLOFMKNT OF THE PUBLIC ECONOMY. I 23 modities on which the tax is levied." Lorcnz von Stein, Adolph Wagner, H. von Scheel (simply to mention the names of recognized manuals) arc agreed on this point. Umpfenbach and Roscher, it is true, still occupy Rau's standpoint. § 76. The multiplicitv of the earlier royalties cited by Rau : mining royalty, game and fisheries royalty, coinage royaltv, postal royalty, railwav rovalty, water rovalty, gambling rovalty, are, in Rau's treatment, still slumbering under the crepuscular light of Cameralistics where fiscal and administrative aims are i nextricably entangled. Stein's new formulation sets forth the form under which the greater part of these royalties have retained a semblance of continued theoretical existence down to the present. A defensible theoretical existence thev do not possess. While advanced criticism has come to recognize the Royalty in some cases as simply a form of taxation and has accordingly relegated these cases of royalties to their proper class, the remain- ing cases fall into line under the head of Administration. The coinage royalty has no more to do with finance than has the crown supervision of weights and measures. It is to be noted as a matter of fact in the history of finance that the debasement of the coinage has been seized upon as a royalty, and that a Russian czar once established a lucrative monopoly of measures to be employed in trade. Modern science treats these matters as questions of administration.^ The traditional royalty is in the eyes of modern science solely an administrative fact, and when fiscal considerations in the modern state begin, the concept of royalty as such ends. The question of paper currencv finds its place in the theory of the public credit, the question of royalty involved possessing but a secondary importance, or none at all. Then there are the great establishments for purposes of inter- course, of recent origin or but recently developed into their pres- ent gigantic dimensions — post, telegraph, railways. The erec- tion of establishments of this class into a royalty is, aside from other considerations, also (juestionable on this ground, that the ' In the sense employed bv Stein. See vol. i. sec. 61 of the present work. 124 fHE SCIENXE OF FINANCE. invariable mark of this concept — the exclusiveness of the state establishment — is not, according to modern conceptions, an essential feature of the matter at all. The essential point to which the railway policy of modern Prussia is directed is quite distinct from the question of an exclusive state monopoly of the railways. This latter point is in fact not the object of anybody's efforts in connection with our railway policy. The reservation of a state power of grant and concession to private railway enterprise is a practice common to all civilized countries, and rests on sufficient, though certainly not financial grounds. But it this reservation is to be counted as an example of royalty, then we might fairly count every case of grant or concession to any industrial undertaking as a case of royalty. In so doing we should in point of fact openl)- revert to the habits of thought of past centuries. In the case of the letter-post the fact of a royalty is a matter of history. How far it is essential to a public postal service today is doubtful, to say the least. The element of peculiar strength in these great establishments is to be sought in quite another direction. It is their organiza- tion and magnitude that gives unity and strength to these under- takings, and thereby secures the best service at the lowest cost ; and it is this fact of the importance of the result to be secured that makes the undertaking worthy the attention of, or rather an unavoidable duty incumbent upon the commonwealth itself. If there are today, or for a number of years to come, a few roads in Prussian territory remaining in private hands, that is a matter of very slight consequence as compared with the great central question of a state railway policy. If the laws of the Empire have left room beside the Imperial Post for that local letter carriage which has of late been trying its fortune, that is by com- parison a trifling incident when contrasted with the unquestioned importance which the Imperial Post-Of^ce possesses today, inde- pendently of any exclusive monopoly that may belong to it.' ' Compare the speech of the Secretary of State for the Imperial Post -Office, Dr. von Stephan, before the Reichstag, 30 November, 1886, in which, among other things, HISTORICAL DEVELOPMENT OF THE PUliLIC ECONOMY. 1 25 § "JT . Meanwhile there remains an undissolved residuum in the case of these non-fiscal establishments. It is an undeniable fact that they do after all — not necessarily, but in an incidental way, and occasionally to a great extent — yield a financial sur- plus ; which gives them theoretically such a claim to be incor})o- rated in the theory of the public revenue as cannot be rejected. In this respect the case of the letter-post is especially in point. In earlier times, in consonance with the generally unde- veloped economy of the state, this fiscal element occupies the foreground. Even the good intention of administering the Post- office for the common advantage is hindered by the external cir- cumstances of the situation. The lower the stage of develop- ment in point of density of population, roads, intercourse, enterprise, culture, etc., the greater are the expenses and the less are the receipts of the postal service. Compare Russia and Eng- land even at the present day. But as soon as these conditioning circumstances reach a vigorous development the whole situation changes. Even a very considerable degree of regard for " public utility " may be compatible with a fiscal surplus that is quite commensurate with the results obtained by the exclusively fiscal methods of administration, and it may even surpass them in this respect. When we come to look more closely into the essential occurs the following: "As concerns the competition of private carriers, it is to be said that they invariably have presently failed and vanished from the screen. This has been due particularly to two reasons : because the promoters of these schemes have set out from false assumptions, especially as regards the financial side of the undertaking ; and because the service of which these establishments were capable has not been satisfactory. As to this latter point, it was a fatal mistake on part of the originators to suppose that it would be a very easy matter to establish a system of letter-carriage. It requires an extensive organization and a large capital ; it requires centuries of experience, a thoroughly trained and select personnel ; it requires a con- siderable exercise of control, buildings, a comprehensive mechanism for transmission, the support of all other state departments. ... At any rate the Post-Office has nothing to fear from competition from this source. Although the proposition has frequently been made, especially in the newspapers, that the postal law should be so broadened as to extend the monopoly of the Post-Oflfice also to local letter-carriage, I have believed it to be my duty to express myself against this proposition and to assume a deprecatory attitude toward it. The Post-Ofiice is nowise in need of an extension of its monopoly in this direction. It finds sufficient protection in the character of the service and in the confidence which it commands." 126 THE SCIENCE OF FIXANXE. character of this " public utility " in respect of its economic and financial value,' it will appear that in this case an important administrative function has attached to it, as it were involuntarily, an effective contrivance for the levying of a tax, such as to require that the post-office be taken u[) in connection with the theory of taxation. Leroy-Beaulieu, the French writer on finance, in his Traitc de la Science des Fi?ia?ices (1877), has duly conformed to this requirement. We here find a separate chapter ^ set apart for the consideration of Droits sur les Correspotida)ices et sur les Transports, and the letter-post is the chief topic treated of.^ Having taken this point of view it will not be much of a strain for us to treat the surplus yielded by the state railwavs after the analogy of that from the post-office. And if our French authority ranks the taxation of freight on French and English railwavs with the taxation on correspondence in the form of a postal net surplus revenue — as I believe he properly should ; then we may with even better reason class the net revenue of the state railway system with the net revenue yielded by the postal service. The like holds true of all similar state establishments. § 78. The terms "Administration" and " Finance" used for purposes of contrast and distinction, as well as the entire course of thought contained in the present chapter, will find their full ' See a discussion of the financial management of the means of communication by the present writer in Schmoller's Ja/irbuch. JV. F. vol. x., " Nationalokonomische Studien," 1886. ^ Livre ii. Des Impots, ch. xii., vol I. pp. l\^ et seq. '' From this point of view, and in order to properly criticise and to second the fur- ther development of the existing system, it is desirable to detennine what are the pecu- liar circumstances to which the surplus afforded by the modern postal service is due. It is, e. g., a fact too little known, that the surplus yielded by the German Imperial Post-office is not so much a net profit of the post-office establishment proper as it is a result of unpaid transportation by the railways. A more careful analvsis — as yet a desideratum — would probablv show that in case full payment were to be made for the transmission of the Imperial Post there would be no surplus but rather a deficit, especially with the present popular system of parcels-conveyance. Quite otherwise in England. We shall get to that in its proper place. HISTORICAL DEVELOPMENT OF THE PUBLIC ECONOMY. 1 27 justification only as an outcome of the discussion in the succeed- ing chapter on the various kinds of j^ayments which are enijjloyed in the public economy. In this way only will the real significance cf the different methods of arrangement and treatment become a})parent, whether the discussion deals with the (juestion of the so-called cjuasi- ^ private or "business" sources of income on the one hand, or with taxes and fees on the other. In this way only will it become clear that, and with what propriety, })Ost, telegraph, rail- ways are managed according to maxims which arc termed busi- ness principles, and that it is inherently necessary that they should always be managed according to these principles, without our taking any other standpoint with regard to the matter than that of public utilitv. This of itself will make it clear that all branches of the public administration, whether they yield a sur- plus or leave a deficit, are comprehended in the great complex of giving and receiving services, in which the just balance in any particular case depends on the form of compensation which the beneficiaries of the service may see fit to establish. CHAPTER III. DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. Literature. Lorenz von Stein, LeJn-buch der Finanzwissefischaft, 5. ed 1885, vol. ii. part i. pp. 248 et seq., 307 et seq., 346 et seq. Adolph Wag- ner, Ftnanzwissenschaft, 3. ed. 1883, vol. i. sees. 202-212. F. J. Neu- mann, Die progressive Einkonivtensteuer im Staats utid Gemeindehaiis- halte, 1874. The Same, "Die Gesialtung des Preises," in Schonberg's Handbuch der Politischen Oekono?)iie, 3. ed. 1890. The Same, Die Steiier imd das offentliche Interesse, 1887. I. ANALYSIS OF THE SERVICES RENDERED BY THE PUBLIC ADMINISTRATION. § 79. If we picture to ourselves a community situated in some remote Utopia, all the members of which are preciselv equal in respect of means and wants, it would be an easy matter to devise an equitable mode of collecting from them the means required to meet the public expenses. Since, by the terms of the abstract supposition we have made, the benefit which thev derive from the public establishments as well as the ability to contribute toward the maintenance of those establishments, is precisely the same for each of them ; therefore there could be no question of adopting any mode of contribution other than the simplest that is possible in any group of beneficiaries, that of apportioning the aggregate expense by a simple capitation. If we make a search for such a Utopia in the real world sur- rounding us we shall find that this form of social organization is possible only on a relativeh' very small scale — onlv in case of segments of the strongly differentiated society of today, which are enabled to afford some sort of exemj)lification of our hypoth- esis only because they are far from being a reproduction of the community as a whole. 128 DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. I 29 I will take as an example one of our ordinary reading clubs, such as go by the name of "museums" in German towns. The membership in the case of these clubs is a strictly limited one. It consists of members of the middle or uj)j)er social strata, of approximately equal means, or at least practically so for the purpose in hand. The object sought is of such slight conse- quence, as compared with the aggregate of ends for which men band themselves together in, or haye coalesced into communi- ties ; the difference between the advantages derived from the establishment by which this object is sought is so insignificant on account of its slight absolute value, that it is held to be per- missible, indeed it seems imperative to disregard it altogether and proceed on the summary hypothesis of equal particijjation by all. It is to be added that there is a complete absence of all such external coercion as would make membership, with its bur- dens and benefits, an unavoidable duty incumbent on each indi- vidual ; though, it is true, public ojjinion within the particular social circle concerned may exert a certain pressure, such as will somewhat modify this unconditional freedom with respect to participation in the payments. At the same time it is not to be denied that, in spite of the fact of their belonging to a common social group, there do oc- cur, among the hundreds of members that make up the club, a considerable number of instances in which the contrast in re- spect of means is great. It is also plain that different members partake in very different degrees in the advantages offered. It may vary from the maximum exemplified by individual cases of people who make the club-house their home outright, to the minimum at which membership has shriveled uj) into a mere social duty owed to one's rank or reputable standing, and from which not the slightest direct personal advantage accrues. These institutions resemble banks of issue in proceeding on the expec- tation that but a portion of the claims upon them will ever be presented at any one time ; but with this difference as com- pared with banks of issue, that a part of the claims upon them are expected to never be presented at all. 130 THE SCIENCE OF FINANCE. § 80. As a matter of fact we find that even within the nar- row limits of the clubs this convenient method of managing the accounts between the individual member and the aggregate is sometimes violated out of considerations of justice. The first fact that brings about a graduation of the dues is the possibility of subdividing the privileges afforded by the club into separate items. The reading of books and periodicals at the club-rooms, the drawing of books by members, social entertain- ment in addition to the mere privilege of reading, balls in addi- tion to everv-day visits to the club-parlors, — these constitute particular items in the aggregate of what the club has to offer its members, and they may be so subdivided and distinguished as to allow members to accept a part or the whole as they may choose, and to pay accordingly. It is looked on as undignified, as well as impracticable, to go the length of gradu- ating dues according to the length of time members spend in the club-rooms, the number of papers made use of, and the like, but these other differences above cited seem readily distinguish- able and sufficiently appreciable to be made the basis of such a graduation. A second fact is to be noted. Difference in economic abil- ity is also taken account of whenever it is indicated by some eas- ily discernible external mark. It is true, the matter in question between the members being nothing more than a yearly fee of some 30 or 40 marks, it is not thought to be of sufficient impor- tance to warrant an inquiry into the amount of income enjoyed by individual members, especially in face of the recognized difficulty of such an undertaking. But a difference in age and social position such as is indicated bv a person's being a student resident at a university, as distinguished from the common run of members, affords an acceptable ground for some modera- tion of the amount of the contribution in favor of this special class. Accordingly we find that even in a body of this character, proceeding as it does on the simplest possible principle of dis- tribution, the need of differentiation makes itself felt in both ot DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. I3I the two directions above indicated, and presently breaks down the original simplicity of method. In proportion as the necessity of differentiation becomes urgent in either or both of these directions, and also in propor- tion as the amount of the contribution in question becomes more considerable and so makes it impossible to disregard the (picstion of greater or less benefit derived, or greater or smaller burden to be borne, in the same proportion will there jjresent itself the ungracious urgency of a departure from this conveniently simple rule of equal contributions, and with it the need of seeking a more complex rule of equity. Finally, when we come to consider the case of public admin- istrations, we find that not only are all the above-mentioned elements present in 'their greatest intensity ; but there is also generally added, with all its grave consequences, the element of public coercion, — a fact which calls for redoubled mindfulness of all considerations in favor of equity. § 81. In order to applv these considerations to the problem in hand it will be necessary to make an economic analysis of the various classes of services rendered by the public administration. The instant we abandon the Utopian conception of a commu- nity made up of typical individuals we are forced to take account of the two causes of differentiation above spoken of. A detailed scrutiny of these two causes of difference is necessary in order to arrive at any adequate norm of equity, for guidance in striking the balance between the individual and the aggregate. One cause of differentiation lies in the varietv of the benefits enjoyed by the individual at the hands of the community ; a second ground of differentiation lies in the variety of that which the individual members are in position to render in return. That is to sav in other words : Difference of benefits received and difference in abilitv to contribute are the causes which decide us to enter on a closer scrutiny of the relations existing between the individual citizens and the commonwealths within which they are placed. 132 THE SCIENCE OF FINANCE. First as to the difference in respect of the benefits enjoyed by different members of the community. There is a large field within which a method of settling accounts in due accord with this class of differences seems practicable. Whenever the state or the commune sets up an establishment which tenders its ser- vices to the citizen in such a form as to admit of their being subdivided and measured by tale or by quantity, an opportunity is afforded for making the individual pay pro rata for whatever benefit he receives, both as to quantity and kind. Post, tele- graph, railroads, gas and water works, afford an opportunity for realizing this method of balancing accounts. The post tenders its services to all men, computing the remuneration on the basis of the number of parcels carried, their kind and weight, the dis- tance and security against any extra risk. The dispatch of telegraphic messages is performed on analogous terms. In rail- way transportation the like method is employed, with the prin- ciple of gradation developed to its highest. In the passenger traffic regard is had to the number of persons, the distance, the class of coaches occupied, the speed of trains, and the like ; in freight traffic, number, weight, car-space, class and value of goods, length of haul, etc. Or in the case of gas or water works : in every house for which the municipal gas or water ser- vice is desired there is placed an apparatus which, by a simple mechanical contrivance, indicates the consumption of the house- hold, and this measurement gives a ready indication of the amount of benefit for which the community may require pay- ment from each of its members. § 82. Unfortunately this simple method of keeping accounts between the individual and the community, based on the measure and quantity of benefit rendered to the individual, deserts us very early. This is true even as regards the particular establishments cited. Letter-carriage, passenger and freight traffic, lighting, etc., may take on the character of services rendered directly to the community as an aggregate, instead of being distributed to DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. I 33 individuals in measured quantities, and the instant this hap- pens the simple and direct method of accounts breaks down. The individual citizen is no longer the direct beneficiary of any one particular service rendered, but the aggregate of citizens profit by the undivided aggregate of services. This happens whenever the municipal gas works are employed to light the streets and squares of the city. The light that fills the public streets affords the aggregate of individual citi- zens the needed artificial light without discrimination or admeas- urement. Something analogous happens in the case of water- works when employed for sprinkling the streets, in case of the postal service when employed to carry the mail for purposes of the public administration, in case of the telegraph when used, in peace and war, for the transmission of public dispatches, in case of the railroads when employed in the public service, and more especially if they are in the first place constructed for adminis- trative or strategic purposes. Moreover, this more difficult part of the keeping of accounts between individual and aggregate with respect to the benefits conferred on the individual by the aggregate by no means con- cerns something incidental or accessory. As a matter of history, it is in this direction that the original motive for the undertaking of this class of enterprises is to be sought. We need only to call to mind what was the origin of the post and the telegraph, the rea- sons which led to the introduction of municipal gas works, the fact that it was for military and administrative purposes, at least in the case of certain countries, that the earlier railways were constructed. § 83. But this second class of functions performed by these establishments only serves to direct attention to other much greater and more fundamental institutions to whose functions these are accessory. I may here refer back to observations contained in chaj)ter I. (sees. 37 ^/ •y^'7-) The elemental function of every civilized state organization, 134 THE SCIENCE OF FIXAN'CE. that which constitutes the basis of every other of its functions, consists in the establishment of an authority which will secure the peace ; and the authority performs this function all the more effect- ively the less it obtrudes itself on the consciousness of the members of the community. At the lowest stages of undeveloped national life the abiding relation between the enjo3'ment of peace and the disposition necessary to the maintenance of peace is constantly enforced by the direct evidence of the senses. The more we succeed in surrounding the life of every member of the state with an atmosphere of peace, and the more we are able to remove from his sight the instruments necessar)- for securing the peace, the less evident to the mind of the individual does the connec- tion between the result and the necessary means become. The squatter who builds himself a cabin on an isolated farm in the Far West, or the able-bodied man in the primitive common- wealth, the pledge of whose security is his arms, or the burgher behind the walls of a mediaeval city ; to all these the correlation of the maintenance of peace and the enjoyment of peace is immediately and tangibly present. The modern man, the citi- zen of the civilized state of today, enjoys the results not only of along historical development of institutions, but also of the indis- pensable permanent material instruments and structures. But they are both — the past and the present alike — so far removed from his perception that he has no appreciation of the manner in which alone this result can be attained. Moreover, the farther the enjoyment of peace is dissociated in the mind of the beneficiary from the means by which the peace is maintained, the more difificult and complicated becomes the admeasurement of the benefit enjoyed. The isolated home- steader knows to a nicety the proportion existing between the instruments b}- which peace is maintained and the advantage he enjoys. The citizen of the modern German Empire would be able to appreciate it with the same exactness only in case it were possible to retail to the individual citizens the atmosphere in which they live, as gas and water are measured out to the con- sumer by a mechanical contrivance and paid for by the cubic foot. DIFFERENT KINDS OF PUBLIC CONTKI BUTIONS. I 35 § 84. The development of that organized ])o\ver which forms the basis of every civilized commonwealth is the foundation on • which every branch of public administration rests. The highest function of an imposing military power is the securing of the peace by convincing every intending disturber of the peace beforehand of the futility of such an attemjjt. With the European world in its present attitude this is the highest and best result we can soberly entertain ho|)es of reaching; for the feeling of a need of peace is j)resent in but an imj)erfect way, and the impulse to violence is constantlv lurking under the sur- face. So also is it in the internal domain of the administration of justice, which is concerned with deciding and enforcing dis- puted or violent points of law between members of the same commonwealth. The highest efificiencv at this point consists in impressing upon the entire people a conviction of the absolute authority of the law, while it is at the same time indispensable that a comprehensive apparatus for the administration of justice should be maintained by the state, as in this wav innumerable temptations to exceed the law, innumerable desires to question the legal rights of a fellow citizen or to infringe upon them with a high hand will be suppressed by the fear of the power with which the administration of justice is clothed. That there still remains a considerable residuum of doubts and malice is due in part to the stage of culture, or lack of cul- ture, as yet attained, in part to the practical difficulty of so clearly enunciating the law as to resolve all doubt. This much, however, is certain : So far as concerns the maintenance of that atmosphere of legality in which the members of a modern civil- ized community pass their lives, by far the greatest significance of the efforts actually put forth by the public administration of law, civil or criminal, lies in their serving as exemplary decisions that practically decide thousands of cases besides those imme- diately dealt with. But from these considerations it follows that, in like manner as we have found it to be the case with the military establishment, the chief service rendered the citizen by the public administra- 136 THE SCIENCE OF FINANCE. tion in enforcing the law is made up of that medium of morals and custom that can not be subdivided and measured in order to find how much of it goes to each individual. That is no doubt an exaggerated rationalism and radicalism that would draw from this, or at least from closely related con- siderations, the inference that the administration of justice should be gratuitous, as is advocated by Justi and repeated from his time down to the social-democratic programs of the present. But in all this exaggeration, it is to be said, expression has been found for a perfectly justifiable reaction against the opposite extreme — the tradition which had been handed down by the historical development of the public executive, — the one-sided exploitation of litigation and litigants for fiscal purposes. The golden mean in this case is to be found in the acceptance of the principle of so-called gratuitousness accompanied by the requirement that the private individual who has brought on the litigation shall pav for the special expenses involved. For while it is true, in accordance with what has already been said, that the particular case which comes before the tribunal is of the nature of a precedent serving to decide a thousand other cases, yet the case is at the same time a concrete application of the law, and as such it has to do with the interests of certain specific private persons who, for their part, are accordingly bound to show some acknowledgment of the fact. On the other hand, if the case had been simply a typical decision, rendered directly in the interest of the community, it would also have been a matter of concern to the community only, and not of special concern to any one individual in particular. ^85. The military establishment and the administration of justice are here selected for the purposes of an economic analvsis, as typifying two great classes of the primary functions of the state. An exhaustive inquiry which should deal in detail with every branch of the state's activity is hardly necessary. What is wanted is simply to bring out whatever may offer any peculiar feature in the way of princi})le or of consequences, in DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. 1 37 virtue of which the defrayment of its expenses recjuires sj:)ecial treatment in a discussion of the public finances. But it is not desirable to canvass in detail everything which may partake of these principles and consequences. We may therefore go on to the discussion of a different class of institutions. There are certain great establishments belonging to the public econom\- which, so far as regards technical availability, are very well adapted to the employment of the simple and convenient means of accounting which we have become familiar with in treating of means of communication and gas and water works. There is the educational system. There are numerous private enterprises of an industrial character, of different grades, which are devoted to the purposes of education in all its varieties and gradations. These undertakings demonstrate the possibility of conducting establishments of this class on the basis of the pay- ment of an equivalent from each beneficiary. Whether it be the smaller primary schools, or the girl's boarding-schools, or the commercial schools established by private enterprise, or the estab- lishments devoted to preparing persons for the various civil- service examinations (and so entering into a peculiar sort of com- petition — conairrcnce deloyale — with the state schools established for the same purpose); in every case we find examples at hand which go to prove that it is practicable for educational establish- ments to dispense their services and to be paid for them by tale and quantity. It is nowise physically impossible in the case of these establishments, as it is in the case of the military establish- ment and the administration of justice, to subdivide and measure the services rendered, for the purpose of keeping accounts with the persons benefited by the services. It must therefore be in whole or in part on other grounds that the state desists from the employment of this method of balancing accounts. These other considerations belong in the second class of considerations above (sec. 8i) pointed out as going to decide the choice of a method of payment for public ser\'iccs, — namely, 138 THE SCIENCE OF FINANCE. the difference existing between the different individuals and classes in point of ability to pay.. § 86. With the Reformation the church handed over to the state the control of the schools as well as of charities. In con- sequence it has become the dutv of the state to place the great business of popular education on a plane far higher than that indi- cated by the payment of an equivalent for the advantages enjoyed. The proper solicitude of the commonwealth for its weaker mem- bers, whether in spiritual or in worldlv good, is a question of the first importance in this connection. This thought has found legislative expression in the principle of obligatory attendance at school. It may have been embodied in an uninterrupted series of enactments reaching from the time of the Reformation down to the latest constitutional provisions adopted ; or it may, as in the case of England, France, etc., have found its way into legislation indirectly, as the occasion for its application has arisen, now through the growing needs of a civilized age, now through the evils of modern child-labor. But the principle of obligatory school attendance has every- where had a severe struggle to assert itself, not onl)- from the failure of the people to appreciate the benefit conferred in the instruction, but also, and especially, on account of their straitened pecuniary circumstances. The surprising interval that frequently exists even today between the letter of the requirement and the actual facts of compliance is mainly traceable to the fact that the requirement of school attendance has conflicted with the pecuniary interests of the family. Any additional stringency in enforce- ment, any^ raising of the legal requirements, such as now-a-days belong everywhere to the order of the day, is feasible only so far as it takes due account of the economic situation of the parents. A child that is withdrawn by the school from household employ- ment, from the farm, the workshop or the factory, and is put to non-productive employment instead of being productively employed, becomes by this fact alone a pecuniar}' drain on the parents. DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. I 39 This state of the case — the existence of a conflict between the compulsory attendance at its schools required by the state and the pecuniary strain which the compliance with this requirement involves for the parents — makes it impossible, on grounds of expediencv and of equitv both, to apportion instruc- tion and its attendant cost by number, length of time, etc., although such a method of admeasurement is not hindered by the intrinsic nature of our schools, considered from the point of view of industrial practicability. § 87. Such is the state of the case as regards that part of public instruction which is known as " popular instruction " in the narrow and everyday sense of the word. As regards those grades of public instruction which rank above the lowest grade, the relation between the public adminis- tration and the individual is essentially different. In the first place, there can be no question of compulsorv attendance beyond a certain minimum of instruction enjoined on the entire population. Beyond this minimum the state cannot use coercion. The most that can be done in this direction is gradually to raise the minimum required. The difificulties in the way of enforcing the law as it now stands are so great as to con- stitute a sufficient warning against any headlong extension of the system of coercion. It is further to be remarked that above a certain moderate grade of popular instruction the occasion for such coercion ceases. Those middle and upper strata of the population for whom the middle and higher grades of the public schools are intended, need no such coercion. They arc in possession of the necessary economic means, and the inclination to afford their children a proper development is also present in a sufficient degree. Indeed, the consideration of an insufficient economic ability has no meaning in connection with these higher grades of instruction. The fact is, rather, that if we confine our attention to these higher grades the whole state of the case tends to reverse 140 THE SCIENCE OF FINANCE. itself. For while it may be reasonable enough, and may even be both expedient and equitable to bear lightl}^ on the scanty means of the lower classes of the people in connection with any such work of public utility, there can be no sense in sparing the adequate, or rather abundant, means of the middle and upper classes in the compensation required of them for benefits which they derive from public institutions. There must accordingly be some other reason present if any such element of gratuity appears in existing institutions of this class. § 88. This other reason is to be found in the conviction that the blessings a people derive from popular education are not confined to the benefits which the particular individual may derive directly from the school, but that the indirect benefit con- ferred on the entire body of the people, and therefore also on those who do not directly enjoy the middle and higher grades of instruction, is equally important. The conception is that the rays which science sheds penetrate with their heat and light every part of the social organism, and that those who are the immediate beneficiaries of the instruction imparted are but the bearers and dispensers of these benefits in behalf of the com- munity. How far this view is a true one is of course a question that 'admits of dispute. It will appear presently that this view involves peculiar dangers for the public administration, and that the exten- sion of this view so as to include such other forms of state activity as in a similar manner serve the purposes mainly of the well-to-do portions of society, is to be admitted, if at all, only with the utmost caution. It is therefore all the more imperative to take into considera- tion the possible concurrence of reasons of another kind. Such a reason is perhaps the following. It has probably always been recognized that the instruction offered in the upper and highest schools is really offered to those strata of society which arc best able to pay their way, and that DIFFER?:NT kinds of PUliLIC CONTRIBUTIONS. I4I such exceptional cases of neediness as constantly occur might be provided for as exceptions by suitable remissions. But at the same time there has been a feeling that, unlike the eagerly- coveted material advantages of the business world, the benefits of education, even of the higher grades, would not be sought for with due earnestness, and that it is therefore expedient to render advantages which are of such importance to society as accessible as possible. Payment in full for university instruction might, in itself considered, not over-tax the means of the beneficiaries. Still it has been thought best, in view of the actually prevailing- disposition of moderate zeal on part of these beneficiaries, to minimize the disagreeableness of the demand upon them, it having been conceived to be for the public interest to reach as large a number of beneficiaries as possible. It is clear that the discussion at this point turns on a differ- ence of opinion, and that for this reason alterations in the rela- tions in which public institutions of this class stand to the indi- vidual citizen are possible, such as would be impossible in a case where the decisive factor is the technical character of the institu- tion itself. ^ 89. This fact, of a varying economic competency on the part of different portions of organized society, when developed in certain special directions, gives occasion for intervention on the part of the collective power in behalf of relative deficiency that may exist at any given point. In the case contemplated, the deficiency exists not as a chronic debility on part of a particular stratum of society, but as an acute shortcoming on part of a portion of society which is temporarily in distress, or at any rate in need of assistance. This fact seems to explain the numerous contrivances of the public administration by means of which it freely lends a hand to certain particular forms of industry. Agriculture, manufac- tures, commerce, transportation continually demand such meas- ures for their assistance ; whether it be that the private under- takings of individual citizens are granted subsidies from the pub- 14 ' THE SCIENCE OF FINANCE. lie funds, or that public establishments for the like purpose are erected independently. State railways, or subventions granted to private undertakings ; model establishments for manufac- tures, or protective duties and bounties ; state-owned studs, or corn and cattle duties ; these are all relief measures by which the surplus energy of the community is directed to the weaker spots. Such weakness is most frequently due to imperfect develop- ment. And so we find that the great industrial commonwealths have all and several laid their collective strength under contribu- tion for the purpose of developing the various particular branches of their production and building up their manufactures, com- merce, shipping, to the standard of efficiency existing at the time. But even when this degree of efficiency has been achieved it is of itself no sufficient guaranty against seasons of exceptional disturbance, which may in their turn be productive of further progress, but which for the time being require the application of such remedial measures against imminent dangers as only the community as a whole is in a position to afford. The central thought in this connection is ever that of a soli- darity of all the parts of the whole. The ruling principle is the conviction that if one member suffers all the other members suffer in consequence ; so that for the maintenance of the com- mon welfare the several mem' i^' enter into a relation of the nature of a mutual insurance, m i'irtue of which now one now the other of the various members receives assistance. ■ '^ '-i § 90. At the extreme limit, in contrast with the element of selfish interest and resting entirely on the fact of a difference in economic competenc}-, is the provision made by the community for its paupers. Here the decisive fact is the sensible difference in this com- petency between the members of the various classes of the pop- ulation ; a difference which at the lower limit merges into abso- lute economic inability, not only to meet the demands which the nil-FKKKNT KINI")S OF PUBLIC CONTRIBUTIONS. _3 public administration makes in order to satisfy its own needs, but even the ability to provide one's own livelihood. It is this phase of public administration that puts to the severest test that moral sensibility which seeks to make the dif- fering degrees of economic strength a criterion for the appor- tionment of the public burdens. This sensibility has stood the test so far without failure, being less beset bv doubts as to practice than as to theory.' A variety of circumstances have contributed to this result. The first point to be gained was the broadening of that prin- ciple of nature according to which the able-bodied man is bound to support his needy relatives, so as to apply beyond the bounds of the very narrowest circle. In the original cantons of Switzer- land the so-called kinship tax \]^erivandtscJiaftssteuer\ has sub- sisted even down into our times\ In the second place the influence of the Christian church — and in this respect there are precedents to be found not onlv in Judaism, as asserted by current theological opinion, but also among the Greeks and Romans — has ever been directed toward a broadening of the sentiment of fellowship bevond the circle of consanguinity, and its extension to the entire congregation and even to the whole of Christendom. The state of the time of the Reformation has fallen heir to the responsibilitv of the mediaeval church in this matter, as also with regard to the administration of the schools. Indeed, the '"s of the modern state have grown preater with the growth oi intercourse in modern society ; the J-- , issive mobility of modern life has lessened the signifi- cance of the remoter degrees of kinship and so has shifted the entire responsibilitv to the political organization. The legislation of the differj^nt states (at least of the Protes- tant states) has made so great an advance in this direction dur- ing the past century, and especially during the last few genera- tions, and has made such serious demands on the public admin- istration — in spite of the theoretical doubts of individualistic 'Cf. a paper by the present writer on "Arbeit und Amiut." — Volkswirthschaftliche Au/satze, 1882, pp. 367 et se(/. 144 'i'HE SCIENCE OF FINANCE. economists, as formulated more particularly by Malthus — that doubts on this head are gradually disappearing ; and it is to be said they were also based on untenable theoretical ground. The feeblest of these objections, and at the same time the one most in vogue, was the position that while the moral obligation was not denied, the voluntary character of alms was made much of, and any legal claim to assistance was disputed. But if the moral obligation were once granted, the legal claim and therefore the public coercion followed as a matter of course in every case where voluntary charity proved insufficient. § 91. I believe the foregoing discussion has brought out the essential elements which it is necessary to consider in any analysis for economic purposes of the services and requisitions incident to public administration. To summarize briefly what has already been said : We have, first, a class of services of such a character as to permit the account between the community and the individual members to be settled by the simple method of a quid pro quo. A second class, comprising the fundamental institutions of the state, does not admit of such a simple method of accounting, for the reason that the benefit conferred cannot be subdivided and measured. Such a method of accounting is applicable only in cases where institutions of this kind render some specific ser- vice to individual members. A third class would admit of the method of accounting employed in the first class, but foregoes its employment in whole or in part, and substitutes payment according to ability in place of payment according to benefit received — with a view to the more general participation in the jDenefits conferred. In addition to these there is also a fourth class, comprising cases of such disability, relative or absolute, on part of certain strata of society, as to constitute a claim on the greater ability of the other strata. An analysis like the present can of course lay no claim to being a definitive exposition of the many complex elements DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. 1 45 which are to be taken account of in this connection. But it may at least be accepted as an attempt at presenting a simple and com- prehensive view of the great complex of services rendered by the public administration, taken in their relation to the compensation required in return for them. II. THE VARIOUS KINDS OF COMPENSATION. §92. Those services rendered by the public administration which belong in the first of the above enumerated classes are those that admit of being admeasured and requited by kind and quantity, so that each individual member of the community shall pay for what he gets. We have adopted as a briefer characteri- zation of this class the standard of measure employed, i. e., the "benefit" enjoyed. On looking about us to see what is usual as regards the forms which compensation assumes in industrial intercourse, we find directly that this class runs in the well-worn ruts along which the intercourse between private establishments is accustomed to move. The same form which has become the customary one in private intercourse for the discharge of thousands of diverse mutual ser- vices is also the form adapted to this class of public services. In looking into the history of the past we have seen how this most readily intelligible form of compensation, coming as it does closer than any other to the ideas and habits of thought of everyday life, has been found extremely desirable and accept- able for the purposes of the public administration, and also that its ready adaptation to the cruder views of early stages of national development has repeatedly led the government to extend its use to branches of the public business that are not by nature well adapted to it. Down to the present hour this method has been, and unquestionably also for a long time to come it will be found to be the most convenient, and it will therefore maintain itself wherever it can be legitimately employed. If we want a concise designation for this form of public con- tribution we shall find it ready to our hand in the usage both of everyday life and of the science. It is of the nature of a price. Had 146 THE SCIENCE OF FINANCE. this been the only form of compensation employed by the public administration, no other designation would have been required. The main facts of finance would then have been discussed from the standpoint of the general economic doctrine of Price, just as is conventionally the case with respect to the affairs of private life. In any case we shall have to fall back on this general doctrine of Price wherever and to the extent to which it applies to this first class of public contributions. And for this first class the principle of Price is in fact to be taken as the essential principle by which to determine the proper amount of the contribution. S 93. In case we had to do with this class of contributions alone, the chief problems of finance would simply not exist. Every government undertaking would in that case automatically defray its own expenses — very much after the fashion of a public railway v/hose receipts are sufficient to defray operating expenses and interest on its fixed capital ; it would then cease to figure in discussions of finance at all, or rather would not ask for consideration by the finance department, being fully able to take care of itself, — for the reason, in other words, that such a public undertaking would be competent to find any economic means it might require. The like is true of water works, gas works, post, telegraph, etc. But such is the case only up to a certain point, and in fact, onlv up to a certain imaginary point which in the actual course of affairs is very rarely attained, — which, indeed, neither need nor ought to be attained, and which in many cases even cannot be attained. The premise on which the view in question proceeds is this, that there shall subsist a precise equilibrium between the expen- ditures of the business and the receipts which it itself brings in. At the instant at which an excess or deficiency on one side or the other disturbs this equilibrium this* whole self-sufificiency is at an end. An excess on the side of the expenses indicates a shortage in receipts, which will have to be covered by some DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. 14/ Other means ; while an excess of receipts confronts the admin- istration with the question, To whom does this surplus properly belong ? § 94. But it follows directly from the essential nature of the purposes for which public administration exists that this equilib- rium will unavoidably fail (cf. vol. i. sees. 400-402). The fol- lowing are some of the reasons : Among the more cogent reasons for the building of railways by the state (rather than by private enterprise) is the considera- tion that under the actually existing circumstances there is a necessary period of transition during which the receipts of the business cannot be expected to cover the expenses. The grad- ual development of the transportation system to such a position as to afford adequate receipts is a main part of the end to be sought by the public control of the means of communication. Or it may be that the possibility of covering expenses is intentionally made subsidiary' to the remoter object of favoring certain branches of industry, of goods, or of passenger traffic. Deficiencies which may arise in this way will have to be made good from other sources. The nature of the causes to which such deficits are due indicates a difference in economic ability on part of the different sections and classes of the population ; and, indeed, it indicates a difference in ability of such a character as not to admit of its being compensated for within the limits of this branch of the administration, but which calls for remedy from with- out. On the other hand, it may happen (quite acceptably) that a surplus comes in from an undertaking which is primarily carried on for administrative purposes alone. A striking instance of this is afforded by the letter-post. If the administrative purpose in ques- tion admitted of no aim beyond the covering of its own expenses, such a surplus would have no meaning, or at any rate no other meaning than that of a surplus in the hands of a consumers' club, which is returned to the members on the closing of the accounts for the year, in the proportion in which they have contributed to it. 148 THE SCIENCE OF FINANCE. The fact that the postal service not only retains any such surplus, -but even (with due regard to its primarily administrative func- tion) consciously seeks it, is to be explained on the ground that, without hindrance to the administrative function, the different abilities of the citizens to contribute to public purposes may be drawn on by this means, with desirable results which are not attainable in any other way. In this way the "price" of everyday industrial life becomes, in the service of the public administration, a means of levying a contribution of a different kind. § 95. This is more particularly the case when the " price " is not intended to serve the purposes of a department which partly or entirely covers its own expenses, but is with conscious purpose made the form under which, as a matter of expediency, a con- tribution is levied for other administrative purposes. This happens in the case of those fiscal monopolies which make the enjoyment of such things as tobacco, salt, spirits, games of chance, a subject of traffic by selling the means to these enjoy- ments to the citizens after the manner of a private business. The purpose here is not (at least not primarily) the supply- ing of the public with tobacco, salt, etc., consciously adopted as a distinct administrative function on account of the advantage possessed by public as compared with private enterprise, but -is adopted primarily, or even exclusively, because of the relative ease or convenience of this means of obtaining a revenue which is to be applied to ends that have nothing to do with the method of obtaining it. § 96. There is yet another form of compensation by means of which an administrative establishment may find the means it requires. This method also, significantly enough, has become familiar to us from its use in the intercourse of private life quite as much as from its employment for the purposes of the public administration. This is the method of "contributions." In its everyday use the word suggests the method by which the members of a club DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. 1 49 or association balance their accounts. Such a club or association may be of a permanent character, or it may have been organized for a temporary purpose only ; it may exist simply for purposes of gain or of generosity, from motives of public expediency or of benevolence. It will be seen that in this everyday use of the word the various motives which go to constitute the specific char- acters of these clubs and associations are lumped together under the one term. But for the purposes of the science it is necessary to system- atically analyze this diversity of character, as we are endeavoring to do in the present chapter. In practical, everyday life we apply the term " contribution " \^Beitrag\ indiscriminately to payments made by members towards the expenses of a charitable organization, a clubhouse, or a dike ; but science has of late properly appropriated this term to designate a particular class of payments. To my mind very appropriately it has been restricted to such payments as approach to the character of a " price " in the respect that in the case of the contribution just as in that of the price, it is possible as well as desirable that the individual benefit should be distributed by measure. The only respect in which these payments differ from the " price " is this, that there is a technical difference in the form in which settlement is made for the benefit received. While in the case of a " price " the measuring of individual benefit is carried to the extent of measurement by the piece, the unit of quantity of service — of which a great number and variety are turned out by a single establishment ; the " contribution," on the other hand, serves for the creation of a common, comprehensive establishment which turns out an undivided product and answers the purposes of the members only if employed as a whole. A contrivance of this kind may benefit the contributors in varying degrees, and it may accordingly be paid for by them in contributions of various amounts to correspond with the varying measure of the benefit enjoyed. Accordingly, in the case of the post, where the service per- formed naturally subdivides itself into hundreds of thousands of I 50 THE SCIENCE OF FINANCE. distinct items, which are, moreover, of many diverse kinds, the participation enjoyed by each individual can be equitably paid for only on the plan of paying a fixed " price " by the piece. A dike, on the other hand, which is built to protect adjacent lands against an encroaching stream, or a common drainage system serving to drain a connected group of estates, can and ought to be paid for only by apportioning the expenses among the pro- prietors in proportion to the benefit conferred upon the several estates. But this is precisely what is meant by " contribution." § 97. Neither "price" nor "contribution" are available forms of public income when the question is as to state institutions the advantage of which to the individual members of the common- wealth can not be measured and apportioned (sees. 83 et seq.). This of course does not set aside the fact of a difference in the benefits enjoyed bv different individuals as a result of this class of institutions ; neither does it remove the necessity of seeking a method of defraying the expenses which shall take account of this difference in the advantage enjoyed. The enjoyment of peace and civil libertv is unquestionably a privilege of very unequal value to different members of the com- monwealth. The fact that these advantages cannot be measured or apportioned by no means prevents the rich and the poor deriving very widely different benefits from them. One who is able to call his own not only a bare existence but also an exten- sive estate, who may be exposed to the violence of foreign armies or domestic malefactors not only in his person but also in his property, is entitled or rather he is in duty bound to look upon the institutions which secure him against these dangers as being contrivances of the same kind with those coparcenary dikes which are constructed to protect his own and his neigh- bors' estates against destructive floods. He is bound to pay in due proportion for this peculiar advantage which accrues to his property above what other less well-to-do, or propertyless members of the commonwealth enjoy. The thought readily suggests itself, too, that it would be an equitable plan to gradu- DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. I5I ate the payment in proportion to the greatness of the property possessed, in a manner analogous to what we find in the case of "contributions." It is also to be remarked that the greatness itself of these public institutions with which we are here dealing, and their far- reaching consequences, are the source of difficulties. But while it is not to be overlooked that these institutions do, in addition to their other purposes, also serve this particular purpose, yet this is never true in such a sense that this special purpose — the securing of property against dangers from within and without — can be treated as their exclusive function, nor even as a function distinct and independent of their other pur- poses. Rather it is characteristic of a highly developed com- monwealth that such an intimate connection prevails between the interests of the individual and those of the aggregate, with respect to every class of interest, that it would appear impossible to bring any one special interest — as here the interest of prop- erty — into a distinct and exceptional relation, in virtue of which it would be practicable to compute how much this particular interest owes to the national institutions. § 98. The absurdity of a computation of advantages, based on the assumption that the national organization is nothing but an insurance-office for property, and unmindful of the security afforded at the same time for human interests of a higher order, — the absurdity of this view comes out glaringly when we reflect that the means necessary to this security comprise not property alone, but also goods of a higher order. For it will not be questioned that demand is made upon such goods of a higher order, in view of the ever wider acceptance by civilized nations of the maxim that every citizen is bound, to the best of his ability, to guarantee the national security even at the risk of his person and his life, at the same time that the culture of our time ascribes to human life an infinitely high value — a value such as is simply incapable of being measured by any industrial standard. Clearly, when sacrifices such as these are demanded, the end 152 THE SCIENCE OF FINANCE. to be attained by their means must be conceived to lie beyond the range of calculable economic advantage. Interests must be at stake which are of such importance as to justify the demand, if need be, upon the citizens' life as security for them. It would be absurd to stake one's life for the maintenance of one's owner- ship of economic goods. If we are in search of a single word by which to denote the aggregate of these higher goods, the word Fatherland prob- ably is the one word that symbolizes to the modern citizen all those higher interests which, apart from economic goods, are what the national organization conserves. The citizen of the German Empire of today, who backs up the hard-won national union with an expensive armament and a universal liability to military service, is very well aware that these sacrifices by no means stand for the security of property alone, but that above all else their purpose is to secure the conservation and independent development of national characteristics in usage and law, in state and church, in science and art. § 99. In this way we come to what is the essential character- istic of the Tax proper. The tax is a payment made by members of a political com- munity toward its expenses, simply in virtue of their being mem bers and without its being possible to balance accounts as regards particular expenditures and the particular benefits accru- ing to individual members (vol. i. sec. 397). We have already found in the discussion of first principles (vol. i. sees. 380, 398) that when the terms of the relation are in this way made to consist of the aggregate advantage of the commonwealth as such on the one side and the collective per- sonality of the several citizens on the other, no method of reck- oning is admissible in assessing the public expenses which does not provide that each citizen must contribute toward the com- mon expense according to his ability. This forms the correlate, in the domain of economic means, of the now-a-days well- accepted principle of personal responsibility exemplified in the DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. I 53 requirement of universal liability to military service. As in the one case solidarity of responsibility for the independence of the common country leads to the principle that every member of the community is held answerable for the welfare of the whole, in his person and his life, to the extent of his ability, as condi- tioned by sex, age and health, — so also in the matter of eco- nomic ability. It is a problem devolving on the general theory of taxation to investigate the nature of these various kinds of economic ability which constitute the basis of the ability to pay taxes. § 100. In the case of the term "tax," as in the case of any of the terms used technically in the political sciences, it will be diffi- cult to bring any precise definition of it into complete accord with the usage of every day life and the changes which this usage has undergone in the course of history. •If a definition of the tax is fixed upon in the manner above indicated, a considerable portion of existing tax legislation will be left unprovided for. There are taxes which are indefen- sible from the standpoint of this definition, but which it may be desirable to maintain on other grounds, and these not only occupy a large space in tax legislation, but have been growing in importance, or have even been introduced within the period of development of Political Economy and of the Science of Finance. Taxes which are levied without regard to the economic ability of the owner, and simply on the basis of the market value of a piece of land, a house, and the like, must either be regarded as very inadequately corresponding to the economic ability of the tax-payer, or they must be justified on other grounds, basing the plea for their retention on facts characteristic of these taxes alone. But this kind of a justification brings us out upon that middle ground which lies between the " contribution " and the "tax," in the narrower sense above defined. § 10 1. There are, for example, certain sj^ecial cases of gain resulting from expenditures incurred by the commonwealth, 154 THE SCIENCE OF FINANCE. which are on the one hand so intimately dependent on the public functions of the establishments in question as not to admit of their being paid for by means of Contributions, while they are on the other hand so obvious and so considerable as in all justice to demand some special compensation. We need only call to mind the close dependence of real prop- erty and its value on the expenditures required by the great, fun- damental institutions of the State. And this relation holds in two different respects. First, there is no form of property that is so closely identified with the country as is real property, which constitutes, in fact, the physical substratum of any community. Every contrivance which furthers the security and welfare of the state, therefore, is first of all of advantage to real property. Other kinds of property, so far as they are movable, can sever their fortune from that of the country; which real property never can do. So that even in virtue of this fact alone its special interest will in a peculiar degree bind it to the support of the national establishment. But in the second place, the same conclusion is even more strongly enforced by the phenomenon of which the law of rent is an explanation (vol. i. sees. 455 et seq.^. As the origin and growth of rent is due to the activities of the aggregate and not to the efforts of the individual owner, real property is in justice bound to bear a specially heavy burden in the appor- tionment of the aggregate expenditure. The justice of this demand is also borne out by the history of our science. The earliest constructed system (that of the Physiocrats) put the recognition of this claim in the most unqualified form, in the demand that real property alone should be made to bear the public burdens; and the science has ever since, in spite of all its progress and purification of the physiocratic teaching, held steadfastly by the essential substance of this claim. § 102. But even apart from this, there is a great number of cases where there exists a special relation of dependence between private interest and public institutions. On comparing the expenditures which any great modern city, DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS, 1 55 such, e.g., as Berlin, has incurred in the course of the past genera- tion for the comfort of its inhabitants, with the simultaneous advance which shows itself in as striking a manner in enhanced values of building-lots as in any other one fact, we shall not find ground for assuming that a direct relation of cause and effect exists between the two facts in the sense that the enhanced value of building-lots is due solely to these communal expenditures. At the same time it is not to be denied that the effects of these expenditures have very distinctly helped the value of build- ing-ground. Improved streets, lighting, water supply, canaliza- tion, sanitation, police, schools, charities, etc., have in a very appreciable degree increased the attractiveness of the city as a whole, and of certain quarters of the city in particular, and have thereby increased the value of building-ground. The fact that apart from and independent of these expenditures such an increase of values would follow from the well-known nature of land, need not stand in the way of the effect of which we are speaking; the advance in values has been considerable enough to admit of a concurrence of several causes. Some of the improve- ments which have been undertaken at public expense are of such a kind as might have been undertaken directly by the owners of the property, or at any rate could have been carried out in a way by levying proportional "contributions" on the property ow^ners interested. Such are thoroughfares, lighting, water supply, canals, and the like. Defective appliances for these and like purposes are felt by the occupants, — by the occupants of the particular pieces of property in the first place, and therefore also, and immediately, by the owners. In the absence of an adequate police provision for the streets and precincts in question a more effective and therefore more costly provision for security (in the way of area walls, manner of building, watchmen, etc.*) will have to be made for each particular house. As soon as an adequate police force is present these provisions at private cost become superfluous, and the indebtedness of the private owner to the community on account of the provisions made then becomes obvious. 156 THE SCIENCE OF FINANCE. A case of a still more special and immediate connection between public expenditure and private gain occurs where partic- ular industrial pursuits on part of private individuals are the cause of some peculiar expense to the community ; as, for example, the damage done to streets by heavy wagons, the damage to rivers from discharge of wastage, the burdening of public charitable establishments and the public schools (which are either entirely or prevailingly gratis) by the proletariat of the factory. It will be made plain later on that these peculiar special rela- tions seriously affect the system of taxation. § 103. A special benefit enjoyed by property in general as an effect of the public establishments will hardly give rise to a special compensation by means of a peculiar tax. For a taxa- tion proportioned to the economic ability of the tax payers will of itself effect this purpose. Indeed it effects it so thoroughly that as a result of the distaste of property owners for a propor- tional taxation and the desire for greater leniency in the burden- ing of property for public purposes, the contrary principle, of pecuniary benefit as contrasted with pecuniary ability, has been made to serve as an argument for a less than proportionate obli- gation. The result of applying the principle of pecuniary ability is such a gradation of the sacrifices undergone for the good of the community as will discard the apportionment of the public bur- dens according to pecuniary interest and allot the expenses according to differences of economic strength. Further, this difference in economic strength has the consequence (as will appear farther on, in the theory of taxation) that the majority, consisting of the weaker members, will pay at a relatively lower rate than the minority of stronger members. § 104. A matter to be considered in connection with the question of what the community may equitably require of a member, is the varying size of the individual households that are the units with which the commonwealth has to do, and with I DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. I 57 which it usually deals through the father of the family. It is also a matter on which the most divergent and even contradictory views are held. Now, as a matter of equity, it is evident that, counting the person as unity, the obligation due on account of advantages accruing from the institutions of society increases in the same proportion as the number of individuals deriving such advan- tages. The father of a family, whose domestic life comprises a numerous flock of children, owes correspondingly more to the community for the peace and security enjoyed by so many of his dear ones, than is due from the single man, the childless couple, or the man with a less numerous household. This fact would seem less doubtful if it were not thrown into the background by considerations of quite another kind. There is in the first place the undecided population question, which of itself gives rise to diverse and contradictory views. The one view — and this is perhaps the most widely prevalent one, as it is also the traditional one — sees in the procreation and rearing of a numerous flock of children a virtuous action, whereby the head of the household merits the gratitude of the community. This view will of course lead to a very extreme position, unless it is tacitly assumed to proceed on the premise that the house- hold in question is possessed of the means necessary for such rearing of children. The mere procreation of offspring regard- less of the pecuniary means required for rearing them is scarce looked upon today as a work meriting the gratitude of society. Herewith we come to the point of transition from this first view to the second, which likewise makes this important function of domestic life a matter of serious interest to the community, though by no means in the sense that the end in view is the sup- plying of the greatest possible population and that the extent of participation in the accomplishment of this office is the measure of desert. The meaning of this second view is rather the posi- tion dictated by a scientific insight into the true significance of the movement of population (cf. vol. i. sees. 163 et seq.^. This scientific insight into the question of population will not permit 158 THE SCIENCE OF FINANCE. US to regard an increase of population as desirable on any such general grounds. It is, in truth, the standing fundamental prob- lem which chronically and persistently obtrudes itself on society for a solution simply in consequence of certain fundamental instincts, and is a persistent cause, in all classes of society, of a discomfort to which society as a whole is at least as sensitive as the individual household. It may also be remarked that even in case of an increase of population which is desirable from the point of view of the com- monwealth, the state has no call to express gratitude. There can be ground for gratitude only in case the useful deed was done with a view to its usefulness. But of this there can be no question in the case in hand. The entering upon married life and the procreation and rearing of children are occurrences which, as moral facts, begin and end within the scope of self- interest and its peculiar instincts and inclinations ; and if it happens that, by exception, these instincts and inclinations are sometimes accompanied by a conscious purpose of accomplishing what is for the public advantage, there are to be offset against this the much greater number of instances in which an increase of the family signifies nothing but a yielding to a self-interest which is harshly at variance with the interest of the community. § 105. If the discussion so far may seem to favor the view which insists on the recognition and compensation of those special pub- lic advantages which result from the size of the individual house- hold, the whole matter assumes a somewhat different aspect as soon as the element of economic ability is also taken into account. Taking the matter from this point of view, the heads of fam- ilies may confidently count on a ready assent to their demand for a reduction of the burden of taxes on the plea that the man who is blessed with a flock of children is thereby rendered less able to pay the tax. It is not to be doubted that the economic ability of the taxpayer is lessened by the expense of supporting a numerous family, and that he is in consequence less able to contribute to the support of the public establishment than is DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. I 59 another taxpayer, who, under otherwise equivalent economic cir- cumstances, has no such family and consequently possesses a larger residue from which to contribute to the public purse. This reasoning has repeatedly influenced legislation, and espe- cially it seems of late, along with the ever-growing insistence on economic ability as the basis of tax apportionment, to be gaining an ever wider acceptance. The limits of its application are indicated by the considera- tions mentioned in the foregoing paragraphs. These are, first, that for the benefits conferred by the state the greater number of human beings included in the household unit and so deriving benefit are properly chargeable in a proportionally increased amount ; and second, there are the scruples due to a recognition of the principle underlying the growth of population, the appre- hension being that legislation framed on these lines may unduly foster the already sufficiently prevalent misconception that the procreation of children is always and everywhere a meritorious service and that the community is much beholden for what is in point of fact the improvidence of individuals. § 106. But if it is true that the consideration of this personal factor, of the number of persons comprised in the family repre- sented by the taxpayer, affords no decided result, or at least none that has been clearly recognized in legislation hitherto, and if, further, the preferential benefit derived by the property owner in general from the public institutions (sec. 103) affords no suf-' ficient occasion for varying the form of taxation from what would be adopted on other grounds, we shall find, on the other hand, that another factor above spoken of (sees. 10 1, 102) has a decided effect on the form which legislation takes. This factor is that enjoyment of peculiar advantages which attaches to the posses- sion of particular kinds of property. These peculiar forms of taxation accordingly occupy a middle ground lying between the territory of the Contribution proper and the Tax (in the narrower sense as defined above — sec. lOo), for the reason that the advantages for which it is sought to collect l60 THE SCIENCE OF FINANCE. payment are so intimately dependent upon and bound up with the general purposes of public institutions as not to admit of an equitable employment of the Contribution. The result is a compromise with which we are familiar under the name of a Tax on Produce or on Proceeds YErtragsstcuer\, or an Objective Tax. The development of those sentiments, in the course of history, to which this kind of tax owes its origin, discloses a gradual prog- ress, both as regards apprehension of the nature of the tax and as regards apprehension of the relation subsisting between the indi- vidual citizen and the national organization. As to the point first mentioned, the course of development has been this : At the out- set the taxation of "proceeds" or of "objects" was regarded as conforming to the principle that each citizen should contribute proportionally toward the whole of the necessary national estab- lishment, while at a later stage it came to be the accepted view that the imposition of this class of taxes is expedient only within the narrower field which we have assigned them. As regards the second point, a growth of national sentiment is to be noted, in consequence of which the Income Tax came to be regarded as (in point of principle) a relatively less adequate means of bal- ancing accounts between citizen and commonwealth, and has been relegated to a more modest sphere. The narrow self which was the determining factor in the earlier public sentiment has retreated within a more restricted field, within which it has better been able to hold its own. § 107. This is perhaps the proper place for some consideration of a form of public exaction which, since the time of K. H. Rau, has been distinguished from the rest of the national income under the head of Fees [Gebiihre?i). Fees have this in common with the Tax on Proceeds iyErtrags- steuer) as discussed above, that they consist of a special payment for some special benefit which individual members of the com- munity derive from the public institutions, beyond what falls to the share of the other members ; or (what comes to the same DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. l6l thing as regards the matter of equitable compensation) the pri- vate interest of individual members occasions the commonwealth some special detriment (costs) which is to be made good by the members in question. The difference between Fees and the Tax on Profits is this, that while it is intended that the latter, by means of annual pay- ments, shall pay for effects wrought by the public establishment continuously through considerable periods of time, Fees on the other hand are payments rendered for isolated acts by which special advantages are offered or special expenses incurred for the benefit of individual citizens. § 1 08. It is well to call to mind at this point what was explained above (sees. 84-88), in the discussion in the course of which the Administration of Justice and Public Instruction were treated of as typical institutions. In the course of that discussion we came to the conclusion that with respect to the administration of justice it is necessary to adhere to a middle course between the traditional financier- ing methods of primitive public economy and the completely gratuitous administration demanded by the radicalism of the past one-hundred years. This middle course finds expression in the employment of the tax on the one hand and the fee on the other, as the proper method of defraying the expenses of the public administration of justice. The tax, in recognition of the incom- putable benefit derived by every citizen — the advantage enjoyed in living in the atmosphere of peace and legality of a civilized state ; the fee, in compensation for the palpable special advan- tage, or the special expense incurred for the benefit of individual citizens who may require the machinery of the courts to be set in motion. An institution of a type somewhat different from that exem- plified by the courts of justice is the public school. In this case the peculiar structure of the public establishment in question does not make it necessary, in order to comply with the demands of equity, that it should be based primarily on a tax ; on the con- l62 THE SCIENCE OF FINANCE. trary the advantages offered and the expense incurred in behalf of individual citizens are in this case quite readily computed and apportioned. That this method of apportionment is after all made subsidiary to the principle of the tax is due the conviction, based on social-political considerations, that a helping hand should be extended to the needy majority of those who make use of the schools. But in proportion as these straitened circumstances are not present, in proportion, that is, as the question concerns those grades of instruction which in a preponderating degree serve the purposes of the well-to-do classes alone, the neces- sity of apportioning payments to advantages enjoyed by indi- viduals makes itself felt, and therefore arises also the expediency of fees. It is true, the recognition of the indirect effects of public instruction modifies this view of the question to some extent. At the same time the requirement of that equity which is to be pre- served as between members of the same social stratum, with respect to their varying pecuniary capacity, demands that this recognition should be allowed but a guarded influence. The out- come of all this is that in the middle and higher grades of public instruction a broad field is left open for the fee. § 109. We have now passed in review all the different kinds of public exactions, so far as they have hitherto been recognized and adopted in the administrative system of any political organization. The foregoing analysis of the services rendered by the public administration, which constitute the basis of the corres- ponding forms of payments exacted, has brought to light one other important consideration in the way of peculiar motives existing in the relation of the individual to the community, but which does not result in any peculiar adaptation in the form of payments. This is the difference in ability between the different indi- viduals and strata of society already explained above (sees. 85—90). There is no further peculiar form of payment avail- DIFFERENT KINDS OF PUBLIC CONTRIBUTIONS. 1 63 able to meet this difference. The form which we have come to know as a tax in the narrower sense will also have to serve for the equitable saiisfaction of the claims represented by this consideration. If the tax, in the sense above (sec. 99) developed, of itself goes in the direction of apportioning pavment to ability, this fur- ther consideration, which demands that the stronger should assist the weaker, can only help on in the same direction and bring the tax system into a form that shall still more distinctly graduate payments in proportion to pecuniary ability. What is exacted in accordance with this view will continue in any case to figure as a sort of " compensation," in the best sense, if the profounder view is taken of the relation in which the life of the individual stands to that of the whole — the view expressed in the old phrase of Montesquieu : '' en naissaiit on contracte c fivers la patrie H7ie dette imme7ise dont on ne pent ja?nais sacquitter" ;' which has again quite lately been expressed so felicitously by the English philosopher, Huxley^. As Huxley, in his beautiful essay on the Struggle for Exist- ence, says: "If I was not at my birth immediately annihilated I owe it either to the natural affection of those about me, which I had done nothing to deserve, or to fear of the law which had been established centuries before my birth by the society into which I made my entrance. If I was nourished, cared for, edu- cated, I know of nothing I had done to deserve those advantages. And if today I possess anything, even if I owe to the sweat of my brow what I do possess, I must not forget that without the organ- ization of society, which is the outcome of the struggles of a long series of generations, I should probably possess nothing more than a stone hatchet and a miserable hut, and even these would be mine only so long as no more powerful savage happened to come my way. But from this it follows that if society has done ' De resprit ties lots, vol. v. p. 3. It is true, Montesquieu's own theory of taxation is not in accord with this maxim : Les revenus de Vetat sont une portion que cliaqite citoyen donne de son bien pour avoir la silreti de r autre. — Vol. xiii. p. I. -In the A'ineteentli Century, February 1888. 164 THE SCIENCE OF FINANCE. all these things for me gratuitously, and then requires me to pay something toward its support — suppose this something is a con- tribution toward the education of children belonging to others — I should be ashamed, in spite of all my individualistic inclina- tions, to say no. And in case I were not moved by shame, I believe society would be in the right if it were to convert its moral claim into a legally binding one. It would be thoroughly unjust to let the willing horse draw the whole load." CHAPTER IV. THE STRUCTURE AND FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. Literature. Alexis de Tocqueville, Z>d? /« democratie en Am^rique, 1834; 14th ed. 1864. L. Stein, Lehrbtich der FinanzwisseJtschaft, 5th ed. 1885, vol. i. pp. 50-89. A. Wagner, Finanzwissenschaft, 3d ed. 1883, vol. i. sees. 38-59. A. Wagner, " Reichsfinanzwesen " (v. Holtzendorff's /a^^r- buch fur Gesetzgebung, Verivaltutig iind Rechtspflcge des Deutschen Reichs, vol. i. pp. 581 ei seq., 1871 ; vol. iii. pp. 60 et seq., 1874). Schriften des Vereins fiir Sozialpolitik, vol. xii. — " Die Kommunalsteuerfrage," 1877. G. Cohn, " Die Steuerreform im Kanton Zurich und der Bundeshaushalt der Schweiz," 1884 {Natio7iar6konomische Siudien, 1886, pp. 315 et seq.). F. Freiherr von Reitzenstein, "Ueber finanzielle Konkurrenz von Gemein- den, Kommunalverbanden und Staat" (Schmoller's Jahrbuch, 1887,. 1 888). " Das kommunale Finanzwesen," by The Same (Schonberg's Hand- buch der politischen Oekonomie, 2d ed. 1885). I. THE STRUCTURE OF THE COMMONWEALTH. § 1 10. If I use the expression "public organizations" iyoffetit- lichc Verbdnde), rather than "the public organization" it is because the unity of that public organization which answers to our con- cept of the state presents itself to us in the guise of a multiplicity of organizations, rising one above another and resulting in a totality only through their organic union with one another. From this point of view the state presents itself to us as a structure making up an undivided whole, rising to a single, cen- tral apex, but the constituent parts of which rise one above another in sharply defined gradations. In the current views of the rnatter this unity is but imperfectly apprehended, as is shown by this, among other things, that the inclination commonly is not so much to conceive of the state in this broader sense, but rather to narrow the concept far enough 165 l66 THE SCIENCE OF FINANCE. to admit of contrasting the state with its own constituent parts. This view has a substantial ground in the sense that it is a sur- vival handed down from an era when the national idea was yet engaged in a struggle to reduce these disjointed members to order and unity ; but it is a conception which falls far short of apprehending the essential character of the modern state. § III. If we examine the state, considered as a structure of the nature indicated above, the lowest form of political associa- tion is the Commune {^Gemei?ide^. The commune is the elementary structure, both in the sense that it is accepted by the consciousness of the individual mem- bers as the immediate fundamental form of public organization, and also in the sense that in point of historical development it is the first link of the chain. The characteristic feature of the commune is the fact that it is a neighborhood organization, which owes its origin to an exten- sion of the relation of kinship beyond the limits of the family and the individual household, and signifies that the members of the commune have come to share in those good offices of human intercourse of which, within its narrower sphere, the family affords a ready illustration. The nearer we approach its beginnings, the more self-con- tained and exclusive is this elementary social organism ; the more does it unite in itself all the essential functions which in the course of development fall to the state. The commune is the ultimate cell, as it were, of the state, from which, by progres- sive segmentation and differentiation, arises the organism with which we have here to deal. § Ii2. The character of this neighborhood organization is somewhat modified by the divergent conditions under which rural and urban social life is carried on. In the historical development, the rural commune, occupying a greater space, is the earlier of the two. The large area occupied by agriculture as contrasted with handicraft and trade, requires FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 67 a relatively great extent of inhabited country, which distinguishes the rural from the urban commune. On the other hand the intensive character of the distinctively urban occupations brings about a great and constantly growing concentration of the popu- lation of the commune within a relatively narrow space. In the very beginnings of towns and town-life this contrast is not perceptible. During the earlier centuries of the Middle Ages the legal maxim that nothing divides the burgher from the peasant but the town wall, is literally true. The towns are nothing but fortified hamlets — places of refuge and asylum in a country of peasants.' Every town was united in a defensive league with the unfortified villages ; the villages were bound to keep the walls of the town in repair, in return for which they found refuge behind the walls in times of war, with their goods and chattels. But it is evident that the advantages of continuous residence within the walls would especially accrue to those whose occupation least led them out into the open country, such as handicraftsmen and tradesmen. Hence the mercantile character of the towns was a consequence of that slighter requirement in the way of space, which could find room enough within the town walls. Hence, also, the towns became the seat of all those occupations, oflfices, functionaries, which in this respect resembled handicraft and trade. As the development goes on the relative importance of the characteristic features of the town is reversed. The walls of the town fall under the sway of the new departure which is changing the face of matters political and military. Concentration of pop- ulation and social intercourse now come to be the decisive characteristic. The shifting character of the concept of the medieval town, which is such as to embarrass modern statisticians, comes partly of a failure to distinguish between the historical and the ' K. Bucher, Die Bevblkerung von Frankfurt am Alain im 14. unci /j. Jahr- hunderty vol. i. p. 469. Cf. Maurer, Geschichte der Stddteverfassung, vol. i. pp. 125, 49 1 et seq. l68 THE SCIENCE OF FINANCE. economic connotation of the term, partly from the impossibility of drawing a hard and fast line of demarkation, in the economic sense, between the town and the rural commune. The facts lying on the border between the two classes do not, however, constitute any obstacle in this any more than in other, analogous cases to the recognition and acceptance of an essential contrast which in a typical way marks off the modern city from the commune of the open country, a contrast founded on the density of population and the higher tension of social life. Hence that dissimilarity of communal life and activity, in aims, functions and powers, which presents itself to our view in an imposing form in the modern city corporation, as contrasted with the rural commune. §113. Although the commune attempts to perform the elementary functions of the state, we still find, even in the ruder stages of culture, an organization wherein the fundamental fact is the submission of a number of communes to a superior power. This superior power arises partly out of a superimposition of the stronger political organization upon the weaker, partly out of an organization of the smaller units into a larger whole. The ambiguity of the term State, above referred to, is largely due to this fact. In its historical development this subordination and incorporation takes the form of a contrast between the greater political unit and the less. From the point of view of the developed state the commune is regarded as a part, the state as the whole. This contrast between the part and the whole, between the elementary organization of the neighborhood community and the national dominion that includes all these individual primary units and binds them together in a sovereign whole, expresses the most striking fact of the organization of social life. The State stands forth as "the self-sufficing," the complement of organized social and political intercourse, varying — with respect to the extent of population which it comprises — with the FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 69 stage of development which it occupies. The commune, on the Other hand, is the group next removed from simple indi- vidual existence, and its repetition in a scries of structurally identical units constitutes the substratum on which national life rests. § 114. Within the field of these two fundamental phenomena of political life — the commune as the elementary fact, and the state as the centralized organization of the whole — is further developed a diversified multiplicity, both of intermediate mem- bers whose special functions intervene between the commune and the state, and of peculiarities of structure modifying the cen- tral organization of the state itself. Naturally, as the interval between center and circumference widens, expediency leads to the introduction of certain inter- mediary institutions, whose purpose is the performance of functions which lie beyond the sphere of the local commune and still do not fall within that of the central authorit3^ These intermediary structures are the outcome partly of that historical development whereby the smaller political units are subordinated and organized into constituent elements of the greater whole (counties, provinces), partly of systematic con- structive effort which, starting from the national center, lavs down the boundaries of the lesser administrative units (precinct, ward, arrondissement, department). Under the head of qualified centralization of the sovereign state we shall have to take up the class of political phenomena of which our recent history affords so many examples. The relation of the individual states of the North American Union to the Union as a whole, the analogous relation of the Swiss Cantons to the Confederation, the relation of the individual German states to the Empire, the different relations of the same states to the German Confederation before 1866, as well as the relation of the Swiss Cantons to the old Helvetian League pre- vious to 1884, — all these are questions which belong under the above head. 170 THE SCIENCE OF FINANCE The aim has thus far been to call attention to the facts of the organization of public bodies ; we shall now have to discuss further what are the causes to which these facts are due. II. THE CAUSES AFFECTING THE STRUCTURE AND ORGANIZATION OF PUBLIC BODIES. § 115. A comparison of the several states of Europe (or states representing European civilization) from the point of view of structure brings out such a multiplicity of forms, existing and extinct, that we find ourselves obliged to begin with a consideration of the historical grounds of this diversity of structure. What, for example, is the reason that in France and England the functions of the central national authority have for centuries past been vested in a stable centralized state, in which no sub- division or diffusion of the supreme authority, in the sense of a subdivision of sovereignty, is traceable ; while in Germany on the other hand, the wearisome advance toward national unity has been content to leave the sub-states their sovereignty, at first with the fuller measure of sovereignty they enjoyed under the Confederation, and afterwards with the diminished measure of autonomy which they possessed under the Union, of which a good share has had to be conceded to the newly constituted Imperial authority ? Again, what is the reason, I ask, that Italy, immediately on emerging from the earlier disunion of its petty states into a reconstituted national unity, was able, as contrasted with Germany, to achieve at a stroke the finished unity of the entire nation, with complete suppression of the previously existing sovereignties ; while on the other hand the Swiss Confederation, with a country and population no greater than a German princi- pality, such as Baden or Wurtemberg, is still far from having achieved the unity of such a German principality, and even fosters the relatively great independence of its constituent can- tons as a characteristic and essential source of strength ; and the modest measure of centralization hitherto attained by the Con- federation in the constitutions of 1848 and 1874 has only with FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. I7I great difficulty been wrested from the traditional sentiment of particularism ? And what is to be said of the Austrian Empire — the latest exponent of the time-honored velleity for a Roman world-empire — which still holds in union (or rather has but now united) wide dominions and diverse nationalities, the union of which has, during the past generation, wavered between the necessity of an absolute or a relative disintegration and the possibility of a greater measure of consolidation ? Foremost among all that goes to explain these differences stand the great number and variety of historical conjunctures, and the peculiar historical situations of the different peoples, § 116. Sober rationalistic reflection alone, without regard to the conditioning historical circumstances, will never be able to satisfy itself that there is any sufficient reason why these differ- ences do or should exist. The great result of a development of peoples and of states is worked out by the combined action of many forces, both helping and hindering, and the outcome is necessarily a different one in each particular case ; indeed, the very substance and purpose of the movement — the development of the nation — is itself of a mutable and fluctuating nature. Only if we take this fact as our point of departure shall we come to appreciate that in this field the force of special circumstances must, in each case, prevail over the forces that make for the norm of greatest expediency. But from these considerations it is clear that, as concerns this particular point, the destiny of the English, the French, the Germans, the Swiss, is a "destiny" in much the same sense as is the life-lot of any individual. That is to say, the helping and hindering circumstances encountered in the outward conditions of life are, at least in some degree, qualified by the intrinsic character of the peoples themselves. Or even if this be dis- puted, it will at least have to be conceded that the course of outward events has reacted upon the intrinsic characteristics of the people (as e. g., habitual political centralization has acted 172 THE SCIENCE OF FINANCE, upon the character of the French, or excessive political sub- division on the character of the Germans), and we shall there- fore, in any case, come back to the fact that the specific character of a people determines the peculiarities in structure of its politi- cal organization. On considering from this standpoint the relation in which the individual states of the German Empire stand to the federal state as constituted today, we find that, owing partly to habitua- tion to the traditional form of political organization, partly to the desire for an immediate control of the local administration, the newly constituted imperial government has been vested with only such powers as are indispensable in order to secure for the German people the necessary degree of cohesion over against the other great nations. And in the relation of the Swiss cantons to the federal authority of the League, there crops out at every turn — and all the more saliently that the traditional political unit is here so diminutive — a great and effective particularistic aversion to fed- eral-national institutions. And this state of affairs seems to be a faithful expression of the national character, for in no other country is such thoroughgoing provision made for the control of the course of public affairs by the popular wish, at least as concerns a restrictive control. § 117. We are therefore able to formulate the proposition: In like measure as any people has achieved its own unity in its struggle with external and internal obstacles, will the aggregate of its political functions take the centralized or the decentralized form. Only we shall have to add that the concept of a "people" as here used, is itself an historical category and is accordingly of a shifting nature (cf. vol. i. sees. 329 ct seq.). The Swiss nation has arisen out of a number of smaller "peoples," who even to this day — obstinately tenacious of old-fashioned ideas and opinions — feel themselves to be distinct peoples; but taken as a whole, the Swiss are, as a nation, rather to be com- FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 73 pared to the Suabian nation than to the German. The German nation of today is after all but an historical datum of the present period, and is neither in prospect nor in retrospect to be looked upon as an immutable and indissoluble unit. If we take a still broader field, so as to comprise within our view that comprehensive republic which is an aspiration of the past and of the remote future alike, — which includes within itself several great heterogeneous nationalities, — we are met by still further special modifications, whose purpose is to reconcile the diverse tendencies of unionism and separatism. In Austria this diversity of nationalities is the occasion of various, partly experimental, arrangements and understandings between the whole and its parts. In Switzerland the discrepancy between the German and the Romance nationalities contributes its share toward the difificulties which the traditional separatism of the country entails on the federal commonwealth. It is still an open question how far it is practicable to con- struct a homogeneous commonwealth out of diverse nationalities, even where external circumstances favor, and where the foreign elements are inconsiderable both in quantity and in degree of diversity. § 1x8. But after having in this way allowed the widest scope to historical circumstances and to peculiarities of national char- acter as factors in determining the structure of the common- wealth, it will after all appear that, on the basis afforded by these historical circumstances, the great factor of simple expedi- ency must have its effect. This factor will always, in every land and people, make its claims heard, and will prevail. It is this factor, with all its tactful sagacity, that must ever prevail, both in the present and in the remoter future, in its struggles with the essentially mutable historical situation. It is this element that gives occasion for improvement and innovation in the manage- ment of political affairs both local and general, — for the change or abandonment of methods as the progress of knowledge may direct. And finally, this factor is most facile in accepting sug- 174 THE SCIENCE OF FINANCE. gestions from observation of the institutions of foreign states. Indeed, the varied historical development of different states and countries is itself, even, an outcome of this expediency of insti- tutions conforming itself to the pressure of the peculiar situation in each particular country. And it is precisely the discrepancy which exists between the organization handed down by history and that struggle for practicality which is latterly making so great a stir, that has led to an intelligent appreciation of the basis on which this factor of expediency rests. It is precisely this international character of the modern progress of knowledge and of the movement for practicality that has brought about a cer- tain uniformity of type in the methods of administration in all countries, as contrasted with the diversities of national character. How is it possible for the system of petty administrations under the cantonal autonomy of Switzerland to hold its own against the modern demands for centralization ? How is the German principality's traditional jealousy of its sovereign powers to be reconciled with the ever-increasing requirements of national life in the direction of national institutions under imperial control ? No answer to such questions as these is possible without a discussion of the factor of expediency and practicality, which supplies the motive for the one tendency or gives support to the other. § 119. The prime factor bearing on the question of structure and organization is the simple fact of size. It is possible for a single commune, especially under the stimulus of the latest improvements in means and methods of intercourse, to attain such proportions, in population and in pop- ular wants and capacities, as will call for the performance of functions that are ordinarily required only by a group of popu- lous communes and circles \_Kretse^. The municipal commune of Berlin has functions to perform such as nowhere else in the Kingdom of Prussia fall to the share of a civil division of lower rank than a province, and, indeed, through the latest legislation it is in fact constituted a province. FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 75 On the other hand, there are many village communes so small as to be unable, both on the score of size and of strength, to support the usual institutions of a municipality, and which aie therefore compelled to unite for these purposes with neighboring municipalities. Conversely, the requirements in the way of magnitude, due to practical exigencies of various public establishments, vary with the technological character of the different establishments in question. The diversity of practical requirements and demands on this ground is analogous to the difference that exists between whole- sale and retail business in productive industry. This point merits more detailed examination. §120 There are certain special branches of the public busi- ness for which this analogy holds, strictly and in detail, — for which the relation is not simply that of analogy, but is in fact identity of principle. The post and the railroad are typical of this class. These not only belong to the general class of undertakings which require a large investment of capital, and which in order to be employed to full advantage must be organized in a single consolidated system and be the exclusive purveyors of the jniblic wants they are intended to serve; they constitute a genus of their own within this general class, inasmuch as it is their purpose, provided for in their material requirements, to cover a very large territory and so lessen the distance between men and goods as far as possible. This purpose they accomplish all the more effectively the greater their extension and the more thoroughly consolidated their management. It may even be maintained that the trend of development in this direction in the case of these means of communication is not limited by national boundaries, — that the ideal in their case is a unified international system. The consequence of this peculiar industrial character is that the post and railway system always expands as far as the bounds of the most extensive political organization that lies within the State's 176 THE SCIENCE OF FINANCE. jurisdiction will permit. These means of communication imme- diately fall, or tend to fall, under the management of the central authority, wherever the modern process of consolidation of petty states takes effect. And these branches of the public service are the part that first drops out of public control and falls into private hands whenever the structure of centralized national public service falls into decay through the overgrowth of constituent structures vested with sovereign power. But even when under private management, the technological character of these branches of industry requires their organization on an equally extended scale. These branches of the public service, moreover, have for some time past shown a tendency to an international organization, pushing boldly forward over the boundaries of great empires and nations, on the road to an international union, — €. g., the Inter- national Postal Union, the beginning already made toward a uniform system of railway service and railway legislation. § 121 The reasons for vesting the control of the really funda- mental institutions of a people in the most comprehensive political organization into which that people enters at the time are of an analogous nature, though mixed with considerations of other kinds. The system of defense is clearly made more effective by a consolidation of the national forces and an orderly disposition under a centralized management. In the latest forward step taken by Germany ( and by Switzerland ) this reconstruction of the military system occupies the most prominent place in the programme of national regeneration : a union of the scattered forces of the people into a single consolidated force. Viewed from the standpoint of practical efficiency, there can be no question of a subdivision of the military power, in the sense of surrendering the control of particular fragments of it to minor political divisions. Wherever anything of this kind occurs it can only be of the nature of a concession to insurmountable histor- ical circumstances. FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 77 Apart from the technological advantage gained by this con- solidation, its great importance as an clement of national strength lies in the moral force of a sense of national unity, of which no other form of expression is so adequate and so effective as a united national army. The requirement of centralization in the administration of justice is not equally uncompromising. As contrasted with the material mechanism of the army, the essentially intellectual struc- ture of the administration of justice proceeds, in its transition to the centralized form, more slowly and by a greater number of intermediate stages. Hence a greater length of time is apt to elapse before the most expedient degree of consolidation is attained, in the case of this than in that of the other institutions spoken of. Special ( local ) laws and systems of law may survive for generations after the unification of the militar)- sys- tem has, under the heavy pressure of necessitv, been perfected. But it is only that the tendencv toward centralization on the part of the administration of justice is more pliant; the tendency is no less distinctly present here than elsewhere. For this there are two reasons. In the first place — in spite of all the tenacity of the par- ticularist spirit — the influence of national unity must con- tinually make for an ever more thoroughgoing uniformity in the administration of justice, because it will in the long run prove insufferable for a politically united people to accept more than one award as the truth in any given case, and because the consciousness of a common national life, a social soli- darity of all the members of the nation, grows ever stronger and more pervading with the growth of improved means of communication. In the second place, when a judgment reads, "in the name of the king," it imparts to the decision a superior sanction that removes it from the petty sphere of village affairs, and so gives it a character of impersonal generality that virtually works a change of venue from the immediate neighborhood of the inter- ested parties. 178 ' THE SCIENCE OF FINANCE. § 122. The case is different as regards the system of public instruction. Here the plan of organization and gradation is very similar to that of the state itself. The grades in the school system rise one above another in close correspondence with the gradation of the classes of society to whose wants they minister. The lowest and broadest stratum, the elementary schools, corresponds to the lowest and broadest stratum of societ)', to that portion of the population which is specially designated the "people" ("popular schools") \l''olksschule7TL\. Towards the apex the breadth of the strata dwindles, to correspond with the diminishing breadth of the upper social strata to whose wants the higher grades of instruction minister. So that the very apex of the pyramid, the high-school system, meets the least considerable demand. The greater the breadth of a given grade in the school system, the more does it approach the broader substrata of the political system in its plan of organization ; thus the elementary schools resemble the communal system, in so much that the extended need of elementary schools — being sufficiently great to afford both adequate demand and adequate means of support for such a school within the limits of a single comrrrune — relegates the management of this grade of instruction to the communes as a matter of course. For a school of a higher grade the demand as well as the means of a commune are insufficient, unless it be an exceptionally strong one. For a high school, except in the case of the largest cities, the needs and the means of a single commune are still less adequate. Accordingly, the high school and the university regularly become a part of the business of the central organization of the state." Besides this, there are some of the larger towns that support academies, provinces that sup- port technological schools, etc. There is still another special reason why the highest institu- tions of learning should continually more and more gravitate toward the control of the central authority, even in cases where the local organization might be large enough and strong enough to employ and to support them. Precisely the highest organ of \ FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 79 control which a nation possesses is the only one that is capable of occupying a standpoint sufficiently high for the adequate administration of its highest schools. The lower we descend in the scale of political stratification the greater becomes the dan- ger from influences which tend to impair that intellectual freedom \yhich is essential to the best scientific work. But it happens here, just as in the case of the administration of justice with its system of higher and lower courts, that the ideal nature of the institution makes possible a longer continued compromise with inherited particularist methods than is practica- .ble in the case of those great institutions of peace and war that rest on a system of material appliances, whose physical character makes a correspondingly tangible demand for a centralized man- agement. § 123. The above discussion of the functions devolving on public bodies has led us step by step from the sphere of what may be called national industry on a large scale to that of national industry of a retail character. What is it that is counted to the credit of the small industry in production ? There are certain industrial and socio-political advantages. First, the close relation between individual interest and the fac- tors of production, such as is possible in a small establishment; whence results a corresponding care and economy with regard to the expenses of the business and the quality of the work done. Second, as viewed from the social standpoint, the subdivision of industry into a great number of small establishments gives rise to a greater number of independent entities, which, as con- trasted with the centralizing tendencies of the large industry and the harsh disparity between the large capitalists and the prole- tariat, creates a large and powerful middle class. In both of these respects it is possible to find something anal- ogous in the field of public administration. In the former respect there is the notable instance of the administration of poor-relief. l80 THE SCIENCE OF FINANCE. The freedom of movement of modern life, and more especially of the modern proletariat, constantly urges the transference of the poor-management of any country from the hands of local authorities to the national administration. The petty casuistry as to the precise obligations of the different local units, as also the manifest over-taxing of particular ones, has often suggested the desirability of such a reform of the poor-management as would place it directly in the hands of the state. But projects of this character have uniformly been rejected. There is always the danger that the local organization having charge of the poor-relief will use no economy in the management of resources, with the gravest consequences both morally and financially — the waste of public means and the attraction of paupers. ^ The commune therefore remains the body with whom the responsibility and the discretion in matters of poor-relief immediately rest, since here alone we can expect to find the .requisite solicitude and personal knowledge coupled with an economical use of the necessary means. Management of the poor-relief by means of a central- ized system of officials is entirely out of the question. It is only in those matters connected with the poor-management from which this financial and ethical difficulty is absent that the larger political organizations properly can take a hand.^ § 124. As to the second point, it has been insisted on with great frequency, especially of late, in the course of the struggle for political liberty and popular participation in the management of public affairs, that the solid substructure of a vigorous and effective communal organization is indispensable to any sound national political life. The oft-cited example of England is well known. It is also well known that local self-government in England, through the ascendency given it by the people's his- torical development, has retained such a degree of vigor as to have held its ground for a long time in the struggle against the ' E. Miinsterberg, Die deutsche Armengesetzgebung tind das Material zu ihrer Reform (vol. vi. of Schmoller's Forschungen), 1887, p. 306. ' Adickes, Zeitschrifi fiir die ges. Staatsivissenschafty 1 88 1. FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. l8l centralizing tendency of the time ; and this result is by no means due solely to superior efficiency on its part in serving the public needs. It is therefore to be remarked that there are certain branches of the public service, which, in point of technological adapta- tion, readily admit of being administered by the central author- ity, but which still are everywhere administered by the commune simply because they afford a field of activity for the latter, at the same time that they admit equally well of being managed by the local body. The care of streets and thoroughfares, as well as their con- struction, repair and lighting, is always the business of the communal administration of the locality whose needs they serve. It is otherwise with the local police. The management of this branch of the service may fall to the local administration or to the central authority, according as the dominant view is or is not the one above indicated. The greater the difficulty of the task, the more its adequate performance becomes a matter of more than local interest, and of importance to the nation at large, the more does the inclination toward a national administration of the police come to prevail. Hence we find the latter method adopted for large cities, the former for smaller towns and villages. III. THE FINANCIAL RELATIONS OF THE MEMBERS OF THE COM- MONWEALTH. § 125. The foregoing discussion has, for the sake of clear- ness, passed over an important factor which we shall now have to examine. No mention has been made in the foregoing of the differences in benefit derived and in ability to pay, due to differences in the relations subsisting between the state and its constituent parts, and between the parts among themselves. These differences are •especially noticeable in a great empire comprising a considerable area and a large population, with the consequent variations in l82 THE SCIENCE OF FINANCE. wealth and needs from one locality or one civil division to another. In point of fact, there is, strictly speaking, nothing among all the variety of public apparatus and service which serves the ends of the various parts of the nation in an equal degree ; and there is no one part of the country, no province, no town, which is exactly on an equal footing with any other part or town in point of ability to contribute to the state. But this being so, it will be found that special problems arise out of the question : What effect should these differences in thQ advantages derived and in ability to pay, have on the financial relations subsisting between the nation as a whole and its various constituent parts? The variations may conceivably be as great and as many in this case as in the case of the individual's relation to the state, with respect to variations in point of individual benefit and ability. § 26. In the first place, as regards the different degrees of advau age derivable by different parts of the country, the differ- ence is present even in the case of such establishments as appear on thejface of the matter to serve only a common and undiffer- entiable public purpose, which are equally of advantage to every part of the nation. So, e. g., the maintenance of a defensive armament is most certainly of greater, more pressing importance to the border provinces that are exposed to the incursions of an aggresfive foreign nation, than to the provinces lying in the interior of the empire or bordering on the territory of a peaceable people. It is likewise of greater importance to the great city^ the modern industrial city of the large class, whose peace is threatened from within by the turbulence of a revolutionary pro- letariat, than to the unruffled, peaceful rural commune, or the humdrum existence of a provincial town. Passing to the opposite extreme, to that class of public estab- lishments whose strictly localized character emphasizes the fact that special benefit is derivable from them by persons living in FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 83 the place, we may cite the construction and care of the streets in a city, with all its attendant expenditures. It would of course be an exaggeration to say that the streets of a town are of use to none but its inhabitants. The tendency of progressive improvement in the means of transportation and of the centralization of trade, is in fact rather toward giving the inhabitants of the whole country a share in the local advantages enjoyed by its largest cities. But the local gain is after all in this case so far predominant as to remove all doubt with respect to the equity of letting the locality defray the expense ; just as, on the other hand, the justice of a national provision for the military expenses of the country is beyond question, whatever special importance the military establishment may have for par- ticular districts and localities. § 127. Between these two typical categories which are here contrasted with one another there is a middle ground. As an example of this middle class we may well take the collective system of highways in any country, with all its gradations and ramifications, highways and byways. , Between the great strategic railwav which connects v;ie cen- ter of the country with the fortifications on the border, and the city street which serves the business and pleasure of the towns- people, there is a multitude of railways and roadwavs of first, second, or third rank, of great waterways and their affluents, channels natural and artificial — all serving the ends of the whole community or of the neighborhood in a greater or less degree. One of the most difficult problems in economic discussion is to determine how far the several thoroughfares of the coun- try are to be treated from the point of view of the general advantage derived from them or from that of the special local advantage derived. This may seem less difficult in the case of the minor roads of an eminently local character, but it is simply an insoluble problem as regards the great highways that are of indisputable importance for the industry of the entire country, at 1 84 THE SCIENCE OF FINANXE. the same time that they in a special degree serve the needs of those portions which they traverse. This question is thrown into the shade by the practical end to be gained, so long as we occupy the happy stage of industrial development at which the receipts of such an undertaking will fully cover expenses of construction and operation. It will also not require discussion so long as there is at least a pros- pect of such an equilibrium between receipts and expenditures, and so long as this prospect is a sufficient incentive to specula- tive enterprises on private account, capable of taking the place of public establishments that would otherwise be necessary. But at the very beginnings of our modern transportation system, during the early stages of the development of railways, the absence of such a probability frequently gave a very practical significance to the question whether the general advantage to be derived from a contemplated state railway would be sufficient to warrant investing the nation's funds in a road to be built through a particular province ; or whether the individual province did not derive by far the greater advantage from the new means of com- munication and so ought to bear the expense. The method of meeting the expense suggested by this latter view has not been adopted. The trend toward centralization inherent in our great railway systems has led to the assumption of the financial burden, also, by the central organization. Indeed, it has even come to pass that in the course of the magnificent development of the Prussian railway s^^stem we find of late that the expense incurred for "secondary" lines (which surely are of no advantage to the national finances) is to an ever increasing extent defrayed by the national treasury. That all these things are so is evidence of the fact that there is another consideration, beside the difference in the advantages to be derived from the roads, affecting the mode of settling accounts between the com- monwealth and its parts. § 128. Especially complicated are the relations between the various parts of the country In matters concerning poor-relief. FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 8$ At least they are complicated, as a matter of fact, under that condition of things which we know as the existing situation, and with which the great efforts of modern poor-law reform are con- cerned. The same is not true of the primary type of public poor- relief. This is based solely and entirely on the parish organiza- tion — at first ecclesiastical, afterwards civil. In such a neighbor- hood association the distress and the obligation of relieving it develop together, as it were within the widened circle of the family. So long as this type of poor-relief answers the exigences of the national organization, that is, so long as the means of the local organization suffice to meet the local demand for assistance, so long does the self-support of each local organization remain the basis of a satisfactory arrangement between the whole and its parts. But this condition of things changes with time. The mobility that comes with modern industrial life disturbs the simple rela- tion on which this arrangement is based. The genesis of poverty, as well as the obligation of relief, ceases to be comprised within the bounds of any individual commune. From being a local matter it becomes a matter of national concern. The habit of permanent inhabitancy of a given neighborhood gives place to the habit of frequent removal from place to place ; hence an incalculable shifting and migration of the laboring population and a great change in and increased variety of the causes which may reduce them to mendicancy, with the consequence that the burden of supporting the poor must in equity be apportioned over a broader field than the boundaries of the single commune. Equity demands, in an ever-increasing degree, that the nation as a whole must assume the responsibility of the public charities. This uncertainty and the vacillation between local and national administration of poor-relief visible in the legislation of today, as well as the obstacles to a practical reform, are due simply to an inherent contradiction between this principle of equity and the well known practical difficulties in the way of administering poor- relief by centralized authority. l86 THE SCIENCE OF FINANCE. In addition to this, it is to be said, there is also the difficulty that wherever the past still asserts its mastery and holds the social life to the old lines of neighborhood organization, its weight is cast in favor of the retention of the system of local management of poor-relief. § 129. The above classification of the public business has for its object the explanation of the differences between the various parts of the commonwealth with respect to benefits derived. It is undoubtedly an easier task to set forth the differences that exist between different parts of the country with respect to pecuniary ability. Difference in pecuniary ability between different localities is a patent fact, and it would be a laborious and bootless undertak- ing for anyone to maintain the contrary with respect to any country. All the factors that have to do with the prosperity of a peo- ple are here at work to produce a complicated diversity. They are such facts as the physical environment, the degree of culture of the people — as it expresses itself in their capacity for labor, their possession of property, their moral standards, their indus- trial discipline and application, etc. Inasmuch as these material and cultural factors vary greatly from place to place and from one individual to another, it is impossible to claim anything more than an approximate and relative homogeneity for any people. Immediately on passing the limits of a pretty small area account will have to be taken of marked differences and contrasts — town and country, manufacture and agriculture, factory and handicraft. When the discussion concerns the state of things in a large modern commonwealth — when we have to do with an aggregate made up of so heterogeneous elements as is the German Empire of today — we are confronted with very great contrasts and differences, many of them due to the presence of different stages of civilization. It is, in itself considered, a matter for congratulation, but it is all the more significant in connection with the contrast here FINAiXCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 87 spoken of, that the advance of civilization carries with it an increase of wealth and a consequent enhanced ability to meet the demands of the state. The stage of culture achieved by the various states and provinces of the German Empire is at the same time an index of their economic strength ; contrast the West and Southwest with the East and Northeast. And as, in this contrast, the divergence in economic ability is in large part a matter of difference in the length of time covered by the process of development, so likewise it is true — in spite of all its harsher incidental features — that the focus of the latest and highest industrial development is at the same time the focus of wealth. § 130. The development of the relation in which these diverse economic capacities stand to the commonwealth exhibits features of a character very analogous to what we find in the relation of individuals to the commonwealth. There is, in the first place, a narrow self-seeking, so extreme as to refuse even such sacrifices as are to its own immediate, pal- pable advantage. We need but call to mind the examples afforded by the later history of Germany. This historv shows us that per- verse spirit at the stage where it stands out in successful opposi- tion to anv sacrifices for the purposes of the greater whole ; the stage where the consciousness of community between parts and whole is as vet entirely absent. A short-sighted selfishness on part of the minor political bodies, which figures in national life as "particularism," and opposes every move in the interest of the common weal. There are, of course, also other factors that work in the direc- tion of particularism ; as, e. g., the instinctive clinging to what is customary, predilection for independent local management of public affairs, a bigoted prejudice in favor of the kind of people to whom we are most accustomed, and the like. But the dominant influence of the economic factor, which makes itself felt in all the affairs of public and of private life, renders it easily comprehen- sible that the provinces which surpass the other portions of the 156 THE SCIENCE OF FINANCE. Empire in point of civilization, and consequently in wealth, should, for economic reasons, be reluctant to cast in their lot unreservedly with those other portions. § 131. History accordingly shows us different stages in this course of development. The first and oldest is that of the unqualified assertion of par- ticularism, in the form of the autonomy of the petty state. The independence of the petty commonwealth conceded nothing to the needs of the larger political organization, whereof, as viewed from the higher standpoint of the general national development, it figures as a member. The second stage is reached when absolute particularism has yielded ground so far that the sub-state is> compelled to cede some portion of its sovereignty to' the national organization. It may have been compelled by a change of relative strength, or by the force of growing public opinion, or by changes in industrial life, or by a combination of these factors. At this point the features with which we are here concerned come out in a more glaring light even than before. The struggle between the unwonted demands of the larger whole and the reluctant yielding of the traditional particularism serves to show the difficulty of the transition. Concessions of course take the place of the earlier downright refusals of national demands ; but there is an anxious balancing of accounts between the individual members of the federal whole, as regards their respective gains and sacrifices, which is significant of the great interval by which this stage of national unity is still removed from perfect union. Hence we have not only the defective unity of the "federal state" \^Bu7idesstaat\, instead of the consolidated "unit state" \^Emheitsstaat\. Within the federal state we find, moreover, ''reserved rights" [^Reservatrechtc^ possessed by particular states ; and in addition to this there is a scrupulous calculation necessary in the adoption of every particular measure, lest it result in some advantage to another sub-state and some disadvantage to our own. FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 89 § 132. It is a characteristic of the mature commonwealth that it has overpassed the narrowness of such a calculation of benefits. The individual members of the federal commonwealth have come to stand in the same relation of indissoluble solidarity and uncalculating devotion to the nation as does the patriotic citizen to the state. It is not the calculation of special benefits to be derived, but the consciousness of a common benefit accruing to all parts of the nation, one with another, that is the guiding prin- ciple in the apportionment of sacrifices among the various parts of the country in proportion to their ability to pay. This differ- ence in point of ability does not afford ground for a correspond- ing arrangement of exclusive spheres, within which the activity based on this ability is to serve the inhabitants of this particular territory alone ; on the contrary, precisely this diversity in ability to pay is a chief means bv which the solidaritv of the parts is to be preserved. The more fully this solidarity is developed the more active and intimate is the giving and taking, the exchange of benefits and sacrifices, within the different parts of the nation, and the more does shrewd calculation of advantages tend to fall into disuse. Naturally this becomes most plainly evident in the case of the great national establishments; as, e.g., when the flourishing busi- ness of the more highly developed provinces contributes the profits of its railroad traffic toward the construction of lines in the poorer provinces. And where such national or central establishments do not exist or are not available, the larger whole will even offer its support in the form of subsidies to the lesser unit to help out its insufficient resources.' 'Cf. von Reitzenstein, " Ueber finanzielle Konkurrenz von Gemeinden, Kom- munalverbanden und Staat " (Schmoller's Jahrbuch fiir Gesetzgebutig im Deutschen Reich, 1887, pp. 123 et seq.), makes out that a dominant feature in the modern appor- tionment of public functions as between the state and the local administrations is the fact that the state and the larger political units assume an increasing share of the burdens of the communes, with a view to reducing the pressure upon the latter. The paper contains a somewhat detailed exposition of the line of thought briefly IQO ■ THE SCIENCE OF FINANCE. The contrary happens when a section of the country possess- ing resources above the common is favored by the national estab- lishments beyond what falls to the share of other sections. The same equity which in the former case requires a subvention from above downwards, from the stronger to the weaker body, will in this case demand a subvention from the weaker to the stronger. In this point, also, the trend of development of the national unity seems rather to favor a broad construction of the duties of the central administration. Whereas it is rather a mark of unde- veloped unity and of particularist pettiness if the normal pre- dominance of the central organ of a great commonwealth is curtailed and frittered away in all manner of petty affairs. §133. This attitude of superiority assumed bv the larger, and the largest, civil unit of the nation toward the smaller unit is also visible in the development of their formal relations to one another in fiscal matters, if it does not rather presuppose the latter. It is a mark of low development, if not rather of an utterly abnormal condition of things, if the higher political unit is obliged to resort to the lower for its sustentation, because it does not itself as yet possess independent revenues obtained through a direct relation between itself and the private individuals. Such is the case with a federation which is supported by the •' matricular fees " \^Matnkularbeitrdgc^ of its members. Such is also the case with a union of states in which these rudimentary survivals of an earlier, less perfect unity are still present, as, e.g., the German Empire of today. In case of a vigorously developing commonwealth, survivals of this sort are to be looked upon merely as a transient feature handed down from an earlier constitution, which will disappear as soon as the fiscal system of the new commonwealth has indicated above, togetlier with citations of tlie legislation bearing on the point. Von Reitzenstein makes a distinction between the principle of Bounties \^Dotatio}i^ and that of subsidies \^Suhventio}i\ (pp. 153 et seq.), and classifies the legislative enactments separately under these two heads. — Cf. A. Wagner, Finnuywissenschaft, vol. i. sec. 49. FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. I9I reached an adequate development. It is a piece of "federalism " surviving in the midst of political union, which is only waiting for the establishment of an adequate fiscal relation between the consolidated national organism and its citizens. The latter is the only method worthy of the state. §.134. Finally, we shall have to add a word in this place touching a factor the full development of which belongs in the discussion of taxes, namely peculiarities of fiscal technique. Quite independently of the question of the necessities of the one civil division, and of the obligation of the other to contribute, or of the degree of development of financial balancing of accounts and adjustment of claims between the different bodies, there is a further factor which affects the problem, but which is often erroneously confounded with the other group of factors already spoken of. This is the special advantage which one political body may possess as compared with another in the levying of taxes. In the United States of America it has happened of late (as, indeed, has also happened before) that the receipts of the Union from customs and internal revenue have produced an unavoidable surplus, contrasting curiously with the embarrassments and large deficits of the state and municipal finances of that country.' The difficulty of raising taxes in the case of the small bodies and the ease with which they are raised by the larger, suggests the existence of circumstances of a technical character connected with peculiarities attaching to the different kinds of taxes, and which therefore work an advantage to the larger as compared with the smaller political body, whether it be special legislative enactments or natural causes that place the more effective method at the disposal of the larger organization. Something similar is to be seen in other countries. Switzer- land, agreeably to the traditions of her customs administration, has hitherto been unable to develop her customs revenues to a point where the full productivity of this fiscal mechanism appears ' Richard T. Ely, Taxation in American States and Cities (New York, 1888). 192 THE SCIENCE OF FINANCE, in anything like the degree attained in the United States. Still less has there, in the case of Switzerland, so far, been any ques- tion of a lucrative internal tax on consumption. But in spite of all this, Switzerland offers a contrast within its own limits similar to that seen in the United States of America. Here, too, we notice during the past decade a marked ease in increasing federal revenues from import duties, and an increasing difficulty in obtaining increased receipts from other customary forms of taxation, either federal or communal ; so much so that a remedy for this technological difficulty has finally been found in diverting the advantageous means at the disposal of the federa- tion into the dried-up channels of the minor civil divisions. Or take the German Empire. In view of its great and unavoidably increasing expenditures, there has of course been no noticeable surplus to speak of. At the same time the develop- ment of the means available for an effective and lucrative Imperial system of taxation has been scanty indeed. Neverthe- less it is true, and certain special reforms in the tax system of the Empire have already given proof of the fact, that the greatest political organization of the German people is also the one that has at its command the most effective fiscal means and methods, and that the technical difficulties of financiering increase as we descend in the scale of the minor civil divisions. Indeed, the widespread conviction so frequently met with in the current discussions of tax reform in the German Empire, that the municipalities are in need of some assistance at the hands of the larger civil divisions, amounts practically to the same thing. Plainly, it can not hold true that the communal divisions and municipalities are intrinsically feebler financially than the Imperial or state organizations, inasmuch as these latter are composed of the same ultimate elements as the former. When the existence of a difference of this general character is asserted (independently of any difference in wealth between particular districts, communes, etc.) it can only be on the ground that greater fiscal advantages of a technical nature are at the com- mand of the larger political unit. FINANCIAL RELATIONS OF PUBLIC ORGANIZATIONS. 1 93 We therefore find that there is a relation of a fiscal character between the various civil organizations, which consists simply in the one acting as tax gatherer for the other. It is not necessarily the larger political unit which in this way acts as tax gatherer. There are also taxes with respect to which the smaller civil division performs the same service for the larger. This is a rare occurrence, however. CHAPTER V. SELF-GOVERNMENT AND VOLUNTARISM. Literature. Alexis de Tocqueville, L'ancien regime et la revolution (1856). Rudolph Gneist, Geschichte und heutige Gestalt der englisc/ten Konwiunalverfassiing oder des Selfgovermnent {2)^ ed. 1871). Rudolph Gneist, Verwaltting, Justiz, Rechtsweg, Staatsverwaltung und Selbstver- waltung nach englischen und deutschen Verhdltnissen (i86g). Adolph • Wagner, Fijian zwissensc haft (3d ed. 1883), Erster Theil, sees. 44-59. J. W. Probyn, Local Governtnent and Taxation in the United Kingdom (1882). I. THE NATURE OF SELF-GOVERNMENT. § 135. The immediate point of departure for the present discussion is afforded by certain discussions of a general char- acter inserted in the earlier portions of the present work, inci- dentally to the course of the exposition ; as, e. g., what has been said in the present volume touching the evolution of the state (especially sees. 27—30), and the discussion, in the first volume \^Grundlegung\, of Coercion and Spontaneity (vol i. sees. 290-292). We shall here have to devote a separate chapter to the con- sideration of voluntary contributions to the public establishment and the question of their relation to compulsory contributions, that is, to the great mass of taxes, and also how far and why they are adequate or inadequate to supplement the taxes. In view of the still very considerable vogue, and in part well- grounded and very gratifying vogue of a predilection for the spontaneous action of public spirit, as contrasted with state com- pulsion and the sacrifices imposed by compulsion, it is particu- larly desirable to come to a clear appreciation of the position which holds self-government to be of the nature of a political organ, and so removes it from the sphere of ''Voluntaryism" 194 SELF-GOVERNMENT AND VOLUNTARISM. I95 (as it is latterly styled by the English) and draws a distinct line of demarkation between these two disparate spheres of activity, bv pointing out the intimate and indissoluble relation in fiscal matters between self-government and the national administration. § 136. The widespread admiration of English political and industrial life rightly makes much of that characteristic feature of personal initiative, which relies much on itself and little on the helping hand of the state. We are all well aware that not only is the factor for which this concept stands an indispensable prerequisite to any sound and virile commonwealth, but also that in this respect the Eng- lish type offers a particularl}' sharp contrast with what we are accustomed to on the continent, — a pattern from which we have already learned much, and from which we hav'e much vet to learn. It is however necessary, here as in every case of strongly •developed individualistic tendencies, to go into a somewhat detailed analysis. It is necessary to take explicit account of a certain ambiguity in the relation of this individualism to the com- monweal and to the proper performance of the state's functions. What is necessary to an adequate recognition of this relation is a profounder appreciation of the fact that wherever individual activity comes into play in relation to the commonwealth, the quality of the activity put forth is of at least as great impor- tance to the discussion as its quantity ; or in other words, the measure of its consonance with the purposes of the community is quite as much to be considered as the measure of its scope and intensity. The more this consideration is pushed into the background, — the more stress is laid on the strength and volume of individual activity, without asking how far the energv put forth goes to serve the ends of the community or how far it is intended to serve those ends, the greater is the danger that we shall come to make the brute intensity of purpose of the speculating man of business the center of our concept of a free commonwealth. 196 THE SCIENCE OF FINANCE. The quality of these individual activities is of the greatest consequence ; the standard of valuation, to be derived from such qualitative appraisement and to be applied in rating the com- plex array of these activities, is of importance. Here we have, in its crudest form, the entire system of indi- vidualistic endeavor, whose sole aim is the individual gain of the undertaker. The most convenient, most plausible view, the view which deals most indulgently with the weaknesses of human nature, goes on the presumption that all the business of human society may safely be entrusted to the keeping of such a system as this. For such a position flatters the callow egotism of the business mind with the acceptable conceit that in its striving after the highest possible profit for itself it is at the same time a benefactor of mankind. In point of fact, human society is not so advantageously placed. The harmonious interplay of individual activities is a dream which has never come near being true. What there really is for us to do is to reach an understanding of the narrow limits within which it is possible at all that this crudest development of individual endeavor can suffice for the purposes of the com- monweal. It does, in fact, suffice for all matters that lie suf- ficiently near to the habits of thought of everyday people, so that the barriers of egotism — on part of those with whom it lies to make provision and of those for whom provision is to be made — will not hinder an adequate provision for the wants of society. As concerns the great mass of everyday wants, the palpable physical needs of mankind as commonly understood — food, clothing, shelter, etc.; here the service may be rendered and may be rated with tolerable accuracy by the ordinary meth- ods of the market, between producers and consumers, sellers and buyers. Whenever these limits prove too narrow, other forces, of a higher, ethical order must come into play. § 137. A higher stage has been reached when the individual comes to a consciousness of the fact that his work-day self- SELF-GOVERNMENT AND VOLUNTARISM. igj seeking alone is not sufficient to insure the existence of society, and that nobler impulses are necessary for the purposes of social life.' It is a very acceptable, and therefore well accepted view, that these indispensable nobler emotions are to be had in suffi- cient quantity spontaneously, if not as a general rule, at least in the case of modern bourgeois society. They are conceived to be present at least in a measure so far adequate, that if only the state, with its coercive power, were willing to desist from what it need not undertake, there would be required but a slight rem- nant of its present activity. This view, too, is based much less on the actual facts of the case than on a seductive self-delusion, which sets up as the criterion of a desirable organization of social life the natural antipathy of men to any political restraint, how- ever necessary. As a matter of fact, the nature and scope of the functions whose performance is necessary in order to the social intercourse of civilized men are such as to require the extensive exercise of ethical springs of action, lying far beyond the bounds of self- interest. In Chapter III, above (sees. 79-91), in the course of the economic analysis of the services rendered by the public admin- istration, we have seen what are the reasons for this being so. Partly they are functions which lie so entirely beyond the scope of self-interest that the private individual is even unable to com- prehend what may be for his own interest ; partly they are func- tions which stand in sheer contradiction to all selfish considera- tions and call for a distinct sacrifice of self-interest. In either case it is necessary to lift the every-day man above the sphere of his habitual interests and activities. In either case spontane- ous private initiative will contribute in but a very modest degree to this end, and coercion by the state must be resorted to. But inasmuch as we found, in the course of the general dis- cussion in Volume I., that in the last analysis any absolute contradiction between this state compulsion and the voluntary motion of the individuals is a psychological impossibility, inas- much as the question, in point of fact, is alway? one of expedi- igS THE SCIENCE OF FINANCE. ency, concerning a series of intermediate links between these two elements, — this relation being moreover involved in the con- stitution of our modern commonwealth ; therefore it becomes a question of the proper intermediatory mechanism which shall serve the purpose of this voluntary motion, in the guise and with the prestige of public institutions, and so help it to the adequate achievement of its national mission in the state. Such is the foundation on which is reared the system of self- government. § 138. It is eminently the business of the Science of Finance to study diligently the interplay of coercion and voluntarism as it appears in the s^'stem of self-government. The development of the public revenue, the tedious rate of progress in the tax system and its various branches and forms, is closely related to this fundamental idea. Even the compul- sory measures of the most heartless despotism are remarkablv impotent to hasteti the course of this evolution ; and under con- ditions of the highest degree of political development hitherto attained, the achievements actually possible have been possible only by virtue of a nice adjustment of coercive measures to the actually available degree of more or less whole-hearted readi- ness to stand by the commonwealth. Those requirements of modern national constitutions which are all intended to secure a large participation on part of the body of citizens in the formation and achievement of national aims, immediately set the factor of popular initiative in motion against any ex parte development of coercive measures by the central organ of the state. In consequence of these favorite constitutional maxims, the acceptance of the principle of popular sovereignty involves the incorporation of this concept of organ- ized public coercion with its opposite, the concept of a myriad- headed individual will. The nearer we approach the attainment of this result in the constitutional development of any particular state, the greater is the degree of political maturity, or in other words, of ethical maturity, presumed on part of this collective SELF-GOVERNMENT AND VOLUNTARISM. 1 99 mind of the multitude ; and the less nisarly this presumption is justified, the greater a source of danger to the commonwealth does this public mind become. In this dilemma there is no expedient left but a prudent combination of these two factors of coercion and spontaneous action. Hence a long-continued, gradual education of an ever larger number of citizens in the discharge of public duties. § 139. Among current conceptions of the nature of self- government the following are to be noticed. The most widely accepted view is that which simply makes individualism, as such, the essence of self-government. This view is to be rejected, as being disproved by the argument of the foregoing paragraphs. In sharp contrast with this view is that advocated by Rudolph Gneist ; a view which he bases on the system of English Consti- tutional Law and English self-government, and which he has repeatedly published during a period of several years past. This view of Gneist's' is to the following effect: Self- government is a method of national administration, a second, supplementary agenc}' for the execution of the national will. It comprises the performance of such functions as are adapted for administration bv the vicinage. All offices under self-govern- ment are offices in the full sense of the word, inasmuch as self- government rests on authority delegated to the communes by the state. The extent of the sphere of self-government is accordingly determined by national exigencies, not by the inter- ests of particular social classes that may seek an accession of power. English legislation has been guided by the principle that the local unit should be called on for the rendering of per- sonal service and the contribution of rates to the extent of its capacity ; what may be needed in excess of this is borne by the county; what passes the county's ability is to be performed by ' Verwaltung, Jtistiz, Rechtsweg, Staatsverivaltung und Selbstvenvaltutig iiach englischen und deiitschen Verhdltnissen, mil besonderer Riicksichl auf VefiValtutigs- refortnen und Kreisordnungen in Preussen (1869), pp. 95 et seq. 200 THE SCIENCE OF FINANCE. government officials and national funds. The resulting "decen- tralization" is a decentralization of the administration only, not a decentralization of legislation and taxation. But inasmuch as all public burdens, whether of a personal or of a material sort, are opposed to the most obvious interests of the citizens, there can be no self-government without a seriously accepted and legally enforced constraint. Self-government, in that it makes certain official duties obligatory on the propertied classes, brings prominently into view the ultimate connection of state and soci- ety in all their parts and in the affairs of everyday life. Such is the nature of self-government according to Gneist, as he finds it in operation in the English commonwealth, and as he presents it as a model for Germany. Lorenz von Stein thinks otherwise.' He finds that within the aggregate structure of self-government there are two great divis- ions, essentially distinct in character : the organs of self-govern- ment proper, and associations. Both of these, according to Stein, are of the nature of public personalities. Under the first head he classes not only so much as what, according to Gneist, exhausts the concept of self-government, but also corporate bodies S^K'dr- perschafte}i\, whose purpose is the performance of a definite administrative function by means of a definite capital, and whose •several varieties fall into three distinct groups — corporations proper, charitable foundations, and public stock. The "asso- ciation system," above spoken of, constitutes a part of the ma- chinery of self-government in so far as the associations or com- panies in question exist for "administrative" purposes, and (as distinguished from business partnerships) employ their capital for the performance of an administrative function at the same time that, in performing this function, they afford a revenue to their members. The two typical examples of this class of " admin- istrative" companies are joint-stock railroad companies and joint- stock banks of issue. It will be seen that this broader concept of the nature of self- government comprises under the idea of self-government matters ' I.elirbuch Jer Fiiianzivissenschaft (5th ed. 1885). Ersier Tlieil, pp. 57 et seq. SELF-GOVERNMENT AND VOLUNTARISM. 201 which the view held by Gneist will distincth- exclude. On the one hand, while charitable foundation.s and the like do their work under state supervision, they are nevertheless voluntary organ- izations (in which respect they are unlike the governmental- communal mechanism of administration); on the other hand, the so-called "administrative" comjjanies are, in point of fact, part of that well-known system of private enterprises whose egoistic- speculative working may be checked by government regulations, but which can not thereby be raised to the dignity of an organ of local self-government. If it were competent for us to say that governmental control of any private business enterprise may con- stitute the latter an administrative organ, it would follow that this entire system of private business enterprise would be drawn bodily into the system of self-government, — and we should reach the conclusion which we have deprecated in the earlier discussion. § 140. But it is also possible to overrate the importance of self-government even when understood in its proper sense. The cause of so doing may be a predilection for local decentralization, as opposed to the present growing necessity for a centralized national organization. This may in part be due to a nebulous romanticism that insists on making the simple ways of life of a primitive democratic community the immutable standard for a large and highly developed commonwealth ; in part it may be a prejudice in favor of certain of the maxims of radicalism as opposed to a sober recognition of the facts of the every-day life of the modern state. These two factors conspire to tempt us to the retention of an ideal of social life which would be impracti- cable for actual men in the modern state and under the conditions of modern society. The English writer, Toulmin Smith,' is an example of a fanat- ical worshiper of the democratic principles of Anglo-Saxon self- government, who has become a champion of yet another type of ' Cf., e. g., his work Government by Commissions Illegal and Pernicious, The Con- stitutional Principles of Taxation, The Rights, Duties and Importance of local Self - Government [London, 1849). „. , Cf. also L. Bucher, Der Parlamentarismus wie er ist (BeriMl^^p[^§^P '-"^>^/?y\^ 202 THE SCIENCE OF FINANCE. misconceptions of the nature of self-government. He offers a mixture of profound truths and profound perversions. Local self-government, according to Toulmin Smith, is the real foundation of any liberal constitutional government and the sole effective guaranty for the responsibility of those to whom authority is entrusted. The mechanism of local self-government alone can adequately protect the interests of the minor civil divis- ions, or afford a fair opportunity for thorough discussion and comprehension of those interests. By its means alone is it pos- sible to exercise a jealous control of the encroachments to which the ofificials entrusted with the general affairs of the state are con- stantly tempted. By its means, too, will the people best be able to comprehend and to deal with national affairs. Self-govern- ment also, and especially, constitutes a safeguard against anarchy and violence, in that it accustoms the citizens to give expression to the public will by peaceful and legal means. But these very important, indeed eternal truths bearing on the nature of every free commonwealth, are placed in a false ligh t when, as in Toulmin Smith's discussion, they are made to serve the turn of an appeal in behalf of the primitive institutions of a country, and so are held up as the sole and suflficient norm for the life of today, and are at the same time made the basis of an unqualified disallowance of all the peculiar needs incident to a great modern commonwealth.' The severe judgment passed on all. centralizing measures in legislation and administration falls with unmerited harshness on the dominant parties, parliaments, statesmen, etc. This tendency to centralization in the first place goes to establish the fact that the ever-growing volume of business of a great civilized commonwealth can not possibly be managed without increasing centralization, and secondly, that in the con- flict with the exigencies of this growing centralization the ancient traditions of local self-government are of constantly decreasing avail. Nor is it political reasons alone that go to lessen the rela- tive significance of the institutions of self-government in the ' It is a significant fact that Smith finds himself in sympathy with the individual- ism of Dr. Ure. Cf., inter alia. Government by Commissions, pp. 266 et seq. SELF-GOVERNMENT AND VOLUNTARISM. 2O3 course of this shifting of governmental functions ; the fact is due also to cultural, economic, social-j)olitical mutations of a general character, changes which alter the inclination as well as the capacity of the modern citizen for self-government. Men change, and the business of the commonwealth changes as well. The outcome of the discussion is that on these grounds, too, the sphere of local self-government is necessarily a restricted one. Within its proper bounds local self-government remains none the less essential, but it is distinctly to be relegated to this its proper sphere. Exactly where its limits lie is a point to be established by specific considerations, in part of an historic nature, in part technical — considerations with which we have become familiar in the course of the preceding (fourth) chapter. § 141. Self-government in all modern states, as in fact in all times, in its actual workings, is divisible into two factors — the element of personal service and the element of material aid. In virtue of its economic nature the material aid rendered is definitely measurable sacrifice rendered to the commonwealth on the general ground of the duties of citizenship or for special cause. With this we shall have to deal in the next following section. The personal services, on the other hand, owing to their not being translatable into economic terms, belong in an indefinite region of psychology ; indefinite because of the difficulty of accurately grasping, and the still greater difficulty of defining the scope of the motives from which the rendering of these personal services proceeds. Gneist designates this class of duties "honorary offices" i^E/iretiiimter) , as contrasted with the salaried offices of the professional civil official or the jurist ; the term "honorarv" serv- ing in this case mainly to express the absence of any salary. As a descriptive designation it could only serve to express the ideal to be sought after, as an appeal to the motives from which the duties of office ought to be discharged under a system of self- government, without implying that these are actually the motives from which the office is ever or anywhere accepted. If such were not the case, if the so-called "honorary" office were as a matter 204 THE SCIENCE OF FINANCE. of fact felt to be a honorific charge, in the positive sense of the term, and as fully and constantly so as the material aid rendered the commonwealth is recognized to be of an exclusively economic character, then the rating of these "honorary " offices and assign- ing them their proper place in the economy of the state (or of the comm'une) would be a very simple matter indeed. They would then be of a distinctly non-economic character, in much the sense in which the material aids rendered are, for their part, of a dis- tinctly economic character, and they would accordingly not come into consideration in the Science of Finance at all. But in point of fact the matter is not so simple ; for, as has already been pointed out, while the thought of honorable distinc- tion may be present in the case of the personal services demanded under self-government (sheriff, juryman, assessor, and the various local administrative offices), there is also distinctly present a feel- ing that these duties are burdensome and therefore involve a sacrifice of an economic sort. Practically, this is made evident by the fact that, in spite of the perfect readiness of the citizens to appreciate at its full the honor attaching to an "honorary" office, such offices are economically in so sad a plight that the fact of their involving a sacrifice has to be recognized by law in the form of a salary paid out of funds derived from other sources. § 142. These considerations are evidently of a wider scope than the domain of local self-government alone. It is rather in the sys- tem of national defense that they find their chief application. A satisfactory financial rating of this phase of the personal services required by the commonwealth, which is so great both in extent and in its importance for state and people, is one of the most difficult problems of economics. A scientifically adequate comparison of the military burdens of states which have different systems of defense is therefore a sheer impossibility. To construe the universal liability to military service of today as a case of an " honorary" office in the strict sense, and thereby exclude all consideration of its economic bearing on the citizen SELF-GOVERNMExNT AND VOLUNTARISM. 20$ subject to conscription, — that would be impossible, unless we are to ignore the plain facts of the case for the sake of an overwrought conceit. On the other hand, to comjmte the burden involved (and a burden it unquestionably is) according to the standard of wages customary in industrial employment, and so encumber the finances with enormous expenses, would be very nearly as bad. For while the economic significance of military service considered as work done for the commonwealth is to be recognized, still this simple method of computing its value will never commend itself to our sober second thought. There is the difficulty, first, that it is a pretty dubious view to rate the personal burden of a universal military service simply as labor in the economic sense ; and second, even if we put aside this doubt we encounter other doubts as to how this economic burden is to be fairly rated in terms of money. As to the first point the reflections that offer themselves are the following. As, on the one hand, it is surely an exaggeration to construe military duty simply as an honorary distinction, in order to remove all conception of an economic appraisement of human life and happiness ; so, on the other hand, it is certainlv a mistake to conceive of military duty simply as a sort of statute labor, which differs from the other burdens imposed for the pur- poses of the commonwealth only in being paid in kind, and is simply awaiting the time when in the course of modern industrial development it shall, like other similar relics of the past, be com- muted into its money equivalent. Such a view is contradicted by the essential nature of a universal militarv dutv, bv the course of past development of which it is a product, bv the great impor- tance which it is conceded to have for the defense of modern civilized states. The peculiar ethical character which attaches to this way of serving one's country, and which gives it its special value as compared with anv other method of national defense ; the peculiar mingling of diverse ethical factors ; the magnifi- cently devised scheme of education which it comprises, serving to awaken the slumbering nobler impulses, together with much undeniable hardship and exacting service ; the beneficent influ- 206 THE SCIENCE OF FINANCE. ences of the service in the way of outward culture, hygiene, cleanliness, etc.; all these considerations forbid our treating it simply as a performance of labor in the economic sense. To say nothing whatever of that minority of the conscripts whose previous intellectual and moral training places them at the out- set above the level of the great mass of recruits, to whom the element of honor in the service appeals in a peculiar degree, even when it is not all in all, and for whom the attractiveness of the service is further increased by a variety of adscititious conces- sions. So much for the first point. The second difficulty lies in the impossibility of properly rating military service as an economic fact, even after we have conceded the propriety of so construing it. The horse-breeder can readily ascertain the market value of horses, and when wanted for the army they can be taken at their customary money value. Men are reared for their own sake ; they have therefore no economic value, except, possibly, where this proposition will not hold on account of their being slaves — objects of value owned by other persons. The attempt to com- pute the economic value (that is to say the loss) of the time spent in military service on the basis of the customary daily wages is nugatory, inasmuch as the able-bodied man contains only the possibility of a valuable use of his labor power, not the certainty of it. On the contrary, under the latest existing cir- cumstances ot the labor market it is exceedingly probable that the hundreds of thousands of soldiers, who in many states are held to service for several years together, would, in case Utopia were realized and standing armies abolished, simply encumber the labor market with their supply of labor, and would in great part be left without employment. As it is now, the population has, as it were, discounted the fact that there are at any given time so or so many hundred thousand men under arms. Our conclusion therefore is that universal military service is a quantity not reducible to strict economic terms, and that in this respect it is Iput an exaggerated example of what is true of the entire personal element in the system of self-government. SELF-GOVERNMENT AND VOLUNTARISM. 20/ H. THE FINANCES OF SELF-GOVERNMENT. § 143. The assertion has repeatedly been made that the material means required by self-government are necessarily, or at least properly, to be correlated with the personal services required ; the tax system of self-government should correspond to the system of personal requirements. This, -however, holds true onlv to a limited extent; and this for reasons which hav^e been indicated in the preceding chajjter. It is right that that same manly vigor which is under self- government called on to partake directly in the discharge of the business of the vicinage, should likewise be immediately respon- sible for raising the funds necessary for the purposes of the vicinage. The patriotic sense of a free man demands that the immediate circle of his life-interests should rest on his own shoulders, much as does the wider circle of the general common- wealth. There are also other less sentimental reasons that go in the same direction. So, for example, other things being equal, the necessity of raising the funds required for the purposes of self-government will undoubtedly always exert a wholesome pressure on the local administration in the way of economy ; whereas, for obvious reasons, the disposal of revenues that are turned over to the local organization from without involves the danger of wasteful extravagance. Also, the local character of the levy will favorably affect its collection, much as if it were within the circle of a large house- hold. Of course, all past experience goes to say that it will not by any means entirely overcome the immaturity of the civic sense, which shows itself in a particularly crude form in the tax- payer ; but it will go some way toward helping out the weakness of human nature, in that the more direct and obvious connection between the common burden and the personal advantage of the individual citizen belonging within the local jurisdiction seconds his sense of dutv, at the same time that it sharpens the vigilance of the taxing authorities. As an example, in the cantons of 208 THE SCIENCE OF FINANCE. Switzerland, where a simple local, communal board of assessors has charge of the property tax (levied by the commune) and the income tax (levied by the canton), the board is found to have an appreciably keener perception for " property " than for "income," in the taxation of which latter the canton alone is interested (though the canton is small enough, and extends but little beyond the limits of the commune). It is sufficiently notorious how, in the administration of the Prussian income tax, the individual communes have developed a local patriotism — deplorable on moral and political grounds alike — which, through the means of the (local) assessment boards, takes care that the commune shall not fulfill its duty toward the state, in the payment of the legally established tax, in any more liberal measure than other com- munes. The result being that, in the absence of any adequate representation of the national interests on the board of assess- ment, a tacit understanding: has been established that the assess- ments are to depart as widely from the truth as practicable. And the oft-mentioned supplementary local rates added to the national income tax are, at least in part, nothing else than the form under which what is withheld from the state is turned over to the commune. § 144. But while the reasons mentioned speak for a close correspondence between local taxation and local administration, there are other weighty reasons against it, which considerably hamper the possibility of this ideal scheme. The first and most obvious of these reasons is the scanty financial means of the local organization, in consequence of which it finds itself obliged to fall back on the support of a larger organization to which it belongs. We have already seen reason to believe that with increasing culture and increasing political development the solidarity of parts and whole also increases, in such fashion that any indigence of this sort on part of individual minor divisions comes to be met by aid from the other parts. So that in this direction, too, it becomes apparent that a self-sufficing local self-government — in the sense made SELF-GOVERNMENT AND VOLUNTARISM. 2O9 familiar to us by current democratic vagaries — is a thing of the past, while in the actual political development of today this ele- ment is to an increasing and gratifying extent giving way to a growing centralization. A second reason is an intimate connection between the busi- ness of the local administration, or at anv rate some parts of this business, and the affairs of the commonwealth. Here, too, we are met by the fact of an increasing centralization that goes hand in hand with the progress of society and of industrial life. A striking instance is the administration of poor-relief. The greater the mobility of the populace — the more freely the mass of the laboring classes, and therefore of the classes that lie nearest to pauperism, move about from place to place in the search for employment, the greater the industrial area within whose limits this shifting back and forth goes on, the smaller is the ground for hope that a merely local provision for the relief of the poor, supported by local financial means alone, will meet the requirements of fiscal equity as between the localitv and the state. The question concerns an obligation resting on the nation as a whole, and every attempt to shift the responsibility to the shoulders of the individual local divisions runs counter not onlv to the dictates of equity but to the requirements of expediency. The outcome is an overburdening of many of the local organizations, and a consequent resort to the superior organization for relief and remedy. Third, there is to be considered the technico-fiscal side of the matter. In view of the difificulties visible on every hand today — difficulties attending a system of taxation which is at once effi- cient and adjusted with a view to the least possible friction and the easiest possible meeting of the tax requirements of the com- mune, the state and the empire — it will not do for a svstem of taxation to neglect any method that may go to make it as efifi- cient a tax system as possible. This factor of fiscal method will largely decide for success or failure in meeting the growing demands for revenue in modern communities without too serious dissatisfaction on part of the taxpayer. A skillful selection 210 THE SCIENCE OF FINANCE. of the proper means and method will enable us to construct an elastic mechanism that will adapt itself to new requirements as they arise. We therefore conclude that it is imperative for the finances of local self-government to submit to this demand of expediency. If the most efficient means of raising the revenue required by one of the minor civil divisions are to be found only under the control of a political unit of larger compass than that for whose needs the revenue is required, then the larger body should prop- erly become the taxgatherer for the smaller, and it would be a piece of vicious doctrinarianism to sacrifice this consideration of expediency to an abstract ideal of self-government as applied to taxation. It is true, the assumption on which this argument proceeds holds by no means invariably. On the contrary, the conviction is spreading of late that in a sober, commonsense system of taxation the communes, too, have a useful part to play, and that in this respect we have much to learn from the French ^ — who are practical as well as conservative in matters of taxation. § 145. The reverse of the situation here contemplated may occur if there is some motive of public policy for administering local affairs by the central organization of the state. In such circumstances the same public interest which calls for the manage- ment of local affairs by the central authority, will also justify some contribution out of the national funds toward defraying the local expenses. But, on the other hand, since the fact remains none the less that the purposes of the local organiza- tion are served by the administrative department so constituted, although it may be under the control of the national administra- tion, it follows that the central finances should combine with the local in meeting the resulting expenses. The administration of a city's police by the national authori- ties is a case in point, in the form in which it occurs, or has ' Cf. von Reitzenstein, " Ueber indirekte Verbrauchsabgaben der Gemeinden, ein Beitrag zur Reform der Gemeindesteuern," JaJninicher fiir A^ationalokonomie und Statistik, 1884, N. F. vol. ix. SELF-GOVERNMENT AND VOLUNTARISM. 211 occurred, abroad and in Germany (in Prussia, in the former king- dom of Hannover, etc.). When a city reaches a certain size and degree of importance, the national government believes the administration of its police can no longer be left to the local authorities, without danger to the commonwealth. It therefore reserves to itself the right to direct this branch of municipal administration through its own agents. Not only is there no warrant for unconditionally condemning this centralizing of the municipal police as being opposed to the principle of local self- government — local self-government is not an end in itself — rather it is an open question in each particular case how far the powers and the services of local self-government are adequate to the needs of the state, and what are its proper limits, and where it needs to be supplemented by an organ of the national administration.^ Nor are we justified in making the national management of a branch of the municipal administration a decisive reason for national payment of the resulting expenses, for the fact of its being primarily a municipal purpose that is served is not set aside by the further fact that the municipal interest in the matter coincides with and is further enforced by a similar interest on •the part of the commonwealth ; still less so if — as may readily be the case — the motive for the national government's action is the knowledge that the measures taken by the local self-govern- ment are not sufficient to insure the peace and security of the city itself. § 146. After all the reservations made in the preceding paragraphs there remains an undoubted sphere of independent financial action for local self-government. But even within this sphere it must so choose its ways and means as to conform to the spirit of the modern state and fit into the structure of the larger whole. Just as we must not confound local self-govern- ment with local autonomy, so also there is no place in the modern ' For the relation of the police to the municipal self-government of Prussian cities cf. Arguments for Municipal Reform, cited by Ernst Meier, Die Reform der Verwaltungs- organisation (1881), pp. 308 elseq. 212 THE SCIENCE OF FINANCE. State for a sovereign taxing power vested in a local organization. The tax system of a local self-governing body, as well as that body itself, is part and parcel of the sovereign state. It follows, in the first place, that the question as to whether we are to adopt the more highly centralized method of supple- mentary communal rates \_Ztischlage^ or the more decentralizing method of special communal taxes reduces itself to a mere secondary question of fiscal-technical expediency. It is a con- sequence to be expected that countries with a highly centralized organization, as, e.g., France, have made use of the supplementary rates ; and that, on the other hand, countries like England, with a predominantly decentralized organization, have granted to their local self-governing bodies a great measure of independent tax- ing power, or rather, what is historically the more accurate view, they have not carried the development of local autonomy into local self-government proper beyond the early stage at which this method is tolerated. For all practical purposes the question is essentially a ques- tion of expediency. The end to be sought is a serviceable method of distributing the aggregate financial burden of the state, com- mune, etc., so as to make it bear equally on the different sup- porting points by means of a shrewd selection and combination of the various forms of taxes. It is not out of any considera- tion in favor of centralization or decentralization, but simply because of its inefficiency as a fiscal apparatus, that the modern Prussian method of superposing a direct communal tax upon the national tax, is so much in need of reform. The reform needed is a relief of the unequal pressure of the burden, and of the dis- proportionate strain that falls on one branch of the tax system — - and on a defective mechanism at that. § 147. Apart from and independent of this question, and back of it, the principle must be accepted as decisive that all taxation by the local administrative body should be subject to the right of supervision by the state ; that with respect to kind and scope the particular tax measures must be made to depend SELF-GOVERNMENT AND VOLUNTARISM. 213 on the legislation and the sanction of the central authority. Not from any disinclination toward the free development of a spiril of local independence, but simply as a necessary consequence of the indispensable system and unity of the aggregate fiscal bur den of the members of the state. While there is, in this connection, an inalienable duty resting upon the national legislature and the national administration to guard the interests of the commonwealth, there are also many other considerations, enforced by much and varied experience, going to show the shortcomings of self-government. In the first place, in this matter as in all other matters of national concern, the duty rests upon the central authority of using its power to correct the trend of the social forces at work whenever that may become necessary. If, generallv, and in every community, erring human nature is everywhere open to the danger that opportunity to influence public affairs will become the occa- sion for exploiting this influence in the interest of one's own par- ticular class, the remedy is nowhere so easily applied as within an organization which is not itself in possession of sovereign powers, but is part of a greater whole. While the sovereign state, if it suffers from disorders of this sort — and it does so suffer, to some extent, everywhere — can look for a remedy only from within itself and its own gradual development and approach to the ideal of national organization, every local organization on the other hand, as being a part of the whole, is subject to the authority of the whole, and may so get rid of these abuses, as it were by appeal to a higher court, at least in case the relation of the local administration to the national government is what it should be. Protection of the lower classes of the population against class legislation and class administration in the interest of the upper classes, protection of the upper strata against the democratic tyranny of the penniless or the less well-to-do classes, who, in human fashion, are eager to turn the oppression and injustice which they have so long suffered into its converse, and to play the hammer instead of the anvil ; the one abuse or the other, if it shows itself in a local administration, may be set right by means 214 THE SCIENCE OF FINANCE. of a proper control exerted by the central authority, unless the state suffers from the same ailment. The mission of the national administration in such a case is that of the unprejudiced third party, who, unbiased by considerations of interest, is to see that justice is done between the contending classes. The antagonism is not always that between rich and poor, between the higher and the lower classes. There are also antag- onisms within the limits of these groups — secondary class differ- ences. So, e. g., the hereditary middle-class citizens of a place, in their assessment of property, will be tempted by their class interest to a criminal connivance as regards the members of their own class, coupled with an excessive vigilance as regards the taxable effects of the higher classes, the official class, or persons of alien birth. In such a case there is no remedy save through the employment of national agents, who, it is true, will not be able to dispense with the knowledge of local affairs possessed by the local administration, but may nevertheless lend their moral support to the employment of this local practical knowledge on the side of truth and good citizenship. This holds with added force if the question concerns a function of the local administration which involves, partly or mainly, the interests of the national taxation. § 148. While there may be room for a variety of opinions as to the exact requirements of justice in the apportionrjient of the fiscal burdens of the commonwealth among the various classes of which it is made up, there are, at any rate, certain kinds of mis- management that are too palpable to leave room for doubt- Unfortunately, there is no lack of experience of this kind. We may call to mind the reckless expenditure that has been so dangerously stimulated by the modern development of public credit, and then has come to the end which waits on all reckless- ness of this sort — bankruptcy. The greater the degree of auton- omy exercised by the local self-government, that is to say, the less developed the national organization (not, as the erroneous teachings of radicalism would have it, the more highl3' devel- SELF-GOVERNMENT AND VOLUNTARISM. 21 5 oped), the greater is the scope allowed for fiscal transactions of this sort. The more completely the management of local affairs is surrendered to the dictation of the so-called public will ; that is, in point of fact, the more exclusively it lies in the hands of an irre- sponsible organization of demagogues ; the more unquestion- ingly will considerations of permanent public policy be made to yield to the exigencies of present partv interests. As regards other pathological phenomena, so also with respect to this mat- ter modern democracy has afforded a fertile field of experimenta- tion'. Indeed, the experiences of democratic municipal finances have furnished new topics for scientific treatises on modern jurisprudence.^ It is the oflfice of an adequate guardianship of the finances of communes and other local organizations, such as a well regulated national organization implies, to prevent such developments of demagogical financiering. in. VOLUNTARY AIDS. § 149. Having now reviewed the nature and the financial sys- tem of local self-government, the field is clear for the discussion of a class of public aids, which, as we have already had occasion to remark in the general exposition, must not be made too much of, but which nevertheless demand a place in any fiscal svstem, and especially in modern finance, and therefore can not be omitted altogether from the discussion. These are the Volun- tary Aids rendered the community bv private individuals for public purposes, and in competition with the more rigid system of national and local administration. ' Cf. in this connection the American political economist, Henry C. Adams, Public Debts (1888), who sets forth the experiences of his country. He says, among other things (p. 25): "The great danger to self-government in the United States lies in municipal corruption, and municipal corruption is in large measure traceable to the manner in which cities have used their credit." *Cf. F. Meili, Die Schuldexekution und der K'onkurs gegen Gemeinden (Zurich, 180O). Die dkonomische Lage der Gemeinde Turbenthal {A'anton Ziiric/t); Finanzielles Gittachteti von H. Cramer-VVysz, und jtiristische Glossen von Professor Dr. Meili, Advo- katin Zurich (1888). 2l6 THE SCIENCE OF FINANCE. As to ideals we are all pretty well agreed. The best and most desirable arrangement would surely be that the aggregate of what today is required for the purposes of the empire, state, and commune should be tendered spontaneously, — from an uncon- strained inclination, with a full knowledge and consciousness, from the force of an enlightened and cordial recognition of what is due to the commonwealth. But seeing that this ideal is very far from being realized, it is after all, or rather it is all the more gratifying to find, at least by way of exception, that something is done from this motive, and it is not for us to make little of this gratifying feature in so far as there is substantial ground for rejoicing. It is also not an easy matter for us to dispense with this ideal. For all the difficulties in the practical working of a system of taxation are in large measure due to the fact that the coercive measures of our tax legislation and tax administration find the lack of sentiment for the commonwealth so great an obstacle as to make the struggle against it always difficult and sometimes futile. The success of these coercive measures rests not exclu- sively, though to a considerable extent, on the growth of a relative willingness on the part of the citizens. We need only call to mind that the contrast between direct and indirect taxation is intimately connected with this question. The problem is to make the most of the deficient willingness to pay taxes, by a skillful employment of ingenious methods of taxation, just as a medi- cine must be administered to a child in some form that is palata- ble to him. We may also call to mind that modern constitutional provisions of every civilized state concede to this element of vol- untary readiness a dominant influence in legislation and administra- tion. The basis of political "liberty" is the fact that "society" makes its will felt in the affairs of the state, not only in the sense of forming a realistic limit to the application of the high strung projects of political idealism, but also in the sense that it consti- tutes a permanent counterpoise which holds every measure look- ing toward an ideal national organization down to its own lower plane. SELF-GOVERNMENT AND VOLUNTARISM. 21 7 Any one who desires instances of this has only to turn to the everyday experiences of any modern state, not last to those of the Prussian state, with its ineffectual tax reforms and the short- comings of its tax administration. There is therefore no occasion to take one's stand on the high ground of national institutions and contemptuously dismiss this ideal factor of spontaneous assumption of financial burdens. On the other hand, there is a great deal to be hoped for financial progress from a growth in this direction. At the same time it is well to be on one's guard against con- venient illusions that go to overrate the services rendered by simple volunteer efforts, as judged by the standard of actual financial necessities. For this reason it will be best to examine a little more closely what are the services actually rendered by volunteer effort. § 150. First as regards the range of voluntary aids, as judged by the standard of the aggregate of public needs. No motive of practical charity is to be denied its due appre- ciation. But this appreciation cannot set aside the fact that even the noblest and best efforts of voluntary charity, such as we find it in practice in German countries, amounts in the aggregate to but a very modest portion of what is required for the purpose. The peculiarly pathetic circumstances which afford the special occasions for this work of compassion themselves go to strengthen the case. They indicate that the utmost that can be accom- plished by voluntary effort has already been accomplished ; they constitute an empirical proof as to what point can be attained by this means, by the utmost exertion and with the best conceivable moral disposition. If we make a comparison, e. g., between the expenditures required of the German finances on account of the armaments of the German states plus the French-Prussian war on the one hand, and the aggregate of all charitable gifts collected under the immediate pressure of the misery incident to the war on the 2l8 THE SCIENCE OF FINANCE. other, we shall find that the latter are related to the former, in character and volume, somewhat as the delicacies offered a con- valescent are related to the aggregate expenditures incurred in the care of the sick. This ought of course to be otherwise, and there is some ground to hope that the very wealthy upper classes especially will gradually learn to discharge their duties to society in a far more adequate measure than hitherto, — that the dangers incident to the great social inequalities of the time will oblige them, out of regard for their own best interest, to seek this means of conciliation. In the meantime, it is to be remarked, what has actually been done is, in spite of all deceptive show, extremely inadequate. The ground of hope lies elsewhere, in the examples offered by other times and countries, which go to indicate the possibility of a transformation of custom and of moral standards. Such, e. g., are the customs we find prevailing in the early towns with their numerous foundations, in the Swiss cantons, and especially in the United States of America. It is a difficult matter to find out just what part has been played in this connection by the truly ethical motive, either in early times or in the present. On the one hand it may be safe to assume that divergence of inter- ests in our modern industrial society must have strengthened the egoistic factors, and that consequently the modern increase of wealth has diminished the inclination to incur sacrifices for the public good. The Earl of Shaftesbury, with his wide experience in the English philanthropic work of a generation ago, expressly declares' that the difficulty of raising money for philanthropic pur- poses increases with every year that passes, and will ever increase with the increase of wealth ; inasmuch as the love of money and the passion for amassing it ever increases with the greatness of the wealth possessed. Still, the testimony which the United States furnishes in elo- quent deeds seems to speak to a different purpose. It exhibits ' The Life and IVorl-s of the Seventh Earl of Shaftesbury, by Edwin Hodder (1888), p. 597- SELF-GOVERNMENT AND VOLUNTARISM. 2I9 a series of voluntary gifts to the community, which, in comparison with what we arc used to, are of a magnitude to be viewed with amazement. A merchant of Baltimore, John^ Hopkins, in 1876, donated a sum of seven million dollars, one-half to the founding of a university, the rest for a hospital. Girard, of Philadelphia^ gave two million dollars for the foundation of Girard College. Smithson gave half-a-million to the Smithsonian Institution in Washington. Vassar gave a like sum toward the foundation of Vassar College in New York state. Lick gave to the University of California the sum of S/oo.ooo to build and equip the most complete astronomical observatory in existence.' And all this falls within the last few decades; for down to 1846 the highest figure of any gift of this kind given during the donor's lifetime did not exceed 1^50,000. These facts are the more significant as coming from the classic home of modern industrialism ; but they are after all, as we shall presently see, not to be rated too high. § 151. But even if the volume of voluntary contributions and in particular such as we meet with in Germany, is of itself a contracted one, there are yet certain qualitative drawbacks to be considered, which will go far to dissipate altogether the impres- sion they make. It. very frequently happens that spontaneity, in the sense in which we are fond of conceiving it, is not present at all. In all cases where the familiar subscription list is passed around for the relief of some sudden or chronic distress, or for the erection of monuments, churches, and the like, it is in great part nothing voluntary whatever, and can properly bear this name onlv to distinguish it from compulsory taxation by the government. In such a case it is not the coercion of the tax law but the compul- sion, less rigorous it is true, but still the compulsion, of public sentiment, of usage, of decency, of reputability, of social stand- ing, that acts as a power from without to enforce the very mod- erate inclination to afford voluntarv aid. ' Cf. R. A. Procter, " Capital and Culture in America," Fortnightly Review, August, 1888, pp. 260 et seq. 220 THE SCIENCE OF FINANCE. In view of this state of the case, with respect to the ethical aspect of a large portion of the so-called voluntary contributions, the question may well be asked, whether the whole business is really sufficient to justify the very appreciable expenditure of energy involved in getting the means together in this scattering fashion, as well as the great amount and variety of annoyance undergone by the members of society who bear a hand in the matter. Might it not be more to the purpose to raise this much additional contribution by the directer method of taxation ? This directer method is also pretty obviously suggested by a familiar fact. These same benefactors of mankind on whom their hundreds of thousands and millions devolve the duty, and more especially the honor, of distinguishing themselves by liberal subscriptions, as honorable as they are easily afforded, are in the habit of leaving a margin of such proportions in their legally obligatory tax payments that this ostentatious liberality of theirs is but a very inadequate "conscience fund" when set off against what, in performing their less public obligations, they have neglected and continue to neglect. They would do better to conform to the requirements of the law, and then let all this ostentatious pretense alone — the pretense of giving something to the community beyond what is legally due from them, while in point of fact, they have fallen far short of doing their duty. The praiseworthy instances in which the gratuity is not pretense alone, but very truth, are surely not to be underrated, but they make up most decidedly only a small minority of the cases. § 152. There is a further circumstance to be taken into account in connection with this voluntary contribution to public purposes, namely, the manner of looking at certain public objects that appeal to our philanthropy. The view taken is largely determined by certain narrow con- ceptions of the nature of the functions of the state, based on the emotion produced by particular occurrences, instead of an intel- ligent appreciation of the great necessities of national life. The so-called charitable gifts prompted by a sentimental compassion SELF-GOVERNMENT AND VOLUNTARISM. 221 for a particular misfortune, and analogous instances, are in them- selves worthy of all respect. But their moral dimensions turn out to be sadly shrunken when we come to find that this very habit of mind, that is so sensitive to an emotion, seems to have no suspicion of the fact that the aggregate of public objects, — all that the state requires of the individual — should properly claim the same cordial response, regardless of how much or how little it is calculated, superficially, to appeal to sentiment. And a second consideration goes along with this one. This same view of the functions of the state which proposes to meet the serious requirements of the commonwealth by means of an impotent voluntarism, is moreover, in attaining its slight actual results, given to the employment of all sorts of questionable financiering, which is to be justified only by its laudable aims. Entertainments are got up, which afford the usual circle of socia- ble acquaintances of the season another occasion to come together and kill time. High official sanction is obtained for the institution of lotteries, which the government ought to prohibit for any and all purposes, if it only had something more of a conscience than it has. However we may look at the matter, therefore, whether from the point of view of their scope or of their nature, the category of voluntary contributions serves no other purpose than that of bringing into a stronger light the great importance of a fiscal sys- tem backed bv coercive power and resting on national legisla- tion. CHAPTER VI. ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. Literature. Adolph V^dignex, Finanzwissenschaft (j. Aiiflage, 1883), Buch i. Cap. iii., iv. Adolph Wagner, " Die Ordnung der Finanzwirthschaft und der offentliche Kredit," in Schonberg's Handbtich der politischen Oekonomie {2. Auflage, 1885), Band iii. pp. 477 et seq. A. Schaeffle, Zeitschrift fur die gesaminte Staatswissenschaft, 1883, 1884. Erwin Nasse, Zeitschrift fiir die gesamtnte Staatswissenschaft, 1868. Paul Leroy-Beaulieu, Traite de la Science des Finances {y^T]), 2'"^ partie, livre I : du budget. I. CLASSIFICATION OF PUBLIC WANTS. § I 53. Some reference has already been made in the introduc- tory porti^-^^n of this work (vol. i. sees. 187-216) to the logical sequence necessary in all organization of demands or expendi- ture {BedP. fsgestaltMig) . Whether the question concerns public or private economy, there is a single ethico-economic norm on which any systematic ordering of demands must be based. This norm consists not simply in the requirement that the aggregate volume of demands must be brought into conformity with the aggregate of available means ; it requires further that the order of precedence as between the different classes of requisitions, must be made to correspond with the order of their relative importance for the life of the individual or of society. The first half of this general rule imposes on the demands of civilized life — in themselves considered, boundless — certain rational limits, determined by the magnitude of the economic means available for their satisfaction. The second half of the rule defines the proper limits of each particular class of these demands, in that it requires them to justify their claims as against other like demands, in an appeal to the standard estab- ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. 223 lished by a rational gradation from the necessary to the dispen- sable. It may be taken as evident that there lies within the horizon of modern social life in state and commune a countless number of possible undertakings calculated to serve the purposes of a physical or spiritual amelioration ; works of some human use, which, in themselves considered — apart from the necessary ■expenditure involved — are of undeniable legitimacy. Indeed, we are well aware that precisely the public economy of modern civilized states, by the nature of the case, rises above the danger of a growth of expenditure for trivial ends, such as we so fre- quently have occasion to deprecate in private life, or at least that it is relatively free from such danger. The danger lies much less in the direction of ignoring any growth of a commendable popular demand, than in the over-zealous acceptance of the func- tions which the new demand may impose. No one would dispute the fact that in any modern state, within the sphere of the obscurest village and of the highest departments of the general government alike, there is ^ resent an endless array of activities waiting to be undertaken, for the fur- therance of health and comfort, of schools and chari^ .'s, of sci- ence and art, — tasks which remain unfulfilled for no other reason than because of the excessive sacrifices which they would require. But if we accept this truth in its general form, it appears that its application to practical affairs is conditioned by the fact that the alternative presented is not a simple negative, but con- sists of counter claims of a positive character. Hence the neces- sity of a more detailed analysis. § 154. What is it, preciselv, that we mean when we say that sacrifices demanded by any public undertaking are excessive ? There is, of course, an extreme limit, where this phrase would hold true literally. But this uttermost limit is never seriously under discussion. As a matter of fact, the discussion concerns only those burdens whose exorbitancv (in case experiments could be made in political affairs) would very speedily be disproven in 224 THE SCIENCE OF FINANCE. case the required sacrifices were increased by the exigencies of a disastrous war. The question therefore practically concerns only the greater or less degree of pressure, of sacrifice, which would be involved in meeting the necessarv expenditure. And how would this pressure, this sacrifice, show itself ? Plainly in this way, that certain demands would intrude on ground already fully occupied by other demands, whose disallowance would be felt as a privation because their claim to satisfaction seems so much more pressing. This is the important point. The question is as to the order and sequence of all classes of demands ; not only as to the particular demand which is to be satisfied by means of the pub- lic contrivances in question, but also as to that class of demands which is met by private business. Within the sphere of this aggregate of organized demand, some decision will have to be reached as to what place in the scale should be assigned to each particular demand. Just as every prudent housekeeper' is wont to calculate whether his income will allow him to afford a pleasure journey, a purchase of paintings, or to indulge the gratification of any other like want of the second or third rank, and to consider whether the gratification of this new want will not undulv stint 'The oft-repeated statement that, unlike the private individual, the state adapts its receipts to its expenditures, recurs again in the writings of one of the latest French economists, Charles Gide {Principes d' Economie politique, 2""*^ edition, 1889, p. 593). This statement holds true only so far as concerns the superficial, juridical aspect of the case. After the national requirements have been fixed at a certain amount, the state proceeds to demand such an amount from its subjects in the form of taxes. The pri- vate individual, who is not clothed with such sovereign power, is of course obliged to inquire into the extent of his income before determining what his expenditure is to be. But viewed from the economic standpoint this contrast disappears ; inasmuch as the determination of the public requirement rests upon an elastic basis in just the same way as is the case in private life. In order to a rational solution of the problem, regard must be had to the available means, and, just as in a case of private expenditure, a balance must constantly be maintained between the urgency of each particular item of expenditure and the pressure which its defrayment throws upon other needs of the economic unit in question. And so far as it holds true in the economic sense that income is affected by expenditure, it is true alike of private and of public economy. If the burden of taxation spurs the private individual to greater effort and parsimony, an expenditure of another kind may also serve the same purpose. ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. 22 5 certain other wants which are undeniably more important, such as the need of shelter, clothing, food, care of children, provision for the future by the saving of a part of the yearly income, — so likewise does the same question come up when reference is had to that class of the needs of each particular household and of the community which arc provided for by state and communal institutions. The question will now read, is the new demand on behalf of the national defense, for better lodging and victualing of the troops, for the construction of new warships and harbors, for the provision of new ordnance and arms, or more serviceable uni- forms, — will this new military requirement be warranted as against demands for other purposes ? What goes to make up these other demands, however, is not simply the aggregate of services which the commonwealth renders to the aggregate of the citizens, not simply the various public institutions and their requirements, but it consists likewise of all those things which each particular private establishment would regard as its special want, together with that which they contribute in the way of taxes to the support of the state and of the commune. This other demand, accordingly, with which the new military demand is to be compared for measurement, and as against which it will have to justify itself, comprises the need of nourishment, shelter, clothing, education, sociality, benevolence, provision for the future, as well as the requirements of the public administration of justice and police, public encouragement of art and science, poor-relief, etc. And the like is true with respect to every other new demand on part of the commonwealth. § 155. An increase of the means available for meeting this demand, through a favorable turn of circumstances, affords noth- ing more than an apparent simplification of the problem which the supposed case offers. As a matter of fact, it is practically desirable to be able to contrive new means to meet the new demand, means which need not be withdrawn from their previous disposition. But this is no answer to the cjuestion whether this 226 THE SCIENCE OF FINANCE. new need has the first claim to the new resources, and there is nothing to hinder the same thing from repeating itself in the economy of the state and commune which has so often been noticed in private establishments, — namely, that the new abun- dance is turned to purposes which should have been the very last to have received attention. The real difficulty still remains in such a case. It lies in the adjustment of the relation of each particular object of expendi- ture to all the rest. Even within the smaller circle of the house- hold, the solution of the problem is difficult enough, and as a matter of fact, it is only partially effected in most cases. In the public economy, and more particularly in a large commonwealth, the difficulty is very great indeed. Indeed it would be a prob- lem of stupendous difficulty were it not that every new adjust- ment arrived at in this balancing of proportions has but slight effect, as compared with the crystallized precipitate of a long- existent, gradually developed body of persistent demand. Still the problem is always difficult enough, and shows us, in the ever- renewed controversies, the impossibility of a thoroughly satisfac- tory solution. The inherent difficulty of a decision as to w^hat particular needs of first, second, third rank may deserve attention, and what may be the degree of urgency of each particular kind of demand, is augmented by obstacles of a subjective character due to the inadequacy of human insight. So long as the crude intelligence of the average citizen remains inaccessible to any rational conception of the essential character and of the necessity of a public revenue, so long will there remain, subjectively, the constant consciousness of a bur- den, even in a case where the tax demanded by state or com- mune is required to cover a need equally urgent with the need of daily bread. The subjective feeling of annoyance wall always remain ; for the most frivolous indulgence is paid for with a lighter heart than any tax whatever. Moreover, so long as the more well-to-do classes of society regard the payment of taxes simply as the price paid for a ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. 22/ selfishly calculated benefit, and are inaccessible to any deeper feeling of duty in the matter, so long, surely, will they continue to feel the burden as oppressive, which, with a better compre- hension of the relation of the individual to society, should be accepted as a matter of course and easy to be borne. Conversely, the proletarian masses at the other end of the scale, who simply do not contribute out of their abundance what they pay to the state and commune, are easily disposed to judge of every object of expenditure on the part of the state according to the standard set by their own necessities, and will — at least as soon as class consciousness develops among them — regard every item of expenditure as heavy and oppressive if it falls out- side the circle of their own every-day necessities, and is devoted to the higher aims of art and science. The one class errs, in that they, without any sense of obliga- tion, seek the advantage of their own more cultured class at the expense of the crude conditions of existence of the lower classes. The other errs in that the narrow horizon of their hapless life Jiinders them from seeing the true goal of advancing civilization. But every administration in a modern state will have to deal with both these classes alike. II. THE DEFRAYMENT OF THE PUBLIC EXPENDITURE. § I 56. But a good deal nearer the surface, and therefore nearer to the point of view of the common run of practical discussion, are the questions which concern the defrajTnent of the public expenditures, that is to say, the maintenance of a balance between the expenditures and receipts of the public treasury. The fact of the necessity of maintaining such a balance is obvious and requires no detailed discussion. Every good citizen is well acquainted with this necessity from its daily and ever recurring presence in the affairs of private life. As we have already frequently called to mind the identity of prudence as applied in public and in private economy, so also at this point. The deceptive appearance due to the peculiar resources at the com- mand of the public administration, as compared with private 228 THE SCIENCE OF FINANCE. sources of income, makes it necessary to begin by correcting the misconception according to which the maintenance of an equilib- rium here is less imperative than it would be in the case of a pri- vate establishment. Only when this has been done can we pro- ceed to give our attention to those peculiar resources which state and communal administrations have at their disposal, together with the special difficulties with which they have to deal, as con- trasted with any private establishment. It is evident from this universal experience in economic mat- ters that a chronic excess of expenditures over receipts — what is called a "deficit" in the public finances — is an abnormal condi- tion and must be avoided. The affairs of everyday life offer fewer illustrations of the failure of the adjustment in the other direction — of an excess of receipts over expenditures. For obvious reasons this case is much rarer than the contrary'. It is evident, however, from its repeated occurrence in the national finances of the United States of Amer- ica, in early years and also of late,' that, under given circum- stances — in this particular case on account of the smallness of the national expenditure and the peculiarities of the tariff policy — a disturbance of the equilibrium may also take place in ' President Cleveland's message of Dec. 6, 1887, contains the following remarkable utterances : " You are confronted at the threshold of your legislative duties, with a condition of the national finances which imperatively demands immediate and careful consider- ation. The amount of money annually exacted, through the operation of the present laws,, from the industries and necessities of the people, largely exceeds the sum necessary to meet the expenses of the government. When we consider that the theory of our institutions guarantees to every citizen the full enjoyment of all the fruits of his industry and enterprise, with only such deduc- tion as may be his share toward the careful and economical maintenance of the Gov- ernment which protects him, it is plain that the exaction of more than this is indefensi- ble extortion, and a culpable betrayal of American fairness. . . . The public treasury, which should only exist as a conduit conveying the people's tribute to its legitimate objects of expenditure, becomes a hoarding place for money needlessly withdrawn from trade and the people's use, thus crippling our national energies, sus- pending our country's development, preventing investment in productive enterprise, threatening financial disturbance, and inviting schemes of public plunder. ... It will not do to neglect this situation because its dangers are not now palpably imminent ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. 229 this direction. And this brings us to an appreciation of the fact that the fiscal administration must be prepared to meet this emer- gency also. The precautions taken must follow the same general rule that has been laid down for the avoidance of a deficit, namely, such a change in the amount of the expenditures or of the receipts as shall suffice to establish an equilibrium. §157. With a view to the maintaining of an equilibrium in the public finances it is necessary to examine the aggregate of expenditures in detail, with respect to the regularity or irregu- larity of recurrence of the particular objects for which the expenditure is incurred. Adopting the usage of private business, it is customary to distinguish public expenditures as ordinary and extraordinary expenses. In the economy of the household we are wont to consciously contrast the annually recurring and relatively invari- able, or at any rate only gradually changing expenditures, for dwelling, food, clothing, social intercourse, recreation, education, etc., with the exceptional expenditure incurred for a household establishment or for some other like provision. Likewise in the case of the public economy we make a distinction between "current," "permanent," "annual," "regularly recurring" expen- ses and the objects for which they are incurred on the one hand, and apparent. They exist none the less certainly, and await the unforeseen and unex- pected occasion when suddenly they will be precipitated upon us. On the 30th day of June, 1885, the excess of revenues over public expenditures after complying with the annual requirement of the sinking-fund act, was $17,859,- 735.84 ; during the year ended June 30, 1886, such excess amounted to §49,405,545.20 ; and during the year ended June 30, 1887, it reached the sum of 555,567,849.54, . . . the excess for the present year amounting on the 1st day of December to §55.258,701.19, and estimated to reach the sum of §113,000,000 on the 30th of June next, at which date it is expected that this sum, added to prior accumulations, will swell the surplus in the Treasury to §140,000,000. There seems to be no assurance that, with such a withdrawal from use of the people's circulating medium, our business community may not in the near future be subjected to the same distress which was quite lately produced from the same cause. And while the functions of our National Treasury should be few and simple, and while its best condition would be reached, I believe, by its entire disconnection with private business interests, yet when, by a perversion of its purposes, it idly holds money use- lessly subtracted from the channels of trade, there seems to be reason for the claim that 230 THE SCIENCE OF FINANCE. and the "non-recurring" expenses on the other, and call the for- mer class the ordinary, and the latter the extraordinary expenses. This terminology is questionable. It indicates an elementary stage of economic thought in that it classes as "extraordinary" an item of expenditure which in many cases is to be distinguished from the so-called ordinary expenses by a technicality alone, and not by the extraordinary character of the object for which it is incurred. If we accept this view we are led to the curious conclusion that the "ordinary" expenses are smaller, relatively to the "extraordinary," the more confused our economic specu- lation is, and conversely, the extraordinary expenses grow relatively smaller the more highly developed our economic conceptions become. It is a well accepted fact in private life that wherever system- atic management in household economy is but very slightly devel- oped, where "hand to mouth" is the rule of life, there is a great number of items of expenditure which present themselves to a thriftless improvidence under the unwelcome head of "extraor- dinary" expenses; — items which a rational foresight would very easily have been able to bring in under the head of "ordinary" expenses. On the other hand, there is such a devel- some legitimate means should be devised by the Government to restore in an emer- gency, without waste or extravagance, such money to its place among the people. If such an emergency arises there now exists no clear and undoubted executive power of relief. Heretofore the redemption of three per cent, bonds, which were pay- able at the option of the Government, has afforded a means for the disbursement of the excess of our revenues ; but these bonds have all been retired, and there are no bonds outstanding the payment of which we have a right to insist upon. The contribution to the sinking fund which furnishes the occasion for expenditure iri the purchase of bonds has been already made for the current year, so that there is no outlet in that direction. In the present state of legislation the only pretense of any existing executive power to restore, at this time, any part of our surplus revenues to the people by its expenditure, consists in the supposition that the Secretary of the Treasury may enter the market and purchase the bonds of the Government not yet due, at a rate of premium to be agreed upon. The only provision of law from which such a power could be derived is found in an appropriation bill passed a number of years ago ; and it is subject to the suspi- cion that it was intended as temporary and limited in its application, instead of con- ferring a continuing discretion and authority. No condition ought to exist which would justify the grant of power to a single official, upon his judgment of its necessity, to withhold from or release to the business of the people, in an unusual manner, money ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. 23 1 opment of systematic foresight possible as will bring a continually larger number of extraordinary expenditures into the category of ordinary, annually defrayed expenses. The whole question turns on a technical distinction. § 158. Elementary discussions in political economy have long been accustomed to make a distinction between goods which are wholly consumed in a single use (as food, drink, fuel) and goods which are consumed only gradually, and so are capable of a continued use (as clothing, shelter, furniture, tools). The need for any given commodity will evidently recur more frequently the more distinctly it belongs in the first class, and less frequently the more distinctly it belongs in the second class, that is to say, the more durable a basis for a continued use its physical characteristics will afford. The need of food recurs daily in every household ; the need for tables and chairs recurs in most households scarcelv once in a lifetime. Now, since any scheme, such as is desirable in private life and is altogether imperative in every public administration, naturally covers a certain definite period, whether of one year or more than one, it follows that any items of expenditure which in consequence of the physical character of the objects for which held in the Treasury, and thus affect, at his will, the financial situation of the country ; and if it is deemed wise to lodge in the Secretary of the Treasury the authority in the present juncture to purchase bonds, it should be plainly vested, and provided, as far as possible, with such checks and limitations as will define this official's right and discre- tion, and at the same time relieve him from undue responsibility. In considering the question of purchasing bonds as a'means of restoring to circu- lation the surplus money accumulating in the Treasury, it should be borne in mind that premiums must of course be paid upon such purchase, that there may be a large part of these bonds held as investments which can not be purchased at any price, and that combinations among holders who are willing to sell may unreasonably enhance the cost of such bonds to the Government. It has been suggested that the present bonded debt might be refunded at a less rate of interest, and the difference between the old and new security paid in cash, thus finding use for the surplus in the Treasury. The success of this plan, it is apparent, must depend upon the volition of the holders of the present bonds." [The extracts from the President's message are here given without abridgment, instead of in the somewhat condeysed form given in the German. — Tr.] 232 THE SCIENCE OF FINANCE. they are incurred, regularly recur within the stated period, will readily fall into the periodicity of such a scheme. On the other hand, such things as are too lasting to need renewal every year or two will appear under the head of "irregular" or "extraordinary" expenses. Plainly this is nothing but an arbitrary classification resulting from the distinction of expenditures according to certain time- limits ; whereas with an indefinitely extended time-limit those items would be recognized as "regular" and "ordinary" whose regularity is now disguised by the arbitrary limits of the period selected. ^159. The difficulty arising from these arbitrarily chosen, narrow time-limits may be set aside by taking thought ; and the expenditures for such relatively imperishable objects may accord- ingly be conceived of as likewise regularly recurring and as subject to the same regulations as the annually recurring body of expenditure. This is on the supposition that the extent of the longer period in question is known; so, for example, it is possible to calculate beforehand the length of time which army uniforms or railway rails will last. There are, surely, difficulties in the way of applying this prin- ciple. In the first place, the degree of permanency in the case of a great many things cannot be known beforehand. Further, we have to do not only with what may be calculated beforehand, but also with other contingencies which simply defy all previs- ion. In an age of such striking progress in the mechanic arts as ours, many a contrivance which is calculated to last for a long time ceases to be of any use long before its natural death, simply in consequence of its being left behind by the march of improve- ment.' We may call to mind the vessels of the navy, ordnance, ' In the memorandum appended to the navy estimates of the German Empire for the year 1889-90, in justification of the demand made for 116.8 million marks for the construction of new vessels, there occur among other things the following statements : "Our fleet consists in the main of vessels which are still of some use, but out of date, •whose decrease in value proceeds />i7ri pa sstt with the progress of improvements in the construction of warships by other nations. • • ,• As regards the ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. 233 fire-arms, fortifications, etc. We may mention the very exten- sive demands made by our modern higher scliools for purposes of scientific and medical research and instruction. Our depart- ments of education and finance find themselves called upon year by year to make costly innoxations at one point or another, in order to retain or to secure the services of the indispensable pio- neer of research. But still further ; wars, inundations, industrial depressions recur, but not with any regularity that is discernible by the human eye. Preventive measures, and therefore the expenditures they involve, may serve to lessen the intensity of such fortuitous calamities, and may even in many cases prevent them ; but, after all, there still remains a body of indefinite demands which can- not be calculated beforehand. Dikes and works for the control •of dangerous rivers, as a safeguard against floods, a prudent industrial policy for the obviation of trade depression, a jealous care of the national defense — all measures of this class may be of use as preventives and so may serve to bring the "extra- ordinary" expenses, to some extent, under the head of the regular annual expenditure. Still, these measures can avail only to reduce, never to abolish these calamities and the financial demands arising out of them. So we are led to the conclusion that the line of demarkation between ordinary and extraordinary expenditure may be shifted but cannot be obliterated. § 160. Corresponding to the customary distinction between ordinary (regular) expenditures, and extraordinary (irregular) ironclad vessels now available for coast defense, in the stricter sense, the case is much the same as with the vessels of the regular fleet. The greater part of them, though still fit for service, are yet to some extent obsolete, and to some extent no longer adequate to the ordinary demands made upon them In consequence of the increased speed of all other classes of vessels, including warships proper, dispatch boats in the navies of all nations have been compelled to increase their efificiency of service to so considerable an extent that dispatch boats which a few years ago were rated as fully up to the standard must now be regarded as out of date. Accordingly in the construction of this class of vessels, too, we can not afford to remain inactive, but must continue to make improvements." 234 THE SCIENCE OF FINANCE. expenditures, there is the other customary distinction between ordinary and extraordinary resources. While it appears that, as regards the former distinction, there will always be some occasion for an extraordinary expenditure, owing to the fact that the periodicity of certain of the needs of the community does not admit of calculation ; so also it appears, as regards the latter distinction, that the line between ordinary and extraordinary resources is a shifting one, inasmuch as there is no extraordinary resource which ma}' not, under given circum- stances, have to be applied to meet ordinary expenditures ; and conversely there is no ordinary resource which may not, under given circumstances, come to be applied to the extraordinary expenditure. Yet something of a distinction remains. The resources pre- ferably to be drawn on for meeting regular expenditures are those which are adapted to yield a regularly recurring income ; whereas, for meeting an irregular or occasional demand, such fiscal means may advantageously be employed (although it is not imperative that they alone should be) as can be drawn on only for occasional purposes and not for expenditures that recur annually. As a concrete example, the annually recurring expenditures for the support of a standing army, for the salaries of the civil service, and for the like purposes, will in any well-ordered fiscal system be met by annually recurring taxes ; it is only when the accustomed order is disturbed by unusual exigencies (war, famine, industrial depression) — exigencies which threaten the orderly course of business and the tax-paying capacity of the community to a much less extent in modern society than in earlier times — that such financial expedients should be resorted to as are primarily adapted to meet occasional demands only. Of such expedients during the earlier history of finance, may be mentioned the alienation of productive public property (domains, etc.); in the later development of financial policy by far the most important of such expedients is the public credit. Both of these fiscal expedients, both the alienation of domains and the use of the public credit, are by nature ill adapted for meeting ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. 235 annually recurring expenditures. Just as property once sold cannot be sold again the second time, so also resort to public credit cannot be made a source of annually recurring income without resulting in an annually increasing debt, and a consequent annually increasing burden of interest. And these difficulties will, with each succeeding year, increase all the more, the greater the difificulties were which were sought to be evaded by such expedients. It is therefore imperative that this class of expedients should be reserved for such extraordinary exigencies, as by their infre- quency and the suddenness and intensity of their demand upon the treasury, make resort to some such means indispensable. But even for exigencies of this kind, of which war is now and long will be the chief example, it should ever be kept in mind that some provision of another kind is also desirable whenever the special circumstances of the case will admit of it. § 161. In order to a clear comprehension of these questions some discussion of the nature of public credit (national and communal) is desirable. In this field, too, theory has been influenced by the course of events in the historical development. In the early stages of public economy, credit appears in such an, extremely precarious position — pawning of crown lands and revenues, onerous conditions attached to loans, usurious interest and the like, on the one side ; breach of faith, insolvency, exhaustion of resources, on the other side — that theoretical discussions of the matter are largely determined by the palpable destitution of the borrowing state. As fast as the ethical and economic character of the modern state has developed, all this has changed. From having been a perpetually embarrassed debtor, the state, with its demand for loans, has come to be sought after as affording the very safest form of investment. This happens because public sentiment, in all matters relating to the state, has changed ; because this altered public sentiment is backed by the infinitely increased resources at the command of modern industry and 236 THE SCIENCE OF FINAN'CE. modern finance. There results a general confidence in the per- manency of the state — in its ever-increasing strength and its unquestioned integrity and soundness. The impression made by the enormous amounts which for some decades past have been raised by this means in nearly all the great states of today, with- out destroying the country's wealth or its financial system, and often without in the least impairing either, — this impression has been so pervasive as to inevitably leave its traces even in the theories held concerning public credit. There resulted an extravagantly optimistic theory, which, significantly enough, had a great vogue in its time, and found many adherents. Contemporary admiration for these clever theories leads to rating them higher than they deserve. They are nothing but a reflection of passing events, whereas the object of scientific inquiry is not only to reflect the events but to under- stand them. Such a reflection of passing events was the view held a gen- eration ago by those who, in accordance with the materialism and optimism of the older Political Economy, explained the state and the national activity as a whole as being an "incorporeal capital," represented by the productivity of all outlay made for national purposes, including war expenditures. There seems to have been no appreciation of the extent to which the best and highest elements of life were debased by attempting to erect them into an industrial investment.' § 162. It is true, there are certain objects of public expendi- ture in which the funds raised by means of public credit take the form of a productive investment. In such cases the objec- tions which might be made against "consumption loans" from the business })oint of view, are out of place, since the question really concerns a case of a "productive loan." Although Prussia, during the decade 1878-88, invested in ' Cf., for correction of the exaggerations of Dietzel and Stein, the restrictions offered in A. Wagner's Fhianzwissenschaft, I. c, and more especially A. Schaeffle, Zeitschrift fiir die gesamnite Staatsivissenschaft, 1884, pp. 134 et seg., as well as a criti- cal paper by the present writer in the same journal, 1868, pp. 594 et seq. ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. 237 the purchase and construction of some 18,000 kilometers of rail- roads a capital of over three milliards of marks, and although it has met this expenditure by recourse to its credit, on the other hand the railroad capital which it has acquired represents a jjro- ductive investment which sufficiently offsets this large debt. In point of fact, this capital is so far productive as not only to cover the interest on the national debt incurred, but also to afford a surplus toward its gradual extinction, and even something more. This is an example of a "productive loan" in the traditional sense. The example is a particularly favorable one, and is typical of a great number of other cases that occur in national and communal econom}-, especially in view of the present ten- dency towards a greater extension of state and communal activity in the direction of many and various business undertakings (gas- works, water-works, horse-cars, etc.). But this is only one side of the question, and moreover the side which offers the fewest difficulties in the way of a discussion of public credit. The other and more difficult side begins where the scope of the so-called consumptive credit begins. And on this point opinions vary all the way from that prudent moderation which insists on applying the maxims of private business in such a sense as to condemn all "consumptive credit,'! even in the economy of the state proper, to the opposite extreme of the exaggerated views that stand for nothing but a spontaneous expression of the latest phases of the development of public credit, but which must be admitted, on this very account, to contain a legitimate protest against the former excessively narrow view. § 163. Even within the narrower field of private economy it will not hold that productive credit alone is to be commended, and that consequently consumptive credit is to be in all cases discountenanced. This position amounts to nothing more than a well-grounded protest of common sense against the well-known and wide-spread abuses of the practice of living on credit. It is the intention to 238 THE SCIENCE OF FINANCE. rebuke this practice without discountenancing all forms of con- sumptive credit indiscriminately. For there are cases where necessity and expedienc}^ require that the accustomed routine of the household, which may be in itself commendable, should yield to the urgency of some exceptional demand. But in the economy of the state the occasions of this kind are so urgent and at the same time recur so inevitably that, for one thing, they cannot be disregarded, and for another they can- not be met except by contracting a large debt. The question in such a case concerns the very gravest interests of the nation, and in such a case no sacrifice of an economic nature, even includ- ing that of the accepted and commendable adjustment of income and expenditure, is too great. And still, sacrifices of this sort are not "productive," especially not in the cases where they are the greatest. What productive end, for example, did the French gain by the expenditure of the enormous sums which the last war with Germany cost them? They have not even acquired the *' incorporeal capital" of having learned to guard themselves against the like mischief in the future. There is one thing, however, about this particular resort to public credit, that is really wonderful. And that is, that a modern state should be able, at the close of so unhappy a war as that of 1870-71 was for France, to borrow, on any toler- able conditions, milliards after milliards, when the new loans went to increase enormously the burden of a national debt that was already very great.'' This is a triumph for those moral and economic forces which go to make the modern state independent of the limits of the resources immediately at hand, and to place at its disposal further resources that are made available only through the confidence that exists in its permanence and con- tinued development. It is the relative immortality of the state 'The expenditures of the French nation immediately before the great war, in the year 1869, amounted to 2209 million francs; whereas in the year 1872 it was 2655 millions. From that time on it increased rapidly and in the year 1877 it had already reached 3052 millions; in 1887 3234 millions. According to the budget of 1887, the annual interest charge on the consolidated debt amounted to 740 millions ; that on the redeemable debt, to 337 millions. ORDER AND SEyUENCE IN THE PUBLIC ECONOMY. 239 as compared with the short life of any individual, that serves to set these limits aside, and offers to the credit of the fully devel- oped state resources which are accessible to it alone. § 164. We have now reached the point at which it will be well to give some attention to the doubts that occur as regards this seductive fiscal expedient, and come to some decision between the claims of this and other means of revenue. The discussion will, of course, be confined to that limited field of financiering within which the extent and suddenness of the demands does not make recourse to the public credit imperative. One thing is constantly to be kept in mind. In the last analysis every public debt, however unusual and however large, must always rest on the taxes, as the regular and ordinary means of satisfying all fiscal demands. It is the nature of a debt to require payment, and at least the greater part of the debt bears an annual interest charge, and these charges can be met in a rational way only by means of current taxes. An extinction of the old debt by means of a new loan is no extinction ; the pay- ment of the interest charge on the old debt by revenues obtained from a new loan subverts the foundation on which public credit rests. Credit will grow constantly weaker, and the terms on which each successive loan is obtained will grow constantly less advantageous. Whereas a determined effort on the part of a community to meet its expenditures by means of the greatest possible exertion of its tax-capacity and an avoidance of all debt, cannot fail to produce such a moral effect as will increase the readiness of capitalists and of the money-market to advance any amount that may be required in such extraordinary cases as will unavoidably occur. And in case of the opposite financial policy a correspon ding penalty will ensue. So it appears again that all business policy \\Virthshaff\ in private and in public life partakes of an ethical character. It follows therefore that the readiest and most expedient method, in so far as adequate resources may be obtained in that way, is the method of taxation. The burden falls, in the last 240 THE SCIENCE OF FINANCE. resort, on the taxpayers, and can in any case be shifted from their shoulders only temporarily by recourse to public credit ; while if resort is had to taxation this burden will fall immedi- ately upon the taxpayers, and what has once been raised by this method need not be raised a second time. But between the two alternatives of an unavoidable resort to loan and a plainly expedient recourse to taxation, there is a middle ground within which there is room for discussion as to the rela- tive advantages and disadvantages of these two financial methods. § 165. Among the objections against contracting a national debt, which the earlier school of theoretical writers were wont to place in the foreground, a prominent one is the apprehension felt about withdrawing capital from industry. This objection is an expression not only of the standpoint of industrial capital, which dominates the older school of thought, but also of a stage of industrial development which had come to an adequate consciousness of its own lack of the capital made necessary by the state of development of the industrial arts and the business methods of the time. This 'same objection, further, involves a protest against that exaggerated conception of the magical potency of credit, which is really open to the criticism that the means for meeting today's fiscal needs can under all circumstances whatever be drawn only from the stock of com- modities on hand today ; no soldier can be fed now with the corn that is to be grown next year, nor can he be armed with the musket that is to be manufactured next year. However, this objection has lost much of its force in conse- quence of the great increase of accumulated capital in all modern civilized states, and indeed the latest phase of the development shows a surplus of capital which has given rise to a condition directly the contrary of the apprehended difficulty on which this objection proceeds. And it is not simply this surplus of capital, by itself considered, that fosters a sentiment favorable to the contraction of public debts. There is among the owners of capital a well-founded conviction of the superior character of ORDER AND SEQUENXE IN THE PUBLIC ECONOMY. 24 1 national bonds as an investment, as compared with the op[)ortu- nities for investment offered by industry. No one who is not infatuated with the point of view of the old school will find any- thing to deprecate in this new departure in the investment of capital, or be inclined to rate speculative enterj^rise above it. As a matter of fact the modern system of national debts has brought into existence a class of investments eminently suited to the wants of a great number of people, and destined to restrain precisely this class of people from rash speculative ventures. Even in the earlier days of public credit and of the accumu- lation of capital, it will hold true that the international character of the money market wen-t far to equalize the discrepancies in the distribution of capital due to differences in industrial develop- ment between different countries, and that the superior character of national securities attracted capital from a distance, which would not have migrated so far for other purposes.' § 166. More serious, it seems to me, is the objection that national debts act, as far as in them lies, to determine the distri- bution of the nation's wealth in a manner which is already favored by the other factors at. work in our industrial age, and which is by no means to be regarded as desirable. The objec- tion is that they serve to strengthen the tendency which, in modern society, makes for contrast between those that have and those that have not, in that they add to the burdens of the por- tionless and increase the income of the property-holding class. A well-regulated system of taxation, even when it requires ' Furthermore, in a country which is rich in capital, the international market for securities serves the purpose of a large reserve fund which can be drawn on in case of a great and sudden- demand for capital. A striking example of this fact also is afforded bv the placing of the French milliard loans during the years 1871-72. Leon Say, in his report, gives figures to show the export from France of foreign securities which were to serve as payment of the war indemnity, that is to say, for the payments made by the new subscribers to the French rentes. Among other things it may be noted that there were paid in Paris during the year 1868, for matured coupons on Italian bonds, eighty-five million francs, while in 1872 only sixty million francs were so paid. Cf. Rapport fait au nom de la commission du budget de 1873 surle payement de I'indem- nite de guerre. {Theory of the Foreign Exchanges, by George G. Goschen ; French translation by Leon Say, 2nd ed. 1875, p. 282.) 242 THE SCIENCE OF FINANCE. great sacrifices for the nation's welfare, should be so contrived as to burden all classes of society, and especially the classes that are best able to contribute, in due proportion. The av^oidance of raising funds by current taxation and a preference for the use of public credit, on the contrary, will not only exempt the property-owning classes from their share in the sacrifice incurred, but the national loans will at the same time afford them an opportunity for advantageous investments, the annually recurring interest charge on which is drawn from the income of society as a whole, and consequently in an especial degree from the great number of people of moderate means, and passes over into the income of the nation's creditors. An example of this occurs in the conduct of the financial affairs of the French government at the time of the French- German war of 1870 and 1871. These extensive loan operations resulted in a considerable addition to the interest charge and a consequent disproportionate burdening of the lower classes, and even to this day no tax reform has been undertaken that would neutralize this inequality.^ It is to be noticed that in this case, as in all cases, the ques- tion is far more as to the conformity of the tax system to the requirements of equity, than as to the desirability of loans in preference to taxes. The tax system wants reform, and so long as this want is not met, it is of no avail to emphasize the short- comings of national loans. Here we come face to face with a fact which needs closer attention. ^ 167. Apart from extreme cases, in which the contracting of national debts is and will always be unavoidable on account of 'The aggregate of the taxes which the French budget for the year 1887 calls for, amoun.ts to about 2600 million francs. Of this aggregate The tax on beverages yields • - - - . - - - - 425 million francs. The sugar tax yields • - 168 " " The salt tax (including duty) yields ------ 33 " " The tobacco monopoly (net receipts) yields - - - . 320 " " Total ... Q^5 million francs. ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. 243 the urgency of a great immediate demand, there is a middle ground within which there is space for the extension of a pro- ductive tax system, instead of a resort to public debt. There is no room for doubt that in the case of the state debts hitherto contracted (and municipal debts as well) no small part of the debt represents what may be called a makeshift made necessary by the inadequacy of the tax system of the time. For in all cases where there can be any question — and therefore exclusive of the cases where absolute impossibility precludes question — as to the possibility of meeting the new demand by augmenting taxes, — in all such cases the question really is as to whether the resulting pressure upon the constituent units of the community is bearable, regard being had to their customary requirements in other directions (cf. ^ 155 above), and this again resolves itself into the question as to how patiently or impatiently the subjective effect on their feelings will be sub- mitted to by the citizens on whom the burden rests. Hence the historical character of the problem. Hence the view which finds in this middle ground the basis of all that development of national spirit which has ripened into a willing- ness to afford such sacrifices as the exigencies of the common- wealth require. The farther advanced a commonwealth is, the more highly developed its tax system, the less will it be compelled to resort, to the expedient of a loan. § 168. There is one peculiar function, and a legitimate one, in our political economy which will always devolve on credit. It is, in fact, the same function that credit performs in private busmess. This function is the maintenance of that elasticity which is necessary to a balance of income and expenditure in cases of a temporary discrepancy between them. For example, if the state habitually pays its officials their salaries at the beginning of each quarter or month, while its receipts from taxes come in only at the end of the quarter, or may perhaps be dela\ed bv difficulties 244 "^^^ SCIENCE OF FINANCE. affecting the taxpayers' ability to pay ; in such a case a dis- crepancy occurs which will have to be provided for. For this purpose there are special forms of credit which are calculated for no greater length of time than the duration of the exigencies which they are intended to meet. A form of loan which has latterly come into great favor for this purpose is that which has spread from England into other countries under the name of Exchequer Bills ; these fall due in a period of from three to six months to one or two years and bear a moderate rate of interest, very much as ordinary securities of corresponding char- acter. A second form is non-interest-bearing paper money which serves the same purpose of a variable volume in the public econ- omy that bank notes do in private business. § 169. Adolph Wagner has called attention to a certain pecu- liar lacuna which the use of the national credit does not ade- quately cover. In so doing he has evidently been influenced by the experiences of the Prussian war management during the last few decades. It is the lacuna which is sought to be covered by a war fund. There is no essential incongruity between the use of the public credit and the war fund. It is by no means inconceiv'- able that in the absence of other sources from which a war fund may be accumulated (surplus revenue from the annual tax- receipts, alienation of property belonging to the state, receipts from war indemnities) a loan might be issued for this special purpose. The point of contrast is simply as to the particular measures which it is thought expedient to employ when the crisis arrives. And as to this point, experience proves that during the initial stage of a war — during that sultry calm preceding the storm, when the expectation, declaration and preparation for war follow on each other's heels — the sudden war demand on the treasury coin- cides with a violent disturbance of credit, and a consequent stringency in the money market. The North-German army (exclusive of the Saxon contingent) required, during the weeks ORDER AND SEQUENCK IN THE PUBLIC ECONOMY. 245 from July 15 to August 3, 1870, no less than two million thalers daily for mobilization and for carrying on the war, that is to say, an aggregate of fully 40 million thalers. As had already appeared in the war of 1866, so now again, the possession of an adequate cash fund, which had been accumulated for this purpose in times of peace, proved itself the most available means of meeting such a contingency, at the same time that it served to strengthen the tone of the general money market, and especially to maintain confidence in the state's own securities. As a result of repeated experiences of this kind, the imperial war fund has come to take its place as an essential constituent element in the German financial system (fixed by imperial statute of November 11, 1 871, at 40 million thalers). So it has come to pass that an institution which at one time, before the development of public credit, the best financiers found indispensable, and which afterward, when public credit had reached a fuller development, came to be regarded as obsolete, has again found acceptance in the theory' and the practice of public finance. A war fund of course finds its limit in the fact that the great waste involved in letting the money lie idle (preferably for as long a time as possible) puts a limit to the amount, so that, for all purposes bevond the immediate expenditure of the first few weeks, recourse must always be had to public loans. The adoption of a system of "extra taxes" for which legis- lative provision has been made beforehand, is essentially a mat- ter which depends on that development of national spirit and of readiness to submit to taxes, which has already been emphasized in what has gone before. Under present circumstances nothing considerable is to be expected from this source. On the other hand it is quite conceivable that at some time in the future special war contributions regulated by law may find a sufficient motive in an enhanced sentiment of patriotism, and may, at the same time, serve to obviate any general panic. 'See also Leroy-Beaulieu, Traite, vol. ii. livre ii. chap. 2, where this matter is dis- cussed at length. 246 THE SCIENCE OF FINANCE. III. THE FORMAL ORGANIZATION AND MANAGEMENT OF THE PUBLIC ECONOMY. § 170. It is very desirable in the case of all private establish- ments, though relatively few have attained the point, that esti- mates should be made out from time to time with a view to the orderly management of the affairs of the concern. As regards the public economy, on the other hand, we have now very gen- erally reached the point, so far as concerns civilized communities^ that an estimate {^Etat, Budget) is submitted at stated intervals and to cover a stated period of time. For the state at large the requirement of such an estimate is made by the fundamental provisions of the constitution ; for communal bodies, as part of the duties of properly constituted state officials. So far as concerns the national finances, the participation of the body of citizens in legislative and administrative matters takes the form of an exercise of control over the regular expendi- tures of the state. The voting of expenditures and revenue, the balancing of accounts by adequately covering fiscal demands,, the decision as to the various kinds of fiscal means to be employed, discussions as to the urgency of different classes of demands upon the treasury, consideration of the claims of this or that demand relatively to the means available, — all these things are matters on which the tax-payers are constitutionally entitled to be heard through their representatives (Parliament, Landtag, Reichstag, Town Council, etc.). Differences in the manner and extent of this constitutional control are therefore due to differences in the fundamental law of the particular nations. To such an extent is this true that many essentially technical features of financial administration have their character determined by political considerations rather than by considerations of expediency. So, for example, with respect to the length of the fiscal period adopted. In view of the disproportionately great trouble involved in an annual repetition of all the labor which the estimate costs the various departments of government and the representative ORDER AMD SEQUENCE IN THE PUBLIC ECONOMY. 24/ bodies that bear a hand in it, it is evidently desirable on grounds of expediency to extend the fiscal period beyond the limits of a single year. But there are other reasons — such as the desirabil- ity of an annually recurring opportunity for the people's repre- sentatives to criticise the estimates of the government, item by item — why annual estimates have as a rule continued to be pre- ferred to estimates covering a longer period. Even the time-tried example of England, the model parlia- mentary government, in favor of exempting the unavoidable expenditures from the requirement of a yearly appropriation,' has so far been unable to find acceptance on the continent, evidently for constitutional and political reasons rather than for reasons of fiscal administration. § 171. It is obviously expedient, as a matter of financial pol- icy, that the periodical estimates should be thoroughly overhauled and passed upon in due conformity to constitutional recjuire- ments, bv a parliamentary body representing the countrv (the state, the city, etc.). The particular manner in which this func- tion is performed in any commonwealth is determined bv legisla- tive provisions regarding the budget. In England a considerable part of the expenditures and receipts is permanently fixed by law, answering to the permanent necessitv that exists for the carrying on of the fundamental functions of the state. Only a part of the annual expenditures and receipts is variable, and is therefore made dependent upon an annual appropriation. Deliberation on the budget takes place only in a full session of the lower house ; which is different from the method usually adopted by parliamentary bodies on the con- tinent, of submitting the estimates to a detailed overhauling by a budget committee and so forestalling and shortening the delib- eration of the whole assemblv. Latterly the English custom has in part been adopted in Prussia, in that certain portions of the ■ Rudolph Gneist, Budget und Gesetz nach detn konsiitutionellen Staatsrecht Eng- lands mtt Kiicksicht auf die deutsche Reichsverfassung, 1867. Cf. Gneist, Englisches Verwaltungsrecht, 3d ed. (1883), vol. i. p. 43 1. 248 THE SCIENCE OF FINANCE. estimates are taken up forthwith and discussed by the whole house, while other and more important parts are first overhauled bv the budget committee. The deliberation in the whole house secures to each member of parliament the opportunity to take part in the revision of the estimates as required by the constitu- tion ; the deliberation by the committee removes the weight of responsibility to that body, probably results in a more thorough overhauling, offers better opportunity for intimate and confiden- tial conference with the representatives of the government, but is at the same time clumsier and less expeditious on account of the necessity of repeating much of the discussion before the whole house. § 172. The submission of the estimates and the deliberation upon them in due accordance with the requirements of the law, as the normal and ordinary provision for each fiscal period, implies an exercise of control over the execution of the scheme adopted for the period in question.' This control partly concerns administrative or executive mat- ters, partly it concerns the legality of items of receipt and expen- diture. For the former purpose, which, apart from a simple supervis- ion of accounts, aims to secure the due execution of the admin- istrative measures adopted, as well as a judicious and economical management of receipts and expenditures, the suitable organ is a central auditing board \^Ober-RecJimmgsbehdrde\, independent of all the other departments, as well as of the department of finance. The progressive development of this sort of control is shown by the increasing independence of this board {^Obcr- Reclmu7igska?nmer) of all the other central organs of the State. Even the absolute-monarchical state found itself obliged to give its superior courts of revision \^Revisionsbehdrdett\ an independent position beside its ministries. (So, for example, in Prussia, Fred- erick William I. instituted the Ober-RecJinungskammer.) It is obvi- ' Cf. the paper " Ueber den Rechnungshof mit hesonderer Rucksicht auf das Deutsche Reich" in the Zeitschrift fiir die gesammte Staatswissenschaft^ 1876, 1877. ORDER AND SEQUENCE IN THE PUBLIC ECONOMY. 249 ouslv for the interest of any monarch to phioe his ministries under the control of an independent authority which shall be responsi- ble to the sovereign alone.' It mav perhaps seem self-evident that the proper body to see that the measures adopted are duly carried out is the representa- tive assembly itself, or a committee of the assembly. But this method, after all, is in the spirit of the feudal state \^stdndische Staat^ (in which the several estates really possessed such special organs of control, apparently for the purpose of defending the interests of one party against the other parties), rather than in the spirit of the modern constitutional state. It is the whole state as a unit that finds expression in the legislative act, so far as this act is established by concurrent action of the government and of the representatives of the people. And it is conformity to stat- ute law that is here in question. It is therefore also appropriate that in this case jurisdiction should be left in the hands of an independent tribunal \Ver'waltungsgerichtshof\. And in view of the very close connection between these two lines of control, the most appropriate body in which to vest this controlling power will be a suitably constituted superior court of accounts \^Ober- RecJmungshof^. This would be a board holding the position of a supreme court of judicature and possessing the qualifications pertaining to that office, together with the resulting attitude of independence, both towards the central government and towards the representative assembly and its parties. 'Cf. Lobe, "Die oberste Finanzkontrole des Konigreichs Sachsen in ihrer organ- ischen Entwicklung von den altesten Zeiten bis auf die Gegenwart" {Finanzarchiv, 1S85, pp. 589-715)- CHAPTER VII. THE VARIOUS KINDS OF PUBLIC REQUISITIONS AND EXPENDITURES \^BEDARF\ Literature. K. H. Rau, Grundsiitze der Finanzwissenschaft. j. Ausgabe (1864). Erste Abtheilung, i. Buck. A. Wagner, Finanzwissenschaft. J. Auflage (1883), 7. Theil, 2. Buck. \. THE DEVELOPMENT OF CONTRIBUTIONS AND EXPENDITURES IN KIND INTO CONTRIBUTIONS AND EXPENDITURES IN MONEY, AND THE LIMITS OF EACH CLASS. § 174. It is well known that, for reasons familiar to every one, the course of historical development due to the division of labor and to technical improvements in industry, has constantly tended away from the employment of barter and payment in kind, and towards the use of money. The public administration has not only taken part in this general economic development, but has distinctly furthered it. It is a mistake, however, as has already been pointed out in the general discussion of economic theory (see vol. i. sees. 246-249) to regard this course of development in the division of labor and the use of money as a supreme law of nature. It should rather be our aim to reach a valuation of the subject con- sidered as an ethical matter and not as a matter of natural law. In the absence of such a valuation from an ethical point of view, we shall simply be amazed at the fact that in the midst of the highest development of modern national life, our financial system has, for some of the most important purposes, retained, or rather returned to, the method of receipt and expenditure in kind. This qualification will of course not prevent our recognizing the fact that the great mass of financial transactions has contin- ually more and more been assuming the form of money transac- tions, just as has been the case with regard to the products and 250 PUBLIC REQUISITIONS AND EXPENDITURES. 25 I articles of consumption in private economy.' For most purposes the public administration, in like manner as is the case in private life, makes use of money as its means of purchase, and it must therefore require the contributions of its members in the form of money. Indeed, the fact serves to mark the character of this development, that it is in times of war, that is to say, at times when the accustomed course of industry is violently disturbed, that to a greater extent than usual recourse is had, and must be had, to transactions in kind in place of money transactions. § 175. But there is also another respect in which the employ- ment of a division of labor and of money transactions is subject to limitations within the sphere of the military activity. Within this sphere whose function it is to build and maintain the founda- tion walls of political autonomy by the development and mani- festation of power, both at home and towards external enemies — which will presumablv have to fulfill this function for a very long time to come ; in military matters, and precisely in their latest developments, the character of the human material required for military service on the one hand, and the special character of the arms, munitions, fortifications, war-vessels required on the other hand, leave considerable room for the employment both of expenditures and of contributions in kind. The most highly developed modern system of defense does not require of its citizens the money with which to hire mercen- aries ; it requires the citizens themselves personally to bear arms, and this for the reason that such general military duty results in a more effective defense than anv and all payments of money for hiring defenders of the Fatherland. But this also is no new discovery on the part of the modern state. On the contrary, the idea of a universal military duty has never been entirely extinguished, from the verv beginnings of national life and through all subsequent changes ; it has only been neglected and lost sight of, and with the awakening of the national spirit it has broken forth with renewed vigor and has set an example that all ■ I may here refer to the Gruudlegting, vol. i. sees. 337 et seq. 252 THE SCIENCE OF FINANCE. other nations, even those which have resisted most stubbornly, have been constrained to follow. And the fact that this phe- nomenon has become such a prominent feature in the life of the modern commonwealth serves to bring out the significance, for the present and the future, of this element which does not par- take of the nature of a money transaction. A second fact of the same character is the extensive factories, navy-yards, fortifications, barracks with their attached cooking- establishments, bakeries, etc., by which the state (the Empire) provides, without the interposition of bargain and sale,' the weapons, munitions, vessels, provisions, which it may require. This is partly due to the fact — frequently underrated — that for purposes of production on a large scale the government may possess advantages equal or superior to those possessed by private industry.^ To some extent it is due to the presence of certain facts of a technical character, such as the possession of exclusive knowledge of new discoveries and inventions in the art of war, which incite to the effort to keep the state independent of private industry. Of course these transactions in kind, in modern financial management, go on side by side with money transactions; the}- occur only, as it were, scattered through the texture of a system of bargain and sale which predominates in the economy of the state in like manner as it does in the general economy of the people today ; but they do, after all, have a definite significance, and are indications of the future course of development. ' At least there is an evident tendency towards supplying the wants of the state with the least possible intervention between it and the prime producer. This is the effect reached by the system which prevails in the German administration of military affairs of making use of military stores instead of a system of purveyors. According to a statement made by the Prussian Minister of War in the German Reichstag, Decem- ber 5, 1888, the wants of 91.78 per cent, of the forces were supplied from the stores, and only 8.22 per cent, through purveyors (this last consisting of small garrisons in places where no stores were at hand). Of the rations for the horses, 94 per cent, were supplied from the stores and only 6 per cent, through purveyors. - Note, as a small but instructive example of the fact, the experiences of the com- munal bakeries of Leipsic as given in the report of Ludwig Wolff, member of the City Council {Schriften des Vereins fi'ir Socialpolitilc) 1888, vol. xxxvii. pp. 19 et seq. public requisitions and expenditures. 253 ii. the personal service required by the state (the civil service). i^ 176. The relation of the state to those persons who consti- tute the living forces of which the state's activity is a product, is necessarily conditioned by the stage of constitutional develop- ment attained; for this latter expresses the relation in which the citizen stands to the formation and execution of the national will. In primitive political organizations where the sphere of the state is small and the public functions are of a correspondingly low degree of development, this relation has a simplicity such as will not serve the purpose of a great complex of functions. At the same time it is to be noted that always after a higher stage of culture has been reached, the influence of democratic ideas, resting as they do on the fundamental concept of a free people S^freier Volksstaat\, leads at least to the effort to maintain a semblance of this primitive simplicity in the relation between citizen and state. Indeed, this democratic idea is never alto- gether lost, so that under every conceivable constitution of the state, in every development of the bureaucracv, some trace of it is discoverable. In any civilized community there will always be two distinct elements in the activitv of those operative. forces that constitute the state a living whole. The one is the element of division of labor between state and society; the other is the element of personal participation of the citizen in the affairs of the state. The latter follows from the claim of every civilized people — especially at the stage of national development which we occupv today — to have some part in the shaping of its own destin)-. The former results from the requirements of the principle of division of labor — valid for all stages of culture — both as conducive to a fuller development of the individual capacities of the citizens and to the efficient performance of the work of society. The overlapping of these two elements gives us that peculiar mixture of the two which characterizes the civil service at the present stage of political development. 2 54 THE SCIENCE OF FINANCE. § 177. This mixture of the two elements assumes a different form under the different national constitutions of the present day. Democracy, as it exists in the Swiss Federation, or in the United States of America, true to its name, seeks to realize the participation of the people in the legislation and administration of the state as effectually as may be. After all the concessions which democracy may make to the principle of division of labor, it still leaves the lines of demarkation of a democratic self- government so vaguely and loosely drawn that the distinction between State and Society is at best a shifting and uncertain one. It is very significant, how, even under a constitution of this sort, the contrast between professional employment in the service of the state and the general participation of the people in state action, asserts itself. In the first place, b}^ the very letter of the constitution and the laws of the land, the actual participation by the people is reduced to the dimensions of a ballot and an election, which, however frequent and burdensome they may appear to the body of the people absorbed in their private business, are, after all, when measured by the standard of a vital popular participation in legislation and government, but a scanty substitute. But far more than appears from the letter of the law does it appear, in the actual political life which has grown up under these forms of law, that there exists an irresistible gravitative force, in con- sequence of which the decisions of this million-headed popular will are really made by comparatively very few men, who have adopted politics as a calling. Whether the ballot be made to apply to general or to special legislation, whether to the selection of subordinate or of superior officials, — there always lies back of the semblance of a decision by the majority the reality of a de- cision by a small number of politicians. In this contradiction between appearances and reality lies the danger to this particular form of national life ; inasmuch as what, under other forms of national organization, is honestly recognized as a necessitv, and therefore need not be hidden from the light of day, will here become the occasion for a systematic falsification of the facts. PUBLIC REQUISITIONS AND EXPENDITURES. 255 But there is one point at which, as a genuine development of the modern age, this form of government takes its place side by side with that form of which it is the exact opposite, viz., the purely bureaucratic state. This is the absolute necessity of payment for all actual work done in the service of the state in a democratic com- munity. Since the attractiveness and honor of this work are not a sufficient inducement, in a democratic society, to attract men of independent means ; since it is rather of the nature of such a society that every household should depend on its own labor for its subsistence ; therefore, work performed in the employ of the state must be paid in like manner as all other professional work. The consequence is a comprehensive system of salaries and allowances ; all the more comprehensive the more highly devel- oped the democracy, and the more fully conscious it consequently is of its divergence from the principle of division of labor that underlies modern societv. Only, the lax organization of this civil service does not admit of any length or security of tenure, which, under the political circumstances, is to a great extent not even desired. As short intervals between elections as possible — in the interest of liberty, — no life tenure, and consequently no pension system. Only in cases where the traditions of earlier times and a corresponding sentiment on the part of the populace, admit of it, is this folly of short terms of service to some extent neutralized by repeated re-election of the same officials. But this does not happen where party lines are closely drawn, and w^here the chance of rich spoils of office makes each recurring election a chase after fresh bootv. § 1 78. Since it is impossible for all to bear a part in the every- day business of the state, it is quite conceivable that even under a democratic constitution — and numerous historical instances go to prove it — an inevitable tendency towards the domination of a few will concentrate authority in the hands of a few wealthy families. These will then come to hold the offices of the state by a sort of hereditary right, without sacrificing the accessories of a democratic form of government ; rather, these latter will be 256 THE SCIENCE OF FINANCE. retained as a convenient cloak for a popular administration of the government at their hands. This would be a case where democracy, either openly or cov- ertly, passes over into aristocracy. In other countries, again, we find, as the outcome of the past development of society and of the national organization in the direction of aristocratic rule, that the aristocracy manages the affairs of the state with but a slight survival of democratic forms. Under the rule of an aristocracy there is no place for the con- tradiction that exists in any democratic society between a nom- inal popular sovereignty and the actual sovereignty of a few on the one hand, and between the universal duty of participation in the service of the state and payment for such service on the other hand. In the place of All, we have, even as a legal fact, only a minority; in the place of a demand for payment of work done for the state, we have the hereditary wealth of the ruling families. Only when this result has been reached, can the State's work be done simply out of inclination for the work, from motives of honor and patriotism, without regard to any economic return. This is the ideal of a free commonwealth; it is the ancient ideal of a life spent in the service of the state and for the state's sake ; it is the grand and undying conception handed down from anti- quity, of a freeman's work, whose spirit instinctively recoils from the thought of a pecuniary motive. These features, which elevate the concept of an aristocracy to an ideal height, serve to direct our attention to the wide divergence between this ideal and the reality. The hackneyed example of such a national constitution is England. For centuries past there has been in England a ruling class backed by great wealth, more particularly by landed prop- erty. The better element of this class has habitually spent its life in the service of the nation, in the minor civil divisions per- forming the duties of local self-government, in the central gov- ernment constituting the legislative and executive organs. But even this favorite example manifests the shortcomings PUBLIC REQUISITIONS AND EXPENDITURES. 257 of an aristocracy under the conditions existing in a great modern state. For, in the first place, the ethico-political question has hitherto remained an unsettled one, as to how far the aristocracy of England has actually given its life to the service of the state, and'not rather made the state a means of furthering its own class interest, so that its ostensibly gratuitous service may, in point of fact, have been dearly paid by the English nation. In the second place, this aristocratic official system has eventuated in a svstem of salaried offices, with the pay calculated on the scale of an aris- tocratic standard of living, whose character of permanencv, together with the exacting work and the considerable expense involved, has made a high salary appear indispensable (embas- sies, diplomatic positions, high judicial positions, etc.). In the third place, it lies in the nature of an aristocracv that, while it will take up its abode in the higher altitudes of the official svstem, it will leave all the lower lying regions to the care of an unpropertied and consequently paid class of professional officials, except so far as the moderate duties of office in these lower stations and the immoderate salaries attached to them may make them available as a provision for younger sons and younger brothers. But when it happens — as has happened in England during the last generation — that the stress of the modern democratic movement acts constantly more and more to displace such an aristocratic constitution, and to develop a feeling of distrust on part of the majority of the people towards the traditional aris- tocratic administration of the affairs of state — in such a case the system of salaried professional officials will irresistibly gain ground in parish and in county affairs, as well as in the numerous administrative bodies required by the increased demand of the new life of society. So that the end of the development is the pavment of members of parliament — discontinued centuries ago, when the transition was made from a democratic to an aristo- cratic coristitution of parliament. Herewith the transition is made to the "functionary" state, which is the form that must be adoj)ted if the modern state is to 258 THE SCIENCE OF FINANCE. meet the requirements of our democratic society in a satisfactory^ manner. § 179. The functionary state \^Bcamte?istaaf\ (often slight- ingly spoken of as a "bureaucracy") is the logical outcome of circumstances. The principle of the division of labor demands a specialized, professional civil service in order to an adequate performance of the increased duties due to increased social wants, just as advancing civilization gives rise to new employ- ments and professions. Germany, in its development since the close of the Middle Ages, presents the classic example of a functionary state. The peculiar character of such a state lies in a frank acceptance of the fact that the profession of the civil service, just as any other profession, must afford a livelihood to the people who fol- low it. The civil service takes its stand on the pay-roll of the country, and this latter, whether it goes by this name or by any other, must, economically considered, in the last analysis, fall under the concept of Wages.'' There are views held on this point somewhat at variance with that expressed above. In part these rest on a confusion of genus and species, in that they place the concept of allowances, pay, salary, in contrast with wages, while all these are prop- erly to be classed under the general head of wages ; in part they rest on the notion that the peculiar organization of the working force of functionaries is an element sufficiently charac- teristic to differentiate the maintenance afforded by the pay-roll, graded as it is by rank, from wages ; while this matter of organi- zation is, in point of fact, nothing but a question of detail, with respect to which the practice in the civil service differs from that of the competitive labor market. The substratum of fact on which these views rest amounts to this, that there are certain special constituent elements in this class of work and wages that are still struggling for recogni- ' Cf. Zeitschrift fitr die gesammie Staatswissenschaft, 1881, pp. 52 et seq. Also Ihering, Zweck im Recht, vol. i. pp. 186 et seq. (2nd ed., 1884). Adolph Wagner, Finanzwissenschaft, vol. i. p. 340. PUBLIC REQUISITIONS AND EXPENDITURES. 259 tion as such, due to the fact that an undertrained economic speculation has denied them their proper place. There is one point with respect to which economic science, in spite of much vacillation and many misconceptions, has in the main been fairly consistent from the early days of scientific writing down to the present. This is the principle that the rate of wages rests on the necessary, traditional standard of living proper to the persons concerned. From Turgot, Smith, Ricardo, John Stuart Mill, Cairnes, down to the latest authorities in the science the principle has been uniformly accepted that the "nat- ural" price of labor depends on the cost of living of the laborer. The advance in this matter — and this is true in general of the position of the science today as compared with a century ago — consists simply in a recognition of the fact that this natural price is measured by a moral standard. The pay which the state allows its functionaries is nothing else than this. It vouchsafes a livelihood commensurate with the requirements of rank, in accord with the postulates of the scien- tific doctrine of wages. So also the provision for old age, for infirmity, for widows and orphans, is nothing but a legitimate extension of the principle of a graded standard of living so as to apply to the household, such as has long been recognized by the commonly accepted theory of wages. The facts of everyday life likewise go to show that prepara- tion for, and application for admission into, the civil service is chosen or avoided in very much the same fashion as other ways of earning a livelihood. The question is whether the civil serv- ice offers greater economic advantages than these other similar occupations. As is sufficiently established by repeated instances in German countries, every increase in the pav offered by the state attracts a greater number of candidates, while conversely, whenever the offer of the state falls short of the inducements offered by business, this number decreases. § 180. The nature of wages is bv no means such as to exclude the possibility of the presence, in the work for which 260 THE SCIENCE OF FINANCE. they are paid, of psychological factors that are not strictly of an dconomic character. The fact that the extra-enonomic factors do not predominate — and for the reason that an economic (pecuniary) basis is indis- pensable to the work so long as it has no economic support from an independent, extraneous source — is for the present purpose altogether decisiv^e as to the character of the state pay. The graduated livelihood which the state guarantees expresses an unreserved acceptance on the part of the state, of the economic necessity formulated by the theory of wages. If it were true, as has been asserted, that the emoluments of ofifice are of a "mixed" nature — being made up partly of honor and partly of money — then it would have to hold true that a deduction should be made from the money payment because of the honor. But that position is manifestly untenable. It may happen that the state declines to meet its full obligation in this respect ; and this, again, is possible only in case the aggregate income of the functionary is made up of two distinct economic elements — in case the salary is helped out by independent means. But this latter is an aristocratic element which the bureaucratic state is by its nature estopped from counting on. Are we to say that the honor of the office of an English Lord Chief Justice is so much less than that of a judge in a Prussian provincial court, as would be indicated by the fact that the former receives an annual salary ten or twenty times as great as that received by the latter ? Or is the honor of the position of Archbishop of Canterbury so slight that it is necessar}- to make good to the incumbent, in his notoriously large revenue,, what is lacking in the way of honor in his position, as compared with the Prussian Superintendent General ?' 'The Lord Chancellor of England receives annually £10,000 ; the Lord Chief Justice receives £8,000 ; each of the superior judges of the Court of Appeals £6,000 ; all other superior judges £5,000. The Archbishop of Canterbury receives £15,000 ; the Archbishop of York £10,000 ; the Bishop of London £10,000. {Whittaker's Almanack, 1889.) On the other hand, the Superior Judge of a Prussian provincial court \^Oberlandesgerichtsrath {A'ammergerichtsrath)'\ receives 4800-6600 marks (£235- £324), with an allowance of 400-900 marks (£20-£44) for house rent. The President PUBLIC REQUISITIONS AND EXPENDITURES. 26 1 \ ~ This can of course not be taken seriously. The truth is rather that the entire notion of such a " mixed compensation" is due to the impression produced by the scantiness of our German salaries, and this latter is in its turn a result of the very general poverty of the German social economy and of the German finances. In placing the salaries of its functionaries as low as we find them, the German state has been guided partly by the traditional standards of living in vogue in our society, and partly bv a parsimony imposed by the scantiness of its resources. The view that a payment in terms of "honor" may possibly replace the maintenance due its functionaries is entirely unworthy of the state. There is but one alternative possible : either the state, in violation of its obligation toward its professional official class, requires them to get along on half pay, or it counts on a supple- mentary income from their private means — a presumption which will hold only in exceptional cases. § i8i. But even if what has been said above sufficiently indicates what is the character of the salaries of officials under normal circumstances, at the same time that it clears up the confusion involved in contrasting salaries with wages, it is to be noted that the same factors are decisive in fixing the salaries of civil servants as in fixing the wages of other occupations ; especially is this true when they are compared with wages in the liberal professions. There is one vocation which, in Germany, is always crowded, and which, apart from a few notable exceptions, offers a miser- ably scanty pay for very exacting work. This is the vocation of the trained musician. The necessary prerequisite for this work is a special endowment ; and, conversely, this special endowment constitutes a powerful incentive to adopt this vocation. This of such a Supreme Court of Judicature receives 14,000 marks (£686) ; a judge of the supreme court of the Empire 12,000 marks (£588) ; the highest judiciary in the German Empire, the President of the Supreme Court, 25,000 marks (£1225), besides lodgings. A Superintendent General receives 9,000 marks ; the President of the Superior Evangelical Ecclesiastical Council 21.000 marks (£i,a3o)r- 262 THE SCIENCE OF FINANCE. subjective incentive of talent urges to the choice of this vocation in spite of the inadequate pecuniary results to be obtained. This incentive is also greatly reinforced by habit and by the example of parents from whom the talent and the profession have been inherited. Something similar is to be observed with respect to the official class, and especially in the German service. The part played in the musician's profession by artistic endowment is in the case of the civil service filled by a lively sense of loyalty to the state, which has become a heritage in official circles. Tradition handed down from generation to generation con- stitutes a nexus between the man and the state that persists under circumstances where, for the majority of men, such attach- ment has been lost. In like manner as the artistic leaning urges to the acceptance of a meagre livelihood, so in this case the ingrained sentiment of attachment to the state renders the individual to a certain extent unable to decline the offer of a scanty living. Indeed the traditional union of these two things, of poverty and attachment to the state, has in a great number of instances brought forth fruits which were quite marvelous in their way. Still, all this is not as it should be. It is unworthy of the state to take advantage of this offer of services which, under given circumstances, may be coupled with an exceedingly low standard of living. It is, however, by no means to be asserted that the excessive number of candidates for the civil service today are uniformly to be fairly compared, in point of disinterestedness, with the musi- cians spoken of above. The fact is, rather, that in very many cases the predominant motive in the choice of their calling is a pecuniary one, often without any admixture whatever of nobler motives. ' § 182. If these considerations bring us to the conclusion that the person. 11 service required in a bureaucratic state, even that required for the higher and the highest functions of the state, PUBLIC REQUISITIONS AND EXPENDITURES. 263 should be paid for according to the general principle of wages, there still remains a further point for consideration. We may properly speak of difference in the psychological character of different kinds of labor. The higher grades of labor, the "liberal" professions, are more reserved about the matter of accepting pay than other forms of labor. Since this is a phenomenon of a psychological nature, it is influenced by the course of historical development. It may be maintained that in the sentiments with which we today regard the service rendered to the state (and services of a similar character) there is a sense of something not adequately covered by a pecuniary reward, which in a certain sense discountenances such payment and crowds it into the background, as being an unwelcome necessity which is not willingly recognized in words. This thought of pecuniarv reward is repugnant to a delicate moral sense, which hereby pronounces in favor of a civil service freed from the constraint of existing social conditions. There is at least one thing forcibly suggested by the presence of this social constraint, namely, that the payment for services rendered to the state should be made in such a form as would to the least possible extent offend this delicate sense of propriety. In like manner as at an earlier stage the state will usuallv bind up its duties with the private interests of its agents, before it has reached the point where it acquires an official class possessed of a due sense of devotion to the public service — so also when a salaried civil service is employed. Here this earlier stage of development is represented by the fee system, which makes the concession to human infirmity of attaching to each particular act of the state official a particular recompense, and by this means keeps him to the performance of his work when it would other- wise be neglected. This piece-wages system, which is very confidently recom- mended for adoption in the lower grades of work, is opposed to the very nature of the higher grades. If these latter cannot bt, made gratuitous ("liberal" in the ancient sense o' 'le word) they must at least not be made to submit to the stigma that they 264 THE SCIENCE OF FINANCE. are performed piece by piece for mone}'. The man must devote his entire energies to the serv^ice of the state as such, and the state's provision for his maintenance is to be carefully discon- nected from the performance of the state's work. The developed constitutional form of the state, as contrasted with the method of psrsonal government, meets this requirement. The annual salary paid from the public treasury enables the state official to live his life for his official duties alone, and free from all pecuniary concern. Wherever we find remnants of the fee-system still existing today, they are survivals of the old order, of the old state, which has yet to make way before the progress of modern ideas. They are antiquated abuses which the self-seeking functionaries clothe in a garment of reverence, while they ought to perceive that in so doing they are degrading their own dignity far below the gen- eral level of the modern state and its functions. § 183. With the adoption of the system of fixed salaries for the professional civil service, graduated according to the stand- ard of living appropriate to the rank of each (and similar "pro- visions for the salaries of communal, provincial and other like officials), a distinction which is characteristic of the aristocratic method of filling offices disappears, viz., the distinction between the superior, the honorary offices proper {li07wres, magistraUis) , and those commonplace services performed for the state and the commune that are paid in the same manner as the meaner occu- pations of everyday life. The distinctions with which we are here concerned are those which depend on differences of grade in the services rendered by the functionaries, together with the consequent differences in the qualifications required of the candidates, and the different ways and means by which the state makes provision for a grad- uated livelihood in keeping with the standard of living proper to the rank of each.' ' Here, as in so many other places, the narrow limits within which our discussion is confined makes it necessary to refer, for particulars of legislation and statistics, to the exhaustive and painstaking work of Adolph Wagner. See especially loc. cit. sees. 152-167. PUBLIC REQUISITIONS AND EXPENDITURES. 265 The various distinctive classes of work re(]uired by j)ublic service depend, just as do the different kinds of work offered in the labor market and the higher grades of work in industrial life, on a difference in intellectual endowment and training. Just as in the ordinary demand for labor there is a gradation of services from the simplest mechanical occupations uj) to the highest classes of intellectual labor, so also in the service of the state and of the commune. Just as in the general industrial organiza- tion this gradation of services runs j^arallel with a gradation of society according to wealth, breeding, education, — so also here. In both spheres alike do we therefore also find the same connec- tion between the rank of the social class in question, and the length of the period of education and the beginning of profitable labor. The lower the culture, the lower the social class, the earlier do the necessities of life put in their claim and so shorten the period available for the education requisite to independence, and extend the years of gainful labor backwards into childhood. The higher the culture, the more elastic is the pressure exerted by the necessities of life as against the requirements of the education and preparation necessary for the person's life-work, and the more time is consequently allowed for meeting these requirements. But inasmuch as the ideal of development in this direction would lead us tp the aristocratic ideal which discountenances any pecuniary object in the professional service rendered the state, it follows that the ideal of the bureaucratic state lies within nar- row limits — limits marked off by the exigencies of the economic situation, frequently opposed to the (juasi-aristocratic ideals which influence the body of state officials and even the national admin- istration itself.' § 184. Under the influence of such ideas as these it has come about that provision for a properly graduated scale of mainte- nance for the official class, in spite of the many improvements ' A discussion of this question from the economic point of view is to be found in Ernst Engel's paper on Der Preis der Arbeil (1866). 266 THE SCIENCE OF FINANCE. that have been made, remains so very inadequate, even in such a classic example of a bureaucratic state as has been developed in Germany. The difficulties of the matter are, of course, considerable ; very much in proportion to the grade of work and the prepara- tion required. In the first place, there is the difficulty of maintaining an equilibrium between the personal services actually required, both as to quantity. and quality, and the supply, — in view of the already excessive inclination to enter the civil service, which would be increased by ever}- improvement made in the scale of mainte- nance of the official class. In point of fact, the number of can- didates for the civil service has been excessive, with the result that the service has been underpaid and the period of prepara- tion and waiting has been undulv lengthened, while the require- ments in the way of qualification for the work have declined in a corresponding degree. In the second place, skilled and specialized work in the civil service is of such a nature as to prevent its being begun very early in life or continued down to a very late period. A letter- carrier in the service of the German Imperial Post-office might very well enter the service as soon as he had passed the primary school and had devoted a few additional years to the develop- ment of his physical and intellectual energies. He might, with- out detriment to the service, continue in the same occupation, supposing his health to be normal, until old age. It is otherwise with respect to the higher functions of the government — in the administration of justice and other like offices. The difficult character of the work to be performed requires a preparation in school, university and practical experience, together with the passing of the necessary state examinations, such as to extend the period of education (taken in the broadest sense) down to the twenty-eighth or thirtieth year. And then it is also true that the period during which these hard-won intellectual and moral powers can be employed to the best advantage is a limited one and does not reach anywhere near the termination of life, although PUBLIC REQUISITIONS AND EXPENDITURES. 26/ it is true that in actual practice they frequently continue to be employed until a very advanced period. There i.s but one of the higher professions in Germany in which this last requirement is, on the whole, lived up to with considerable strictness. This is the officers of the army. The excellence of the body of officers as a whole is due to the fact that a sifting process is constantlv going on, that a great portion of the officers are weeded out at a comparatively early age, in the prime of manhood, and that only in cases of very high position, with men of unusually good connections, is that indul- gence exercised which is the rule in the higher grades of the civil service proper. The severity of the strict requirements in the case of the army officers, only, to a slight extent affected by an early partial provision for the young lieutenant, calls attention to the shortcomings of the state in the matter of adequate pro- vision for its officials ; just as connivance at the continuance in office of superannuated and infirm functionaries does in the civil service. The fact that an officer is past usefulness for his profession before he has reached his fiftieth year, and that this is not the exception but the rule for the majority of the members of the profession, imposes on the state the dutv of a generous provision for such cases, in place of the inadequate pension system hitherto employed ; just as the retention of office by an infirm judge after his continuance in the serv- ice has become detrimental to the interests of the state should be prevented by such a pension system as will afford an economic justification for a seasonable removal from office. If it is further borne in mind, as Engel, particularly, has impressively shown, that a great part of this functionary class and of the army officers is recruited from the same social class generation after generation, the difficulties in the way will become sufficiently evident, and the problems which the state has vet to solve in the matter of an adequate maintenance of its servants will be seen to be stupendous. 268 THE SCIENCE OF FINANCE. III. THE FINANCIAL CHARACTER OF THE SEVERAL BRANCHES OF THE ADMINISTRATION. S 185. A discussion of the fiscal demands of the several branches of national and communal administration leads unavoidably into the technicalities and details of each of these different admin- istrative functions, and so out of the sphere of financial science proper and into that of what has latterly (following the exam- ple of Lorenz von Stein) been called Administrative Science \Verwaltimgslehre\ If, consequently, such a discussion does not properly belong in the science of finance we may surely omit it here, since the present purpose is to present in brief space and as concisely as may be, the leading features of the Science of Finance proper. Still less do I feel myself tempted in this connection to go into the customary statistical comparisons of one time and coun- try with another. Such comparisons seem to me to be much better adapted to serve as material for a yet unwritten manual on the subterfuges of statistics; so persistent is the practice of comparing things essentially incommensurable, so constantly does this method lend support to those deplorable misconceptions that claim statistics as an infallible witness one day and treat it with ridicule the next. What is in place at this point is a consideration of the differ- ent financial character of the various branches of state and com- munal administration. . On taking a survey of the aggregate of the divisions and ramifications of the administration of a modern state, we find that the various "ministries" which have the oversight of differ- ent public functions for the most part look to the ministry of finance for the requisite fiscal means ; this latter standing to the other ministries in a relation similar to that of a head of a house- hold towards his family. This relation of dependence on the ministry of finance, however, does not hold to the same extent for the various departments. Indeed, certain ones of them are in the fortunate position of carrying on an important administra- PUBLIC KEQUISITIONS AND EXPENDITUKES. 269 tive work for the community without having to require any of the means for their purpose from the ministry of finance. The operation of their own branch of the administrative machinery produces the fiscal means which they need, and even much more than they need. Other branches of the administration are at least able to cover part of their expenditure by means of the receipts for the services they render. Still others, however, do nothing, or as good as nothing, towards meeting their own expenses. It goes without saying that in this matter of a greater or less degree of financial self-sufficiency, the decisive consideration in a modern civilized state is the c[uestion of expediency and equity, as within the sphere of the particular administrative department in question. The norm is not now, as in the nature of the case it was with the undeveloped state, a crude fiscality, which, on account of the difficulty of finding a productive system of taxa- tion, exploited every state function indiscriminately as a source of fees. § 186^ If we take for the basis of our discussion the modern Prussian-German administration, we find that the management of Prussian state-railways is far and away the foremost of those branches of the administration which satisfactorily perform the public service required of them and at the same time fully meet their own expenses out of the receipts from their own business. The roads have by no means been built by the state, or taken out of the hands of the stock companies and placed in the pos- session and management of the state for fiscal ])urposes. They have come to constitute a department of the national administra- tion as a logical consequence of the universal customary right of roadway ; in virtue of which, in order to best subserve the pur- poses of the public business, the control of the public highways has been withdrawn from private hands and placed in the hands of the public, for the reason that it has been found by experience that the frequent and varied points of conflict between the com- mon interest in the means of communication, and th& interests of 270 THE SCIENXE OF FINANXE. private speculative enterprises, can be properly controlled only by public management. But the state is more especially urged to this position by the following considerations. In the course of time, the state will again and again find itself obliged to take the part of such portions of the country and such lines of communication as do not promise a sufficient profit to attract private enterprise. The result is a contrast between a dividend-paying private railway system, and a deficit-bringing state railway system within the same country. This contrast can be done away only by means of a unified state system which shall include both. In the second place, in an age which makes every improve- ment in the mechanic arts serve its military purpose, the railway is indispensable to the state on strategic grounds. The state is induced to assume direct administration of the railway system not only in order to have unhampered control of the lines in case of mobilization and war, but also in order to the construction of the shortest lines and the lines most desirable for military purposes. The situation demands an expenditure in the interest of the com- monwealth as a whole — a purpose for which private enterprises are not undertaken. In the third place, the traffic of every section of the road requires careful attention on the part of the railroad officials, whether the business of each particular section is great or small, whether it is more or less lucrative in the aggregate. The details of transportation are so varied, and the interests involved are so great and man)^ that the business cannot safely be made depen- dent on the degree of lucrativeness. Such a careful supervision requires sacrifices ; and this fact is the reason why the interested parties demand a state railway system. This fact, that part of the business of the railroads has to be done at a sacrifice, involves the danger of class discrimination at the expense of the community, but this danger will have to be guarded against by proper precautions. But if the administration of a state railway cheerfully assumes all these losses, and still is able to make the excess of its income PUBLIC REQUISITIONS AND EXPENDITURES. 27 1 not only cover its outlay, but even run up a surplus in addition, which may be applied to the expenses of other branches of the national administration; if it can do all this without laying itself open to merited censure for discrimination ; then it may truly be said to have reached the limit of the attainable in the way of financial independence on the part of an administrative depart- ment.' § 187. The case of the post-ofifice is much the same as that of the railways. 'The Report of the Prussian Minister of Public Works to the King (1888) contains the following statement: "Although the industrial situation of the country and the development of the traffic during the last ten years cannot be said to have been extra- ordinary, still, the surplus receipts of the state railways during this period have not only sufficed for the payment of interest and the discharge of the entire debt representing railway capital, as fixed by the provisions of the law of March 27, 1882, but have also afforded a further surplus aggregating in round numbers 330 million marks, which has been applied partlv to meet the other expenditures of the national budget, partly to the further discharge of the national debt, or to balance unsettled accounts. To this is to be added another 56 million marks which, in accordance with the provisions of the above-mentioned law, is to be considered as the surplus of the years 1880-81 and 1881-82. If to this sum is added the funds which the acquisition of the private lines has released from their former destination and placed at the disposal of the state, aggregating 182 million marks, as also the 98 million marks which the national railway adm.inistration has applied, out of the receipts of the current fiscal year, to the systematic payment of the preferred bonds of the railways acquired by the state, we have an aggregate of 666 million marks. Against this is to be set down expenses of some 687 million marks provided for by special loan bills since the year 1879, for the building of new lines and the extension and completion of the plant. It need not be pointed out that %vhat still remains of this amount is much more than covered by the expenditures for payment of interest and discharge of debt. It may therefore be maintained that the extensive building operations of the state during the last ten years might approximately have been met out of the reverted funds and the railway surplus left over after payment of the permanent expenses and the interest on the debt representing the capital of the railways, without resort to a national loan, if only this surplus had been left at the disposal of the railway administration, and not diverted to the general expense, of the state. If the surplus receipts of the [Prussian] Railway Administration during the last ten vears are compared with the sums applied by the National Debt Bureau [S/aa/s- schnldeuverii.?^ Grundsdtze der Steuerpolitik und die schwebenden Finanzfragen Deiitschlands und Oesterreichs (1880). Robert Meyer, Die Prinzipien der gerechten Besteuerung in der neiieren Finanz- wissenschaft (1882). I. THE RIGHT TO TAX AND THE OBLIGATION TO PAY TAXES. § 192. The evolution of the right to tax on part of the com monvvealth, and of the liability to taxation on part of the individ- ual members of the community, goes on pari passu with the evolu- tion of the state itself, as the conditions of its development are the same. The relation of the individual citizen to the state generally, as well as the special relation of his participation in the covering of the public expenditure, depends, after a certain stage in the development of any nation is passed, on the degree of the inti- macy of connection between the whole and the individual. /This connection will soonest find a lodgment in the consciousness of the members of the community in cases where the group is a small one — where the interval between its center and its environ- ment is consequently slight. But inasmuch as the inevitable 285 286 THE SCIENCE OF FINANCE. trend of history is toward a progressive widening of the social groups and a continued increase of the population comprised in each group ; since this course of development goes hand in hand with the growth of the demands of advancing culture and the increasing ability to obtain the means of subsistence ; there arises a discrepancy between the circumstances that condition the development of this connection and those which condition the advance of culture. A discrepancy of the kind which we observe at various stages of the historical development, and which also presents itself for solution in more than one direction at the hands of the nations of the present day. The tax system of the German cities of the Middle Ages and succeeding centuries is the correlate of that political maturity which here first developed itself, in these oases of political liberty as it were.' Machiavelli^ accords high praise to the republican vir- tue with which the ancient property tax of these cities was duly paid; and we find survivals of it (in Bremen) in force even in our day. Outside the city republics, the idea of an obligation to pay taxes finds acceptance only very slowly, in the course of the struggle of a developed concept of the state against the indi- vidualist claims of a constitution based on class privileges. It is true that even as early as 1664, speaking' from the standpoint of the absolute state, J. F. Horn says :^ optime sibi constat respublica in qua imperantur tribiita, 7ion rogantur. But about the same time (1654) the delegation of Braunschweig-Wolfenbuttel in the Ger- man Reichstag declares it "an immutable principle that taxes and imposts are fundamentally at variance with the nature of a commonwealth ; inasmuch as it is only with a view to the con- servation of one's effects that one enters into civil relations; men become citizens precisely in order to be able to retain their belongings in peace and security."^ And even as late as 1782 ^Qi&xV^, DeiUsches Genossenschaftsrecht, vol. ii. (1873), p. 698. Cf. Andreas Ileus- ler, Ursprung der deuischen Stadtverfassting (1872), pp. 218, 251. ^ De republ. lib. i. cap. jj. 3Politica, p. 316. ^ K. H. Lang, Histoi-isclie EnHvickelung der Tetitschen Steiierverfassiingen (1^93) p. 206. THE JUSTICE OF TAXATION. 287 the Lord Bishop of Salzburg was rebuked by a conclusum of the High Court of Judicatiye for having presumed to assert that in matters of taxation the will of the sovereign was the only law, and that taxation was one of the royal prerogatives.' The systematic thought which prepared the way for the state and the public economy of the nineteenth century made its first decided step in advance at this point. § 193. The Political Philosophy and the Political Economy of the era of the enlightenment erected an ambitious structure, in which the motives of the individual are claimed to be in full har- mony with the interests of the community. The result of their labors is an imposing scheme, a sort of ideal to be worked out practically in the development of a new concept of citizenship. The speculations of these theorists disregarded the differences which divide the concrete man, whom the earlier era transmits to the new, from the great abstract concept of the commonwealth. For more than a hundred years past, science has been at work to enforce the consciousness of the duty of tax paying, and there- with to further the development of a fuller sense of citizenship. And it is never to be forgotten that in the earliest beginnings of an independent science of economics the point of departure was the subordination of the economic individual to the concept of the state, and therefore to the idea of taxation. At this point the German Cameralists are at one with the French Physiocrats. Justi^ savs, to cite but a single utterance out of many that we have from this eminent man : "There isnodoubt whatev-erbut that the subjects are in duty bound to render this contribution towards the great expenses of the state ; the private property of individ- uals, in so far as the common welfare of all subjects unites them into a single body or moral person, is, at the same time, the com- mon, though not immediate property of the state, and the state is therefore fully competent to make use of this its mediate prop- erty for the purposes of its own welfare whenever its immediate ' K. H."Xang, p. 232. '^ Staatnoi^-thschaft (1755), vol. ii. p. 288. 288 THE SCIENCE OF FINANCE. property is insufficient. Since the subjects have once volun- tarily organized a commonwealth for the furtherance of their common welfare, they cannot refuse the means required for the purpose .... so that they are bound to contribute towards all proper expenditures and necessities of the state, not only a part, but the whole of their incomes, and even, in cases of extreme necessity, to place the body of their possessions at the disposal of the state . . . ." The Physiocratic theory of the net product, which is the corner- stone of their structure,^ is but an expression of that idea of the state which dominated all their economic thinking. (The same is true of the German Cameralists, cited above, who wrote in the time of the Physiocrats.) As is the case with so much else, this doctrine too has been laid at the door of the later political economists of the English school because neither the origin of the doctrine nor its historical connection was known. Its con- nection was this, that private economy figured as the foundation of the state's finances and the prosperity of private industrv was regarded as the basis of a productive tax system. The idea of the rising absolute state, according to which men are but the ways and means for the purposes of the state, was taken over by the phil- osophy of the new economists. It is true they lay down new principles for a rational system of taxation which is to clear away the old empiricism ; but the course of argument, which con- ceives of private industry as the means and the economy of the state as the end, is the same as ever. Hence the peculiar views, so foreign to us today, which are frequently misconstrued when expressed by the later theoretical writers on the doctrine of the net product. Quesnay, for example, says:^ "It is not so much men as riches that are wanted for the development of a country ; for the greater the riches employed in agriculture the fewer men will it employ, the more will it prosper, and the larger a net product will it yield." Whereas a numerous peasant population 'Cf. vol. i. sec. 424. "^ Maximes generales du gouvernement economique (1758). Ed. Daire, p. ^\. Cf. also p. 10 1 et passim. THE JUSTICE OF TAXATION. 289 produces but little more than the necessary costs of cultivation, and can scarcely afford the lightest tax. And in order to make the close connection between produc- tion and taxes perfectly clear,. Quesnav says in a neighboring passage in the same work :' " Next to the means for cultivating the soil, it is the net product and the tax that are the things most urgently needed by a state, in order to protect the subjects against scarcity and against the public enemy, and in order to maintain the prestige and the power of the monarch." In beautiful accord with these ideas of his time, the German poet shows us the ideal of the modern citizen \^Staatsmenscli\ as contrasted with the Phil- istinism of the olden time.^ Just as he alone, says Lothario, is a good father who first serves his children at the table, so is he alone a good citizen who lays aside what he is to contribute to the state, before affording any other expense. But Werner assures him that he has never in all his life thought of the state. § 194. In the state of today, the state's right to tax and the individual's obligation to pay taxes are a matter of necessity, and correlated with this necessity is the external constraint to pay taxes. This necessity rests on the universally accepted idea of the state and of the national economy, and the varying require- ments of a modern national constitution and the rights of popular representation which it specifies do not limit, but only confirm it. The right of granting taxes by a representative body does not imply a lessening of this requirement, but only provides for a discussion of the kind and volume of the growing national wants, and of the taxes necessary fo meet them. This element of coercion — the expression of the consciousness of the necessity of the payment of taxes in the modern state — distinguishes the tax liability of today from the shifting phases of the state's finances in earlier times. It is no longer possible as was the case down to the end of the eighteenth century, and even later,^ ' Maximes, p. 93. = Wilhelm Meister, Werke ( 1828 ), vol. xx. p. 147. Cf., among others, for the state of Wurtemberg, G. Riimelin, Reden und Aufsdise, A'. /". (1881 ), p. 450. 290 THE SCIENCE OF FINANCE. for the state to place its dependence in its own domanial posses- sions. This is the most convenient manner of obtaining public revenue, for it does not arouse the citizen's slumbering sense of duty towards the commonwealth. In the constitutions and the tax leg- islation of many modern states this form of income is still retained as the normal basis of the public finances, very much as a tale that has been handed down from the olden time. It is no longer possible to make use of the circuitous method of government prerogatives, which seeks to obtain the needed revenue by humoring the individualistic notions of the citizen in offering its services in a palpable form and requiring payment for them. It is no longer possible to depend on taxation by voluntary extraordinarv grants, with their narrow, anxiously specified time- limit and their specific appropriation to certain definite, tem- porary purposes.' For the modern state the tax and the national finances are indissolubly bound up together. The possibility of a change lies entirely in an alteration of the relation subsisting between private economy and the public economy. So long as private property continues to be the fundamental institution in modern society and the basis of industry and of the public econ- omy, the tax must also necessarily continue to be the foundation and the corner-stone of the public finances. The socialism embodied in the radical party programs of today is quite right in regarding the system of taxation which they demand as nothing more than a part of the "transitional meas- ures" w^hich are intended to further the interests of the laboring proletariat; abolition of indirect taxes, exemption of a subsistence minimum, a single progressive income tax for state and commune — all these are measures calculated to serve the social-democratic class interests only so long as the existing legal relations of our economic system endure. These measures presume a national and communal fiscal system which depends on private industry and on private production carried on with private capital, and ' Cf., with respect to taxation under the direction of the estates, the exhaustive investigation of K. G. Kries, Historische Enticickluiig der Steuet"'erfassung in Sclile- sien unier Theilnahme der allgemeinen Laudtagsversam/nlungen, ein Beitrag zur Geschichte der scklesischen Stiinde (1842), especially pp. 5 et seq. THE JUSTICE OF TAXATION. 29 1 which therefore draws its revenues from the same source as pri- vate establishments, in so much that it requires its share of the means of subsistence from the latter. And this share is the taxes. So soon as socialism has traversed the region of transitional measures, it abandons the institution of jirivate ownership of pro- ductive capital, and therewith it abandons the method of produc- tion by private enterprise. Under the socialistic method of pro- duction all the incomes of private individuals arc transmuted into official salaries drawn from an all-comprehending state activity. The ideal of the corning commonwealth and of the coming national economy becomes identical with the type of the primitive national economy, with its comprehensive national possessions and its revenue drawn from them. For the present, and, in point of actuality, for the future as well, private ownership, and therefore the necessity of the tax, remains. This logical consequence should not be lost sight of by the political parties that wish to preserve the state. II. THE PRINCIPLES OF EQUITABLE TAXATION. § 195. The general principle being admitted that each indi- vidual private economy is in duty bound to contribute to the taxes, there remains for discussion the more difficult question as to the method by which this great multitude of dissimilar private establishments are to be laid under contribution to meet the expenses of the general public economy in such a way as to dis- tribute the burden equitably among them all. We have here to do with a postulate which the presence of moral considerations in every fundamental question of economics obliges us to take account of. I shall allow myself here to refer back to the more detailed treatment given to these ques- tions in the introductory portion of this work (vol. i. sees. 366 €t seq. ) . It is unnecessary to recur to the fact that in any investigation of the ground for a determination of prices, whether in the mar- ket or in the affairs of the public economy, we have to do with historical problems yet awaiting solution, inasmuch as they are 292 THE SCIENCE OF FINANCE. problems involving a moral factor. It may be sufficient to call to mind the point already established, that it is a meretricious sub- terfuge to erect what is, into a norm of what should be. Whoever puts the question as to the ground for a determination of prices, or taxes, or any other form of payment employed in human society, thereby puts the deeper lying question : What has the judgment of men in the past declared to be just and right in their adjustment of business matters? and how far is their judg- ment to be accepted as good? To the observation and appraise- ment of the ethical desiderandum which expresses itself empiri- cally in the judgments already passed, there is to be added an exposition of the further desiderandum wherein the decisions of the past are to be cleared up and further developed. Far from its being possible to accept any fixed datum from which to proceed as from a basis of "natural" right, and beyond which nothing would be necessary but a dry, deductive logic (mathematically exact and subtle), we have on the contrary to do with the evolution of moral impulses, judgments, activities ; matters which appear definitive and statical only to the most superficial view, but which, in point of fact, constitute an unceas- ing movement, while they present as statical data nothing more than a certain body of average, customary decisions, which on closer inspection resolves itself (like any other average) into an aggregation of diverse individual cases. § 196. The development of judgments concerning what is equitable is a progressive development, just as all historical development is progressive. Starting from very crude beginnings, the sense of equity gradually gains strength in the struggle against the selfish motives and the force of the strongest. But even after a lively sense of equity has been attained and has been incorporated into the social structure and habits of thought, there still remains a wide scope for development in the way of extending and deep- ening it ; -while there also remains open a path of indefinite prog- ress in respect of quality. THE JUSTICE OF TAXATION. 293 The principles of prices and taxes afford a wealth of special materials illustrative of this general law. A great advance in the progress of society has been achieved when the distribution and the recompense of work in an indus- trial society have been freed from every element of coercion, and are determined solely on grounds of a recognition of equitable reward. But even though the element of force has been elimi- nated, there still remains a broad field for the exercise of judg- ment with respect to the nature and the reach of the principles on which is based an equitable determination of prices, wages, con- tributions, taxes, — a field which the present age is far from having exhausted. The facts of past progress in this respect, and the problems offered by the present and future in the way of further develop- ment, are the matters with which our discussion will next have to deal. § 197. Free Contract and Authoritative Enactment are but different forms of the same process of judgment in the determi- nation of values — in price, wages, contributions, taxes. Whether prices are determined by the "higgling of the mar- ket" or by legislative enactment and regulation; whether the question concerns the exchange of the products of private industry between individuals, or services rendered its mem- bers by the commonwealth ; whether governmental authority simply regulates prices ni private intercourse, or fixes the price of what itself contributes toward the general well being — the basis of this multiplicity of determinations of price, etc., is always a multiplicity of judgments as to values, which may be carried out in practice with or without the intervention of the public authority. It only makes the case clearer, it simply serves as a more palpable confutation of the illusory belief in determination of price by natural forces, to have the state enact what is to be done in squaring accounts for services rendered. And this authorita- tive manner of determining price moreover affords a more potent means of progress in the growth of ccjuitv in price determination. 294 THE SCIENCE OF FINANCE. But in point of substantial fact, the process is just the same whether controlled by the organized action of the state or not ; it is always the existing sense of equity that has to decide with respect to the equitable adjustment of prices (taxes, etc.). The state has nothing at its disposal beyond the human material of which it is made up, being nothing but an organized society. The state's enactments, therefore — price schedules, taxes, salaries, dike regulations, etc. — are but the expression of views that lie within the compass of the insight and intelligence already achieved and current. In virtue of its ofifice it becomes the state's duty as a matter of course to give expression to the best and ripest sense of equity attained, and in so doing it will be able to rise above the level of free contract. The state is hereby enabled to bridge the interval between the backward sense of equity of today and the higher plane of a riper equity yet to be attained. But even in so doing it affords a proof of its depend- ence on present attainments in moral and spiritual development § 198. All determinations of value rest, as we know, on the two elements of Utility and Scarcity. Scarcity resolves itself, so far as concerns all reproducible goods, into the cost of production. Utility, with respect to goods of all kinds, resolves itself into a complex of elements, some of which are only now struggling into recognition. ( Cf. vol. i. sees. 370, 378-380, 396-403.) Current views as to what is an equitable compensation are very largely agreed in looking for the ground of decision to the principle of cost of production. It is a simple and easily compre- hensible postulate of the practical reason that every man, so far as he has the ability, should make good the cost at which another has wrought in his interest. When the pains, the labor, the consumption of materials undergone by another have served to afford me an advantage which I should otherwise have been obliged to compass by my own effort, etc., there is a manifestly equitable relation present between the sacrifice and the benefit conferred. I' THE JUSTICE OF TAXATION. 295 The appreciation of this principle of equitable reward is, indeed, so general and thorough that the need is rather of an effort to limit and circumscribe it than to advocate its wider acceptance. And this for two reasons. In the first place, even in cases where the principle of cost of production has found adequate recognition in practice, we find expressions of views at variance with this principle and favoring a comparison of the benefits conferred, where benefits of different magnitudes are conferred at equal cost. In the second place, there are large groups of facts, especially within the domain of the public service, where, from the nature of the case, it is either impossible or impracticable to set off individual expenditure against individual gain. Here the sense of equity accordingly turns perforce to other grounds for an equitable adjustment of the compensation required. § 199. Under the first head it may be noted that the current views of equity demand that in cases where the municipal author- ities construct a new street, not only should the owners of the adjacent real property be required to bear a considerable share of the cost of construction, but the owners whose property is benefited in an especial degree, on account of a specially advan- tageous situation of their property relatively to the new street, should be made to bear a larger proportion of the cost than the owners of property less advantageously situated. They reap a greater advantage from the same proportional cost, and should therefore bear a proportionally larger share of the expenditure by which they have been benefited. As to the second point, we are aware that in the current views of what constitutes an equitable equivalent for benefits enjoved there occurs a second, less definite principle of award, which mav be designated simplv as the ability to pay. The indef- inite character of this element lies rather in uncertainty as to its scope, and as to the various remoter questions into which it ultimately resolves itself, than in any doubts entertained with respect to its own legitimacy. 296 THE SCIENCE OF FINANCE. As regards the scope of this principle, it is to be said that its legitimacy is questioned as far as concerns the great mass of pri- vate business intercourse. We are shocked to hear that the same merchant or landlord demands a higher price for the same goods from a wealthy customer than from a poorer one. Indeed, it is the traditional attitude of the government in case of services which are of great importance to the public and are of a monopolistic character (railways and other common carriers), to forbid "dis- crimination" between customers, under penalty of law. But one may easily see that ethical concepts are less fixed and definite with respect to this point than with respect to the other principles governing the equity of compensation. The point which arouses antagonism is the arbitrariness, the discrimi- nation between persons, etc., rather than the connection between the prices charged and the bu^-er's ability to pay. It is at anv rate certain that we find other portions of the industrial field, even in private business relations, where such a dependence of price on ability to pay is not only accepted as equitable, but is even required. In railway passenger traffic the classification of coaches as first, second, and so on, proceeds on the assumption (fre- quently not in accordance with fact ) that fares are graded according to the ability of the various classes of passengers to pay; so that the fares charged for third or fourth class may not only afford less profit, but may even fail to cover expenses, as compared with prices for first and second class. On comparing this case with the examples previously cited it appears that in private business, for large classes of society, the gradation of prices according to ability to j)ay is approved of, while personal discrimination is disapproved. But even this rule does not hold in the case, c. g., of the physician, who actually regulates his charges by an elaborate scale of prices, and rates his services according to the ability of his patients to pay for them. In this case the principle (habitually accepted as equitable ) seems to be connected with the peculiar nature of the physician's services, which, as is the case in all the higher professional occupations, rises above the ])lane of a pecu- THE JUSTICE OF TAXATION. 297 niary ecjuivalent, being in a numerous class of cases constrained by the pecuniary position of the patients to forego it and there- fore, on the other hand, constrained to recouj) from the patients who can pay, in order to cover pecuniary necessities. § 200. But the principle of Ability to Pay finds its widest scope and most unquestioned recognition in the field of state and communal affairs. Not that this field docs not afford ample play for the practice of an adjustment of price to cost; but nowhere else does it hold true to the same extent as here that wide-reaching and funda- mental relations of social life demand the application of the principle of pecuniary ability as the equitable and unavoidable norm of adjustment, scarcely questioned by current conceptions of equity. I may here refer back to the discussion contained in an earlier chapter (book i. chapter iii., On the Various Kinds of Public Contributions ). The demand of equity that individuals are to pay in propor- tion to their varying pecuniary ability, is accepted so unresistingly within the field of the public economy for the reason, in the first place, that a computation of proportional cost and benefit is, in regard to many very essential services, impossible, and in the second place, and more especially, because the more fundamental phases of the public activity in some degree condition the very existence of the individual in society, so that it appears right and just that these fundamental conditions of human social life should be intimately bound up with the total personal and eco- nomic strength of each individual. The appeal to the principle of the pecuniary ability of the individual in matters of national concern touches our sense of equity so directly and irresistibly because it is a principle of wider scope than that of the economic field alone, and is but a special application of the broad principle of a moral solidarity. But the degree to which this principle has won acceptance in the convictions of any generation of men is not the same with J 298 THE SCIENCE OF FINANCE. respect to all matters. And then, again, there are large classes of relations, even in public m-atters, for which the method of pa}'- ment according to cost and benefit received is both possible and expedient, not only for the present, but for an indefinite distance into the future. So that the principles of equitable adjustment prevailing at any given point of time are a complex — a varying combination of the factors that bear on the question of equity, varying according to the relative importance ascribed to one or the other factor in different fields of public activity. § 201. It follows from what has already been said that the struggle between the two principles of taxation which the ethical conceptions of earlier historical writers have presented as antagonistic, viz., the so-called utility principle (or the prin- ciple of taxation according to interest, or benefit received) and the so-called sacrifice principle (or the principle of taxation accord- ing to ability to pay) is not to be set at rest simply by a decision in favor of one or the other alternative, to the exclusibn of the other. Rather, the question of equity in all taxation, inclusive of payments not usually classed as taxes (fees, contributions), reduces itself to the question of an equitable determination of values, such as has already been discussed in what has gone before. The question concerns the same elements, in varying combinations according to the degree in which one or another of these elements is in any particular case recognized as equitably decisive. In the course of the exposition in which there has been attempted an analysis of the services rendered by the public economy and the formulation of the methods of payment properly to be adopted in requiting these services, the conclusion has been reached, not only that the "utility" principle alone does not afford a tenable basis for taxation, but also that the principle of sacrifice, or ability to pay, cannot be accepted as the sole principle. To state the matter briefly and in a general form, the two prin- ciples simply serve to indicate the prevalence of certain concep- THE JUSTICE OF TAXATION. 299 tions of equity. And — historically considered — their signifi- cance, in the sequence in which they have won acceptance, is that they indicate the course of development from the egoistic, indi- vidualistic conception of ecjuity to the conception of solidarity. There has been an evolution of the moral attitude of men and a progressive recognition of the equitableness of taxation. ^ 202. There is a class of speculative writers on history who seek to insure the unhampered claim of coming generations to a free choice of any peculiar norm of equity, by recognizing as valid, without reservation, whatever conceptions of e(juity have prevailed in times past. In freely accepting as sufificient the grounds on which each successive generation holds its peculiar tenets with respect to equity in taxation, they fancy that they are leaving so much the freer scope for conceptions of equity that may arise in the future. To me it seems that this conception blurs the unquestionably legitimate idea of an historical development of equity by over- stating it. On the basis of an unproven premise there is con- ceded to each succeeding epoch the capacity to give adequate expression in its institutions to the idea of equity answering to the circumstances of the time ; so that we should have to look for progress in the conception of equity not from any advance in knowledge and moral sentiment, but simply as depending on the historical epoch from which it emanates. Still, in the facts of daily life, and in our scientific researches as well, we are con- stantly confronted with the obvious fact that the concept of equity in the period of history to which we belong is in dispute at every point. Adolph Wagner has not been entirely uninfluenced by his- torical-philosophical views of this nature in drawing his distinc- tion, in his Allgemeine Steuerlehre, between a "purely financial" (or fiscal) principle of taxation and a social-political principle. The former of these principles being assigned to the "civic i^staatsbiirgerliche) period," as good and fair for that period, while the latter is insisted on as the true principle for the present and 300 THE SCIENCE OF FINANCE. the coming period, as the basis of the "social phase" of taxa- tion. But if we are to construct our "civil period" out of the material furnished by the actual course of political and social development, and not replace reality by a utopia, it becomes absolutely impossible to accept the purely fiscal principle as a tenable sole principle at all ; that principle not only claims to afford a justification for thoroughgoing individualism and egoism, but also seeks to justify a complete disregard of the unavoidable fact of solidarity in all political and social life.^ In the second place, the justification offered for the "social- political" principle of taxation, to which this other principle is made to serve as a foil in the same manner as the "civic" period serves as a foil to the "social" period — this principle, with its contained purpose of abolishing existing inequalities in incomes and property — with its struggle against the inequities of the " competitiv^e system," is but an exaggerated expression of the legitimate sentiments of equity which have grown out of the principle of pecuniary ability in the course of its develop- ment, and which we shall have to discuss later on. I apprehend that the placing of these two principles in antith- esis is but the rending asunder of a single fundamental principle, the investigation of whose historical development is our real task. III. THE HISTORICAL GROWTH OF EQUITABLE TAXATION. § 203. The discussion has, so far, dealt with the course of development out of which the principles of equitable taxation have emerged as an historical product. It will now be necessary to give some attention to the way in which these principles have been applied in the course of history to the relations subsisting between the different social classes. The significant point here, apart from the central fact of a growth of clearness in the conceptions of ccjuity, is that of the prevailing views as to what are the equitable claims of a more or 'See a paper by the present writer in Conrad's Jalirhiicher fitr Nationalokonomie tind Statistik, 1880, N. F. vol. i. pp. 206-232. THE JUSTICE OF TAXATION. 3OI less considerable portion of society to a certain fullness of life. In the degree in which the apex of the social [pyramid looks upon the underlying layers as a means to the attainment of its own ends, in such degree will we have an unscrupulous exploitation of these lower strata in the distribution of the public burdens. The slow, uncertain growth of the recognition of the inherent rights of each and all members of the community necessarily carries with it a gradual progress in the views of what is an ecjuit- able taxation of the different social strata. Down to the present period, which begins with the French Revolution, the system of taxation, through preceding centuries, was determined by the relation of domination on the one side and subjection on the other. The " dishonor " attaching to a personal tax is a consequence of a system of taxation whose aim was to exempt the ruling classes, cities, peoples from personal ta.xation, for the reason that they had the power to unload the burden from their own shoulders and shift it to the shoulders of the lower classes, provinces, peoples. The position of the subject countries (provinces) in the Roman Empire, with their enforced submission to a lower legal status,' has in view a fiscal exploitation just as distinctly as has the policy of the individual cities that used all means, of force and fraud, of blood or money, to bring the cir- cumjacent country into a state of dependence in order to exploit it pecuniarily. The same thing repeats itself within the different classes of any given commonwealth. Here, again, there is the same irresist- ible desire for the sweet fruition of a domination over other men, whose subjection is turned to advantage in making them bear the public burdens. Here the ruling class wrings "surplus- value" from the subject classes, just as in the other case it was wrung from the subject countries and peoples. Exemption from taxation was just as much a matter of course under such a system df domination as it now seems a monstrosity to us. In point of fact, even the Aufkldrung of the eighteenth cen- tury made an energetic protest against the tax exemption of the ' See Mommsen, Rbmisches Siaatsrecht, vol. iii. pp. 728 et seq. (1887). 302 THE SCIENCE OF FINANCE. upper classes. It is a fundamental principle, says Justi,' that taxes and imposts are to be borne by all subjects equally; for in this matter the same obligation rests upon all subjects, and all share alike in the state's protection and the other benefits arising from the constitution of the commonwealth. Indeed, Justi, in like manner as his contemporary, the founder of the French school, replaces the traditional injustice of the earlier social organization with its opposite, in that he demands that in the distribution of taxes special regard is to be shown the poor and the people of moderate means, in the exemption of an "existence" minimum. On the other hand, in the constitutional enactments of the French revolution, and in the declaration of the rights of man,^ the universality of the obligation to pay taxes is constantly insisted on. No citizen, says the decree of June 24, 1793, is exempt from the honorable duty of contributing to the public burdeng. § 204. In the case of Prussia, the edict of October 27, 18 10, dealing with the finances and the new measures to be instituted with respect to the imposts, declares "that a complete reform must be had in the impost system, the point of departure for which is that all taxes are to be borne by everyone alike, according to uniform regulations throughout the realm; that all exemption is to be abolished, as being no longer consonant either with natural right or with the spirit of administration of neighboring states." The hope is expressed " that those whom this provision touches will comfort themselves with the fact that they are no longer open to the reproach of avoiding the public burdens at the cost of their fellow subjects. " Still, the constitutional enactment of January 31, 1850 (Article loi ), is constrained to speak of a revision yet to be car- ried out with respect to existing tax exemptions, which will put in ' SiaaiS7virthschaft {lTS$), vol. ii. p. 293. ' Declaration 3-14 Sept. 1791, section 13 (repeated in the constitution of 1791), cf. Constitution, 24 juin /79J, section loi. Qi. "Loms Tx'i^itx, Les constitutions franfaise (1849), passim. THK JUSTICK OF TAXATION. 3O3 force what Ronnc calls the princij)le of "natural public law" \^naturliches Staatsrecht\. This became necessary for the reason, in the first place, that the regulation of June 21, 181 5, under Article 14 of the German Act of Confederation, provided "that media- tized persons were to enjoy freedom from the ordinary personal and land taxes, as concerns their persons and their families, as well as their domains." In the second place, the lower nobility had also been able to preserve their ancient exemption from taxes on landed property down to the middle of the nineteenth century, although the Prussian crown had for centuries past been engaged in a struggle with them, and had even achieved a notable sMJCcess' against them as early as the beginning of the eighteenth century,^ in the revision of the general land-tax payable by the East Prus sian nobility. An ordinance for the latter purpose was for the first time promulgated in the legislation of May 21, 1861, provid- ing for changes in the tax on landed property, and for a general building-tax of universal application. The point first spoken of above was sought to be dealt with by the legislation of May 1, 185 I, concerning the classified income and class tax, amending the law of December 7, 1849, and which expressly abolished the exemption hitherto enjoyed by "immediate" princes {die Reichs- immittclbarai) from the class tax.^ Nevertheless, a further (unpublished) order in council, of March 16, 1857, ordained that the exemption of the mediatized German princes and counts of the empire, not only from the ordinary taxes on landed property, but also the ordinary personal taxes, as concerned their persons, families and domains, was reestablished. This was, it is to be said, at an epoch in Prussian national life when mediaeval romanticism was struggling, for the last time and in the last ditch, to uphold or to reestablish institutions which have no place in the constitution of the modern state. Under modern views of taxation an exemption of this kind is ' Zakrzewski, Die wichtigeren prettssisc/ien Refortuen der direkten Idndlicheti Stciiern tin i8. Jahrhundert (1887), Schmoller's Forschungen, vol. vii. ^ Ludwig von Ronne, Das Staatsrecht der preussischen Monarcliie, j. Auflage, vol. i. .;z regime et la revolutio7i (1856). G. Schmoller, "Die Epochen der preussischen Finanzpolitik" {Jahrbuch des deutschen Reichs, 1877). G. Schmoller, "Studien iiber die wirthschaftliche Politik Friedrichs des Grossen und Preussens iiberhaupt von 1680 bis 1786" {Jahrbuch des deutschen Reichs, 1 884-1 887). H. Bielfeld, Geschichte des magdeburgischen Steuerwesens von der Reformationszeit bis ins 18. Jahrhu7idert (1888). Walther Schultze, Geschichte der preussischen Regie- verivaltung von 1766 bis ij86 (1888). C. A. Zakrzewski, Die wichtig- eren preussischen Reformen der direkten Idndlicheti Steitern im 18. Jahr- himdert (1887). B. Gliemann, " Die Einfuhrung der Accise in Preussen" {Zeitschrift fiir die gesamtnte Staatswisseiischaft, 1873). ^ on Inama- Sternegg, "Der Accisestreit deutscher Finanztheoretiker im 17. und 18. Jahrhundert" (Zeitschrift fiir die gesainmte Staatswissenschaft, 1865). J. G. Hoffmann, Die Lehre von den Steuerti (1840). Carl Dieterici, Zur Geschichte der Steuerreform iti Preussen /8/o-/82o(iS7S)- K. G. Kries, Zeitschrift fiir die gesatnmte Staatsiuissenschaft, 1854, 1855, 1856. I. THE SINGLE TAX AND A PLURALITY OF TAXES. § 251. As old as financial science itself is the idea of embodying the whole system of taxation in a single tax. The Physiocratic theory of taxation points to the tax on rent (assumed to be the only surplus of industrial production avail- able for purposes of taxation) as being the direct and the 374 THE HISTORICAL FORMS OF TAXATION. 375 only tax. Voltaire (in his L Homme aux quara?itc ecus) ridiculed this as well as the other doctrines of the Physiocrats — the impot U7tique was the impot iniqiie .^ Still the interests both of the theory and the practice were on the side of the Physiocratic idea. The Single Tax came as a great relief to the theory after the chaos of taxes which the historical development had been piling up for some centuries past. Aversion to the results of the his- torical development seemed to offer special inducement at this point to a radical transformation of existing institutions. Sim- plicity, which, as the adage has it, is an earmark of the truth, was in this case, as happens so often on the introduction of a new doctrine, urged as a strong argument for the truth of the doctrine put forth. The entire view of the state and of society which dominated the era of the Revolution, with all its rational- istic, atomistic theory of the state and the man, favored and was attracted by this simplification. The administrative practice of the new era seized upon this simplification of an intricate prob- lem with alacrity, and applied it in good earnest at the instant when the French Revolution was realizing its programme. And even after the legislation had discovered and attempted to rem- edy the defects of the "single tax" the magic word retained its spell, and continued to figure as an article of faith in the radical party programmes. It was not only that the complete simplicity and intelligibility of the single tax fell in with the spirit of these programmes, but more especially that it recommended itself as of practical value for certain social-political purposes. It was only a secondary question whether the doctrine of the single tax was to be construed to mean an exclusive tax on rent (as was not usually done), or a "single progressive income tax for state and commune," in accord with the requirements of the most advanced thought. The application of the single tax has, under favorable circum- stances, even passed beyond the stage of party platforms and 'The single tax was criticised in detail by Necker, De V administration des finances de la France (1785), vol. i. pp. 153-192; and earlier by Justi in criticising Vauban {Staatswirthschaft, vol. ii. p. 297). 376 • THE SCIENCE OF FINANCE. been adopted, at least with approximate completeness, into the fiscal administration of some smaller communities. The canton Zurich has afforded a notable instance for twenty years past. § 252. The question is, whether the ideal of radicalism which claims so very respectable scientific antecedents, is to be accepted by modern science. Is the single tax also our ideal, or are there scientific reasons which restrain us from availing ourselves of its apparent advantages. It is in the first place to be granted that the necessity of at least a relative simplification has made itself felt and produced an effect in all the tax systems of Europe ; whether we look to the French, the German, the British, or even the Swiss tax legis- lation, this proposition holds true. A great deal of the relics of the older tax system has been cleared away with the help of the light of financial science, even though this work of reform has not in all cases gone so far as in Great Britain, where the free- trade movement gradually reduced the number of dutiable art- icles from several thousand to half-a-dozen, or as in the cantons of Switzerland, the more advanced of which have cleared away practically the whole of the earlier tax system in order to make room for the income and property taxes. Still, this relative simplification of the tax system always leaves room for some plurality of taxes, so much so that even in the experimental field of radicalism — in Switzerland — there is enough of it left to challenge reflection. It is to be noted that the increasing fiscal demands of canton and commune have for a number of years past found the "single tax" an intractable instrument which refuses to meet any considerable demands upon it ; as a consequence of this fact the necessity of meeting the growing outlays has compelled the refurbishing and exaltation of nominally obsolete and long-discarded forms of taxation ; at the same time the finances of the Swiss federation have never ceased to place their chief dependence on consumption taxes in the shape of a comprehensive taxation of nearly all articles of import, and under the pressure of new fiscal necessities these taxes have even THE HISTORICAL FORMS OF TAXATION. 377 been energetically pushed to a further development. It must therefore be said that even under the exceptional circumstances of national and constitutional activity which are to be found in Switzerland, the test of experience does not favor a "single tax." Observation of the practice of modern states would therefore go to show a general tendency toward simplification of the tax system, but not to support the doctrine of a single tax. § 253. The observation of the actual course of development of the tax legislation of modern states accords with the conclu- sions to which we have been brought by our previous discussion. A single and exclusive tax to replace a system of diverse taxes fails to answer a series of requirements which are made from the standpoint of equity as well as from that of expediency.^ (i) The payment of taxes rests, as we are well aware, on various principles of equity which cannot all be satisfied by a single tax. For example, if an owner of real estate is in fairness bound to pay for the advantage accruing to his property through the expenditures of the commune or the state, this object cannot be attained by means of the same tax which the same real estate owner is called on to pay toward the support of the public schools and of the poor, in proportion to his personal ability to pay taxes. (2) When we come to consider the psychological character of every tax burden, we find ourselves per force entering on a lengthy discussion of practical questions of tax administration ; it being one of the practical problems in every tax administration to lighten the pressure of a given burden of taxation as far as may be. As is the case with every sensation of pleasure or discomfort in economic life, so also the payment of a tax does not figure as a fixed mechanical quantity that may be mathematically meas- 'Justi, even, makes some very sensible remarks on this point. — Staatswirthshaft, vol. ii. pp. 293-300. 378 THE SCIENCE OF FINANCE. ured in degrees of pressure on the taxpayers, but as an historical phenomenon influenced by the varying sentiments of the tax- payers. The question here concerns the entire development of the sense of citizenship, intelligence, self-sacrifice, patriotism, as opposed to the individualist motives of private life, with its primitive crudity or its more refined love of gain and of pleasure. This relation subsisting between the commonwealth which imposes the tax and the individual taxpayer, requires forms of taxation adapted to its purpose ; just as the development of the fiscal policy as a whole necessitates a series of grades, within each of which grades the tax is levied at a proportionate rate ; this being especially true after the tax has come to be the normal dependence for the public revenue (Book I, Chapter II.); so the tax system too requires a gradation in its development, which shall correspond to the gradual evolution, the advance and decline, of the sense of nationality. The rapid growth of the need of tax revenue, which ordinarily increases much faster than the consciousness of civil duty, con- stantly urges the tax administration to invent suitable forms of taxation, whose flexibility is put to the test by the elasticity of the demand for revenue. The result of all this is that we have a number of different forms of taxation, which, judged by the ideal of the single direct tax intended to make the tax-source the tax-object, may appear very imperfect in the eyes of abstract doctrinarianism, but which are, after all, nothing but the adequate expression of the nation's immature sense of citizenship. § 254. (3) It is to be added that even where the intelligence and sense of citizenship on part of the taxpayers is relatively mature, the practical difficulties attaching to a single tax on income are so great as to necessitate supplementary taxes of other kinds in order to carry out the purpose of the single tax. The mobility of modern life makes it difficult, or rather impossible, to levy accurately and in proper season on a large body of tax-paying ability, by means of this single form of tax- THE HISTORICAL FORMS OF TAXATION. 379 ation alone. For this purpose, too, we need other more flexible forms of taxation, which will adapt themselves to these changes of residence. But even when the great and hitherto rarely accomplished task of any income tax is achieved — the ascertainment of the income — that is not all that is necessary. The problem consists not alone in ascertaining the amount of the income, but also in finding the relation between the income and the aggregate necessary expenditure of each taxpayer. The inflexible standard afforded by the amount of the income alone gives no information as to the individual's tax-paying capacity, this latter depending on the peculiar conditions of his life. And to ascertain what these are, the tax legislation requires a deal of supplementing which must be got through other means than the income tax. (4) The organization of a commonwealth under a system of larger and smaller civil divisions, especially in a federal state \^Biindesstaaf\, gives rise to peculiar fiscal conditions, such as do not admit of our placing at the disposal of each of these civil divisions a single form of taxation which is to be used by all in common. Rather, the federal state has special reasons of its own for discarding the single tax on income, reasons involving the innermost nature of such a state, and which would not be pres- ent if the people in question were prepared for a national union. ( 5 ) There flow into the treasury tax revenues which arise out of measures adopted on the ground of economic policy, and are, according to the views accepted today, desirable and judicious taxes. But the occasion for measures of this kind, we mav assume, will recur in the future, and this class of taxes will therefore continue to be levied. The chief example of this class of cases is the tariff on imports. § 255. In order to clothe these introductory remarks with flesh and blood, it will be desirable to consider the historical forms of taxation. It is only by examining the actual course of development that we come to appreciate the difiicultv of progress in the direc- 380 THE SCIENCE OF FINANXE. tion of abstract ideals on the one hand, and the significance of the peculiar content and purpose of each particular group of taxes on the other. The gradual development of the historical institu- tions is shown by the import duties, the stamp taxes, and the monopolies. These forms of taxation were made intelligible and acceptable to the childish understanding of earlier times by appearing in the guise of payment for an equivalent, and have disclosed their true character only at a later stage, after the dawn of an era of a more mature sense of citizenship, when it has appeared that what was so long taken for their substance is only their form. The successive stages in the historical development, and its wonderful changes and alterations, are manifested in a specially impressive way in the rise and decline, the fixity or instability, the disappearance or prominence, of the scot, the property tax, the income tax, etc. These most perfect forms of taxation attained relatively early to an energetic application, and flourished in a remarkable degree, and then, after half a thousand years, they have been taken up again as an ideal of taxation to be striven for. The introduction of the so-called "proceeds-tax" \^Ertragsstcuer\, which was adopted at the beginning of the nineteenth centurv, especially in France, as a redeeming improvement over the old direct tax, brings out the same difficulty of historical progress. It presently manifested all its native ineptitude when compared with the old direct tax in its revised form, and has in many cases been altogether discarded. The difference in content and purpose between the different historic forms of taxation will be brought out by a discussion of the historical material from the point of view of modern science. In pursuance of this purpose, and referring back to the observations previously made on the National Economy in Proc- ess of Becoming (sees. 52 et seq.^, the present chapter will attempt an historical survey. The succeeding chapter will then go on to combine the historical data with the deliverances of theory, in order, in this way, to arrive at a tax system based on history and theory alike and adapted to the fiscal exigences of a modern European State. THE HISTORICAL FORMS OF TAXATION. 38 1 II. THE EARLY PERSONAL TAXES. § 256. The purpose of this historical survey is not a collec- tion of all sorts of curious and obscure facts from the records of all ages and all peoples, such as often characterizes the infan- tile stage of historical research. It is of no consequence to us that certain kinds of taxes have, made their appearance in this or that country at such or such a time during its development. What it concerns us to know is the relation of these forms of taxation to the political and fiscal development of a given people. It is already a hundred years since K. H. Lang (in his His- torische Entwickhing dcr TeutscJicn Stcuerverfassiing scit dcr Karolingcr bis aiif tinscrc Zcitc?i) discussed in this manner the phases of Ger- man taxation in connection with the development of the military system. The motley array of varieties and forms of taxation is there exhibited, freed from the appearance of accident, and sub- ject to the law of historical development. It is also not to the purpose to sever the individual kinds of taxes which go to make up the fiscal system of each historical epoch from one another, and take up each one by itself. At the same time, the object of the present discussion could scarcely be accomplished without our singling out for examination cer- tain leading groups of taxes which are to afford the material for the construction of our system. No class of taxes is more deserving of such special attention than the one which, very significantly, makes its appearance right at the beginning, and recurs constantly in the later stages of the development of the tax system. For in spite of all reser- vations, it remains true that the one tax which the groping hand of the primitive national economy, as well as the radicalism of advanced political systems, lays hold of, is above all others the tax of taxes. It is also a notable fact that on the most diverse occasions, based on the need of revenue or on the demand for equity in the distribution of the public burden, this one form of taxation has been resorted to for ages past, over and over again, for this reason if for no other, that it is the simplest in form. 382 ' THE SCIENCE OF FINANCE. § 257. A characteristic of the old personal taxes is the fact that they were levied on some extraordinary occasion.' From the earliest beginnings down into the nineteenth century they are for the most part a temporary impost justified by a special plea of unusual necessity. This state of things changed only very slowly. The German writers on financial theory, even as late as the close of the eighteenth century, regarded the tax as an extraordinary impost, as a malady with respect to which there was an uncomfortable doubt whether it would ever be cured. Thiers reflects the sentiment of modern individualism in close touch with mediaeval individualism, when he airs his aversion to the direct tax in the assertion that it is characteristic of bar- barous, as contrasted with civilized peoples. The earliest form of this tax occurs in connection with the feudal state. In the place of personal service, and supplemen tary to the personal obligations of the vassal in cases of the tri- noda necessitas {ransom of the sovereign, knighting of the vassal's son, betrothal of his daughter), the tax comes to be substituted^ in times of war — adjutoriutn, saitagium, tallagiimi. Tl^e usual German term for it is " Bede" — etymologically,3 as well as by its conventional Latin equivalent [petitio, rogatio, precaria), indxcdii- ing a petitionary character, at least in its origin. Where, con- trary to its nature, it takes on the character of a fixed burden, it is transformed into a burden on real property ; a fixed personal tax being, to the mediaeval sense of personal liberty and dignity, a mark of the bondman. And as we have already found in the general survey of the historical development of the public econ- omy (Book I. Chap. II.), this class of imposts blends with the peculiar burdens pertaining to villenage ; a fact which becomes intelligible when it is remembered that villenage originates in personal inability to bear arms. It is quite in accord with the traditions of the feudal system that we find that the Great Elector of Brandenburg, as late as the year 'Cf. sees. 55 and 56 above. *Cf. also Bluntschli, Staats- und Rechtsgeschichte der Siadt und Landschaft Ziirich {1838), vol. i. p. 207. ? Grimm, Deutsches Worterbuch, vol. i. p. 1 22 1. THE HISTORICAL FORMS OF TAXATION. 383 1662, had gradually, and only after long and tedious negotiations with the estates of the realm, succeeded in substituting, in place of special grants for the purpose, fixed contributions from his terri- tories toward the support of the standing army which he had created. At the same time the obligation of the knighthood to follow the sovereign in war was commuted into a money payment of forty thalers for each horseman.' In the towns, wherever the re(]uirements of the tax administra- tion permitted, the excise was generally introduced after 1667, to take the place of Contributions ; a step which lightened the taxes of the burghers and increased the revenue. The inadequacy of the Contribution became evident as early as the years 1677 and 1679, when an extraordinarv subsidy, a "poll-money" [^Kopfschoss^, was levied on all inhabitants. In point of fact this contribution appears to have been an income tax; we are told that (towards the total of 200,000 thalers) the Elector himself headed the list of contributors with a sum of 1000 thalers for his own person, 500 thalers for his consort, and so on for all the members of his house- hold, with the purpose of taxing all inhabitants down to a mini- mum rate of 4 groschen. This poll tax was repeated under his successor with increasing frequency^ but was made the subject of a formal waiver by Frederick William 1.(1715), and was restricted to the case of a defensive war. Frederick the Great finally found other means of obtaining a revenue in order to provide for the heavy expenditures of the wars, and was able to leave the Prussian state at the end of his reign with a clear annual revenue of 20,- 000,000 thalers. 3 So far as this was accomplished bv means of taxes it was by the use of those real taxes which are to us the opposite of direct personal taxes. The Contribution, however, was made use of by both the two great Prussian kings of the eighteenth century as the point of departure for reforms which ])repared the wav for the modern land tax by means of a registry of incomes ; they aimed partly to 'Riedel, Der brandenburgisch-preussische Staatshatishalt, pp. 31 <■/ seq. ^ Ibid., pp. 48 et seq. ^Ibid., p. 132. 384 THE SCIENCE OF FINANCE. consolidate the burdens resting on the land into a single impost, partly to lessen the inequality of the burdens resting on land owned by peasants compared with that owned by the knight- hood.' § 258. But even during these earlier centuries the personal taxes developed into quite a different form when employed under circumstances which approached modern political life in being freed from the trammels of the feudal system and the territorial state. What I have in mind is the democratic organizations of the old cantons of Switzerland and the city republics of the Middle Ages. The rule is the same here as elsewhere during those centuries. The tax is for the most part an extraordinary burden, levied to meet cases of special necessity or the exigencies of war. Still, in certain ones of them there is a relatively early development of a fixed tax constituting a permanent element of the public finances. Looking first to the early democracies of Switzerland^ we find that the facts are as follows. In most of these democracies a general tax on the country was resorted to only as an extraordinary resource when the ordinary revenues of the treasury were insuf- ficient, especially in case of war. • So, for example, in Uri it was usual to impose a general tax in times of need. This tax, by ancient usage, was primarily levied on landed property, which was assessed by public officials, the creditors of the landowner being required to contribute toward the owner's payment of the tax in the proportion of their claims. At the same time, every- body was required, under oath, to return to the proper authori- ties all his other property, whether situated at home or abroad, whether in the form of securities, rents or business establish- ments ; the penalty being confiscation of everything not so returned. The same is true of Schwyz, Nidwalden, etc. In ' Zakrzewski, Die wichtigeren preussischen Reforincn der direkten Idndlichcn Steuern im 1 8. Jahrhundert (x'i'iil). ^J. J. Blumer, Staats-und Rechtsgeschichte der sclnueizerischen Deinokratien oder der Kantono Uri, Schwyz, Unterivalden, Glarus, Zttg und Appenzcll. Part ii. {1858), pp. 295 et .q. THE HISTORICAL FORMS OF TAXATION. 385 Glarus, where the property tax occurs as early as the time of the wars of Burgundy, the religious convention of 1683 mentions as a customary source of revenue for the general treasury, "imposts per capita and on estates," what afterwards was usually spoken of as the Hab-, Gut- iind Kopfstciier. This was a combination of the capitation tax with the property tax, such as occurs in the case of the general tax of the German Empire as early as the fifteenth century, and such as we find it in the extraordi- nary taxes levied by the Great Elector and by Frederick I. In this latter case the capitation tax becomes incorporated with the privileges of the "independent gentleman" in a thoroughly democratic fashion ; so much so that it became a condition of participation in the public privileges and immunities. During the eighteenth century a "uniform general tax" \^Einfache Landesstciicr\ was regularly levied (one in a thousand gulden of property and one-fourth gulden per capita). To prevent unequal taxation, the estates of the realm enacted in 1725 that all per- sons must return, on honor, all their property, excepting only household articles and clothing ; if it appeared in case of suc- cession that the property was greater than returned, then the amount concealed was to escheat to the state, the ofificials being for this purpose empowered to make the necessary official inventory. § 259. In the mediaeval towns we find something similar, only at a distinctly earlier date. In Zurich, Hans VValdmann, who was chosen Burgomaster in 1483 in opposition to the old families, introduced, in the town and in the territorv belonging to the town, both the salt tax and the so-called ReisbiicJisen into which all taxable inhabitants were to pay a yearly contribution ; the purpose being to provide beforehand for the case of war in order to meet the expenses of war so much the more easily.' It is true this institu- tion, created under the democratic administration of Wald- ' Bluntschli, Staats- und Rechtsgeschichte der Stadt und Landschaft Zurich, vol. i. P- 354. 386 THE SCIENCE OF FINANCE. mann, disappeared with his overthrow. At the same time it is instructive to note that the Richtebricf of the citizens of Zurich^ of the year 1304 speaks of the Gewerf, that is to say, the property tax, as a tax of frequent occurrence. When- ever \_Sivenne~\, says the document, the Gewerf xs levied, the tables in which the Gewerf is engrossed are to be read in the presence of all the citizens. This is followed by provisions respecting exemption from taxes and liability to pay taxes ; among other things a provision for the equal taxation of citizens of Zurich living outside the city, whether knights or citizens. In the year 141 7 a property tax {^Gutsieuer) was levied, for three years,^ towards which the Great Council ordained that everyone must pay one penny in the pound on all his estate, real and personal, house, chattels, clothing and raiment, except only the harness in which he served in the city guard. From persons who live expen- sively or are engaged in a profitable business and still own but little property, the assessors of the tax are empowered to require payment in proportion to the profitableness of the business. Side by side with this Gutsteiier was a Leibsteuer (poll tax) levied on all persons. It appears that during the fifteenth cen- tury, and also during the sixteenth and seventeenth centuries, the tax3 was continually approaching the character of a fixed impost, being thrown off in displeasure every once in a while by the citi- zens after having been in force for decades together (not unlike the fortune which the English income tax has experienced in the, nineteenth century). In Duderstadf* the scot \^ScJioss\ makes its appearance as a regular and considerable factor in the annual revenues, about the middle ot the fifteenth century. The accounts rendered for each year invariably begin with a list of those liable to pay the scot, that is, of persons required to pay a tax on land, on house ^ Archiv fiir sc/nueizerische Geschichte, vol. v. (1847), p. 219. ^Bluntschli, Rechisgeschichte, vol. i. p. 401. 3G. Meyer von Knonau, Der Kanton Zurich von den dltesten Zeiten bis auf die Gegenwart (1846), vol. ii. p. 257. '' Julius Jager, Duderstadt gegen Ende des Mittelalters (1886), pp. 21 et seq., 22 et seq. THE HISTORICAL FORMS OF TAXATION. 387 and home, tithes, incomes, rents, and personal property (except clothing), church livings and foundations, the guilds, the citizens and the disfranchised inhabitants, the citizens living outside, the Jews, and the outlying farms. At Michaelmas, at the beginning of each fiscal year, the clerk of the treasury drew up the tax lists, and the tax was paid according to these lists, in two installments. Anyone who failed to pay the scot forfeited his brewery privi- leges for the year, or else he was obliged to pay an additional one-fourth of the scot as a penalty. The scot amounted to more than half the aggregate annual revenue. As early as 1435 '^"'^ 1438 there occur discussions between the town council and the guilds with regard to increasing the scot. The guilds demanded that property \^Erbe wid Giit\ should be taxed at a higher rate than the earnings of the handicraftsmen ; they succeeded in effecting that the assessment was to be made before the nine guild masters. On account of the town's being involved in a variety of feuds, an extra scot {^Jmlpe, hulpegelt) amounting to about one-fifth of the regular tax was levied, and that repeatedly, between 1443 and 1456. The guilds made this a lever by which to further their demands for a fuller participation in the city's affairs, and in fact it enabled them to effect the appointment of the so-called Viermdtmer , and so to control and even to dis- place the treasurer. § 260. There is one thing, especially, about the old personal taxes which impresses on the modern observer the closeness of the connection between the past and the present, viz., the vary- ing character of the measures taken to insure a proper assess- ment of the taxpayer.' We find a high-strung reliance on the uprightness of the taxpayers on the one side, and severe penalties on the other. There is a great variation from place to place and often from one decade to another. Adam Smith ^ cites, as examples of the exceptional conditions 'Cf. K. Ze\imQv, Die deutsckett Stddtesteuent imi2. und /jj. Jahrhundert {1^"]%), pp. 6 1 et seq. ' M^ealeh of Nations, book v. chap. ii. 388 THE SCIENCE OF FINANCE. under which he regards the income tax as admissible, the taxation of Hamburg, Zurich, Unterwalden and Holland. Regarding Hamburg he relates that (as was true of Bremen until very lately) every taxpayer assessed himself, and paid the amount due (one- fourth per cent, of his property) into the public treasury, mak- ing oath as to its correctness without naming the sum. Smith explains the general confidence entertained as to the honest pay- ment of this tax'' by pointing out that the community in question was a small one, that the people had great confidence in their gov- ernment, and that they were thoroughly persuaded of the neces- sity of the tax. Of Zurich he relates — and similarly of the other Swiss cantons — that each citizen publicly states the amount of his property under oath ; such a measure would seem a very great hardship to a body of citizens engaged in trade, as the people of Hamburg were, while it would seem quite unobjectionable to a sober and thrifty people like the Swiss. In point of fact, this contrast of race and occupation which Smith points out does not explain the matter. Within the Swiss cantons, and often in places but little removed from each other, the arrangements differ widely. In the Zurich Richtebrief of 1304 it is provided, as has been pointed out, that the amounts assessed are to be read in ' Machiavelli praised this system of tax-paying employed by the German towns, in extravagant terms {Discorsi, yo\. i. p. 55; cf. K. H. Lang, Urspriing, p. i66; K. Kries, Zeitschrift fiir die ges. Staatswissenschaft, 1852, p. 276). He compares the virtue which it indicates with the patriotism of the ancient Romans. He says: "When the German cities require a sum of money for public purposes, the magistrates draw up an ordinance that every inhabitant is to pay in one or two per cent, of his property. . , . Thereupon each one appears before the collectors of these imposts and after having made oath that he is about to pay the sum due from him, he drops into a sealed box as much as he conscientiously believes he ought to pay, no other test being required of him. From this we may understand how great an uprightness and religion still pre- vails among these people." Machiavelli adds : " The uncorrupted morals of these people deserve our admiration all the more that the like today survives nowhere but in Germany; this is probably due to the fact that this country keeps aloof from the mer- chants, has no intercourse with its highly corrupt neighbors, the French, Italians and Spaniards, and contents itself with its homely sustenance and clothing and its domestic products, without aping foreign manners." It may be noticed that this explanation is quite a different one from that of Adam Smith, in fact, to some extent contra- dictory of it. THE HISTORICAL FORMS OF TAXATION. 389 public. But Bluntschli^ tells us that in the fifteenth century the amount of the tax was thrown into a vessel by the taxpayers without being counted, and he adds (much the same as what Smith says of Hamburg) that the reasons for this method were personal confidence on the one hand, and the wish to av^oid pub- lication of the amount of property belonging to the individuals, on the other. Close by, in the Province of Zurich, in the village of Elgg, the tax law was quite a different one. If the magistrate and the council were of opinion that anyone had, under oath, returned his property at too low a figure, any citizen whosoever might "seize and purchase"^ the property at the price returned. In the canton of Glarus,^ again, self-assessment prevailed from 1725 to 1735 ; but in 1735 a committee was appointed to manage the assessment, and in 1 764 a law was passed making the assessment a duty of the magistrates. Then, on complaints being made of inequality of taxation, self-assessment was rein- troduced in 1 78 1 and was confirmed in 1794, but only to be abolished again in 1796 as "altogether too rigorous," and again replaced bv official assessment. III. TOLLS. § 261. The discussion under the last preceding head has dealt with that class of taxes which have, on account of their simplicity, lasted through from the beginning to the end, and combine the earliest tentative efforts and the ideal of developed taxation. Under the head of tolls (duties) we shall have to do with a kind of taxes which are of a diametrically opposite char- acter, and reflect all the changes of the political system and of the public economy. In the first place the tolls are, in their origin, to quite as great an extent as anv other kind of pavment towards the primitive public economy, an individual payment for individual ^ Rechtsgeschichte, vol. ii. p. 29. ^ Herrschaftsrecht von Elgg von 1333, art. 56, 5. Something similar occurs as early as 1345 in Stendal. Cf. sec. 56. 3Blumer, Demokratien, vol. ii. p. 297. 390 THE SCIENCE OF FINANCE. benefits/ They are payments due from the individual to the lord of the land for the establishment and security of roads, rivers, bridges, harbors, markets. Whether, with Gneist,^ we derive them from the police power (preservation of the peace), or lay special stress on the service rendered as an equivalent, — in any case it is a fact of great significance for the nature of these imposts that they constantly tend to develop into private rights, in that everybody asserts the right to collect tolls who feels himself strong enough to enforce the claim. This usurious exploitation for private gain of what is properly a public right, and the further development of a well-founded right into an abuse, was a subject for magisterial prohibition from very early times. The capitularies of the Prankish kingdom mention a variety of tolls: bridge-toll, river-toll, harbor-toll, road-toll, wheel-toll, pack-horse-toll, foot-passenger-toll, market-toll, and the like. 3 That these and other tolls had, even at that time, been carried to excess, and were frequently abusivelv collected by great lords and small, is evident from the ordinance enacting that in general, no toll is to be collected on the open road where there is neither bridge, nor ford, nor ferry \^ similarly this other provision that no toll was to be levied except what had been levied since ancient times. 5 While it here appears that the rulers of the Prankish kingdom sought to protect their subjects against the oppressive collection of tolls by the powerful, and their constantly renewed prohibitions bear witness to the futilitv of their ordinances, in England, under the Norman kings, this same subject is a matter of complaint against the kings. An integral part of the rights of the English people, confirmed by John in the Magna Charta,^ is the right of all tradesmen to a ' Johann Falke, Die Geschichte cies deiitschen Zollwesens, p. xiii. 'Gneist, Englische Verwaltungsrecht {x^b"]), p. 41. 'i Fonlaiicum, rivaticum, poriaticiim, plateaticum, rotaticum, saumaticttm, peda- giti in , foraticu m . ''Capitul. 1. III. c. 54. 5 Capitul. I. V. c. 202. •*Gneist, Englisches Verzvaltungsrecht, p. 287. THE HISTORICAL FORMS OF TAXATION. 39 1 safe-conduct to go out of England and to come into England, to sojourn in and to pass through England, both by land and water, to buy and to sell "without all mails toltls per antlquas et rcctas cofisjictudmes," that is to say, in violation of the ancient and law- ful tolls. The restriction of tolls to what has been established by ancient customs i^comuetudmes) is so firmly bound up with the idea, that the prevalent name for tolls in English is derived from the term for a customary right {^coiitiimc, acstuma, custom). The revenue from customs tolls was still quite inconsiderable at the time of King John ; the customs being farmed out in the fourth year of his reign for ^50 silver.' § 262. We are now in a position to discuss the English development^ as contrasted with the German, and to follow up the development of tolls under the influence of an orderly and consolidated government, until it becomes what it is today for the purposes of the modern state, namely, a payment of a gen- eral character into the public treasury. It is therefore a form of taxation, usually levied on articles of consumption on their cross- ing the national boundaries, especially on their import. It is a form of taxation which does not exclude other than financial considerations, and which may even, under'given circumstances, give such considerations the chief place. A significant contrast appears in the fact of a much earlier development in England than in Germany. It is shown even in the fact that the differentiation of the name took place earlier in England. The Low-German-Saxon term " toll " began to be used quite early, and has continued until the present to denote the payments by individuals, and in part to private individuals, such ' Madox, History of the Exchequer, p. 529. Sinclair, History of the Public Revenue, vol. i. p. 100. ^ A History of the Custom Revenue in England from the Earliest Times to the Year 1827, by Hubert Hall, contains a great deal of historical information regarding the details of the origin and development of the English customs, based on the original documents. Hall shows the complexity of the subject and the tardy process of elim- ination by which a system of individual payments for an equivalent developed into a svstem of public revenues — taxes in the special form of duties, and a system of polit- ical measures for the regulation of imports and exports — protective duties, etc. 392 THE SCIENCE OF FINANCE, as bridge-tolls, road-tolls, canal-tolls, and the like ; while the term "customs" is used to designate import and export duties as known to modern political administration. In Germany, on the contrary, these different classes of payments are designated indiscriminately by the single term Zoll, a usage which connotes centuries of confusion in the public administration and public law. It is not that England simpliiied the practice of import and export duties. They were, in England as elsewhere, devel- oped into an extremely complex and variegated structure, so much so that even Pitt's Customs-Consolidation Act (1787) contained twelve hundred dutiable articles of import, besides fifty dutiable articles of export. But the idea of the duty had long been clearly and distinctly conceived, while in Germany a similar clear conception had been sought in vain for centuries. This clear conception had been reached early because a consolidated political organization had developed a uniform organization of the revenue system ; the public \dffentlich-reclitliclie\ nature of the national government brought out the public nature of the tax which had originated in these individual payments. In Germany the course of development was much slower. As is the case in the Capitularies of the Frankish kingdom, so we find it also happens that the German Emperor, in his struggle for the establishment of the imperial sovereignty, attacks the abuses that occur in the collection of tolls. Very significant' is the edict promulgated by Frederick II. at the Reichstag in Regensburg (1235). This edict provides that all tolls on land and water, whose collection was begun after Henry's death, wherever and by whomsoever levied, are to be abolished, except the taker of the toll could prove to the Emperor that he had a right to levy it. Persons violating this provision were to be punished as robbers and highwaymen. Moreover, those entitled to levy tolls were required to improve bridges and roads and to provide for the peace and security of travelers. The imperial edicts of the following century show how the abusive collection of tolls increased as the imperial authority ' Falke, Das Zolhvesen, pp. 33 et seq. THE HISTORICAL FORMS OF TAXATION. 393 declined. The imperial edict of the Emj)eror Sigismund (1430) reasserts the principle that the right to levy a toll is based on the rendering of an equivalent. Finally, in the midst of the decline of the Empire, a notable attempt was made to establish an imperial toll system, which was intended to further the realiza- tion of the imperial idea, but for this very reason was impossible of realization under the circumstances then existing. This was the scheme of Charles V.' to establish a system of toll collection at the frontiers of the Empire ; duties at the rate of four per cent, to be collected on all goods imported or exported, with the exception of all food products indispensable for daily use, but including all members of the Empire,^ even the Emperor and the Electors (1522). The scheme failed, both on account of the difificulties besetting the Empire at the time, and especially on account of the opposition of the imperial cities, which pointed out that the German Empire, beyond all other nations, was bur- dened with a multitude of heavv internal tolls and that trade would be unable to bear such an additional burden. In jioint of fact, this reform could be achieved in Germany onlv bv passing through an intermediate stage. The power of the territorial princes had grown so great through the feebleness of the imperial authority, that the reform would first have to work its way through this intermediate structure, and from that point gradually penetrate the imperial commonweal. § 263. The German Empire had not succeeded in transform- ing the mediaeval toll system into a national system of frontier duties, after the manner of the other European states. This service had to be performed for Germany by the territorial princes. We shall briefly review the policy of the principality 'Falke, pp. 60 et seq. Cf. Ranke, Deutsche Geschichte, vol. vi. p. 36. ^Similarly the gerneine Pfennig of the German Empire is levied on every prince, archbishop, nobleman and official, as well as on citizens and peasants ; this was of course one more reason for the opposition to the measure on part of the estates of the realm. The legislative recognition of the tax exemption of immediate members of the Empire \_Reichsunmitlelhare^ in the laws of the nineteenth century, therefore, answers not so much to the legal ideas of the Middle Ages as to the deteriorative form of these ideas current in later centuries. — Lang, Ursprung, p. 190. 394 THE SCIENCE OF FINANCE. which has, more than any other, been instrumental in resuscita- ting the imperial idea, and substituting it for the inherited scheme of independent states ; this principality was Brandenburg-Prussia.' All historical development proceeds by degrees. The great end of the movement is reached by first compassing the lesser intermediate ends which mark the stages along the way. The consolidation of the imperial territory into an economic whole is the concluding act of a movement towards which the political unification of the territory, centuries earlier, served as an intro- ductory measure. The unified territory itself had for its model the unified economic domain of the mediaeval city. The system of tolls was, for this evolution, both a hindrance and a help. The advance which it promoted consisted in this, that the eco- nomic domain which was at any given time united in a single political organization — the city, later the territory, finally the Empire — drew the line of prohibition and hindrance along its frontier, and thereby furthered its own internal economic unity. An attitude of forbidding egoism towards outsiders leads to the strengthening of the city, then of the principality, or in England, France and the like, of the realm. The toll system, and its employment in the interest of the country and against all out- siders, is an effective means to this end. The economic policy of the mediaeval city, therefore, furnishes the model for the toll policy of the large states, or, more immediately, of the principal- ities. The so-called mercantile system is not simply a phenom- enon of the seventeenth and eighteenth centuries ; the deeper meaning of the system is this tendency which has been working itself out gradually from the Middle Ages down to the latest times. It is not an ephemeral doctrine belonging to a single generation, but it is the expression of an immutable bent towards a conscious shaping of the national economy into a unified organic whole. - ' Schmoller, Studien iiberdie wirthschaftliche Politik Friedrichs des Grossen. — Jahr- buch 1 884-1 887. The Same, Die Handehsperre zwischen Brandenburg und Pommerti im]. 1562. — Zeitschrift fiir preuss. Geschichte 1882. ^Cf. K. G. Kries, Histoi-ische Entwicklutig der Steuervcrfassung in Schlesien (1842), pp. 72-84. THE HISTORICAL FORMS OF TAXATION. 395 The lever which served the HohenzoUern princes in the development of the toll system within their principality was the privilege granted by Emperor Frederick III., in 1456, to apply to their Brandenburg and Franconian territory, of increasing or changing existing tolls according to their ])leasurc, of levying new tolls, of taxing wine, beer and other articles consumed in their territory or transported through it. The first attcmi)t to use this privilege on a large scale was made by Albert Achilles in 1472. His scheme was thought out with equal care both in its political and its financial bearings. The new tunnage was to be collected by roval ofificials in the cities, entirely independent of all previously existing tolls ; only a small number of articles in extensive use, viz., fish, herrings, wine, honey, lard, tallow, meat, tar, and other goods in barrels were to pay three groschen per tun. Beer was left untaxed because it was the most impor- tant article of manufacture and export in the cities of Branden- burg. The toll was to be of the nature of a frontier duty, in that it was paid only at a custom house and that the dutiable goods were thenceforth free. The cities opposed this plan in much the same way as they afterwards opposed the project of the Emperor Charles V. for an imperial toll system. But the sixteenth cen- tury is taken up with a long series of efforts of the same kind, this time successful, by the Electors of Brandenburg. In particular, the Lenten corn duty was developed (1569) into a general export duty on corn and remained the chief source of the reve- nues of the Electorate throughout the sixteenth and seventeenth centuries. It was farmed out to Denmark for a time at 200,000 reichsthalers. In the Marches the course of events was the same as in Pomerania and in all the other larger territories. The dominant motive was furnished by the interests and fiscal needs of the state, which necessarily traversed the interests of neighboring states, as, in detail, they also traversed the interests of the cities and of domestic commerce. It was a toll system which com- bined fiscal considerations with considerations of industrial policy, and in both of these respects served as an instrument in 396 THE SCIENCE OF FINANCE. the hard work which it has cost to build up the modern national organization. § 264. The era of the territorial toll policy of the princes in Germany closed with the development of the ZoUverein, which prepared the way for the unified toll system of the newly created Empire. The tariff wars of the seventeenth and eighteenth centuries^ were replaced by a common toll policy and common toll frontiers among the individual territorial states of Germanv." In Prussia, which afterwards became the centre of the ZoU- verein, the preparatory steps (1816) towards a reform of the toll and tax administration began immediately after the Wars of the Liberation. On July ii, 18 16, the water-tolls, the internal-tolls, the provincial-tolls were abolished (first in the older provinces), and the government on the same occasion for the first time declared its intention to introduce "a general and uniform system of frontier duties instead of the complicated system of tolls, transit duties and commercial duties which had grown up in earlier times." The intentions of the government coincided with the wishes of the business population, as is shown in an address by manufacturers of the Lower Rhine provinces, of April 27, 18 1 8, where the complaint occurs : "Our products are exclu- ded from all the markets of Europe by tariff boundaries, while all the products of Europe find an open market in Germany." The new tariff law went into effect May 28, 1818. This law 3 had, in the first place, to solve the problem of a uniform tariff frontier ^ for the scattered territory of the Prussian 'Johann Falke, pp. 269 et seq. ^Gustav Fischer, "Ueber das Wesen und die Bedingungen eines Zollvereins" (Jahrbticher fiir Nationalokonoviie, 1864). Falke, pp. 348 et seq. Fr. List, Ges. Schriften (1850), vol. ii. pp. 15-62. Fr. Nebenius, Denkschrift fur den Beitritt Badens zum Zoll- verein (1833). 3 J. G. Hoffmann, Die Lehre von den Steiiern (1840), pp. 340 et seq. Dieterici, Ztir Geschichte de}' Steuerreform in Preussen 18/0-1820 (1875), pp. 197 et seq., 1 12 et seq. ■•On May 8, 1768, for the first time appeared a declaration requiring custom houses to be established all along the frontier; cf. Dieterici, p. 13. The earliest edict dealing with the question of a uniform toll administration and the abolition of internal^tolls appeared on Oct. 26, 1805. THE HISTORICAL FORMS OF TAXATION. 397 state, and the difficulty of this problem drove the government to a ZoUverein with the neighboring German states. The tariff frontier which Prussia had to guard in 1819 stretched over 1073 miles; by the end of the year 1837 the Zollverein, with a popu- lation of 25,500,000, of which little more than half belonged to Prussia, had a tariff frontier of only 1064 miles in all. The tariff of 18 18 originally made a distinction between a duty (on the gross weight of the goods), and a consumption ta.x on the net weight. The duty amounted to a uniform tax of one- half thaler per cwt.; the consumption tax was for the most part levied at a rate of about 10 per cent, ad valorem. (Exports were free of duty, with a few exceptions.) By 1821 the duty and the consumption tax were consolidated into an "import tax" [^Eingangsabgabe^ . This tariff, as well as its successors in the united tariff territory of the German states, has the qualities both of a fiscal tariff and a moderate protective tariff. The imjjort duty is well adapted to serve the purposes, on the one hand, of levying a consumption tax on articles the use of which is taken to indicate the degree of ability to pay taxes, and on the other hand, of erecting these same taxes into a barrier against the free com- petition by foreign products in the domestic market. A blend- ing of these two purposes, both of which are readily served bv the tariff frontier, arises even unintentionally in the case of all articles which are produced at home as well as abroad ; a pro- tective tariff will afford some revenue from the foreign imports, while a tariff for revenue acts to some extent as a measure of protection for domestic production. The purely fiscal duty reaches its logical consequence only in cases where everv measure of protection for domestic production is avoided, and the import duty is confined to such goods as are not produced at home. Most of our modern states, Great Britain excejjted, have never yet reached this stage in their tariff policy, however near to it they may often have believed themselves to stand ; they have rather, in point of fact, departed farther from it dur- ing the last ten or fifteen years, and are in possession of a tariff 398 . THE SCIENCE OF FINANCE. system which, on account of its blending of the two purposes of a tariff, has lately been well named the "mixed" tariff. But whether taken together or separately, these two objects represent the public function of the tariff system which, in our most mature state organizations, has replaced the primitive market, river and road toll, at the same time that the frontier of the consolidated industrial territory has taken the place of the mediaeval subdivision and diversity.^ IV. THE EXCISE. § 265. Even as late as the Prussian tariff of 1818 we find a distinction drawn between Duty and Excise. The latter term has been used since the Middle Ages as the customary designa- tion for what we today call taxes on consumption. It answers to the earlier term^ Ungelt {indebiturn) , ,which was chieflv used during the earlier centuries. But in a document dating from 1 340 the word Zyse is used as synonymous with " Ungelt." 3 From the fifteenth century Accise (or more frequently the more con- venient form Zise^ gradually comes into general use. Just as was the case with the term Ungelt, so also this term is applied in the case of those articles of consumption which are taxed on being imported into the tax territory, as well as in the case of articles produced at home and therefore taxed at home. ' As is the case generally, so also on this particular point, Switzerland exhibits the conditions of the Middle Ages the longest and carried to the highest degree. A report of May 13, 1823, by the Swiss Federal Revisor of Toll Accounts, I. C. Zellweger, to the Assembly, on the Swiss toll administration, says : " There are in existence within the boundaries of the League over four hundred duties and road and bridge tolls, which make up a very parti-colored picture. In some places road and bridge tolls are levied on the team or on the wagon, in other places on weight or on the goods ; it is even possible to find instances where the toll levied on each horse may vary as widely as one to four, according as the animal is used in transporting one kind of goods or another. Again, we find an accumulation of fees under the designations Zolle, Geleit FukrleiteHgeld, Bruchgeld, Trattengeld, Weggeld, Briickengeld, Susfgehl." The public clerk of Zurich, J. H. Hottinger, who cites this report, remarks {Der Staats/tans/ialt der schioeizerischen Eidgenossenschaft und ihrer einzclnen Ket>ubliken, p. 1 1 8) that the same statement will hold true generally in 1847. ^ Cf. sec. 55 above. 3 Lang, Ursprung, p. 169. I THE HISTORICAL FORMS OF TAXATION, 399 But as this form of taxation came to be transferred from the mediaeval towns to the territorial states, it became the usage, especially in Brandenburg-Prussia, by preference to apply the term Excise [^Acctse'\ in the case of such articles as were most usually subjected to a consumption tax in the territorial domains of the seventeenth and eighteenth centuries — that is to say, domestic products for everyday consumption. In explanation of this it is to be noted that, for one thing, the consumption of foreign products in those times was not sufficiently extensive, and for another, and more especially, that the political boundaries were so ill-adapted to the purpose that an effective supervision of the boundary for the levying of taxes on imports seemed to be impossible.' The lev3'ing of imports on articles of consump- tion was confined to the towns, which were, for this reason, shut off from the country by barriers. The open country, however, was obliged to pay this class of taxes by the fact that the rural population purchased its supplies of town-made and foreign prod- ucts in the towns. Then came the further development of the tariff boundary of the country, the increase of international trade and consequently of the consumption of foreign products, together with a growing sentiment that the taxable consumption of foreign products should equitably be made to bear a heavier taxation as compared with the consumption of domestic products. This devel- opment first drew the line ( 1 82 1 ) between the concept of an excise and that of an import duty as an independent and important form of consumption-tax, and led to the creation of import duties in addi- tion to the consumption-tax (excise) levied within the country. § 266, In like manner as the personal tax, the excise also proceeds by gradations from the loose and indefinite forms of the extraordinary grant, through those of the voluntary contribu- tion and the occasional extra tax, to that of a fixed and perma- nent constituent of the finances. In the one case as in the other, there is a gradual development of the bony framework out of the primordial gelatinous mass. ' J. G. Hoffmann, Die Lehre von den Steuern, p. 341. 400 THE SCIENCE OF FINANCE. The term Ungelt {iiidebitutn) implies a contribution which is not paid on the basis of a legal claim. And while this impost very early developed in the mediaeval towns into a permanent element of the public revenue, it continued, in the territorial finances, to be for centuries, just as was the Contribution, a tax granted by the estates from time to time for a few years. ^ On account of the general consumption of beer, the beer excise was a favorite subject of grants made by the estates. The estates of Brandenburg granted the Elector in the year 1467 an excise on beer for a period of six years. During the sixteenth century this excise gradually comes to recur constantly in the deliberations of the estates.^ The estates were not at the out- set inclined to regard it as a burden assumed permanently ; on the other hand they explicitly declared in Silesia (1546) that the grant was, at the expiration of the four years, "to be entirely null and void." But the actual result proved to be different. The tax was not only not discontinued, but it increased fast and considerably (i 546-1 585 from one to six groschen per barrel). In Brandenburg-Prussia the excise acquired a definite and per- ' Gliemann (" Die Einfiihrung der Accise in Preussen," Zeitschrift fur die ges- S(aats7u., 1873, p. 178) says: "As a territorial tax, the Ungelt comes later than the Bede, while as a municipal tax it comes earlier than the Bede, so that, whereas the development of the taxes of the territorial finances has been from direct to indirect, in the communal taxes the course of development has been in the opposite direction." He is able to cite the authority of W. Arnold, who says {Verfassungsgeschichte der deutschett Freistddte,vo\. ii. p. 139): "The earliest, and for along time the only munic- ipal tax was one requiring the payment of a small impost on the commonest articles of necessary consumption, on corn, wine, and beer, and which was originally paid in kind. Direct taxes are of a much later origin in the cities." In agreement with this, and very explicit, is the statement of R. Sohm i^Com-ad's Jahrbilcher, 1880, vol. xxxiv. p. 260) : " As in Basle, so in all the other German towns, the municipal fiscal adminis- tration had its origin in the Ungelt." It is to be remarked that the Prussian excise continued to be collected for the benefit of the state at the gates of the towns, down into the nineteenth century. This suggests, as an obvious explanation of the levying of an excise in the walled towns of the Middle Ages earlier than in the open country, the much greater difficulty of collecting the excise in the country. The aversion to personal taxes outside the cities was at least as great as inside. I shall not venture to decide whether the views held by Arnold, Sohm and others are well founded. K. Zeumer seems not to be of the same opinion {^Deutsche Stadtesteuern, 1878, pp. 91-94), ^Kries, Historische Entwicklung der Steuerverfassung in Sc/ilesien, pp. 63 et seq. On Saxony cf. Gliemann, Zeitschrift fiir die ges. Staatsiv., 1873, p. 189. THE HISTORICAL FORMS OF TAXATION. 4OI manent form only in the latter part of the reign of the Great Elector (sec. 62), after having, through the fifteenth and six- teenth and the greater part of the seventeenth centuries been the object of constantly recurring negotiations between the Elector and the estates. For the town population it was the correlate of the Contribution, for the population as a whole it became a supplement to the latter. § 267. Lotze, in a passage in his Microcosmus where he speaks of the rise and decline and reappearance of philosophical systems, says that systems of thought which have long ago been in vogue and have then disappeared before a prevailing senti- ment of disapprobation, will come forward again after the lapse of a few years and appear as new to the short memory of men, just as a garment that has been hung away in a closet is brought out again after a few months with a semblance of renewed youth. It is not only philosophical systems that run this course. The like happens in all other fields of human thought and activ- ity. It recurs in the constitutional development of States as well as in special branches of the administration. The republican form of political organization had fallen into disrepute in the eighteenth century, on account of the abuses prevalent in the existing republics of Europe. It was the independence of the United States and the new ideas of liberty which came in with* the revolutionary era that rescued this form of national organ- ization from, general contempt and set it up as an object of gen- eral enthusiasm. In the matter of taxation, much the same has happened. The chief forms of taxation have alternately been approved and disapproved with the shifting of sentiment ; for centuries past the one class has been taken up with a one-sided enthusiasm, while the other has been treated with undeserved contempt. In this, as in other matters, maturitv of thought will show itself in avoiding the exaggerated notions of the past and holding to a reasonable balance between praise and blame. 402 THE SCIENCE OF FINANCE. The dogma of the single tax has been in favor ever since the days of the Physiocrats. During our own century this dogma has gradually assumed the form of the single income tax which is to replace all other forms of taxation ; and as a matter of fact, we find that this dogma, under favorable circumstances, exerts a great influence on constitutional and legislative development. In the seventeenth century it was the Excise that was in a similar ■ manner made the object of a prevalent enthusiasm whose relics have come down to us in the shape of a voluminous literature ; an enthusiasm that seemed to be in complete ignorance of the fact that the Excise had been in existence for a long time in the cities, under one name or another, dating far back into the Middle Ages. Now this form of taxation was to be more extensively applied, and altered to suit the larger needs of the developing national organization. It was to comprise not only isolated articles, such as beer, corn and the like, but the aggregate of all articles of consumption ; a universal excise was to be introduced. In this matter, as is so often the case, the impulse was given by the example of foreign countries which took the lead of our own country in wealth and in public institutions. These examples held out the hope of deliverance from the unspeakable annoy- ances and hardships of the personal tax. From the point of view of the state as a whole it was con- sidered as an effective means of establishing equality of taxa- tion, of abolishing the tax exemption of the privileged classes. Even in the mediaeval towns the Ungelt had come into great favor with the municipal administration as being a means for nullify- ing the tax exemption of the clergy. Later the princes used it in their struggle against the exemption of the nobility. Here we meet with another example of the changes wrought by altered circumstances. A form of taxation which was in its time employed as a means of equalizing the tax burden, inso- much as it served, at least in some slight degree, to defeat abso- lute tax exemption, — this same form of taxation, in a later age, after legal tax exemption has been abolished and has left only THE HISTORICAL FORMS OF TAXATION. 4O3 scanty remnants to recall an odious memory, has become the special object of attack of modern radicalism as producing a relative tax exemption of the rich. § 268. The increase of wealth, which showed itself in the con- sumption of many articles not necessary to subsistence, drew the attention of statesmen more and more strongly to the Excise. Even Colbert' united with his efforts for the reduction of the salt tax a heavy taxation of tobacco, wine and similar articles. While he was occupied throughout his fiscal administration with successful attempts to lighten the salt tax because salt is a neces- sity of life, he laid stress on the propriety of the wine tax as being a taxation of what is not necessary to life. He turned his attention to tobacco, and established a tobacco monopoly in 1674, and sought consistently to increase the revenues from it — the tax was so much the more equitable as anybody was free to smoke tobacco or not, as they chose ; he points out that the revenues from the tobacco tax in the states bordering on France were higher, and sets as his goal a sum of one and one-half million livres, while the receipts had so far been only half-a-million. The tax-reform project of Marshal Vauban ( 1698) was directed to a great simplification of the existing French tax system through the employment of his Dime royalc ; but from an inclina- tion to favor the people, the tax is laid primarily on the many new articles consumed by the wealthy. He wishes to retain or to reintroduce the taxes on tobacco, spirits, tea, coffee, choco- late, dress, carriages, wigs, wine and beer, because they are impdts volontaires, because they fall on consumption which is a matter of choice ; indeed thev are only penalties on luxury, vanity or extravagance.^ These taxes on consumption and on articles of luxury were at that time already highly developed in Holland, ^ the country 'Cf. Zeitschrift fiir die ges. Staats7u., 1869. ^ Dime royale, ddit. Eug. Daire. Econotnistes financiers dii xviii'"'. siicle (1843) pp. 99 et seq. 3The first comprehensive excise on beer, wine, cider and tobacco (1643) was intro- duced in England under Charles I. (W. Vocke, Geschichte der Steuern des britisclten- 404 THE SCIENCE OF FINANCE. which surpassed all others in wealth. The number of taxes was so enormous that the English ambassador, William Temple, (1672) was able to state that anyone who ate a dish of fish in Holland paid thirty different taxes on it.' Even Justi says there is no article of subsistence or necessary consumption to be had in Holland which has not paid taxes five or six times. It was the example of Holland and of the Electorate of Saxony, bordering on Brandenburg, which gave the decisive impulse to the fiscal policy of the Great Elector and his succes- sors. § 269. From the close of the seventeenth century the General Excise \^Gc/iera/-Accise'\ became a national tax institution. Its Keiches, 1866, pp. 360 et seq.). The most important article seems, at that time, still to have been beer, on which an excise was levied of one shilling for each cask of strong beer (of a price of eight shillings). On tobacco was levied, in addition to the already existing import duty, four shillings for each pound sterling in value (two shillings on tobacco from the English colonies). Cf. Cobbett's Parliamentary History of England, vol. iii. (1808) p. 115, which affords certain corrections to Vocke. Sinclair {History of the Public Revenue, vol. i. p. 46) supposes the impulse to the introduction of the excise to have been given by the success of the Dutch excise. It was solemnly declared in 1643 that the excise was to be abolished at the close of the war; but as the struggle continued, the impost was extended to bread, meat, salt and many other articles, bread and meat being afterwards exempted. Towards the close of the seventeenth century there is a further development of the excise. Under William III. and Anne the revenue amounted to from one to one and one half million pounds. By 1733 ''^^ estimation in which this form of taxation was held had risen to such a degree that Walpole pro- posed a scheme for a "General Excise" (Sinclair, vol. ii. p. 28) which was to replace all import duties. The scheme met with serious difficulties — the displeasure of the people at the proposed "servitude" defeated it; but even half a century later Sinclair sounds its praises. And in fact, the idea of free-trade herein expressed itself in quite a modern fashion, being fostered by the then existing abuses of the tariff. Of the gross receipts from duties at that time (;if3,50o,ooo) ;^2,ooo,ooo went to drawbacks (for the most part on smuggled goods) etc. But even without Walpole's scheme the excise made great progress — in the rate of the tax, in its extension to a variety of articles, and in the receipts. The receipts amounted to ;^i 0,000,000 in 1792, ;^25,ooo,ooo in 1810. With George Canning (1822) begins the era of exemption of articles of neces- sary or extended use, the simplification of the excise and its concentration on a few objects yielding a large revenue. * Observations upon the United Provinces, chap. vii. A Dutch writer confirms Temple's statement as being literally true {Dialogue sur les impots en Hollande, 1688). Cf. E. Laspeyres, Geschichte der volks7virthschaftlichen Anschauungen der Niederldnder (1863), pp. 217 ^^Jt. And especially, A. Wagner, Finanswissenschaft, vol. iii. 502-596. THE HISTORICAL FORMS OF TAXATION. 429 December 12, 1798. Then there follow the stamp duties in the narrower sense {droits dc timbre'), recast by the laws of 1790-91, and established on a permanent footing by a law of November 13, 1798. Finally there are the Recorder's Fees {droits de greffe), the main law dealing with these being dated March ii, 1799. A great number of laws and regulations have effected changes in these during the course of the nineteenth century. In this field, as in the political system generally, the point of departure for the legislation has been the earlier institutions. Except for this continuity of development, the great compass of this taxation and the relative ease with which it is borne would scarcely be comprehensible.' The old droits de controle, the origin of which is traced back to Henry III., were, as the droits d' e?iregistreme?its have been since 1790, an impost on all legal transactions performed with or with- out the cognizance of the courts. These acts are now classed under three heads according to their character, one class being subject only to a fixed tax, the second class subject to a gradu- ated fixed tax, and the third class subject to a tax proportioned to the value involved. The two former approach the character of fees, and are of slight fiscal consequence relatively to the degree of their interference with business and to the income yielded by the proportional tax, the latter being of greater financial consequence. This latter tax is levied on documents and on events which confer rights of property or ownership ; the revenue derived from it amounts (1886) to 413.50 million francs, of which 200 millions come from the tax on inheritances and donations, 139 millions from the tax on sales of real estate, 56 millions from the tax on leases, rentals, evidences of debt, etc. The average rate of taxation of inheritances and dona- tions (ranging from one to nine per cent., the lowest rate men- tioned falling on the nearest degrees of kinship) is 3.13 per 'In the year 1788 the answer returned by owners of rural property to the circular letter of inquiry of the provincial assembly declares, among other complaints of tax oppression: "Les droits d' enregistrement sont dcrasants." — Tocqueville, L'ancien rigime, p. 299. 430 THE SCIENCE OF FINANCE. cent.; the average rate on the value of real estate is 6.61 per cent.' We have here a tax falling heavily on property, and so serv- ing to make good the absence of income and property' taxes which is characteristic of the French tax system. It serves this purpose in a somewhat dubious fashion, but quite effectively as judged by results. There is this to be said in its favor, that it is levied in a relatively more agreeable and therefore less oppressive form than the income and property taxes, to which the French char- acter seems to harbor an antipathy. The stamp dues proper, which are by principle levied on all papers used for business or legal documents, are classed as dimen- sion stamps (according to the dimensions of the stamped paper), proportional stamps (increasing in proportion to the value of the objects), and special stamps of fixed value. The latter have been developed especially during the last generation and are attached to a great variety of commercial papers (receipts, brokers' cer- tificates, checks, freight bills, insurance policies and the like). Drafts and securities, on the other hand, are subject to the pro- portional stamp, which amounts to one-half per mille on drafts and similar papers and yielded (1886) 14 million francs; on securities (stock exchange papers) it is imposed as a tax on their issue (one per cent, of the face value), and yielded 20 million francs. The aggregate revenue from stamp dues was i 56 million francs. As a third class there is to be added to the preceding the droits de grcffe (recorder's fees). These are payments for the services of the Recorder, and are therefore of the nature of fees (1886, 8 million francs); with these are to be classed mortgage fees (1886, 5.68 millions). The growth of this class of taxes, which are of so great importance to France (and so instructive for other states), is shown by the following figures :' ' Warner, vol. iii. pp. 523 et seq. A supplementary taxation of securities was introduced in 1857, which yielded in 1886, 37 million francs. — Wagner, pp. 533 et seq. ^ Wagner, vol. iii. p. 567. THE HISTORICAL FORMS OF TAXATION. 43 1 1816 - -- - -143 million francs 1850 - - - - - 248 " " 1869 - - - - - 461 " " 1886 - - - - - 675 " " VI. MONOPOLIES (royalties). § 284. Although the system of royalties, as a fiscal resource, properly belongs to an early stage of the development of the public exchequer, and is intelligible only as conditioned by the circumstances of the epoch to which it belongs, while in connec- tion with the modern public economy it is to be treated of only for the purpose of destructive criticism (cf. sees. 71—77 above), still there is one element of that system which has maintained itself as part of the modern system of taxation at the same time that it dates far back into the past. This is the state monopoly. Aristotle ' tells us that the buying up and exclusive sale of a given article was known to the commercial world of antiquity as a favorite method of acquiring wealth ; that Thales of Miletus had emploved this means to silence those who ridiculed his poverty, by showing that the wise man is poor by choice because he despises wealth although his knowledge gives him the power to acquire wealth. He was able to foresee by observation of the stars that the olive crop would be unusually large ; accordingly he bought up all the oil-presses in Miletus and Chios and let them for hire during the harvest at a great profit. Many states have profited by this class of traffic, adds Aristotle [fiovoTruiXiav yap twc wtwv TToiovo-tv) . From other sources we have accounts of a variety of monopolies in Greece and Egypt. It was an obvious expedi- ent for the Greek statesmen, since the state looked upon the con- trol of trade as its proper function.^ In Rome the salt monopoly was introduced during the early years of the Republic, because the price of salt had been greatly increased by speculation on the part of the traders .3 A reg- ' Politics, i. 4 (Ed. Bekker, i. 11). ' Bbckh, Staatshaushaltung der Athener (2 Ausg. 1 851), vol. i. p. 75. Cf. Strabo, 17, p. 798. 3 Marquardt, Romische Staatsverwaltung (1876), vol. ii. p. 155; cf. vol. ii. p. 2" I. Mommsen, Komisches Staatsrecht, vol. iii. p. ii 15 (1887), supposes the monopoly to have 432 THE SCIENCE OF FINANCE. ulation in the laws of Justinian also points to the existence of a salt monopoly during the later times of the Empire.' During the Republic this monopoly appears to have afforded no consid- erable profit, but to have been maintained chiefly for the public benefit, to keep the price of salt down (as is the case with the salt monopoly in the canton of Zurich today) . Under the Empire however it seems to have been used for fiscal purposes, and to have been farmed out.^ § 285. The mediaeval city is to be mentioned in connection with these accounts handed down from antiquity, inasmuch as it shows a predilection for the salt monopoly as a factor in its rev- enue system, employing it along with a variety of other monop- olies, such as that of the retailing of wine (sec. 57). The rela- tive importance of salt during earlier stages of culture,^ the extreme localization of its production,"* the public obligation to provide a sufficient supply, readily suggest to the public author- ities the expedient of taking over the business of its sale. The salt monopoly was introduced into Zurich by the burgomaster Hans Waldmann (1483). It was chiefly by this means that he improved the finances of the city:^ all who paid taxes or ren- dered military service to the town were obliged "to provide themselves with salt from the town." Until that time the trade in salt had been in the possession of one of the thirteen guilds in Zurich which had, even during the thirteenth and fourteenth centuries, had the exclusive sale of salt, selling it in their own salt warehouse in the salt-market.^ From the middle of the seventeenth century the salt monopoly been such only in point of fact, as a consequence of the low price at which the goods were offered. ' Cod. Just. i„b\, II. "^ Mommsen, Rbmisches Staatsrecht, vol. ii. (2d ed. 1877), pp. 430 et seq., note 7. 3 V. Hehn, DasSalz, eine Kultiirhistorische Studie (1873). ^^Justi, Staatswirthschaft, vol. ii. sec. 199, goes so far as to derive the salt monopoly from the mine monopoly. SBluntschli, Staats- und Rechtsgeschichte der Stadt- und Landschaft Ziirich, vol. i. P- .ISS- N'S. Vogelin, Das alle Zurich (1829), p. 215. THE HISTORICAL FORMS OF TAXATION. 433 was exercised by the governments of Berne and Lucerne within their cantonal district, and was gradually extended also to the city's manorial estates. It came to be the custom that each of the ruling classes, during the years for which it had the right to appoint the district governor, was also entitled to farm the salt trade \^Die Besalzimg\ of the district.^ In the year 1399 the city council of Zurich enacted'^ that the city exclusively was to retail all imported wines ; the ofifice of wine master was erected into a civil office, but it was afterward (1578) farmed out. § 286. The fuller development of the system of monopolies belongs to the centuries following the close of the Middle Ages and during the rise of the monarchical state. The monarchical power of England, France and certain of the German principalities turned to the monopoly as a means of remedying their financial embarrassments, and at the same time as a means of furthering the public welfare by encouraging industrial activity in various directions. It is instructive to note that such a statesman and financier as Colbert in France, and that the Tudors, especially Queen Elizabeth, in England, fur- thered the development of the monopolies. In Germany the Electorate of Saxony led the way. Its exam- ple was followed by the Great Elector and his successors. They figure as undertakers of industrial enterprises and bring crafts- men into the country by means of monopolies and privileges. 3 The fiscal glass industry was extended and expanded into a man- ufacture of mirrors ; copper and brass forges, iron and steel works were erected at public expense, and the import of competing goods prohibited or discouraged. The Elector came to a settle- ment with Luneburg in 165 i with respect to the debts of his house, and at the same time also with respect to new supplies of salt \^ 'Blumer, Slaats- iitid Rechtsgeschichte der Schweizer Demokratien, vol. ii. p. 286. ^ Vogelin, Z)aj a//^ Ziirich, p. 214. ^Schmoller, Die Epocheii der frenssisc/ten Finanzpolitik, pp. 66 et seq. ••SchmoUer, yfl/ir(^«g2). The following figures are from the Thirty-fourth Report of the Postmaster General (1888, p. 3). The number of parcels (of which aportion were not carried by rail) rose from 22.90 millions in 1884-85 to 36.70 millions in 1887-88. The receipts in 1887-88 were ;^8i 1,764, of which the railways received ^^401, 295 (55 per cent, of the receipts from the parcels-post). The difference is due to the fact that other means of transportation besides the railways were employed for the carriage of the mails. In addition to this, the postoffice paid ^^89 1,782 (1888-89). — .\ccording to a statement received by letter from the English General Postoffice. 45S THE SCIENCE OF FINANCE, This brings us face to face with questions which are not (as is often supposed) already disposed of, but require further dis- cussion. This matter will be taken up in its proper place later on. VII. OBJECTIVE TAXES (tAXES ON PROCEEDS). § 297. In taking up the consideration of objective taxes, the concept of which contains implicitly a contrast with subjective taxes, we are treading the historic ground of the scientific period of tax development. The consciousness of this contrast is absent in earlier times. It was not until the nineteenth century theory brought it forward that it came into the foreground ; its logical consequences have become evident only very recently. Objective taxes, however, considered as a distinct group of taxes, are of so great importance, their presence in the modern system of taxation is of so great conse- quence that at least the leading types of the development deserve to be noticed. The scientific epoch in the history of taxation, although it partakes largely of the character of the eighteenth century and of the new science of political economy, and although it very boldly opposes and criticises the abuses of the earlier political and financial system, is still, in one respect, affected by the sobering influence of experience, and that to such a degree that it is only very lately that the idealistic view of life and of the science has been able to set aside the realism of that early day. There took place a sobering of the views on personal taxes. Very much in the same manner as the small city republics brought the idea of popular sovereignty into disrepute in the eighteenth century,' so that a considerable further development in theory and experience was necessary in order to reinstate it in the position of importance which it holds at present, so also in the case of the personal taxes. The days of the republican virtue, and of its tax system, such as Macchiavelli found it existing in the German cities alone, were by this time past in those cities ' H. S. Maine, Popular Government. THE HISTORICAL FORMS OF TAXATION. 459 also. It is the abuses of the tax which obtrude themselves on the notice of any observer of the state of affairs in the eighteenth century. The best that \vc can expect to find will be excejjtions from the demands and presumptions which arise out of the greater size which is normal to the modern commonwealth. Theoretical writers, lik'c Justi and Smith, combat the predilection for personal taxes by citing the unfavorable experiences of the past.' The teachers of Finan- cial Science followed in their footsteps for a hundred years. ' One reason which was present in the substitution of taxes on realty for personal taxes was the wish to avoid double taxation. K. H. Lang {Ursprung der Teutschen Steuerverfassungen, p. 240) notices difificulties of this sort which had, as early as the middle of the sixteenth century, been the occasion for treaty agreements between the princes of the small German states. In practice, says he, a subject paid taxes on his entire estate to the lord within whose jurisdiction he was domiciled, even if a few acres, or even entire farms, were situated in territory belonging under another jurisdiction. So that if, for example, a citizen of an imperial city bought a piece of land in a neighboring village which was in the jurisdiction of a territorial prince, the land having previously belonged to a subject of the prince, then the tax on this land would no longer be paid to the prince but to the city treasury. Such property was called " rolling estates" [walzende Giiter^, because they shifted from one tax to another according to the domicile of their owner. This shifting could not but be highly exasperating to the lord to whom taxes were to have been paid. He was unable to count on any income with certainty, and an estate which today owed taxes to him might shift over-night, bv an unforeseen sale or inheritance, so as to owe its taxes to his neighbor. The neighborhood of the imperial cities was especially detrimental to the territorial princes, inasmuch as the wealthier inhabitants of these cities frequently bought up whole villages with their outlying fields, and so left frightful gaps in the tax list. It is, there- fore, not to be wondered at that the territorial princes opposed this continued shifting with all their might, and finally brought it about that thenceforward the estates should no longer shift but should "fly" [/liegen'\ instead; that is to say, they might pass out of the hands of one owner to any other, whether citizen or alien, but they must pay taxes the same as before (an example occurs in a decision of the city council of the imperial city of Nuremberg, August 11, 1719). Still, the "flying," too, encountered great obstacles, and the princes finally succeeded in making the estates "lie immov- able." For this purpose they were then duly surveyed and were entered in a regular cadaster on register and invoice books, their area, boundaries, and the names of their owners being specified. They were then subjected to a schedule of taxes (as to the details of this taxation, see L D. Eulner's Praktische Vorschrift, welchergestalt Steuer und Koniribiition nach Attleitiing der Keichsabschiede einzurichten set. 2. Aitfl., Marburg: 1741). In the territory of Wurtemberg, f. g-., the process of redistributing the tax and assessing the estates began in 17 13 and continued until 1741. The instructions are that the Commissioners must not assess according to the current price of the estates, as in former times, but are to base the assessment on the income they 460 THE SCIENXE OF FINANCE. The tax theory of the entire abstract school of the Physiocrats, in whose theory empirical knowledge plays but a negative part, afforded a staunch support to this direction of the develop- ment of financial theory ; for their doctrine of the single tax became the foundation of the whole of the modern European system of objective taxation. It is not exactly praiseworthy, although it is excusable in a youthful science, to have gone on in this direction long after the new epoch in taxation, though unrecognized in theory, had been introduced into practice by the course of events. The greatest of Adam Smith's disciples among practical statesmen, William Pitt, is far in advance of his teacher on this point. § 298. Justi^ sets up the fundamental principle of taxation that the taxes must rest on a secure, stable and unequivocal basis, and must consequently be laid on objects from which it cannot only be collected expeditiously and with certainty, but with regard to which fraud and concealment on part of the subjects, and peculation on part of the tax collectors, cannot easily take place. These requirements are best fulfilled by the tax on landed property, and this tax has consequently come to occupy a prom- inent place in the fiscal system of every civilized people. In com- parison with this land tax a general income tax^ is condemned by Justi, for the reason that it involves a publication of the amount of the taxpayer's property, which is detrimental to the yield, no distinction being made between tliose owned by citizens and those owned by aliens ; the arable land is to be,ranged in six classes for the purpose of assessment, meadow and pasture in seven classes, vineyards in five classes, on the basis of the average yield of six, three, and ten years respectively. The general disposition being made, the aggregate of the revenue required by the country was then distributed among the different districts, either in the form of fixed amounts or by months, and, inasmuch as every subject had a definitely computed capital on which to pay taxes, there was no difficulty in the way of determining the amoimt of taxes to be paid by each hundred within each district [Am/], and by each individual subject in detail. This contrivance, says Lang, had been pretty commonly in use in the countries of Germany since the middle of the eighteenth century ; a readjustment being effected from time to time by a revision of the tax registers. ' Staatswirthschaft, vol. ii. pp. 294-320. ^Vol. ii. pp. 321 et seq. Cf. also vol. ii. pp. 418-420. THE HISTORICAL FORMS OF TAXATION. 46 1 credit of merchants and is annoying to all men. Such an income tax could scarcely be adopted by a wise government. There is a warning in the example of the city of Nuremberg, at one time wealthy and beautiful, but whose population is now dwindling daily, which must be attributed mainly to their cmj)loyment of this class of taxes.' We are familiar with the similar views held by Adam Smith. The historic structure of the French tax system prepared the way for the Physiocrats and for the development of French tax- ation along the lines of their theory ; a development which came to serve as a model for Germany and for other states. Even under the old regime there is distinctly perceptible a tendency toward the transformation of the burdensome system of personal taxes into the less burdensome and less arbitrary form of objective taxes. The taille, by tradition the cardinal form of the personal tax, was, according to an official expression dating from the year 1772,^ "arbitrary in point of apportionment, solidaire in the method.of collection pursued, a personal, and not a land tax in most parts of France, and subject to continual changes in conse- ' Personal taxes frequently develop into taxes on realty. So, for example, the tax on realty in the province of Silesia grew out of what was originally a property tax \^Schatzungssteuer\ (K. G. Krits, Historische Entivicklung der Steuerverfassung Schles- iens, pp. 37 et seq). Similarly the English land tax was originally an income and property tax. Sinclair {^History of the Public Revenue of the British Empire, 1803, vol. i. pp. 277, 304, vol. ii. p. 8) repeatedly cites evidence of this fact from the history of the seven- teenth century. He says that at the accession of William III., none other than a tax on landed property would be sufficiently productive, land being at that time the chief source of wealth. In order to make this tax as effective as possible, a new assessment of the property and income of each individual was undertaken. The result varied greatly from one person to another. The taxpayers were more or less ready to make an ade- quate return of their property in proportion as they were more or less well inclined to the new government. The adherents of the Stuarts returned their property as low as possible. For this reason, adds Sinclair, the assessments which have since then been known under the name of the land tax were by no means so productive of revenue as they should have been. Even earlier than this, under Charles II., Parliament decided (vol. ii. p. 277), in order to the better support of the troops, "to levy assessments on the personal and landed property of the people .... Under the denom- ination of a land tax, they have since formed a very considerable branch of the public revenue." Cf. also Gneist, Englische Verwaltungsrecht, 3d ed., pp. 625 et seq. 2 Tocqueville, Vancien regime, p. 207. It is a confidential communication from the Comptroller General to the Intendants. 462 THE SCIENCE OF FINANCE. quence of alterations occurring every year in the pecuniary means of the taxpayers." The ofifice of tax-assessor and tax-collector was held by a member of the commune, and since it was looked upon by everybody as a misfortune, it was held by each one in turn, for a year at a time ; the miserable incumbent was surety with his person and his property for the payment of the prescribed amount. Turgot says of this ofifice that its consequence was desperation and, almost invariably, the ruin of the incumbent ; whence it came that the well-to-do families were, one after the other, reduced to beggary, while in their relation to the lower classes it was a fear- ful incentive to the exercise of arbitrary power. Under this s_ys- tem it was everybody's interest to conceal his own wealth and to keep a watch upon his neighbors and inform the assessor. Such was the state of the case in the greater portion of France. But there were, even at that time, particular provinces in which — in connection with certain survivals of self-government' that had been preserved by good fortune — the Taille had not assumed this oppressive character because it had remained an ' With this may be compared what Gneist [Englisches Verrvaltungsrecht, 3d ed., p. 624) says about the parallel development of English institutions : England had, in the course of this century, developed so varied a system of direct taxes as to have made a very thorough acquaintance with the legal difficulties in the way of assessed taxes. The Norman tallages and proportional taxes, as administered by the Exchequer, the itinerant commissioners and the sheriffs, impressed upon the island nation earlier than upon the continental peoples the fact that there can scarcely be any free owner- ship so long as the individual is liable to be taxed arbitrarily by officers of the crown. The corrective to this evil is to be found in the following principles tested by the experience of centuries, (i) that all assessed taxes must be assessed exclusively by officers of the local self-government, (2) that the development of this national tax went hand in hand with the development of local taxes, with a like method of assessment, reclamation, levying and collection, (3) that with the gradual destruction of free choice on the part of the people a tendency to make assessed taxes objective and specific, asserted itself. The income taxes of the local self-governing bodies have, both in practice and in law, uniformly been changed into taxes on visible, useful, real property, which permits of an assessment on the basis of leases and rents. In the collection of national taxes the custom came to prevail more and more as time went on, of basing it mainly on landed property, which was readily ascertainable by the officials who made the assessment. At the same time there was manifested a constant tendency on the part of landed property to commute its taxes payable to the state into fixed annual payments, and to rid itself of the demands by payment of a lump sum without regard to the increasing needs of the public treasury. V THE HISTORICAL FORMS OF TAXATION. 463 objective tax, in fact a tax on realty. In the Languedoc,' for example, one of the most fortunate of the provinces under the old regime, the case was such as we have described. The Taille rested only on landed property ; it did not change with the changing fortunes of the landowner ; its basis was a hard and fast cadaster, which was constructed with great care, and was revised once in thirty years. By this means every taxpayer knew beforehand exactly what part of his net receipts he had to pay yearly. There was no personal or other security for the tax, except the plot of ground on which it rested. All these provisions, remarks Tocqueville, correspond with precision to those which we apply today ; no improvement has been made since that time in the provisions, but they have been extended to apply to the whole country uniformly. And this historical fact is not all ; it is an integral part of what Tocqueville aims to prove — namely, the intimate connection between the political machinery of old France and the new — but he also goes on to argue from this development of the new French tax system to the permanent adequacy of the tax reform ; so excel- lent a historian is he, and so excellent a Frenchman, § 299. In view of this historical relation the objective tax system of the French Revolution appears in quite a different light from what it does when viewed from the standpoint of the modern German tax system and its theory.. For that epoch and that people, it was a great deliverance and a great step in advance. The prominent place occupied by the tax on realty in this system is due to causes which had, for hundreds of years past, acted to make landed property the chief object of taxation ; it was the chief element of wealth at the stage' of industrial development which was then prevalent, it is the most palpable object at every stage of industry, and there subsists, in an emi- nent degree, a connection between landed property and the wel- ' Tocqueville, L'ancieti regime, p. 211 ; cf. p. 347; cf. Parieu, Traite des impdts, vol. i. pp. 223-224. [ 464 THE SCIENCE OF FINANCE. fare of the commonwealth. This view was expressed in scientific form by Justi, and Adam Smith and his school afterwards spread it abroad. The Physiocrats are advocates of the same doctrine, only in a cruder, more abstract, more exaggerated form. In view of all that we observed with regard to the legislation gener- ally, and particularly the tax legislation, of the French Revolu- tion, it seems improbable that the authority of the Physiocratic doctrine alone would have been sufficient to establish the tax on realty as so essential a factor in the French tax system, if that tax had not at the same time fitted in so precisely with the facts of the case. The law of November 23 and December i, 1790,' introduced a tax on realty, to be assessed in proportion to the average net rental. The net income from property was to be found by an appraisement, taking account of the character of the soil and the kind of cultivation, and with deduction of the cost of culti- vation. For city property (buildings) the basis of the tax was to be the rental, after deduction of one-fourth for wear and tear, etc. The sum to be raised by the tax was to be determined beforehand by a legislative act, so that the officials having charge of the assessment would simply have to distribute the aggregate amount of the tax among the individual parcels of property. The tax was to be collected beginning with January i, 1791. The uniform appraisement of net income from the land met with great difficulties. TJie provision that the tax must in no case exceed one-sixth (1791), afterwards one-fifth (1793) of the net rental was not found sufficient. It appeared that resort must be had to a cadaster, in which each particular property was regis- tered, specifying the character of its cultivation, its net rental and its boundaries. The cadaster was begun in 1807 and was not finished until 1850. But inasmuch as this painstaking and tedious task was carried out without taking into consideration changes in cultivation and in the net rental, it presented only a 'Vuatrin et Batbie, Lois administratives fran(;aises (1876), pp. 342-481. A. Wagner, Finanzwissenschaft, vol. iii. (1888), pp. 432-502. Von Reitzenstein, Das A'ommunalsteuersystem Frankreichs und die Reform in Preussen {Schrifien des Vereins fiir Sozialpolitik, vol. xii. 1877). THE HISTORICAL FORMS OF TAXATION. 465 picture of the situation at the moment of the first assessment, no account being taken of any change except changes of owner- ship, changes in tax exemption, and the destruction or con- struction of buildings. But in consequence of the lapse of time since the beginning of the cadastration, it came to pass that the cadaster was not an accurate expression of a real situation with respect to net rental, even at the time of its incejjtion. Imme- diately after the cadastration was concluded it was ofificially ascertained that the tax on realty in France varied from 3.74 per cent, to 9.07 per cent, of the net rental. It amounted on an average to 6.06 per cent, of an appraised revenue of 2645 ^n'l" lion francs. In addition to all this, changes in the net rental have also taken place, and (according to official enquiries, 1851-1880) the net rental varies greatly with variation in the kind of cultivation.' The intention of the legislators to establish a distribution of the tax on realty in proportion to the net rental was therefore not accomplished by means of the cadaster either. At the same time the harshness of these inequalities have been, to a slight extent, made more tolerable by avoiding any increase of the aggregate amount of the tax. In 1790 the aggre- gate was fixed at 210,000,000 francs, in 1804, at 184,000,000, in 1821 it was lowered to 154,000,000, in 1859 it was 162,000,000, in 1 884, 1 75,700,000 francs. Of course the supplementary taxes for departments and communes are a factor of some importance, and of growing importance (1838, 70.78 millions, 1851, 96.3 millions, 1885, 192 million francs). If the question were simply that of increasing the tax to correspond with the increase in net rental that has taken place during the century, this increase of the com- munal supplementary taxes might probably be regarded as a sufficient increase of the tax as a whole. Even an increase of ' The net income per hectare was : Garden Arable - . . . Meadow - - Vineyard - - - . Forest - - . - I85I Francs 119. 61 1880 Francs 166.06 Increase per cent. 3S.0 42.49 56.47 33-5 72.60 96.67 33-1 69-38 129.95 87.3 20.18 22.50 II-5 466 THE SCIENCE OF FINANCE. the tax beyond this proportion would be quite feasible and proper. The inequality that is properly to be complained of is that which results from the imperfect character of the cadastra- tion. § 300. Even at the outset the tax legislation of the Revolu- tion did not proceed on the Phvsiocratic doctrine that the land tax was to be the sole tax. On the other hand there was intro- duced at the same time (December 5-19, 1790, January 13, and February 18, 1791) the "Personal and Personal-Property Tax" \impot persontiel et 7nobilier\. The purpose of this latter was to supplement the land tax by reaching incomes which are not drawn from landed property. In this case, too, the problem was to divest the taillc of the arbitrary character it had hitherto borne, by the addition of objec- tive, impersonal specifications. As such an external aid, the amount of rent paid by the taxpayer had been favorably con- sidered even before this time. After some tentative experiments, among which was also a personal class tax, the law of April 24, 1806, incorporated as permanent elements in the tax: (i) a per- sonal tax amounting to the value of three days' labor (minimum 50 centimes, maximum 1.50 francs); (2) the personal property tax [impot mobilier^ based on the rent of dwellings. The aggregate amount of this tax for the whole country, as well as its repartition among the departments, is determined yearly by the budget ; the departmental quotas are then distrib- uted among the arrondissements and communes, and the com- munal quotas are distributed among the individual taxpayers. The personal tax, limited by law to the value of three days' work, is the fixed element in the tax ; the product of this is deducted before distributing the amount of the tax among the individual communes, arrondissements and departments, in pro- portion to the rent paid for dwellings. From the tax so dis- tributed are exempted industrial and business establishments together with the usufruct of furniture in dwellings which are rented furnished. THE HISTORICAL FORMS OF TAXATION. 467 t This Personal and Personal-Property Tax is therefore, in part, a very moderate poll tax, which, in spite of repeated attem])ts at its development in the direction of a Class and Income Tax, still remains in an embryonic state. In part — and this comprises the greater part of the entire tax — it is an ordi- nary tax on dwellings, based on the rental of the dwelling. Here, as well as in the case of the tax on realty, it follows from the inflexible form of the tax that the revenue has devel- oped but slowly and not in proportion to the development of the national expenditures and the people's taxpaying capacity. The national tax was, in 1832, 39.41 million francs; in 1870, 55.51 millions; in 1885, 70.26 millions. The repartition of the aggregate amount of the tax among the departments has remained unchanged since 1832. Within the arrondissements and communes there is a greater flexibility ; the supplementary taxes for communal purposes showing the more vigorous devel- opment : the supplementary taxes have risen from an aggregate of 9.13 millions in 1838, to 32.86 millions in 1885 ; the communal supplements have increased during the same period from 4.04 million to 28.97 million francs. A modification of the tax is possible, in that the communal quota may be in whole or in part paid out of the receipts from the octroi (on resolution by the common council and authoriza- tion by the national government), and in point of fact this is the practice in the larger cities. Paris, for the payment of the portion not covered bv the receipts from the octroi, lavs a rental tax of a strongly progressive character (while the rate of the ordinary impot mobilier is a proportional rate), rising from zero (for rentals of less than 250 francs) to 9 per cent, (for rentals of 1500 francs and upward). § 301. Originating in 179S as a supplement to the impot mobilier, the Door and Window Tax presently became a ta.x on realt}^ by making the landlord surety for the payment of the tax. The owner's name alone is carried on the tax list. It is left entirely to him to recoup himself from the tenant for the pav- 468 THE SCIENCE OF FINANCE. ment of the tax. But this is not commonly done ; so that the tax is, in practice, a house tax, which may, under given circum- stances, be shifted to the tenant, but is not primarily expected to be paid by him. The schedule of rates under this tax was fixed by a law of April 21, 1832. The rate is graduated in proportion to the size of the dwelling and the number of openings and windows of the house, with a slight reduction on the windows of the upper (third, fourth, etc.) stories in the larger cities. This tax, also, therefore, is levied by a hard and fast schedule, and based on out- ward symptoms as far as possible without any attempt to pene- trate into the personal circumstances of the taxpayer ; it is an objective tax of characteristic French precision. But the precis- ion is a negative one, so to speak, in that it defines very clearly what are the rights and liabilities of the taxpayer (though it leaves room for a good deal of casuistry in individual cases), rather than positive in the sense that the particular external specifications on which the tax is based are well chosen, or even favorable to the development of proper housing of the people. In 1802 the aggregate sum to be raised by the tax was arbitrarily fixed, because the receipts had been too low during the years immediately preceding. But inasmuch as the data were wanting for a proper repartition of the tax among the departments, etc., it was quite in order (March 26, 183 1) to replace this repartition tax by a proportional tax, which increased the receipts and drew more heavily on the portions of the country that were better able to pay. But by April 21, 1832, the favorite system of a repartition tax was reinstated, the aggre- gate receipts being now fixed at 22,000,000 francs (instead of 16,000,000 francs in 1802). At the same time greater flexibility was given the tax (1835, i844) by graduating the schedule of rates according to the size of the establishment, and by taking account of new buildings. The aggregate receipts have therefore increased — 1870, 40,000,000 francs; 1885, 47,000,000 francs. The number of THE HISTORICAL FORMS OF TAXATION. 469 houses (and factories) in 1876 was 8,630,182; so that the average amount of the tax is quite moderate. § 302. Finally, there is the Trade-License Tax [ Gewerbcsteuer^ {^contribution dcs patc7itcs) . This was originally based on the rental of the place employed for the trade (decree of February 19-25, 1 791). It was abolished in 1793, re-established by a law of July 22, 1795, altered during the years following, especially by the law of October 22, 1798 ; it was further developed and adapted by the law of April 25, 1844, and later by the law of July 15, 1880. It is contrasted with the other three taxes spoken of in not being a repartition tax, but is like them in being based on external indications which, during the development of the past century, have been the subject of a progressive casuistical treat- ment. The name {contribution des pate ate s) is due to the fact that the governmental concession under the rule of free choice of employment established by the Revolution, involves the obtain- ing of letters patent, the granting of which was based on purely fiscal conditions, namely, the payment of a yearly tax. But as a uniform annual payment, incumbent on all persons following a trade, could at best be but very low, there came to be gradually introduced an ever more exact gradation in the rates of the tax. This was accomplished in part by graduating the fixed yearly license fee, in part by means of the Proportional Rates combined with it and based on the rental of the place employed for the trade or of the dwelling. . To the trade-license tax are subject trades and occupations, in the conventional sense which excludes agricultural pursuits. It includes, however, the chief liberal professions, in so far as these are carried on independently. Exempt are the business establishments on the smallest scale (without assistants, appren- tices, or the like). In the case of occupations serving the needs of the local population only, the rate of taxation is graduated according to the number of inhabitants of the place. All occupations are classified (in four classes) according to the character of the 470 THE SCIENCE OF FINANCE. industry, and within each class the establishments are classified according to the rental paid. The maximum tax paid as a trade license, as, for example, by a Parisian banker, may amount to three or four thousand francs. For the great majority of per- sons liable to this tax, the rate (assessed anew every year) fluctu- ates between two and four hundred francs. To this is to be added the supplements levied for the purposes of the department and of the communes. The aggregate receipts have increased considerably. The revenue going to the state increased from 31 million francs in 1838 to 107 millions in 1885. But the supplementary additions, which at the outset were quite low (6 millions), have now risen to 65 millions ; the total has accordingly increased from 37 millions to 172 millions. The efforts of the French legislation to base the amount of direct taxes on external indications alone, have met with greater success in the case of the license tax than in that of other taxes, even including the tax on realty, because, in the first place, in this case the changes undergone by these external indications from year to year are taken into account ; second, because the great number of indications taken into account is being contin- ually more and more developed and better classified ; third, because this more accurate ascertainment of the actual incomes of taxpayers enables the taxing power to augment the demands made on the taxpayer in proportion as the needs of state and commune increase. That perfection has been reached in this direction no one will assert. Rather, this legislation is to be looked upon as an experiment to ascertain the limits which tax legislation of this class must not exceed. Within the limits of a simple income and objective tax, however, the French trade- license tax is probably to be taken as a relatively successful solution of the problem ; the problem in this case, analogous with that of the tax on realty, being to determine the average (that is to say, without regard to variations in individual cases) net income, regard being had to objective, external indications alone, and to fix the rate of taxation on this basis. THE HISTORICAL FORMS OF TAXATION. 4/1 §303. The unity of presentation of the matter which must be preserved in such a brief survey of the history of taxation, and for the sake of which we have constantly kept the Prussian- German tax legislation in view — this unity is not impaired if, as in the present case, developments of tax legislation in foreign ■countries are introduced into the discussion, so long as they are developments of such importance for the history of financial science, and at the same time closely related to the practical measures through which the tax system of the Fatherland was built up. The science of taxation and the practice of tax legis- lation have for nearly a hundred years past been incorporating into the French model which we have briefly described such ideas as our century has found to afford the most satisfactory solution of the tax problem. We shall now take up Prussia, and first of all, the legislation dealing with taxation of realty.' Here, as in France, the eighteenth century prepared the way for the nineteenth century in the matter of a carefully constructed cadaster of rentals and usufructs, and land taxes apportioned on the basis of such a cadaster. The prevalent abuses of the taille in France, as a personal tax varying from year to year, are not a feature here, but the oppression of the lower .classes of the rural population and the exemption of the nobility are present here as they were there. Differences in the taxes on realty from one place to another are a more prominent feature here, in conse- quence of the relative newness and imperfect centralization of the political organization. It is also not entirely due to differ- ences in our favor, that the burden of taxation resting on the lower classes was lighter here than in France. The persistence of serfdom even down into the nineteenth century, shielded a large part of the lower classes of the rural population from the 'K. G. Y^n&s, Htstorische Entwicklung der Steiierverfassung in Schlesien (1842). Zakrzewski, Die prcussischen Reformen der Idndlichen direkten Steuern ini iS.Jahr- hundert (1887). H. Bielfeld, Geschichte des magdeburgischen Stetterwesens von der Refortnationszeit bis ins 18. Ja/irhundert (1888). C. Dieterici, Zur Geschichte der Steuerreform in Preussen 1810-1820 (1875), pp. 217-224. J. G. Hoffmann, Die Lehre von den Steuern (1840), pp. 94-140. K. G. Kries, Vorschldge zur Regelung der Grund- steuer in Preussen (1855). 472 THE SCIENCE OF FINANCE. incidence of the land tax, by depriving them of the possibility of ownership ; whereas in France villenage disappeared centuries ago, and the widespread peasant proprietary was the prerequisite of a general incidence of the land tax.' In strong contrast with what happened in France, the idea of the new century (expressed in the Fiscal Edict of October 27, 1 8 10), that equality of taxation was to replace the inequity of the olden time, failed to make good its promise. This is a point at which the Revolution shows itself superior to the peaceful methods of reform which prevailed in the Prussian state. The peaceful reform requires another half century to overtake the Revolution. The land taxation which immediately preceded the reform period in the Prussian territory varied greatly from place to place. An attempt had been made as early as the times of Fred- erick William I. to terminate the cruder inequalities in the dis- tribution of taxes ; he sought to adjust the Hide Tax S^Hiifcn- schoss\, and the Horn and Hoof Tax in East Prussia to the real productive capacity of the property, whereas the quality of the fields had hitherto been left out of account, and this mechanical uniformity of taxation had resulted in the grossest inequality in the burdens imposed. In this attempt was included an endeavor to tax the nobility and the peasantry on the same basis,'^ as also to impose an income cadaster, of the nature of an objective tax, which should take no account of incumbrances on the land, etc. Reforms of the same nature were in progress in Pomeraniaand in Citerior Pomerania at the same time. In Silesia the Austrian government had begun the construction of a cadaster in 1723, and Frederick the Great had, since 1743, tried to introduce a uni- form tax on land instead of the numerous burdens that had accu- mulated in the course of time; dating from 1748 he had estab- lished a cadaster which was in part based on an extremely artificial 'Tocqueville, L'ancien regime, p. 55. Taine, Les origines de la France content- poraine, vol. i. {1876), livre v. ch. ii. ^The nobility should enjoy no preference, declaVed Count Waldburg in one of his memorials to the king in 1 7 15, inasmuch as the monarch is obliged to afford protec- tion to the fields of the nobility as well as to those of the peasants. — Zakrzewski, p. 28. THE HISTORICAL FORMS OF TAXATION. 473 method of computing the income. For West Prussia a cadaster was established in 1773. In the duchy of Magdeburg, Freder- ick William I. introduced order into the rural tax system, with such effect that at the end of the eighteenth century Klewiz, the historian of the Magdeburg tax system, very significantly expresses the opinion that the people could from that time on rely uj)on the immutability, the fixed and stable character of its taxes ; every farmer knew the amount of the tax and could plan his work and his expenses accordingly.' § 304. The edict of October 27, 18 10, on the national finances and the new revenue regulations, made the following promise : "A new cadaster will be put in force as expeditiously as possible, by which to regulate the land tax ; our intention in so doing is by no means to increase the amount hitherto levied, but simply to effect an equal and proportional distribution of the tax among all taxpayers ; still, all exemptions are to be abolished, as they are no longer consistent either with natural equity or with the spirit of tax administration in neighboring states ; the lands hith- erto exempted from the land tax will accordingly be subjected to it without exception, and it is our pleasure that this decision shall apply also to our own domanial estates." The inequality of the taxes on land in the different parts of the country was such that the five provinces, East and West Prussia, Posen, Brandenburg and Pomerania, which comprised an area of more than three thousand square miles and a popula- tion of nearly 4.50 millions, yielded a revenue of only three million thalers, while the provinces of Silesia, Saxony, Westphalia, Cleve- Berg and the Lower Rhine, which had not quite two thousand square miles and something less than 6.33 million inhabitants, yielded a land-tax revenue of over seven million thalers. "^ The Lords-Lieutenants of the western provinces declared in the dis- cussion of the tax-reform projects laid before the Privy Council in 1 81 7, that they considered the imposition of uniform tax 'Bielfeld, Geschichte des magdeburgischen Sleuerwesens, p. i66. ''Report of the Department of State (of January 31, 1820) to the King. — Dieterici, p. 241. 474 THE SCIENCE OF FINANCE. burdens in the form of personal and consumption taxes through- out the country to be impracticable, so long as a uniform taxa- tion of land was not also introduced. The disparity in the land tax in the old provinces had, down to the introduction of the reform, been measurably neutralized by differences in the other taxes. Of the three million thalers, it is true, two million was borne by Silesia alone ; but Silesia yielded scarcely 2.50 millions of excise out of an aggregate excise revenue of 7.5 millions (1810), many occupations properl}' belonging to the towns being, in Silesia, suffered to be carried on in villages free of excise. Of an aggregate of 18.25 million thalers, in iSiO, Silesia's con- tribution was 6.25 millions, although it comprised two-fifths of the population of the entire state. All this was changed by the reform of the excise. Still the state department declared, Jan- uary I, 1820, in its report on the tax-reform law, that it would be impossible immediately to abolish all inequality in the land tax, if for no other reason, because a new distribution of the land tax would have to be preceded by long and expensive surveys and appraisements. It was therefore proposed to equalize the burden by making a change in the other kinds of taxes, whereby the amount required of each taxpayer would be reduced by as much as it had previously been too great. The difficulties of such an equalization (which the majority of the Council, under the lead- ership of von Billow, formerly Minister of Finance, pointed out) lay in the absence of a universally applicable standard of appor- tionment such as was not afforded by the number of the inhab- itants alone. The recognition of this difficulty resulted in the reference of further consideration of the matter to the provincial assemblies, which were presently to be called together, and so postponed it to an indefinite future date, as the law dealing with imposts was adopted on May 30, 1820. It was only in the two western provinces, where there was a demand for an equalization of taxes on land as between indi- vidual taxpayers, as well as a need of equalization as between provinces, that an improvement was made in the distribution of the land tax, based on a survey and assessment and without THE HISTORICAL FORMS OF TAXATION. 475 increasing the aggregate revenue from the tax. It was an improvement over the uncertain assessment on which the land tax in those parts of the country had been based at the time of the French governments, an assessment which even at the time it was made, was regarded as provisional only, and was coupled with the promise of a future, more accurate survey and assessment of the individual parcels of land.' The aggregate income from the land tax in the whole of the Prussian territory was, in 1821, 9,878,752 thalers ; in 1838, ro, 163,942 thalers. The amount per capita of the population has varied from 11.5 silver-groschen (in the province of Prussia) to 35.5 silver-groschen (in the province of Saxony). Westphalia and the Rhine province made a good second (34 and 33 silver- groschen). Brandenburg paid scarcely 16 silver-groschen; Pomerania, 15.33, Silesia, 26.75.^^ § 305. The movement of 1848 and immediately succeeding years, which pushed on so many of the arrears of the reform period of 18 10-1820 towards a solution, brought up again also the demand for a settlement of this old legislative debt. The exemptions from the land tax and the inequalities in taxation remained in force afterwards as they had been before ; the abso- lute amount of the land tax had remained unchanged (10,085,- 387 thalers in 1855) although the population had increased from 1 1 to 17 millions during the period 1 821-185 5, while the expend- itures of the state had risen from 86 million to 105 million thalers during the years 1849-185 5 alone. 3 The state and local bodies were alike deprived of the chance of making an adequate use of this tax. While the purpose of the reform in 18 10 had been simplv a better distribution of the tax, it was now, after a lapse of half a century, and in view of a great increase in popu- ' A lucid presentation of the land-tax systems of Prussia is given by Struensee, Die Grundsteuer mit besonderer Beziehtittg aitf das Konigreich Preussen (1850). More detailed is the account by Schimmelpfennig, Die prdussischen direkten Steuern (2d ed., 1843)- ^J. G. Hoffmann, Die Lehre von den Steuern, pp. 126-130. 3 K. G. Kries, Vorschldge zur Regelung der Grundsteuer in Preussen, p. 4. 4/6 THE SCIENCE OF FINANCE. lation and wealth, quite fair and equitable that some increase m the amount to be raised by the tax on land should be made. To this is to be added that the taxation of cities, relatively to the rural districts, still bore plain marks of the tax methods of the eighteenth century. As an equivalent of the land tax there had been introduced into the towns, after the abolition of the earlier excise, an increased billet tax [^Serznslasf^ (as a contribution towards the expense of quartering the troops). In the western provinces, where the sense of national soli- darity was still slight, and where French-Liberal views prevailed, it was a constant source of complaint that the land tax bore more heavily on these than on the eastern provinces, and that the government showed no inclination to mend the difficulty ; a decree of the Diet with regard to Westphalia, dated December 30, 1834, embodied a distinct refusal to do anything about the matter. The new movement made the preference shown the estates of the nobility above the lands owned by peasants a prominent point of the agitation ; it became an eminently polit- ical question ; the Liberals demanded an abolition of this medi- aeval survival. As early as 1847 ^^e committee appointed to consider petitions regarding the land tax expressed themselves (11 to 5) to the effect "that the government should be requested to reorganize the land tax on a basis of equality and with the abolition of all privileges." In March, 1849, the proposal was brought forward simultaneously in both chambers of the new parliament by members of the Right (to which the owners of noble estates chiefly belonged), to request the ministry as soon as possible to submit bills for the abolition of existing inequalities in the direct taxation. On February 24, 1 8 50, a law was passed which (through lack of time for consideration of details) simply declared the general principle that all exemptions and privileges in matters of taxation were forthwith to cease. The question of indemnification was reserved for future decision. A bill brought in by the government in the year 1851-52, dealing with the exe- cution of this law, fell through on March 7, 1853, because the Right was unwilling to content itself with an indemnity amount- THE HISTORICAL FORMS OF TAXATION. 477 ing to only two-thirds of the value, while the Left refused to grant any indemnity whatever, at the same time that the govern- ment had made unanimous consent on this point a condition on which the whole law depended. The success of the project at this time, as in earlier years, was hindered by a variety of obstacles of a general character, but there was also the special objection, on grounds of administrative expediency, which J. G. Hoffmann' had brought out as early as 1840, and which K. G. Kries urged with decisive arguments in 1855, — the objection of the inexpediency of such a cadaster as had then recently been completed in France, after protracted labors, and which, instead of meeting the high-strung expectations with which it was begun, turned out to be a stupendous disillusion- ment. It had been Hoffmann's wish that the existing taxes on land should be declared a redeemable rent, and that it should be replaced by a license tax on agricultural occupations. Kries pointed out that the experience of both the western Prussian provinces and of France showed that the newly constructed cadaster was of considerable service in equalizing the land tax . within a relatively small area, but not as a basis for alterations in the contingents to be paid by large and widely separated regions. The ofificials in charge of the cadaster on the Rhine, as well as those in France, themselves admitted that any computa- tion of net income was uncertain ; that the coincidence of the figures obtained by the cadastral computation with the actual net income could never be assured ; that the figures afforded by the cadaster were rather of the nature of a proportion, while uni- formity of assessment was to be attained rather by observation of the business transacted than by depending on the figures obtained by computation. In every one of the various cadas- trations that had to do with the ascertainment of the net income from business of any kind (classifications of soils, determination of the gross product, computation of the money value of the product, determmation of the cost of cultivation) a considerable margin is allowed for estimates by experts, very appreciable ' Lehre von den Steticrn, pp. 1 05 et seq. 478 THE SCIENCE OF FINANCE. divergencies appearing in the figures obtained from different persons and under different circumstances (especially in a large territory), even apart from any influence that may be exerted by practical interests ; to this is to be added the changes in the industry which take place from year to year.^ Instead of the produce-cadaster \^Ertragskataster\, therefore, Kries sought to find a method of assessment that should be simpler, cheaper, more adequate, and should conform with the facts of industrial life and keep pace with industrial progress. He called attention to the importance and the necessity of a productive tax on land, and showed that the income cadaster was not an expedient means of assessment, whereas there were other means available which he thought were to be found in the example afforded by England and its local taxation, as also in the property tax system and the method of assessment in use in the United States. In both these countries a heavy burden of taxation rested on real estate, but it was not levied by means of an income cadaster. In neither of these countries, according to Kries, does the valuation of real estate involve either great expense or great difficulties ; complaints of unfair assessment are rare. The reason is that the assessment is based on data afforded by business transactions. In England the guiding principle is afforded by the rental, in America by the market price. The fact that the tax on land is by preference employed for local purposes only in both these countries simplifies the problem of assessment, in that it requires consistency of assess- ment only within the limits of the minor civil divisions. Now, in Prussia it is an urgent question how the communal bodies and their functions may be strengthened and extended. At this point, therefore, a great principle of political reform falls in with 'Kries thought (p. 67) that we must admit that the men are in the right who think that the time and energy, the means and labor spent in the construction of a cadaster of parcels of land, are for the most part spent to no purpose. Hoffmann had asserted that the circumstances affecting the value and use of agricultural land change so greatly even within a moderate space of time as to destroy the value of the entire painstaking and expensive labor of cadastration, with the exception of the simplest item alone, that is to say, the survey (p. 105). THE HISTORICAL FORMS OF TAXATION. 479 the aims of administrative reform involved in the reform of the land tax. The depression prevalent in the western provinces, due to the oppressive character of the existing land tax, would be relieved just as soon as it should come to pass that the revenue from the income tax should be kept in the country for provincial and local expenditures. The flexibility of the land tax, which would so take the place of its traditional rigidity, would render it more available and more productive under the rule of the new method of assessment and expenditure. These recommendations of Kries's have been spoken of here in detail, because they were not successful in finding acceptance. The example of the French income cadaster was still able to exert a decisive influence when, at the beginning of the regency (1858), the reform of the land tax was again placed on the order of the day with somewhat more of a prospect of success than before. § 306. The law of May 21, 1861, establishing the new order of things in the land tax, divides the aggregate taxation of real estate into the land tax proper, levied on property employed in agriculture or in forest industry, and the tax on buildings \^Gebdudesteuer\, levied on buildings and the attached courtyards and gardens (not exceeding one morgen). The land tax proper was, from January i, 1865, fixed at a yearly aggregate of ten million thalers, that is to say, two millions more than the old land tax produced, if deduction were made of the amount now to be paid by the tax on buildings (7,920,231 thalers). The ten millions were to be repartitioned among the provinces, local divisions, precincts, on the basis of a new valua^ tion of the net product differing from the earlier one. Exem])t from the land tax are lands belonging to the state, the doma- nial lands of the German barons, lands belonging to the prov- inces or to local civil bodies and appropriated to some public service (roads, canals, cemeteries), certain lands belonging to churches and ^chools. All other lands previously exempt or privileged under the land ta.x are, from January i, 1865, to be 480 THE SCIENCE OF FINANCE. taxed on their net income, equally with other lands, but with the payment of an indemnity fixed by a special law of the same date. Authenticated exemption from taxation was to be indemnified at the rate of twenty times the new land tax ; otherwise an indem- nity of two-thirds of this amount was to be paid. A special ordinance was issued simultaneously with the new law, regulating the method of appraising the net income. Quite in contrast with the long-protracted work on the French cadaster, the limit was* at the outset, fixed at three and one- half years, and this limit was in fact observed.^ An assessment commissioner was to be appointed for each circle, who was to have charge of the business and to act as chairman of the circle committee, this latter consisting of from four to ten persons, according to the extent of the circle, one-half of the membership to be appointed by the representatives of the circle and one- half by the central government. A department commissioner was to have the charge of the business for each department, assisted by a department committee of a composition similar to that of the circle committees. At the head of the entire organ- ization was the central cojnmittee, under the presidency of the Minister of Finance. There were 302 commissioners appointed for the 342 existing circles, but by a further consolidation of circles the number was afterwards reduced to 284. The valuation gave a net income, for the entire kingdom,^ of 140,446,993 thalers (an average of 34 silver-groschen per morgen over all; for the province of Prussia, 19 silver-groschen; for the Rhine provinces, 54 silver-groschen; for Saxony, 62 silver- groschen). The average rate of the new land tax, therefore, •amounted to 9.50 per cent, of the net income. Of this amount, Silesia, Saxony and the Rhine province have to pay about one- ' The legislation on the land tax in the kingdom of Prussia was somewhat differ- ent. For a statement of the method of assessing the land tax, the more important results of the survey and assessment, the resulting distribution of the tax burden, and the expenses of the assessment, cf. the special supplements to Nos. 19, 24, 27, 32 of the Koniglich fireussische Staatsanzeiger for 1 866. 2 Exclusive of the exempted estates, whose net income was estimated at 7,866,735 thalers, with an average net income of 21 silver-groschen per morgen ; this low figure being due to the great proportion of woodland classed under tliis head. THE HISTORICAL FORMS OF TAXATION. 48 1 half, in very nearly equal proportion ; the province of Prussia, 1.33 million thalers; Brandenburg, i.ii millions; Westj)halia,o.96 million; Posen, 0.73 million; Pomerania, 0.82 million. The absolute increase as compared with the old land tax, was greatest in the province of Prussia (previously 0.55 million), and some- what the same in Brandenburg (0.54 million). It was relatively greatest in Posen, where the new tax amounts to nearly twice the old (0.73 million as compared with 0.37 million), and in Pome- rania (0.83 million as against 0.41 million). A relatively moder- ate increase also resulted in Saxony and the Rhine province (0.21 million and 0.15 million respectively). An absolute decrease took place in Silesia and Westphalia (0.16 million and 0.04 million respectively). * The cost of the cadastration amounted to 7.32 million thalers, that is to say, two silver-groschen per morgen on an average (whereas the cadastration in the western provinces, in 18 18- 1834, had cost nearly seven silver-groschen per morgen). Simultaneously with the law introducing these changes in the land tax, a law was also passed, on May 21, 1861, establishing a general building tax. This tax supersedes all the earlier taxes on buildings, where such had existed. Exempted are buildings belonging to the state, to the provinces,' to the circles and communes, devoted to public purposes ; also unoccupied buildings which are intended to be used in agricultural industry only. The assessment of the tax is based on the annual usufruct of the property. The rate is 4 per cent, for such buildings as are used mainly as dwellings, 2 per cent, for such as are used mainly for industrial purposes. So far as possible the rents customary in the place during the previous ten years are taken as the basis for determining the value of the usufruct. The assessment of the tax on buildings is to be subject to a revision every fifteen years. Both these laws were afterwards introduced in the provinces annexed in 1866. By a law of February ii, 1870, the land tax was introduced into the provinces of Schleswig-Holstein, Han- over and Hesse-Nassau, dating from January i, 1875. ^^ ^^^ 482 THE SCIENCE OF FINANCE. fixed at an annual amount of 3,200,000 thalers, and was distrib- uted between the provinces in proportion to the net income on which the tax was paid. The building tax was introduced into the new provinces by ordinances issued April 28 and May ii, 1867.' The land tax has therefore maintained itself as a permanent and, apart from slight variations, unaltered burden, yielding, for a considerable number of years past, about 40 million marks. The tax on buildings on the other hand, better adapted to the exigencies of the situation in respect of assessment, as Kries has pointed out, has increased with the increase of wealth (1878- 79,M8. 84 million marks ; 1887-88 30.15 million marks; 1889- 90, 31.503 million marks). While it may be true that the land-tax reform in Prussia was delayed for half a century beyond the date at which it was first seen to be a political and fiscal necessity, so that the adoption of the French example in its fiscal administration has often been spoken of as the result of an obsolete point of view, the recent measures taken by the Kingdom of Italy may be cited as a striking parallel. In Italy, after the consolidation of the country, the differences existing in the taxation of land presented a situ- ation not unlike what existed in Prussia at the beginning of this century."* After the lapse of a quarter of a century, a law was finally adopted, March i, 1886, dealing with the reform of the land tax. This law ordains a cadaster of the net product of land, with the double purpose of an authentication of ownership and an equalization of the tax on land. So we find that here again, and very recently, the French example has been honored. § 307. Another form of a tax on profits was established by the tax reform in Prussia during the years 18 10-1820, earlier ' Ronne, Das Staatsrecht der preiissischen Motiarchie, vol. ii. sec. 528. ^Finanzarchiv, 1887, p. 316. 3 Of this Berlin alone yields 6.24 million marks. 4Ricca-Salerno, "Die neue Regelung der Grundsteuern und die Steuerreform in Italien," Finanzarchiv, 1885, pp. 747-807. Cf. also, Finanzarchiv, 1888, pp. 362- 383. THE HISTORICAL FORMS OF TAXATION. 483 than the land tax. This was the license tax on occupations [ Gcwcrbestetier^. In the Prussian state, down to the year 1810,' the pursuit of certain occupations was subject, here and there and with no uniformity, to licenses and taxes on occupations. But a general tax on occupations was for the first time introduced by the edict of November 2, 18 10, which followed the French example in incorporating fiscal designs in its carrying out of the new princi- ples of a free pursuit of occupations. The receipts were some- what over 600,000 thalers. Permission to follow any occupation was to be had by the yearly purchase of a certificate of license from the government. Exempted were those who followed agricultural pursuits on their own account, day laborers, com- mon servants, national and communal officials. The highest license fee was 200,000 thalers, the lowest one thaler ; it was impossible to effect anything but a very general classification of occupations in the schedule, the final decision being in the great proportion of cases left to the discretion of the local authorities. After the close of the war the increased size of the Prussian state made it necessary to bring order and unitv into the parti- colored local provisions for the taxation of occupations, and to extend the license tax over the whole country. The license tax of November 2, 18 10, however, called for a careful revision, the results of which were embodied in the law of May 30, 1820, dealing with the payment of the license tax. The provisions of the earlier law were so altered as to leave the liberal professions exempt from the license tax ; likewise the smaller handicrafts- men employing not more than one journeyman and one apprentice. In character, this tax is half way between a tax on profits and a personal tax ; indeed it partakes somewhat of the character of the class tax (presently to be spoken of) which was intro- duced at the same time, and in so far it diverges from the "' Promemoria for the bills to be proposed for the equalization of taxes and the regulation of imposts," Dieterici, pp. 291 e( seq. J. G. Hoffmann, Die Lehre von den Steuern, pp. 190-225. 484 THE SCIENCE OF FINANCE. French pattern. Its purpose is to neutralize the inequality arising from the fact that an appreciable proportion of the persons following a trade are not taxed, either by the class tax or by taxes on consumption, in a fair proportion to their ability to pay. The law has accordingly, in the case of the greater number of taxable occupations, only imposed an average rate S^Mittelsatz^ to be paid by the aggregate body of persons carry- ing on the same trade within a given department ; it leaves the persons subject to the tax to repartition the required aggregate among the taxpayers, by assessment through the agency of delegates chosen out of their midst. These average rates are divided into four classes, according to the wealth and prosperity of the place where the trade in question is carried on. The first class comprises the ten largest cities of the country ; the second class, cities of more than 6000 inhabitants ; the third class, places of more than 1500 inhabitants; the fourth class, all smaller places. The highest average rate (for merchants in places of the first class) is 30 thalers a year. The rates of this tax have, in the course of years, been repeatedly altered, being generally increased (Order in Council of November 24, 1843, Acts of July 19, 1861, and March 20, 1872). There are at present three main classes: (i) commerce and manufactures; (2) hotels; (3) handicraftsmen employing several journeymen. Within each of these three categories are a greater or smaller number of subclasses, according to the extent of the business. So, for example, the group A (com- merce) has three subclasses, the two higher ones of which (A I. and A II.) each constitutes a distinct tax-paying association, assessing its own members, while the third (B) is assessed by the officials of the circle and commune in consultation with the merchants subject to the tax. The entire country is divided into two parts according to the greater or less preponderance of an industrial-mercantile character. One of these portions is sub- jected to an average rate of 96 thalers for class A I., while for the other part the corresponding average rate is 72 thalers, but through- out the country a minimum rate of 48 thalers for each taxpayer \ THE HISTORICAL FORMS OF TAXATION. 485 under class A I. is required,' The aggregate amount of the tax to be paid is found by multiplying the number of payers into the rate. It is then the duty of the seven delegates, chosen every third year from among the persons constituting the tax-paying association, to rej)artition this aggregate sum among the individ- ual taxpayers. The other subclasses and groujjs fared some- what similarly, but with lower average rates. The receipts from the license tax increased during the period 1821-1826 from 1.70 million thalers to 1.85 millions ; from 1827- 1838 it rose very gradually from 1.95 million thalers to 2.30 millions. The assessment of 1864 aggregated "^ 3.68 million thalers; that of 1878-79 amounted to 18.67 million marks; for 1887-88 it was 20 millions; for 1888-89, 20.62 million marks (of this amount Berlin paid 2.76 million marks). The population was, at the Close of 1822 - - - - 11.66 millions 1837 .... - 14.10 Dec. I, 1885 .... 28.32 The receipts from the license tax, as appears from these figures, have been nearly quadrupled during the period 1821- 1889, while the population has increased to not quite threefold. This moderate increase of the rate per capita of the population (0.45 mark to 0.68) is certainly far from expressing the people's industrial progress and increased productivity, whether viewed from the standpoint of the volume of business or from that of the wealth of the people concerned in it. VIII. THE INCOME TAXES OF THE NINETEENTH CENTURY. § 308. The great truths of national life are simple ; their realization is difficult. The new era which is now at the close of its first century can make no new discoveries in matters of taxa- tion, in which the innovation extends beyond the technical details of administration. In the great fundamental principles and in 'The license tax of 1810, which was divided into six classes, imposed a rate of from 96 to 200 thalers in the highest class. — Hoffmann, Stettern, p. 207. ' Bergius, Finanzwissenschaft, p. 330. L 486 THE SCIENCE OF FINANCE. their contrasts there is a continual recurrence of what is already- long familiar. The difficulties with which the method of taxa- tion which recommends itself to the unsophisticated mind as a matter of course is beset, have been as clearly seen in the earliest beginnings of a scientific knowledge of the subject of finance as they are at present. The progress has been altogether prepon- deratingly on the side of practical administration ; this is shown by the gradual, circumscribed alteration of the difficulties referred to ; it appears also in this connection qualified by those limitations of all historical progress which result from interminable deviations from a direct and uninterrupted succession of stages of development. The problem of the income taxes of the nineteenth century is in intimate relation with the general transformation of social and political life, with the helping and the hindering factors which enter into it, with its influence upon the relations subsisting between the state and the individual. The principalities and the great powers of past centuries afford the traditional contrast to the free cities, in which the significance of a close union between the burghers of the town individually, as well as between the burgher and public affairs, was brought out in a clear light. The towns were the oases of civil liberty in the Middle Ages ; they were the prelude to the greater national development which was presently to pass over the stage of the principalities and the great centralized states. With the era of the Revolution a new element entered, which hastened and furthered the development. This was the awakening of the sentiment of a participation in the state, which had been slumbering or had been stifled for centuries past. The purpose of this movement, so far as regards the ideas underlying it, was the strengthening of the sentiment of civic duty ; nor was the declaration of human rights chary of its magniloquent speech on the subject of the "honor" of tax- paying. But precisely these swelling words showed that in the prac- tical experience of their immediate surroundings there was a great difference between words and deeds. It was only very THE HISTORICAL FORMS OF TAXATION. 487 gradually that the sense of civic duty was able to penetrate the new social organization ; at the outset the new national life was intelligible to these people, who had put aside the state, only so far as regarded their rights. It is to be added that the other great factor of the new era, the new industrial productivity, con- stituted a force which, while it was not in itself antagonistic to the first factor, proved, in its consequences, to be inimical to it. The new means of communication and the redistribution and regrouping of the population which resulted from their intro- duction ; the new means of gain and the resulting new stratifica- tion of property-holding ; the new examples of gain and its enjoyment, ^and the chase after success and enjoyment to which they gave rise ; the unexampled increase of the population and the resulting struggle for existence; — all this served to accentu- ate the contrast between society and the state, between the indi- vidual and the whole, and, to say the least, all this had an unfavorable influence upon the advantageous results achieved by the new political life. There is one state which takes the lead of all our great powers in this new era of civic development. This is England, The peculiar development of its constitution enables it to pre- serve intact the traditional bond between state and citizen, and therefore to carry over from the past into the new era the habits pf political liberty .which in other countries existed at the outset only in words. It is a significant fact that England has taken the lead in the income taxation of the new era. Its example is not by any means a faultless model to be followed ; there is in it much of the spirit of the olden time with its plea of excep- tional exigencies arising through the demands of a war, and it disappears immediately with the close of the great war against France. The influence exerted by the new industrial life is as strong in England as anywhere ; the mature growth of a hearty sense of duty in this matter has perhaps come no nearer achieve- ment in the course of the nineteenth century than it was at its beginning. And still, the results attained during the first period of income taxation, with its great patriotic sacrifices on the one 488 THE SCIENCE OF FINANCE. hand, and the early resumption of the income tax and its practi- cal incorporation as a permanent constituent of the English tax system of the nineteenth century on the other hand, are so much of a new departure that we are fully warranted in dating the introduction of the income tax into the new tax systems of civil- ized countries from these reforms. It is true here as it is with respect to the development of national credit, that it is not the economic phase of the matter alone that is decisive and signifi- cant ; the essentially decisive element is the ethical-political principles involved. § 309. On December 3, 1798, the House of Commons, after a patriotic speech from Pitt, passed a resolution that from April 5, 1799, a tax was to be levied on all income of any British sub- ject, whether residing in Great Britain or elsewhere, and of every . inhabitant of Great Britain, to raise the means for carrying on the war against France.' The tax was to be levied at the rate of 10 per cent, on all incomes over ^200, while incomes under ;^6o were exempt ; for incomes between ;^6o and ^200, distributed in twenty-eight classes, the rate was a progressive one, rising from -j4o- to yV Pitt estimated the aggregate income of Great Britain at i^i02,ooo,ooo, and hoped to raise an aggregate reve- nue of i^ 1 0,000,000. The actual results fell considerably short of the expectation (5.6-6.25 million pounds). This law superseded another and more complicated tax law imposed the previous year, which served as immediately intro- ductory to the income tax, in that, in like manner as the latter, it embodied the principle of a progressive tax, the exemption of incomes under i^6o, the reduction of the rate of taxation in pro- portion to the number of the taxpayer's children ; especially, it required proofs of the amount of the income in all proceedings ' W. Vocke, Geschichte derSteuern desbritischen Reichs ( l866), pp. 505-590. Adolph Wagner, Finanztvissenschaft, voL.iii. (1886), pp. 195-198, 238-256. Dowell, History of Taxation (1884), vol. ii. pp. 305-353, vol. iii. pp. 103-137. Kr\t%, Zeitschri/t fiir die ges. Staatsw., 1854. Gneist, Das englische Verzvaltungsrecht der Gegenwart, 3. Aufl. (1884), sec. 85. Sinclair, History of the Public Revenue (3d ed. 1803), vol. ii. pp. 230-252. William Pitt, Speeches in the House of Commons (2d ed. 1808), vol. ii. pp. 425-458. THE HISTORICAL FORMS OF TAXATION. 489 for recovery or indemnification. The Property and Income Tax continued to be levied until the peace of Amiens (1802), and was reintroduced immediately on the fresh outbreak of the war (1803). At this time it was given the form which it has per- manently retained, and which it also resumed upon being reintro- duced by Robert Peel after the interval 1 8 16-1842. Being levied to meet the exigencies of war, it varied down to 18 16 with the shifting fortunes of peace and war ; it was modified in detail, the rates were raised and lowered, and it was finally abolished, by a large majority (238 to 201), on March 18, 18 16, against the proposal of the Vansittart-Castlereagh ministry, which desired to retain the income tax at half the war rates for times of peace. From 1806 the rate of 10 per cent, had been reintroduced, and it brought in a revenue which not only increased from year to year, but was in absolute amount so enormous (^16,000,000 in 181 5) as to furnish a striking evidence of the political and eco- nomic development of England,' when contrasted with the similar attempts by Continental states during the war against Napoleon. The Lord Lieutenant, von Vincke, wrote to Baron von Stein dur- ing his first residence in England (1800) expressing his great admiration of the patriotic emulation with which nobility and commonalty devoted themselves to meeting the requirements of the income tax. He found an explanation of this self-sacrificing spirit in his study of the political institutions which for a long time past had served as a bond between the citizen and the state in England. § 310. After an interval of a quarter of a century, Robert 'In 1806 not less than I02i persons declared their income to exceed ;i^io.ooo {Darstellung der inneren Ver-ivaltung Grossbritaniens. By L. Freiherr von Vincke, edited by B. G. Niebuhr (1815, 2d ed. 1848), p. 13). The expenses of collection amounted, in 1799, to only .50 per cent. {Vincke, p. 83). In Prussia, according to the tax lists, there were, even as late as 1886, only 737 persons whose income exceeded one-half of this figure (100,000 marks), out of an aggregate population amounting in round numbers to 28,000,000, as contrasted with the population of Great Britain and Ireland, which reached the figure of 21,000,000 only in the year 1 82 1. (Porter, Progress of the Nation, 1836, vol. i. p. 13. Adolph Soetbeer, "Zur Einkommenstatistik von Preussen, Sachsen und Grossbritanien," Vierteljahrsschrift fiir Volkswirthschaft Politik und Kulturgeschichte, 1887-88.) 490 THE SCIENCE OF FINANCE. Peel again took up the income tax, in 1842, to cover the deficit created by the reduction of import duties. It was at first granted, according to earlier custom, only for a limited term (three years); but it was renewed at the expiration of this term, was increased on the outbreak of the war with Russia, after- wards lowered, being in part reduced to a very low rate, and being altered from year to year according to the varying demands of the national treasury and the varying amounts of revenue derived from other taxes. It is true, the leading statesmen of England have continually flattered the propertied classes with the prospect that the income tax is to be abolished as soon as may be. But the practical fact of its uninterrupted persistence for nearly half a century past seems rather to have erected it into a permanent institution, the equity of which is constantly being more and more clearly impressed on the mind of the propertied class through the growing power and importance of the laboring classes. The propertied class seems by this time, in point of fact, to have accepted the income tax as a permanent institution.'' The rate was,^ from 1842 to 1853, a uniform one of seven pence in the pound on every income in Great Britain over .1^150; it is only since April 1853 that this law has applied to Ireland. During the years 1854-185 7 occurred a considerable increase of the rate (14-16 pence in the pound = 6-6^ per cent.), but the revenue obtained amounted to no more than what was paid forty years earlier, during the Napoleonic war, by the same country, with a much smaller population, with a much smaller aggregate of wealth, and while subjected to much heavier taxes of other kinds. Since 1857 the rate has been lowered ; during the suc- ceeding years it was successively 7, 5, 9, 10, 9 and 6 pence; during the years 1 864-1 873 it ordinarily amounted to 4-5 pence (1^-2 per cent.); in 1874 it declined to 3 pence, and in 1875- 76 to 2 pence. During the decade 1 876-1 886 it rose somewhat (5-6 pence) ; it has since risen to 8 pence (3^ per cent.) in " " Notwithstanding its inequalities the Income and Property Tax must now be regarded as permanent." — Whitaker's Almanack, 1889, p. 178. '^ Statistical Abstract for the United Kingdom, 1 843-1888. THE HISTORICAL FORMS OF TAXATION. 49I 1885-86 and 1887-88 (being 9 pence in 1886-87), but in 1888- 89 it declined again to 6 pence. The net income in 1887-88 was ;^I4,275,502. The degression changes, and is determined annually in the budget, as has already been pointed out (sec. 219). The tend- ency so far has been to exempt the smaller and medium incomes more and more from the tax. While Pitt exempted only incomes under ^60, Peel exempted incomes under ;^I50; in 1853, however, incomes of ;i^ioo-^i50 were again sub- jected to a moderate tax. But in its latest form (1882) the law favors incomes under ^^^400 by deducting i^i20 from the taxable amount, at the same time that it entirely exempts all incomes under ;^I50. In addition to this there are special modifications favoring particular classes of incomes; the incomes of leaseholders, for example, in 1888-89, ^^^ subject to half-rates only. The social-political significance of the income tax as a per- manent institution in times of peace has long been properly appreciated by sensible men in England. Shortly after its rein- troduction by Robert Peel, Lord Ashley, afterwards Earl of Shaftesbury, occupied himself with a tax-reform scheme on a large scale, in which it was proposed to abolish the beer tax and the duties on corn entirely, and to lower the duties on tea and sugar to one-sixth of the then existing rate, at the same time that the income tax was to be raised to five per cent.' § 311. The English income tax has (smce 1803) in a pecul- iar degree been based on the distinction of all kinds of incomes into classes corresponding to the sources from which the income is drawn. Of these classes the law enumerates the fol- lowing five: A, landed property, B, income from rural lease- holds, C, interest-bearing capital the interest on which is paid within Great Britain and Ireland, E, official salaries, D, indus- trial enterprises and the liberal professions, together with all ■An entry in Ashley's diary for November 28, 1844. — The Life and Work of the Seventh Earl of Shaftesbury, by Edwin Hodder (1888), p. 316. 492 THE SCIENCE OF FINANCE. incomes which are not included under the four other classes (as, for example, receipts from capital invested abroad). It is thought that the facts will be ascertained with greater accuracy by means of this classification of incomes,' than if, as is the prac- tice in income-tax legislation elsewhere, the aggregate income of the individual is made the basis of assessment. Habituation to this method of assessment seems to have recommended its retention in England, while in other countries there is little evi- dence of an inclination to follow this example. Subject to the tax are all British subjects resident in the country or only temporarily absent, as well as all amounts pay- able within the country (whether they are remitted abroad, and whether they are paid to a citizen or to an alien within the coun- try) and all amounts due from foreign countries. The revenue from landed property (A) is found by ascer- taining the rental value which, owing to the peculiar features of the English land system, it is possible to determine on the basis of a great number of actual cases. In case of an incum- brance on the property the owner is entitled to deduct a propor- tionate amount from the tax. It also frequently happens that the tenant (lessee) pays the tax for the owner and then deducts the amount from the rent. Incomes from leaseholds (B) are assessed in a fixed proportion to the rent (in England one-half, in Scotland and Ireland one-third) with reservation of the privi- lege on part of taxpayer of proving that his actual gain is less than this proportion. In both of these classes the dec- laration of the taxpayer is taken, and the assessment is sub- ject to revision every three years. ^ ' This method of assessment has been retained in England ever since its first intro- duction, though quite at variance with the usual method of assessing an income tax. In the year 1801, when every taxpayer was required to report the aggregate amount of his income, the income tax, at a rate of 10 per cent., yielded ;f 5, 628, 000. In 1806 the now prevalent method was introduced, and at the same rate of 10 per cent, the tax yielded rather more than twice that amount (;i{^i 1,633, 000). — Qi. Report from the Select Committee oti the Income Tax {Minutes of Eviciettce, Questions 61, 5061 etseq.), and Kries, Zeitschrift fiir die ges. Staatsw., 1854, pp. 203-207, 548-549, and 1855, p. 384. ='In 1888-89 tenants' incomes pay a lower rate (3 pence) than other incomes (6 pence). In Scotland and Ireland the rate is only 2% pence. THE HISTORICAL FORMS OF TAXATION. 493 On interest-bearing investments (C) the interest on which is paid within Great Britain and Ireland, deduction of the amount of the tax is to be made by the payer at the time of the payment of the interest. Private establishments doing this kind of business are required to make the necessary reports to the tax commissioners. Similarly in the case of salaries of offi- cials (E) the tax is deducted by the establishment paying the salary and is turned over directly to the tax administration. The profits of business and the like (D) are assessed by means of an obligatory declaration on part of the taxpayer (penalty for omission ;!^5o) which is required to be made every year, but under the supervision and control of the tax officials. This class presents the weakest point of the method of assessment. Its peculiar character is indicated by the fact that the usual practice in English assessment, as in that of other countries, of intrusting this duty to local organs of assessment chosen by the taxpayers, is in this case (out of regard for the privacy of business) disregarded, and the assessment is intrusted to special commissioners appointed by the government. The assessment of the tax, generally, is based on the tradi- tional institutions of local self-government.' Still, by means of the relatively permanent tenure of the assessors and their inde- pendence of any election by the taxpayer, by suitable limitation of the assessment districts, and especially by the right kind of influence exerted by the national tax commissioners, much more adequate provision is made for an honest assessment^ than is ' Gneist, Englisches Verwaltungsrecht, 3d ed., pp. 632 et seq. Cf. also Kries, Zeit- schrift fiir die ges. Staatszv., 1855, pp. 402 et seq. ^The results of the assessments for the five classes in Great Britain and Ireland have been as follows: ANNUAL INCOMES IN MILLIONS OF POUNDS Year ABODE 1871 - - 152.34 59-12 38.11 189.02 26.86 1880 - - 185.37 69.38 39-86 249.49 32.79 1885 - - 194.37 65.23 41.02 295.52 38.52 1887 - - 196.66 62.71 43.85 285.87 40.31 In each of the five classes a continual increase is noticeable, excepting class B alone where a decrease set in in 1880, which, it is to be remarked, is confined to 494 THE SCIENCE OF FINANCE. possible where an unmitigated local self-government results in impaneling the citizen's and farmer's aversion to taxes in the jury box (cf. sec. 317 below). §312. The relativity of all institutions for political and tax purposes is made clear by a comparison of the attempts at an income tax made on the Continent at the time of its employment in England in the early years of this century. In the one case as in the other the occasion for the attempt was the extraor- dinary demands created by the war against France, which necessitated resort to extraordinary means. As such extraor- dinary means of revenue, it was sought to make use of heavy taxes on property and income. But the practical results dif- fered widely in the one case and the other. In Prussia a property tax and an income tax had been intro- duced by an edict of May 24, 1812, the former of which was to be not only a nominal but also a real property tax; as a result of this aim it was a mixture of forced loan and tax. On all property (landed property, investments, stores of merchan- dise) 3 per cent, (of the amount of the property itself) was to be paid as a tax. Everyone was required to return his prop- erty under oath; in case of grave suspicion of too low a return the commissions in charge were to institute a detailed investi- gation of the property ; a special method of valuation was adopted in the case of merchants to avoid publishing the amount of their assets. All taxpayers were, if possible, to be repaid two-thirds of the tax by means of a sale of the public domains. It was expected that the property tax would produce 25 million thalers, the aggregate wealth of the country being estimated at 850 million thalers (Pitt had, in 1798, estimated England only (1880, 51.62; 1887, 45.65). In class D there was a decrease from 1876 to 1880 (1876, 271.97 millions) which however was recovered by 1883. Taking the five classes together we have the following amounts (in millions of pounds): 1871 465-48 1880 ..... 576.90 1885 631.48 1887 ..... 629.40 THE HISTORICAL FORMS OF TAXATION. 495 the yearly revenue of Great Britain at a sum not much less than this, viz., 102 million pounds), but the receipts actually obtained amounted to only 4.50 million thalers. The income tax enacted at the same time required (in addi- tion to the property tax) a payment of five per cent, on every income of 300 thalers or over; incomes of 1 00-300 thalers were to pay I per cent.; incomes below 100 thalers, subdivided into two classes, to pay one-half and three-quarters thaler, respectively. A burden of such extraordinary weight could be imposed only as a resort in extreme need, and only temporarily. On Sep- tember 7, 1814, was issued the edict which abolished the tax. The experiment had been made under the most unfavorable cir- cumstances. The country was already exhausted by war expend- itures running over a series of years ; the people were not habit- uated to bearing such a tax, although the patriotic enthusiasm of that time might be counted on for something; the demand was an extravagant one, for although the actual receipts from the property tax amounted to only one-fifth or one-sixth of the esti- mated receipts, still, even that was more than 10 per cent.' of the annual income, and therefore more than the nominal rate of Pitt's income tax at its highest. And this takes no account of the 5 per cent, income tax. In England the people had, for nearly two decades, been gradually habituating themselves to the income tax and learning to manage it in connection with the existing institutions of the fiscal administration. There was already a good foundation present on which to erect the income tax into a permanent constituent of the tax system, and the gov- ernment, too, was determined to retain it after the close of the war, while only a moderate majority were opposed to it. It was quite otherwise in Prussia. Here the demand was for a single, extraordinarily heavy contribution, coupled for the most part with ■ It is true that Hoffmann places the aggregate wealth of the Prussian people appre- ciably higher than this. He holds that the value of landed property alone amounted to 840 million thalers. The annual production of the industry of the Prussian population at that date (4-75 millions) ought, according to him, to aggregate at least 190 million thalers (not less than 40 thalers per capita). This he holds to have been out of all proportion (over 22 per cent.) to an aggregate wealth amounting to only 855 million thalers. 496 THE SCIENCE OF FINANCE. the promise of restitution, a promise which, it is to be added, was not lived up to in the midst of the financial straits of that time. What favorable conditions were present, either in the people or in the government, for the introduction of and habit- uation to a moderate income tax as a permanent feature, were largely destroyed by this unsuccessful attempt. J. G. Hoffmann, in his memorial of May 22, 181 2, to Prince Hardenberg, had argued in vain against the property tax, whereas he was relatively well inclined to an income tax. On the occasion of the reforms of the years 18 17-1820 he was a most determined opponent of the income tax also ; he wished to narrow it down to a class tax of the kind that Justi^ had recommended as early as 1755, when Justi also condemned the income tax. Minor attempts at introducing the income tax had been made as early as 1808 and 1810. In connection with the earliest finan- cial reforms of 18 10, Stein had come forward as an enthusiastic advocate of the income tax ; ^ he claimed that it was under all circumstances the most equitable impost, inasmuch as it falls upon all citizens and all sources of income; 3 that it was the most uniform and the most productive tax. It was Stein's view that little attention was to be paid to public opinion in Prussia ; that this people is dominated by a deep-rooted egoism, a half civiliza- tion and license, combined with the rudeness and absence of feeling that belong to the North ; that this unregulated public opinion was to be corrected by severe penalties, and by no means be led farther afield by leniency and indulgence. A royal Order in Council (written by Hardenberg) of January ii, 181 1, expresses displeasure at the proposal made by the Estates of the Circle of Heilsberg in favor of a capitation tax. But even at that date von Raumer (in his work on the British Tax System, especially on the income tax, 1810) had found that ^ Slaatswirthschaft, vol. ii. pp. 418-422. ^Dieterici, p. 22. 3Cf. Bismarck's speech in the Lower House on February 5, 1850, where he says : ", . . . The income tax, which, in point of principle, is the most just and reasonable of all taxes, whatever may be the shortcomings which attach to its administration in consequence of human imperfection." — Die Reden des Abg. von Bismarck-Schonhausen in den Pariatnenten, 1847-/8^2 (1885), p. 83. THE HISTORICAL FORMS OF TAXATION. 497 the experience of England with the income tax was an '' auf inimcr schrcckcndcs Bcispicl.'' At the same time Privy Counsellor of Finance, von Prittwitz, in his report to Hardenberg (May i8, 1810), recommended a Class Tax, objecting to the income tax that it could not be levied except by applying most odious meas- ures, inasmuch as it lies in the nature of this tax to pry violently into the secrets of ownership, thereby demoralizing the nation, restraining foreigners from coming into the country, and driving the well-to-do inhabitants out of the land. ^313. So the class tax came to be the median line, on which the majority agreed in the tax legislation of 1820 ; but even this tax could be adopted only in the mutilated form (sec. 270) in which it was expected to serve simply as a complement to the grist and slaughter tax within the limits of the smaller local units, for only within such narrow limits was it thought feasible to undertake even such a class assessment. In towns of five to six thousand inhabitants, and still more distinctly in all larger places, the more convenient grist and slaughter tax was preferred. "The secret of finance is to take without irritating," said Hoff- mann in his memorandum on the tax bills of 1820.' Labaye, a high official in the fiscal administration, had in 18 10 remarked in criticism of the class tax, especially of its higher grades : So long as we do not adopt as our guiding principle some rate per cent, of the income we are simply plaving blind- man's-buff.^ The demand for a heavier taxation of the uj)per classes afso found expression in the Privy Council ; in a Scparat- votiim of May 5, 1820, Prince William (afterwards Emperor) urged that the new taxes should be discontinued or lowered, and that to this end the wealthier classes of the nation and the more highly salaried officials should be taxed more heavily, and so lighten the burden of the poorer classes of the population. Prince William was by no means alone in holding this view. It was a fact well calculated to urge reflection on the subject of the class tax that in the year 1820, when a number of attachments were ' Dieterici, p. 284. "Ibid., p. 32. 498 THE SCIENCE OF FINANCE. made in Luckenwalde on account of failure to pay the quarter- ing impost, it appeared that in more than one hundred of the houses subjected to the attachment, not more than 30 thalers' worth of attachable property was found. So the class tax came to serve as an initial stage towards the development of the income tax in Prussia — a preparatory stage which, for a generation, answered, or was required to answer, to the demands of the existing situation, in much the same way as the provincial estates did service in the political constitution of the nation. A growth of the sentiment of equity, an increase of wealth, together with the development of modern industrial life in Prussia, a growth of the sphere of public activity and of the interest taken in public affairs and the resulting growth of the mechanism of taxation, — these various factors gradually carried legislation beyond this initial stage. In proportion as this rudi- mentary structure developed into a maturer form, an ever-increas- ing pressure made itself felt for a fuller development of the higher gradations of the class tax, as well as for a relative exemp- tion of the lower classes of the people, the direct taxation of whom presented itself in an increasing degree, as time went on, to one party as oppression, to the other as idle doctrinarianism. § 314. It was intended that the repartition of the new tax should be based, not on the incomes of the taxpayers but simply on their position in social life.' By tradition, society was sub- divided into four classes, and these classes were to serve as the norm for the distribution of the Prussian class tax of 'May 30, 1820.^ The way had been prepared for the class tax by the legisla- tion of the years 1810-1811. Among the new taxes on con- sumption, which were at that time introduced to replace the earlier municipal excise, was a grist tax \^Mahlsteuer\ amounting to one half thaler per scheffel of wheat and one-tenth thaler per scheffel of rye. The difficulty of adequately superintending the grinding of grain in the country and in the smaller towns led 'J. G. Hoffmann, Lehre von den Steieern, p. 163. * Supplemented by the Act of September 5, 1821. THE HISTORICAL FORMS OF TAXATION. 499 to the substitution, by Act of September 7, 1 8 1 1 , of a personal tax \^Pcrso7ialsteiicr\ for the grist tax, which was in point of fact a capitation tax, being levied on every subject of twelve years or over ; its amount, one-half thaler, being the computed equivalent of the grist tax payable on an average annual consumption of five scheffels of rye. This amounted to the introduction of a capitation tax for three-fourths of the population of Prussia. From this it appears that the capitation tax of 1811 was the germ out of which was developed the Prussian class tax of 1820, which afterwards gave rise to the income tax. Instead of three- fourths of the population of Prussia, to whom the capitation tax of 181 1 had applied, the class tax comprised six-sevenths of the population. It distinguished four chief classes, each of which was subdivided into two or three subclasses. In the highest class the monthlv rate was (according to the subclass affected) four, eight or twelve thalers, in the next highest class it was one to two thalers per month, in the third one-third to two-thirds thaler, in the lowest class one-sixth to one-fourth thaler. These rates applied to the household, single persons without a house- hold establishment paying one-half the rates. The assessment was in the hands of the communal officials, under the supervi- sion of the president of the district. The idea was to substitute in place of differences in incomes the more readily ascertainable differences in social stratification, as a standard for the gradua- tion of the tax, and at the same time to call into service the ele- ment of social ambition as a motive to prompt payment of the tax.' But this social ambition was confined to certain of the upper strata 6f society ; furthermore there was, even at that time, so great a diversity of tax-paying capacity within each class that an accurate knowledge of this tax-paying capacity was necessary in order to a proper division of the class into sub- classes. This of course held true to the greatest extent of the 'As to the mean results of the communal income tax in Breslau, 1820-1843, cf. Kries, Ueber die Einkommensteuer in Breslau, eine historisck-kritische Abhandlung (1844). After a review of these experiences he falls back on J. G. Hoffmann's position, and holds that "a gradation of classes in which the inhabitants are classified accord- ing to readily perceptible characteristics is the only permissible classification " (p. 79). 500 THE SCIENCE OF FINANCE. higher classes. In this respect, too, the class tax therefore came to serve as a preparatory stage to the income tax that was to follow. The evolution of social life itself tended to break down the limits of the class tax. This first became evident in the most modern and the wealthiest part of the monarchy, — in the Rhine province. An attempt was made in 1830, for the behoof of this province, to mend matters by a greater specializa- tion and subdivision of the upper classes (the first into six, the second into five subclasses). But the results hoped for were not attained. During the years 1833-1836, out of every 100,000 thalers paid as class tax in the Rhine province, only 3375 thalers were paid by the first class ; in the remaining seven provinces the fig- ure was 3574 thalers; nearly one-half was paid by the lowest class (48,174, and 46,247 thalers respectively).' The average annual receipts for the whole kingdom, during the eighteen years 1821-1838, were 6.83 millions; of this the Rhine province afforded i.io millions with a population subject to the class tax amounting (1833-1838) to 2.12 millions, while that of the other seven provinces amounted to 9.65 millions. But this tax proved inept also in other respects; in 1822 it brought in an aggregate of 6.72 million thalers, in 1838 not more than 7.16 million thalers, in 1849, 7-57 niillions. During this time the population of the places subject to the class tax had risen from 9.85 millions to over 12 millions. The tax had not even kept pace with the increase of population, not to speak of the increase of wealth.^ The provocation which acted to hasten this rudimentarv structure forward in the line of development lay on the one hand in the hardship which direct taxation imposed on a great num- ber of poor people whose industrial development was not yet ripe for such taxation ; and on the other in the cramped condi- tion of the higher classes subject to the tax, where it achieved a minimum of satisfactory results together with a maximum of claims for remission, 'J. G. Hoffmann, p. i8i. ^Hoffmann, p. 178, explains it as being due to "the government's yielding to the representations of the taxpayers." THE HISTORICAL FORMS OF TAXATION. 5OI § 315. The government attempted a reform when it called the Diet together in 1847. The proposed scheme would have abolished the grist and slaughter tax as well as the existing class tax, introducing in place of these an income tax on all incomes of 400 thalcrs and over, while incomes under 400 thalers would be subjected to an improved form of class tax. The pro- posal was rejected, although it did not contemplate an increase of taxation but only a better distribution of the burden, seeking thereby to meet the demands of equity which again came into prominence only at a considerably later period ; it sought to tax funded incomes at a higher rate than unfunded. On September 22, 1849, the government submitted to the lower house a new scheme, out of which was evolved the Act of May I, 185 I. The old class tax was nominally abolished, but it was in point of fact virtually retained for its higher classes, which were recast under the form of a classified income tax — another halfway measure, partaking both of the class tax and the income tax ("income tax" proper). The essential provisions are as follows : On persons who neither possess an income of 1000 thalers, nor live in a town subject to the grist and slaughter tax, a new class tax is levied. On persons having an income of more than 1000 thalers a classified income tax is levied, and in case they live in a town subject to the grist and slaughter tax they are entitled to an annual rebate of twenty thalers on the income tax. The new class tax distinguishes three classes, with an aggre- gate of thirteen subclasses. The rate varies from one-half thaler to three thalers annually in the lowest class, four to ten thalers in the second, and twelve to twenty-four thalers in the highest class. Every person over sixteen years of age is subject to the class tax, excepting such as belong to a household already liable to the class tax. The classified income tax distinguishes thirty classes, each of which represents a certain space within which the amount of the tax is the same, this space being narrower the lower the 502 THE SCIENCE OF FINANCE. class' (20 per cent, of the lowest figure included). The rate is within each class 3 per cent, of the minimum income included in the class, so that those incomes which exceed this lowest figure enjoy a partial exemption under the law. This exemption is greatest in the highest class, where the rate of 3 per cent, on the minimum income (240,000 thalers) applies in the case of incomes exceeding this figure by any amount whatever. The valuation is in the hands of a commission appointed annually for each circle (or town), presided over by the district president, its members being elected by the representatives of the circle (or commune). The president of this commission of valuation, who also represents the interest of the state, directs the work of assessment. The commission revises the estimates of incomes submitted by its presiding officer, employing in this work all means of information which it can command, but with the proviso that "every offensive intrusion into the pecuniary affairs of the individual taxpayer is to be avoided." From this assessment appeal may be taken to the departmental commission appointed for each governmental department ; this commission is chosen by the provincial representatives and is presided over by a commissioner appointed by the government. It is the duty of this official to see that the assessments are made on a uniform basis and to superintend the work of the commissions of valua- tion. The whole is under the control of the Minister of Finance, who has to hear and decide complaints against the action of the department commissions. A fine is imposed only in case the taxpayer, in his claim for remission, is proved to have know- ingly made too low a return ; the fine amounts to four times the amount by which the return falls short. ^ J Class I 2 - 5 29 - 30 2 Von Ronne, Das Staatsrecht der pretissischen Monarchie, vol. ii. sec. 529. K. G. Kries, "Ergebnisse der preussischen Einkommensteuer und Vorschlage zu ihrer Verbesserung," Zeitschrift fiir die ges. Staatsiv., i855> PP- 359~420. Income Rate PER YEAR - I000-I200 thalers - 30 thalers 1200-1400 " 36 " - 2000-2400 " - 60 " 200,000-240,000 " 6000 " - 240,000 thalers and over - - 7200 " THE HISTORICAL FORMS OF TAXATION. 5O3 § 316. The expectations of the government in the way of a revenue from the income tax were quite moderate at the time of the discussion of the bill. It was assumed that there were in the Prussian state not more than 27,400 persons liable to the tax, with an average rate of 70 thalers (aggregating 1.9 millions). The results obtained in 1854 showed that there were then as many as 47,750 persons liable to the tax, yielding a revenue of 2.8 million thalers;' but from this amount there was a deduction on account of the grist and slaughter tax, considerably in excess of what the government had assumed.'' At the same time the receipts from the new class tax also exceeded expectations. The revenue from this tax — after making allowance for the transfer of the higher classes to the income tax — had been estimated at the same amount which the old class tax, including these higher classes, had yielded in 1849 (7-50 million thalers). The receipts actually obtained in 1853 were 7.94 million thalers, of which one-half was paid by the lowest class (3.89 million thalers). The results obtained by the income tax, therefore, indicated an increase in the taxation of the middle and upper classes of the population. The impression produced b}^ these results was so favorable that the government was able, in 1854, to cover a deficit of 3,000,000 thalers by adding a supplementary tax of 25 per cent, to the income and class tax (including also the grist and slaughter tax). The moral effect of the income tax on the lower classes served also to strengthen the position of the class ' There were 23,545 persons liable to the income tax living in the towns subject to the grist and slaughter tax, that is to say one-half ; while the government had assumed that these persons would amount to only one-fourth of the total. The remissions actually made amounted to 465 thalers, instead of 145 thalers as had been expected. — Kries, loc. cit. p. 380. ^ The persons liable to the tax in 1854 were distributed by classes as follows: Incomes valued at Persons iopo-2000 thalers - - - 34,459 2000-4000 " - - 9655 4000-9600 " . - . . 2835 9600 thalers and over - - 773 504 THE SCIENCE OF FINANCE. tax ; the equal taxation of the upper classes, which had so long been avoided, had now become an accomplished fact. This form of taxation now appeared to be sufficiently well established and feasible to admit of building up a system of communal sup- plements \^Kommufialzuschldge^ upon it, which increased in importance more and more as time went on. Still it is necessary to use all moderation in speaking of the insignificant results of this income tax, as compared with its English prototype, if we are not to judge it too harshly. It was certainly extravagant, at the time the new law was in prepara- tion, to recommend the "only equitable" law as capable of replacing all existing taxes whatsoever, and of affording a revenue of some 30,000,000 thalers ; even that gifted and realistic deputy, Bismarck-Schonhausen, had been wrought up into enthusiasm over this tax, but what was to be said of these 2.50 million thalers w^hen it was remembered that at the same time, in Great Britain, with the same rate of 3 per cent, and with the same minimum limit of lOOO thalers, a population but slightly greater paid in a revenue of 38,000,000 thalers ; indeed, under the exigencies of the Crimean war both the rate and the aggregate revenue were doubled, and much more than doubled.^ § 317. It was in fact the English example which incited to emulation. Thoughtful people, such as K. G. Kries, who had formerly occupied Hoffmann's standpoint, took their stand on the new income-tax legislation and looked to the future rather than the past. Another man thoroughly familiar with English political institutions, Erwin Nasse, at a slightly later date pointed to this same example as the goal to be striven for in Prussian tax legislation.^ It goes without saying that in all this we have not to do with an undiscriminating admiration of English "wealth." This » For the fiscal year 1854-55 - - 10.60 million pounds "' 1855-56 - 15 1856-57 - - 16 1857-58 - 11.58 Statistical Abstract for the United Kingdom, 1853-1867, p. 5. Bemerkungen iiber das preussische Steuersystem (1861), especially pp. 49-61. THE HISTORICAL FORMS OF TAXATION. 5O5 point, of superior wealth, was rather regarded as a factor to be eliminated from the problem and so not counted as affecting the result. The point in (juestion, the point which these men insisted on, was quite a different one. It was impossible, said they, that the difference in wealth between the two countries could be as great as the figures afforded by the income tax would indicate ; they insisted that there entered into this result a difference in political morals as v/ell as a difference in pecun- iary ability ,^ — that it was a difference in the degree of moral maturity which was revealed in the payment of this tax. It was to be noted that the per capita receipts from the income tax, even in the metropolis of Berlin taken by itself, was much less than the receipts of the English income tax, levied at the same rate and computed per capita of the entire population of Great Britain (1.25 thalers against 1.92 thalers). In view of our experience with the Prussian income tax for something over a generation past, it seems rather naive for Kries to assure us that not only the members of the commission of valuation, but the taxpayers as well, admitted quite openly in private conversation that it had never yet been possible to assess the tax on the full income of the majority of the taxpayers. But it is also a characteristic fact that many people at that time did not consider the attainment of such a result to be in any way the purpose of the income tax ; they were of opinion that the gov- ernment had good reason to rest content with the undoubted improvements that had been effected, as compared with the earlier state of affairs. It was, in fact, still necessary to combat views of this kind with insistence on the grave injustice of an arrangement under which one person is taxed on his last penny, while the next man pays a tax on less than one-third or one- fourth part of his income. The reform of the Prussian method of assessment presented itself, even in the earliest beginnings of the income tax, as an urgent question, and on this head, too, the experience of England' offered many valuable suggestions. 'While Kries cal^s special attention to the fiscal results obtained by the English L 506 THE SCIENCE OF FINANCE. The organization of the Prussian mechanism of assessment (the owners of baronial estates with their county chairman \La7idratJi\, the inhabitants of the town with their burgomaster, the too far removed and therefore uniformly ineffective higher instance of the department commission with its president appointed by the government) had already at the start given evidence that it needed reform, and had continued to do so for more than a generation. The first principle of all self-govern- ment is that no one is to be judge of his own case ; the organi- zation of self-government must provide that no citizen in the exercise of an office is exposed to the temptation of serving his own private interest while fulfilling a public duty. If anywhere, this is difficult in the case of a tax assessment by the method of self-government, and still the aid of the neighborhood factor cannot be dispensed with ; the intimate knowledge of the affairs of the neighborhood which can be made use of in this way is necessary to success, and the fact of local co-operation in the assessment acts to increase the good-will with which the inhabit- ants of the place pay their tax. Better provision has been made against these dangers, in many ways, in England than in Prussia. The extent of the assessment district is much greater than that of a Prussian circle, and still not too great ; this obviates the dominance of neigh- borly connivance. The composition of the board of assessment is not dependent on the choice of the taxpayers (the taxpayers might frequently be inclined to choose men from whom they could expect a low assessment). The board of tax commission- ers (seven) fills vacancies by co-optation, and traces its historical origin back in unbroken continuity to the land-tax commission- ers, who appointed the first income-tax assessment board. The interest of the government is represented by professionally method of assessing the tax according to the source of the income, he declares that this method is impracticable under Prussian conditions. He even expresses the opinion that this method of assessment is the chief reason why the income tax has not been successfully established as a permanent constituent of the financial system. The lapse of time has decided this question in a different sense. — Cf. Zeiischrift fiir die ges, Staatsw. (1855), p. 390. THE HISTORICAL FORMS OF TAXATION. 507 trained state officials (surveyors) whose district comprises some ten assessment districts (with some 2000 taxpayers); the care of the public interest is not an incidental, cx-officio duty to be per- formed in a medium of agreeable social relations that are by no means to be disturbed. Over these surveyors are placed ten central inspectors. This regulative apparatus of the general tax administration subjects the assessment of the local boards to inspection by experts ; it stands in no social relations to the mem- bership of the boards ; and with the support of a staff of subordi- nate officials it independently possesses itself of the facts with regard to incomes in any given locality, in order to report to the board of commissioners any apparent case of too low assess- ment. It makes such a report simply as state's attorney, while the decision of the case rests with the board, which has by numerous decisions of this class given evidence of the indispen- sability of the surveyors. We therefore have here an institution of self-government, and a combination of this institution with the organs of the national administration. The example should be all the more instructive since it occurs in the native land of self-government, and may well serve as a model for the bungling efforts at self- government in our bureaucratic states. To return from this digression, we have found that prevalent opiniort in Prussia for a long time countenanced the deficiencies of the income tax administration ; for more than a generation it was thought necessary to introduce an intermediate stage between the old class tax and any seriously administered income tax, just as the class tax itself was in its time adopted as a preliminary to any income tax whatever. If the wording of the Act of May I, 185 1, is at pains to say that all " annoying intrusion into matters of prop- erty and income" is to be avoided, what was to be expected in the execution of the law ? And what prospect of success during the next following decades could there be for any legislative reform based on the conviction that such intrusion was indispen- sable to an equitable administration of an income tax, even if it were at the same time annoying to the individual taxpayers ? 508 THE SCIENCE OF FINANCE. §318. The number of payers and the revenue from the income tax have gradually increased. In 1864 there were 68,- III persons subject to the tax,' as compared with 47,750 in 1854 ; a rapid increase, not equaled by the increase in the aggre- gate revenue from the tax (3.56 million thalers). It was other- wise with the class tax, the revenue from which increased during the same period about twice as fast as the number of persons taxed (in 1864,9.63 million thalers was paid by 16.20 million persons). With the increase of population and the extension of the field of government activity^ since 1866, the number of persons 3 liable to the income tax has increased : 1876 ...... 157,096 1886 - - - - - - - 207,608 With respect to this increase, of course, it remains an open ques- tion whether it is not due to improvement in the assessment, and therefore in the willingness to submit to the payment of the tax, quite as much as it is due to the increase of wealth. The receipts from the income tax were, in 1876, 29.34 mil- lion marks; in 1884, 35-8o million marks (of which one million marks is to be deducted for remissions under the Act of March 26, 1883); and finally, in the estimates for 1889-90, 41.90 mil- lion marks. The number of persons liable to the income tax amounts now (1889) to 777,319,"* in an aggregate population of 28,313,833, that is to say, 2.74 per cent, of the total ; it is there- fore about twice what it was in 1864 (1.40 per cent.). The rev- enue derived from the tax has increased during the period 1864-1889 in a still greater ratio (from 10.68 million marks to 41.90 millions = 1:3.92). ' Bergius, Finanzwissenschaft, p. 345. ^The number of inhabitants in Prussia was : Year Millions 1864 - . . . . 19.30 1876 25.77 (December i, 1875) 1886 28.31 ( " I, 1885) ^Adolph Soetbeer, Vierteljahrschrift fur Volkswirthschaft, 1887-88. •*" Estimates of the administration of the direct taxes for the year beginning April I, 1889," p. 20. — Anlagen zum Staatshaushaltsetat, vol. i. THE HISTORICAL FORMS OF TAXATION. 5O9 Changes in the law have somewhat affected this result and the bearing of these changes will be discussed presently. The effect of such changes has been especially great in the case of the class tax, which has been gradually lowered by successive enactments, until the receipts, as given in the latest estimates, amount to only 24 million marks ; that is to say, 5 million marks less than was derived in 1864 from the same tax on a popula- tion amounting to not more than two-thirds of the present total, at the same time that the law did not then apply to the new provinces, whose lower classes are relatively well-to-do. § 319. The gradual precession [^Versc/neditfig^ of the progres- sion in the Prussian class and income tax legislation has already been spoken of in its proper place (sec. 219). In the further development of what was established by Act of May I, 1851, the reform of May 25, 1873, has been of especial importance.' The views of the men who gave its character to the legislation of 1820 were just as consistently in favor of making the direct tax apply to the lowest classes as they were opposed to the development of the class tax into an income tax. Hoffmann sees in the nominal uniformity of the class tax for higher and lower classes alike an expression of the idea of the dignity of citizenship, as contrasted with conditions under the old regime.^ This view exerted its influence for half a century after that time, and it shows some vitality even today. Still it appears that this view has had to yield to the force of circumstances, in much the same way as the class tax has been affected by altered times and opinions. The Act of May i, 1851, lops off a fragment from the apex of the class tax ; the Act of May 25, 1873, cuts a piece out of the foundation ; later enactments have repeatedly done the like ; the original structure of the class tax of 1 820 and 185 1 is set 'Adolph Held, HildebraniPs Jahrbiicher, vol. xx. 1873, PP- 373-389- Cf. F. J. Neumann, Die progressive Einkotnmensteuer im Staats-und Gemcindehatishalte (1874), pp. 156 et seq. '' Lehre von den Steuern, p. 151- 510 THE SCIENCE OF FINANCE. aside by the Act of 1873 ; a classified income tax is substituted for it also as applies to the lower classes ; but precisely these lower classes are more and more influenced by experience and are continually better inclined to a tax policy which is realistic in form while it is idealistic in theory. The lowest class of the class tax of 185 1 comprised, in the year 1851, approximately 5,000,000 taxpayers, paying an annual tax of one-half thaler. Incident to the collection of every 100 thalers of the tax for this class, 797 special notifications, involv- ing costs, were necessary in the department of Koenigsberg, 689 in the department of Marienwerder ; of legal executions there were ordered, in the department of Koenigsberg, 354 for each TOO thalers of receipts; 167 of these executions were fruitless. Backed with such empirical data as these the government, in 1872, submitted to the House of Deputies a memorandum announcing its intention of abolishing this lowest class of the class tax. But the House of Deputies acceded to this proposal only to a very limited extent, in fixing the limit of the class tax for the future at an income of 140 thalers. Upwards from this minimum there were twelve grades speci fied by the Act of 1873, the upper limit being lOOO thalers.^ The rate per cent, varied from about .75 to 2.50 per cent. The income tax was also further developed ; the higher classes under this tax were further subdivided, and the upper limit of 7200 thalers (for incomes of 240,000 thalers) was discontinued, the I Class Income Rate per taxpayer (thalers) (thalers) 1 - - - 140 220 - - - - I 2 - - - 120 — 300 .... 2 3 - - - 300—350 - - - - 4 4 - - - 330—400 - - - - 5 5 - - - 400—450 - - - - 6 6 - - - 450—500 . - - - 8 7 - - - 500—550 - - - - 10 8 - - - 550 — 600 - - - - 12 9 - - - 600 — 700 - - - - 14 10 - - - 700—800 - - - - 16 11 - - - 800—900 - - - - 20 12 - - - 900-1000 - - - - 24 THE HISTORICAL FORMS OF TAXATION. 5II rate increasing also beyond that point so that every additional 20,000 thalers of income would pay an additional tax of 600 thalers/ In the assessment of persons liable under the first and second classes (1000-1400 thalers) the taxpayer was hence- forth to be entitled to some consideration on account of any circumstances that might diminish his ability to pay (a large number of children, poor relations, etc.). At the same time the grist and slaughter tax was abolished (from January i, 1875, on) and the class tax introduced in its place ; only the slaughter tax, and that only for communal pur- poses, remained optional (requiring a triennial resolution to that effect by the communal officials and a ministerial authorization). By means of the communal supplements ^Gcmcindczusclildge^ (under official supervision) both the class tax and the grist and slaughter tax had long been made use of for communal purposes. An ordinance dating back as far as April 4, 1848, had assigned to the towns liable to the grist and slaughter tax one-third of the gross receipts from the grist tax, and this had been confirmed by the Act of May i, 1851. But even as early as 1847^ ^he gov- ernment had submitted to the Federal Diet a memorandum look- ing to the abolition of this tax and the substitution of an income tax for it ; the provisional regulation of April 4, 1848, had sought to accomplish the abolition indirectly. Suggestions to this effect ' The fiscal significance of this reform is indicated by the following figures, which are taken from official publications for the year 1886-87. There were altogether twelve taxpayers in Prussia who were obliged to pay a larger tax in consequence of the Act of 1873 than they had paid under the Act of 1851. These twelve now paid 608,400 marks in all, while under the old law they would have paid 259,200 marks The figures are as follows : Tax- Incomes Tax PAYERS (million MARKS) (MARKS) I - - 5.04 - - - 151,200 I - - - 2.70 - - 81,000 I - - 2.58 - - - 77,400 1 - - - 2.28 - - 68,400 2 - - 1.08 - - - 32,400 3 - - - 1.02 - - 30,600 2 - - .84 - - - 25,200 I - - - .78 - - 23,400 ^Von Ronne, Staatsreclit der preiissischen Monarchie. sec. 535. 512 THE SCIENCE OF FINANCE. came in repeatedly from the House of Delegates (1850, 1868, 1869). The grist and slaughter tax had (apart from the com- munal supplements) yielded 4.75 million thalers in 1872. The number of towns liable to this tax had declined in the course of years (in 1820, 132, whereas according to the Act of 1851 there were only 83, and of these 8 additional ones had fallen out by 1872). § 320. For several reasons there was some improvement in the class and income tax legislation contained in the Act of 1873, but it was an improvement that was everything but definitive. It was a step in advance which divested the class tax of its obso- lete form, abolished the lowest grade of that tax, and further developed the income tax in the higher grades. On the other hand it is to be doubted if the substitution of the class tax for the grist tax was a commendable measure, and it is a matter for serious question if the abolition of the slaughter tax was not simply an outcome of a preference for direct taxation on abstract grounds. In this case, as so frequently happens, the question of the relative taxation of the lower classes was mixed up with the question of the form in which the tax was to be laid ; it might have been the proper thing to exempt the lower classes altogether from the burden laid on them in the form of the grist tax (and slaughter tax) ; but that would have amounted to an admission that an over-taxation existed in the form of the class tax as the alternative and equivalent of the grist and slaughter tax. But to retain the burden, and simply transmute it into the form of the class tax as that already existed in the greater part of the king- dom, was merely a change of form which could not be justified in face of the experience already had, and which had been reviewed in the memorandum submitted by the government in 1872. This state of affairs led to further reforms which have not even yet reached a definitive conclusion. An Act ' was passed July 16, 1880, which, in conjunction with the increase of duties in 1879, had the avowed purpose of chang- ' ConracT s Jahrbiicher, 1884, N. F. vol. viii. pp. 134 el seq. THE HISTORICAL FORMS OF TAXATION. 513 ing the relative shares borne by direct and by indirect taxes so as to effect a lowering of the direct taxes. The increased receipts from the imperial taxes on consumption were to be made available for lightening the burden of the class and income taxes on the lower and middle classes. This action was fairly contrary to the views which in 1873 had prevailed even among a majority of the Chamber of Deputies. It was decided that the funds made available to Prussia out of the imperial taxes were to be applied towards remission of the monthly rates payable by the several classes under the class tax and by the five lowest classes under the income tax. On March lo, 1881, a second act was passed which made permanent provision for a remission of three monthly dues pay- able under the class tax and by the five lower classes under the income tax. And again, during the session of 1882-83, a pro- posal was submitted by the government which contemplated a still more radical measure. It was proposed that, dating from April I, 1883, the four lowest grades (420-1200 marks) were to be abolished altogether. In presenting its reasons for the meas- ure the government again cited the experience on which the memorial of 1872 had been based. By the exemption of these four grades, which comprised 86 ,per cent, of all persons liable to the class tax, there would have resulted a shortage of 11.70 million marks in the tax receipts. To cover this shortage a tax on the sale of spirituous beverages and on the manufacture of tobacco was to be introduced. As a result partly of disinclination to such a tax, partly of a prefer- ence for the class tax on part of the majority of the Chamber of Deputies, the measure proposed by the government was some- what modified and curtailed. The Act of March 26, 1883, abolished only the two lowest grades of the class tax (420-900 marks) which, it is true, exempted the greater number of those previously liable to the class tax (3742 million = 75 per cent.), as the third and fourth grades comprised only some 619,000 tax- payers. But some further results were also accomplished. All the remaining grades (3-12) of the class tax were henceforth to k 514 THE SCIENCE OF FINANCE. enjoy a remission of three monthly dues ; the lowest grade of the income tax (3000-3600 marks), two monthly dues; the second grade of the income tax (3600-4200 marks), one monthly due. The government had only yielded temporarily to a large adverse majority (four-fifths) of the Chamber of Deputies. At the opening of the next session (1883-84) it introduced a new measure which went much further. It provided in the first place for the exemption of all incomes under 1200 marks, and in the second place for a lowering of the rate on all incomes under 10,000 marks (the rate to increase gradually from i to 3 per cent, with the increase of incomes from 1200-10,000 marks). At the same time the relief already afforded to the lower grades, on account of a large number of children and the like, was to be extended also to incomes of 9000 marks and upward. The shortage resulting was to be covered by improvement of the method of assessment, by extending the income tax to joint- stock companies, and, finally, by a progressive tax on dividends in the case of income from dividends amounting to 600 marks and over. The exhaustive discussion which arose over this proposal led to no positive result, and after that time the whole matter remained in abeyance for a number of years. On January 21, 1885, the Minister of Finance declared in the Chamber of Depu- ties that it was the wish of the government to abolish, not only the third and fourth, but also the fifth and sixth grades of the class tax (1200-1500 marks), but without finding any support among the deputies. § 321. Finally, there is a word to be said about the income tax in the cantons of Switzerland. We have seen (sec. 214) how great has been the growth in those communities of the income and property taxes as compared with other forms of taxation ; this has at least been shown so far as concerns the typical canton of Zurich, but there has also been perceptible a general movement in this direction in the other THE HISTORICAL FORMS OF TAXATION. 515 cantons, showing a decided partiality for this kind of taxes and SO contrasting sharply with what was the case at a not very remote period. Towards the end of the eighteenth century the finances of individual cantons for the most part still bore the impress of the Middle Ages. As in so many other respects, so also in its finan- cial system, the epoch of the Helvetic Republic exerted a radi- cal influence; under the constitution of April 12, 1798, the Republic, by an act of the seventeenth of October, 1798, dealing with imposts,' introduced, among other things, a property tax amounting to 2 per mille, together with a tax of 2 per cent, on the profits of trade. The system of taxation adopted by the League contributed not a little to the dissatisfaction with a constitution and legislation that disregarded the results of past historical development. A considerable portion of the Swiss population was stirred to an intense opposition to direct taxes, not having been accustomed to that form of taxation. When the era of the restoration rein- stated the old regime in Switzerland and elsewhere, these oppress- ive taxes were thrown off, together with so much else that the French period had introduced. The fiscal accounts of the canton of Zurich in 1830 showed no trace of a property or an income tax.^ Not until 1832 was a moderate tax of this kind introduced, as one of the consequences of the Liberal movement. Even in 1847 the receipts from this source amounted to only one-eighth of the aggregate revenue ; in Schaffhausen one-twelfth, in Thur- gau one-eighth, in the largest canton, Berne, there was no tax of the kind at that time. In the communal finances, on the other hand, a moderate property tax seems to Viave been in pretty general use by this time. But every glance into the accounts that have come down from that time shows how very sensitive people were with respect to any considerable employment of this tax. What complaints and what discontent would manifest 'I. H. Hottinger, Der Staatshaiishalt der schweizerischen Eidgenossenschaft und ihrer einzelnen Reptibliken (1847), p. 5- = Eduard Sulzer, Die Finanzen des Kantons Zurich, 1832-1850 (Zurich, 1851), p. 22. 5l6 THE SCIENCE OF FINANCE. itself everywhere if it were proposed to substitute for the federal import duties a permanent advance of the property tax from one per mille to one and one-half per mille ! says the Zurich Director of Finance in 1850. As regards the communal expenditures and the communal property taxes intended to cover them, another writer' expressed the opinion that they had already reached their highest development, and that the future ought to bring a reduction. But it all turned out quite differently during the next genera- tion. In 1 88 1 a man with 3000 francs of personal income and 60,000 francs property, paid property and income tax to the state and commune in the ten cantonal capitals as follows :^ It appears from this that there are still a number of cantons in which this tax is levied for communal purposes only; in others the commune gets at any rate the larger share of the tax. This is also the case in Zurich, where the aggregate amount is an extraordinarily large one. (In particular communes outside of the capital it is even appreciably larger.) About one-fourth to one- third of the yearly income from property is demanded for the state (4 per mille) and the commune (7-10 per mille) in the form of a property tax. The commune has as good as no other taxes, and the canton very few. The centre of gravity of the indirect taxation lies continually more decidedly in the federal import duties, in their further development, and in the incipient adoption of other federal taxes on consumption. 'Hottinger, p. 147. "^ Finanzarchiv, 1884, p. 60. City Basle (city) - - - . Liestal (canton Basle) Soleure - - - - Aarau - - - - Schaffhausen St. Gall - - . - Glarus - - - . Berne .... Lucerne Zurich .... Communal tax National tax Total (francs) (francs) (fr.\ncs) 16.00 80.00 96.00 166.00 166.00 - 172.00 172.00 252.00 252.00 - 177-50 94.80 272.30 198.50 82.80 281 .30 - 200.10 126.25 326.35 165.75 165.75 331-50 - 336-00 336.00 359-60 197-30 556.90 THE HISTORICAL FORMS OF ^AXATION. $iy § 322. The development of the Swiss taxes is noteworthy as a counterpart to the development of the income tax in all other states.' As the demands on the state and commune (poor relief, schools, roads, railway subsidies) continued irresistibly to increase, there supervened in the Swiss cantons a condition of things in which, on the one hand, the basis for an adequate development of a system of taxes on consumption was lacking (in part a purely administrative shortcoming), while on the other hand, "the force of the democratic current, with its favorite views of taxation, was such as to sweep all considerations out of the way. The questions of equity, as well as the questions of expe- diency, that centred about the increase of the property and income tax during the last generation, were easily answered in a case where circumstances put the shaping of constitutions and laws into the hands of a majority possessed of little or no prop- erty. Characteristic features in this peculiarly Swiss development are, apart from the high rate of the tax absolutely considered, the strong ratio of progression, the marked exemption of small personal incomes, the preponderant taxation of incomes from property (especially for communal purposes) as contrasted with personal incomes. But there is also another characteristic fea- ture, which is likewise an outcome of democratic institutions, — which does not stand out in contrast with the arrangements in other states, but is very similar to them. This is the method of assessment. On this head it is to be remarked that democracy has not yet nearly reached the logical result of its method of taxation, that is to say, democracy is still to an extent a civil democracy, and not as yet a social democracy. If it had reached the ultimate stage of its development then its assessment machinery which lies entirely in the hands of the ' The somewhat legendary conceptions that have prevailed on the subject of the property tax in American states and cities have been subjected to a sobering process through Richard T. Ely's Taxation in American States and Cities (New York, 1888). Cf. also a paper by the present writer in the Political Science Quarterly, vol. iv. March, 1889. On Swiss Taxation cf. Georg Schanz, Die Steuern der Schweiz (5 vols., 1890). 5l8 THE SCIENCE OF FINANCE. communal officials, in conformity with the principles of demo- cratic self-government, would reflect the same social contrast which is shown in the legislation on the rate and progression of the tax. For the time being, this is not the case ; for the time, property relations have not yet been sufficiently differ- entiated for such a result ; the extreme dangers of democracy have so far been staved off by the preponderance of the middle class. Hence we find an application of the taxation of property and income calculated to show up the dark side of any system of assessment of equals by equals ; it has disclosed the existence of such a dark side to an extent that is possible only in a case where the individual and the state are so directly and immedi- ately in contact with one another as here. Among the conse- quences of this management has been a moderation in demands made by the law, of such a character as to make up for much of the apparent hardship involved in the law ; but this has been done in a perverse and inequitable fashion. While this Swiss method of self-government as applied to taxation is very suggestive as compared with the experiences of Prussia, it affords a particularly instructive contrast to the carefully planned method of assessment in use under English self-govern- ment. § 323. The Swiss taxes on income stand in the sharpest con- trast to the great democratic state of France, and its system of taxation. It has already been remarked in another place that the influence of democratic ideas, even when a favorable ground is afforded by a radical constitution, will work out very different results in a large political and social organism from those seen in small democratic republics, such as those of Switzerland. It is, relatively, such a long and intricate way from the individual to the whole ; further, the preponderance of the historical forces which continue to govern the state under anv and all changes of constitutional forms, the ascendancy of the proper- THE HISTORICAL FORMS OF TAXATION. 5ig tied classes, the frequently decisive influence of the capital, — • these are breakwaters opposed to the currents of democracy. There has, of course, been no lack of incitement to the domestication of the income tax in France also.' But none of the attempts made have so far led to any result, not even the legitimate result which ought to be attained by this class of tax in a modern system of taxation, still less the extravagant outcome proper to a triumphant radicalism. In 1848, Goudcheaux, the Minister of Finance, submitted a project to raise 60 million francs by means of a repartitioned income tax, to be distributed upon the departments and com- munes and levied by communal assessment upon the individual taxpayers. A committee of the national assembly, whose chair- man was Parieu, altered this project essentially, especially by introducing certain bureaucratic features in order to perfect the mechanism of assessment,^ but when Parieu presently succeeded to the Ministry of Finance, he withdrew this project, and sub- stituted another in 1849, which was to tax all incomes at the rate of i per cent., the assessment being based on returns made by the taxpayers under the supervision of a communal commission, to consist of the mayor, a citizen selected by the prefect and the comptroller of the direct taxes. This project was also presently withdrawn, Fould having succeeded Parieu in the Ministry of Finance. Since that time proposals of the same nature have frequently (1855, 1862, 1863, 1871, 1872, and later) been made by various deputies, but the government has invariably opposed the meas- ures from apprehension of the unpopularity of any income tax. With the shifting of the majority of the Chambers over towards the left, the idea has again suggested itself to the ministries that have lately succeeded one another. Gambetta included the income tax in his programme, very much as he did so many other reforms which were intrinsically desirable, but practically ' Paul Leroy-Beaulieu, Traite de la science ifcs finances, vol. i. pp. 466-470. ^The indispensability of these bureaucratic elements is insisted on by Lerov-Beau- lieu, vol. i. 470. 520 THE SCIENCE OF FINANCE, impossible. Very lately (October 30, 1888) the Minister of Finance, Peytral, submitted the draught of a bill' for a general income tax, which has shared the fate of others — being forgot- ten in the rapid succession of ministries. The antipathy of the propertied and cultured classes, even of experts, in France, to this tax is well illustrated by the position of Leroy-Beaulieu. In his Science des Finances (1877) he advocates the adoption of the income tax as an indispensable corrective to other, especially indirect taxes, as being in a peculiar degree calculated to reach the well-to-do and the wealthy classes, but he offers the criticism on Peytral's proposed law, that an income tax would be inequitable in France for the reason that the upper and middle classes already "contribute more than their propor- tionate share of the public burdens" under the taxes now exist- ing. A further illustration to the same effect is afforded by the fact that while G. de Molinari, the editor of the Journal des Economistes, opposes^ this view of Leroy-Beaulieu's, he offers the very characteristic objection that the upper and middle classes, who, after all, continue to exercise a predominant influence in the state, are fairly unanimous in rejecting the income tax, and that, moreover, with the country broken up into factions as it is, it would be impossible to find honest assessors. 'Cf. the report and the text of the bill in t\\t Journal des £.cono7nistes, November 1888, pp. 239 et seq. Peytral's report contains a review of similar attempts that have been made since 1848, especially those made under the Third Republic. ^Journal des Economistes, November, 1888, pp. 309 et seq. CHAPTER IV. THE TAX SYSTEM. Literature. Adolph Wagner, Finanzwissenschaft, Ziveiter Theil (li Allgemeine Steuerlehrc, Dritter Hatiptabschnitt : Das Steuersystem unci die Hauptarien der Steitern, pp. 362-565. Lorenz von Stein, Lehrbuch der Finanzwissenschaft {^\\\ ed., 1885), Ziveiter Theil, Erste Abtheilung, pp. 495-533. Karl von Hock, Die bffentlichen Abgaben und Schulden (1863), sees. 4, 13, 14. Fr. J. Neumann, "Schwebende Finanzfragen, Erster Abschnitt : Die Unterscheidung direkter und indirekter Steuern" (Schmoller's Jahrbitch fiir Gesetzgebtnig, Verivaltung und Volkswirth- schaft itn Deutschen Reich, vol. i. 1882, pp. 945-976). Fr. J. Neumann, Die Steuer ; Erster Band : Die S tetter und das offentliche Interesse, eine Utitersuchung iiber das Wcsen der Steuer und die Gliederung der Staats- tmd Gemeinde-Einnahmen (1887). Albert Schaeffle, Die Grundsdtze der Steuerpolitik utid die schwebenden Finanzfragen Deutschlands und Oester- reichs (1880), pp. 51-198. I. CONSPECTUS OF THE VARIOUS KINDS OF TAXES. § 324. A conspectus of the various kinds of taxes might be most simply and easily effected by means of an historical survey in which it is attempted to arrange the main facts of tax- ation in an orderl}- manner by groups, provided only that the historical material were of a nature to lend itself to this treat- ment by showing an orderly gradation of development from one kind of taxation to another. It would then be possible to trace some sort of necessary connection between certain stages of political development and certain forms of taxation, and to show that in accordance with well-known conceptions of the evolution of political, juridical and economic institutions, a gradual progress in forms of taxation has gone hand in hand with the gradual development of the state. It is not only true that in the earlier treatment of tax sys- tems a lively sense of the desirability of such a generalization 521 522 THE SCIENCE OF FINANCE. has been present ; the promptings of this sense have been heeded, with the result that the existence of such a parallelism of prog- ress has been asserted, and a simple and perspicuous scheme of historical development has been constructed. The fav^orite attempt in this direction was the predication of a progress from the stage of indirect taxation to that of direct taxation, which was claimed to go hand in hand with a development from an abso- lute to a liberal constitution. This position is right, not only with regard to the general claim that there is a progress of development in the form of taxation and that this development is connected with the general development of political and social life ; it is also right in assum- ing that a transition from indirect taxes to direct taxes follows as a result of certain general features of the political and social development. But it falls short through the superficiality which per- mits itself to overlook the complex of relations and circumstances that condition any such progressive development ; it also falls short in that it sets up this generalization as a convenient and adequate programme to be immediately applied in tax legisla- tion. For the purposes of such a conspectus of the leading facts of taxation it is of little use to point out such a general tendency, so long as the realization of this tendency lies in the distant future, and so long as there is a great number of taxes that are for the present indispensable, but for whose orderly classification the fact of this general tendency is of slight or no significance. On this head, as on so many others, the science in its maturer and more thoughtful days has arrived at conditional and qualified conclusions in cases where the youthful science thought itself to have discovered simple and sweeping laws. § 325. As the result of the historical exposition contained in the last chapter we have reached a generalization of the history of taxation for a thousand years past which may be summed up in two propositions : ( i ) there has taken place a process of clar- ification whereby the taxes, being recognized as a necessary compensation of the public administration, have come to be THE TAX SYSTEM. 523 segregated out from other state activities directed to other ends than that of raising taxes ; (2) we have an aggregation of experi- ences with the various kinds of taxation, which is calculated to bring us to a modest appreciation of the fact that our modern practical sagacity in matters of taxation is very old. The process of clarification is visible in this, that the taxes have developed out of the position of a temporary and extraor- dinary effort on part of the members of the state to the position of an unquestionable public necessity ; it appears also in this, that tolls, stamp dues and monopolies, in consequence of a full consciousness of this necessity, have ceased to be privileges of a quasi-private character and have taken on the character of con- tributions rendered by the body of citizens under the forms of public law. But what this process of clarification affords us in the way of positive data accumulated by this long historical experience is a great number of means and appliances for the realization of the purpose of taxation, and these numerous ways and means are yet waiting to be intelligently classified according to their relative importance. This orderly classification is not to be drawn immediately and directly from the history of the past, but must be reached by means of a critical review of the historical material. For just as in our everyday life it is the part of an intelligent being to make use of the experiences of past days only as a guide to the realization of a rational plan of life, aiming at the accomplishment of what ought to be, and so contin- ually improving upon the past, in like manner it is the office of the science within the field of human social life to make use of the experiences of the past as a guide for the efforts of the future. To avoid this duty, the science would have to show that historical events succeed each other without the intervention of reflection, and would have to persuade us that they ought to succeed each other in this way. ^ 326. The Phvsiocratic doctrine has given evidence of its incisive scientific character also in this, that it subjected the com- plex varietv of taxes handed down from the past to a systematic ? 524 THE SCIENCE OF FINANCE. criticism, a criticism which brought order into the matter at a sin- gle stroke in such a way that the classification of the taxes at the same time embodied a decision as to their expediency and justice. In point of form this was a solution of the problem. The deficiencies of the solution lay in the substance of the theory of taxation, in the bold conception of productivity and of the tax source resulting from it ; its deficiencies lay in a rationalistic disregard of the results of historical growth, and in the habit of mind which, according to the fashion of that time, saw nothing but confusion in the tax systems of the past, instead of finding in them material for a thoughtful analysis and discussion. If we should ever succeed in constructing an orderly scheme of taxation based on an enlightened appreciation of the nature of the tax and of the tax source, and at the same time in organic connection with the past development of taxation, the goal would have been reached. For the present there is but slight prospect of such a con- summation. All attempts that have been made since the time of these earliest systematic writers have departed from their simple scheme of tax classification in the same measure as they have acquired a more adequate knowledge of facts. Very instructive in this connection is the fortune experienced by the Physiocratic terminology of "direct" and "indirect" taxes. In contrast with every other of the manifold significations which these terms have assumed since their time, to the Physio- crats the antithesis of the direct tax to the indirect taxes was at the same time, and above all, a decision as to the proper struc- ture of the tax system. The direct tax was the only admissible kind of tax, because it falls immediately upon the tax source ; all other kinds of taxes are called indirect because they are levied on a tax object which is not identical with the tax source, and are, therefore, objectionable forms of taxation.' '"La forme essentielle de 1' impot consiste a prendre directement Timpot oil il est, at a ne pas vouloir le prendre oil il n' est pas . . . . les fonds qui appartiennent a r impot ne peuvent se trouver que dans les mains des propri^taires fonciers .... Changer cette forme directe de I'dtablissenient de 1' impot pour lui donner une forme indirecte, c' est renverser un ordre naturel dont on ne se peut s' ecarter sans les plus THE TAX SYSTEM. 525 ^ 327. The radical precision and simplicity of the Physio- cratic theory of taxation is like the other efforts of this earliest scientific school in its boldness of conception ; it was a concep- tion that has been fruitful in the later development of the science, but fruitful after the manner of the seed corn, whose substance dissolves to reappear in structures of a different character. It is true of Adam Smith's theory of taxation, which influenced science and practice for severarl generations, that, as is the case with so much else in Adam Smith's work, it bears the traces of this writer's great indebtedness to the French school. If we compare Smith with James Steuarf it immediately becomes apparent that the former's theory of taxation has passed through the Physio- cratic school, that of the latter not. But as so frequently happens in Smith, as a consequence of the relative independence with which he constructs his own theory, the rigorous logic and adherence to the requirements of the system, characteristic of the French school, have disappeared. The net product upon which the Physiocrats focused their tax system by means of the single direct tax, resolves itself in Smith's hands'^ into three kinds of income, Rent, Profits, and Wages. He prefaces his discussion with four briefly stated rules of taxation, somewhat illogically arranged, but of practical value, and repeated with great frequency ; and by these rules he tests the tax contrivances of the past, and by so doing shows his superiority over the abstract radicalism of his French contemporaries. There is no longer any talk of a "system" of taxation. The distinction between direct and indirect taxes disappears in Smith's discussion. It is of course true that the locution introduced by the Physiocrats recurs both in the science and in practical life, and that it had a great vogue, but the emotional content of the grands inconv^nients." — Mercier de \a. Rixihre, L^ ordre naturel et essentiel des societes politiques, chap. iv. {Physiocrates, dd. Daire, 1846, p. 474). He goes on to say: "La forme de 1' impot est indirecte lorsqu' il est ^tabli ou sur les personnes memes ou sur les choses commer9ables ; dans 1' un et 1' autre cas, les prejudices qu' il cause au souverain et a la nation, sont ^normes." ^Inquiry into the Principles of Political Economy (1767). ^ Wealth of iVations, bk. v. chap. ii. part ii. 526 THE SCIENCE OF FINANCE. concept disappeared. A distant follower of the Physiocrats, Theodor Schmalz, utters a note of warning in the beginning of the nineteenth century against the " customary division of taxes into direct and indirect"; these expressions could have a defi- nite meaning only if by direct are meant those taxes which are levied immediately upon the productions of nature, and by indirect all others, because they also finally fall upon natural products, but only indirectly and by a very circuitous path.' But this theory has long ceased to be anything more than the mistake of an obsolete school of thought. The classification of taxes as direct and indirect is no longer a question as to the remoteness of the tax object from the tax source, but simply a question regarding different kinds of tax objects ; it is a question of the technique of taxation.^ § 328. Of the many attempts at defining the terms in this latter sense it will be possible here to cite only a few of the more noted ones, which have gained a wider acceptance than others. The view already spoken of above (sec. 246), which is prob- ably the most widely accepted in the usage of practical life, is the one which is represented in the science by K. H. Rau and later by Adolph Wagner, If the demand, says Rau, is made immediately on the persons whom it is desired to tax, then the tax in question is levied without mediation and is a direct tax ; the person who pays the tax is, in this case, also the person who bears the burden of the tax. If, on the other hand, the taxes are demanded of persons whom the government does not intend should bear the tax themselves, but who are expected to recoup themselves from the persons whom it is desired to tax, then the tax is mediate, advanced or indirect. But as this " distinction between direct and indirect collection is an external distinction," Rau prefers the distinction between Assessments and Expendi- ture Taxes. " Assessments " have to do with the person on whom '^ Handbuch der Staatswirthschaft (i8o8), sec. 410. * Taxes, says Rau, may also be classified according to the method pursued in obtaining the payment from the citizens liable to the tax ; this method may be simple and direct, or it may be roundabout. Finanzwissenschaft, sec. 293. THE TAX SYSTEM. 527 is imposed year by vear an obligation to pay a certain tax ; whereas the "expenditure tax" is based on the outlay of the taxpayer, as indicating the amount of his property. Assessments are for the most part, though not always, levied directly, expenditure taxes for the most part indirectly. While Rau, very significantly, is not satisfied with the classi- fication of taxes as direct and indirect, and so sets it aside as "extrinsic" in favor of the other classification, into assessments and expenditure taxes, J. G. Hoffmann' is concerned to bring the usage of practical life into consonance with the requirements of scientific thought. The separation of the totality of taxes into direct and indirect, says Hoffmann, is familiar to everyone, and most people understand the terms in approximately the same sense, although there is usually a great lack of clearness and pre- cision ; the etyrhological derivation of the word would indicate that those taxes are to be called direct which are borne by the person who pays them ; whereas those are indirect which in the intention of the tax of^cials are advanced by some one else on behalf of the persons by whom they are ultimately to be borne ; but in most cases it is quite impossible to say who really bears a given tax, and it is to be added that, if the word be taken in the sense specified, the same tax will be indirect or direct according as a merchant or the actual consumer imports the goods on which the tax is levied. It is therefore necessary to find a profounder definition of the concept, and such a definition Hoffmann finds in the distinction that direct taxes are taxes levied on possession, while indirect taxes are taxes levied on l/^ transactions — a distinction which is at the same time of practical value, inasmuch as this distinguishing characteristic points to the necessity of a very different treatment of the two kinds of taxes ; it requires a different apparatus to collect taxes on possessions from what is adapted to collect taxes on transactions ; possession being more or less permanent, while a transaction is by nature transient.^ '^ Pretissische Staalszeitting, 1829, No. 304. Die Lehre von den Steiiern (1840), pp. 66-73. * Somewhat similar is the distinction made by J- B. Say {Coiirs complet d' economie politique pratique, 1829, vol. vi. p. 68) between direct and indirect taxes; at least such 528 THE SCIENCE OF FINANCE. § 329. It is a matter of repeated experience in the political sciences that the efforts to establish harmony between colloquial usage and the notions of the science attain their end but very slowly. To begin with, agreement between the individual men of the science is reached with difficulty. And then, colloquial usage is very apt to be guided by the momentum of established habits. The case in hand, however, is a somewhat unusual one ; the usage in question originated with a theory which has had no practical application and was thereupon presently supplanted in colloquial usage by a quite different signification (according to Hoffmann's view of the etymology), and now this latter col- loquial usage is also incapable of reaching a stable and satisfac- tory definition because it will not stand the test of a closer analysis. Improved definitions, as this of Hoffmann's, also labor under the difficulty that they are, in the first place, in conflict with the usage of practical life (of legislation, of the administration, etc.), and in the second place, they are themselves open to criticism. So we find that, on the one hand, logicians, such as J. S. Mill ' and Adolph Wagner,^ have gone back to that meaning which the word has in colloquial usage, while on the other hand, Leroy- Beaulieu3 (as contrasted with Parieu'* and other French writers on finance), dissatisfied with the current explanations, returns, consciously or unconsciously, to the sense which the Physiocrats attached to the term, but without returning to their ideals. The definition (closely related to that of Hoffmann) which has gained is its sense, although it is very clumsily formulated: "Ou bien on demande directe- ment au contribuable une somme que certaines indications font supposer qu'il est en ^tat de payer, comme dans le cas ou il est taxe en raison de la propriete fonciere . . . soit en raison de la grandeur du logement . . . ; ou bien on le taxe en raison de la marchandise qui est I'objet de son travail ou qu'il veut consommer ou qu'il fait trans- porter d'un lieu dans un autre." ^ Principles of Political Economy, book v. chap, iii.: "A direct tax is one which is demanded from the very person who, it is intended or desired, should pay it ; indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another." ' Finanzwissenschaft, vol. ii. sees. 338, 388. 3 Traiti de la science des finances, vol. i. p. 214. * Traite des Impdts (1866), vol. i. p, 9. THE TAX SYSTEM. 529 acceptance in the official language' of France he dubs "empir- ical"; it lumps things together which should be kept distinct. For example, it includes taxes on inheritances and donations under indirect taxes, for the reason that these taxes are levied on occasion of a particular isolated act. If a more scientific definition were desired, he would suggest the following : By the direct tax it is the legislator's aim to reach the actual payer of the tax, and to tax him in proportion to his property and his ability to pay ; he therefore suppresses every intermediate link between the taxpayer and the treasury and seeks to make the tax strictlv proportional to the property and the tax-paying capacity. Bv the indirect tax, on the other hand, the legislator seeks to reach the actual taxpayer only by a sort of repercussion iy^par ricochet) instead of going directly to the end to be attained ; he relinquishes the idea of a strict proportionality, and contents himself with an approximation. §330. There has been, latterly, a considerable writing of mono- graphs with a v4ew to bring order into the inconsistency of these conceptions, the results of which, it is true, have scarcely been proportional to the efforts put forth. It can therefore not be in place to take up the question here anew. But it may be in place to call attention to whatever fundamental element is common to all these diverse definitions, and to what is of vital importance to the econoni}^ of the tax system. Common to all the definitions, and at the same time of practical value, is the contrast between the flexibility, impercep- tibilitv and relative voluntariness of the indirect taxes, and the inflexibilitv, i)ublicitvand harsh imperativeness of the direct taxes. This contrast, quite independently of all varying definitions, is forever present in the historical development of taxation ; it results in or is the result of the more general contrast of a realistic ' This definition reads : Les inipots directs portent immediatement sur les per- sonnes, sur la possession ou la jouissance de la richesse ; — les impots indirects sont per^us a I'occasion d'un fait, d'un acte, d'un ^change. "Telle est la definition admin- istrative," adds Leroy-Beaulieu ; it is therefore the authoritati ve detinition , binding in administrative law. .•""^^^^^ LlBR^A^v, <^ ^ Cf THE ■aNlVERSlTY 530 THE SCIENCE OF FINANCE. or idealistic character in the different historical phases of taxation. Abstract idealism, in its earliest scientific form and at the height of its ascendancy, rejects indirect taxes unconditionally. Theo- retical writers who hold closer to the facts of evervdav life are as a rule apt to appreciate the realistic value of indirect taxes. Justi' puts it forward as a fundamental principle, applicable to all contributions, taxes and imposts, that, as far as possible, wa3's and means should be found and adopted, such as will lead the subjects to make the pa^-ment willingly and readily and, as it were, on their own motion ; for just as undeniable as is the duty of the subject to pay taxes, just so undeniable is the annoyance and hardship which most -men find in the payment of taxes. James Steuart^ finds (as so many others have done since his time), in direct contradiction to his contemporaries, the Physio- crats, that taxes on necessary articles of consumption should commend themselves to producers precisely for this reason, that such taxes are repaid to them in the price of the product. Adam Smith incorporates in his rules of taxation 3 (extolled as " classic " by J. S. Mill) the requirement that taxes should be levied in the manner most likely to be convenient to the contributor, and he counts as especially conforming to this requirement consumption taxes levied on superfluities in such a manner that the contrib- utor pays them in small installments and, moreover, pays them voluntarily, seeing that the articles taxed are not necessities of life, it being therefore his own fault if such taxes become oppressive. "The secret of finance is to take without causing discomfort," ^ Staatswirthschaft, vol. ii. p. 290. ^Principles of Political Economy, book v. chap. iii. 3 1. The subjects of every state ought to contribute to the support of the govern- ment as nearly as possible in proportion to their respective abilities. 2. The tax which each individual is bound to pay ought to be certain and not arbitrarv. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person. 3. Every tax ought to be levied at the time, or in the manner, in wh'ich it is most likely to be convenient for the contrili- utor to pay it. 4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. — Wealth of Nations, book v. chap, ii. THE TAX SYSTEM. 53 1 i says J. G. Hoffmann in the Promemoria drawn up by him for the purposes of the Prussian tax legislation of February 20, 1820;' and in his LcJirc von den Sh'iicrn,- Hoffmann says that taxes on transactions bear less heavily on the taxpayer than taxes on possessions, for the reason that the extent to which the taxpayer is subject to them always depends somewhat on his own choice. From this valuation of indirect taxes in the old Cameralistic science and in the school of Adam Smith, the contrary estimate of the value of direct taxes follows as a matter of course. §331. It is quite obvious that the distinction between direct and indirect taxes could no longer satisfy the student after it had yielded its most valuable and suggestive results and had been reduced to a simple technical distinction in financial termi- nology, as it has been for a hundred years past. In order to accomplish, for the purposes of a more highly developed stage of economic thought and a maturer view of the history of finance, something analogous to what the Physiocrats once achieved at a single bold stroke, it would be necessary to follow their example in placing all existing kinds of taxes in intimate connection with the sources and the purposes of taxation. The purpose to be accomplished was at that time a systematic classification of his- torical data, in order to prepare the way for a reform of the existing taxation. The task before the later generation was a harder one. While taking their stand on the historical development of taxa- tion in the past, they were required to work out a system which should exhibit the reasonable nature of this past development and at the same time exert a salutary influence on the course of taxa- tion in the future. Their task was a harder one than that of the Physiocrats, insomuch as the latter threw overboard everything handed down from the past, and looked for no rationality in "existing institutions. Our past discussions of the ideal of a single tax (sees. 251- 254) have already so far converted us into advocates of the ' Dieterici, p. 284. *P. 67. 532 THE SCIENCE OF FINANCE. historic tax systems as to have shown us the decisive arguments in favor of a plurality of taxes, both on grounds of equity and of expediency. The particulars as to what kinds of taxes are to be adopted, and why, remain yet to be discussed. History affords us the data for answering these questions, but not the complete answer. We are thoroughly aware that these data show a progress, but we are also aware that the progress has never been so rapid as since the beginnings of a conscious reflection on these questions, — a science of taxes and scientific systems of taxation. What were the motive forces in the reforms effected in the Prussian tax system which we have reviewed, in the reforms at the beginning and jduring the course of the nineteenth century ? Among the very foremost (in this as in other fields of economic life) was the influence exerted by the French-English theory upon the brains of our leading statesmen. It is only as a second- ary factor that we can here cite the influence of historical facts ; their share in the movement was more frequently that of a drag (on the new concepts reached by the science, and resulted in a :sort of compromise which presently yielded again to the influ- ence of the theory. Keeping in mind these experiences it must be said that the science would be ingloriously renouncing its historic office if it were to do honor to the power of the scientific schools of the past as exemplified in the established institutions handed down from the past, and at the same time decline to do its duty for the present and the future by saying what line of action is to be followed. ^332. Our systematic classification of taxes starts from the premise that incomes, and in exceptional cases, property, consti- tute the tax source from which any and every kind of taxes are drawn (sees. 236-244). The distinction to be made in respect of all taxes, therefore, will depend on the relation in which the tax object stands to these tax sources. THE TAX SYSTEM. 533 The numerous economic phenomena to which all taxes hitherto levied attach, will, with respect to the above-mentioned relation, group themselves under three heads: (i) those which show us the income (or ])ropcrtv) in its genesis ; (2) those which show it in its finished (or achieved) form; (3) such as show it in its expenditure for private consumption. Hence we have the three chief classes of taxes: taxes on Earnings \^£nverd], taxes on Possession, and taxes on Consumption.' A more detailed examination of these three general classes is necessary in order to an appreciation of the peculiar office of each class, and of each particular kind of tax belonging under one or the other class. Bv this means we shall come to under- stand the necessity of their mutually supplementing one another in the completed structure of the tax system. The historic evolution will thus come to its rights, in that the materials afforded by past forms of taxation will be assimi- lated into the system ; while at the same time room will be afforded for scientific criticism, in the opportunity offered for sifting the historical material, and so preparing the way for fur- ther progress in taxation. § 333. Before proceeding to this detailed examination it may be proper to consider briefly the "classic" rules of taxation of Adam Smith. These rules are a typical example of the "principles" which for a hundred years were so much in vogue in the school of Adam Smith, and before his time in the German Cameralistic science, and not least in the crossing of Justi and Smith, together with its hybrid progeny, down to Rau and Roscher. A few maxims of prudence, so drawn, if possible, as to admit of being immediately adopted in practice, while they are them- selves but a generalization from everyday practice, and arranged and numbered with the greatest care ; interspersed among these 'Wagner, Finanzwissenscliaft, sec. 451 (vol. ii. Allgemeine SteiierUlire, p. 410). I adopt Wagner's classification as above given, with the thought that it may serve the purpose of bringing uniformity and agreement into the systematic treatment of taxation. 534 THE SCIEN'CE OF FINANXE. and in the same series with them, embryonic indications of the presence of important questions of principle, the passing, superficial reference to which contrasts most significantly and curiously with the gravity with which the maxims of everyday expediency are expounded. The first of Adam Smith's rules of taxation is a rudimentary statement of principle, which does not belong with the three rules following it. It is concerned with the questions dealt with in the first chapter of the present book, "Equity in Taxation," which were in part also treated of in Book I. Chapter III., on "The Various Kinds of Public Contributions." It is quite char- acteristic that in this first rule Smith follows up the proposition : "The subjects of every state ought to contribute to the support of the government in proportion to their respective abilities," with this second proposition : "The expense of government to the individuals of a great nation, is like the expense of management to the joint tenants of a great estate, who are all obliged to con- tribute in proportion to their respective interests in the estate." The ground is shifted to quite a different category when to this first principle is added a second one which prescribes that "The tax which each individual is bound to pay ought to be certain, and not arbitrary," and that "The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain," since "Where it is otherwise, every person sub- ject to the tax is more or less in the power of the tax-gatherer," etc. We have here to do with a point in the struggle between the constitutional state \^R€cJUsstdat"\ and the earlier police state, a question which is no longer a question in the modern state, and like so much else in the writings of Adam Smith and his contemporaries, is to be taken retrospectively. The third rule, as also the fourth, recites certain consider- ations of expediency which are no more exhaustive than they are well arranged. In the third rule stress is laid on the proper choice of the tax period and on the convenience to the taxpayer of the quasi-voluntary taxes on consumption, in enforcement of the maxim that "Every tax ought to be levied at the time, or in THE TAX SYSTEM. 535 the manner, in which it is most likely to be convenient for the con- tributor to j)ay it." In the fourth rule the [principle is inculcated that " Every tax ought to be so contrived as to both take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state." This j)rinciple is exj)ounded somewhat in detail, divers causes being cited from which undesirable expenses w^ould result, and among these are the cost of collection, the disturbance to industry, pen- alties for fraud and annoying interference by the tax officials. The truth contained in these two rules is vitiated by being mixed up with opinions which are altogether peculiar to the times of Adam Smith, so that not even within the narrow field of pru- dential maxims do these rules merit the epithet "classic " which is applied by Mill, unless we use the term classic to designate whatever has been repeated an infinite number of times, often without an appreciation of its meaning. Such is the following reflection on smuggling: "The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it ; and it commonly enhances the punishment too in proportion to the very circumstance which ought certainly to alleviate it, the temptation to commit the crime." Here, as in other propositions contained in these rules of taxation, we have an expression of the individualism of the eighteenth century, which rises against the state instead of aj)pre- ciating the great necessity of its presence. What there is left of positive content in these rules is accord- ingly reduced to a collection of simple considerations of common sense, such as would find their place as a matter of course in a discussion of the different classes of taxes; whereas, such matters as the historical estimate of direct and of indirect taxes demand other treatment than they receive in the modest position awarded them by Smith under his third rule. II. THE TAXATION OF EARNINGS. § 334. Reasons of equity as well as of expediency have led to the construction of a system of taxation out of manv and diverse 536 THE SCIENCE OF FINANCE. constituent elements; these constituent elements are classed under three general heads. The same reasons have brought it about that each of these groups also is a similar systematic structure. In the first place, each particular kind of tax taken by itself is so far inadequate as to leave gaps that have to be filled by other taxes, and in the second place, particular forms of gain, possession or consumption stand in such a peculiar relation of indebtedness to certain public institutions as to require special payments. For reasons of this kind the general group of taxes on earn- ings is subdivided into Subjective Taxes, Objective Taxes, and Taxes on Business. The two former classes have this in common, that they are levied on a regularly recurring gain, on yearly proceeds, yearly receipts, whereas the third class, the taxes on business, are levied on individual transactions of exchange. Subjective and objective taxes are distinguished from one another by the fact that the former strike the gain only after it makes its appearance as an item of income at the disposition of the taxable person ; whereas the latter, the objective taxes, fall upon the gain-yielding material goods from which the income of the person is derived. The subjective taxes are undeniably the most perfect form of taxation, so far as concerns the purpose of enforcing the public obligations of the person.^ It is to be added that this relative per- ' The realistic sense of modern statesmen is for the most part not inclined to acknowledge this fact, not even in England. Gladstone once {Speech on the Budget, April 15, 1 861) compared direct and indirect taxes to two charming sisters, the one blonde the other brunette, the one more frank and outspoken, the other inclined to be shy and retiring, but more winning ; as Member of the House, and more particularly as Chancellor of the Exchequer, he had always considered it his duty to pay his respects to both. He held it to be a great mistake to think that it had been the occu- pation of Parliament for the last twenty years to destroy the indirect taxes; the tree had only been pruned in order to let the trunk grow all the more vigorously, with the consequence that the indirect taxes were now of more consequence and more pro- ductive than at any previous period of English history. At the same time it was a disagreeable fact that the income tax now amounted to ten pence in the pound (a trifle over four per cent.) ; he found this high, and would gladly be the man to abolish it. {Financial Statements by W. E. Gladstone, 2d ed. 1864, p. 241). It is however to be added that the same Gladstone, in his speech on the Budget, April 7, 1864, says that he knows of no tax by which the large incomes of the country may be reached as effectively as by the income tax {ibid. p. 516). THE TAX SYSTEM. 537 fection is accompanied by practical difficulties in the way of bringing them to a full development. From these practical diffi- culties it results that these taxes arc developed in a graduated series (capitation taxes, household taxes, class taxes, classified income taxes, income taxes proper, low income taxes, high income taxes) in which the idea of the subjective tax develops gradually from a minute germ into full bloom. There are difficulties con- nected with this gradual development such as to lead to the employment, by preference, of less perfect, but for that reason more available forms of taxation. Such, for example, are the other taxes on gains, which afford a more convenient means of taxation in being levied on easilv accessible tax objects (divi- dends, transactions); such arc also taxes on consumption, which are levied on obvious manifestations of tax-paying capacity in the form of the taxpayer's consumption of goods. But in addition to the difficulties in the way of an adequate development of the subjective taxes there is also the intrinsic difficultv that they leave uncovered gaps which require other kinds of taxes to cover them. One important failure of this kind on part of subjective taxes lies in the fact that they are too inflexible, too one-sided to serve as an exclusive measure of tax-paying capacitv ; onlv the active emplovment of the earnings in serving the demands of the household can lend this measure of tax-paying capacity the requi- site flexibility. Another inherent shortcoming lies in the neces- sary inability of. the subjective tax to meet the requirements of the objective liability ; to meet which the objective taxes have been adopted. The strength of objective taxes lies in this, that they are well adapted to fill up the gaps left by any subjective taxation, and that they can attach to tangible and easily accessible objects without prying into the more intimate relation existing between these tax objects and the aggregate income of the person taxed. But aj)art from these reasons in its favor objective taxes have also their undesirable features. If thev are to be taken as a sufficient measure of tax-paying capacity, then instead of the praise be- stowed by the Phvsiocratic school (that this class of taxes attach to 538 THE SCIENCE OF FINANCE. obvious facts and are not arbitrary, as every personal tax is)/ they are met by the impatient declaration of the science that ''die todte Sache kann nicht stejierti, sofidern nur derlebende Me?isch."^ As soon as the attempt is made to reach profit-yielding objects which are not pre-eminently conspicuous, such as a trade, securities and the like, the practical advantage attaching to objective taxes immediately disappears ; the difficulties of administration become as great as the corresponding difficulties in the case of the subjective taxes. As regards taxes on business, they have with good reason been wont to disguise themselves during their early development under the semblance of payment for a service rendered. They possess this advantage, that they reach a great variety of visible events ; the disadvantas^e attaching to them lies in the fact that these events or transactions afford a much less reliable indica- tion of tax-paying capacity than do the income-yielding objects — apart from a single class of events (not included under taxes on business by Wagner, for example) viz., inheritances, donations and the like. Unless they are used with moderation, therefore, they will result in great inequalities, such as only long habitua- tion can render bearable. § 335. The early stages in the development of subjective taxation are characterized by a lack of clearness in its relation to objective taxes ; there is even a pronounced tendency towards a transformation of subjective taxes into objective taxes (taxes on realty), which is to be taken partly as an expression of the absence of a developed idea of the different character of the two classes of taxes, partly as expressing the urgent need of definiteness and tangibility of the tax requirements under an undeveloped system of taxation, as a protection against arbitrary and defective assessment. The difficulties in the way of subjective taxation are also somewhat lessened by the gradual character of the historical ' L'impot sur les personnes est necessairement un impot arbitraire, destiuctif par consequent du droit de propriete .... Car tout ce qui n'a rien d'evident est arbi- traire. — Mercier de la Rivi&re, Z ^ordre naturel, chap. iv. ^J. G. Hoffmann, Lehre von den Steuern, p. 106. THE TAX SYSTEM. 539 development ; at the outset the structures are quite embryonic, and are then succeeded by slightly higher developed stages, presently to be followed by a still higher development, — the evolution going hand in hand with the progress of development in state and society. It is a very significant fact that after the subjective taxes of earlier centuries had long since assumed the character of objective taxes, the Prussian tax system of the nine- teenth century began this course of evolution over again, starting with the capitation tax \^Kopfsteuer\, which was at that time literally what financial science in modern times understands by the term, whereas in the tax system of the times of the Great Elector, even, the tax levied under this name had assumed the character of a progressive income tax, by no means levied on a capitation- basis alone. But every capitation tax (in the strict sense) tends, in any progressive society, to a broader development. It is only under primitive conditions, under a regime of relatively stable economic conditions and a primitive uniformity and equalitv in resj)ect of acquisition and possession of wealth that a capitation tax answers to the requirements of justice. As the social differentiation progresses this kind of taxation must decline in im])ortance, relative or absolute. It declines in relative importance in case other taxes, better adapted to that end, are introduced for the purpose of graduating the tax in proportion to the diverse degrees of tax-paying capacity possessed by individual households. It declines in importance absolutely in case other forms of taxation are found to be better adapted than the capitation tax for the collection of its due contingent from each household liable to the tax obligation. It declines, nominally and apparently, in all cases, because even where it is retained in point of fact it is brought in under the more comprehensive head of a class or income tax. In Prussia it was only during the short experimental epoch of the tax- reform period that any attempt was made to adopt a capitation tax in the strict sense (1811-1820). The next higher stage, of the class tax, was reached very shortlv. The latter 540 THE SCIENCE OF FINANCE. embodies the compromise effected by the earlier liberalism, and contains the contradiction between an abstract enthusiasm for direct taxes and the empirical difficulties of an exact assessment of incomes. During this period of liberalistic enthusiasm there was, in the first place, an aspiration to do honor to the personal tax as the most perfect form of taxation, as being in a special degree an expression of the awakened consciousness of the identity of the people and the state ; but in the second place^ experience and the doctrines of Adam Smith effectively combine to discountenance the carrying out of this view to its logical consequences. A tax which does not resort to that class of demands that make the income tax seem insufferable to an imma- ture sense of citizenship, which contents itself with conspicuous external indications of wealth instead of resorting to an annoy- ing intrusion into the private concerns of the individual, is an obvious measure of compromise. As the evidence afforded by palpable facts was accepted as a substitute for an appraisement of a person's pecuniary condition in the administration of the French system of objective taxes of that era, similarlv with us the readily ascertainable fact of social position was made use of for the same purpose. But this expedient, too, is nothing more than a beginning which tends constantly to further development as the evolution of life goes on, and tends therefore to break up and disappear. Even the social stratification which the class-tax system takes as its point of departure, everywhere contains intermediate layers between the strata and layers pitched on for the purpose of the tax, and these intermediate layers have also to be taken account of ; hence arises the necessity for what is sought to be avoided by the class tax, viz., the valuation of individual tax-paying capacities within the same stratum. And what is of still greater consequence, the economic development of the nineteenth cen- tury has, in a very brief space of time, utterly confounded the typical social strata which have come down by tradition from previous centuries. In all this later process of fermentation there is a single indication of pecuniary ability coming ever more THE TAX SYSTEM. 54 1 strongly into the foreground and displacing all traditional dis- tinctions and indications ; this is the amount of money which each household acquires. But this indication is not a very con- spicuous one ; it has to be ascertained, and that by the adoj)tion of measures before which the era that breeds the class tax recoils. A surv'ey of a very short period suffices to establish the necessity of the consequences indicated. The income tax makes its debtit in a very instructive relation to the renewed aggression of liberalism in the constitutional development of Prussia about the middle of the nineteenth century. § 336. But even at that time all that was achieved was a transitional measure (1851-1873). The class tax was retained in substance for the great majority of the population, being modified only in certain details. It is based on the old stratification of societv, quite after the fashion of a generation earlier. A decided alteration is made onlv as concerns those classes of societv which possess an income of one thousand thalers and upwards. As affects these classes, the requirements of equitv and the awakened public sentiment with regard to the obligations of the well-to-do towards the common- wealth, carried the day to the extent of introducing a real income tax. This new step in advance was sought to be mitigated by a variety of provisos. The statute explains that all annoving intru- sion into private matters is to be avoided in the assessment of the tax. The organizations in charge of the assessment are genial social bodies, organized on a basis of self-government, and with more regard for social amenities than for a strict performance of their dutv to the state ; the assessment is also somewhat lightened by the manner in which the new classes of incomes are constructed. Still a gradual progress takes place, though by loosely defined methods impregnated with grave abuses, and after the lapse of a couple of decades a new reform is brought underway, — this time, too, being associated with far-reaching changes in the constitution of the commonwealth. 542 THE SCIENCE OF FINANCE. The class tax was still retained for incomes under one thou- sand thalers ; but it was now (1873) for the first time given a form answering to the requirements of the new era, being mod- eled after the classified income tax and based on a classification according to the money value of incomes. The income tax became a classified income tax, but it narrowed the intervals between classes and extended its action uninterruptedlv into the highest grades of income ; whereas the older form of the tax, as adopted in 1851, stopped short on reaching its highest class. At one essential point no change was yet made : the method of assessment remained as it had been. But the aggressive vitality of this young tree would suffer no, standstill. From this time the reforms follow one another with accelerated frequency. The obsolete method of the class tax was displaced in 1873, but in point of substantial fact the doc- trinarianism of the years 18 10- 1820 still remained master of the situation. But the great events of the new era clear the way for realism at this point also. The class tax itself must gradually yield ; as a first step in this " direction the very lowest grades crumble away under the action of irresistible social facts. But even that is not sufficient ; the view gains ground ever more decid- edly, especially with the national government, that the class tax should be abolished or reduced, and even that the reduction should apply to the lower grades of the income tax as well as to the class tax. In this we are following the example set by the practical English people, whose income tax has, for a hundred years past, given up taxing the poorer classes. This is in part a practical acknowledgment of the difficulties of levying a personal tax on the lower classes, in part it is an expression of a sense of equitv which finds that the lower classes^are sufficientlv drawn on bv means of other taxes for their proportional share in the burden of taxation. The further development of the progression, the distinction between funded and unfunded incomes, in brief, a progressive realization of an equitable apportionment of the burden to the THE TAX SVSTEM. 543 various grades of tax-paying cajmcity, but also as an indispensable means to this end, a thoroughgoing reform of the method of assessment, — these are reforms that follow necessarily as the next succeeding steps of the reform movement. The difficulties of levying an adequately productive tax on large incomes by means of the other forms of taxation already spoken of will always necessitate a recourse to the subjective tax and the development of that tax in the direction above indicated. This is the office of the subjective tax as it is to stand in the new era, after it has cleared itself of the old-time accretions of capita- tion and class taxes, and so shall have reached an all the more vigorous development in its own proper direction. § 337. Aj)art from this social-political purpose, the further development of the income tax has yet another office to [perform. This is the attainment of that flexibility which will enable the tax system to adjust itself year by year to the varying fiscal demands. Also on this head the English income tax affords us an instructive example. It is to be said that this positive advantage possessed by this tax is due to what may be called the negative characteristics of the tax, — to the circumstance that it came into the world as an extraordinary tax, to be adjusted to the fiscal demands year by year, and to be dispensed with as soon as possible. But this negative feature has practically been set aside by the development of the last half century, and the positive advantages of the tax for meeting an annually increasing expend- iture have been established for a long time past. The reasons for this use of the income tax lie in certain peculiar characteristics belonging to it, as contrasted with other taxes. Objective taxes are too rigid to admit of any mobility of this sort ; they are characterized by a definiteness and relative fixity of the rate of taxation — in some respects an excellent quality on general princijiles, but at all events an excellent (juality in the eyes of the taxpayers. A rate varying greatly from year to year in accordance with the variations in the 544 THE SCIENCE OF FINANCE. demand would under the objective tax (only remotely related to the individual's tax-paying capacity) frequently result in griev- ances which it is in the nature of the subjective tax to lessen. Still less adapted to this purpose are the taxes on business and on consumption. Both these classes of taxes are, for the most part, levied on acts which are, in a way, "voluntary." An increase of the rate in case of these taxes may easily result in the opposite of what was intended by their introduction ; the business or consumption in question may decline under the pres- sure of the higher rate. Moreover, an annual adjustment of the rate is even more annoying in these cases than in that of the objective taxes, and this is to be avoided. The course of busi- ness and of the markets, the proper shifting of taxes from the first payers to the consumers, will be greatly disturbed by any- thing of the kind. It is the ofifice of the income tax — in an adequately developed form — to infuse flexibility and extensibility into the tax system, and so to put an end to open or covert deficit financiering, as well as to the ever-recurring necessity of a new loan to meet even the most moderate "extraordinary" demand on the treas- ury.^ § 338. Objective taxes \^lirtragssteucr7i\ are, in point of histor- ical origin, an outcome of the diflficulties which beset the develop- ment of the tax system as well as of the growth o-f a sense of civic obligation to pay taxes ; they therefore represent a low development of the methods of appraising tax-paying capacity, being employed under circumstances where the mature public sentiment on which to base a more perfect appraisement is lack- ing, where the " arbitrary " character of the income tax is dreaded and the obviousness of the assessment on proceeds is made much of. Further, in point of present expediency, the objective taxes are an equitable form of taxation so far as concerns the relation 'On this point Gladstone says in his speech on the Budget, April 18, 1853: "The general position of her Majesty's government with respect to the income tax is this, that it is an engine of gigantic power for great national purposes." — Gladstone's Speeches (London, 1870), p. 308. THE TAX SYSTEM. 545 between the household and the state (empire, commune), where no regard is had to the subject's relative ability to pay. While by its nature the subjective tax, in more or less devel- oped form, taxes the aggregate income of the individual, it lies in the nature of the objective tax to follow up the particular tax- able items \^Ertrdgeii\ with or without a view to their equal taxa- tion. The classic example of this kind of tax is the English income tax, which is based on the five specified classes of incomes, but which, as is well known, really is, as it purports to be, a subjective tax (sec. 311). Whenever the objective tax is in realitv an objective tax, the question arises whether the peculiar relations of certain income- yielding objects to the community, in contradistinction to other income-yielding objects and their relations to the community, are to be followed up with a special objective tax. On grounds of historical development, as well as for enduring reasons of efjuity, this question is answered in the affirmative (in Prussia, France, etc.) so far as regards receipts from real property in town and country ;■ — on historical grounds, because of its dominant impor- tance among the different kinds of property, and because of its conspicuousness ; for permanent ethical reasons, because of the intimate connection of landed property with the various organs of the commonwealth. The question as to whether an objective tax is to be levied at all or to the same extent on proceeds arising from other forms of property, is suggested by the above question with respect to landed property. It goes without saying that other forms of })roperty will also be taxed in a community where there has been considerable develojMnent of other kinds of projjerty than real estate. If they are taxed at a lower rate than real estate, it is to be taken that the eminent importance of real estate for the commonwealth affords a substantial practical justification for so doing. On the other hand, the little else than technological advantage of a greater tangibility of real estate as contrasted with the jirofessions, commerce, investments of capital, can afford no definitive solution of the matter; it is rather to be looked 546 THE SCIENCE OF FINANCE. upon as an incentive to improvements in the methods of taxa- tion, with a view to adequately reaching the income from these sources. Whether the tax on realty, in the form of a tax on proceeds, is regarded as a means of laying the tax-paying capacity under contribution, or is taken to fulfill its office of payment for special advantages enjoyed ; in either case something similar will hold with respect to a tax on professions, trade or profits of capital. In the Prussian tax system there is a gap at this point, which can in any case be only partially filled by the tax on realty. The requirements of equity remain unsatisfied so far as concerns the demand that our great industrial establishments, and the like, should bear their proportionate share of the burdens of the commune, etc. ^ 339. The relative importance of objective taxes was greatly increased by the later development of business life, at about the same time that the science came to an appreciation of the inade- quacy of this class of taxes for the purpose of equitably taxing the subject (taxpayer).' The increased mobility of modern life has given rise to an ever-increasing number of such relations between the individual establishment and the public treasury as separate the subject (taxpayer), spatially, from the tax object, so that the tax sub- ject and the tax object frequently fall within the jurisdiction o( different tax-levying authorities. Every such case of separation gives rise to a question of equity, requiring for its solution a dis- tinction between the tax liability of the subject and that of the tax object (sees. 223-228). The development of the means of communication must of necessity develop tendencies to a dispersion in space, a feature for which even the old regime (sec. 297) had been led by expe- rience to make provision by means of its objective taxes. ^ It must of necessity happen more and more frequently that a tax- ^ Schriften des Vereins fiir Sozialpolitik, vols, xii., xiv., 1877, 1878. ''Cf. the citation from K. H. Lang in the note to sec. 385. THE TAX SYSTEM. 547 payer's estate, or his place of business, or his business activity, lies in a different commune from his domicile. As an example of the development here spoken of I mav refer to the tvpical and very characteristic phenomenon of a gradual depoj^ulation (as regards residents domiciled in the place) of the Citv of London at the same time that the business life of the City is taking rapid strides in advance. This class of cases increases constantlv, intensively and extensively, in volume and diversity. Both as regards the com- mune and as regards the larger communal organizations (circles, provinces), as regards states and empires, there makes itself constantlv felt the need of a balancing of accounts between the individual and the public economy, such as objective ta.xes are well adapted to effect. § 340. But it is not the development of the means of com- munication alone which affords occasion for a growth of this need; there are developments in other lines in modern industrial life whose tendency is in the same direction. There arc forms of industrial enterprise w'hose nature involves the result that the place where the undertaking in question develops its activitv is nowise related to the place of domicile or of the business activity of the persons whose means are invested in the enterprise. Joint- stock companies are the chief example of this class of enter- prises. They gather the large capitals which are required for carrying on certain industries from the most varied sources and from ever-increasing distances, and by means of an ever more extended sale of shares. Hence it happens, with growing frequencv, that the place where the invested capital puts forth its industrial activitv is remote from the place of domicile of the shareholders in the companv. The result is that we have a great number of cases in which subjective taxation and objective taxation do not keep company, a diversity of demands on part of various tax-levving bodies crossing one another. The business of a joint-stock rail- way company with its extensive plant, necessarilv comes into 548 THE SCIENCE OF FINANCE. intimate relations with local political bodies within whose juris- diction its stations, workshops, etc., lie. These local tax-levying bodies have an equitable claim to some payment from the com- pany, independently of all question as to whether or how far the railway plant and its business affords any profits (subjectively considered) to the stockholders of the company. A factory, whether it declares a dividend of i per cent, or of 30 per cent., in any case makes use of the streets and highways, and in so doing it occasions an expense to the local civil body, at the same time that it frequently increases the burden of the com- munal poor relief and public schools by attracting a laboring population to the place ; for such expenses the industrial enter- prises within the commune (of the province, etc.) are properly chargeable, just as much as for any other expenditure made in the interest of the enterprises in question. This is a place where the objective tax should be employed. The employment of the subjective tax is entirely out of the question, either because there are no profits obtained or because such subjective tax as may be levied falls to those communes, etc., in which the persons live to whom the dividends go. This taxation of joint-stock companies, it therefore appears, is of a twofold nature, involving two distinct principles of taxa- tion, and therefore two kinds of taxes. From this is to be dis- tinguished the other taxation of joint-stock concerns, which is intended to act as a double taxation with only the appearance of single taxation, the purpose of the legislator in its employ- ment being to reach, by the taxation of the joint-stock company, what he is unable to reach directly by taxing the members of the company subjectively. So it was the purpose of the tax- reform proposition of the Prussian government in 1883 (follow- ing the example of the Saxon law) to tax the profits of joint- stock companies in order to cover the unavoidable gaps in the assessments on dividends (and other similar incomes), which were already nominally taxed by the law of May i, 185 1, but with very unsatisfactory results. It was therefore an attempt to accomplish, by what was in theory a double taxation, a result THE TAX SYSTEM. 549 which in point of fact would amount to nothing more than a single subjective tax.' The case of associations [Genossenschafteti^ (in the strict sense) is to some extent analogous. But only to some extent. The complicated cjuestion as to whether a society is a business concern in the same sense as a joint-stock company, and should therefore be required to pay the taxes levied on business asso- ciations, introduces a special point of some difficulty.^ i^ 341. Closely related to the objective taxes, and in some part employed for a similar jnirpose, are the taxes on business or on transfers \^VcrkchrsstcHcr/i^. These are levied on particular transactions, a great variety of which are occasioned by the exigencies of business intercourse, and which constantlv increase in number and varietv with the increase of business. They differ from objective taxes in this respect, that thev are levied not on regularly recurring })rofits, but on certain business transactions recognized by the law (purchase, lease, loan, insur- ance, inheritance, gift), from whose occurrence the tax legislation infers the presence of corresponding receipts and incomes. The designation adopted for this class of taxes, as well as their theoretical basis and their classification, has hitherto been a shifting one. The step taken by Lorenz von Stein, 3 in advance of the position occupied by K. H. Rau,^ on this head, is signifi- cant of the entire attitude of Stein toward Rau's Financial Science; it is a needed disintegration of the earlier doctrine,, which is, however, far from having reached a definitive conclu- sion and a satisfactory systematic structure. But the disintegration of the untenable concept of a stamp- ' For the legislation of the German states cf. Finanzarchiv, 1885, pp. 317 et seq.^ 1886, pp. 803 et se(]. and 1888, pp. 1009 et seq. *For the controversy on this point in connection with the German and Austrian' legislation, cf. Schanz, Finanzarchiv, 1886, pp. 674-762; Lewald, ibid. 1886, p. 805;, von Myrbach, ibid. 1888, pp. 674-720. 3 Le/trbuc/i der Finanz'ivissenschaft (5th ed. 1886), Zweitcr Theil, 2. Abtheilung,. pp. 210-226. ^ Cf. sec. 280 above. 550 THE SCIENCE OF FINANCE. tax. or rather of a stamp fee, is definitively accomplished.' It has been made plain that the stamp is nothing but a particular means of collecting a tax or a fee, and that it may be employed in the collection of various kinds of taxes, taxes on business as well as on consumption. The difficulty of constructing an ade- quate scientific definition, but not the tenability of the earlier notion of a stamp tax, is increased by the fact that many stamp taxes partake of the character of tax and fee both, and that other stamp taxes occupy an uncertain middle ground between the tax on business and the tax on consumption (taxes on bills of lading, on railway tickets — transportation taxes). While this field affords an opportunity for the exercise of scientific acumen,^ it also appears, on the other hand, that the further development of taxation will, for a long time to come, afford a place for the employment of taxes on business transactions. These taxes seem to me (and in this I substantially agree with Adolph Wagner) to be of service as supplementing the taxes on earnings \^Envcrdsste?/crnl^, subjective as well as objective. This position is in consonance with a view of taxation — idealistic in its aspirations and realistic with respect to the means to be employed — which recognizes the shortcomings of each particular class of tax as well as the great difficulty of removing these shortcom- ings, and is therefore thoroughly convinced of the necessity of supplementing any single class of taxes by taxes of another kind. We have not even the conviction, but only a hope that a pains- taking elaboration of the tax system in detail will make the various kinds of taxes mutually supplement one another and fit the salient and re-entrant angles of taxation together. Of course this point of view does not exclude, but rather demands a persistent criticism and improvement of existing taxes on business transactions, under the guidance of scientific theory. But at this point, as well as elsewhere, we must care- fully avoid underrating the importance of existing results of his- torical growth ; the French taxes on transactions have been cited ■ Cf. R. Friedberg, "Zur Theorie der Stempelsteuern," Conrad's Jahrbiicher, 1878, pp. 69-94. 1 he same, Die Borsensteuer (1875). 'Wagner, FinanzTvissenschaft, vol. ii. pp. 439-480. THE TAX SYSTEM. 55 I (sec. 283) as an historical example of taxes on the transfer of realty, serving to illustrate the force of habit, at the same time that it is a result not to be reconciled with any scientific system of taxation. ■i^ 342. Whether (with Adolph Wagner) we construct a special class of "succession-taxes" \^A?ifallssteucrfi^ beside the taxes on transfers, or, as seems not incongruous to me, we comprehend this class of taxes under the general class of taxes on transfers, in any case this is a branch of taxation resting on a solid basis and of great significance for the future. For while in the great variety of other occurrences that are reached by the taxes on transactions we have to do with trans- actions of the nature of bargain and sale, which logically afford nothing more than a basis of inference, and even a qualified infer- ence, as to the taxable gains resulting from the transaction, the nature of inheritances and donations, on the other hand, is that of gratuitous transfer, so that these occurrences of themselves indicate an accession of property ; and although the significance of such accession may vary with the varying relations subsisting between the parties concerned, still the fact remains that there is in every case a real gain. It may be that other taxes on business \^Verkehrssteueni} as well as taxes on proceeds \^Ertragsstcuerti\ will have to acquiesce in the imputation that they fall upon business transactions which afford no safe inference as to any gain derivable from them (even the taxes on proceeds, as regards some portion of them, are of the nature of advances made in productive industry, in that they are simply a payment for services rendered by certain public establishments without there being any question as to whether a gain will result to the taxpayer). But the case for the tax on inheritances and gifts is a much stronger one ; these events are not expressions of a simple one-sided relation alone, but what is much more imj)ortant, there is a manifest connection between the transaction taxed and the paying capacity of the taxpayer. 552 THE SCIENCE OF FIXAN'CE. S 343. The category constructed and introduced into the theory of taxation by Adolph Wagner, and commended by him as peculiarly important and desirable — Taxes on Speculative Gains S^Kotijunktiirgewimie^ — occupies a middle ground. From one point of view these gains appear to be gratuitous gifts of chance, accruing to the individual under circumstances calculated to shed light upon a dubious spot in ever)- industrial community organized on the basis of private love of gain. The taxation of these gains, when viewed from this standpoint, com- mends itself not only as a direct logical consequence of the accepted principles of taxation, in the same sense as does the tax on inheritances, but it is at the same time a social-political measure directed to an equitable neutralization of the harsh discords of modern business life. It is unnecessary here to recall Lassalle's highly colored account of the nature of the "conjuncture"' — ''ah rohc Natiirmacht aiiftretcndc gcscllscliaftliche Ziisanvncnkdngcy This is one point of view ; but there is also another. Speculation is not, as Lassalle asserts, simply "a guess at the results which unascertainable circumstances will bring forth." It is more than that. It is the struggle of intelligence, armed with a knowledge of the ascertainable conditions, against the blind workings of chance. This struggle takes the form of commercial transactions between two parties holding opposite opinions as to the results to be expected from known conditions, and so testifying to the uncertainty of any anticipation of the future. It is these trans- actions, based on the uncertainty of the future, on which the tax must be levied if it is to reach the speculative gains under the general form of a tax on business transactions. Precisely this recognition of the blind working of chance in human affairs casts doubt upon the legitimacy of such legislative interference, at the same time that it neutralizes the effort to reach the specu- lative gain. It is only on such portion of the transactions in question as have actually resulted in a gain, and only on the ground that they have so resulted, that a special tax can be ^ Kapital tind ^;-/w/ (1864), chap. i. THE TAX SYSTEM. 553 imposed, after the fashion of the inheritance tax ; provided always that practicable means of levying such a tax are at hand, and that such means are available only in the form of a subjective tax — a taxation of income and property — and not in the form of a tax on business. § 344. The problem seems an easier one in cases where the nature of the speculative article excludes the possibility of two alternative speculative aims — a rising and a falling of the price both. In such a case an exceptional preponderance of the ascertainable and the known conditions affecting the particular article in question confines the force of chance within a narrower range. In these cases the development of value in the process out of which speculative gains accrue to private individuals takes the form of an undeviating, continuous chain of increments of value, and in such cases there is a more available ojjportunitv for the imposition of a practicable and equitable tax on the transactions in question. The course of values in real estate has frequently, under favorable circumstances, given the impression that it affords a case of development of the kind above spoken of. During a period of stronglv progressive development of industrial produc- tivitv and of population, and especiallv at everv focus of economic growth, in the great cities and their immediate surroundings in the city-like industrial countries, the record of increase in real values shows a movement which appears to be quite the opposite of the rise and fall above contemplated, both in point of absolute increase and in point of steadv growth. Especially striking are the instances, to be found in any modern metropolis, of the value of building ground advancing in the course of years, decades, centuries, moving constantlv in the same direction. But even at this point the tax on business transactions will not find as ready application as might be expected or as might be desired. In the first place, it appears on analvzing the movement in detail that the steadv advance of values which is observ- 554 I'HE SCIENCE OF FINANCE. able in the movement taken as a whole is not to be found in each particular case. It may be full)- established as a point of theory, and it may also be sufficiently borne out by experience, that under certain favorable conditions the course of v^alues of realtv is, in the long run, upwards ; but the ownership of a given piece of property by a given person is, under modern economic condi- tions, not a matter of centuries, and frequently not a matter of decades ; it is the course of values during the lapse of a shorter time that is the decisive ])oint for the owner, and it is this fluctuation of shorter periodicity that is had in view in very many of the transactions in real estate. And within this briefer period it is to be remarked that (especially under existing agri- cultural conditions in Great Britain, Germany, etc.) what we find is at best a stagnation, or even some decline of values. The rental value of landed property, therefore, falls into the same category as other goods whose rise and fall is to be taken into account. In the second place, so far as it is well founded, the expecta- tion of an advance in the value of real estate — such as is unmis- takably to be seen in a modern city like Berlin — will give rise to an effort, as widespread as the tendency itself, to take advan- tage of this "calculable appreciation." The prices which are paid for a building lot under such circumstances mav of course be expected to comprise the equivalent of the currently expected future advance. The degree in which these expectations affect prices may be greater or smaller, according as times are good or bad, but it is always an active factor for the simple reason th^t the future rise of land values is a generally accepted article of belief. From this it follows that such an advance in the prices is not necessarily due to a present favorable turn in the move- ment of population or of industry, but rather that the effect of any such favorable turn in the future has already been discounted in the present price. The greater the number of speculators concerned, the more highly developed the speculation, the more sensitive is the fluctuation of values and' the more difficult, consequently, is it to infer any speculative gain from the fact of a transfer of property. THE TAX SYSTEM. 555 Still, it is conceivable that demonstrable gain from the sale of real estate might be made an object of taxation just as a gain by inheritance or from a lottery ticket is taxed. It is also not to be denied that the publicity of the transfer of real estate affords a readier indication of such a gain than is to be had in the case of other business profits. But on this ])oint the follow- ing considerations are to be taken into account. In the first place it would lead to the adoption of annoying regulations to be observed in every transfer of real estate with a view to determining, from the special circumstances of the indi- vidual case, whether any gain has resulted or not. How far these regulations would be burdensome to the officials and to private parties, how far they would accomplish their purpose, what kind and amount of evasions they would encounter ; this would be a problem to be settled by experience alone. But in the second place, even a relatively successful taxation of the speculative gains on real estate might easily be regarded as an anomaly, or as a case of one-sided taxation (as is so often the case with respect to existing imposts on landed property), in view of the absence of any similar taxation of other business gains. But the attempt to supply this deficiency with respect to the taxation of other gains would probably encounter very great difficulties, inasmuch as it would require the application of similar methods of publicity to other business, and these arrangements would have to be created, and created for the purjjoses of the tax, whereas, in the case of the transfer of realty these require- ments of publicity already exist, even apart from any purpose of taxation, and are in the nature of the case readily enforced in spite of the mobility of business life as it actually exists. At the same time, the unreserved disclosure of the condition of other business enterprises to the officials for purposes of taxation would involve an amount of intrusion into })rivate affairs such as is entirely foreign to existing methods of tax administration and would therefore appear to be a harsh and unequal requirement. And in addition to this, the artifices for the evasion of any such requirement in themselves offer a problem of some difficulty. 556 THE SCIENCE OF FINANCE. § 345. In itself considered, the idea of seeking out and ade- quately taxing the speculative element in the gains of modern business is quite legitimate, but it is scarcely if at all feasible' by the proposed method of a tax on business. Still, the difficul- ties of this method serve to point out another and more practica- ble way. The fact has already (sec. 243) been spoken of that there is a point here at which tax legislation may fail, either in the enact- ment of the law (Prussia) or in the administration of it (Switzer- land). Land adjoining the city and increasing rapidly in value by reason of the city's growth is permitted to escape with a tax answering simply to its agricultural value, so long as it has not actually undergone the transformation into an urban building site. A piece of suburban property — according to the provisions of the Prussian tax legislation (sec. 306) — is not transferred from the land-tax cadaster to the building-tax cadaster until it is covered with a building; there is no tax for a building lot, as such, so long as it is not occupied by a house, however great may be its actual value, and however manifestly it is withheld from occupancy for the sake of a speculative gain. The justice of this claim is not impugned by the fact that the good intention has, in a particular instance, taken a vicious form.^ What is wanted is a more adequate application of the canons of equity than is to be expected in the caricature of legislation comprised within the jurisdiction of a state covering a few square milelfe, where the merchants make laws to suit their own interests ; as Aristotle savs, a wagon one span long is no wagon. But the question does not concern values of real estate alone ; the omission which claims our attention at this point is one which calls for reform in our income-tax legislation as well. There are, in fact, very grave problems calling for solution at this point.^ These problems stand in close relation to what has already been said (sees. 317-322) on this head in speaking of ' Cf. the opinion of G. Hanssen on the law of Bremen and the Sn/>ercvdi/n'ef/ [Bremen, 1877). Also Finaitzarchiv, 1S84, pp. 100 et seq. 'Q.o\\xz.A'sJahrbiicher, 1885, pp. 24-45 (" K'" Wort zur Borsensteuer"). Reprinted n Nationalbkoiioniische Studien, 1886. THK TAX SYSTEM. 557 the Prussian legislation, as well as with what remains to be said farther on. Their consideration would lead to a discussion of certain peculiar supplementary tax contrivances calculated to impose special taxes on the great aggregations of profit from speculative business. It is therefore to subjective taxation that we must turn for the effective means of compassing the required equitv. § 346. Taxes on transactions, in the strict sense (exclusive of "succession-taxes" in the sense used by Adolph Wagner), show, in respect of the objects on which they are levied, the same course of development which we find in the case of other taxes. Just as in the case of taxes on proceeds the tax on land stands first in importance and in point of time, because of the pre- eminent importance of landed property in the economy of the community, because of the relative unimportance of other sources of income during the early stages of industrial development, because of the obtrusiveness of this as contrasted with other forms of propert}' ; — so, likewise, in the case of taxes on trans- actions it is the transfer of realty that is constantlv required to bear a burden beyond what is imposed on other proj^erty trans- ferred. In a commonwealth in which the propensity for innovation turns by preference to alterations of the constitution, while the methods of administration all the more presistentlv retain their ancient form, — in France we find even to this day a tax on the transfer of real estate, which is a faithful image of this earlier method of taxation. And in this taxation it will even hold true that imposts of a private and of a public character are blended together quite after the fashion of what occurs under the feudal state. The contrast between the established institutions and what reason would require is in this case a very striking one. The evidence of the fact of transfer is desirable for purposes of tax- ation, but the imposition of the burden has nothing to do 558 THE SCIENCE OF FINANCE. with equity. The special tax imposed on the basis of the evi- dence so obtained is justifiable only in case the (in itself con- sidered, justifiable) purpose is not adequately attained by other forms of taxation. The hardship involved in a considerable tax on transfers (with a view to taxation of the speculative gain) might be dispensed with in case a great and constant advance in the value of real estate could be assumed to take place ; but the difficult}' at this point lies with the assumption here made, which may either be wholly unfounded or may not hold with sufficient permanence and generality. We accordingly find that the tendency of the latest legislation is toward an abatement of the tax on realty which has been handed down from the past. § 347. The need of some equalization on grounds of justice, the development of personal property and the resulting increased transfer of personalty \^Mobiliarverkehr\ and the complaints of excessive taxation on part of landowners, have in later times given our tax legislation an occasion to extend itself along the lines of the earlier stamp taxation. But it has always been with a well-founded horror of interfering with business transactions, such as must result from any but moderate rates of taxation. Still, it is instructive to note that those countries of Europe whose industry stands at the head of modern development have applied the tax on transactions to a greater extent than those whose industrial development has been later and slower. Great Britain, and also France, have, as contrasted with the German legislation, made earlier and more extended use of the tax on transactions. The British law taxes bills of exchange, bank notes, life and marine insurance policies" (previous to 1869 also fire insurance policies), receipts. None of this occurs in the legisla- tion of the German Empire. Receipts, taxed since 1855 at an invariable rate of only one penny (for sums of £2 and over), yield at the present time an annual revenue of i^ 1,000, 000,' 'The amount for the fiscal year ending March 31, 1888, was ^^"992, 325, as against ;^733>i58 in 1874, and £'2.^1,bT,\ in 1856. — Statistical Abstracts for the United Kingdom, 1853-1867 and 1873-1887. THE TAX SYSTEM. 559 that is to say, four times what it amounted to thirty years earlier. The legislation of the German Empire (Acts of July i, 1881, and May 29, 1885) omits all these items. It applies, apart from drafts, only to securities, broker's notes and bills of transactions in securities, and the aggregate amount of the tax was for the fiscal year 1886-87' 12.88 million marks; that is to say, not much more than one-half of what the tax on receipts alone yielded in Great Britain. The stamp tax on drafts, habitually in extended use in Germany as in other countries, was reduced to uniformity for the first time by a law of the North German Fed- eration of July 10, 1869, and afterwards (1870-71) extended throughout the German Emj^ire. This tax, in spite of the appreciable increase in its aggregate amount as compared with the results obtained during the first half of the century, still yields only 6.50 million marks in German}-, while it yields 14' million marks in Great Britain. At the same time it is to be noticed that the stamp tax on drafts in the latter country has fallen off ^ very considerably on account of the great spread of business transactions on a large scale since 1874, much more so than in the German Empire, where the amount of the tax in 1873 was 7.85 million marks (in 1874, 7.04 million marks). ^ 348. It appears, therefore, from the foregoing considera- tions that there are grave difficulties connected with the taxa- tion of transactions ; it is only in cases where the business in question is very brisk that it is possible to collect a considerable revenue, because the rates are perforce extremely low ; while the classes of transactions which would seem at first sight to be especially fitted for this kind of taxation prove unproductive of revenue. In coming now to the taxation of inheritances and gifts, however, we have to do with a more amenable subject, which ^ Statistisches Jahrbuch fiir das deutsche Keich, l888, p. 197. = The revenue olitained was, in 1874, inclusive of the tax on bank notes, ;^'i,i27,- 945, and has constantly declined from that time until late years, being in 1887, "inclusive of the tax on bank notes, ;(,765,059 ; precisely the opposite of what happened in the case of the tax on receipts. 560 THE SCIENCE OF FINANCE. may more properly be made a subject of heavy taxation both on grounds of justice and of expediency. All the elements which are absent in the case of the common run of business are here combined — a coincidence of an inde- pendent act of the court with the act of proving and entering upon an accession of wealth, and therefore of an increased tax- paying capacity. It is of course necessary to take cognizance of the kind and degree of relationship between the heir and the person leaving the inheritance, in order to satisfy the require- ments of equity in taxation ; it may be that an adequate appre- ciation of this relation will, under given circumstances, result in an exemption from the inheritance tax (as happens in point of fact under the inheritance laws of most countries with respect to the inheritance of property within the first degree of relationship) ; but after all due allowance has been made, there is still left a broad field for an inheritance tax of undoubted equity and expe- diency, as is proven by the testimony of all existing systems of tax legislation (in other words, all convictions as to equity handed down from the past), as also by cogent arguments of policy both as regards taxation simply and as regards social expediency.' § 349. In order to an understanding of the inheritance tax in its relation to existing tax legislation it is necessary to reach some definite appreciation of the meaning of the right of inheritance. The right of inheritance is, on the one hand, a civil recogni- tion of the bond of kinship, which is an expression of an ever- active sentiment of humanity as well as of a necessary condition of civilized life (vol. i. sec. 308); but at the same time it is also, on the other hand, the expression of the owner's arbitrary choice seeking to perpetuate itself beyond the grave. 'Cf. H. von Scheel, Erbschaftssteuern inid Erbrechtsreforvi (2. ed. 1878). The Same, Hirth's Annalen des deutschen Reichs, 1877. E. Leser, " Die britische Erb- schaftsbesteuerung," Zeitschrift fiir die gesammte Staatswissenschaft, 1881. A. Wagner, Finanzwissenschaft, 3. 7y/«7 {1889), pp. 266-276. Finanzarchiv, 1885, pp. 877-892. Otto Bacher, Die deiitschett Erbschafts- imd Schenkiaigssteiiern (1886). Ilildebramfs Jahrbiicher, 1873, vol. xx. pp. 373-384. Karl Kriiger, Die Erbschaftssietier nach Hirer Ausiibung in den ausserdeutsclteti Staalen, die Berechtigung Hirer Reform in Dentsch- land und Hirer Eiufiihrung ah Reichssteuer (1889). THE TAX SYSTEM. 56 1 According as the right of inheritance is one or the other of these two things it does or does not appear to society and to the state as unimpeachable, or at least a restriction of it will or will not seem to be a hardship, as the case may be. The senti- ment which has found expression in the gradation of the inher- itance tax is quite in consonance with this view. Inheritance by a son or a daughter is simply an accession to what the sentiment with regard to kinship as well as the consciousness of the great significance of this relation for the commonwealth recog- nizes as theirs by right. Accordingly the sense of equity does not see in an inheritance of this kind an increase of possessions in which the state can claim a share on the ground of its being a fortuitous gain. Even where the prevalent views as to the equity of an inheritance tax call for a taxation of such cases they are wont to content themselves with the imposition of the lowest rate employed. In proportion as the transmission bv inheritance passes these narrow limits of kinship, sentiments of a different character with regard to the equitv of an inheritance tax come to prevail. The less close the bond of relationship is, whether because of greater remoteness or because of the prevailing conceptions as to the degree of importance of such a relationship, the more will the view prevail that inheritance is of the nature of an extraordinary accession and partakes of the character of fortuitous gain. The heir is conceived to enter upon the possession not of something that is properly his own and that bv the nature of the case has long pertained to him, but of something alien, accidental and unexpected. This contrast and this tendency in the evolution of the inheritance tax will always be present, so long as the now preva- lent views of the family, property and inheritance on the one side, and of the state and the obligation to pay taxes on the other side persist. At the same time the practical realization of these tax gradations in the future will be subject to the like course of development as the varied tax provisions of different countries show to have prevailed in the past. 562 THE SCIENCE OF FINANCE. § 350. The contrast afforded by the amount obtained from the tax in different countries may serve to show to how great an extent the inheritance tax is a product of historical conditions. In the German states the amount of the inheritance tax was on an average for the years 1 880-1884 not more than 29 pfennigs per capita of the population, in Prussia only 19 pfennigs' (with a very gradual increase resulting from the increase of wealth), and for 1889 in Prussia about 24 pfennigs. - On the other hand the inheritance tax in France, in 1SS4, yielded a revenue of 2.85 marks per capita, in Belgium (1880) 3 marks, in Italy .83 mark, in Great Britain (1884) 4.37 marks, in Holland 3.02 marks. There is no doubt but that diversity in point of wealth, at least as regards certain ones of these countries, has something to do with this difference in results. Also some part of the differ- ence is dire to the different degrees of strictness with which the tax law is administered (somewhat as we have found is the case with the income tax in England as compared with Prussia). But the chief cause of difference is no doubt a difference in the pro- visions of the law, in great part the taxing of the nearer degrees of kinship in some countries instead of exempting them as is done in other countries. In France, with an aggregate revenue (1883) of 138 million francs derived from the inheritance tax, the taxation of inheritances in the direct line alone vields 35 million francs and the tax on inheritance between man and wife 15.50 millions; while both these degrees of relationship are exempt in Prussia and in pretty nearly all the other German states (Baden, Schwartzburg-Sondershausen and the Duchy of Lauenburg impose a tax on inheritance between man and wife of 1.66, 3, and I per cent, respectively). France taxes inheritance in the direct line at a rate of 1.25 per cent, and inheritance between man and wife at 3.75 per cent. To this is to be added that the other, remoter degrees of relationship, as well as the cases where there is no relationship, ^ Finanzarchiv, 1885, p. 877. 'The estimates for 1889-90 assume a probable revenue of 6,900,000 mark?. THE TAX SYSTKM. 563 are taxed more heavily. Inheritance between brother and sister is taxed in France at 8.125 per cent., in Prussia at only 2 per cent. The highest rate imposed on the remotest degrees of relationship and on non-related heirs is 8 per cent, in Prussia and 11.25 P^'' cent, in France. In Great Britain the inheritance tax in its various forms has yielded a progressively increasing revenue whose amount has been as follows:' 1859-60 .... ^3.46 million 1873-74 ----- 5.48 i87g-8o .... 6.23 " 1887-88 .... - 8.24 In this latter year it made up about one-ninth of Great Britain's aggregate revenue from taxation (75.66 million pounds). In this case, too, there is a taxation of inheritance in the direct line (i per cent.), a higher rate for the nearer degrees of kinship (3 per cent, for brothers or sisters) and a further increase of the rate for the remoter degrees of relationship and non- related heirs (lO per cent.). There is also a second, subsidiary" form of inheritance tax (probate duty) which is levied without regard to the degree of relationship and is graduated by classes according to the amount of the property, the rate being about 2 per cent. § 351. Tax legislation has so far reached a much lower degree of development in another direction — viz., in the development of a progressive rate, to increase with the increasing amount of the property inherited. In this case, as elsewhere in taxation, a beginning in this direction has been made at the lower end of the scale, by the exemption of the very small and the smallest amounts. A measure of this nature, moreover, has the support of a princijjle involved in the taxation' of inheritances. If, as happens in France, Great Britain and many other countries, inheritance in the direct line is also taxed, there is at least this much to be said for the views which prevail today in the German states, ' Statistical Abstract for the United Kingdom, 1888, p. 17. 564 THE SCIENCE OF FIXANXE. that in case of very modest pecuniary circumstances (such as are so common in Germany) the decease of the head of the household and the succession of his immediate heirs to the property carries with it a pecuniary change for the worse rather than for the better.^ It is in accord with this fact that the idea of the inheritance tax requires the exemption of this class of cases, or at the most that they should be taxed at a lower rate than others, and the case is analogous if legacies of small amount in favor of needy relatives who may have habitually received support from the testator during his lifetime are exempted, relatively or entirely, from the inheritance tax. ^ Following out the same thought higher up in the scale, into the development of the idea of a progressive taxation we come upon demands which lie rather in the region of what ought to be in the future than of what actually exists today. It is only in isolated instances that existing legislation has been affected by this line of thought, and, very significantly, it is (in connec- tion with existing taxes on income and property) in three Swiss cantons, Zurich, Soleure and Thurgau, that anything of the kind occurs. In Zurich it is provided by the law of December 22, 1869, that "these amounts of the tax are to be increased: by one- tenth in case not less than 10,000 francs, by two-tenths in case not less than 20,000 francs, by three-tenths in case not less than 30,000 francs, by four-tenths in case not less than .40,000 francs, by five-tenths in case not less than 50,000 francs fall to a single recipient." In Soleure the law of December 13, 1848, provides: "If the amount inherited by a single heir (or legatee) amounts to less than 100 francs, only one-half the fee will be collected; whereas the like fee will be increased by one-quarter for all such legacies amounting to not less than 5000 francs, by one-half for amounts of not less than 10,000 francs, by three-fourths for amounts of not less than 15,000 francs, and doubled for amounts of not less than 20,000 francs." In Thurgau the law of May 23, 1850, provides: "If the amount received by an heir falls ' J. G. Hoffmann, Lehre von den Steuern, p. 424. THE TAX SYSTEM. 565 short of 212 francs (= lOO gulden) only one-half the fee will be exacted ; whereas the like fee will be increased by one-fourth for legacies amounting to not less than 6350 francs, by one-half for amounts of not less than 12,700 francs, by three-fourths for amounts of not less than 19,000 francs, and doubled for amounts of not less than 25,000 francs." In other countries the development of tax legislation in this direction has so far taken place to so slight an extent that it even happens in many countries (in a manner quite analogous to what occurs in the case of the undeveloped income tax) that the rate of the tax decreases in the higher grades of the scale, so that the larger inheritances bear a relatively lighter burden than the smaller ones. Such is the case in Great Britain. Here the probate duty for amounts of ^30,000 and over is about one and one-half per cent., whereas for amounts of ;^3000 to ;i^30,ooo it is about two per cent., and for still smaller amounts usually over two per cent. A reform has been attempted only very lately (1889). The Chancellor of the Exchequer, Mr. Goschen, proposed to introduce a new form of inheritance tax to be added to those already in force, by which it is proposed to levy a tax of one per cent, on every estate amounting to more than ;^ 1 0,000, whether land or personalty. The purpose avowed by Mr. Goschen (a correct Manchesterist, by the way) is to reach the growing body of accumulation, because "people of consid- erable means habitually pay very low taxes in proportion to their aggregate income."' ' " On the whole, I think it will be found that the men whose fortunes are consider- able are those who pay the least in proportion to their aggregate income." {Econo- mist, April 20, 1889.) A reform was introduced in England as early as 1888, the purpose of which was to raise the disproportionately low rate of taxation on realty to correspond to that on personalty by adding one-half per cent, to the succession duty. An inheritance of ;i^20,ooo (lineal succession to unsettled property) bore a burden aggregating as follows : REALTY PERSONALTY 1887 ;^84 i8s. ^600 (Succession duty) (Probate duty) Law of 1888 ;^I24 3s. ;i^600 (Succession duty) (Probate duty) 566 THE SCIENCE OF FINANCE. It is to be remarked that, as happens in the case of the income and property tax, so also in the case of the inheritance tax, we have to do with the solution of problems of financial equity and of social policy, towards which existing legislation serves as the rudimentary substructure on the basis of which a further development is to proceed. It is only by bearing this purpose in mind that we shall be able to maintain the existing system of property in substantial integrity, as against the far- reaching demands put forward not only by the radical opponents of the rights of property, but also by scholarly critics, such as John Stuart Mill,' who claims that "no one person should be permitted to acquire by inheritance more than the amount of a moderate independence."- III. THE TAXATION OF PROPERTY OR POSSESSIONS. § 352. The taxation of earnings \^Erwerbsbesteiierimg\ as it exists today leaves but scant room for taxes on possession \^Besitzbestctieni?ig\. In point of the extent to which it is employed the property tax is the chief item under this head. As viewed from the stand- point of the modern science the property tax is to be regarded as comprising several heterogeneous elements. First, the property tax is the ancient form of the tax on earnings, making its demand upon the taxable earnings on the basis of the most obvious and accessible evidence. To this day it commends itself to the Swiss peasant as a much more con- venient and expedient method of assessment to return the aggregate value of his property than' to compute the annual income which it yields. The further provision by law for a return of the "income" is evidence of the difficulties in the way REALTY PERSONALTY f ^"124 3S. ;^600 I (Succession duty) (Probate duty) Bill of 1889 i I ;^200 l20Q \^ (New tax) (New tax) ' Principles of Political Economy, book v. chap. Q. THE TAX SYSTEM. 56/ of properly collecting the tax under the incredible circumstances that prevail in the assessment of rural property. Second (not without some regard to the above-mentioned difficulties), modern financial science, so far as concerns certain of its representatives, is also inclined to recognize the practical technical advantages of the " property tax " as contrasted with the "income tax."' By its means we not only avoid the vagueness and indistinctness of the idea of "income," we not only avoid the difficulties involved in a return of the produce of property, but we also accomplish certain positive results which cannot be as readily attained by any other method. These positive results to be attained are, ( i ) the compensa- tory taxation of property which does not, for the time, yield an income, (2) the taxation of consumable goods \^Gebrauchsver- niogc/i^ as well as of property productively employed, (3) the heavier taxation of income from property as compared with income from personal effort, and, finally, (4) the ability to demand a, portion of the principal [^Vcrmdgcnssta?mn\ for certain (extraordinary) purposes of the commonwealth (real property tax) in case of need. We shall now have to discuss these several purposes of the property tax proper. ^353. In the first place, as regards the compensatory taxa- tion of property, a consideration of this point confronts us with the technical difficulties in the way of a taxation of income. These are difficulties which have to some extent been augmented by the later development of industry. There are certain classes of income which — apart from any difficulty in getting at the truth — stand out in perfect distinct- ness and regularity and so are well adapted for the application of the income tax. This class of incomes is made up of the per- manent interest payments derived from loan capital invested in good securities for a long period. Of a similar nature are the salaries drawn by higher and lower officials holding permanent ' For the meaning of these terms, cf. sees. 237-244 above. 568 THE SCIENCE OF FINAN'CE. positions in public and in private life. In cases of this kind, of course, we can no more speak of an unlimited permanency of the income than we can speak of an unchangeable uniformity in it. But with regard to both of these points the actual limits are so narrow as to effectively serve the purpose of the tax assessment, which is that of reaching the regularly recurring incomes. There are large regions in the field of industrial life within which the circumstances are not so favorable to the appraisement of income as here. Strong and frequent fluctuations in the earnings of capital and of labor give rise to the necessity of a frequently recurring, annually (bienniall}', triennially) repeated appraisement, which encounters special difficulties even on account of this frequency of recurrence. The more frequently it recurs the more difficult will it be to so allow for the annual fluctuation as to reach any kind of a stable average of the income in question. If we have regard to the relatively, great space of time within which the periodicity of rise and decline in modern industry and modern business completes itself, it will appear that an appraisement covering a period of one, or even of three years is quite inadequate. Any extension whatever of the period covered by the assessment, of which there could be serious talk would — even apart from its doubtful applicability to other classes of incomes — be ineffective for the desired end. The uniformity of income sought to be attained by means of an aver- age of a great number of varying annual amounts could in any case not be reached. By replacing the income tax by the property tax this difficulty is avoided. But the difficulty is not removed. How much is to be demanded annually of the property in question in the form of a property tax remains an open question, just as it was when the same deman^ was made in the form of an income tax. In both cases the problem is to pitch upon the proper average figure for a tax on a certain regularly recurring, average tax- paying capacity. It is only when we come to apply it to property which yields THE TAX SYSTEM. 569 no profits that the property tax is anything more than an income tax under a different form. In such a case the income tax ceases to be operative because the income on which the tax is based has ceased for the time. It therefore becomes the office of the property tax to assert the right of taxation which (even in the absence of income) pertains to the state and to the public organization generally simply in virtue of the fundamental importance of these public institutions for the life of every civilized man. This fundamental im{)ortance of the state for the life of all its members gives it a claim to a tax on property of the same validity as the claims of the other fundamental necessities of life — of food and drink, of shelter and clothing. Here we have accordingly come upon an actual gap left by the income tax, which it is the office of the property tax to fill out ; a gap which the income tax as such can scarcely remove, and which plays so unobtrusive a part in the assessment of incomes only because the assessment of income in practice departs even more widely from the strict principle than the tax legislation does. §354. The taxation of property employed in consumption \_Gebrauchsvermdgen^ (as distinguished from productive property) is also a matter that comes up for consideration in connection with any thoroughgoing income-tax system ; but so long as the prevailing indefiniteness of ideas as to the nature of income con- tinues, and especially so long as the prevailing instinct of the majority continues to assert itself against the payment of taxes, this problem, too, has a better chance of solution by the method of the property tax. Crude notions as to the nature of income, as well as apprehen- sion of the insuperable difficulties of assessmer^t, have inclined the income-tax legislation to recognize an income only in cases where a money value emerges — where there is a receipt in money or where there are proceeds in kind which bear an obvious money value. The tax administration follows this inclination still 570 THE SCIENCE OF FINANCE. further, so as to close its eyes to the presence of any proceeds in kind even if they possess an obvious money value. The income tax should fall on the house occupied by its owner, or rather on his use of it, as well as on the rent which he receives for the house occupied by a tenant. The more preva- lent the business of renting dwelling houses is, the more surely will the usance of a house occupied by its owner be brought under the income tax. But where, as in the country, it is the rule (at least for the well-to-do, who mainly contribute to the income tax) to own one's own house, while the renting of houses is not a usual source of money income, tax legislation, and especially the tax administration, will be inclined to disregard this element of income. Something analogous occurs quite generally, so far as concerns items of property which afford their owner a usance that does not take the form of a money income, whether in town or country, that is, things which in the nature of the case are neither hired nor leased. A typical example of this is the possession of a picture gallery. If the occupancy of one's own house is to be counted at the rental value of a house of the same value, and therefore as representing so much of an increment to the owner's income, then it is plain that. the same will hold of any house, however expensive, by whatever accessories the expensiv^eness of the house is increased, whether by a greater number of rooms, by gardens, parks, works of art, picture galleries, or anything whatever. The enjoyment of a house that has been rendered beautiful by art is a consumption of greater money value, just as much as it is more expensive to occupy ten rooms than to occupy five. This simple course of argument will lead to a practical result much more readily by the method of the property tax than by that of the income tax. If we start out from the fact of the ownership of property as our point of departure, the misconcep- tions of everyday life will not blind us to the obvious principle that every item of property carries with it the same obligation to pay taxes, independently of what may be the particular steps THE TAX SYSTEM. 57 1 by which it serves its purpose of utility to its owner. Indeed, how true it is that certain kinds of property devoted to con- sumption give rise to the impression of a greater tax-paying capacity on the part of their owner than the possession of pro- ductive property, is evident from the need which is felt of reach- ing this wealth by some other means — in the absence of a pro[;- erty tax, more especially by means of the so-called "direct taxes on luxuries." But this method has the disadvantage of attach- ing to special items of the wealth devoted to consumption, and so only circuitously approaches to the true goal, very generally without reaching it. § 355. On the other hand it is quite usual even where a general property tax is enforced to afford some relief in favor of such consumable wealth as serves the necessities of life. There is, therefore, observed in practice a sort of subsistence minimum in the application of the property tax, which differs from the principle of progression and exemption of a certain class of small properties in this, that the precise amount of the necessities of life is not here sought to be expressed in figures and therefore varies with a certain elasticity according to the stand- ard of living and the pecuniary strength of the taxpayer. The property-tax legislation of the Swiss cantons has applied this measure of relief more than once. The practice seems to have been less extended in earlier times than at present. The mediaeval property tax \^GutsUuer^ in Zurich,' which was fre- quently levied after 1343, was to be borne by all property, fixed and movable, to be levied on Hms, Plutider, Kleider und Gewand. The harness alone, da niit cr gcmeiner Stadt zvartet oder dcr zii scinem Lcib gchorct, is exempted. The propert^'-tax law of 1417"^ con- tains a provision to the same effect. In the next succeeding centuries this seems to have changed ; not only weapons and armor,' but also plate, ornaments, house- hold utensils, clothing and tools are exempt from the property 'G. Meyer von Knonau, Der Kanton Zurich (1846), vol. ii. p. 256. ^Bluntschli, Staats-und Rechtsgeschichte der Stadt und Landschaft Ziirich (1838), vol. i. p. 401. 572 THE SCIENCE OF FINANCE. tax in Zurich.' In Glarus^ the Common Council \_genieine La?id- gemeihdr^' ) •rda.ined in 1725 that everyone was to return, bci Ehr u)id Gew. 7z, all his property, with the sole exception of house- hold furniture and clothing, etc. The later property-tax legis- lation in force at present pretty generally provides for a similar exemption. The Zurich law of March 2, 1870, provides that from the property tax is to be exempted "the clothings books, field and handicraft implements used by the taxpayers, and the necessary household furniture." (Similarly the Zurich law of February 14, 1861.) The law in Glarus (May, 18 50) exempts household furniture and implements used in handicraft or field work. A similar provision is in force in Zug by a law of December 5, 1861 (March 10, 1862); also in St. Gall by a law of May 30, 1863; in Vaud by. a law of August 21, 1862, ("the bed and the clothing required for the family, kitchen uten- sils, agricultural tools and implements, the tools and implements of handicraftsmen and laborers"). There are a number of cantonal tax provisions which go fur- ther, in that they apply under the term " capital-tax" only to realty and wealth productively employed. So,3 for example, Schwyz (law of September 10, 1854), Soleure (March 9, 1832), Unterwalden nid dem Wald '(June 5, 1848), Basle province (August II, 1856), Schaffhausen (December 15, 1862), Thurgau (March 6, 1849), Valais (May 31, 1856, and November 26, 1862). Here, then, the use of the property tax for the purpose of reach- ing wealth devoted to consumption is definitely abandoned, quite in contrast with the earliest property-tax legislation of Switzer- land, which was manifestly intended to reach wealth employed for consumption. The Swiss federal law of Jurje 28, 1878, dealing with the military-compensation tax \^Militdrpfiichtcrsatz'\,Tprov\dcs, as does the Zurich law of 1870, that in the assessment of property "the ' Bluntschli, vol. ii. p. 28. '^^\\xmtx,Siaa(s- und Rechtsgeschichte der schweizerischen Deinokratien (1858), vol. ii. p. 297. 3Renward Meyer, Materialien zur Revision des Steuergesetzes, vol. ii.; Zusammen- stellnng der in den Kantonen geltenden Steuergrundsdtz^ (Lucerne, 1865). THE TAX SYSTEM. 573 value of chattels required for the needs of the household, as well as of tools for handicraft and agricultural work, is t>'to be included." j • These provisions of the Swiss legislation embody a certain tendency to limit the taxation of wealth employed in consump- tion ; the precise determination of its scope is yet to be decided by the future evolution of the property tax, together with the further improvement that ma}' take place in the method of assess- ment. It is not only true that the inadequacy of such a defining concept as "necessary" when introduced into a tax provision, points to the necessity of a closer definition of what is to be exempt from the tax, but it is very doubtful if an exemption of this kind can be justified at all in case it covers much more than the strict physical necessities, so as to include also the luxuries required by a socially necessary standard of living. § 356. The third office of the property tax, as enumerated above, is the imposition of a heavier tax on income from property than on personal income. In point of fact, this object is compassed by the property tax as employed in the Swiss cantons and the Confederation (under the above-mentioned law dealing with the military-compensation tax). This has already been shown in detail in the earlier por- tions of the present volume (sees. 214, 321). In the canton of Zurich an income of 4000 francs (from property worth 100,000 francs) pays at present 17 to 20 per cent, to canton and commune together; a personal income of the same amount pays scarcely 3 per cent, to canton and commune together. In other can- tons this contrast is rarely as striking as in Zurich. But as it is a very prevalent custom to employ the property tax exclusively (or as good as exclusively) for the purpose of communal reve- nue, the result is that throughout Switzerland, even outside the canton of Zurich, there is a very general heavy taxation of property coupled with a relatively slight taxation of personal income. The federal law above referred to, on the military-corn pensation tax of June 28, 1878, taxes every 1000 francs of 574 THE SCIENCE OF FINANCE. property at the same rate (1.50 francs) as lOO francs of personal income ; the result being that by so much as the average pro- ceeds from property fall short of ten per cent., by so much does the burden on income from property exceed that on per- sonal income. The repeatedly projected legislation of the Prussian govern- ment (1847, 1883) goes to show that the same purpose may be sought without employing the form of a property tax ; the method adopted may be that of a higher rate of taxation on funded than on personal income under the provisions of the same general income tax. But these projects have not been carried through. The Swiss system of property taxation on the contrary has now been in force uninterruptedly for a long period of years and has become so much of a fixture that its characteristic features are no longer subject to change. This result may possibly be due to the intrinsic justice of the demand that income from property should pay a higher tax. This rests on the claim, which is scarcely to be seriously ques- tioned, that the tax-paying capacity of income from property is much greater than that of personal income because of its greater security and permanence. It is also not to be overlooked that objective taxes (taxes on proceeds) ordinarily are not to be found in Switzerland, and that the property tax consequently is also called on to supply their place. Progressive evolution of taxes on income in the great states of the present and the future will also be required to solve cer- tain problems of this kind which have hitherto remained unsolved chiefly because of the dominance of the propertied classes and their disinclination to pay their share of the taxes. In the usual objections to a higher taxation of funded income than of personal income I am, in fact, unable to detect any argu- ment which has as much force as this practical fact above cited, which enables us to comprehend the delay there has been in recognizing the simple justice of the demand. That the income from property, too, is "uncertain" is an assertion of that undeni- able sort that j^roves nothing. All human arrangements of wealth THE TAX SYSTEM. 575 or of well-being are "uncertain," but that fact does not affect the relativity with which the cjuestion is concerned ; the fact remains that the certainty of the one class of income, as well as its dura- tion, or even pcrj)etuitv, is much greater than that of the other. And what we are concerned with is entirely a matter of a differ- ence of dei^ree ; we rccjuire a larger percentage of the one class of income because it is held to possess a greater tax-paving capacity than the other. The objection that the taxation of income from property at a higher rate would discourage saving and accumu- lation of capital is the same well-known objection which on other occasions is raised against every kind of income tax. Anv proof founded on experience in support of this objection has not yet been brought forward. And when put' forward on general grounds only this objection has no more cogency than the contrary position which is urged on an equally general ground, viz., that the payment of taxes acts as an incentive to the industry and thrift of the citizens. It is a substantial gain to have hunted the aversion to this form of taxation into a corner and established the fact that it has its origin in an unripe public sentiment and not in a convic- tion which will bear scientific investigation. ^257. Finally, in the fourth place, the purpose of a tax on propertv as a "real property tax" cannot logically be compassed under the form of an income tax, and can be accomplished under the form of an inheritance tax (cf. sec. 239 above) onlv under special circumstances. In this connection it is to be remarked that a real taxation of wealth (sees. 237-240), apart from the inheritance tax and other taxes of that class, is, for the existing stage of develoj> ment of taxation, nothing but a remote possibilitv. In the first place, the high development of public credit in our modern states has made available a very convenient method of raising the means necessary to cover any extraordinary expenditures. The imposition of a projierty tax, such as was repeatedly attempted in Prussia at the beginning of the century, 576 THE SCIENCE OF FINANCE. for war purposes, and which failed so signally that its failure was used as an effective argument against the introduction even of a moderate income tax, — a measure of this kind in Prussia, as in any other state with a similarly developed system of finance and public credit, would be crowded to the wall by the greatly superior expediency of a public loan. In the second place, the moral factors, the maturity of civic sentiment requisite for the successful adoption of such a property tax, are a feature of the future rather than of the present. In discussing the relative advantages of war taxes and of public loans we came to the conviction (sec. 167) that the sensitive- ness to the pressure of a tax is greatly conditioned by the stage of development of the political sense, which is closely related to the growth of insight into the indispensabilit}^ of the state and the consequent necessity of taxes. We have in the fore- going chapters repeatedly had occasion to remark how great are the difficulties which beset the states of today in this respect, how far in the future lies the last step in the progress if the con- summation is to be a system of taxation which shall be based on a full recognition of the greatness of the burden together with a ready acceptance of it. IV. TAXES ON CONSUMPTION. § 358. The taxation of wealth in the form of a tax on con- sumable wealth affords the transition to the important field of taxes on consumption (consumption taxes, taxes on expendi- tures). So long as we have to do with objects of the nature of durable wealth, the basis of an enduring utility (capital, con- sumable wealth), which are turned to use in their original form and not through the medium of an exchange in the market, so long, we have seen, is the "property tax" or the "direct tax on luxuries" the proper form of taxation. As soon as these utilities are thrown upon the market, as happens with the impor- tant class of rented houses, they lend themselves more readily to taxation on the basis of their market value. It is quite in accord with the general deliverance of experience on the subject ( iM 1 THE TAX SYSTEM.V ^ ■ ^77 of the relation of the value of the goods consumed in kind to the money value of the same goods, that it is only after the development of marketability in these utilities that the tax ("rental tax") assumes a form which has long been in use and has proved itself very practicable in other lines. Something similar may be observed in the broader field of those consumption taxes the tax-object of which is not the usance of invested capital but objects of immediate use. It is true in this case even to a greater extent than in the case of productive capital that there are practical difficulties in the way of subjecting products consumed in kind to a consumption tax, whereas the same products if they are put on the market are extremely well adapted to a tax on consumption (tobacco, beer, wine, etc.). So true is this that it may even be said that the development of production for a market by the method of great centralized industrial establishments is to some extent necessary as a foundation for a highly developed and effective system of taxes on consumption (distilleries, breweries, beet-sugar fac- tories). § 359. The fundamental principle of the tax on consumption is this, that it accepts the demand of the taxpayer for consumable goods as the standard by which to measure his ability to con- tribute to the public expenditures. The fact that a household consumes a given quantity of beer, wine, spirits, tobacco, tea, coffee, sugar, etc., is accepted as evidence that the same house- hold is capable of rendering for public purposes a contribution proportioned in quantity (and if practicable in kind) to this consumption. This principle of consumption taxes is no more fundamentally opposed to the principle of equity in taxation than is a tax on earnings in any of its various forms. Nor are the difficulties which stand in the way of the application of this principle any- thing more than what every other form of taxation has to con- tend with, and in this case as in every other the chief problem is to bring the })ractical working of the tax continually more and 578 THE SCIEN'CE OF FINANCE. more into conformity with the requirements of equity. It is to be remarked that it is the unavoidable shortcomings of every form of taxation that necessitate a mutual supplementing of these shortcomings, as it were a fitting together of salient and re-entrant angles. And it is true not only of the less manage- able kinds of the taxes on earnings, those which bv nature are necessarily more imperfect, but even of the relatively most perfect of them, the income tax, which has its defects, partly inherent in the nature of the tax, partly defects in its practical working ; and these defects and shortcomings plainly point to the taxes on consumption as well adapted to supplement and correct them. Defects inherent in the nature of the tax are due to the fact that the method of ascertaining the income necessarily applies too inflexible a standard in measuring the tax-paying capacity, and so *nakes a more flexible, subsidiary standard desirable. The defects in its practical working are due to the obstacles which a "direct tax" encounters in the immature civic and economic sense of the majority, which gives an advantage to "indirect" forms of taxation that collect the amount of the tax in driblets and in an inconspicuous way. § 360. The literary and social-political struggle against taxes on consumption ("indirect taxes") which has now been going on for two hundred years, turns out on closer examination to be directed not so much against the substance of this kind of taxation as against a special form of it which is at variance with the demands of equity. One of the greatest of the precursors of the Physiocrats in France, Vauban, who submitted to the king the radical scheme of tax reform of a universal d'mie (i6g8) as a means of achiev- ing an equitable distribution of the public burden, was willing to retain a number of taxes on consumption so far as they were not levied on necessaries, and he even would have retained the salt tax in an improved form.' ^ Projet d'line dime royale. EconomisUs financiers du iS^ sieele {€A. Daire, 1843), p. 97. THE TAX SYSTEM, 579 Every one of the later opjioncnts of "indirect taxes"' (apart from those occupying very extreme positions on the theory of taxation, as for example the Physiocrats) opposes [)rimarily the inccjuitable forms of taxes on consumption and the substan- tial injustice which results from these forms. No one has estab- lished that there is anv necessary connection between this sub- stantial injustice and the form of the consumption tax. Even in the discussion of the facts the emphasis is frequently thrown very decidedly upon the existing inequality in the most diverse forms of taxation ; so that we find the famous modern opponent of indirect taxes — consciously or unconsciously — construing the taille as an indirect tax and so bringing it under Boisguillebert's condemnation.^ But the struggle against indirect taxes is, further, closely connected with that unhistorical radicalism which was initiated and is typified by the Physiocrats. And in a qualified form, dissociated from the bold projects of the Physiocrats, this doc- trinarian view of the matter has lasted on for a hundred years. It takes offense at this class of taxes, now because they hinder the freedom of trade, now because their cost of collection is high, now because they are inequitable as between taxpayers of different tax-paying ability, and always with an air that seems to assume there are other forms of taxes available which are ideally perfect in these respects ; but when we come to examine these other kinds of taxes we find to our disappointment that their shortcomings, too, are very great. So that this carping criticism, 'Cf. especially the numerous instances cited by Ferdinand Lassalle, Die indirekte Steuer unci die Lage der arbeitettden Klassen (1863), pp. 14-54. * Lassalle, p. 31 : " Boisguillebert points out that the indirect taxes then in force in France, the taiilc, or the taxes resting on agriculture, the aides, or wine tax, and the duties .... render consumption impossible." In fact the iaille was as thoroughly a " direct tax " as any tax is, and was most assuredly not an " indirect tax " in the sense in which that word is employed by Lassalle and in modern usage. But this tax was the most grievous burden of the French people; it made "consumption impossible," to use Boisguillebert's expression, not because it was a consumption tax, but because it left too little of the means for consumption. Henri 'I"aine computes from docu- mentary sources that the aggregate of the four direct taxes of which the taille was the chief amounted to 53 per cent, of the aggregate national income. — Les origines de la France content poraiue (1876), p. 543. 580 THE SCIENCE OF FINANCE. in SO far as it means anything, turns out to be nothing but an expression of that state-and-tax-abhorrent attitude whose ideal in the matter of taxation consists in the absence of all taxation. § 361. The office of the science in relation to taxes on con- sumption is the same as what we have found to be the office of financial science and of the theory of taxation in general ; it is a dispassionate investigation and appreciation of the develop- ments of the past and their causes on the one hand, and a shrewd guidance of their further development in the future in conformity with the principles of justice and expediency on the other. There exists at present a relatively very general consensus, both in the theory and in the practice of finance, as to how this problem is to be solved. It is not thought possible, in the first place, to attain the desired equitable taxation by taxes on con- sumption alone ; in the second place it is further recognized that taxes on consumption are a necessary constituent of every modern system of taxation ; third, matters of detail in consumption taxes are considered open questions, both with respect to their expediency and with respect to their justice. The problem is greatly simplified by the attainment of such a unanimity in the dominant views of the matter. We have hereby reached a position with respect to the problem from which it is possible to initiate a reconciliation of the historic tax systems with the ideal tax system of the future. What we have already found to be true with respect to taxes and financial matters generally and with respect to the state as a whole, repeats itself within the field of the consumption taxes ; all historical development is gradual and precarious ; the less perfect is gradually replaced by the more perfect ; but the rate of this approach towards perfection must always contmue to be slow and very modest, for the decisive factors in the progress, the psychological elements involved, are incapable of a develop- ment by leaps and bounds. THE TAX SYSTEM. 58 1 § 362. If we look into the nature of the taxes on consump- tion with a view to ascertaining their office in the fiscal system we shall find that it is as follows:^ The point from which we must, approach the question is the amount of the public expenditure, or of that portion of it which it is thought proper to cover by means of taxes on consumption. The second step is duly to consider, in connection with this first point, what is the kind and quantity of the different items that go to make up the actual expenditure and consumption of the economic units comprised in the system with which we have to do. As has been pointed out in the preliminary discussion, in treating of the evolution of demand (vol. i. sees. 187-212), we have here to do with a question of historical growth, varying with the time and the people in question and with the plane of culture attained by the society as a whole, as well as from one stratum of society to another. . The problem is to get a correct appreciation of this diversity and of the proper significance of each particular branch of consumption and of each particular object of consumption in the community which is to be laid under contribution ; and also to appreciate the true significance of these relatively to the aggregate demand of the community as a whole and to that of the various classes of the community. Even within the circle of the modern civilized countries of Europe and within the brief space of time comprised in the pres- ent century we meet with appreciable alterations in the character of the aggregate consumption and considerable variations from one people to another. This fact is especially obvious as regards the articles commonly subjected to a consumption tax, more particularly the great variety of stimulating beverages in use at present. It is not only that coffee and tea are products introduced into our consumption from abroad, which have only gradually and to a great extent not until the present century replaced certain domestic products ; it is also true that they have penetrated the daily life of the different countries of Europe in 'Cf. G. Hanssen, "Die Normirung der Eingangszolle aus dem rein finanzielien Gesichtspunkte." Zeiischrift fiir die ges. Staatsw., 1855. 582 THE SCIENCE OF FINANCE. very different degrees and play a very different part in their aggregate consumption. Tea has become the popular beverage most generally consumed in England, while in Germany (apart from certain sections of the northwest) it is chiefly a luxury of the upper classes. On the other hand, coffee is the popular •drink of Germany and has gradually more and more driven the national meal or milk porridge from the field, while in England coffee is properly to be considered a luxury.^ The consumption of tea during the last generation has increased in England just as steadily as that of coffee in Germany. The consumption of coffee has constantly declined in England, while the consumption of tea in Germany has increased but very slightly, and the mod- erate increase which has taken place, as shown by the figures cited in the note, is in part due to the accession of new tea- drinking countries lying outside the limits of the old Zollverein. Spirituous beverages (beer, wine, brandy) have a very differ- ent importance for different countries and localities, according to the varying circumstances of climate and culture. In the •wine countries wine is the staple popular beverage ; so, for -example, in the Rhine country, in the wine-producing cantons of Switzerland, in the corresponding sections of France, Italy, Spain, etc. It is only under circumstances of exceptional indigence that its place is taken by cider and the like. Whereas in coun- tries where wine is not produced, where no wine is consumed except what is imported from abroad, wine is the drink of well- ' The consumption per capita of the population in the United Kingdom was (5/d'/w- tical Abstracts for the United Kingdom, 1868-1888): Year 1853 - - - - 1867 1880 - - - - 1887 The consumption in the Zollverein per capita was {Statistisches Jahrbitch fiir das deutsche Reich, 1886, p. 158, and Hanssen, loc. cit. p. 64) : Year Tea Coffee 1853 - - - - .02-3. 1867 - - - - .04 - - 4. 1880 ... - .06 - 4.66 188S - - - - .06 - . 5. Tea, lbs. Coffee, lbs 2.14 1-34 3.68 - - 1.04 4-57 .92 4-95 - - -79 THE TAX SYSTEM. 583 to-do people and is not generally used as an everyday beverage even by them. Accordingly, in such countries beer is the article generally consumed, and latterly, in consequence of improve- ments in processes and the product, the consumption of beer is becoming extremely commoh.' The extended use of distilled liquors is often due to the same causes which hinder the general consumjjtion of other spirituous beverages. The distilled liquor being the cheapest is consumed by the poorer classes of the people in proportion as the more expensive beverages are beyond their reach, at the same time that lack of proper nutriment and the rigors of the climate make brandy a desirable means of keeping warm. Hence we find a much greater consumption of spirits in the more northerly and poorer localities than in the more southerly and wealthier ; frequently in adjacent territories there may be no consumption of spirits at all in a wine-producing locality on the one hand and a very great consumption in a neighboring mountainous district. The facts about the consumption of tobacco in modern coun- tries are of much the same kind. But the facts of tobacco con- sumption as they are today are the result of a recent historical growth, and the figures afforded by the accounts of the French tobacco monopoly which hav'e been reviewed above (sec. 288) are an evidence and an approximately reliable index of the" change, the receipts having increased during the years 181 5- 1887 from 32 million to 320 million francs. ^ 363. These examples (which, as will presently appear, arc of great })ractical significance for any application of a system of consumption taxes) have served to show that a demand for a particular class of consumable goods may vary greatly according to time, place and peo[)le, and they serve also to show what far- reaching consecjuences this relativity of demand has for the (]ues- tion of taxes on consumption. ' In Great Britain and Ireland tlie per capita consumption in 1887 was 27 gallons=: 122 litres (the consumption in the German Empire in 1884-85 being 90 litres of beer), whereas the consumption of wine was only .37 gallon, having been .25 gallon in 1853. 584 THE SCIENCE OF FINANCE. The question as to the relation between the public demand and the various directions taken by private demand, such as comes up for consideration in all taxes on consumption, means in the last analysis a question as to the limitations which the public consumption imposes on the various directions of private con- sumption. The pressure exerted by the tax will, of course, vary according to the degree of importance which the article taxed assumes in the aggregate consumption of the tax-paying house- hold. Articles of necessity will be more sensitive to the pressure of the public burden than the less necessary or superfluous articles. And, conversely, this latter class will develop an elas- ticity in the adaptation of private consumption to the enhanced cost of the articles subject to the tax, such as the articles of necessary consumption will not admit of. Consequently the urgency of the public need will, on the one hand, have to decide how far the imposition of taxes on the necessities of life is to be carried, while by a painstaking adjust- ment of the taxes on consumption on the other hand the pres- sure of the tax is sought to be kept within bounds. It is, however, an exaggeration, which is readily explicable as an outgrowth of historical events, to condemn all and every taxation of articles of necessary consumption. It is true that this particular class of taxes on consumption falls short in point, of that flexibility and spontaneous adaptation of private con- sumption to the pressure of the public burden which constitutes the great advantage of consumption taxes generally as contrasted with taxes of other kinds ; the decrease of the consumption of salt or of bread can never be taken into consideration as a factor of any consequence in the employment of consumption taxes. And still it is quite conceivable, and it is borne out by the very latest events, that a tax on necessities may be justly and expedi- ently imposed in place of many another less feasible form of tax- ation ; so it may be noticed that quite recently (see sec. 287) the assembled populace of the country district of Glarus decided to retain the salt tax. The point not to be lost sight of is not the avoidance of all THE TAX SYSTEM. 585 taxation on necessary consumption, but the proper relation of this taxation to the rest of the taxes on consumption and to the general tax system ; it is this relative weight of consumption taxes that has so frequently suffered an abnormal and offen- sive development in the past. ^ 364. This brings us to the point of view of that social equity which is to be maintained between the various classes of society. Since consumption taxes are always levied on the articles of consumption and not on the persons of the consumers, they can make no distinction between the salt which serves the necessity of the poor man and the salt on the table of the rich. It is, therefore, the article of consumption simply as such, taken with a view to its importance to the various classes of society, with which the tax policy has to do and which affords the norm in the imposition of consumption taxes. Let us imagine a social pyramid in which the most necessary and therefore the most extended wants constitute the lowest strata, while the nearer we approach the apex the more dispensable are the articles and therefore the less extended the want of them. Every taxation of the lowest and broadest strata of this pyramid of wants is pre-eminently a taxation of the lowest strata of society ; the higher we ascend the more does the taxation fall upon the more well-to-do classes. The advantage of a taxation of necessary consumption lies, therefore, in the great number of persons liable to it and the consequent great relative productivity of such a tax ; but there is also bound up with this fact the danger of throwing too much of a burden upon the slight tax-paying capacity which manifests itself in the consumption of the necessi- ties of life. On the other hand those consumption taxes which fall only upon the apex of our pyramid are quite sure to touch only the most dispensable objects of consumption and the wealthiest consumers ; but they are for this reason also open to the objection that they fall upon a very limited number of tax- payers and have at the same time to make allowance for the 586 THE SCIENCE OF FINANCE. possible shrinkage of the taxable consum}:)tion which may result from the enhancement of the price of the articles taxed. This contrast between the two classes of consumption taxes not only indicates the point of view for practical tax legislation in the present and future ; it also serves to explain the historical evolution of taxes on consumption in the past. The slighter the degree of wealth, and therefore the narrower the range of con- sumption, of the masses of the people, the more is the con- sumption tax constrained to fall back upon the broad lower strata of the necessary wants. Hence it may happen that a friend of the people, like Vauban, may favor the retention of the salt tax and mav wish to derive a revenue of 24 million livres from it in a country such as France was two hundred years ago. The development of the consumption tax in this direction finds support in the relative absence of any lively sentiment of social equity, the state being primarily concerned about the amount of the tax and only secondarily about the manner in which it is to be borne. As the people advance in wealth and in a sense of social equity all this is changed. The acquisition of wealth leads to an extension of the consumption of dispensable articles, so as to include a larger portion of the taxpayers. There results the much- to-be-desired but hitherto missing coincidence of a dispensable and a widely extended consumption ; the tax in such a case falls upon a great number of households, but without pressing heavily upon them. But at the same time there comes into the fore- ground an enhanced sense of the justice of distributing the bur- den of taxation among the different classes of society. Even where the economic development seconds the fiscal productivity of the tax and affords an abundant revenue, this fact alone is not sufficient to meet all requirements ; the further question then comes up whether the distribution of the burden is what it should be — whether the lower classes are not disproportionately taxed. It is only after having reached a lively appreciation of the cogency of these considerations that we are fairly prepared to face the objections which are brought forward against "indirect taxes" as such. THE TAX SYSTEM. 587 § 365. Taxes on consumption will accordingly have to be arranged with a view to bringing the state's requirement of a productive tax more and more into accord with the requirements of justice. An effort is to be made to achieve this end. within the field of consumption taxes alone ; but so far as this end may prove unattainable — in consequence of the difficulties alluded to above in the way of a taxation of the up})er strata of the social pyramid — recourse must be had to proper supplementary taxes of other kinds. A well-constructed system of taxes on consumption is a financial work of art. Its purpose is to bring the great variety of wants which are met with in an}' modern civilized country within the lines of the tax legislation in such a manner that the portion of the taxes payable by each individual household shall represent a variegated mosaic, in which the harmonious blending of the colors is represented by the rate of taxation and the sur- face of the individual blocks by the volume of the consumption on which the tax is levied. This work of art is imperfect in the degree in which glaring contrasts occur between the burdens im})osed on different articles of consumption and in the degree in which the system of taxation is of a one-sided character. To illustrate what is meant we may select an example of great importance from existing tax legislation, viz., the system of consumption taxes in force in Great Britain and Ireland. The aggregate taxes of the state (for the fiscal vear ending March 31, 1888) amount to nearly ;^8o,ooo,ooo.' Of this sum consumption taxes of various kinds yield some ;i^45,OOO,0O0. This latter amount is made up of ^20,000,000 from customs and ^25,000,000 from excise. Of this, $17,250,000 is derived from spirits (.1^13,000,000 from the excise and ;^4,250,000 from import duties); further, ;i^8,750,000 from beer and the same from tobacco. That is to say, ;^3 5,000,000, or nearlv one-half of the entire revenue of the state, is derived from spirits, beer and tobacco, the burden, therefore, falling in a strikingly one-sided manner on the great mass of relatively dispensable articles of ■ Statistical Abstract for the United Kingdom, 1873-1887, p|). 9, 16. 588 THE SCIENCE OF FINANCE. consumption. This one-sidedness which taxes the majority of the population for the benefit of that portion which does not smoke or drink, has no adequate counterpoise within the British system of consumption taxes. The 3.50 million pounds paid for licenses also falls chiefly upon the same class (liquor licenses and the like). The 4.66 million pounds derived from the tea duty (6d. per pound) falls in great measure upon the general body of the people and constitutes a very inadequate and unsatisfactory counterpoise to this one-sidedness. We have, therefore, left only the receipts from the duty on wine, amounting to one million, and the approximately equal amount derived from the duty on coffee, fruits, spices, etc., making together about ^2,000,- 000 ; this may to some extent be assumed to constitute a com- pensatory burden imposed on the wealthier classes, but it is to be remarked that onl}' one-half of it falls on persons who do not drink. The British system of consumption taxes accordingly proves to be a bit of consumption taxation in which the very realistic requirement of fiscal productivity is satisfied while the require- ment of equity is lost sight of. It marks a stage in the develop- ment which presents a finished and typical system only to the superficial glance, while in reality it calls for further develop- ment and improvement of a qualitative kind. As compared with earlier systems of taxation, the British system, it is true, gives evidence of the pleasing fact of great and widely distributed wealth and a corresponding distribution of consumption, but this relatively high development must not blind us to the shortcom- ings of the system as it stands, or to the further advance still necessary to be made. These further improvements yet to be made lie in the direc- tion of an increase of the scope and number of taxable 'articles, and a more adequate equalization of the burden by fur- ther special taxation of the upper classes. Either these objects will be accomplished more and more completely as time goes on, or the system of consumption taxes must yield the ground to other forms of taxation which are capable of meeting these requirements. THE TAX SYSTEM. 589 It is the tendency of the present realistic age to thrust these duties that are concerned with the attainment of equity into the background. The science would fail of its highest duty if it did not oppose this realistic tendency by calling attention all the more persistently to the unalterable goal of advance and improve- ment in this field. § 366. In order to a proper appreciation of the realistic and the idealistic aspects of taxes on consumption it is necessarv to occupy a point of view which has so far not been adverted to and which we shall now have to discuss, viz., that of the practical limitations of taxes on consumption. It would, however, be unjust to the British svstem of con- sumption taxes to disregard the many and urgent reasons of expe- diency which have led to its adoption and the repeated experi- ences which have led to the substitution of this particular sys- tem for a different one which was, in itself considered, more in accord with the requirements of equity. It is regarded as a chief advantage of taxes on consump- tion that they are levied in an imperceptible manner, drop J^y drop ; but this presupposes that by the provisions of the law the tax is collected upon the taxable articles in a mass at a poirit of time when these articles are aggregated together in great quantities. The assumed advantage would entirely disappear if this supposition did not hold, if it were necessary to collect the tax separately on each minute item of the articles taxed. The practical question involved in taxes on consumption therefore reduces itself to the question whether articles of con- sumption which commend themselves for taxation on gen- eral grounds of equity present any such convenient stages of concentration as the collection of the tax requires, and which articles of consumption are in this respect the best adapted to the tax. Experience answers the former question in not a few cases in the negative. It may happen that the tax legislation of the German Empire imposes a tax of ten marks j^er kilogram on silks imported 590 THE SCIENCE OF FINANCE. from abroad, and of twelve marks per kilogram on ready-made garments under the same circumstances, while it lays no tax on the same quality of silks or garments of home production. Now,, looking at the matter from the standpoint of equity it may readily be admitted that the consumption of foreign silks and of foreign garments ordinarily indicates a greater degree of luxury than the consumption of similar home products ; still the sense of equity finds it hard to reconcile itself to so radical a distinc- tion as that the one case should be taxed at a high rate and the other not at all. And in point of fact the decisive ground for avoiding the taxation of this class of objects by any other than the one convenient method of an import duty is not the equity of the case, but simply the practical expediency of this method of obtaining the tax. To cite another example. The consumption of the better grades of wine is habitually accepted as an indication of wealth and luxurv ; justice would therefore require that this consump- tion should be subjected to an adequate, and by no means inconsiderable tax. Still, the wine tax as it stands, and as it was in Prussia (sec. 273) from 18 19 to 1868, makes not the slightest distinction between the poorest product and the " Schloss Johan- nisberger" or the "Steinberger Kabinet ;" on the contrary, it taxes all wine alike and at an extremely low rate ; and it is to be added that the great annoyances and expenses connected with the col- lection of the tax, taken together with the ver}' slight revenue derived from it, has led to the entire abolition of this tax. The consumption of the best and most expensive wine produced at home is therefore entirely untaxed in the German Empire, whereas the poorest wine imported from abroad bears an import duty of 24 marks per hundred kilograms (48 marks if in bottles). In both the cases which we have cited as illustrations, it is the fact of a practical advantage offered by the tariff boundary, where the taxable articles of consumption can be dealt with in quantity, which has decided that the tax is to be imposed upon an article on its importation ; while it is exempt from any con- sumption tax in case it is produced within the country, where THE TAX SYSTEM. SQI such a practical advantage for the collection of the tax is absent ; and this in spite of the fact that justice would require, if not an equal, at least a similar tax in both cases. ^ 367. What has here been brought before our minds in the sheer contrast between taxation or no taxation, according as the practical circumstances do or do not admit of the imposition of a consumption tax, comes up again in a great number of cases as a difference of degree in the extent to which the exigencies of practical life favor the imposition of such a tax. We have already conceived of the tariff boundary as being, for the purpose in hand, simplv a convenient place for levying taxes on consumption, — -convenient as contrasted with the method of taxing consumption within the country. This idea is, how- ever, to be qualified by the consideration that the practical value of the tariff boundary of different countries for this purpose differs widely. The i^olitical boundary of a state such as the Prussian state once was, whose king was styled the King of Frontiers, is, of course, for the levying of taxes as for every other purpose, much less advantageous than the frontier of a well-rounded domain which comprises the greatest possible area and population within the shortest possible tariff boundary. A wooded or mountain- ous frontier, offering convenient hiding places for smugglers, is less well adapted for a tariff boundary than the seacoasts of Eng- land. The evolution of the tariff system will accordingly in all cases be influenced by circumstances of this kind ; while a devel- oping tariff system at the same time will seek to alter these con- ditions and adapt them to its purj)oses {e.j^. the ZoUverein). Historical events as well as natural conditions may influence the development of the tariff boundary, and in the more fortunate cases the course of historical development may even modify the natural disadvantages of the tariff boundary, as, r.^., by means of a political or tariff union which removes the former disadvan- tageous tariff boundary to a point within the resultant new tariff territory. 592 THE SCIENCE OF FINANCE. Conversel}', the course of historical development may affect the tariff system unfavorably, as, e. g., the ascendancy of free-trade ideas or a solicitude for the international trade may prevent or limit the imposition of import duties which might be commendable on fiscal grounds. The one-sidedness of the English tariff which has been referred to above has its origin for the most part in the principle of freedom of international trade which has been in the ascendant in that country for a gen- eration past. This principle has been violated by the imposition of import duties only to the least possible extent ; the exceptions have been scarcely anything but taxes on narcotics, which would for the most part leave trade relations with the more important foreign countries unaltered. The earlier tariffs of England and the existing tariffs of the German Empire, Austria, Switzerland, France, the United States of America, etc., are not liable to this one-sidedness in their consumption taxes, so far as concerns any necessary consequence of the practical exigencies of a system of import duties ; these countries have not only not applied the prin- ciple of free trade after the radical fashion of England, but have even systematically made use of their import tariff to hinder free trade. Still, even these countries, as the development of modern industry makes them more and more dependent on the world market, will find themselves obliged by their mutual interest to forego the levying of many fiscal duties which might commend themselves on all other grounds. For example, the Swiss import duty on French wines remains extremely low although the Swiss Confederation has increased the rate on many other items in its tariff, the reason being simply the pressure which France has exerted in the negotiation of treaties and the danger there would be to the graver interests of international relations, and the danger of a disturbance of trade relations with France. § 368. In the domain of internal taxes on consumption, as in that of import duties, the problem is to discover certain points or stations where the consumable goods in question may THE TAX SYSTEM. 593 be dealt with collectively or in a wholesale way ; and the absence of any feasible stations of this kind makes a great number of con- sumption taxes practically impossible though they might be desirable on other grounds. Viewed from the standpoint of equity, simply, it is an incom- prehensible inconsistency that the consumption of domestic wine in Prussia is exempt from taxation while the consumption of domestic beer and spirits bears a considerable ta.x. This incon- gruity is only to be explained (but it is also sufficiently justified) by the fact that it has been found by experience that the prac- tical obstacles to a taxation of domestic wine make such taxa- tion inexpedient, while the taxation of beer and spirits has progressively developed in consequence of the progressive cen- tralization and consolidation of the production of these goods.' So far as this concentration is absent the practical advan- tages favoring an internal consumption tax are also absent. The system of taxation habitually employed in wine-producing coun- tries, which makes use of the place of sale as a medium by which to collect the tax, is so burdensome to the business that there is properly a great hesitation about introducing this form of taxa- tion in any place where it has not already long been established. The decentralized character of tobacco culture is of the nature of a downright calamity so far as regards the taxation of home- grown tobacco, and it is only on the ground of other considera- tions which speak so strongly for the eminent propriety of a tax on tobacco, that such a tax is collected in spite of the serious ])ractical difficulties connected with it. Viewed from the stand- point of the tobacco ta.x England occupies a very enviable posi- ' Within the territorv covered by the Imperial tax system there were in 1872 2216 potato distilleries paying each less than 6000 marks in yearly taxes ; in 1886, there were onlv 1664. On the other hand the very large distilleries which pay more than 12,000 marks each in taxes have increased in numberduring the same period from 986 to 1836 {Conrsid's Ja/iHnic/ier N. F., 1887, vol. xv. p. 6). Of breweries there were in the territory comprised in the tax system in 1872 an aggregate of 14,157, with an aggregate product of 16.1 million hektolitres; whereas in 1S84-85 there were only 10,520 breweries, with an aggregate product of 24.6 million hektolitres {Siadstisches Jahrbuch fiir das deutsche Reich, 1886, p. 58). For beet-sugar factories, see sec. 274 above. 594 THE SCIENCE OF FINAN'CE. tion, because it has no home-grown tobacco to tax, but is able to tax the entire tobacco supply of its population at the tariff boundary. § 369. An artificial concentration of the production of domestic products may be specially created as an expedient for the levying of an internal tax on consumption. This is the principle embodied in so-called tax monopolies. The extreme subdivision of the tobacco culture into an enor- mous number of very small establishments makes the taxation of this industry just as difficult as the taxation of the greatly sub- divided industry of tobacco manufacture (household industry and the like). The tax on the consumption of tobacco, instead of collecting the amount required from the still more extremely subdivided business of the retail trade, or from the consumers in person, goes directly to the establishment where the tobacco is grown or where it is manufactured ; but even in so doing it imposes the burden upon many shoulders, and the majority of them feeble ones which are not well able to bear it although it is but a single item of expenditure. This subdivision of the tax collection is as burdensome to the government as it is to the tax- payers. The measures of supervision required for the purposes of the tax are as annoying to the taxpayers as they are trouble- some and odious to the officials. If the culture and manufacture of tobacco were consolidated to the same degree as the beet- sugar industry the chief difficulties of an internal consumption ax would be removed. But where this consolidation does not result from the free development of the industry the state mav interfere and bring about a compulsory concentration. This is the fundamental principle of the tax monopolv. As an illustrious example of a tax monopolv we have alreadv (sec. 288) given a brief review of the historv of the French tobacco monopoly. Where a tax monopoly has been introduced earlv and has become incorporated in the habits of thought of the people, there arc but slight traces perceptible of those difficulties which THE TAX SYSTEM. 595 are so apparent in cases where the requisite concentration of the industry is sought to be introduced at a later stage — to rej)lace a widely extended and subdivided production by |)rivatc enter- prise. The obstacles are partly the economic and financial dif- ficulties of a change from the old method of production to the new, partly the opposition to and prejudices against a mono])oly bred by long-continued freedom of the business. These obsta- cles can be ov^ercome only under the pressure of very great financial straits or through a great advance in popular insight and intelligence, § 370. There are a few taxes on consumption which find the state monopoly readv to their hand, established for other jjur- poses than that of taxation. One of the chief instances of this is the Post. In this case a consolidated single establishment and centralized management follows from the practical requirements of this means of com- munication. Any surplus receipts that may result (and there is certainly occasion and inducement to derive a real surplus reve- nue from this source, such as is obtained in Great Britain, and not an apparent surplus only, such as we have at present in the German Empire) have not hitherto been clearly recognized as being of the nature of taxes, for the reason that the postal monopoly rests on other than fiscal grounds. But it is none the less true that apart from its other purposes this monopoly also serves the purpose of taxation so far as it affords a real net revenue. Also the lotterv monopoly (which in any modern tax system has to be counted with not as something that ought to be com- prised in the system but simply as an empirical fact) is of course a tax monopolv to the extent that it would not e.xist at all except for the purpose of taxing (human folly). At the same time it is distinguished from other tax monopolies bv the fact that it has been established not for the purpose of taxation alone but also for the sake of obviating the more deplorable effects that would follow from a "free J'lay of natural forces." 596 THE SCIENCE OF FINANCE. § 371. In the last few paragraphs we have discussed the practical limitations and obstacles to taxes on consumption and the means of overcoming them. It is now to be added that there are also inducements on other than fiscal grounds which may urge to the taxation of articles of consumption. Such other grounds are the suppression of the use of an article which is regarded as hurtful, and the exclusion of foreign articles of import as a protection to the domestic products. As is the case with so much of what the institutions of the seventeenth and eighteenth centuries have handed down to mod- ern times, so also the policy of prohibiting a luxury — which was then sold by the state for fiscal purposes as a means of taxation' (sec. 57) — was already well known in the mediaeval towns. Such is the origin of many consumption taxes which are extensively used at present; such, e. g., is the case with the taxation of tobacco, which, however, does not retain this character in any of the modern states. On the other hand there is even today a motive of this kind present in the taxation of spirits, and this motive has also been influential in bringing about the latest increase of the brandy tax in the German Empire (June 24, 1887), being acknowledged by the government to be one of the reasons which influenced its action. If the fiscal purpose and the pedagogical purpose of the con- sumption tax could be made to go hand in hand we should have a charming harmony of interests. But it is plain that these two purposes logically traverse one another, and that it is only under very special circumstances that they mutually further one another. The pedagogical purpose, whose aim is the restriction of the consumption of a given article through the interference of the state, will of course tend to diminish the quantity of the article ' Quod si quis est qui scire de me velit, quodnam genus vectigalium immortali Deo gratissimum, civitatibus pulcherrimum, principibus honestissimum, plebi utilissi- mum videatur, illud est quod iis rebus imponitur quae ad corrumpendos civium mores, quae ad delicias, quae ad luxum, quae ad libidinem spectant .... quae proliibenda non sunt, nee, si velis, possis .... Quamobrem principes qui Aquiloniis regionibus imperant, nullum vectigal majus habent quam ex vino, quo subditi, ut carere possint, nolint tamen, sed assidue locis omnibus sese ingurgitabunt semper. — Bodini, de Republica lib, VI. p. 661 (ed. Paris, 1586). THE TAX SYSTEM. 597 liable to the tax ; the fiscal purpose, apart from fiscal consid- erations with which we are not at present concerned, does at least not aim at this result. If we succeed, by means of increased rates, in obtaining an increased revenue from the tax in spite of a diminished consumption of the article, that of course does not prov^e that it would be impossible to obtain a still greater aggregate revenue by lowering the rates. The presence of this foreign purpose in the imposition of the tax accordingly acts as an inherent limit to the taxation of con- sumption at the same time that it may furnish an extraneous motive to the imposition of the tax. Something similar occurs when an import duty is levied as a measure of protection for the home product.' The duty may be intended by its creator to serve this purpose, or it may accom- plish the purpose independently of, or contrary to the intention of the legislator. It is only in the case of such articles of consumption as cannot be produced at home that the duty is only a tax. The simplicity of the English tariff is largely made possible by the fact that neither tobacco, wine (and formerly sugar) nor tea, coffee or other like articles are produced in the country. The protective character of the English duties can come into play only indirectly by affecting the home-produced substitutes for the taxed articles. The more effectively a protective duty serves its purpose, or the more a duty is intended for protection, the less is its financial importance. On the other hand, the more completely the duty is made to serve the purpose of a tax, or the less it acts as a protective duty, the less effective will it be as a protective measure for the home industry. The term "mixed duties" has lately been used officially to designate import duties which are intended, or at any rate serve, to effect both these purposes. ^ 372. This examination of the {)ractical limitations both ' Depuis Colbert, dit I'abb^ Galiani, on distingue entre I'impot de profit et I'impot d'encouragement. — Le Trosne, De rinteret social {F/iysiocrates, ed. Daire, vol. ii. p. 985)- 598 THE SCIENCE OF FINANCE. extc nal and internal on the taxation of consumption serves to shov not only that such a system of taxation is in need of con- tinued development and improvement in order to overcome its jieculiar diflficulties and to meet the requirements made upon it ; it also points to the necessity of supplementing any system of consumption taxes by taxes of other kinds. The one-sidedness which so persistently attaches to a system of consumption taxes, and which can scarcely be entirely removed by the development and perfecting of such a system, suggests a recourse to supplementary taxes of another kind in the interest of equity. The difificulty, or rather impossibility, of levying on the greater tax-paying capacities in due proportion by means of a taxation of the peculiar goods consumed by them, especially where there is a steadily increasing need of revenue coupled with a progressively deepening conviction of the greater obligation properly incumbent on the greater tax-paying capacity, — these considerations lead to the adoption of taxes which are essentially of the nature of taxes on earnings (income, property, inheritance and objective taxes). Even the relative advantages attaching to taxes on consump- tion have their reverse aspect. The flexibility of all those con- sumption taxes which are levied on articles of voluntary con- sumption has the consequence that it is impossible to secure a definite and stable revenue by this means alone, because the volume of consumption will vary under the pressure of the tax. Recourse must therefore be had to taxes which are less flexible and which can therefore better be depended on. The relative unobtrusiveness of the tax on consumption is also of great practical importance for anv system of taxation, and, in spite of all the protests of the radicals and the doctri- naires, it will continue to be so for a long time to come ; for the question of the burden of taxation is largely a question of sub- jective appreciation of the pressure of the tax, or at any rate it does not depend on the amount of the tax alone. At the same time it is also to be recognized that the aim of any modern pro- THE TAX SYSTEM. 599 grcssive tax policy comprises also such a moral developm,'nt on the part of the people as shall alter the popular sentin /ent on this head and bring it into conformity with that ideal of civic virtue which must not be condemned as a piece of folly merely because it would be premature to apply it unreservedly in the systems of taxation in vogue today. CHAPTER V. TAX ADMINISTRATION. Literature. Adolph Wagner, Finanzwissenschaft, Zweiter Theil (1880), pp. 566-708. Lorenz von Stein, Lehrbuch der Fmanzwissenschaft (5. Auflage, 1885), Zweiter Theil, Erste Abtheilicng, pp. 419-495. Ziveiter Theil, Zweite Abtheilung, pp. 272-407. Carl Frhr. von Hock, Die offentlichen Abgaben und Schulden (1863), pp. 122-129. A- Schaeffle, " Ergebnisse der Tabakenquete," Zeitschrift fiir die gesammte Staats- wissenschaft, 1879 ^"^ 1880. Richard von Kaufmann, Die Zucker- industrie in ihrer wirthschaftlichen tmd t steuerrechtlichen Bedetitung (1878). Julius Wolff, Zeitschr. fiir die ges. Staatsw., 1882. Julius Wolff, Die Branntweinsteiier, ihre Stellmig im Steuersystem und in der Volkswirthschaft, ihre geschichtliche Entwickliaig und gegenwdrtige Gestalt in den einzelnen Ldndern und ihre Erhebtmgsformen (1884). Ame, Etude sur les tarifs de douanes et sur les traites de commerce (iZiG). Richard T. Ely, Taxation iti American States and Cities (li I. ADMINISTRATION OF THE TAX SYSTEM BY NATIONAL AND BY LOCAL AUTHORITIES. § 373- The dependence of the different kinds of taxes on the conditions of their administration, on the circumstances which condition the ascertainment of the object on which the tax is levied and the collection of the taxes, has come into view in the course of the foregoing review of the historical development, as well as in the theoretical discussion of the taxes. The purpose of the present chapter is to make a survey of the points bearing on this subject. As a preliminary point of a general character there is some- thing to be said on the relation of national administration of the taxes to administration by the organs of local self-government. Something has already been said (sees. 135-148) of self- government and of its general relation to the state. The discus- 600 / TAX ADMINISTRATION. 60I sion was there concerned with the position of local sclf-f^ovcrn- ment as an intermediary between the centralized national administration and that class of services which are. voluntarily rendered to the commonwealth, the cjuestion being as to the scope and significance of local self-government in this its most general character, for the fiimnces of state and commune. We have now to do with that special phase of local self-government which is concerned with the administration of taxes, — with the special problems which arise out of the mutual interference between the national administration of taxes and administration by local self-government. The problems which are to be worked out by the central authority and its organs or by the organs of local self-government have received some consideration in the course of the more general discussion. The means at the dis- posal of both of these two kinds of organs for carrying the tax legislation into effect, as well as the limitation's of each and their relation to one another, are properly to be taken up at this point. The general principle of self-government of course reappears in this phase of self-government. In one case as in the other its chief purpose is an intermediation between the coercion embod- ied in the decrees of the central government and the spontaneous inclination of the citizens to perform their public duty. In the one case as in the other some attention is to be given to the difficulties in the way of such an intermediation and the conse- quent necessity of supporting the local administration by the more effective machinery of the central authority\ The great advocates of local self-government, such as Freiherr von Stein, do not appear to hav^e stated the difficulties and dis- crepancies inherent in the problem with sufficient clearness in all cases, at the same time that they have very forcibly described these same difficulties and discrepancies as occasion has arisen. The same Stein who is eager to tear down the Formenkram iind Dicnstmccliatiisnms of the professional officials by " bringing in men from the turmoil of practical life" and to replace this method by " cincfi mis der Fnlle der Natiir genommenen Reichthiim von Ansichten 602 THE SCIENCE OF FINANCE. U7id Gefiihlcn,'' who "is quite unable to comprehend why the bur- gomaster may not be engaged in business,"' — this same great statesman, on occasion of the Prussian finance reform of i8iO, when he very strongly advocated the income tax as the fairest, most equal and most productive of all taxes, condemns in the harshest terms the public opinion then prevalent in Prussia, and characterizes it as an ingrained egoism and as "northern license and barbarity, which ought to be corrected by the application of the severest penalties, and not led still further astray by indulgence."^ It is quite evident that he is speaking of the same people from two very different points of view, or in two very different frames of mind. It is the office of the science, of disinterested thought, to seek out the unity which underlies the contradictions due to the shifting tendencies of life and the shifting moods of our statesmen. § 374. So long as we have not reached a clear comprehension of the questions of principle involved, a discussion of the questions of practical administration, which by preference centers about the system of direct taxes (income, property and produce taxes), will lead to an infinity of delusion and self-deception regarding the importance of the form of these institutions as contrasted with their substantial content ; whereas the latter alone is of any decisive importance. If there is any law which suffers from the eternal contradic- tion that affects so many of our laws, — of attempting, under sanc- tion of public compulsion, to command something which will not be performed voluntarily, while still obliged to recognize that compulsion alone is no adequate substitute for voluntary inclina- tion, — if this is the case with any law it is eminently the case with the tax laws. The tax law owes its origin to the necessity of formally demanding from the members of the community the pecuniary sacrifices required to carry on the public business when 'Ernst Meier, Die Reform der I'ei-ivaUunss-Organisation, pp. 142, 330. *Cf. sec. 312 above. TAX ADMINISTRATION. 603 the indlspensability of these sacrifices is for the most part not appreciated by the taxpayers, who are therefore habitually unwill- ing to render such sacrifices except on formal requisition and under public coercion. Since, in point of fact, the taxpayers hav^e no other spontaneous feeling in the matter than a disinclination to comply, the tax law is very speedily brought face to face with the impossibility of making the letter of its provisions a living fact. This sheer contradiction between the injunctions of the law and the disinclination to comply with them of course does not occur in the public life of any modern civilized people. The old question, ''quid leges sine moribusf" is to be taken everywhere, at least in some degree, in the conciliatory sense which it funda- mentalh' implies — that no law can become an actuality which, not being based on the morals, habits and free inclination of the people, attempts, by means of public coercion, to advance but a single step further than the majority is inclined to go, — which seeks to exert a pressure that shall carry the movement beyond the point of everyday habit and in the direction of some ulterior moral aim. But in view of the force with which the modern state, with its ever-increasing demands and its social-political and fiscal ideals, pushes its legislation forward on this line of tax policy, there is always danger that the aim of the law may be in advance of the inclination of the citizens on a jioint of extreme sensitive- ness — the point of their pecuniary interests. The idea that at this point, as at so many others, what is, may, by the aid of the organs of self-government alone be brought into accord with what should be, carries an attractive and, abstractly considered, a valuable suggestion. The reasons which in other connections are urged in favor of a recourse to this means are in this particular case reinforced by the practical advantage of an intimate acquaintance with the affairs of the neighborhood, which is available to this method as contrasted with the employment of professional officials of the central government. In the case of other functions undertaken by local self-government (jury service, justices of the peace) the contrary is nearer being true with 604 'fHE SCIENCE OF FINANCE. respect to the practical advantages of taking the functionaries from the immediate neighborhood. Still, as has already appeared in the course of the historical comparison between the Prussian administration of the income tax by local self-government and the English methods of local self-government, a very great deal depends on the form which this idea takes. Just as it is a mistake to believe that the unhampered activ- ity of industrial societ}', or of self-interest, means the same thing as a true self-government, so it is also true that that must be a very undeveloped self-government in which the everyday views and ideas of the neighborhood are called into activity in the service of the public without the requirement of any training or habituation whatever to the duties of office.^ If sufficient time is allowed them, the better fitted members of the community will, by habituation to office, presently acquire the moral and intellec- tual qualifications necessary for its administration. If the jury panel were a perpetual or relatively permanent office to be administered by the citizen, it would gradually raise the juryman above the narrow range of ideas belonging to his business, and bring his concepts up to the level of the national administration of justice, — the peasant would be less lenient towards perjury and the'burgher would be less lenient towards dishonesty. But where the self-interest which dominates the everyday life of the business man stands in sheer contradiction to the duties of office, as happens in the case of the administration of taxes by local self-government, even permanency of office and habituation to its duties will not avail to raise the individual to a full sense of his public duty. What is needed in such a case is a complex artificial mechanism whose efficiency depends on the fact that it ' It is therefore quite intelligible that in any country where the habit of participa- tion in public affair^ is extinguished or has not been developed, we also find that the difficulties in the way of those forms of taxation that require such participation are extremely great ; as, for example, in the France of today, as testified by French author- ities. Montesquieu characterizes this state of things when he says {^De V esprit des lots, bk. vi. chap, viii.): " Dans les lois de Platon, ceux qui negligent d'avertir les magistrals ou de leur donner du secours, doivent etre punis; cela ne conviendrait point aujour- d'hui ; la partie publique veille pour les citoyens ; elle agit, et ils sent tranquilles." TAX ADMINISTRATION. 605 com})rises a great number of psychological elements which are bound up together and mutually suj)j)lemenL one another; whereas a one-sided load imposed upon any one of these various elements would bring but an inconsiderable result. S 375. We have now to examine the secjuence and gradation of these elements in the light of the institutions which the history of taxation offers, proceeding in order from the individual to the central authority.- At the lower end of the scale, but one remove from the spontaneous contributions by the individuals to public expendi- tures, we have the method of secret [^siillschwcigcndc^ self-assess- ment handed down to us from the Middle Ages, — a bit of voluntarism incorporated into the public law, and hence invariably a rudimentary contrivance which is set aside in favor of more effective contrivances that face the necessity of public coercion more frankly. According to this method everything is left to the inclination and the conscience of the individual ; he is in no fear of coercion ; the letter of the law and his own sense of duty are the sole deciding factors. Accordingly, the largest demands on this sense of duty as well as its most satisfactory practical application are to be found under the circumstances offered by a diminutive commonwealth, where the relations between the indi- vidual and the whole are close, the sense of community highly developed, the habituation to a close attachment of the part to the whole thoroughly ingrained and fortified by tradition, and where, in addition to all this, the amount demanded by the tax is inconsiderable, or where any demand of considerable magnitude is made only on occasion of events that ])rofoundly stir the sentiment of patriotism. Under the circumstances existing in the large states of today, where these conditions arc absent, wholly or in part, this rudimentarv method of assessment is condemned at tiie start. One step further brings us to that method of self-assessment (declaration) which consists in a public statement, written or 6o6 THE SCIENCE OF FINANXE. oral, before the tax officials. The interval between this stage and the first is not so great as is often assumed, especially it is not so great as is claimed where this method is not in use, and where it is accordingly overrated in the manner in which untried institutions commonly are. The advantage of this stage over the previous one is bound up with the question, what effect the superadded publicity will have. It is quite possible, and experience goes to prove the fact, that — where the outcome of this publicity is a mutual neighborly connivance — self-assess- ment before the officials remains about as much an affair of private conscience, or consciencelessness, as the method of secret self-assessment. The efficacy of publicity is a matter depending on a great number of conditions which must be fulfilled by the adoption of the proper contrivances and institutions. This is the point of contact between individualism and self-government in taxa- tion. If the assessing authority is endowed with the full meas- ure of civic unripeness that many countries know so well through their experience with local self-government, then this authority' will be practically useless as a means of publicity in self-assessment. It is not until this authority is clothed with the power attaching to a national office, and only in the degree in which it is so endowed, that it can have any effect in fortify- ing the conscience of the self-assessing taxpayer. It is only in the presence of such an authority that the sanctions coupled with self-assessment become effective. All this holds true of the penalties attaching to false returns (which in the absence of such authority remain a dead letter) and of the submission of the tax lists to inspection by the taxpayers (which in an atmosphere of prevalent evasion of the tax will in any case not receive any attention from the public). Public sentiment is inclined to seek improvement in the adoption of certain mechanical con- trivances which unaided can never lead to improvement, and which can achieve an improvement only when hcl[)ed out by an organic growth of institutions. It therefore a[)pears that the hopes entertained regarding the TAX ADMINISTRATION. 607 individualist factor in tax administration presently point to the need of something lying beyond that factor — tax officials clothed with the powers of the national authority. How can local self-government create an authority clothed with these powers ? 4^ 376. The great point is the same in this instance as in the case of all the machinery of self-government, viz., the citizen's administration of office must, as far as possible, be removed from the influence of his selfish instincts. But there is a second point of considerable difficulty, by which the administration of the taxes is distinguished from other phases of self-government, viz., that it is indispensable that the administrative official should combine an intimate knowledge of the affairs of the neighborhood with all these general qualifications. K. G. Kries,' after a few years' experience with the Prussian income-tax legislation, was able to point out the way bv which this purpose may be accomplished. In this work he took his suggestions partly from the English model, partly from the practice of the local administration of taxes in Berlin, as con- trasted with that of the Prussian provinces. The members of the Berlin board of assessment are taken from all classes and all parts of the city, so that thev are not bound together by anv personal or class interest ; the great number of taxpayers prevents more than a relatiyely small number of them from standing in any close relation to the members of the board ; at the same time, the members of the commission are so numer- ous and are brought together out of so w^idely different spheres of life as to bring to naught the influence of all ])ersonal inter- ests which might otherwise affect the result. The result is that as contrasted with the degenerate self- government of shopkeepers assembling in the market place, or with the rural idyl, we have such a complexity and inclusiveness in the organs of self-government as to raise them above the business interests of the individual citizen to the level of public ^ Zeilschrift fi(7- die gesainmte Staatsivissensc/taf/, r855> P- 397- 6o8 THE SCIENCE OF FINANCE. duty and neutralize the influence of private interest through the great number and diversity of such interests which it comprises. There is a variety of this scheme, and indeed a somewhat dubious variety, in which the class contrasts subsisting between the taxpayers are marshalled not so much in the spirit of self- government as in that of class administration \^Klasse7ivenval- tu?ig}, a parallel to class legislation. Under the circumstances which would supervene with the realization of the social-demo- cratic ideal the tax legislation and tax administration in the hands of the proletariat would be an effective handle for the taxation of the bourgeoisie. In such a case we should have not the spirit of self-administration — the sense of public duty as opposed to the promptmgs of individual interest — but the struggle of interest against interest. There are other class con- trasts than the social-democratic one which may be made to serve this purpose; the legislation of Bremen, of 1873, is a case in point, where the merchants taxed the farmers ; and especially worthy of mention is the American method of tax administration, such as exists, for instance, in the state of New York, where there is a combined assessment of the property tax for the town, county and state, but subject to reapportionment or equalization within the county bv county officials and for the state at large by state officials, in such a manner that it is pos- sible, for instance, for the officials representing the rest of the state to increase the taxes for New York City out of all propor- tion to those paid b}' the state at large. A further modification consists in supplementing the still surviving human infirmity by the rigid framework afforded by a professional official class,' and a succession of stages of appeal leading up to the central power of the state. 'According to facts collected from the several states of the Union by Richard T. Ely, in his work on Taxation in American States and Cities (l888), the workings of American self-government in tax administration seem to be exceedingly unsatisfac- tory. There are (according to the letter of the law) very stringent provisions in many of the states with respect to the assessment of the customary property tax, but these provisions are brought to naught by an extremely lax administration, a fact which in its turn is a consefjuence of democratic self-government. In Ohio, for example, there is a provision requiring taxpayers to fippear, on retjuest, before the tax officials and TAX ADMINISTRATION. 609 The Prussian legislation of 185 1 recognized this necessity fully, but the practical application of the principle was and is defective in a high degree ; and under the influence of the latest reforms in the direction of local self-government the principle has even been weakened. Where, as is the case at j>resent in Prussia, the court of first instance, and, for the great body of assessments, practically the court of last instance, is made up of an elec- tive committee of members of the commune, under the presi- dency of the mayor in the towns and of the county chairmen in the country districts, it is to be said that this leaves the admin- istration of the public business entirely to the organs of local self-government. The office of mayor or of county chairman must be filled by persons of very unusual qualifications if they are to rise above the level of the views held by their constitu- ency and (in accordance with the intention of the law) raise it to the dignity of an office of the state. Ordinarily, accord- ing to the bent of their everyday habits of mind, these men feel themselves to be in some sort attorneys for their commune; they prefer to exercise their courage against what lies outside rather than inside, counting it a patriotic duty to shield their fellow townsmen from a more honest payment of taxes than other towns and provinces. If any serious reform is to be effected, then this indispen- sable element of the national authority must be provided for under one form or another. In place of the mayor with his social connections and incumbrances, or of the county chairman, must be substituted an officer of the state, with a permanent tenure, appointed for this special duty, answerable to the cen- tral government alone, independent of the organs of self-gov- ernment, not bound to the narrow interests of a town or a make a sworn self-assessment or return; the result being that there is no well-to-do man in that state who is not a perjurer (p. 159). An exceptionally conscientious assessor was practically removed by not being re-elected (p. 150). The New York assessors say in their report for 1881 that personal property is on an average assessed at less than one-tenth its value (p. 176); in 1884 the assessed value of real estate in the state of New York was 2669 million dollars, while the assessed value of personal property was 345 million dollars (1885, 2762 million and 332 million respectively). Personal property paid only 1 1. 50 per cent, of the property tax of New York. 6 10 THE SCIENCE OF FINANCE. district, and therefore also not hampered by the social consider- ations of the neighborhood ; but at the same time his duties must be confined within a district small enough to admit of his acquiring and making use of an intimate knowledge of the affairs of the individual inhabitants. In virtue of his direct connec- tion with the central tax-administration and by means of the proper official relations with like commissioners of other tax districts, the duties of such a tax commissioner will also include a care of the uniformity and equalit}'^ of assessments ; in addi- tion to his watchfulness over the equity of taxation as between individual taxpayers within his own district, he must also keep watch of the equity of taxation as between different districts. Without some such organ there is no assurance of uniformity of taxes, especially in a country of great extent. It may be remarked that one of the chief obstacles to an imperial income tax in Germany, as in any other federal state, lies in this, that the very nature of a federal state is opposed to the establish- ment of the requisite centralized control, partly because of the particularist attitude of the individual states, partly out of consid- eration for the hardships involved in any thoroughgoing cen- tralization. The many causes of friction already existing and difficult enough to be overcome are reinforced by an additional one, and one of a very sensitive nature. Arrangement must also be made for an appeal from this lowest organ of the state tax administration to higher authori- ties of the same character. The bodies which hear complaints must likewise contain representatives of the national tax adminis- tration as well as of the higher organs of local self-government. All historical development, and especially that of the difficult questions whose solution goes to make up progress in tax policy, is of slow growth ; we may therefore look upon the imperfection of the Prussian tax administration as a result of the difficulties with which all innovations have to contend. § 377- There is one means offered by the technique of taxa- tion for an approach to that goal which the foregoing discussion TAX ADMINISTRATION. 611 has shown to be very difficult of attainment in the administration of taxes ; this means will contribute materially to brini^ the j)er- formance of the taxpayer up to the standard of the law. If, instead of leaving the amount to be derived from the tax dependent upon the greater or less discrepancy between the letter of the law and its fulfillment, we start out with fixing the aggregate revenue to be required, levying this aggregate upon the aggregate of taxpavers and then leaving them to distribute the burden among themselves, we have not only defined the letter of the law, but have at the same time secured the cer- tainty of its realizing a given aggregate result. This leaves no discretion, in substance, to the intermediaries between the state and the individual. The' greater rigidity of this method as contrasted with the one already spoken of is brought out by the most striking case of its application, that is to say, the war indemnities which have traditionally been levied in this form by the victors upon the conquered country or upon its provinces, communes and other constituent bodies, leaving these bodies to make any distribu- tion of the burden among individuals. But there are noteworthy examples of this method being adopted by preference even in taxation that is intended for times of peace ; the French direct taxes are an especially well-known example (sec. 299). It has also become customary to use the French name for this method of apportioning taxes, taxes levied in this manner being called *' taxes of repartition," while the converse method, by which the law fixes a quota or j^ercentage to be levied as a tax-rate on the individual taxpayer or tax-object, is called a "proportional tax" [ Quotitdtsstctier\ . These two methods are, in point of form, diametrically opposed to each other, but considered as fiscal expedients the contrast between them is only relative. For, even in adopting the method of the repartition tax, the legislator contemplates an approximately ascertained and fixed rate of taxation, and simi- larly in case of the proportional tax the law contemplates a more or less definitelv fixed aggregate revenue. But it is the 6l2 THE SCIENCE OF FINANCE. relative contrast between the two methods alone with which we are here concerned. For the point immediately in hand relates to those props and coercive measures by which assistance is afforded the taxpayer's vacillating sense of duty. If certain fixed annual sums are required of the provincial and communal self-governing organization, with the expectation that these local authorities will distribute the burden among individuals, this affords the administration of taxes by the local authorities a fixed support and standard from which they cannot depart. In Prussia, according to the law of May 21, 1861, the land tax is a repartition tax, but with certain peculiar conditions attached which have been mentioned above (sec. 306). Sig- nificantly enough, the house tax is not of this character, and this fact serves to bring out the extreme rigiditv of the repartition tax on land. Of the variable taxes in the Prussian system the trade-license tax (sec. 307) has something of the character of a repartition tax, in that certain average rates are prescribed, which rates multiplied by the number of taxpayers liable to the tax give the sum which is to be jointly paid by them. In the case of the class tax and the income tax the limit set by the vearly income has also something of the character of repartition, but in a negative rather than a positive sense ; for example, the law of May 25, 1873, introduced an element of propor- tionality \^Ko/ititigeiitining\ into the class tax by means of the provision that any amount by which the aggregate revenue from the tax exceeded a certain fixed sum was to be applied in abate- ment of the tax. The flexibility of consumption taxes (and taxes on transfers) is coupled with the drawback that, while they are amenable to treatment by this negative method, the positive method by which the aggregate amount of the tax is fixed at a given figure cannot be applied in their case. II. THE ASCERTAINMENT OF THE TAXABLE OBJECTS. § 378. In the administration of the tax law, in applving the provisions of the statute to the phenomena of actual life, the TAX ADMINISTRATION. 613 great problem is to ascertain what these phenomena are. Viewed in the light of the foregoing considerations on state administra- tion and administration bv the local self-government, the feature which first obtrudes itself is the great difference between the two chief classes into which taxes are divaded. It has of late been thought a jiertinent characterization of this difference, as regards the Prussian territory, to sav that the officers of the indirect taxes wear uniforms, and those of the direct taxes civilian's dress.' This external distinction in some degree coincides with an intrinsic difference between the organs of administration which are required for these two great classes of taxes. The uniform of the officials of the indirect tax points to the fact of a professional class of permanent officials which it would be impossible to replace by the organs of local self-government, a jjoint in which the administration of the direct differs from that of the indirect taxes. And this difference results from a sub- stantial difference in the work to be ])erformed. If the facts with which the tax administration has to deal are of a stationary nature, then a relatively impermanent class of officials may suffice for the work, — such an official class as is afforded by local self-government, especially if it is to some extent supple- mented by the professional administrative officials of the national authority. If, on the other hand, the facts which the tax law is; to cover are in a state of constant flux, if they are of the nature of instantaneous phenomena which must be seized at the instant of their ajjpearance, if at all, then it is necessary to have a per- manent administrative organization at hand, which can be on the. watch at every hour of the night or day. It is further to be remarked that in the practical work of ascertainment of the taxable objects the neighborhood element afforded by the method of self-government is of great use in the former of these two classes (assessment for the purpose of the income tax, the land tax, house tax, trade-license tax), as bv this method use can be made of information which is not avail- able to any professional official class — personal acquaintance ' Neumann, Schinoller^s Jahrbuch, 1882, p. 971. 6l4 THE SCIENCE OF FINANCE. with tlie circumstances of the neighbors in respect of property and business, knowledge of customar}- prices, values, rents, income, etc. With respect to the second group of taxes above mentioned this kind of information is of small consequence ; the facts to be dealt with here are, as it were, of a mechanical nature, palpable and definite, not involving the uncertainty of an appraisement ; they admit of being set down according to kind and quantity. This is especially true of the great number of consumption taxes, whether they are collected as an internal tax or as a tariff duty, — whether it is the tax official's business to keep watch of the receipts of beets at a beet-sugar factory in order to record their weis^ht before thev are reduced, or the customs official inspects dutiable goods in vessels, railway cars, cases, etc., coming from foreign countries. The fact is not to be overlooked, however, that the legisla- tion dealing with this second group of taxes achieves a formal simplicity of the tax at the cost of a substantial sacrifice. This requires some further consideration. ^ 379. Among the great shortcomings of the taxes on con- sumption (to confine ourselves to this category) is to be counted the circumstance — which viewed from another side is a merit — that the collection of the tax takes place without ref- erence to, or contact with, the person on whom it is intended that the burden should rest. We proceed on nothing more (definite than the estimated average of the proportion between the consumption of the taxable article and the tax-paving capac- ity of the individuals. This average on which we proceed is necessarily of the most superficial character, since it comprises the greatest possible variety of individual cases. The consump- tion of objects of luxury pure and simple, such as champagne for example, bears such a very uncertain proportion to the tax- paying capacity of the household by which these articles are con- sumed, that the wish, however impracticable, obtrudes itself upon us, on grounds of equity, that every bottle which passes the custom-house might show on its face who is going to consume TAX ADMINISTRATION. 615 it. And how much more true is all this of the great staples of consumption — beer, wine, tobacco, tea, coffee and the like — and how constantly we have occasion to regret the fact that under this tax it happens in a large proportion of cases that a tax-paying capacity ten times as great as another jjays not a single penny more than the latter. Now while this wish of ours has no chance of being realized, we must and do, at least, make such effort to correct this short- coming as the techni(jue of consumption taxes will ])ermit. The attainable in this direction seems to be to take due account of the different grades and qualities of all articles of consump- tion, or — what amounts to the same thing — to take account of the value of the article in fixing the rate of the tax. In fixing a much higher rate of taxation for the better grades of wine, cigars, etc., than for the poorer articles we are justified in believing that we have done something appreciable towards correcting the superficiality of the average of which we hav^e spoken above. But even in this effort we meet with great difficulties. The ascertainment of this difference in value by the tax official involves so much labor, and is, in part, so far impracticable, that even this modest requirement of equity in con- sumption taxes fails of accomj)lishment ; the tax official is only required to perform the easier task of taking note of such grada- tions in (jualitv, and consequently in rates of taxation, as do not require an excessively minute inspection of the contents but are evident from obvious superficial characteristics. We confine ourselves, for example, to taxing imported manufactured tobacco higher than the unmanufactured, cigars higher than tobacco cut for the pipe, foreign wines in bottles higher than foreign wines in the wood, ready-made clothing higher than materials for clothing. To use the commonly accepted terms, "ad valorem" duties have, after a good deal of discouraging experience with them, been given uj), and "specific" duties substituted in their place. The outcome would surely ha\e been different if the declara- tion made by the payers, which is ordinarily taken as the basis of 6l6 THE SCIENCE OF FINANCE. the tax, had been found by experience to be reliable. Experience has shown that such declaration is pretty generally very much in need of supervision by the tax officials. The chief advantage of the tax monopoly consists in this, that it enables the tax to follow up differences in the quality and value of the goods which necessarily escape the other customary forms of taxation. The monopoly places this distinction between grades and qualities entirely within the discretion of the author- ities, in permitting them to fix the price at which the goods are sold to consumers. § 380. With respect to the measures taken by the tax admin- istration for the ascertainment and assessment of the taxable objects, it will be found that these measures admit of a graded classification according to the degree of publicity of these objects or facts. It will be found that there is a graded succession, beginning with subjective taxes and running through objective taxes to taxes on exchanges or transfers and, finally, taxes on consumption. The more intimately the facts to be ascertained are woven into the texture of household affairs, the greater are the difficul- ties which the tax administration will encounter in trying to ascertain them ; the more the facts lie on the surface the less the difficulty. The knowledge of the income and property of a person, particularly under the complex circumstances of modern industrial life and property relations, is ordinarily, both as to aggregate amount and as to constituents, shielded from the public eye by the same boundary wall behind which the house- hold jealously shelters its private affairs from the eyes of out- siders. Just as is true of every other private matter of domestic life, so also, and in an especial degree, is it true that prevalent sentiment looks upon the knowledge of private pecuniary cir- cumstances as a noli me taitgcre which may properly claim a sort of sanctity even as against the obligations towards state and commune. It is true that in this case as in so many others, really venerable sentiments are appealed to simply to cover TAX ADMINISTRATION. 617 sentiments that are in no wise venerable ; and there are large classes of persons (state and communal officials and the like) who will serve as an instructive example of the fact that an appreciable number and a select class of households do not stickle for this domesticity and sanctitv. Still, the fact of a prevalent immaturitv in moral and political sentiments exists and manifests itself in this way. This sentiment is unmistakably the outcome of long-continued habits of life adopted under the constrained and narrow conditions of the earlier political svstem and the old-time seclusion of individual life from the j^ublic, or it is an outgrowth of an innate self-seeking which will have to be overcome by a long and arduous process of moral and civic growth and education. Only in proportion as these sentiments give place to a more liberal habit of mind is there any fair prospect of penetrating the obscure ground of individual pecuniary circumstances, and the hope of the various legal measures employed by the administra- tion for this purpose lies in the fact that there exists a certain, perhaps very modest, degree of readiness to comply, and that this incipient readiness will be strengthened by the pressure exerted by the law. If after the manner of the Prussian law of i 851, in its p'odi- fication of the earlier legislation of 1820, assessment bv men taken from the neighborhood is made use of in an attempt to pursue a middle course between the method of co-operation on part of the taxpayers themselves and that of an energetic inter- ference bv the central government, nothing is accomplished beyond showing a lack of confidence in the readiness of individ- uals to publish their pecuniarv affairs, without doing anything to correct this shortcoming. If the declaration of the taxpayer is made the basis of the assessment, this indicates, at any rate, a greater degree of confi- dence in the taxpayer ; but the precise extent of this confidence, as well as the extent to which it is justified, will appear only on taking account of the other measures bearing on the same point, and of the results achieved. 6l8 THE SCIENCE OF FINANCE. §381. Self-assessment in its most primitive and least rigid form may be entirely optional ; so that failure to make a decla- ration carries no penalty nor any disadvantage to the individual ; it may therefore be left entirely to his own discretion what bis conscience or his sense of his own advantage may prompt him to return. Obligatory self-assessment must be backed by the sanction of some penalty or other, at least some disadvantage (such as loss of the right to make complaint of too high an assessment), if it is to deserve the name at all. But the simple requirement of some return of income or property is entirely nugatory if no penalty attaches to an excessively low return. Herewith we have reached the domain at whose boundary the representatives of the taxpayers in our legislative assemblies (and to some extent even the national government itself), in the degree in which they are possessed of sympathy for human infirmity, timorously draw back. The obvious method of requiring an oath as to the accuracy of the return, coupled with the severe penalties attached to all perjury, have been found by experience to be of very doubtful expediency. The history of taxation in the United States has long since established the fact, on documentarv evidence, that in that country this requirement has made perjur}- habitual in tax assessments. And the experience of our own courts, which gives evidence of a veritable epidemic of perjury,^ does not encourage a further extension of the employment of this means. The danger of using the oath in connection with self-assessment of taxes lies in this fact, that, besides its evil effects on morals, it still further increases the inequality of assessments ; one part of the taxpayers will have their conscience aroused by the oath, while- others do not, so that the inequality to be expected under any system of self-assessment will simply be augmented. Other means of compulsi'on — fines for failure to make returns, 'As an example may be cited the list of cases at present (1888) being decided" before the Court of Jury in Gottingen. On June 24, C. K., miner, from Andreasberg, sentenced for perjury ; June 25, H. S., lath-cutter and woodman from Sievershausen, sentenced for perjury and libelous accusation, etc., etc. TAX ADMINISTRATION. 619 penalties for too low returns, whether in the more usual form of a money penalty or the less usual form of j)ersonal detention — are effective only in pro{)ortion as the threat is expected to be put into execution. In case of a lax administration of the tax system by local authorities these penalties are just as ineffectual as the assessment oaths in the United States. If they are to be made effective they will therefore require an adequate organiza- tion of the officials in charge of the tax administration, such as has already been spoken of above. Indirect measures of compulsion whicii are intended to accom- plish their object through publication of the tax lists, whether by exhibition of the returns posted in the ofifice of the board of assessment, or by publishing them in the newspapers, may, though not necessarily, be of some use in getting at the truth. It will appear, in this matter as in all others, that the j^oint of substantial importance is the question of morals, of sentiments, and of the prevalent habits of mind. This remedy, of a publica- tion of the tax lists (often spoken of as extremely strict and rigorous), may remain without effect wherever there is a preva- lent remissness and toleration, es])eciallv if it is coupled with a lack of conscientious insistence on the rights of the community. Where there is jealousy and ill-will between neighbors, where there are strong class contrasts, or where there is a jealous watchfulness of the public interest, such a measure may be of some service, although it will always achieve a more satisfactorv result if it acts preventively (by quickening the conscience) than where it acts only repressivelv (through informers and the like). It appears, therefore, that the prospect for a j)rogressive improvement in the ascertainment of the facts in this most recondite field of taxation, lies not so much in particular prac- tical measures that have been tried and found effective, but rather in the gradual evolution of a sense of civic dutv, to be fostered by sagaciously chosen measures for ])romoting the observance of the law, and even more j^articularlv, bv a proper development of the organs of tax administration- 620 THE SCIENCE OF FINANXE. § 382. Very appreciably easier is the ascertainment of the facts in the case of those taxes which are levied not upon per- sonal relations and circumstances, not on the "subject," but which attach simply to the "object," that is to say, objective taxes. The facts to be -ascertained in this case are much more obvious and external. We no longer have to do with personal relations, possessions, gain, credit, debt, business activity, profit and loss, but with things, external objects which serve simply as a basis, as a readily ascertainable constituent factor in these personal relations. In order to their ascertainment the person of the taxpayer and his knowledge of the facts are not only dispen- sable, but are of no use whatever ; we have nothing to do with the individual or personal element, but only with general facts and averages. The task seems especially to be lightened by the fact that — quite different from what is the case with subjective taxes — when the facts are once ascertained the results commonlv hold good for a number of years ; so that the laborious investigation has to be repeated only at rare intervals, perhaps once in a generation, while it is of the nature of subjective taxation that it Requires this operation to be repeated frequently, commonly every year, in order to keep abreast of the continual change that goes on in each person's pecuniary circumstances. However, experience teaches that ordinarily, even in this field, the ascertainment of the facts is practically not so simple and easy. It is true there are objects with regard to which the facts can be ascertained with little effort, and for which a single valuation will serve tolerably for a long period. A good instance of this is the Prussian house tax (sec. 306). In this case the objective taxation in question is confined to a particu- lar and generally simple form of land tax ; where the practice of renting prevails, as in the large and medium-sized towns and cities, the ascertainment of the facts required for this tax is. especially easy ; if the repetition of the assessment takes place only after an interval of fifteen years this method of assessment TAX ADMINISTRATION. 621 becomes one of the most convenient and satisfactory that is to be found. But in most cases the advantages are not so pronounced. The account given of the French land tax, and the accompany- ing discussion of the manner of constructing a land-tax cadas- ter, and the observations made on the Prussian land-tax reform (sees. 299, 305) will serve to indicate the practical difficulties with which this phase of objective taxation and assessment have in experience had to contend. While the work of cadastration promised great things and was intended to dispose of the ques- tion for a long time to come, employing a great and expensive aj)paratus and organization for a number of years, or even (in France) for a number of decades, it is after all a work which bears on its face the stamp of error, transiencv and inequality, from the very start. The reason for this is simply that the com- putation of the net produce of agricultural land, even when no regard is had to the pecuniary circumstances and relations of the individual owners, is so difficult a problem that it is impos- sible to ascertain the truth of the matter bv this method, except in a very imperfect way. It is only under circumstances where the customarv meth- ods of business favor the ascertainment of the facts in the way they do for the house tax, that the task of ascertaining the produce of land can be accomplished easily and in a tolerably satisfactory manner. If the practice of leasing prevails exten- sively in agriculture or if sales of land are very frequent, this will afford reliable and accessible facts as to the produce, or at least afford ground for an inference as to the produce and value of land much preferable to the laborious and, in the last analy- sis, fictitious computations of the cadaster. § 383. It is characteristic of these classes of taxes, and of the method of assessment required by them, that these, as well as the subjective taxes, necessarily involve an element of self- administration. In the assessment of the Prussian house tax, as well as in 622 THE SCIENCE OF FINANCE. the construction of the cadaster for the Prussian land tax, the assistance of experts is always counted on. The alternative method of assessment, modeled after the English pattern and advocated by Kries (sec. 305), also rests, substantially, on the services of men intimately acquainted with the affairs of the neighborhood. This fact itself suggests the relative difficulty of assess- ing this class of taxes as compared with the others presently to be taken up, which can and do dispense with the services of " experts." It is not for the detection of the intricate facts of private life and circumstances, but only of the facts of the tax- payer's business activity that we do and must employ business men, men who have gained experience in the business world and especially in local business affairs. This is particularly evident in the case of the trade-license tax,, where, as is the case in Prussia (sec. 302), the taxing authorities shrink from the difficulties of the French method (sec. 302) and reluctantly adopt the methods of subjective taxation. In this case we have an assessment after the manner of the class tax, being partly effected by professional officials and partly by the members of the commune ; the tax being at the same time restricted to a certain rate, somewhat after the fashion of the repartition tax, by the requirement of an average rate to be paid by the members of the class on whom the tax is levied. It is to be added that this method of administering the trade-license tax has been less productive of results than the French license tax precisely because it occupies a vacillating position between the subjective and the objective tax. The French tax does not employ personal assessment of any kind, but has recourse exclu- sively to definite external indications — the number of inhabitants of the place, the character of the industry, the rental of the buildings and grounds occupied by the establishment. The diffi- culties which arise out of this purely "objective" treatment of the license tax, and which have to be overcome by extremely minute and (retailed provisions, remind us of the difficulties of the land-tax cadaster ; any advantage that may belong to the TAX ADMINISTRATION. 623 license tax depends on the fact that a single assessment is not required to serve for a long term of years, but is renewed from }ear to year. In the one case as in the other, the inadequacy of the assess- ment is shown" by the fact that we content ourselves with a simple class tax because an adequate ascertainment of the net produce of any industry is practically unattainable. 4^ 384. The problem of assessment is greatly simplified if the facts to which the tax attaches are obvious and tangible. This is habitually the case as regards taxes on consumption and on transactions. It is especially true in case the law applies to the most obvious facts only. The substitution of specific for ad valorem duties, for example, is such a case of simplification in the tax administration ; neglect of differences in quality, other than the most tangible ones, is a grave fault in point of equity, but is often highly expedient as a practical measure. In the same spirit a selection is sometimes made of the simplest and most obvious factors in the process of production in order to the laying of a tax on articles of consumption })ro- duced within the country ; the taxation of the raw material of beet-sugar, or of spirits, or of beer (sees. 272, 274) seizes upon the most accessible of the stages into which the process of pro- ducing these goods resolves itself, — of course not without raising a question as to the expediency of this method on other grounds. Viewed from the standpoint of industrial progress, the incitement to a fuller utilization of the raw material, afforded by a tax on raw material, may of course recommend itself; but as seen from the standpoint which is immediately concerned in the question of taxation, it must be set down as a defect of the method that this incitement not only involves an advantage to the stronger producer over the weaker, but also a failure to collect the full tax income aimed at by the legislator. Experience of this kind accordingly urges to the supplementing of this simple method of taxation by extending the tax to other portions of the process of production or circulation. 624 THE SCIENCE OF FINANCE. Taxes of this class will, of course, continue to enjoy the advantage that in their employment the tax administration has only to take thought for the ascertainment of the presence of the special facts in question, and the necessary supervision is facilitated by this fact that the tax need attach only to facts that are easily ascertainable. Goods may be taxed at their entrance into the country in case the conformation of the national bound- ary favors or admits of the proper supervision of imports. The articles of consumption produced at home are taxed by this method if of such a nature that their production (or circulation) may be readily controlled. This class of taxation, therefore, selects those articles and those steps in their production or cir- culation that can be assessed with ease and accurac3^ A tax on transactions derives an advantage from the use it can make of the courts, notaries and other officials, very analo- gous to the advantage which taxes on consumption enjoy in the accessibility of the process of production or circulation. The stamp used for purposes of public registration, or simply as an evidence of the payment of the tax (as happens n the case of many consumption taxes), aids in the ascertainm nt of taxable objects by the requirement of publicity. III. THE COLLECTION OF TAXES. § 385. In the method of collecting taxes, at least so far as concerns indirect taxes — internal taxes on consumption and import duties — we are confronted with an historical growth of the same character as what we have met with in other depart- ments of national life, — a development from the j^erformance of public functions by private enterprise to their performance by a state organization in the full sense. In the states of classical antiquity, as well as in the tax administration of the ancicn regime, and, under analogous circum- stances, in the countries of Eastern Europe at the present time, and even in certain special instances in the modern kingdom of Italy, we have the institution of Tax Farming. This method of collecting taxes turns over to private business men a function TAX ADMINISTRATION. 625 which is assumed as a matter of course by the financial adminis- tration of any fully developed modern state. Even PVcderick the Great, in his effort to increase the revenues of the Prussian state after the Seven Years' War, made an attempt to reorganize and strengthen the tax system by calling French farmers of the taxes to his aid. It is not to be denied that expedients of this sort may find some justification if we consider the relative efficiency of })rivate enterprise as compared with an undeveloped official class for the performance of services of this kind, together with the teaching of past experience in the administration of the taxes. In this, as in other cases, the self-seeking of private indi\'iduals mav be made use of to accomplish those purj)oses of the community for whose adequate performance the state officials of the time are not possessed of a sufficiently mature intelligence and sense of duty. But there is also a second, and })erhaps often a stronger argument for the farming of the taxes, viz., the state's need of advances for which it will, in such a case, pawn the taxes for a number of years. Even in the case of Italy's granting a lease of her tobacco monopoly to a joint-stock company this was the decisive reason ; and in France this was the decisive inducement to a farming of the taxes down to the reorganization of the finances after the Revolution. From time immemorial, savs Taine,' it had been the custom to eat the corn in the ear and to antici- pate the income of the succeeding year. Even Colbert^ tried to break with the practice of alienating the national revenues and to annul the contracts already made ; but without any permanent result. It is therefore readily intelligible that theoretical writers should have condemned the farming of taxes at an earlv date. Montesquieu 3 says that the rovalty (A e., collection of taxes by state officials) is the management of a j:)rudent householder who takes up his revenues in an orderly and economic manner; he " Les origines de la France contemporaine, p. 403. - Zeitschrift fiir die gesanimte Staatsicissenschaft, iSTQvpcSE LiBR/4frC>«v. ^ De r esprit des lots (in i!i),\)oo\i x\\\. c\i2i\>. \Q. f cfthe A ^ (university; 626 THE SCIENCE OF FINANCE. saves the state the enormous gains of the tax farmers, who con- sume the substance of the country in a thousand ways ; he saves the people a multitude of evil laws which the greed of the tax farmers imposes on them. Montesquieu's historic sense, how- ever, leads him to admit the possible utility of a tax lease in introducing a new tax where the resourceful self-seeking of pri- vate interest would detect and prevent tax frauds that would escape the state officials. Justi,^ who in so many things has a modern air, sets up the general rule that royalties cannot be farmed out without some detriment, and applies the statement particularly to customs duties and tolls. It is impossible that a farmer of the taxes should pay more for the lease than the revenue which would be obtained through officials, unless he enriches himself by illegal exactions from the public. But Justi falls short of Montesquieu in breadth of view, in that he does not recognize the importance of a self-seeking private enterprise, which may be made use of to prepare the way for administration by state authority in this field in much the same way as it is useful in modern improved industry and business. The experiences which were present to the writers of the eighteenth century, especially in France, must have been quite unfavorable to the farming of taxes, since this method is so per- emptorily condemned even by Adam Smith, from whose general standpoint it might be expected that he would show a certain predilection for it. The best and most economical way of col- lecting the taxes, says he,'' can never be by the use of the tax lease. The large capital required for the purpose excludes any active competition, so that the state granting the lease has to deal with a combination instead of with competitors outbidding each other, and the profits of the tax farmers are consequently enormous ; they are the richest people in the country, stir up the hatred of the public by their extravagance and their heartless oppression of the taxpayers, for whom it is impossible that thev ^ yt-iatsivirthscliaft, vol. ii. p. 141. * IVcaUli of Nations, book v. chap. ii. (ed. I'layfair, vol. iii. p. 403). TAX ADMINISTRATION. 62/ should feel the sympathy which the officials feel towards subjects, Even a very bad prince has more sympathy with his people than can ever be expected of the farmers of taxes ; hence the tax laws are harshest in countries where the farming of taxes is practiced ; the sovereign has an interest in dealing gently with his people, the farmer of the taxes, never. § 386. The qualification gf the state officials for the collec- tion of taxes, just as the adaptation of the state officials gen- erally for any function, is the product of a development which gradually brings out the requisite intellectual characteristics of the people. The official class, and more particularly the tax officials of the half-civilized states of today, afford us a living example of this in the contrast they offer to what we find in civi- lized states. In these half-civilized states there are no accom- plished results ready to hand — the goal has to be reached by a process of gradual approach. The question as to whether the Russian state is better served by the kind of administration which it can get through an official class of the grade of development actually to be found in that country, or through an administra- tion carried on by joint-stock companies and private enterprise, is a question to which an answer can be found only by experience. For the state of the higher stages of development this ques- tion has been solved. Its official class has reached a maturity corresponding to the cultural stage occupied by the community, and possesses the qualities which the state's work requires of it. It is safe to assume this fact as the basis of tax adminis- tration and tax collection and to simply make allowance for such infirmities of "human nature" as are unavoidable, or at least unavoidable at the present stage of development. This public function is adequately performed by the official staff simply as part of its public duties, without recourse to those motives of private interest which the immature political organism of the Middle Ages and the formative period of the absolute state found so useful. 628 THE SCIENCE OF FINANCE. Viewed from this standpoint it becomes a question of detail only how far the organs of local self-government are to assist the organs of the central administration in the collection of taxes. There are no reasons in favor of a participation of the organs of local self-government in the collection of taxes, of equal urgency with those which speak for participation in the assessment of taxes. And in point of fact the national government does not so frequentlv employ those organs for the former purpose. The case where it will most obviouslv and most frequently occur is that of a tax levied for the purposes of state and commune both, when the commune may be entrusted with its- collection for both ; or in the analogous cases where, in a federal state, a mem- ber of the confederacy, as being the public body in closest con- tact with men and affairs, mav be entrusted with the collection of a tax levied for the member and the confederation in com- mon, — as, for example, is done in Switzerland, since 1879, with the military-compensation tax, one-half of which goes to the canton and the other half to the confederation. ^ 387. The period of recurrence in the collection of taxes is of considerable importance in connection with the various forms of taxation. In the case of the direct taxes (taxes on income and prod- uce) it is customary to concede so much to the circumstances and habits of the less well-to-do classes as to collect the tax in as small quotas, and therefore at as short intervals (monthly and the like) as possible. The aggregate sum to be paid is not reduced by this process ; but, the burden of taxation being to a large extent an emotional fact, it is to be remarked that the poor man who is not in the habit of keeping large sums on hand (except under circumstances of an unusual industrial maturity) finds it harder to pay the entire annual tax once for all than to pay it in twelve monthly installments. It answers more nearly to the habits of the well-to-do classes to collect the tax in quarterly, semi-annual or even annual install- ments. But even in the case of these well-to-do classes the TAX ADMINISTRATION. 629 degree of economic maturity and the consequent habits vary greatly from one country to another. It is by no means a matter of pure accident that in the canton of Zurich the state tax is paid in a single annual installment by all classes of taxjjaycrs, and the communal tax in semi-annual installments by all classes alike, whereas in Prussia the class tax jja>able to state and com- mune is collected monthly, and the income tax quarterly. If no such considerations of leniency toward straitened cir- cumstances and an undeveloped economic sense are taken into account, it is certainly most convenient, for the tax collector and for the taxpayers both, to make the tax payable in a single yearly sum. The circumstances controlling the collection of indirect taxes, and especially of taxes on consumption, are quite different. The point of practical utility in this form of taxation lies, to a great extent, in the fact that in the collection of the tax the producers (merchants, etc.) advance the tax in a lumj) sum, with the expectation of recouping themselves from the persons who ultimately bear the tax. This method of pavment is a necessary feature of this form of taxation, the hardship of which cannot be avoided although it can be reduced. Measures may be taken which will, as far as possible, reduce the interval between the pay- ment of the tax and the recovery. The more nearly we succeed in making these two points of time coincide, the less legitimate ground will there be for the complaint (not ungrounded though often exaggerated for purposes of free-trade advocacy) of a bur- densome interference with production and trade by taxes of this kind. Measures intended to serve this purpose are : ( i ) Extension of the time of payment, for a proper term and with proper secu- rity ; (2) the laying of the tax in such a manner as will (so far as other requirements permit) require the payment of the tax at a point in the process of production or of circulation that shall be as little removed from the time of sale to the consumers as may be; (3) bonded warehouses {^entrepots) where goods maybe held in bond until the tax is paid and the goods removed for 630 THE SCIENCE OF FINANCE. actual entrance into domestic consumption, or until they are removed for re-export ; of course with all due precautions against abuses and discrimination. Under this third head are comprised especially dutiable arti- cles of import which at the same time enter largely into a transit trade with other countries ; for this reason there is frequently (where the political circumstances permit) a protracted struggle against including these markets within the tariff boundaries. The remedy in such a case, after the modern state has once carried its irresistible tendency to unity and centralization so far as to include them within the tariff boundary, is that of great places of deposit (free ports under customs supervision). Such are to be found in the commercial cities of Great Britain, France, and latterly also in the politically independent seaports of the Ger- man Empire. Something analogous may also occur with respect to consu-mp- tion taxes on domestic products in case the tax is levied on the finished product. Very much as is done with the goods imported from abroad, these domestic products may be held in bond under the charge of the tax officials until the goods are thrown on the domestic market or are exported. The difficulty is much greater in case the tax is levied at a stage in the productive process at which no determination with respect to the destination of the goods has been taken. Under the Prussian-German law, the potatoes intended for distillation, the barley intended for beer, the beets which are to be converted into sugar represent the stage at which the tax is collected, whereas the decision as to their ultimate use, whether for home consumption or for export, will not be made until they have passed through the manufacturing process and assumed their finished form. For, it is to be remarked, this manufacture plays a very important part in the national industry and produces in excess of the home demand. The consequence is that a tax is paid on the raw material which is reimbursed in case the product can be shown to have been exjiorted (drawback). So that we have, instead of a place TAX ADMINISTKATION. 63 I of deposit exemj^t from taxation (bonded warehouse), an actual payment and reimbursement of the tax. The objectionable fea- tures of this method are (apart from the tax supervision), in the first place, a burdening of the industry by the tax, and in the second place, the difficulty of an accurate comjjutation, for the purpose of the drawback, of the ratio of the raw material to the finished product. If the drawback is placed at too low a fit^ure the result is a hardshij) to the producers ; if it is placed too high it invokes a drain on the j)ublic rex'enues which goes to the pro- ducers as a \'irtual export bounty, and may under given circum- stances result' in all the detriment involved not only in the enrich- ment of a number of individuals at the public expense, but also in an abnormal growth of certain branches of jjroduction through artificially over-stimulating them, as has hap[)cned of late in the case of the beet-sugar industry. i^ 388. To this national character of taxation and tax collection there corresponds a system of coercive measures, in the shape of tax inspection and penalties adopted to secure the j)a\-ment of taxes. The methods of tax inspection are so closely connected with the character of the various forms of taxation, that the adoption and the successful employment of a given tax, as we have seen, largely depends on the kind and the possibility of the measures of control to be adopted. The entire system of income taxation is dependent on the feasibility of certain methods of sui)erin- tendence, the characteristic features of which haxe alread\- been touched upon ; the question as to whether taxes involving certain annoyances and difificulties are feasible at all, what results may be expected from them, and how much it is exj^edient to require of them, all these are questions the answer to which depends on the existence of })racticable means of supervision and control. Whether and what taxes on consumi)tion are to be employed, on what particular articles they are to be levied, whether on imported goods or on domestic j^roducts, and at what rates, depends (aside from the (juestion of the need of revenue and 632 THE SCIENCE OF FINANCE. of equitable distribution) on the practical conditions imposed by the measures of supervision and control necessary to be adopted. Hence we have a variety of methods of supervision employed in the various classes of taxes, as well as a further variation in detail between the individual kinds of taxes made necessarv by differences in the details of production and circulation. The practical exigencies of the processes of production and distribu- tion, therefore, give rise to special practices in tax collection ; we find instances of this in the taxation of distilled liquors and in the sugar tax ; and the progressive centralization of the busi- ness of supplying a great city by rail has, for example, resulted in a centralized control of the octroi in Paris and other similar places. The strictness with which measures of superintendence and control are applied answers in some degree to the height of the rate of taxation ; so that an increase in the demand for a tax revenue is followed by a fresh accentuation of the measures of control, which sometimes takes the form of the substitution of a new method of tax collection (a tobacco monopoly instead of a tobacco tax levied on private producers). The principle involved in the question is the discovery of the most effective weapon that can be brought to bear upon the taxpayers' undeveloped sense of public duty ; the greater the demands, the severer, catcris paribus, is this struggle between the public demand and the tax- payers' reluctance, and the severer the struggle the greater the need of an effective weapon. Penalties for failure to pay the taxes are the ultima ratio in this struggle, just as the legal penalty is always the ultima ratio in the struggle between the public authority and the individual in the execution of the public will. And the tax penalties can do nothing beyond applying to the special purpose contemplated the penalties which are at the disposal of the law generally, and by the usual methods. The distinction between different degrees of offense and the consequent difference in the penalties imposed, etc., have their place in the field of taxation as elsewhere. The TAX ADMINISTRATION. 633 distinction between this field and the field of criminal law gener- ally lies in a difference not of principle but of practical applica- tion. The difference lies in this, that the penalties with which the modern state visits tax frauds are relatively very light, the very name and implication of fraud being avoided in the word- ing of the law, out of consideration for the very j^revalent feeble- ness of the sense of civic dutv. The law has got into the habit of taking active cognizance of only a very moderate proportion of the cases of such frauds as actually take place. Probably in no sj)here is the proportion so very low as in the field of frauds on the taxes. BOOK III., GERMAN TAX LEGISLATION OF THE PRESENT TIME, IS OMITTED FROM THIS TRANSLATION. (634) BOOK IV. THE PUBLIC CREDIT. (ft^s^ CHAPTER I. THE HISTORY OF PUBLIC CREDIT. Literature. A. Anderson, Ait Historical and Chronological Deduction of the Origin of Commerce from the Earliest Accounts to the Present Time. (German translation, 7 vols., \772>-79)- Johann Beckmann, Bcitriige ztir Geschichte der Erfindungcn, (3 vols., 1792). Savary, Dictionnaire tmiversel de commerce (1742). Wilhelm Endemann, Studien in der romanisch-kanonistischen Wirthsc hafts- nnd Rechtslehre bis gegen Efide des 17. fahrhimderts {vo\.\., 1874). Karl Knies, "Niccolo Mac- chiavelli als volkswirthschaftlicher Schriftsteller " {Zeitschrift fiir die gesanunte Staats7uisse7ischaft, 1852). Erwin Nasse, "Das venetianische Bankwesen im 14., 15. und 16. ]i\\ir)i\indcxt." [fahrbiicher fiir National- okonomie Jind Statistik, 1880). Etienne Laspeyres, Geschichte der volkswirthschaftlichen Anschaimngcn der Niederldnder nnd ihrer Litcra- tiir znr Zeit der Rcpiiblik (1863). Ricard, Le ncgoce d' Amsterdatn, 1720 (Pinto), Traite de la circulation et du credit {Avasierddim, 1771). Adam Smith, /nguiry into the Nature and Causes of the Wealth of Nations (i 776), book V. chap. 3. Sir John Sinclair, The History of the Public Revenue of the British Empire (3d edition, 1803), vol. i. pp. 329-530. Davenant, Essay upon Loans {1716). Robert Hamilton, An Inqiciry concerning the Rise, Progress, Redemption, Present State and Management of the National Debt of Great Britain and Ireland {^d edition, 18 18). E. Capps, The National Debt, Financially Considered {\Z^C)). Necker, De T adminstra- tion des finances de la France, vol. ii. (1785). Adolj)h Friedrich Riedel, Der brandenburgisch-preussische Staatshaushalt in den beiden letzten fahrhunderten (1866). Krug, Geschichte der preussischen Staatsschuld (edited by Bergius, 1861). Eugen Richter, ZPa^ preussische Staatsschuld- enwesen und die preussischen Staatspapiere (1869). K. Fr. Nebenius, Der (i/fentliche Kredif {26. edxiion, 1829). Adolph Wagner, " Finanzen Oesterreichs" (Bluntschli and Vtmitr's Deutsches Staatsworterbuch, vol. vii., 1862). A. Beer, Die Finanzen Oesterreichs (1877). N. Brsezny, " Die Entwicklung der russischen Staatsschuld" (translated from the Russian by Edward Berendts), /vV/aw^-arr^/V, 1889, pp. 153-198. I. THE EARLY DEVELOPMENT OF PUBLIC DEBTS IN EUROPE. §470. Credit is a fruit of advancing civilization. It is a j)re- cipitate from the moral atmosphere of a people and an epoch 637 638 THE SCIENCE OF FINANCE. which finds the transfer of the usance of capital advantageous (vol. i. sec. 418). The resulting historical development takes the form of a suc- cession of stages within the history of any given people, and the form of a succession of phases in the history of the various peoples concerned. The degree of industrial efificiency, the pro- ductivity of industry and commerce, the degree of accumulation of capital, all these furnish the material basis for some one stage in the course of this development. Political and civil activities, as the visible manifestation of the degree of moral culture achieved, constitute the h3'perphysical basis. The importance of this last factor is especially great, and is on the increase, within that sphere of credit where the state figures not simply as the keeper of the law, but is itself the recipient of loans — the field of oublic credit. The stage of industrial and political development, both, therefore, decides what shall be the degree of development of pu 'icoq:redit. The early development of credit in the city repubh-: s of Italy gave the first impetus to this growth in the modern European world ; and afterwards the other European states in succession, each in turn as it reached its prime, fol- lowed the example of that ancient home of civilization. In this spread of public credit, as happens so often in analogous cases where a cultural advance is transmitted from one people to another, the hand of the business men and adventurers of the land of its origin was active in introducing the institution into foreign lands. The Italians taught the people of the North the unfamiliar methods of credit and of financiering, the lottery and the tontines ; adventurers bent on gain made the capitals of Europe the scene of their activity even as late as the close of the last cen- tury. Indeed the great world-market of capital and of credit which has been suppl3-ing the world with loans for a century past still bears the name of those Lombards who came to England seven hundred years ago on the business of collecting tolls and taxes and of loaning money on the security of those sources of income.' ' Schanz, Englische Handelspolitik ^egeii Eiidc ties MiUc'lalUrs (1881), p. 551. TlIK HISTORY OF PUBLIC CREDIT. 639 §471. The business of the lta.\ \a.n campsores began quite early to extend itself beyond the simple exchange of coin (money- changing in the strict sense), so as to include the making of remittances to distant places, and more esjjecially to include the deposit business. It had been the custom for a long time past, traceable to the business methods of ancient Rome, to place money in banks for security. The deposits which accumulated in this fashion as dcpositum irregidare afforded the banker an opportunity to make a profit. The Roman-Canonical dogmas, howeyer, forbade the deriyation of any profit from such deposits on loans by the payment of interest, and the representatives of this doctrine, eyen as late as the middle of the seventeenth cen- tury, were unable to find any justification for such interest. Hence arose the custom of entering such money nominally as a partnership investment, in which case a participation in |be gains from the money would be legitimate, and so the partnership method gradually replaced the form of a deposit. These part- nership banks are to be conceived of as a number of ' '•w-i^'fful and respectable family establishments, some of them \ y old, which played a very important part in the money market. The name Bancherii had gradually come to replace that of Campsores. At the same time there was in existence a deposit business in the strict sense, which was even developing into the chief busi- ness of the banks. This gave the state, as guardian of the public interests, and in much the same manner as the exchange business of the campsores formerly, occasion to require an official concession as a condition of doing business ; whereby the state would have an opportunity to guard against frauds on the pub- lic conscience on the part of the banks. From all this there resulted a supervision on the part of the state and a giving of bonds on the part of the banks ; all of which afforded the state a leverage for fiscal exactions.' In the case of Venice there is documentary evidence going back to the second half of the fif- teenth century^ to show that certain banking houses had loaned 'Endemann, pp. 423-431. ^-Nassc, pp. 339-342. 640 THE SCIENCE OF FINANCE. the state sums amounting to 1,200,000 ducats, for which they received no interest and, according to the views of that time, could not receive mterest. Whenever the fiscal administration of the state was in a strait it seems to have turned to the banks as the most obvious resource. It is conceivable that the gov- ernment's power of supervision and control over the city's com- merce may have been made use of to indemnify the bank. But the banking business found the arrangement unprofitable ; the banks gradually came to refuse credit to anyone whom they sus- pected of the intention of withdrawing the amount credited to him instead of letting it remain in the bank. So the govern- ment enjoined the banks by law from declining to make any transfer that might be demanded. § 472. Besides this abusive conversion of the bank deposits to national loans there was also some borrowing of a permanent character. Since the doctrine on usury prohibited interest, the state paid "rents" in return for the loans, and these rents were secured by special branches of the national income. The origin of the monies which were by accepted usage the means of placing these loans, and the relation of the rnontes to the development of the Italian banking system, have to this day not been thoroughly cleared up. It seems certain that the rela- tion was a close one. The common bond between them is the state's need of loans and its use of compulsion in order to secure loans from private parties. The dwiis had this in com- mon with the bank partnership, that both of them were in pos- session of an accumulation of capital which was made up of a number of shares.' ' Mons argetiti, vions auri, occur in the Latin comedians of the classic period. Prudentius (Hymnus II. in honorem Laurentii) relates, in the early years of the fifth cen- tury, that in the third century the pagan prtvfectiis tirbi had made a demand on the Deacon Laurentius for the church treasure {fulgidae viontes monetae conditos). Cer- tain writers as H. C. Senkenberg and Beckmann take this as a proof that the usage was already in vogue at that early date, and that the term vions was applied to the treasure of the Christian church. This does not seem to me to be proven by the passage in question, as the church treasure is here first spoken of as area {exquirit aream ditibus massis refertam), followed by the above words used as a poetic figure. THE HISTORY OF PUBLIC CKEDIT. 64 1 In the thirteenth century, it is said, the government of Flor- ence having to pa)' a number of its own citizens a debt of sev- enty marks in gold, and being without money, adopted the expe- dient of assigning its creditors a fixed annual income to be paid out of the state's revenues, the rate being first fixed ,at 15 per cent, and then successivelv lowered to 10 and 5 per cent. Out of this beginning there grew up a permanent financial system ; the debt of the republic increasing in times of war and dimin- ishing in times of peace. These annuities also became objects of purchase and sale, their price fluctuating, like that of other goods, according to the seasons, the fancy of jjurchasers, etc' As in Florence, so in Genoa, Rome, Naples and other cities ; these fiscal institutions are said to have come into general use, gradually sj)reading over the country in the fourteenth and fifteenth centuries. The ?noiitcs pictatis (pawnbrokers' shops established for some charitable purpose) seem to have come into vogue later than these niofitcs {profani).'^ The )nontcs are said to owe their origin, in Florence as else- where, to forced loans {pr(ust(j?iti(7c), but thev presently came to be taken up to some extent voluntarily, as a business, by capital- ists. The spread of this method of loans furnished occasion for the canonical doctrines to consider the question of its permissi- bilitv. The voluminous literature of learned monks and jurists bears testimony to. the importance and the pre\'alence of the montcs in Italy. The inclination was, more and more, to admit the legitimacy of this method of loan. Fcclesiastical authori- ties who ordinarily anathematized all countries and cities that borrowed and paid usury on their loans, ad\ocated the full free- Leonardus Aietinus says {Ilistor. Florenlinarum,\\h. \\\. y>- 145)- " Quantitates vero i/isas in unurn coacervatas a siiiiilitudiiie cunntlaiiJi vitlgo inontem vocavere. hi(]ite in civitate postea servalum.''^ ' Leonardus Aretinus, loc. cit. On Venice in the Sixteenth Centurv, cf. also Nasse, p. 350; Endemann, p. 433; Beckmann, vol. iii. p. 344. ^ The meaning of the name inontedi piela, mont de piete, was afterward in its turn lost sight of, as shown, e.g., by Savary s. h. %>. According to Savary, the original meaning of the word inotis seems to have been retained in Rome as late as the eighteenth centurv, being used to designate une creation de rentes lorsque la chamhre apostoliqiie a hesoin d\irgent .... ces rentes se payant tres regulih-ement. 642 THE SCIENCE OF FINANCE. dom of interest payment for the Florentine, Genoese and Vene- tian monies. Then, during the course of the fifteenth and sixteenth cen- turies, there is a typical development of the details of business methods in this fiscal institution, whereby the diff'erent permu- tations of chance and circumstance are exploited by means of a specialization of the mechanism. Data and experiences were carefully collected and then adopted as guiding principles for the routine of the business and handed on to later generations. The annuities assigned to creditors were for the most part funded on particular sources of public revenue. The shares of these annuities {appoints, loca montiimi) were adapted to the vary- ing demands of purchasers. They were sometimes life annuities terminating at the death of the creditor {mo/ites vacabiles), some- times terminating only on repayment of the capital, and capable of being inherited [jnontes non vacabilcs), these latter being com- puted at a lower rate than the former ; sometimes the annuity was terminable at the instance of the creditor {niontcs rediinibiles^ , sometimes non-terminable {non rcdvnibiks). The modification of the annuities which in the time of Louis XIV. was introduced into France and Northern Europe, and associated with the name of the Neapolitan Tonti, had long been well known in Italy (and in the German towns) — the principle of this form of annuity being that the value of annuities falling void is to accrue to the surviving annuitants. § 473. The connection of these institutions with forced loans, which during their early days had served to exempt the sale of annuities from the canonical condemnation of usury, ))res- ently declined in importance. It came to be more and more a matter of interest voluntarily entered into between capitalists and the state. The popes themselves made use of it after the begin- ning of the sixteenth century. The name employed {inons rcli- gionis, 1110ns fidci), which carried a suggestion of the war against the infidel or of the defense of the faith in the protection of the city of Rome, and which was thus calculated to cover up THE HISTORY OF PUBLIC CREDIT. 643 whatever might be questionable about this money transaction,' this form of name gradually came to be accepted as the every- day designation for those domains or taxes which were mortgaged to the state's creditors {ttwntcs farinac, cayniimi, vini)\ or the loans were sometimes named for the popes who contracted them {nwiis lulius) or were designated by the length of time which the annuity had to run {^nio/is fun'c/uui/is). In the seventeenth century it was, es{)ecially in Rome, that the tnontes came to be a perma- nent institution ; about the middle of the eighteenth century these papal annuities were accounted an especially safe and jjop- ular investment.^ The shares {loca inontis) became subject to inheritance and transfer. The state when in need of a loan watched its oppor- tunity to place them advantageously on the market just as the various states have placed their bonds on the market in later times. The price of these loca fluctuated according to the for- tunes of war and peace, and according to the security and pro- ductiveness of the hypothecated sources of revenue. An obvious further step was that this mortgaging of the future revenues from taxes and duties to the state's creditors should bring with it a leasing of these sources of revenue to the creditors, and a consequent collection of the taxes by farmers. The )}ions was therefore very often a tax-farming business, and the farmers of the taxes were a detested class of people in Italy, as they afterwards were in France and other countries. About the close of the fifteenth and the beginning of the six- teenth century, Macchiavelli testifies to the influence which public credit at that time had on the course of political affairs. When the Venetians entered into alliance with the King of Naples against Florence, Cosimo di Medici, by means of a loan opera- tion, drained Venice and Naples of money to such an extent that those states were obliged to accept the terms of peace dictated ' Sixtus V . (Bull of 1585) established a mons non vacabilis which was based on an agreement manifestly more fjuestionahle under the doctrine of usury than that involved in the mons vacabilis. ^Cf. Savarv, Dictionnaire de commerce, article " Mont ; " Endeniann, p. 4 ?6 ; Beck- mann, vol. iii. p. 346. k 644 THE SCIENCE OF FINANCE. to them by Florence. And still the Medicis were only one of the wealthy families of Florence ; besides them there were many other families that were noted for enormous wealth. Great pro- ductivity of industry, of trade and of the banking business on the one hand, and a standing mercenary army, frequent wars, large payments of tribute to the great states of the north, on the other hand, srave rise to the habitual use of credit bv the Italian states and their capitalists. § 474. The German cities of the Middle Ages ' also show a striking similarity in the evolution of their public credit to the city republics of Italy. ■ Even as early as the latter half of the fourteenth century (in Basle beginning 1365-66) municipal loans occur as a constantly recurring transaction, loans being taken up year after year. One reason for this is the fluctuations in public expenditures, the greater part of which cannot be fixed beforehand. If a war came on unexpectedly, or an opportunity to acquire prerogatives or domains, or to extend the municipal territory, then the public credit offered a means of supplementing the revenues. In this way the growth of political power was, here also, just as in the case of the Italian republics, largely bound up with the employ- ment of public credit. A second reason may (according to Sohm's hypothesis) have been — the first reason offered being insufficient to explain the permanent character of these loans — that the city carried on a banking business in order to profit by the fact (founded in law) that its credit alone was sufficiently stable for such a business. The city became a banker ; it looked upon the contracting of liabilities in the way of annuities and the like, not primarily as a means of covering extraordinary public expenditures, but as an ordinary constituent factor in the municipal administration ; because the city was in possession of a virtual bank monopoly for certain purposes, in much the same way as it possessed a ' G. Schonberg, Fiminzverhaltnisse der Stadt Basel iin 14. mid i j;. JahrJtundert (1879). Kud. Sohm, " Stadtische Wirthschaft im 14. und 15. Jahrhundert," Conrad's Jahrbdicher, 1880, vol. xxxiv. pp. 261-266. THE HISTORY OF PUBLIC CREDIT. 645 legal monopoly of the salt business. Interest-bearing debt was here employed side by side with annuities ; debts with a high rate of interest were .also converted into new debts with a lower rate of interest. All this was of course useful as prej^aring the way for profit- able employment of the municipal credit in case of public need, and served therefore as a substantial support of the city's polit- ical power.' § 475. The center of gravity of the world's trade shifted, during the era of discoveries, from Italy to the countries which lay on the new high road of the world and were able to seize the advantage of their position. There resulted a northern counterpart to the commercial prosperity of Italy in the Nether- lands, whose gains were drawn from the more productive sources of the all-inclusive world market. The money market of the Netherlands developed a luxuriant growth along the lines of the traditional fiscal methods, and at the same time brought forth new forms beside the old. The ' The public credit as employed in the German principalities during the Middle Ages is treated of in Der offentliche Kredit im Alittelalter nach Urkttnden der HerzogthiUner BraunscJnveig u?id Litneburg, by A. von Kostanecki {Staats- tin J sozialwissenschaft- liche Forschungen, vol. ix. p. i, 1889), containing details as to the early development of public credit. The documents of the duchies of Brunswick and Luneburg show- nearly 300 ducal debentures issued during the period 1 293-1 405. In by far the greater number of cases the creditors are secured by a grant of the usufruct of property or franchises. Three-fourths are mortgages on castles \^Schloss7'erpfdndnvge)i\ The occupant of a large estate in pawn was, as a very general rule, vested witli the power to appoint the officials of the district {Amtleiite, Vogle etc.) ; or at an}' rate the old incumbents must fnit Eiden Sicherheit leisten. As regards the towns of Brunswick and Luneburg (Brunswick, Luneburg, Hano- ver, Gottingen) the facts given in this publication supplement what was already known from other sources (especially from Schonberg's book). Here, as in Basle, the preva- lent form of credit is that of the sale of annuities. These were at the outset founded on sources of revenue in kind (real estate), afterward on income in money (taxes and the like). In particular cases there occur, here as in Basle, phenomena properly belonging to a more highly developed stage of public credit ; so, for example, in Brunswick there occurs between 1396 and 1406 a progressive reduction of interest (first from lo-ii per cent, to 8 per cent., and afterwaW gradually down to 3 per cent.). And, as was also the case in Basle, we find both life annuities and perpetual annuities. And as applied to the life annuities, we find the method of the tontine in use. 646 THE SCIENCE OF FINANCE, bourse of Amsterdam was, in the early part of the seventeenth century, a money market of the same significance for its day as the London money market became some 200 years later. The buying and selling of securities here for the first time developed to considerable proportions, with all the excitement and the excrescences of speculation. The business spread abroad about it an atmosphere of reckless thirst for gain, which presently led to the extension of the business methods of the exchange from transactions in securities to commercial transactions in all kinds of goods. A development which in point of technical efficiency is admirable, in point of morality problematical, and in its eco- nomic bearings not fairly comprehended to this day.' The Dutch East India Company was founded in 1602. Its shares directly became such a favorite object of speculation on change that a decree of the States General was issued in 1610 prohibiting the sale of these securities in blank. The same thing was repeated in connection with the West India Company founded shortly afterward. The occasion for these prohibitions was the solicitude felt for the credit of the companies and for the state interests closely bound up with them. The extended participation of the public in investments of this kind is evident from these acts ; even in these early decrees there is mention of the property of widows and orphans, which was afterward so frequentlv declared to be bound up with the interests of these joint-stock companies. In like manner as the investments of private individuals in the company's stock served to strengthen Holland's world-wide trade, so the same wealth invested in the state securities did service in the national struggle for a position as a political and commercial power. What had been done on a small scale by the Italian republics and by the German towns at the height of the Middle Ages, repeats itself in the Netherlands on a much broader scale ; the public credit is constantly made to serve as a resource of the national finances and for carrying on war. The 'G. Cohn, " Zeitgeschafte und Diffefenzgeschafte," H'\\dehrand'» /a/irduc/ier fur Nationalokonomie und Statistic, 1 866, vol. vii. pp. 395-403. THE HISTOKV OF PUBLIC CREDIT. 647 accumulation of capital and the security of the public credit both developed in such a high degree that the rate of interest declined in the course of the seventeenth century to the point at which it commonly stands in the wealthiest and soundest nations of today.' As early as the second half of the seventeenth century the rate of interest had declined to 3-2^ per cent., and even the shares of the East India Company ])aid no more than 3^ per cent. This low rate of interest drove the superfluous capital to foreign countries, where it could obtain twice as much. In the American War of Independence Dutch capital fought both on the English and on the American side. Amsterdam sided with the one party, Rotterdam with the other. The greater risk of investments abroad made itself felt as an advantage to the increasing national debts ; these served to keep the money from going out of the countrv and to bind the creditors to the state. ^ 476. The usual form in which national and municipal debts were contracted in the Netherlands, too, was the sale <)f annuities. In this the earlier examples, which we are already acquainted with, were followed. But the occasion for so doing which was afforded bN' the canonical doctrine of usury was not present in this case;- the decisive reasons were reasons of financial admin- istration. The annual payments were employed to cancel the principal of the debt. This form of payment moreover afforded an opportunity for a reduction of the rate of interest, of which the finance administration made j)rofitable use. Under the Stadtholder Maurice the rate of interest in Holland and West Friesland was reduced from 6.25 per cent, to 5 per cent.; in 1655, under John de Witt, it was reduced from 5 to 4 per cent., in order to reorganize the finances and to lighten the burden on the citizens by redeeming the debt or to place new war loans on more advantageous conditions. This measure was of course not applied to the life annuities ; but these were looked on with all the mord favor as canceling the principal of the debt in a short ' Laspeyres, Geschu/iU- der AleJerliinder, pp. 248-253. -Ibid., pp. 256-270. 648 THE SCIENCE OF FINANCE. time. The principal of interest-reduction, too, found less appli- cation in the eighteenth century, as the rate of interest on state loans had then fallen to 2.50 per cent. With respect to the life annuities, the question was then com- ing up as to whether the state or private enterprise had best take this branch of the insurance business in hand. Projects for carrying on the business bv private enterprise were put forward as early as the close of the seventeenth century, but the private establishments for this purpose seem not to have been particu- larly successful in the Netherlands.' Even as late as the close of the eighteenth centurv there is evidence that the business was thought very unfavorablv of.= Tontines and life annuities, says De Koopma/i, are good as state institutions ; as private undertakings they for the most part profess to be charitable institutions, but their sole real basis is greed of gain, and in the most favorable cases the poor results are due to incompetence rather than to fraudulent management. % 8 477. As we approach the present we naturally turn to the country which at present is the center of the world's money market — Great Britain. With the unity and centralization of its general development during the past eight hundred years this countrv affords us also in the growth of its national debt administration a clear and conspicuous example of the development of public credit, from infancy upward through many intermediate stages to the mature vigor based upon a controlling position in the world's commerce, which England inherited from the Netherlands, and then, since the close of the eighteenth centurv, strengthened and increased to gigantic proportions by the aid of the modern efificiencv of industry. And all this rests upon a political system whose basis is not the narrow ground of a citv republic or a collection of several city republics, but has all the breadth and scope of a great modern state. 'Laspeyres, pp. 252-253. ^ De Koopman, vol. iii. pp. 24-28. THE HISTORY OF PUBLIC CREDIT. 649 Down to the closing years of the eighteenth century England was dependent on Dutch capital even for its public credit, so much so that during the English war against the American col- onies the people of Amsterdam could seriously ask the question how long England would be able to go on paying interest on its debts. The stupendous effort jnit forth in the struggle against France was a marvelously successful test of England's wealth of capital and of its credit ; so that after the great war closed Eng- lish capital was already in position to render the same service to the states of the continent as Holland had rendered to England shortly before. During the progress of the American war every successive loan was obtained on more onerous terms than the next preceding ; (juite the contrary was the case during the war at the close of the century, when every successive loan was obtained on easier conditions.' And when, in 1783, a man of great consequence exclaimed : " Either the nation must put an end to its debts or the debts will put an end to the nation, ""^ the historian of English finances, Sir John Sinclair,3 replied with prophetic words, then as he did twenty years later : " Posterity will laugh at the foolishness and shortsightedness of the states- men of today who venture to assert that we have entirely exhausted our resources." § 478. But it is a long way that has to be accomplished before this point is reached. Want, violence, breach of faith, straitened finances, these are the conditions amidst which the evolution must proceed for centuries before the requisite legal basis of public credit and the free movement of capital which comes of law and order can be achieved. So long as the authority of the sovereign, like all other public authority during the Middle Ages, is still encumbered with the swaddling bands of private law and private-law rela- ' William I'lavfair, the editor of Adam Smith's work, writes to this effect in the year 1805, and adds (vol. iii. p. 445, note) : "An effect has taken place in England which nobody expected and which it is not easy distinctly to explain." ^ Hints Addressed to the Publie on the State of Our Finances ( 1 783 ) . 3 The History of the Publie Revenue, vol. iii. p. 21 1 (3d ed., 1804 ) . 650 THE SCIENCE OF FINANCE. tions, SO long does the public credit also continue to lie latent under the form of the king's priv^ate credit, and this latter bears all the characteristic marks of its time, in the way of indebted- ness and pecuniary straits. The first king whose debts history records is Henry III. ; he had pawned everything, crown jewels, robes of state, even the casket containing the relics of St. Edward ; he was so beset with debts that he could scarcely appear in public without being assailed by the shouts of his creditors ; he is even reported to have publicly declared his want to be so great that it would be a greater deed of charity to give money to him than to a beggar at the door. A hundred years later Edward III. (1340) disclosed to Parlia- ment that he had borrowed so much money on his personal security while abroad that in case it were not repaid he would be obliged to return to Brussels and stay there as a pledge to his creditors. The grandson of Edward III., Richard II., was the first king' who applied to Parliament for aid in raising the money necessar}' for a campaign against France. But in vain ; the Lords declared that they were willing to accompany him to the war in person, but they had no money, and the merchants were unwilling to lend except on the most unquestionable secu- rity. A further attempt to raise the required sum (;^6o,ooo) from foreign merchants by granting them the privilege of trade in England failed, and so the war had to be given up. Among the grievances on which the deposition of this king was based there stands out prominently the complaint that he had extorted money under pretense of borrowing. Henry V. succeeded in obtaining from Parliament (14 16) a subsidy of ;^6o,ooo to cover pressing necessities in the war in France. But as it was feared that the money would not come in fast enough, the attempt was made to borrow the money on hypothecation of the subsidy, at the same time giving three royal princes as hostages. Scarcely one-fourth of this loan could be obtained ; the king was obliged to mortgage the crown and the crown jewels to raise the remainder. ^ Rot. Pari., vol. iii. p. 122; Sinclair, vol. i. p. 384. THE HISTORY OK I'UUI.IC CRKDIT. 65 I § 479. With Henry VII. and the House of Tudor bet^nns a new era. The fiscality introduced by him was violent in the means it employed and hypocritical in its professions, but jirofitable to the commonwealth in its substantial effects, and it gradually reduced the public finances to order. Henry VH. left behind him a national treasure of ;6 1,800,000. By an exercise of sagac- ity in the punctual payment of debts he improved his credit. Henry VHI., it is true, repeatedly resorted to the dubious exj)e- dient of having a pliant Parliament absohe him from his obliga- tions. But the modern order and method of things comes more clearly into the foreground, in this department also, under Eliza- beth's rule. In 1575 the Chancellor of the Exchequer was able to assure Parliament that the whole of the old debt, which went back at least four years before the death of Henrv VTII., had been paid, with interest; and that Her Majesty's credit had hereby grown stronger both at home and abroad than that of arry other prince, because she had kept her word to everybody, which many princes had not done. In return for this the queen desired that her prerogative of granting monopolies should be left intact, as being "the most beautiful flower in her garden and the richest jewel of her diadem." For this purpose she also revived an old law, of the second year of Richard II., which recognized the right of the crown to lew forced loans and left the decision as to what constituted a "reasonable excuse" in the discretion of the crown. For this purpose she had to go into the money markets of the continent — Hamburg, Cologne, Ant- werp^ — ^and pay high interest (10-12 percent.) even for small sums, which could even then be obtained onlv on the securit}- of the City of London and the personal securitv of her own min- isters. Such was the case until the increasing wealth of the country, the parsimony of the administration and the growing credit of the crown made cajiital available at home. The turbu- lent times of the seventeenth centurv involved the English national credit in vicissitudes of the same kind as the rest of the political system. This came to a close with the Revolution of 652 THE SCIENCE OF FINANCE. 1688, and an orderly system then began to be introduced into the management of the public debt, such as to inspire its historian with the conviction,^ quite in the spirit of the time, that Henry V. would never have been hindered in his glorious campaign by lack of funds if the system of funded debts had been in existence in his time. § 480. The struggle against the French power in Europe and in the colonies, the struggle against the independence of the English colonies, and, finally, the struggle against the French republic and empire, were the causes which kept the English national credit on the stretch throughout the course of the eighteenth century and down into the beginning of the nine- teenth, and so occasioned the search for and the finding of new resources in the use of it. These sources of revenue only grad- ualh' reached the full productivity which they had at the begin- ning of the nineteenth century. The stability of the public credit, as well as the country's wealth of capital, had to devetop for a full hundred years before the point of saturation was reached, before the state could stand independently on its own credit and the country on its own domestic capital. The reign of William III. opened amidst financial difficulties which had been aggravated by the war. The English were not accustomed to heavy burdens of taxation, and "did not know that no nation has ever enjoyed civil and political liberty with- out paying dearly for these blessings." Moreover, the custom- ary revenues declined in consequence of the war. The same taxes which yielded net receipts of ;^2,ooo,ooo before the Revo- lution, yielded in 1693 only ;^"i,ioo,ooo, and in 1695 orilv i!^8i2,- 000. Of taxes previously in existence, the hearth money alone had been remitted ; new duties and excise taxes had been intro- duced, which in 1693 yielded not half a million, so that the aggregate receipts of earlier times were not nearly equaled. The growth of political parties was one cause of this result. Dave- nant computes that the sudden changes in the administration of 'Sinclair, vol. i. p. 401. THK HISTORY OF PUBLIC CKKDIT. 653 the excise, due to the revolution in political parties (to cite one out of a great number of instances in the national administration), brought about a decrease of more than one (juarter of a million pounds. Great defalcations came to light. In 1701 the lower house found it necessary to pass a resolution that: "It is noto- rious that many millions have been j)aid to His Majesty for public purposes without their being, so far, accounted for in any way." We can comprehend the necessit\' of the debts that were incurred, even without resorting to the explanation afterwards brought forward by Bolingbroke that they were incurred in order to bind the propertied classes to the new government. In 1 7 10, writes Davenant, the government was in the position of a debtor reduced to such extremities that the creditors were squeezing the very blood out of it ; the citizens had withdrawn from trade and given up commerce because the wars inter- fered with the business, and had become usurers, lending their money to the government. As early as 1697 Parliament passed a law to control the brokers, who were put under oath in order to remedy the ill consequences of the unfortunate traffic in securities. § 481. At the outset the form of public credit employed was that in v^ogue under Charles II.; the taxes granted by Parliament were^ anticipated by pledging them. Presently a change was made to the system of rents or annuities, patterned after the Dutch model. In 1692 an attempt was made to borrow one million by this method, on annuities to run ninety-nine years, at 10 per cent, until 1700, and 7 jjer cent, after that date; but it was impossible to raise the full amount on these conditions. The following year one million was borrowed on annuities of sixteen years' term, with annual j)ayments of 14 percent, and a lottery feature added. Life annuities were also sold (at 14 per cent, to terminate with the life of a single person, at 12 ])er cent, for the life of two persons, and 10 per cent, for three, no regard being had to the age of the j)crson taking uj) the annuit\). The 654 THE SCIENCE OF FINANCE. lottery also came into vogue ; the opposition, even at that time, styled it the destroyer of industry and sobriety, and ascribed to the Dutch the intention of undermining the virtue and thrift of the English by introducing this institution among them. In 1697 the Chancellor of the Exchequer, Montagu, invented the excheq- uer bills, issued to some extent in denominations of five and ten pounds, as an expedient for remedying the scarcity of money while the recoinage was going forward. The government bor- rowed from the Bank of England and the East India Company, on occasion of granting them their privileges, 1.2 million and 2 million pounds respectively, for which they received 8 per cent, interest. The entire national debt at the close of 1701 amounted to 16.4 million pounds, and the annual interest charge on the debt to 1.3 million pounds. Only so much of this was accounted a permanent debt as was borrowed from the two companies above mentioned, together with a sum of .66 million pounds carried over from the reign of Charles II. Anticipation of future tax revenues and the sale of annuities remained the staple forms of public credit. The rate of interest declined gradually ; at times during the reign of Queen Anne it was only 6-5 per cent. B\- the end of 1714 the permanent debt to the companies (to which had now been added the South Sea Company) amounted to 20.50 million pounds; to which is to be added annuities to the amount of 26 millions (one-half of this being lottery annuities of thirty-two years' term) ; and finally there was a floating debt of five million ])ounds, which it was esti- mated might be converted into a funded debt of an additional two millions. The debt therefore aggregated 54 million pounds, with an interest payment of 3.35 million pounds. Next followed several decades of improvement in the national credit and of decrease of the debt. At the close of 1727 the debt amounted to 52 millions, with an interest charge of 2.2 mil- lions ; by the end of 1739 it was only 47 millions, with a yearly charge of 1.96 millions. In 1737 Sir John Barnard was able to submit a scheme for reducing the interest on the greater part of the redeemable annuities from 4 to 3 per cent., a measiu'e which THK HISTORY OF PUBLIC CREDIT. 655 was adopted ten years later.' The 3 per cent, stock, during the succeeding years, stood nearly at par, never below 89. About this time it becanie the fashion to issue stock with an integral rate of interest and at a fluctuating price ; the 3 per cent, secur- ities continued to be used even at a later time, when the state could sell these securities onlv at a discount of 40 or 50 per cent. The use of life annuities and lotteries still continued, especially in seasons of great expenditure and straitened finances ; they^ were held to contain something of the nature of douceurs to the creditors, spices to tickle the palate of the investing public. Also loans .from the privileged companies, who received in return new privileges or an extension of the term of the old, continued to be a fiscal expedient which could be of but relatively slight jjrofit to a state whose credit was good. In return for the exten- sion of the privileges of the East India Company for fourteen vears (1766-80), the state received ;^ 1,000, 000 at 3 per cent, interest; this was in 1 743 when 3 per cent, stock stood at 97. § 482. From this time on heavier demands on the state's credit occur from time to time, on account of war expenditures ; the heavier demand ])ushes the rate of interest uj) above the nor- mal rate of 3 percent., sometimes very considerably ; but greater and greater sums were continuallv demanded, and the influence of this demand to injure the national credit grew relatively less as time went on.^ Contemporaries were readily led to see only 'Montesquieu (Esprit des Lois, livre xxii. chap. l8) points to the interest reduction effected by England as an example to be followed. If, says he, a state is in possession of a credit which has never been shaken it can do what one of the states of Europe has so successfully accomplished, viz., lay in 'a great stock of ready money and offer all its creditors payment in full, with the alternative that they may accept a reduction in the rate of interest. ^Justi {Staats7virthschaft, vol. ii. p. 432) speaks of this with admiration : "When a state's credit is perfect it is generally true that nothing is easier than to raise anv sum required, whatever necessity may arise ; it need only he published that the state wishes to raise so or so much money, and creditors enough will appear and freely offer their money." He cites Holland and England as examples. Although the state was already burdened with very large debts it is to be noticed that, especially in England, when the government, " during the late war," opened a subscription for a loan, there were within a few hours so many creditors offering to subscribe that several millions had to be declined. 656 THE SCIENCE OF FINANCE. the dark side of these increasing burdens ; but for the historian it is not difficult to recognize a great advance in the fact that such increasing burdens could be borne at all, and that a con- stantly increasing strain on the public credit can be met. More than that, from the historical point of view it is possible to see the mutual relation of cause and effect between this increasing capacity of the public credit and the increasing demands of the state ; it is possible to perceive that these national demands could not have grown as they have done if the state had not had such a credit to fall back on. The Seven Years' War (175 5-1 762) burdened the nation with a yearly interest charge of 2.50 million pounds, but at the close of the war the countr}- was in a flourishing condition. The American War of Independence with its consequences, during the years 1776-1784, created a new interest charge of 5.20 mil- lions, so that the entire interest charge by that time amounted to 9.70 millions, and the principal of the debt to 257 millions. But during the years 1793-1801 alone the debt increased by 327.50 million pounds (face value, for 21 5.40 millions actually received). And finally, during the years 1802-1815 the debt increased by 260 million pounds. The growth of the debt was as follows : Year Principal Interest (million pounds) (million pounds) 1792 239.66 943 1802 537-65 25.30 1815 861.04 32.65' During the period 1793-1815 the taxes rose by a steady pro- gression from 20 million poands to 72 million pounds. We can appreciate the magnitude of this burden of taxation if we call to mind that it is only very lately (since 1883) that an annual amount of 72 million pounds has been raised by taxation in Great Britain ; and this after an interval of seventy years, during which the popu- lation of Great Britain (exclusive of Ireland) has increased from ' The lowest point reached by the three-per cents was 47-47^, in 1797-8. — Leroy- Beaulieu, Traite de la Science des Finance, vol. ii. p. 435. Compare this table with more detailed computations given by Porter, Progress of the A'aiioti (1838), sec. 4, chap. ii. p. 291. THE HISTOKV OF I'UHI.IC CREDIT. '3/ I 2.50 millions to 3 I millions, and the country's wealth increased in an unparalleled manner, while at the same time the value of money has very aj)i)reciablv declined. § 483. During the severest test to which the national credit of England has been subjected, the appeal to the public credit was accomj)anied by a remarkable strain on the j)cople's tax- j)aving capacitv. A hundred years before that time the govern- ment was engaged in great financial efforts to cancel its debts. In the course of development of its credit every civilized state reaches a point where the necessity of redeeming its debt is no longer present to the thoughts of its creditors. It is the {)oint at which, in the course of history, the public credit diverges in its essential character from that of j)rivate credit, where con- fidence in the permanence, the immortalitv of the state (as con- trasted with the physical person) comes to ])rcvail. The neces- sity previouslv present, of providing for the claims of creditors bv securing the redemption of the debt in some specific way, is replaced bv a free choice of redeeming the debt or not. Annu- ities with a short term and life annuities have, in England, since the beginning of the eighteenth century given place to long-term (ninety-nine years') annuities and the like. The ever-recurring and ever-increasing need of loans swells the aggregate sum con- tinually until it has now become an important duty of the finan- cial administration to take thought and put a stoj:) to its over- growth by a systematic pavment of the debt. Radical schemes for this purpose were brought forward as early as the times of Queen Anne and George I. The expedient of a reduction of interest was first applied on a large scale by Robert Walpole, when, in 17 16, he converted the 6 per cent, debt to a 5 per cent., and with such success as to have no need of the capital which he had secured from the bank for the operation. This conversion made so favorable an impression even on the creditors that one of the largest capitalists told the minister' that while he lost in the rate of interest it seemed to him that his ' Sinclair, vol. i. p. 485. 658 THE SCIENCE OF FINANCE. capital was all the more securely invested. His operation had appended to it a provision that the sum hereby saved in interest was to apply to the redemption of the debt, and from this measure, therefore, dates the sinking fund. The principle of the sinking fund is a statutory provision imposed by the government upon itself as if to bring the external pressure of the law to bear upon the vacillations of the times and of its own resolutions. It is a good resolution seeking support in a formal declaration, and continues to be practiced until it presently appears from experience that this formality is too feeble to resist the force of circumstances, though it may be strong enough to act as a vexatious obstruction. From 1716 to 1728, for example, 2.70 million pounds of the debt was canceled, but in the next succeeding 3'ears new needs came up, so that in 1732 Walpole himself was constrained to cover the shortage in the land tax (which he had reduced in order to gain the support of the landlords) by taking half-a-mil- lion from the sinking fund. So (wrote Price at a later time) the sinking fund, the only hope of the nation, was murdered prema- turely and cruelly by its own father. § 484. The superstitious belief in the mechanism of the sink- ing fund retained such a hold, however, that even as late as 1783 an authority in finance could assert that it was immaterial how high a rate of interest a nation had to pay for its debts, inasmuch as the higher the interest the sooner will a properly organized sinking fund cancel the principal. Eminent authorities in finance, though differing somewhat in detail, were enthusiastic for the plan, — Sinclair, Price, the younger Pitt. Price created some- thing of a sensation by his mathematical exposition of the scheme ; Sinclair was agreed with him in the astounding calculation by which he showed that the state, by means of a sinking fund of one million a year at compound interest, would in sixty years cancel a principal of 3 1 7 millions of 3 per cent, stock. Pitt clothed the idea in the form of law and made one of his elocjuent speeches^ ' Speeches of the Right Honorable IVilliam Pitt in the House of Commons (2d ed. 1808), vol. i. pp. 217-237. THE HISTORY OF I'URLIC CREDIT. 659 in the House of Commons (March 29, 1786) in su])|)ort of the proposition that "a sum of one million annually be granted the Commissioners of the Sinking Fund to be apj)lied to the purchase of national securities with a view to discharging the j)ublic debt of the country." This contrivance had been the wish and the hope of all men, said Pitt ; he himself was proud that his name was to be inscribed on this strong pillar of the national credit and prosperity. A few years later these brave hopes were brought to grief by the war which Pitt waged against France, and the national expenditures which it involved. Even as early as 1772 a reply to Price's scheme had well remarked that taxes are taken, not from a dead, insensible fund, but from the living source of the labor and tax-paying capacity of the people. ' Sinclair had himself anticipated the bolder objec- tion that the increase of the wealth of the English people which went hand in hand with the increase of the debt might make it more advantageous to apply the amount to the promotion of industry and wealth under state supervision instead of to the sinking fund,^ and had in this connection made a sharp attack on Adam Smith, in defense of what the latter had named the Mer- cantile System. The most effective method for reducing the debt during the first half of the eighteenth century continued to be that adopted by Walpole in 17 16, namely, the reduction of the rate of inter- est, effected by terminating the terminable bonds and by conver- sion. But when the 3 per cent, rate had been reached it became the custom to regard this as the normal rate and gradually to bring the entire debt formally to this rate, in spite of any fluctua- ' Remarks on Dr. Price's Appeal to the People {1772), pp. 8-10. In scientific litera- ture this view gains ground only very gradually. Sismondi, Nebenius and Lotz advo- cated the view. Sismondi {Nouveaux priiicipes (Tecotiotnie politique, 18 19, vol. ii. pp. 241 et seq.) says: " Quelque independance qti'on pretende assurer a une caisse d'amor- tissetnent,elle fait toujours partie de r Etat,elle est toujotirs soumise aux lois; etV experience a deja prouve que dans les moments de detresse un emprunt a la caisse de f amortisse- ment, tin emploi irregulier de ses fonds, sont des ressources si faciles, qu'aucun gouv- ernement ne saurait se promettre (f avoir assez de fermeti pour s^y refuser toujours." On Nebenius and Lotz see below (sees. 512, 513). ^ Vol. i. p. 522. I 660 THE SCIENCE OF FINANCE. tions of credit. Sinclair criticises the loans placed during the war of 1755-62 because they were issued at 3 percent, interest and much below par. ^ If these debts had been contracted at a high rate of interest, according to Sinclair, the country might have saved 12.50 millions; since it would in that case have been possible to borrow at a lower rate after the return of peace, and so pay off the old debt.- § 485. As a contrast to the mature development of public credit which England shows us during this era, we will turn now to the youngest among modern civilized states, youngest in point of political power as well as in the development of its industry and credit, but for our purposes practically the most important, viz., the Prussian state. While Great Britain exhibits the characteristic features of a stable and productive national credit as earlv as the first half of the eighteenth century; while that countrv came out of the Seven Years' War in a flourishing condition at the middle of the century, after having contracted enormous loans ; while it was able even during the first half of the eighteenth century to relieve its finances bv a reduction of interest that resulted in the adoption of 3 per cent, as the normal rate, and its retention for a cen- turv-and-a-half since ; while it has consequently outgrown all the primitive methods of covering extraordinary expenditures of the state, anci retains but a single one of the expedients handed down from earlier stages of growth- — the suspension of specie payments by the Bank of England on February 26, 1797 — an expedient which, even at the end of another century, has not been made obsolete by the financial development of the most advanced nations ; while all this is true of England, a comparison (which ' Vol. i. p. 464. ^R. Pauli {Geschichte Englands seit den FriedeHsschliisseti von 1S14 und 1813, vol. i. p. 329) says: " It makes one's head swim to be confronted with proofs of the dis- proportion which has always existed between the nominal value of the securities and the actual receipts from the loans; the loans issued between 1793 and 1816 amounted to ;i,"586,697,433 on paper, but they actually yielded only ^^339, 13 1,500." This over- statement is {5rol)ably due to the fact that to the historian, simply as such, this class of facts are not very clear. THE HISTORY OF PUBLIC CREDIT. 66l will carry US several centuries backwards in English history) will show us the youthful German nation meetintj^ the fiscal demands of its struggle for national existence bv means that belong to an essentially earlier period. The expenses of the first two Silesian wars' were for the most part defrayed out of the war treasure which Frederick William I. had left to his son, amounting to 8."0 million thalers. To this is to be added funds in the two treasuries of more than one mil- lion thalers. But. 1.50 million thalers in jjlate, which the royal palace contained, also gradually to6k their way into the melting- j)ot and were converted into coin. The King contracted a debt of 1.35 millions to the Electorate for the second Silesian war, which he discharged after the close of the war. Prej)aratory to the third war there had again been ( 1756) accumulated in the treasury a sum of 13.38 millions, and a new loan of 3.57 millions was had from the Electorate. Apart from about one million con- tained in the "new" trea'^ure, and set apart for the mobilization of the army, the funds with which the great war was begun amounted to 18 million thalers. These funds were exhausted by the end of 1757. ■s^ 486. The fiscal expedient which was next resorted to is a barbaric one. It marks the cultural level of a state with no credit and struggling for existence with brute violence. Resort was now had to debasement of the coin. First gold and then silver coins of light weight were struck, in the ex])ectation that a debasement carried out in secret would pass unnoticed on the strength of the confidence which the Prussian coins had earned, and with the further intention of sparing the home country as far as possible and of issuing the money in the territory of the enemy. Any scruples entertained by the king and the higher officials as to this measure affected the result but slightly; more than half- a-thousand years earlier the German Em])eror, hVederick II., had aptly characterized the curse of uncertainty of the coinage in a rescript to the citizens of Nuremberg.'' But the necessity of the ' Riedel, Der brandenbiirgisch-prcussische Staatshau shall, pp. So, ct seq. ^In talibus .simililudinibus et tantjuam indemnitatibus monetarum danina latent 662 THE SCIENCE OF FINANCE. state was pressing. The contrast at this point with England and Holland is as instructive for the historical study of the public credit as it is serviceable for the pedagogic purposes of the reformer. While the debasement of the coin by Frederick the Great was aimed at the neighboring German states, it is to be added that these states presentl}' found themselves tempted to meet him and even outbid him on this treacherous field. In Wurtemberg, on the Rhine, in hither Pomerania, in Brunswick, etc., the governments sought to make head by the use of the same expedient against the inundation of Prussian coin. Quite naturally, in the course of the long continued war, the Prussian countries were also not spared the infliction of the debased coin. After the close of the war the light-weight coin was formally rated at its bullion value, and as a measure of transition a "new Brandenburg money" was introduced, which was to be employed in the discharge of the obligations entered into before March i, 1759, but at a rate 41 per cent, above its nominal value. The officials suffered in an especial degree from this calamity. Since the close of 1757 they had received no payment of salary, but only treasury certificates to be redeemed upon the return of peace, which declined in value constantly from 3'ear to year. In 1763 the redemption of these certificates began, but only in the "new Brandenburg money" in which for the time being cur- rent payments of salaries were also paid (consequently at 40 per cent, reduction). Besides the debasement of the coin, some help was also derived from war contributions (which fell especially on Saxony and Mecklenburg), from the English subsidies ( ;^670,000 annu- ally, 1758-61), and finally from the quasi-contributions of cor- porations within the country. Under this latter head are to be named the loans which the king obtained from all bishoprics and chapters, from the towns, and, towards the close of the war, from the provincial estates of Magdeburg. universalia et ex ipsis generalius provenit dispendium provinciis et hominibus quam ex guerra vel causa aliqua temporis sive aeris particulari (Ried, Cod. Ratisb. vol. i. p. 325). Cf. K. W. Nitzsch, Mhiisterialitdt utid Biirgerthnin im 11. und 12. Jahrhundert (1859), p. 386. THE HISTORY OF PUBLIC CREDIT. 663 § 487. After the war the financial policy of the great king was permeated by the conviction ' that more effective provision must be made against such exigencies in the future. He saw such a provision in the accumulation of a national treasure which should go farther than the last one. He sought a means for the accumulation of such a treasure in a more effectual administration of the excise and the ta.x monopolies ; into which he introduced the more highlv developed methods of foreign countries and which he to some extent suj)plemented with fiscal expedients that — as, e. g., the lotteries — had been discarded by more advanced states, especially by England.^ By 1 766 the greater treasure of the king contained 18 million thalers and the petit treasure over one million. Down to 1780 the great treasure increased till it nearlv reached the sum of 32 millions ; at the same time the petit treasure, destined for the mobilization of the army, had received 4.33 millions. In 1786 Frederick H. left behind him a national treasure aggregating 55 million thalers. ^ In the meantime he had carried on the war of the Bavarian succession, which, according to the king's own account, had cost 17 millions. During the later 3-ears of his reign the national income reached a yearly net average of nearly 20 million thalers."* Of this 2-3 millions were turned over to the treasure ; for military expenses during the years 1 784-1 786 12.50 millions a year were appropriated, for the civil service and the court not quite 4 millions, for the crown about 220 thousand thalers. Income and expenditure remained in somewhat the same relation under Frederick's successor. During 1 786-1 796 about one million yearly, on an average, was turned in to the national treasure. But the art of carrying on wars and still replenishing the national treasure had, as so much else, disappeared with Frederick the Great. The unsuccessful wars against France, in ' Riedel, Staatshanshalt, pp. 96 et seq. ' Cf. William Pitt, Speeches, vol. i. p. 230. ^Biisching gives (what is an exaggeration) no million thalers; others give simi- lar sums. ^Riedel, p. 122. Less reliable accounts place it as high as 46 million thalers. 664 THE SCIENCE OF FINANCE. 1792-1795 especially, called for great expenditures, and so the national treasure was exhausted by 1794. The financial support which had been looked for from England, Holland and the German Empire failed, and Prussia therefore had to face the necessity of resort to extraordinary measures.' Frederick William I. had, in 171 5, relinquished the right of collecting the poll tax, which had so frccjuentlv been resorted to by his predecessors in times of need, but with the reseryation^ that it might be leyied in case he had to go to war for the [)res- ervation of his own territory. This poll tax which had eyen in the days of the Great Elector been, in point of fact, a j)ro- gressive income tax, was now advocated by persons who stood near the throne, because they were anxious to avoid the alter- native of a contraction of debts. It was at the time when the income tax was called upon to plav a great part in England to meet the war expenditures. In Prussia the imposition of such a burden upon the subjects was sought to be avoided and a loan was preferred ; this means was now for the first time employed on a moderately large scale. The king had scinon '" laiides- vdtcrlichoi Hcrzoi die GemigtJiming vcrsclwfft, Dcro getrciic Unter- tliaiicn I'o/i Auflagoi loid Lastoi, die ili/ie/i sonsf zur FilJining dieses iiberaiis kostbaren Krieges, zi'ie in a /id ere n Stciate/i, lidtten aiifgebiirdet iverdeiL miissen, glilcklicli be f re it sn Jinbefi, nnd ini Gcfolge dieser woJikvollenden Gesinmingen geliet a/te/i jetzt AUerJwchstdero Absiclit daJiin, beide Zu^eeke, Abzaldimg der Ziiiseii mid Abzaidioig der Cnpi- talieii, »nt fernerer Beiseitesetzioig eiiies Beitre/gs der Unterthane/i, bloss dnreh Ainvcndung eines Theiles der Staatscinkiinfte erf idle n zu lasseny^ In the foreign money markets, in 1794, eight million gulden of the debt was jjlaccd in Holland ; and in Frankfort on the Main, in i 794 and 1795, five million gulden was placed each of the ' Riedel, pp. 192 et seq. ^ Riedel, p. 63. '^Allerh. Cab.-Ordrc, of January 20, 1796. Riedel is (jiiite at one with this posi- tion : "Des Konigs staatswirthschaftliche Einsicht wie seine landesvaterliche Gesin- nung striiubten sich gleichmjissich gegen eine solche Massregel " (viz., the capitation tax). THE HISTORY OF PUBLIC CREDIT. 665 two years ; at home the Society of Maritime Commerce took u[) two to three million thalers. This, totj^ether with a few smaller loans, seems to have touched the limits of the national credit, and before the year was out an attemj)t was made to supply the missint^ funds by the dubious method to which the great king had resorted in the financial straits of the Seven Years War — the issue of light coin (the minor coins). These light coins were, now as in the former instance, especially intended for foreign countries, where they were put in circula- tion by being paid to the trooj)s ; but the light coin })resently returned to the Prussian territorN'. It is true, the plan of the Minister Struensee embodied a ])rovision that this money would be receiyed in sums of 25 thalers, 50 thalers, etc., in pa\nient for national bonds bearing 4 per cent, interest ; but this sim])lv seryed all the more certainly to insure their return home. The conclusion of peace at Basle, April 5," 1795, was to some extent brought about by the financial straits of Prussia.' § 488. The national debt which Frederick William II. left to his successor in 1797 amounted to fort\-eight million thalers. Twelye millions of this had come down from the reign of Fred- erick the Great, 5.75 millions had been assumed by the state in connection with the new acquisition of territory, and 2.33 mill- ions were arrears of subsidies, granted but not yet disbursed, for the assistance of certain proyinces, communes and individuals; this had been occasioned esj^ecially by the distress of 1794-95. ' Riedel holds this to be a justification of the conclusion of peace at liasle, as opposed by J. von Miiller, who taxes the king with betraying German interests. On the other hand Von Sybel {Geschichte der Revolutionszeit von /"jSq bis ijgji, vol. iii., 4th ed., 1877, p. 367.) points to the relative magnitude of the exertions which were put forth by various nations at that time, and also indicates what are the moral and spiritual (jualities which go to make a nation more or less capable of meeting the demands made upon them at such times and in such circumstances, when he says : "The financial and military exhaustion of the state was imminent and was apparent enough to restrain the government from any fight for a foreign interest ; but as regards the question of efforts put forth for self-preservation it is to be said that the exertions made by Prussia during the period since 1792 did not amount to one-third of the exertions by which France had risen in the course of a single year from absolute impotency to the leading position in Europe." 666 THE SCIENCE OF FINANCE. The remaining twenty-eight millions consisted of three approx- imately equal parts : the debt held at home, foreign loans, and floating obligations for army supplies. It is to be added that an additional three millions had been canceled during the king's lifetime. The revenues from the salt business were set apart for the gradual discharge of the debt, the management of the business being connected with the Society of Marine Commerce, but on account of previous appropriation of these revenues for other purposes there was but half a million yearl)^ (1796—97) left for the discharge of the debt. This was to be supplemented by the revenue from the lately revived tobacco monopoly, esti- mated at four to five millions, but this revenue came to an abrupt end with the change in the government. The discharge of the debt proceeded very slowlv from this time on, so that during the years 1797 -1805 there were redeemed in all seven millions. In addition to this it was found impossible to meet the maturing obligations of the foreign loans without contracting new debts. The second Frankfort loan, for example, which matured January i, 1796, was a lottery loan payable at the rate of one million gulden a year, and therefore to be discharged in five years, beginning January i, 1797. The first Frankfort loan of five million gulden bore interest, but it, too, was payable at the rate of one million gulden a year, and therefore to be discharged in five years, beginning February i, 1799. The case of the Dutch loans was similar. The first of these, contracted June i, 1793, was pa_yable at the rate of one million gulden a year, beginning June i, 1799; the second, dated April i, 1794, was payable 800,000 gulden a year, begin- ning April I, 1800. Similarly with respect to the loans of Kassel and Hardenberg. These were managed by the Society of Marine Commerce (under the direction of the Minister Struensee) as a banking establishment the purpose of which was partly to find new creditors and partly to furnish the funds for the new loan out of its own capital. The society placed 4 per cent, securities on the market, payable after one year on notice from either the creditor or the debtor, and in this way secured THE HISTORY OF I'UIiLIC CREDIT. 66/ considerable sums for the state from private parties ; it was able gradually to reduce the interest to 3 per cent, and had, by the end of 1805, loaned the state more than thirteen million thalers. But when the peace came to an end the government was again brought face to face with the traditional fiscal expedients of distress. Besides obtaining two loans in Kassel and Danzig, aggregating about two million thalers, resort was had to the issue of five millions of treasury notes (Order in Council of February 4, 1806), of which one million had already been pre- sented for redemption by June i, 1806, and the government then turned with renewed energy to the ancient practice of issuing light coin (minor coins). From December i, 1797, to the end of October 1805, there were coined 14.70 million thalers, and from October 1805 to 1806 an additional 3.50 millions; altogether rather over 18 million thalers (for the most part groschens)' on the issue of which the treasury computed a profit of six million thalers. Then, when the misfortune came and reduced the Prussian territory by three-fifths, this mass of depreciated treasury notes and minor coin and a debt of 48 million thalers were crowded together within the reduced boundaries, and the exhausted national treasury was in addition required to pay a war indemnity of 120 million francs to the victorious enemy. § 489. The raising of this war indemnity served to show the full wretchedness of a nation subjected to a foreign conqueror and with its wealth and credit in an undeveloped condition. ' The mark of fine silver was coined into a nominal value of 21 thalers, while it was actually worth only 13}^ thalers. Struensee persuaded the king that "the issue of minor coin to any amount whatever, so long as the public acce])ted them, would not alter the essential character of the currency if there only were good, full-weight silver coin in circulation." A I'russian correspondent of the Allgenieine Zeitung (Septem- ber 28, 1798) says : "An effort is being made in Prussia to bring up the treasure again, and to make some respectable preparation for an emergency ; among the measures taken for this purpose is the minting of minor coins, which undoubtedly means a reduction of their value, and by which means, as we are assured by experts in finance, the king will gain half a million yearly. In point of fact the worst money is the best, inasmuch as it does not go out of the country and we are therefore sure always to retain an adequate circulating medium of exchange in the country. Base money alone has created the armv and the manufactures of Prussia." 668 THE SCIENCE OF FINANCE. The indemnity was the price to be paid for the evacuation of the country in September 1808, but this price could be paid only in j^romises, and as security for its payment the enemy continued to garrison the fortifications on the Oder. It was stipulated^ that of this sum 70 million francs was to be paid in mortgages on domains, and the remaining 50 millions in bills of exchange. The domanial mortgages were issued in 1809 by the various provincial establishments, after the king had abro- gated the edict making the domains inalienable, and had handed over a suitable projDortion of them to these establishments as security. The bills of exchange were issued by the bankers and merchants of the country, and were payable in monthly instal- ments of four million francs, beginning with Nov^ember, 1808. The difficult task of raising these sums fell upon the i\lten- stein Ministry, after Stein had resigned in November 1808. The new ministry succeeded only to a slight extent. On December 27, 1808, they issued a domestic premium loan of one million thalers (scarcely one month's instalment), but only 0.75 million had been disposed of b}' iSii. Then an order was issued, February 12, 1809, requiring the delivery of all articles of gold and silver in return for certificates payable in coin ; any- one who paid one-third of the value of the articles in question as a tax to be exempt from the entire amount of this forced loan. By 1812 there had been turned over to the government a bullion value of not quite 1.50 million thalers; the one-third tax yielded less than one million, b}^ far the greater portion of this (as much as 110,645 thalers) being paid in coin certif- icates, which were of no avail for meeting the immediate demand. On February 12, 18 10, the government issued a loan which embodied a very peculiar mixture of free choice and com- pulsion. It demanded 1.50 million thalers which might be paid in the minor coins, and bearing 5 per cent, interest ; in case the amount were not forthcoming voluntarily the residue would be raised by compulsion. This alternative was not emplo3-cd, as nearly the whole amount was obtained (1.39 millions). ' K^ut,^ Gcschichle der preiissisclioi StaatsschulJen. THE HISTORY ()I>- I'UIU.IC CREDIT. 669 Negotiations had been in progress with Holland since the fall of 1807. These negotiations came to a conclusion in March 1 8 10. But while the reciucst had been for 32 million gulden, the transaction brought in by 181 2 an aggregate of scarcely four million gulden. So it happened that of the aggregate of 50 million francs payable prior to November 1809, in monthh' instalments of four million francs, only 41.30 million francs had been j:)aid by May 1 8 10. There were arrears (aside from interest) of some- thing more than nine million francs. Further, after the pay- ment of the 50 million francs, the 70 million francs secured by the mortgages on domains were to be paid off in monthly instalments beginning November 8, 1809, and closing Aj)ril 8, 181 1. Napoleon's importunity in the midst of this embar- rassment led Altenstein into the scheme of ceding the j:)rovince of Silesia to France in lieu of the remainder of the debt. But at this point Altenstein was replaced by Hardenberg. Then the property of the church was confiscated in order to be sold along with the national domains. But the outcome of this transaction, too, was insignificant. In order to find buyers at all the government accepted national bonds in pa^•ment of not more than two-thirds of the price. Still, the sales amounted (January 7, 1809, to June i, 181 3) to not more than eight mil- lions, and of this not one-tenth was paid in cash. The new taxes imposed since 181 1 were scarcely sufificient to help cover the current expenses of the government, to pay the salaries of the government officials, to discharge the interest on the national debt, and to pay for the keep of the French garrisons (1807- 1812. 5.84 million thalers). Hardenberg therefore was able to discharge during the year (1810-11) not more than 25 million francs of the indemnity, and at the end of May 181 1 there was still left unj)aid 59 million francs, toward which only slight j^ayments were afterwards made. § 490. There remained the li(|uidation of arrears as promised to the Prussian subjects in the edict of October 27, 18 10. As 6/0 THE SCIEN'CE OF FINANCE. there was no cash on hand, pa3'ment was made in interest-cer- tificates which were to mature in 1814 (3.75 million thalers). In salaries and pensions there were still about five million thalers of arrears dating back of March 1809, the date at which regular payments recommenced. To cover this, too, bonds were issued to mature in 18 14, besides an issue of about 1.50 millions in treasury notes. Finally, there were arrears payable on claims for supplies furnished the Russian army (1805-1807), amounting to nearly 13 million thalers. These were covered by bonds to mature in 18 16, but which were in the meantime receivable at the treasury in payment of not more than two-thirds of the purchase price of national domains and the like. Along with this went a consolidation of the funded national debt, which was also completed on the basis of the free consent of the creditors. The edict of October 27, 18 10, consolidated the various earlier obligations incurred into a new 4 per cent, security, the national bonds \_StaatsschuldscJiei?ie'\. These were not terminable at the option of the creditors ; but it was stated that after the payment of the indemnity to France and the pay- ment of the arrears of interest, a given yearly sum was to be devoted to their redemption. The measure was a compulsory conversion, whereby the more advantageous conditions originally secured by the creditors (rate of interest and repayment) were altered. Among these may be named the debts to the Society of Marine Commerce, which were originally terminable on short notice and had originated as a kind of bank account, and had afterwards, through the unbusiness-like amalgamation of the national funded debt -with the banking business of the Society,' been changed into ordinary government securities, so that they now partook of the universal distress in which the national credit was involved. At the beginning of 18 13 there were 20 million thalers of these new debentures outstanding. The remainder of the indemnity to France was canceled by Prussia's undertaking the maintenance of the French and allied armies in their transit through the country on the expedition to Russia, February 12, 1812. By June 181 2, 35 million francs had in THE HISTORY OF PUBLIC CREDIT. 67 1 this way been })aid off in supplies. France then returned the mortgages on the domains. The chief means of revenue which was now employed was a mixture of a property-tax and a forced loan. The tax was to be paid at the rate of 3 per cent, on the property, that is, not much less than the full annual income ; those who ])aid 2 i^er cent., however, were granted a remission of one-half of the remaining one-third per cent., and received in addition, to the amount of i j^ per cent, of the tax, a mortgage on the public domain bearing interest at the rate of 4 per cent. ; they would therefore have paid, in point of fact, only i per cent, on their propertv as a tax, together with i ^ per cent, as a forced loan. It has already been noticed (sec. 312) how far the receipts from this tax fell short of the estimates (25 million thalers) ; there were actually received only 4.50 million thalers. Besides this property tax there was also levied a tax on personal income (5 per cent.). In anticipation of the revenue from this tax there were issued at the middle of 181 2 one million thalers of treasury notes and 3.50 million thalers of non-interest-bearing bills redeemable after January i, 1 183. These flowed back into the treasury in the pay- ment of the property tax. The supplies to the army from March i, 1812, to IMarch i, 181 3, amounted, so far as claims were allowed by the govern- ment, to nearly 25.50 million thalers. Of this 4.50 millions were placed to the account of the property tax, and what was called "pay-certificates" \^Kompe}isatio>iserken7ituisse^ were issued to cover the rest. § 491. With the beginning of the year 181 3 all energies had to be directed to the struggle against France ; resort was then had — besides discontinuing the payment of interest to the cred- itors of the state — to an issue of paper money with forced circu- lation. Up to this time the treasury notes issued had circulated without coercion ; during 181 2 they had fluctuated between 80 and 48 per cent., and at the middle of January 181 3 they stood 6/2 THE SCIENCE OF FINANCE. at 48. January 19, 181 3, an edict increased the issue of these treasury notes to 10 million thalers and made them full legal- tender for all sums payable by the state. Their redemption was to be secured by the receipts from a new property and income tax which was to be paid quarterly, beginning with May 181 3 and running for a year and a half, and at half the rate fixed for the tax of 181 2. Although the government discontinued the further issue of treasury notes on March 5, 181 3, when eight million thalers had already been issued, while at the same time some mitigation was made in the rigor of their legal-tender quality, they stood at 25 per cent, in July 181 3. Supplies for the army were paid for with these notes, while officials were obliged to accept them in part payment (salaries and pensions of more than 400 thalers a year were paid one-fourth in treasury notes). On the other hand the treasury notes were received in pavment of the property tax. The property tax had to be given up. The voluntary pay- ments brought in but a very inconsiderable revenue. The sale of domains, which had been facilitated by the ordinance of March 5, 18 1 3, was equally ineffective in bringing cash into the treasury, because it had been decided to accept national bonds and treasury notes in payment of the domains in order to mend the national credit. There was therefore nothing left but the forced loan and the requisition of contributions in kind to the maintenance of the army. The former expedient brought in four million thalers. The courts were formally enjoined from entertaining complaints for supplies seized for the use of the army. Not until July i, 1 814, were cash payments again made. Supplies obtained pre- vious to that time were paid for in non-interest-bearing warrants, which were redeemable within the year (in 1814, one million thalers; beginning with 181 5, two millions a year), but in point of fact they were exchanged for government securities under an ordinance of March i, 181 5, at a time when the government secu- rities stood at 83-86 per cent. The legal-tender paper money was redeemed after the fortu- THE HISTORY OF PUBLIC CREDIT. 673 nate turn of events that began in 1814. The ordinance of March I, 181 5 made the sum then in circulation (about six million tha- lers, worth 85-90 per cent.) receivable at its face value in all payments to the government, and full legal-tender. The second victorious campaign against Na[)oleon was carried through without any funds for the maintenance of the troops. Resort was had to recjuisitions, even in the enemy's territory; while the English army paid for its supplies in cash. But herewith the feeble powers of the youthful commonwealth had passed what was, for a long time to come, to be the last severe test. Now succeeded a long period of growth ayd gathering of strength, during which Prussia's national credit graduallv came to maturity. i^ 492. Let us now take a look at the disposition made of the Prussian debt after the close of the war. In sj)ite of the favorable termination of the war, in s])ite of the not inconsiderable share coming to Prussia (145 million francs) out of the war indemnity (500 million francs) exacted from France, beside the indemnification received from friendly jjowers for the maintenance of their troops (50 myiion thalers), the exhausted country succeeded only very graduallv (1815- 1820) in bringing order into its debt, and even then only by the help of repeated loans obtained on onerous conditions from for- eign countries. The settlement of a great number of floating obligations had to be postponed. The first successful effort was that directed to bringing the treasur)- notes to par; they reached par January 13, 18 16. On the other hand, it |)rovcd impossible to discharge the Russian bonds which matured in 1816 (issued in 181 1, to an amount of nearly 13 million thalers, to cover the maintenance of the Russian armv during the vear 1806-7), a further extension of three years being required for this purpose. Something similar is true of the smaller loans issued during the war. In warrants issued for war supplies in 181 2- 181 4 the government owed nearly 36 million thalers; the j)avment of these was not begun until the 6y^ THE SCIENCE OF FINANCE. latter part of 1815. At the same time the option was offered of exchanging these warrants for 4 per cent, national bonds, and after the redemption of the warrants had come to a standstill in 18 1 7 the government ordered (May 7, 1818) the compulsory- exchange of the warrants for bonds which were at that time worth only 66-68 per cent., and so reduced the debt by about one-third. And still it was necessary to obtain several foreign loans. In 1817 a loan of five million gulden was obtained from the banking house of the Rothschilds at 5 per cent, interest, in order to meet earlier obligations outstanding in South Germany. A much larger loan had to be contracted on account of pressing pecuniary embarrassments in 18 18; this was arranged for with the Roths- childs in London by the Counsellor of the Finances, Rother. This amounted to five million pounds sterling and was disposed of at 7 1 .86 per cent., with interest at the rate of 5 per cent., redeemable in yearly instalments within twenty-eight years and secured by mortgage on a correspondingly large extent of domains. These conditions were accepted because the terms offered by German contractors were still more disadvantageous to the state than those obtained in London, the terms offered being interest at 7 per cent., coUaiteral security in the domains, and payment withm a short term. Still the government continued to draw on the Prussian bank, which had been a fellow-sufferer with the government ever since 1807 and had for this reason been prevented from meeting its obligations; it was not until 18 17 that the bank succeeded in returning to a payment of interest, which had been discontinued in 1807. Still, the year 1819 closed with a deficit of 13.50 mil- lion thalers, and for the years 1820-22 the deficit was computed at 27 million thalers. § 493. The royal ordinance of January 17, 1820, sought to explain the state of the national debt and to strengthen the public credit by appealing to the people for support, referring in express terms to the control to be exercised by the " Estates of the Realm," which had been talked of ever since the reform period. THE HISTORY OF PUBLIC CREDIT. Cy$ At that date the national debt amounted, in round numbers, to 218 million thalers,' and was made up of the following obliga- tions : (i) The foreign loans of 181 7 and 1818 from the Roths- childs, in round numbers 36 million thalers ; (2) the old obliga- tions of the' Electorate, dating back of 1807, amounting to 3.23 millions; (3) domanial mortgages, 5.50 millions; (4) national bonds (the consolidated national debt), 1 19.50 mitlions, of which 56.60 millions were outstanding in 1820 and the remainder was intended to cover the floating debt. The national debentures in circulation before this time had for the most part originated in a forced conversion of the obligations incurred during the war period (15.70 millions for securities and stock of the Society of ' The report submitted by the commissioners of the national debt, which was appended to this ordinance, says that an aggregate debt of 239 million thalers would be shown to exist [^motivirt sein zcnirJe^, and reports the following amounts: (l) War indemnity to P>ance and the expenses of armament down to 1813, 86.60 million thalers ; (2) maintenance of the French garrisons for five years in the three forts on the Oder, 5.80 million thalers ; (3) supplies and services rendered the French army in the campaign of 18 12, 52 million thalers ; (4) expenditures of the campaigns of 1813-1815,61.60 millions; (5) expenses of general reorganization of the govern- ment 1815-1819, 50 millions; (6) sums required to cover the deficits in 1820 and suc- ceeding rears, 31.50 millions. That is to say, altogether 287,50 million thalers. Of this amount there had been raised up to date: (i) by extraordinary taxes, 23.50 millions; (2) bv forced loans which were afterward converted into national securities, one million (forced loans, inclusive of amounts reimbursed or compensated for, amounted to 17.60 million thalers); (3) compensation received from friendlv powers for maintenance of troops, 50.27 millions ; (4) war indemnity from P>ance and maintenance of Prussian troops in hostile territory, 65.50 millions; (5) sale of domains and secularized estates, 25.30 million thalers. That is to say, the receipts from extraordinary sources aggre- gated 165.50 millions, leaving 122 million thalers to be covered by other means. To this is to be added : (i) the debts outstanding at the close of 1806, exclusive of the debts assigned to the territory lost in 1806, amounting to 49 million thalers; (2) the debts resting on the territory acquired since the Peace of Paris, amounting to nearly 68 million thalers. This makes up the aggregate debt of 239 million thalers which the commissioners of the national debt in 1820 counted up as " motivirty It is to be remarked that in point of fact this statement of the obligations outstanding in 1820, as amounting only to 217 millions, omits many items of the floating debt. On the other hand there is included in these 217 millions 35.50 million thalers of which 27 millions were to cover the deficit of the succeeding years, 1820-1822. and also 4.50 millions intended to replenish the national treasure and four millions of non-interest- bearing debt. 676 THE SCIENCE OF FINANCE. Marine Commerce alone); (5) the provincial public debts, 26 millions; (6) claims still unliquidated, i 5.20 millions ; (7) non- interest-bearing debts, 11.20 millions (including six millions of treasury notes outstanding); (8) sundry minor items. Speaking of this national debt the ordinance of January 17, 1820, said (Art. 11): "We declare this statement of .the national debt to be definitively closed. No national bond nor national debt paper of any kind may be issued in excess of the sum herein given. Should the state hereafter be placed under the necessity of taking up a new loan for its own preservation or for the fur- therance of the public good, such a step can be taken only with the advice and assent of the estates of the realm in assembly." The national bonds were to be paid off at the rate of one per cent, a year. The yearly interest-charge' amounted to 7.60 millions, the charge for the redemption of the debt to 2.50 mil- lions. The funds realized from the sale of domains were 'A review of F. Nebenius's work {Der offentliche Kredit, 1820J \\\ Hermes {\%2\, p. 160) computes the annual payments of interest by the various European states at that date. The amounts, expressed in millions of dollars-banco ( = 3 marks-banco = 4.5o imperial marks = $i.07), are : Great Britain . - . - 1^5. France . . . . . •^:>. Austria .... - 7. Russia - - - - - 5.2 Prussia - . . - . 5. Holland ----- 5. Spain, Portugal, Italy, Sweden, Denmark and the minor German states - - - 50. Total - - - . - 250 million dollars-banco. Bender {Der Verkehr viit Staatspapiereii, 2. Aufl. 1830, pp. 149 ct seq.) computes that for the year 1829 the proportion of the interest-charge on public debts to the entire national income was as follows : Great Britain -.-... Three fifths. France ...... Five-nineteenths. Russia --.-... One-ninth. Austria ...... One-sixth. Prussia --..... One-fifth. Hanover ) Baden v ----- . One fourth. Bavaria ) Wurtemburg .---.- One-sixth. THE HISTORY OF PUBLIC CREDIT. 67/ devoted to this redemption, the amount being placed provision- ally at one million a year; but in point of fact there was more than seven million thalers drawn from this source during the next three years. There still remained a yearly charge for interest and redemption of 4.50 millions. To meet this was the purpose of the tax reform of 1818-1820 (sees. 272, 275, 307, 308). The 54.50 millions of national bonds which the government had to convert into cash in order to pay off the floating debt, were not disposed of without some trouble and shrewd manage- ment. Thirty millions were disposed of through various bank- ing houses, but this was accomplished only by combining the feature of a premium lottery with the loan ; in this way the bonds were sold at their face value. The remaining 24.50 mil- lion thalers were taken by the Society of Marine Commerce at 66.66 per cent., the Society obtaining the necessary funds by negotiating a loan of 3.50 million pounds from the Rothschilds in London, bearing interest at 5 per cent.; this loan being placed at a discount of 16 per cent., and with the national bonds as col- lateral security. i^ 494. The promise contained in the royal ordinance of January 17, 1820, went too far in one direction at least. There was a miscalculation (subjective or objective) with respect to the difficulties involved in getting th^ ZnzicJiung der kilnftigeii reichs- stdndiscJicn Vcrsaimiihing, or else with resj)ect to the necessary recurrence of an occasion for borrowing on the part of the Prussian government. The result was that the actual needs of the state during the next succeeding decades led to financial methods intended to mask the fact of a new national debt, and pressing necessities which could be met only by a public loan were not met at all by the government. The first extraordinary armament in time of peace (1831), it is true, was covered by the national treasure of 1 1 million thalers. But before that time (1824) the Society of Marine Commerce had built 125 miles of public highways for which thev 678 THE SCIENCE OF FINANCE. had not been paid. In order to place funds at the disposal of this institution it was authorized by an order in council of July 27, 1832, to contract a loan of 12.60 millions in the form of premium-bonds of 50 thalers each, bearing interest at 5 per cent, and payable between 1833 and 1857. At the same time there were many undertakings properly belonging to the government.which had to be neglected or left to private enterprise. The chief example of this is afforded by the beginnings of the railroad business in Prussia. The redemption of the old debt went on; but the sale of domains was called on to contribute much more to this end than had been counted on in 1820. During the thirteen years 1820- 1833 the funds actually derived from this source amounted to 24 millions, instead of the estimated 13 millions; the funds from the tax revenues amounting only to six millions. The later progress of the redemption was very similar ; during the years 1833-1847, 38 millions were applied on the debt, of which 20.70 millions came from the sale of domains, 11.50 from taxes and six millions from interest saved on the discharged debt. In 1848 the national debt amounted to 9.66 thalers per capita of the population (16.30 million inhabitants), as compared with 20 thalers in 1822 (11.66 million inhabitants). Still more gratifying was the case of the interest-charge. The growth of the credit of the Prussian state between 1820 and 1848, together with a favorable condition of the money market, made it possible in 1830 to convert the 5 per cent, debt to 4 per cent., and to con- vert these 4 per cent, bonds again to 3^ percent, in 1838. The total interest-charge in 1833 was 6.40 million thalers, and in 1848, 4.35 million thalers. The first loan, formally recognized as such, which the gov- ernment attempted to contract, came up in connection with the calling of the United Diet (1847) ^"<^ ^^^ intended for the con- struction of the Eastern Railway [^Os^da/m'\. But, on constitu- tional and fiscal-political grounds, it was refused, and so, together with so much else of the business brought before the United Diet, was laid over until succeeding years. THE HISTORY OF PUBLIC CREDIT. 679 II. OUTLINES OF THE EVOLUTION OF THE PUBLIC CREDIT. § 495. The purpose of the foregoing survey has been to give a realistic picture of the actual course of development of public debts. For this purpose we have selected countries which are of great importance in this development, or which stand for typical stages of the evolution, such as Italy, Holland and Great Britain, making our account of the development in these coun- tries the point of departure for a discussion of the affairs of our own commonwealth and the later growth of its public credit along the same lines. Our next task is to bring out the most important facts in the history of the development, so as to indicate the successive stages in the growth of public credit. There are two features in which the public credit differs from private credit. The first of these is the relation of public author- ity to the loans negotiated for public purposes. The second is the relative permanency of the public body in quest of a loan. The sequence of development with which we are occupied depends on the development of these, two factors through the process of differentiation by which public credit comes to depart from its original identity with private credit. In the first place, then, as regards the relation of the jniblic control to the public credit, there is obviously a long step taken in advance when this public control comes to be so employed as to not discriminate in its own favor. A long course of experi- ence may be required to inculcate the expediency of using this power of control with moderation, because only in this way will confidence in the government's good faith be firmly established. But the memory is not retentive of experiences of this kind, and recurring necessity is ever anew suggesting recourse to this treacherous use of power. And while it is true that after a great advance has been made along this line the public power is used with great regard for the demands of morality, it is also true that necessity and its temptations can never be quite done away ; so that even at the height of the maturity of the state 680 THE SCIENCE OF FINANCE. and of the jjublic credit there always remains an undissolv^ed residuum, within which breach of faith backed by force must of necessity remain triumphant. As regards the other phase of the matter — -the permanence of the commonwealth as compared with the individuals who make up the state ; it is not on the fact of permanence alone, but quite as much on confidence in the continued existence of the state, that the growth of public credit depends. Long centuries of interminable struggles for supremacy precede the final recogni- tion of such a stable continuity as is raised above all the changes and vicissitudes of sovereignity and of the lives of individuals. It is to be added that it also requires a long continued growth of the commonwealth before the rulers for the time being come to recognize an element of. permanency in their own government, such as to impose the necessity of honoring the obligations of the past while they may themselves in turn transmit new obliga- tions to the future. § 496. The weight of these two elements will explain why private credit may reach a fair degree of development under the circumstances of a time and a people where the public credit is still in its infancy. The element of force acts as a hindrance until it has passed through the refining evolutionary process. The element of per- manence, while in its nature favorable to a growth of public credit as compared with private credit, cannot exert its favor- able influence at this early period because it is as yet unrecog- nized. On the other hand, there exist for a long time only oases of credit, lying within the restricted circle of commercial relations, while in the world outside the fraud and knavery of untamed natural man arc constantly confounding the struggling growth of credit.' 'The RomaHcero del Cid gives an instructive account of what were the kniglitly notiois of honor that prevailed among the chivalry at the height of the .Middle Ages, and that exerted an influence long after that time. The ideal of Spanish chivalry, Don Rodrigo de Vihar, had no money for his journey into exile. He accordingly called in THE HISTORY OF I'UIU.IC CREDIT. 68 1 The first of these striking" facts in the historical development of the j)ublic credit is therefore the j^art j)layed by the i)ledge in credit transactions. At the outset, the pledge, in public as in jjrivate credit, must be a dead-pledge, so as to secure the creditor against any attempt on part of the debtor to violate the contract by physical force. Progress is seen in the fact that the articles which serve as ])ledges presently come to be delivered into the hands of the creditor, not dc facto, but onlv dc jure ; then, little by little, comes an assignment of certain specified income devoted to' ])aying the interest on a given debt or to discharging the principal. So long as the creditor takes over the collection of this income (farming of taxes) there is an actual, and not onlv a virtual, pledge or pawn, though its terms mav be laxer than those of the dead-j)ledge. As soon as the collection of the pledged income comes to be placed in the hands of the state, the creditor's securitv is removed from its previous phvsical basis, and this step therefore serves as introductory to the stage of the mature national credit where there is no longer any mention of such a pledge. The obligation of the state and the financial means at its disposal are, at this highest stage, securities that replace anv and all pledges. § 497. The second feature of the dcvclo])ment is the length of the term for which the loan is to run. W^th respect to, this ])oint the change accomplished by the course of historical development is verv great. At the outset, before the peculiar elements of strength belonging to the public credit have come into view, the condition is always made that, just as in private credit, the debt must be discharged very shortlv — after a few months or vears ; the creditor has good ground two Jews and begged them with many blandishments to lend him a thousand gulden. As a pledge he left with them, as he said, two chests of plate which they were author- ized to sell in case they were not redeemed within a year. The chests were locke?. 165. 3 Pp. 102-104. THE HISTORY OF PUI5LIC CREDIT. 7OI place, certain conditions must be fulfilled in order to a plentiful public credit, and, in the second place, that the employment of this credit would enhance the efficiency of the available capital. Even a hundred years after Pinto's time the English writer Macleod and others have identified this moral power of credit with actual capital ( by the aid of the untenable notion of an " immaterial capital"). § 507. Leaving the English national credit and the theories built upon it, we come now to a writer' on finance who rej)roduces in his writings the results of French financial practice of the pre- revolutionary times. This is the French minister, Necker. With Pinto and the English writers the French national credit serves as a contrast to the English, and brings home to the enthusiastic admirers of the English national credit the conditions and limitations of all public credit. With the French finance minister it is his own experience that serves to bring out the dark side of this new and brilliant institution. Necker' not only opposes the favorable view of national debts that was coming into vogue in his time so far as regards the French finances. He goes on to generalize, and extends his criticism and objections to all national debts, and applies his objections especially to the English debts. He points out the disadvantages attaching to the English public credit as compared with the French. So, for example, he remarks that England owes more to foreign countries than France, with the consequence that a great part of the interest paid is consumed in foreign coun- tries. Necker lavs great stress on the divergence of interest between the state's creditors and the taxpayers. In answer to the light-hearted view that the payment of taxes to the creditors of the state amounts to nothing more than a change from one hand to the other, he remarks that the relations between the dif- ferent members of society are not like the relations between the individual grains in a heap of sand, which can be altered at will. ^ De radmiuislration des finances de la France (1785), vol. ii. pp. 371-383. 702 THE SCIENCE OF FINANCE. Is it a matter of indifference, he asks, if great changes in owner- ship are wrought, whereby the property of those who are attached to the soil and to the country is diminished and new accessions of wealth are created for the class of people known as annuitants, who can readily become citizens of any country ? The growth of national debts has done much to destroy public spirit, by increasing the number of those persons whose interest is opposed to the public welfare. Within moderate limits the use of the public debt might become a means of enlarging institutions of public utility. But the debts haye been made an instrument of political and military ambition. They have made it possible to expend two or three hundred millions, where forty or fifty millions could perhaps haye barely been raised by means of extraordinary taxes. Nations ought to enter into a compact never to contract loans in order to carry on war against one another. A very amiable wish ! One might just as well propose that the different governments should agree to discontinue the use of cannon. There is better reason to hope that the greatness of the evil itself would set a limit to it and that the nations overburdened w'ith enormous debts, and taxes to correspond, would be compelled to call a halt.' How very different is this discourse on public debts from what the financiers of England and Holland have to say on the same topic! ' It may be remarked by the way that loans were spoken of in France a few decades later as unnecessary and objectionable, in an official document of Napoleon's. In the decree on the establishment of the tobacco monopoly, of December 29, 1810 ( Anlagen to the Report of the Tabak-Enquete-Commission des Deutschen Reiches, vol. iii. Anlage xii. p. 114), there is a pompous declaration to the effect that: The most enlightened nations had resorted to national loans as an expedient under extraor- dinary circumstances ; this expedient, however, is both immoral and fatal ; it imposes a tax on future generations, undermines the state, etc. We, it goes on to say, have adopted a different principle. We have established a system of taxation in times of peace, which is constructed out of a variety of taxes atmoderate rates, and rates that are not oppressive, but that can be increased in case of a war, and, so are capable of meeting the vicissitudes of the bitterest war. Such is the salt monopoly, and such is also now the tobacco monopoly. Along with the public loan, extraordinary war taxes were also to be superseded by this system, for the reason that the latter are both unproductive and, at the same time, likely to fail at the critical moment. THE HISTOKV OF PUBLIC CREDIT. 7O3 A similar attitude of opposition is taken by a considerably later French writer, Jean l^aptiste Say,' who took the lead in introducing the political economy of Adam Smith into his country. So far as regards the detriment to the taxpayer, there is, according to Say, no difference between a public loan and a tax ; the former is somewhat the worse in that the taxj)ayer has to pay not only the entire amount of the principal but the costs involved in discounting future taxes. The increase of taxes raises the price of all articles, which is ecjuivalent to a general impoverishment iyappaiivrissoncnt general^. The conclusion is therefore that public loans doubly impoverish the future. Against the claim that public debts encourage people to save. Say objects that it could much more truly be said that j)ublic debts dissipate capital b\' drawing into "the abyss of the public expenditures" caj)ital which would otherwise be employed, though at a lower rate of interest, for some purpose of human use or comfort.^ Proceeding still further in his opposition to the views then in vogue. Say, quite in the spirit of the orthodox school, rejects the argument that public loans serve to keep cajjital within the countr}'. He says : Let the ca])ital go abroad, by all means, rather than that it should stay and oppress our taxpayers ! Say follows Necker almost to the letter in charging national loans with having greatly fa\'ored the lust for conquest ami war. § 508. We come now to the German writers on finance, the first one to be mentioned being J. H. G. von Justi.^ Justi, the ablest of all the German Cameralists. approaches the questions involved in the public credit from the standpoint of a man who is familiar with the remarkable results achic\'ed by the Dutch and English through the cm[)loyment of national debts during his time, and has at the same time intelligently studied the peculiar and di\ergent circumstances of the German ^ Cours complet it economic politique pratique (1829), vol. vi. pp. 1 28- 1 67. ^"'2l des placements dont le revenu serait I'utilite ou ragr^ment des families." ^ Staatswirtkschaft (1755), 2. T/icil, pp. 428-444, 5S7-608. 704 THE SCIENCE OF FINANCE. states, as he has encountered the facts in his own rich and varied experience. His point of departure is the question of the alternative which offers itself to the state under unusual circumstances and exigencies : extraordinarv taxes, or state debts. He is disin- clined to the usual forms of extraordinar)- taxation, especially the property tax ( the ascertainment of the propertv of all sub- jects would take time, and in case the attempt were not to be nugatory this ascertainment must be under oath, which would require still more time; and even then there would be no end of perjury, not to speak of the fact that the publication of their pecuniary circumstances would be very detrimental to merchants and manv other subjects, and would be highly distasteful and objectionable to all). In all this he describes the facts as we meet with them in Prussia half a century after his time. Hence the necessity of public debts. If the government has no credit, says Justi, the state suffers from a great and pervading injury. It is therefore one of the first principles of action for any wise government to keep its credit perfect. And this pur- pose is served almost exclusively by the prompt payment of inter- est. For every creditor considers his money safe and has no desire to make any change so long as interest is punctually paid. In this respect the case of the state's creditors is very different from that of the creditors of a private person. No one is concerned about the question whether the state is able to pay all its debts ; if only the interest is properly paid the creditor can transfer his claim to some other person, so that the claim is ahvavs as good as coin. The astounding debts owed by the state in England and Holland are well known all over the world, and everybody knows that it would be impossible to redeem these debts in case all the creditors demanded payment at once. But these states do not on this account suffer for lack of credit, and thev could readily, at any hour, add many millions of new loans to the old debts if necessary, simply because the interest is punctually paid. Justi, too, strongly favors an independent sinking fund com- mission, like the other writers of the West of Europe whom we THE HISTORY OF PUBLIC CREDIT. 7O5 have already mentioned. It would be better, in his opinion, if the business of paying the debt, in great states where there are large debts, were entirely disconnected with the exchecjuer, and a special commission were appointed, to consist one-half of skilled financiers and the other one-half of learned and conscien- tious men trained in the law. Such an arrangement, he says, is to be found in the Austrian states, and its usefulness is very evi- dent. If, therefore, the national credit is perfectly good, nothing is easier than to raise any required sum under all circumstances. It needs only to publish the fact that the state will receive so and so much money, and creditors in abundance will present them- selves and freely offer their money even beyond what the state desires. The experience of Holland and England is evidence of this fact. § 509. While Justi points to the highest perfection of the public credit to be found in Holland and England as the goal of the development, he falls short of this level by several degrees in his discussion of details, and takes us back, on this head, into a different and remote age. The bridge by which the higher development is to be reached is to be constructed out of financial expedients which had already been discarded by this more highly developed public credit, but which were yet to be introduced into German and Austrian finance administration. Annuities, tontines, lotteries — the essential prin- ciple of all these, the spice of chance which they contain, is treated by Justi with characteristic expressions of approbation. Many respectable writers, says he, have made what are in fact specious objections to the morality of institutions of this sort (referring particularly to the lotteries); but it is not opposed even to the strictest principles of ethics to entrust a superfluous portion of one's property to the chances of fortune, otherwise we should be able to carry on but very few branches of trade. The state may properly assume that everyone will make use of these institutions according to the dictates of duty ; at any rate it is not the state's ^706 THE SCIENCE OF FINANCE. dut}', nor does it lie within its power, to prevent their using them to excess ; and in case it were to block this road, they would find a hundred other wa3'S of misusing their wealth. And in case the government were to exclude establishments of this kind from its own territory, it would by so doing accomplish nothing more than to divert a great deal of money to other states. Justi counts this fiscal expedient among those which a gov- ernment must use when in possession of a "perfect credit." But where such a credit is absent, what is then to be done ? One of the most usual means in such a case is that of farming out all the revenues of the state and receiving the farm-rent in advance. Such a method was in almost constant use in France, but that was an evil state of affairs and the French farmers gen- eral were looked upon by everybody as leeches sucking the blood of the people. Very similar is the method of pledging the domains or leasing them for a long term. It is preferable to pawn the royal heirlooms and crown jewels, or even to sell them, as it is easy to replace them when times are better again, and probably at a lower price, as the supply of jewels is constantly increasing. The most desperate of all expedients is for a state in financial straits to raise money, as a last resort, by the alienation of terri- tories, provinces, cities, or fortifications, to other states. During the Middle Ages this occurred quite frequently, and many domin- ions grew great by this method ; but nowadays the claims of national sovereignty and integrity are regarded as quite priceless and not to be offset bv any sum of money. In order to avoid such extreme necessities a national treasure must be accumulated. It is a great misfortune to any state not to be in possession of an adequate treasure. Circumstances do not always admit of the state's obtaining the necessary funds from its subjects, or by the use of its credit. At any rate the state may suffer the greatest misfortunes before it is able effect- ively to do so. Hence it is imperative to make a seasonable provision for the accumulation of a treasure, and this work must take precedence of all expenditures that are calculated simpU^ to serve some purpose of use or convenience. It is true, certain THE HISTOKV OF PUBLIC CREDIT. "JOJ writers had exj)rcssed the opinion that the devotion of the sub- jects might take the place of a treasure, through the subjects coming to the assistance of the sovereign with their possessions in time of need. But Justi would advise no sovereign to dej^end on such a su{)port in case of real necessity. The extravagant importance which Justi ascribes to a national treasure shows how far behind Sinclair and others he still stands, and how greatly he is bound by the circumstances of the German principality of his day. The whole substance of the power and suzerainty of a monarch, according to Justi, rests on this national treasure; all his negotiations will carry an added weight when it is known that his power is sufficiently backed by force. Mere again what holds true of a person in private life holds true of the sovereign : where there is money it is possible to accomplish something. ^ 510. The German Science of Finance, which followed in the footsteps of Justi and Cameral Science for a hundred years after his day, down to Rau and Roscher, followed him very' closely also on the head of the national credit. There is a painstaking collation and comparison of the various facts of political and financial affairs, of the experience of foreign countries, especially England, with the experience of the German states, in all of which the homespun practicality of the writers gives a preponderant importance to the homely facts of their own immediate surroundings. This characteristic also furnishes an element of moderation, as contrasted with the dogmatism fos- tered by Adam Smith and his school, es[)ecially as opposed to their one-sided disapproval of all development of state activity and of the development of the financial means necessary to such activity. Theodor Schmalz' may be taken as one of the most radical of these writers. He was a campfollower of the Physiocrats and ^ Uandbuth der Staats7s.nrthscliaft (1808), sees. 410-432. The book is full of extravagant statements. The following is a sample : "Nothing hut a straining after paradox, or the most inveterate bigotry, could lead anyone to defend the tobacco monopoly" (sec. 382). 708 THE SCIENCE OF FINANCE. the representative of the science in the new University of Berlin. And still, even his judgment is influenced by his Prussian sur- roundings and by the circumstances of the time. A statesman, says Schmalz, must always look upon debts as a great evil, to which he can resort only under stress of great neces- sity, viz., the impossibility of meeting extraordinary demands by means of taxes. But in such a case he must not fear the evil, as it can be rendered quite harmless by a proper exercise of sagac- ity. For the fact is that the oppressive character of debts is simply a result of the manner in which they are contracted and the method by which they are redeemed. Schmalz accordingly sets up the requirement that the debt must be paid by the generation by whom it was contracted, and that a sinking fund must therefore be established ; and if the state is in so fortunate a position as to have paid off its debts, then it should turn its attention to preventing future debts by accumulation of a treasure. What has been said in derogation of such accumulated treasure originated in the erroneous notions of the Mercantilists, who conceived money alone to be capital, and then, on the ground of this premise, talked about capital lying idle. §511. More moderate, and more nearly approaching the facts of the case, is the view of Ludwig Heinrich von Jacob.' While Schmalz still adhered to the opinion that public debts could be avoided by the accumulation of a war treasure, Jacob, on the other hand, makes the war treasure his point of departure, and argues from the limitations and inadequacy of such a treas- ure to the indispensability of public loans. Jacob enumerates the reasons for and against a national treas- ure in the fashion which K. H. Rau's usage has since made typi- cal, and concludes that the reasons against preponderate. He admits that many good financiers had proposed to provide them- selves for times of war with a treasure large enough not only to ^ Die Staatsfinanzwissenschaft, theoretisch und praktisch dargestellt, yo\.'\. {\'ii\)y sees. 728-825. THE HISTORY OF PUBLIC CREDIT. "JOg cover everything that is rccjuirccl for the opcninj^ of a campaign, but even to defray the expenses of several campaigns. But as contrasted with the savings of private persons, such treasures lie idle, to the detriment of the finances and of industry. Accordingly, if a state is able to provide the means for an expeditious conduct of war in other ways, then it may properly dis- pense with the treasure. Such is the case with any wealthy nation, where there is a great accumulation of capital and an unques- tioned confidence in the government. Under different circum- stances the accumulation of a treasure in times of peace is desir- able and necessary. But in our day such a treasure will proba- bly never be large enough to go far. For one thing our states are generally not in a position to think of accumulating a treas- ure, and for another, the wars of our time are much more expen- sive than formerly. The state will accordingly always have use for its credit. It is therefore a matter of the first importance for every state to establish its credit on a firm basis. Jacob enumerates the means by which this firmer basis for the public credit is to be established, in the same long-winded fashion as Justi, who preceded him by two generations. These long and elaborate prescriptions, which rehearse what is matter of course to the German state of today and to the English state of that time, are but the symptoms of those diseases of child- hood from which the German public credit of that time suffered. The ever-recurring asseveration that public debts, although a necessity, are an evil, that the public creditors live on the product of the people's industry, that national debts have a detrimental effect on production, that they are a dangerous financial engine in the hands of an ambitious or wasteful government — all these are little else than evidences of the influence of the Smithian school. On the other hand, a decided progress on the part of the German political and financial organization since the days of Justi is indicated bv Jacob's position, that a j)owerful state will not readily resort to any other method than that of borrowing on its own credit simply, without the pledging of specific portions 7 10 THE SCIEN'CE OF FINANCE. of its property or revenues. A similar progress is indicated by the position that "the principles of sound policy demand" that the state should dispense entirely with annuities, tontines, and other like means of raising funds, and rather place its loans in such a way that the creditors, instead of being repaid their capi- tal, will receive simply the interest on it. It is also to be con- sidered a relative advance that the " funding method invented in England" is commended as an indispensable means of maintain- ing a perfect national credit, the method consisting in this, that a loan is not put upon the market until a specific source of reve- nue has been set apart for the payment of the interest and the establishment of a sinking fund. § 512. The work of Friedrich Nebenius [Ucber die Natur und die Ursache?i dcs dffe7itlichc7i Kr edits ''^ is in the form of a mono- graph on the subject, which it treats in the school-book fashion so much in vogue in Germany at that time. It is also in point of its content a faithful expression of the circumstances of the author's time and surroundings, but somewhat clearer and more definite than is to be found in the works of his contemporaries. We are told that the expenditures demanded by a modern war are too great to be met by an accumulation of treasure, and at the same time the greater activity of industrial life, which now absorbs all available capital, has made such accumulation inex- pedient on other grounds. Credit enables a nation to employ its energies on the offensive or the defensive, and to concentrate them upon a given point at the decisive moment. In cases where no lucky turn of the fortunes of war shifts the burden to the losing party alone, it will always be necessary to draw on the future.^ Credit, therefore, adds to the political power of the state. After the events of the successful war against Napoleon there was added ground for the admiration with which the German ^ Der '6fft')itliclie Krcdit. Zweile Aitflage, Erster, allgemcitier 77/i?//(i82g). The second pari, not published, was to treat of the History of Public Debts, while the first part is occupied with the general discussion. The first edition (1820) contained both parts in one volume. ^Chap. V. sec. 7. pp. 249 et seq. THE HISTORY OF PUBLIC CREDIT. /I I Canicralists had looked upon the English national credit even as early as the middle of the eighteenth century. Without preju- dice to the gratitude due the liberator of Europe, says Nebcnius, we may well ask if, in the absence of the credit which the British government was able to use to such stu[)endous effect at the crit- ical moment, events would not have taken a different turn in Europe, unfavorable to the independence of the European nations. Every state should therefore take thought to maintain and strengthen its credit. Upon the conclusion of a war the next stej3 is to proceed to the redemption of the debt ; history teaches that it very rarely happens that a single generation is exempt from this disease of human society. And this method will more- over conduce to greater moderation, because the same generation which has contracted the debt must count on contributing to its redemption. Experience also teaches that representative institutions are no defense against a progressive accumulation of debts, but they are good security for a faithful observance of obligations entered into. Nebenius is a writer who solemnly emphasizes the importance of good faith and honesty for maintaining and strengthening the public credit, and this makes the unconstrained way in which he (quite different from many of his contemporaries) judges of the sinking fund all the more remarkable. What is of avail is not those schemes that are constructed to run for several generations and are never adhered to ; but rather, the point of importance is the relation in which the interest on the debt and the other national expenditures stand to the resources of the country, that is to sav, the means available for the redemption of the debt after these other demands have been satisfied. People are prone to believe that thev have cleared themselves of the debt as soon as they have made provision for the interest and the sinking fund ; but they forget that the values which the public accounts present as an increasing sinking fund are not a product of the amortiza- tion office, but are drawn annually from the people's income.' ' Similarly Lotz, Handbuch der StaatsiVirthschaftslehre (2d ed. 1838), vol. iii. pp. 475-477, About the time the second edition of Nebenius's work appeared obliga- tory redemption was abolished in England, by a law of June I, 1829. 712 THE SCIENCE OF FINANCE. But Nebenius is all the more the spokesman of a bygone age when in a painstakingly elaborate chapter on the sundry aims of operations in public credit, he remarks with regard to loans for productive purposes,' or what we have called "productive credit" in the stricter sense (sec. 162), that experience condemns the undertaking by the financial administration of such produc- tive enterprises as come into competition, ordinarily into disas- trous competition, with private industry. The few exceptions which must be admitted are, taken as a whole, of no consequence. And even of these (highways, canals, etc.) it has become possible, through a progressive accumulation of large bodies of capital in the hands of single individuals, and through the increasing facilitv of combination, to relegate a good portion to private industry. What Nebenius has in view in his reflections on the influence of public loans upon the industrial situation, is the German indus- try of his own time and its scanty supply of capital, and he views this situation in the light of that exaggerated sense of the impor- tance of private production which was then so much in vogue in economic science. This is the ground of the proposition^ that: Public loans destroy capital which has been accumulated by indus- try and thrift, and in so doing they deprive society of an impor- tant means to the improvement of its condition ; just as the beginning of all civilization is conditioned upon the capacity of men for the accumulation of capital, so it is also true that all progress of any people in welfare and happiness essentially depends on changes which take place in their fund of accumu- lated capital. The very existence of a considerable national debt, says he, affects production detrimentally, particularlv by the resulting increase in the number of persons who withdraw their energies from the services of production — that is to say, on the one hand the creditors of the state, with the persons who serv^e their luxurious mode of life, and on the other hand the numerous official class who perform the unproductive labor of collecting the taxes. ' Pp. 295 ('/ seq. (chap vi. sec. 2). ^Chap. X. sees. 5 et seq. pp. tbgc/ seq. THE HISTORY OF PUBLIC CREDIT. /I 3 Further it is worthy of remark that Nebenius aj^proves' of lottery loans (on the lines of the financial practice of Baden,^ 1820, 1840, 1845) provided that no great favors are conceded to the lucky numbers, no more, for example, than the interest on their investment, and provided that the principal remains unim- paired, and also provided that the shares are not altogether too small. The third of the lottery loans issued by Baden, during Nebenius's lifetime, contracted in 1845 in order to provide means for railway-building, consisted of 400,000 shares of 35 gulden, to be redeemed by means of four drawings a year and canceled within forty years ; this loan was issued at 3jE^ per cent, interest and was taken up at considerably above par (iio^ per cent.). Regenauer, in fact, remarks that "the demand for interest-bear- ing obligations was for the first time fully met by the loan of 1842 ; the demand for lottery shares should in all reason be decidedly more activ-e. Still this was Baden's last lottery loan. §513. C. A, von Malchus (Royal Finance Minister of Wurtemberg) wrote 3 unreservedly from the standpoint of the financial practice of his time. According to Malchus, in the existing state of all political relations, internal and external, a more or less extended use of credit is a necessity for all states, and especially for the larger states ; it is a necessary and effective means for consolidating political power. Still, a large national debt is " a canker which consumes the political energy and the wealth of a nation," and will sooner or later destroy it. It is, of course, less detrimental where there is a sufficient surplus of capital to prevent the con- traction of a national loan from trenching on the increment of capital demanded by industry ; but it is all the more disastrous in countries not so favorably placed. There is, accordingly, no financial measure which is less confidently to be justified ' Chap. vii. sec. 9, pp. 343-353- * Regenauer, Der Staatskaushalt des Grossherzogthums Baden (1863), pp. 689, et seq.; cf. also pp. 206 et seq. ^ Handbuch der Finanzwissenschaft tind Finanzz'cr'waltutig (1830), Ersier Theil, sees. 80 et seq. 714 THE SCIENCE OF FINANCE. on the simple plea of its successful employment in other countries. The idea of a national treasure is, for Malchus, an obsolete notion, just as it was to the greater number of his contemporaries and to the financial administrations of his time. He discusses the various forms of national debts dispassionately and concisely, and explains the nature of annuities and lotteries also with con- siderable breadth of view. He lays stress on the requirement that loans must not be made terminable at the pleasure of the creditors, but insists also on the great value of the sinking fund. Johann Friedrich Eusebius Lotz,' the contemporary of Mal- chus, Nebenius and Jacob, goes into a detailed criticism of the expediency of a national treasure. The example of the ancients, says he, cannot be appealed to with any effect ; their treasures were accumulated from a source which is available only in the very rarest cases in our time, viz., the spoils of a conquered enemy. And the possession even of the richest treasure cannot afford a modern nation the same degree of security that a nation derives from its wealth and culture ; and these factors in turn presume as low a rate of taxation as possible. Of all expedients in times of need the contracting of debts is the least objectionable. This means has the advantage over forced loans, anticipation of revenues, and the levying of extraor- dinary imposts, that it ordinarily diverts to the government only the floating capital and especially that belonging to the wealthier classes. It can, therefore, "never have a particularly detrilnental effect upon the regular course of the nation's indus- try." Indeed, if it brings out capital which has previously been lying idle, or brings in capital from abroad, it is even conceivable that it will act to quicken industry for the time being. It is however to be added that the loan results in a heavy burden of taxation, and the ease with which they can borrow has tempted many governments into a wanton contraction of debts. It is a sore grief to anyone who has the welfare of the nation at heart to see that individual politicians have so far forgotten ■ Handbucit der Staatswirlhschaflilelirc (2d eil. 1838), vol. iii. sec. 146. THE HISTORY OF I'UBLIC CREDIT. /I 5 themselves as to incite our governments to an unnecessarv con- traction of debts, by advocating _the doctrine that ])ublic debts always increase the wealth of a people, and that there is no sounder means of furthering the nation's wealth and welfare than to borrow without stint. Lotz accuses Pinto particularly of this "scarcely intelligible nonsense ; " of course this is an overstatement, as we ha\e already seen. For it is not only true that Pinto emj:)hasizes the limita- tions of the public credit, but, more than that, it needs onl\- a charitable construction of his exposition in order to sec that, though clumsily expressed, his meaning is that the development of credit as a substitute for metallic money increases the efficiency of a people's industry. The most powerful motive to the contraction of public debts which is usually cited, viz., the assertion of independence and political power, may, as a matter of fact, have a result the con- trary of that desired if, as so often happens, the government places its loans abroad and so becomes a tributary to a foreign country. At the same time, national debts which are owned at home are a very effective lever for political revolutions, because they give the capitalists too great an influence in all the affairs of the nation, and too great a preponderance over the landowners and professional classes, who are the real support of the- existing order.'' As an offset to the wonderful results wrought bv the P.nglish 'How slight a support this apprehension, so frecjuently expressed by financial writers of that and earlier times, derives from the facts of actual life, maybe seen .rom the following figures. In Great Britain the number of persons who drew interest on the national debt was as follows : £ PEK YEAR Under 5 - - - - 5- 50 - 50- 100 - 100- 500 . - - - 500-2000 . - - . 2000 and over Total - - 275,532 284,127 '833 1848 «5,i42 96,415 141,021 140,962 25,446 24,462 21,941 20,516 1.799 1,550 183 177 7l6 THE SCIENCE OF FINANCE. national credit, Lotz not very felicitously remarks that while England had contracted a debt of 706 million pounds between 1688 and 18 1 3, she could in case of need scarcely contract an equally large debt during the next 124 years, because the wealth of the English nation had already been trenched on too seriously by previous loans. He puts the responsibility of England's large debt on her representative form of government ; the repre- sentatives of the people made use of loans in order to avoid the sacrifices which would have been required of them to meet extraor- dinary demands by taxation. But he forgets the great sacrifices in the way of taxes which England bore in addition to the debt during the long period of the war (sec. 482). § 514. To the group of German writers on finance already spoken of belongs also Karl Heinrich Rau. In the successive editions of his work on the Science of Finance he stands as the exponent of the views of that age, even down to a date very near the present.' His method of treatment, collecting and collating the views of other writers with the same industry as he does the varied facts of the fiscal and industrial field, is as far removed from the harsh radicalism of Lotz as it is from the sober lucidity of Nebenius. His work, which was in progress for a generation, during which it was pushed on to completeness with painstaking industry, places in juxtaposition doctrines and facts which mutually contradict one another. For example, he is of opinion that: "Under the circumstances of today, when governments as well as private individuals can find the necessary In France, in 1845, the payments of interest to private creditors on the 5 per cent, securities were : Under 100 francs ------ 36,833 100- 500 " - . , . - 40,186 500-1000 ".----- 13,424 1000-2000 " . . - - - 9.710 2000 and over ...--- 9)009 Cf. Rau, Finanzwissenschaft (5th ed. 1865), sec. 480. ^ GrunJsdtze der Finanzwissenschaft (5th ed. 1864-1865), sees. 464-529. (Vol. iii. of the Lehrbuch der politischen Oekonomie.) The jirst edition of the Grundsdtze der Finanzwissenschaft appeared in 1832. THE HISTORY OF PUBLIC CREDIT. 717 credit with the owners of capital, it is unnecessary to accumulate a national treasure, because the state can easily get along by loans in case of need ; and it is moreover unwise, because the lying idle of considerable sums of money works an injury to the industry and income of the people, as well as because the pres- ence of such large funds will easily tempt to unnecessary expen- diture." But in a note to this proposition, in the last edition of the book, he says: " Latterly it has been claimed with respect to the Prussian state that a national treasure has great value, in that it affords a speedy resource in case of a sudden emergency, and probably also because it enables the government to dispense for the time being with parliamentary consent to a loan. . . . This treasure amounted in 1862 to 12 million thalers, in 1863 to 20 millions." Which of the two was in the right, the text or the note, became evident the following year. And it is probable that in case of a sixth edition the note would have found its way into the text and the text into the note. Rau considers national debts the unavoidable means of meeting great expenditures in time of war or under other extraor- dinary circumstances. With the rate of taxation already at a given height it seems to him "beneficent" for the government to make use of its credit to meet such demands. But at the same time he hedges this necessity about with all manner of precautions, and in the course of so doing he brings under view all the many unfavorable circumstances connected with state debts that hav^e ever been discovered. He cites as a commendable example the " Pragmatic Sanction on Public Debts," of November 18, 1808, issued under Charles Frederick of Baden. This pro- vides that a public loan must not be contracted except on occasion of an actual and immediate public necessity, such as a permanent improvement of the situation of the country, or the redemption of an honest debt, or the rescue of the state, the prince or his successor from some great danger or calamity. Quite in the spirit of the Aufkliining is the proposition that the history of national debts goes to show how little the nature of public credit and the best manner of employing it have been 7l8 THE SCIEN'CE OV FINANCE. understood in the past ; but during the present century an under- standing of this matter has reached maturity, with the result, on the one hand, that the sacrifices demanded of the taxpayers have been reduced, and, on the other hand, that the rights of the ])ublic creditors have been better secured. In point of fact, the history of public debts shows a gradual development of the finances and of the national credit, which is not by any means due to "insight" alone. It shows a mature development in several countries long before the insight of the nineteenth century came to its aid. It attained, especially on the classic soil of modern economic life and economic theory, a high • degree of perfection half a century if not a whole century before the insight of the nineteenth century impressed its seal of approval. It is particularly to be noticed that the insight of Adam Smith and his school falls wofully short of the practical development of English national credit in their time. ■^515. During the first half of the nineteenth century, German writers on finance are substantially agreed in a position of a more positive character and more nearly in accord with existing insti- tutions than that of Smith and his school ; although in recogniz- ing the necessity of public debts they for the most part recognize them as a necessar}' evil. About the middle of the nineteenth century there comes a change in the attitude of German writers which at a single stroke shifts the position quite appreciably :nearer to a full recognition of the nature of public debts, and makes an effort to bring the developments of the new era into ■harmony with certain fundamental points of theory insisted on by the old school. The representative of this new departure is Carl Dietzel.' First as to the fundamental points of theory. Among the doctrines of the Smithian school (vol. i. sees. 143-146) the concept of productivity has, ever since the begin- ning, been the occasion of a great deal of discussion. These ' JDas System der Staatsaiileilieii, ini Zustiiii»ii;?i/ian^ der I'olksivirtliscluift be- Inu-Jitet (Heidelberg, 1855). THIi HISTORY OV PUBLIC CREDIT. 7I9 discussions are in line with the efforts of the Physiocrats to reach a clear comprehension of the essential nature of economic life, and are influenced by the advancing development of method on the one hand and bv the shifting jjhases of practical life on the other. On the one hand we have the gradually unfolding doc- trine concerning the nature of net product and income, which came down from the Phvsiocrats tiirough the hands of Adam Smith and Ricardo, and reached a relatively definitive conclusion in the writings of Hermann. On the other hand we have the practical question as to the proper order of j)recedence of the industrial classes in the modern society, as judged by the standard of their relatixe importance to the social welfare ; the interest in this question, setting out from the peculiar and fre(]uently mis- aj)])rehended views of the Physiocrats, accpiircd a continually wider and more philanthropic scope until it so seriously violated the boundary lines of the neighboring fields of science as to bring on a reaction, represented {mrticularly by Theodor Bern- hardi.' For the purjiose in hand, and as bearing on C. Dietzel's work here under discussion, this literary growth becomes important at the point where the doctrine of " immaterial j:)roduction " and "immaterial capital" (Say, Macculloch, List) comes into prom- inence and seeks to terminate the ancient controversy by con- ceding the invaluable character of "productivity" to every use- ful activity. Possessed of the conception, quite natural to a new scientific system, that all and every human action must be meas- ured by its measure and be ranked accordingly, the new depart- ure magnanimously spreads its protecting mantle over the high- est as well as the lowest of human activities. As Bernhardi with a noble indignation has pointed out (though going too far in restricting the idea of productivity to the production of material goods alone), the error of this view lies in its seeking to bring every human aspiration under the yoke of the economic end. We are told,^ says he, about the ' Versiic/t einer Kritik der Griinde, die fur grosses und kleities Griindeigfuthuin angefiihrt werden (St. Petersburg, 184Q). Cf. especially pp. 67-157. *Pp. 141 ct seq. 720 THE SCIENCE OF FINANCE. righteous judge who defends the cause of the innocent, and about the soldier who fights for his country at the frontier, and so protects the house and home of the individual citizen ; and it is taken for granted that the trade of these persons, especially of the latter, is not a little improved in reputability when it is declared to be no less useful than any other occupation ; military service is a form of production ; it is quite proper that other producers should pay the security-producing soldier the value of the product of his work. Bernhardi goes on to say the defense of house and home is certainly of great importance ; but is property the only thing for which the fighting is done ? House and horne might often be preserved by simple submission — a kind of prudence which has frequently been put in practice by sensible, calculating people. On the other hand the world's history teaches that hearth and home have frequently been for- feited in war in order to preserve things which belong under quite another head, for a future which the men who take part in the struggle cannot hope to see or to enjoy, and which cannot well come within the scope of the eudemonism of the individual. It may be set down as an accepted tenet of the political economy of today (apart from such reactionary tendencies as always occur) that the importance attached to the economic point of view and to economic standards in the aggregate of human activity, is a phenomenon of an essentially psychological and therefore historical nature ; and that its scope and degree of influence on the aims of human life and activities vary. Its influence is relatively strong in our century, but assuredly not so strong as to leave no room for other and higher interests. Even at lower stages of culture this is never the sole considera- tion ; kinship, religion, independent national life, are interests possessing a powerful influence even there.; so much so that the economic interest must yield to them in part. The state, as comprising all the highest interests of civiliza- tion, is in a special degree the stage upon which this truth comes into view and is realized in any people. But the state is not the only form in which it expresses itself. Its expression in the N. THE HISTORY OF PUBLIC. CREDIT. J2\ ( U N 1 ■, state is but a repetition of what is present in private life as well. When the bold discoverer, bent on research, ventures his life and his property, both, on a })olar expedition, he undergoes an economic sacrifice which is not repaid by any pecuniary results. When the fatherland calls out its sons to defend the highest of human interests and at the same time jjuts into the \enture those expensive material equipments which are indispensable in modern warfare, then there is done in the name of the com- munity something analogous to what is done by the individual investigator spoken of above. After full allowance is made for the economic interests which, among others, are served by these public activities, there still remains a residuum which is not to be resolved into economic elements, but must be classed under a different head. There is a consumption of economic goods for purposes of another class, which yields no economic results. From this it follows that a national expenditure of economic goods, whether thev are obtained by loans or taxation, may yield an economic equivalent if it is undertaken for an economic end, but that where no such aim is jjresent (as happens in the case of the greatest of all expenditures), there the production of an economic equivalent is not to be looked for, except as a possible incidental result under specially favorable circumstances (war indemnity). A theory, therefore, which insists on forcing taxes and national loans into the mould of a pecuniary equivalent will accomplish nothing further than is accomplished by that mathe- matical method in economic science, which is able to begin its work only after elimination of all the real character of the matter in hand. In point of fact, the question between the state and the individual concerns an exchange of economically incommensu- rable benefits and economically incommensurable obligations. § 516. The foregoing brief reflections have been introduced in order to indicate the theoretical standpoint from which Dietzel's view of public loans is to be regarded, as well as to show what influence he has had upon later writers on finance. 722 THE SCIENCE OF FINANCE. According to Dietzel' the only expedient method of trans- ferring capital from private economy to the national economy is by the use of national loans. Bv this method private individuials are led to put their disposable capital into the permanent capital of the community as a means of obtaining a permanent income, just as soon as it commends itself to them as a profitable invest- ment. The collective capital \^Natiofuilkapital^ is that portion of a nation's aggregate capital by means of which the collective busi- ness of the people is carried on. It consists of those permanent works and establishments, and those immaterial relations and things, whose presence is necessary in order to the emergence of the useful results which the nation has to accomplish by this method of collective production. The cause ^ of all perverse and derogatory opinions and sentiments with regard to public loans lies in a one-sided conception of the nature of the nation's econ- omy, according to which the aggregate costs of production include nothing but the expenditures which are made by each private economy in detail, and which reappear more or less pal- pably in new products ; this view overlooks the fact that the national organization is the prime requisite of all economic development, and that the ever-recurring expenditures which this national establishment requires are properly to be included in the aggregate costs of production of the nation's industry. The view 3 which is expressed by most writers, that a system of public loans destroys capital, will not bear inspection. Aside from its defective apprehension of the nature of capital, this opinion is an inference from the proposition that everything which is consumed by the collective economy is consumed unproductively. If the position were sound that national loans are an iniqui- tous imposition of a burden upon future generations by the pres- ent generation, then it should also hold that no one engaged in ^System de?' Staatsanleihen, pp. 148 et seq. ; cf. pp. 84 et seq. 'P. 155. 3 P. 167. THE HISTORY OF PUBLIC CREDIT. 723 industry, who is at the same time the father of a family, ought to borrow capital in order, e. g., to add to his fixed caj)ital a much needed and probably very profitable supplement in the form, say, of a new machine.' The line of demarkation between public loans and taxes is determined as follows.' Taxes are to serve for meeting the ordi- nary running expenses and cost of repairs of the national estab- lishment ; whereas all expenditures for permanent public improve- ments, for the extension and maintenance of the state establish- ment must be met by means of loans. How much is to be regarded as ordinary expenditure in the sense here understood is easily determined by finding if it recurs invariably in each successive industrial period. These propositions, given almost word for word in Dietzel's language, suflficiently characterize his doctrine of public debts. It is seductively simple, and brings the irresistible rise of the public debt in European countries into harmony with the plausi- ble doctrines of the old school. It falls short at two points. It rests on an unsound theoretical basis, as I have already attempted to show ; and as a practical scheme, even if its theoretical sound- ness be conceded, it affords but a very dubious footing for any actual system of national debts. Viewed from the historical standpoint it must be conceded that this doctrine reflects the later phases of the public debt administration more faithfully than any previous formulation of doctrine does. It does not suffer from the vicious economics of Pinto and his contemporaries ; — though it is to be added that the doubtful economic doctrines of these latter writers serve to cover a much more moderate position with respect to the public debts than that of Dietzel. § 517. Lorenz von Stein ^ so far lends his countenance to ' System der Staatsanleihen, pp. 182 et seq. -P. 152. ^ Lehrbuch der Finanzwissenschaft. Ziueiter Theil: Die FinanzT'erTiuittutijr Euro- pas. Dritte Ahtheilung: Das Staatsschttldenwesen [S^h t<\. 1886), p. 427. Cf. especially pp. 41 et seq., 212 et seq. 724 THE SCIENCE OF FINANCE. Dietzel's position as to reckon the third and concluding epoch in his scheme of the theory of public credit as having begun with Dietzel.' The characteristic feature of this third epoch is that the pub- lic debts are now judged of in a much profounder way. The position now is that a "public debt is debt only in form ; in point of substantial fact every loan is an independent method of taxing the future for all those government expenses which go to build up permanent government establishments for the benefit of the future by means of advances furnished by the present." To those who hold this view, therefore, Stein goes on to say, the placing of a debt has come to be not a manifestation of straitened finances, but simply an obligation of the state, which, by the payment of interest and the gradual redemption of such debts, shifts to the coming generation a part of the burdens incurred for the joint ' The first epoch of " speculations upon the public credit " contains as yet, according to Ste'n (pp. 40 et seq.), no conception of an organic connection between the national credit and the rest of the finances, nor any conception of the difference between financial credit and the national debt. This first epoch regards every debt as the result of mismanagement and misfortune. There is at this period no demand for a systematic administration of the national credit ; consolidation is still unknown, and there is no question of the method of redemption. This period begins with Adam Smith, although Smith's fundamental principles have in part survived down to the present. The second epoch begins even before the beginning of our century and its characteristic features are that, in the first place, it incorporates the entire subject of national debts into the body of the science of finance, and, in the second place, it seeks to ascertain the principles of a wise administration of the national credit as a whole. This second epoch begins with Sonnenfels, and its most characteristic exponents are Malchus and Nebenius. This scheme of Stein's has the dubious feature not only that it constructs a second epoch which comes upon the stage before its first epoch (Adam Smith 1776, Sonnen- fels 1765), but it also overlooks the fact that there is quite a respectable literature ante- dating Smith and Sonnenfels which gives evidence of a broader comprehension of the national credit. In England, for example, James Steuart (1767) preceded Smith, in Germany and Austria Justi (1755) preceded Sonnenfels. The praise which Stein (p. 44) lavishes on Sonnenfels should go not to Sonnenfels but to Justi. Also, as we are aware, it is incorrect to say that from Adam Smith's time " unto this day the English litera- ture has been unanimous in absolutely condemning national debts." It needs only men- tion Sinclair. The reason given for this condemnation is that "the English national debts have been employed almost exclusively for purposes of war" ; — surely a curious explanation ir. view of the fact that the English finances afford the standing illustration of a great public debt during times of peace. THE niSTORV OF PUBLIC CREDIT. 725 benefit of the present and tlic future. Hereby for the first time is a basis established for the organic connection of the national credit with the national finances, and in so doing we are also shown the bond which exists between the national administration and the national credit. " Uietzcl was unquestionably the pio- neer in this work." In order to a closer appreciation of this position, it may be well to give some attention to Stein's remaining propositions.' Every debt contracted by the state, says he, increases the state's "productivity,"^ that is to say, every debt pays its own interest in the useful purpose which it serves. A national debt is directly productive if its expenditure results in income, and indirectly productive if its productivity consists simply in increasing the taxpaying capacity of the people. The former is calculable, the latter not. The former completes itself and may be measured within a period of one year; the latter, as e.g., in the resumption of specie payments or the establishment of penal or educational institutions, will often demand several generations for the full accomplishment of its purpose. Instead of a computation, there- fore, we must in this latter case fall back on a general principle. This principle can be no other than the principle which holds for all national income and expenditure. The national administra- tion must see that in the contraction of any national debt the expenditure of the funds shall provide for interest payment and redemption of the debt, at the same time that its application works out the moral and economic results for which the debt was incurred. If this is not done then every public debt becomes a consumption of the people's capital instead of becoming an ele- ment in the productive power of private capital. So far Stein. He agrees in substance with Dietzel's theory of production, and what has already been said of Dietzel's view of the public credit will hold true in the main of Stein's view. ' Lehrbuch der Finanzwissenschaft, pp. 230 et seq. * The quotation marks are Stein's own ; but they do not recur in his subsequent use of the term. 726 THE SCIENCE OF FINANCE. His writings constitute the summit to which the doctrinal reflex of the development of public debts gradually attained dur- ing the course of two centuries. The economic science of the past rendered valuable service in this presentation of facts and views relating to public credit ; it may in a similar way be the privilege of the science of today, by viewing these reflections of past events^ from its own modern standpoint, to reach such an understanding of the matter as shall do justice to the present and the past alike. ^ 'For criticisms of Stein see Adolph Wagner, Ordnung des osterreichischen Staats- haushalts (Vienna, 1863), pp. 17 et seq., and "Staatsschulden," in Bluntschli's Deutsches Staatsworterbuch (1867). ^Cf. sees. 157-169 above (book i. chap, vi., "Order and Sequence in the Public Economy"). CHAPTER II. THE PUBLIC CREDIT OF THE PRESENT TIME. Literature. Friedrich Nebenius, Ueber die Natiir iind die Ursachen des bffentlichen Kredits, Staatsanlehcn, die Tilgimg der offentlichen Sc/tuiden, den Handel mit Staatspapieren utid die Wechselwirkung zwischen den Kreditoperationen der Staaten tmd dem okonomischen und politischen Zustande der Ldnder (2. Auflage. Erster, allgemeiner Theil, 1829). Lorenz von Stein, Lehrbicch der Finanzwissensc haft ; Zweiter Theil: Die Finanzverwaltutig Etiropas ; Dritte Abtheilung : Das Staatsschtildenwesen (5. Auflage, 1886). Adolph Wagner, Ordnung des osterreichischen Staatshanshalts {iZSt,). The Same, "Staatsschulden," Bluntschli and V>xa.\.ers Deuisches Staatsworterbiich ( 1867). The Same, "Die Ordnung der Finanzwirthschaft und der offentliche Kredit," Schonberg's Hand- btich der politischen Oekononiie, vol. iii. (2d ed. 1885). Paul Leroy- Beaulieu, Traite de la science des finances (1877), vol. ii. G. Ricca- Salerno, Teoria generale dei prestiti pubblici {^\\\3Ln, 1879). Henry C. Adams, Public Debts (New York, 1887). F. von Reitzenstein, "Das kommunale Finanzwesen," Schonberg's Handbuch der politischen Oekonomie {26. ed. 1885), vol. iii. pp. 649-657. For statistics on the present state of national and municipal debts, c£. Finanzarchiii, 1884-1889. Richard von Kaufniann, " Finanzstatistisches zu den Schulden der europaischen Grossmachte," Conrad's Jahrbiicher fUr Nationalokonomie und Statistik, 1887 ( N. F. vol. xv.). The Same, "Die offentlichen Ausgaben der grosseren europaischen Lander nach ihrer Zweckbestimmung," ibid., 1889 (N. F. vol. xviii.) Specially on Paper money. T. Tooke and W. Newmarch, History of Prices (German Translation by C. W. Asher, 1859). Adolph Wagner, " Papiergeld," Deiitsches Staatsworterbiich (1862). The Same, " Zur Geschichte der osterreichischen Bankozettelperiode," Zeitschrift fiir die gesammte Staatswissenschaft, 1861, 1863. The Same, Die russische Papier- wdhrung, eine volkswirthschaftliche und finanspolitische Studie nebst Vorschldgen zur Herstellung der Valuta (Riga., 1868). J. A. R. Helferich, "Die osterreichische Valuta seit dem Jahre iS^S," Zeitschrift fiir die ges. Staatstv., 1855, 1856. Carlo Y&xx2ix\%, Moneta e corso forzoso{)A\\2iXi, 1879). I. THE PRESENT STATE OF THE PUBLIC CREDIT. §518. What the far-seeing philosopher Berkeley said, a century and half ago, in speaking of England, that the discovery 727 728 THE SCIENCE OF FINANCE. of public credit was the discovery of a new gold mine, and what James Steuart, and more particularly Sinclair, had to say of its efificiency as an instrument of political power, all this has been realized in actual fact during the course of a hundred years after their time. The debts of the nations of Europe, the magnitude of which at the close of the wars with which the nineteenth century began, filled the most sensible of our financial writers with astonishment and dismay, have gone on increasing during a further couple of generations in a degree to correspond with the progress in industrial productivity accomplished during the cen- tury. It is true that the wealthiest and most deeply involved of all the nations — Great Britain — was able not only to come to a halt in its career of national debts, but even to cancel a consider- able portion of its old debts. But at the same time it is to be noted that the other states which have attained a similar abun- dance of credit and capital, have, as fast as the circumstances have permitted, also found occasion for the contraction of large national debts ; so that we have today the following situation. While, according to computations given above (sec. 493), the interest payable on debts in 1820 by the various states of Europe amounted to 1,125 million marks, later computations show that by 1865-66 this sum had nearly doubled, and by 1885- 86 had increased nearly fourfold.^ From the principal of the debt (1885-86, 108,431 million francs) is to be deducted so ' The Society de Statistique computes that the payments for interest and redemp- tion in 1865-66 amounted to 2438 million francs ; for 1885-86 Paul Boiteau computes, it at 4864 million francs (Conrad's Ja/irii/c/ier, 1887, p. 145). According to an official ■ Italian docnment {/^tnanzarc/iiv, 1885, pp. 847 et seq.) the interest-charge on the public debt of the seven states (the individual states of the German Empire being included under Germany) France, England, Italy, Austria-Hungary, Spain, Russia and Germany^ in 1882, amounted to 3957 million francs; that is to say, three times as much as the computed expenditure of all European states in 1820. Henry C. Adams [Public DebtSy 1887) finds that the civilized countries of today, with a population of 1 170 millions and an area of 37.4 million square miles, have an aggregate burden of debt amounting to 27,000 million dollars. This does not include municipal or communal debts. Con- verted into francs this would be 143,000 millions, as contrasted with an aggregate of 108,431 million francs for European public debts alone according to the French calcu- lation cited above. THE PUBLIC CREDIT OF THE PRESENT TIME. 729 much as is covered by productive investments, as, e.g., the Prus- sian railway loans. But as against this there is to be added the municipal and communal debts, of which but a very modest portion are so invested as to cover their own interest-char^^e. In Prussia alone the urban and rural communes together paid, in 1883-84, 34.50 million marks in interest and in discharge of the principal of their debts ; in the kingdom of Italy the communes and provinces in 1880 paid 41.50 million francs as interest^ on their debt (on a principal of 745.40 million francs).' The national debt of England, the interest-charge on which amounted to 32.50 million pounds in 1820, has been gradually redeemed, so that the interest-charge in 1852 amounted to only 28 millions, and in 1885-86 only 22 millions.^ Instead of amounting to three-fifths of the national expenditures, as in 1820, the interest-charge now amounted to only one-third or one-fourfch of the total. But in most other countries (with the exception of the Ger- man states, especially Prussia) the public debt has increased with great rapidity. Austria-Hungary in 1820 paid only 31 million marks in interest, as compared with 395 millions in 1882; Russia 23 millions in 1820, and 640 millions in 1882; France 148 millions in 1820, and 790 millions in 1882. Italy paid 410 million marks in interest on its public debt in 1882, while in 1820 all the Italian states, together with Spain, Portugal, Sweden, Denmark and the minor German states paid only 225 million marks interest. It is especially in the case of states like Austria-Hungary and Russia, which had exhausted all their resources, including their credit, at the close of the great war, that the contrast between the relatively slight amount paid after the Napoleonic • wars and the large interest-charge of today brings out the great advance that has taken place in the growth of the public credit and of the financial strength of the states. Even in the case ^ Finanzarchiv, 1884, pp. 760, 244-253. ^ Statistical Abstract for the United Kin g:do>n, 186S. 1888. 730 THE SCIENCE OF FINANCE. • of France, which, it is true, was treated with leniency at the re-establishment of peace in Europe, but was still subjected to burdens that were very great for that time, — even in France the increase of the interest-charge by more than sevenfold is evi- dence of a great development of industrial productivity and wealth during the nineteenth century. § 519. Let us take up, somewhat in detail, the development of the public credit in Prussia and Germany. In so doing we shall (here as in the discussion of the tax system) avoid com- parison of multifarious facts and figures taken from various sys- tems of legislation and various nations, and will be able to con- fine our attention to definite facts regarding the community immediately under consideration. We shall in this way get a conception much truer to life than is attainable by the old- fashioned method of discussion.' A survey of the Prussian public debts, and their development since the middle of this century, is calculated to impress us with the worthlessness of the customary arithmetical comparison of our state with other of the larger states. What everyone under- stands in speaking of the debts of any private person, viz., that the degree of indebtedness depends on the purpose for which the debts have been contracted and the assets to be set off against them, — this important fact is left out of consideration in speaking of public debts. This is to some extent due to the influence of unsound theory. During the years 1 848-1 866 the Prussian national debt increased from 158.50 million thalers to 290 millions, that is to say, by 131.50 million thalers. The amount invested in the state railways built or bought during this period (inclusive of the stock held by the state in private roads) amounted to 124.33 million thalers. This leaves a remainder of only 7 million^ 'Even Nebenius {Der dffentliche Kredit, 2d ed. vol. i. pp. 289 et seq.) made some acute and noteworthy remarks on the subject of the prevalent method of comparing figures taken from different countries. His remarks have seldom received due con- sideration. ^E. Richter, Das preussische Staatsschuldenwesen, pp. 63 et seq. THE PUBLIC CREDIT OF THE PRESENT TIME. 73 1 thalers not covered by the value of the railways. The national treasure at the end of 1865, moreover, amounted to 20 million thalers (1848, 19.40 millions). The interest-charge on the national debt in 1865 was ii mil- lion thalers, whereas the railroads turned in funds to meet this charge amounting to 9.6 million thalers. The latest changes in the national railway policy have appre- ciably altered this condition of things for the better. The national debt has greatly increased in aggregate amount, and, through productive investment, it has not only afforded the funds necessary for interest and redemption, but has even yielded a progressively increasing surplus above these requirements. The debt has increased as follows : Year Population (millions) Principal of Debt (million marks) Interest and Redemp tion Char(ice (million marks) 1867 24. II35 42.78 1881-82 27.30 1995 98.49 1886-87 28.30 4073 181.88 1889-90 [28.30] 4457 196.60' But the net receipts of the state railway business have devel- oped at such a rate that from 1878-79 they nearly equaled the interest-charge on the entire national debt, and since 1 879-80 they have even exceeded the interest-charge.^ The figures are as follows : Year I nterest - Charge (million marks) Net Receipts (million marks) 1881-82 72.40 95.10 1883-84 107.60 141.90 1886-87 L61.IO 201.70 1887-88 170.90 209.90 1889-90 165.60 278.60 According to this showing the public debt of Prussia during the last forty years has been in a radically different situation from what we find in Austria, France, Russia, Italy and even the- United States, and differs likewise from the debts contracted by 'Cf. Anlagen ztim Staatshaushaltsetat for 1S89-90, vol. ii. No. I, Beilage B. Staats- schuldenveru^ per cent, bonds were quoted on July 26, 1889, at 102.80. The citv of Zurich has issued a 3^ per cent, loan which has been quoted at 99.10 per cent, on the Berlin exchange from the date of issue. The city of Hildesheim placed (July, 1889) a loan of 1.50 million marks, bearing interest at 3^ per cent., with a syndicate of bankers on a basis of 101.25. "On March 31, 1884, the amount of the loans to communes was 202.30 million marks, bearing interest at 4-4 K per cent. 3 Phillips, Local Taxation in England and Wales {Local Government and Taxation in the United Kingdom, edited by J. W. I'robyn, 1882) p. 479. 738 THE SCIENCE OF FINANCE. considerable amount have been obtained from the Exchequer (the rates of interest since 1879 are as follows: 3j^ per cent, payable in 20 years; 3^ per cent, payable between 20 and 30 years after the date of issue ; 4 per cent, for loans payable between 30 and 40 years after the date of issue; 4j^ per cent, for loans of a longer term than 40 years). The aggregate amount of the municipal debts has greatly increased of late years. In 1872-73 its amount in England and Wales was only 80 million pounds, and in 1879-80, 137 million pounds. Of the latter amount only 30 millions were funded on special items of revenue (tolls, dues, rents); the whole of the remaining 107 millions rested on taxes. The control exerted by Parliament or by the Board of Public Works Loan Commis- sioners seems to be very lax and to unduly facilitate the con- traction of debt, especially it has little effect to enforce season- able discharge of the debt. II. THE VARIOUS KINDS OF PUBLIC DEBTS. § 523. The facts relating to public debts which we have reviewed have so far been distinguished into classes only accord- ing to two principles of classification, (i) According as the loan is made for productive or for unproductive purposes, and (2) with respect to the kind of public body which issues the loan. We shall now have to make a further distinction. If we examine the debts of the German Empire we shall find that they were, March 31, 1887,' made up of the following classes : Interest-bearing bonds - - 504.2 million marks Non-interest-bearing Treasury Bills 54.15 " " Imperial Treasury Notes - - 133.87 " " We have here three typical forms of public loans differing in respect of the term for which they are to run, and this differ- ence in duration is in its turn determined by the differing causes and purposes of the loan. ^ Statistisches Jahrbtuh fiir das deutsche Reich, 1888, p. 198. THE PUBLIC CREDIT OF THE PRESENT TIME. 739 Just as vvc distinguish between long and short credit in pri- vate business, and just as the credit employed assumes various forms to correspond to the object for which it is employed, so also in the case of the public credit. We make a distinction between mortgage-loans advanced to a land-owner for a long term of years, answering to the permanency of his tenure of the land, and loans made on bills of exchange or on personal secur- ity, the short term of which corresjjonds to the rapidity of cir- culation with which goods pass through the various stages of the productive process. Similarly, occasions arise in the public economy which demand the use of a longer term of credit, at the same time that there are also objects for which a short credit is sufficient. § 524. It has appeared from the historical survey that the great body of public debts, whether contracted for productive or unproductive purposes, is always of some considerable duration, and the mature development of the public credit even enforces the conviction that an unlimited duration is the essential characteristic of the public credit. The essential nature of the great body of requirements which occasion the use of the public credit is on this point at one with the essential nature of the state. The fiscal demands which the national economy makes through the loan market are in this respect of the same nature as the ethical-political demand which we know it is competent for the state to assert. And this demand is no longer reluctantly complied with ; the experience of the various states, for a long time past, goes to prove that the money mar- ket is always ready to meet such demands, if only the state and the nation's industry have reached the recjuisite degree of maturity. Some of these experiences have been outright triumphs for the public credit, in which confidence in the permanency of the state and in its financial soundness has mastered all doubts aris- ing from the changing fortunes of a growing state and the changes and succession of constitutions and of dynasties. The 740 THE SCIENCE OF FINANXE. stability of the national unity has prov^ed itself so indu- bitable that all the alterations have seemed trifling in com- parison. The fiscal need of obtaining loans of a long term must always come prominently into view when large sums have to be raised for carrying on a great war, or even when more moderate sums are wanted for establishing great productive institutions. The name " funded debt" which has usually been applied to this best known class of public debts is itself an evidence of the growth of the public credit at this point. The term came into general use in England during the eighteenth century, and was there used to designate the practice of setting apart certain specified public revenues for the payment of a debt and its inter- est-charge. I This was a further development of the earlier prac- tice of pledging certain crown estates and crown revenues, only that the setting apart of certain revenues by a legislative act now took the place of an earlier cjuasi-private hypothecation of prop- erty by an act of the crown. By a further step in the. develop- ment, this close relation between a particular expenditure and a particular source of revenue fell into disuse, and the annual pay- ment for interest and redemption of the debt took its place among the other national expenditures ; and this led to the "funding" of all the state's expenditures, so that all expendi- tures without distinction have come to depend on the aggregate of the national revenue. The original meaning of this old term has therefore been lost, so far as regards any modern state with a mature system of national credit. The term funded debt has come to sig- nify only so much of the original content of the term as has survived in practice, viz., a debt intended to run for a long time. § 525. To distinguish it from the funded debt the rest of the public debt is designated as a "floating" debt. This latter is ordinarily of slight consequence as compared with the funded THE PUBLIC CREDIT OF THE PRESENT TIME. 74 1 debt, especially in countries with a large funded debt ; ' it is made up of so great a diversity of items, and is incurred for such a variety of purposes, as to require some detailed consider- ation. This subject has alrcadv been touched ujjon in the general exposition dealing with the relation between taxes and national debts in meeting the public exj^cnditures (sec. 168). It will now have to be taken up somewhat more in detail. A national economy with an undeveloped credit system is like an ill-ordered private economy ; it will incur debts of whose necessary term of duration it has no adc(|uate concej)tion, at the same time that it does not possess the means for their speedy discharge. It may even be that the debts arise out of a simjjle disproportion between expenditures and incorne, such as cannot be remedied either by an increase of revenue or by any avail- able recourse to credit. This mav fairly be designated a " shift- less " credit system. Under this system, in the public as in private finances, arrears will dragon from year to year, increasing as time goes on through the persistence of the causes out of which they originated,/ and in the absence of an increase of ordinarv revenues they can be liquidated only by facing the facts squarely and recognizing that this multitude of small over-due liabilities amounts to the same thing as a considerable body of debt, for the discharge of which, and for the pavment of interest on which adequate provision must be made. This is the oldest and therefore, under conditions of an inade- quately organized public economy, the most prevalent form in which the floating debt occurs. But even the shrewd manager, whether in public or in private 'The national debt of Great Britain on March 31, 1888, consisted of the follow- ing items {Statistical Abstract for the U)iited Kingdom, 18S8, p. 29): (i) Funded Debt ... - - ;i;609,740,743 (2) Terminable Annuities .... 78,449,230 (3) Unfunded Debt .... 17,385.100 (4) Savings Banks Deficiencies - - - 1,346,176 (5) Exchequer Balances at the banks of England and Ireland 7.647.072 (6) Sundry Debts (local loans, Suez Canal Shares, etc.) 5,522,917 742 THE SCIENCE OF FINANCE. life, must come to recognize that debts of this character will occur even where there is no such shiftlessness in the keeping of accounts. Even the best administrator cannot avoid the carrying over from one fiscal period into the next unliquidated claims for sup- plies and services rendered in the course of the former period. There may moreover occur unforeseen shortages in the esti- mated revenues, or unforeseen items of expenditure which will not admit of delay. Moreover, the regular revenues and the regular expenditures do not always coincide in point of time. Considerable sums may be required for the payment of officials, troops, etc., whose equivalent in the shape of revenues from taxes, domains, rents and the like, will regularly be received after an interval of some months or quarters. But it is especially the administrative activities of the gov- ernment that give rise to floating debts[due to other than finan- cial reasons. We will now take a closer look at the chief kinds of these administrative expenditures. § 526. The chief source of a floating debt of this kind is the issue of government paper money. All financial abuses apart, this paper money in any country with a silver currency serves the purpose of a more easily portable substitute for silver for the payment of amounts the transportation of which in silver would be burdensome, at the same time that the bank notes in circulation are, and properly should be, of too large denomina- tions to serve for this particular purpose.) A typical illustration of the need of such a paper currency is afforded by the practice of the German states ; previous to the imperial law of April 30, 1874, they kept notes in circulation of one, five, and ten thalers (gulden), — amounting to 184,298,500 marks at the time the law went into effect ; and the Empire inherited from them the insti- tution of the imperial treasury notes of a normal amount of 1 20 million marks. In addition to this, as a measure of transition, THE PUHLIC CREDIT OF THE PRESENT TIME. 743 the right to issue 54.74 millions was conceded to the individual states, to be redeemed between 1876 and 1890, so that at the end of March, 1887, there were still 133.86 millions in circulation, of different denominations as follows:' 2,041,823 imperial treasury notes of 5 marks 1,000,038 " " " " 20 " 2,073,172 " " " " 50 A second provocation to the contraction of a floating debt, also incidental to the administrative duties of the government, is afforded by national (imperial) savings banks where such exist. This is especially apt to be the case under the modern practice of combining savings banks with the post-office, which involves the contraction of a large debt payable on demand. In Great Britain and Ireland the amount owed by the state on March 31, 1887, was 53.97 million pounds sterling.^ § 527. Whether the causes of the floating debt are of one kind or another, whether the occasion out of which the debt arises may be said to be an active cause or an occasion simply, in any case the management of the debt by the fiscal administra- tion will necessarily differ, according as the debt results directly and immediately from the occasioning cause or originates as an indirect consequence. If supplies furnished to the state are not duly paid for, or if the postal savings banks bring large deposits fact itself immediately gives rise to a floatii other hand, if the equilibrium aimed at in the financial estimates is disturbed by unforeseen shortages in the revenue or by unfore- seen expenditures, so as to leave a shortage in the funds available for meeting immediate expenditures, then it becomes necessary to incur a floating debt. Halfway between these two classes lies the issue of national trcasurv notes. A sufficient ground for such an issue is to be found in circumstances affecting the ^ Statistisches Jahrbuch fiir das dcutschc Reich, 1S88, [>. 123. '^Statistical Ahslmcf, 1888, p. 180. In the statement yi-*ht national debt (see note to preceding section) this item does not appear. y^ ^^ c^ ' isits to the sta^e, this ating debt. fOn the 744 THE SCIENCE OF FINANCE. currency, as we have already seen. But neither as an historical fact nor in point of practical expediency is this the sole or most important ground of such issue. The outstanding imperial treasury notes which are at present to be found in circulation in the Empire, under the law of April 30, 1874, represent a legacy from the monetary habits and abuses of the states of Germany ; -'the institution owes its origin to the eagerness of (at least some of) these governments to exploit to the utmost the advantages of a non-interest-bearing debt. As a result Prussia found herself compelled as early as 1856 to reduce her paper-money issue by one-half,^ and the imperial government was again compelled to reduce the amount from the 184.30 million marks outstanding at the beginning of 1874 to 120 million marks (at the same time introducing the gold standard). Treasury notes (paper money in the widest sense) are there- fore one of the usual means by which a temporary deficit in the available funds is supplied. Under what circumstances, within what limits, and with what special danger will appear later on. Besides paper money there are (especially in countries which do not make use of this expedient, as, e. g., Great Britain and France) other forms of floating debt which serve the same purpose. vAs we have seen, Prussia, especially in seasons of financial or political straits, fell back on the Society of Marine Commerce, which helped out the abnormalities of the public credit by means of a permanent floating debt.) In Great Britain there have existed ever since its foundation certain financial relations between the exchequer and the Bank of England ; also the privileged trading companies (the East India and the West India Companies) stood in a somewhat similar relation to the English public credit, i The mixture of diverse forms of credit which resulted from these financial relations, and the conversion of cash deposits in the hands of these financial institutions into a permanent national debt, mark an immature, and therefore unsound stage of development of the public credit. After these aberrations of the early days are past, banks of this kind come ' Law of May 7, 1856, reducing the issue from 30.7 million thalers to 1 5.7 millions. THE PUBLIC CREDIT OF THE PRESENT TIME. 74$ to assume their legitimate function in a develojjed system of public credit, viz., the maintaining of a running account for the purposes of the floating debt. The indebtedness of the English government on this account to the Banks of England and Ireland amounted, on March 31, 1887, to ^^7, 647,072.' An important form of floating debt which is likewise native to England and has lately been introduced into Continental countries is Exchequer Bills \^Sc/Mtaschcine^. These differ from treasurv notes [^Kasscnscheine^ much as commercial bills differ from bank notes, /while treasury notes and bank notes are issued as a substitute for coin and are therefore intended to serve the everyday purposes of circulation, basing their accept- ance in the circulation on their redeemabilitv in coin on demand, commercial bills and exchequer bills on the other hand are adapted for temporary investment of money, as contrasted with the relatively permanent investment in funded securities, mort- gage loans and the like. As investments the exchequer bills, just like commercial bills, pay interest, and this interest being of the nature of interest on short loans (discount) has the charac- teristics of a discount, which differs somewhat from the interest paid on loans of a long term. ^ 528. We come now to a consideration of the various kinds of public debts in detail. The line of demarkation between the funded and the floating debt is determined by the form in which the debt is owed. The tendency in every ill-ordered financial system is to increase the amount of the floating debt and so lessen that of the funded debt. This is done partly to conceal the actual amount of the latter, partly in order to enjoy the fiscal advantages there are in a floating debt (no interest, or a low rate of interest); but this advantage finds its offset in the loss which it involves of all the advantages of a funded debt. These advantages are the long term of credit and the less 'During the fifteen years 1873-87 it was on an average six million pounds at the close of the fiscal x^kt.— Statistical Abstract, 1888, p. 29. 746 THE SCIENCE OF FINANCE. importunate requirement of discharging the debt ; whereas the floating debt, maturing from day to day or from month to month, may, if it grows very large, exert a great pressure on the finances, such as the funding of the national debt is devised to obviate. In case of an orderly and well-developed national credit, such an excessive accumulation of floating debt may exist in good times without evil consequences ; but if confidence in the state is shaken, as in case of a threatened war, when alarm may easily take possession of the public, such a mistaken policy may plunge the country into embarrassments at the precise moment when it is least able to cope with them. If in such an emergency the state is unable to meet its obli- gations, this failure will in its turn react on the public confidence and so increase the general alarm. There is therefore great danger in an excessive issue of sub- stitutes for money (treasury notes and the like) whose acceptance and value rest on their being redeemable in coin on demand. Clf this convertibility fails at the decisive moment the result will be precisely the contrary of what was aimed at in the issue of the paper money.^ The paper money which is issued in the expectation that it will float on the strength of an. unshaken confidence in its ready convertibility into coin, is now importu- nately presented to the treasury for redemption at a time when redemption is impossible. There is in such a case a great temp- tation for the state to help out its credit by the use of compulsion. While the acceptance of the paper as a means of payment had previously rested almost exclusively on public confidence, it comes now, when public confidence has failed, to rest on the legal-tender quality of the paper, at the same time that this legal-tender quality is unable to save it from depreciation. Something similar has happened in cases where the state has not itself issued paper money but has incurred a floating debt in the form of short bills due to privileged banks of issue, and where, instead of being able to discharge this debt in a time of financial stringency, it has been obliged to incur additional debts. In consequence of such a situation the banks have been unable THE PUBLIC CREDIT OF THE PRESENT TIME. 747 to meet their own obligations, with the result that a continually increasing pressure has been brought to bear upon the state to use its authority to suspend specie payments. It is, however, quite impossible to draw a hard and fast line between the floating and the funded debt. There were in the German Empire, on March 31, 1887, 133.87 million marks of imperial treasury notes, 54.15 million marks of exchequer bills \^Schatsanweis7ifigcn^^, which being non-interest- bearing, just like commercial bills, were discounted at their issue (at an average of 3 per cent.). The amount of these exchequer bills outstanding at the close of each fiscal year between 1877 and 1887 varied between 10 and 70 million marks. In earlier years (i 868-1 875) the form employed was usually that of interest- bearing exchequer bills, which, it is to be remarked, were not exempt from the fluctuations of discount by virtue of their bearing interest. Exchequer bills were especially used to a very great extent in connection with the monetary reform of the German Empire. Since 1868, the date when exchequer bills were first employed both in Prussia and in the North German Confederation, the amount of exchequer bills which may be issued during the year, as well as the interest-charge on them, is determined by the budget from year to year. The imperial budget for 1 889-90' provides for an issue of 78.50 millions, and allows a sum of 350,- 000 marks for interest. The Prussian estimates^ contain the provision that "for the payment of interest on the exchequer bills issued for the temporary reinforcement of the funds at the disposal of the general treasury during 1889-90 there are appro- priated 600,000 marks. "3 § 529. 1-^unded debts are of various kinds, differing and varying according to the progressive develo})ment of the chief ^ Anlage A'., Etat der Reichsschuld auf das Etatsjahr 1889-90. ^ Aiilagen, vol. ii. No. i, " Staatsschuldenverwaltung." 3" Zur Verzinsung der zur voriibergehenden Verslarkung des Betriebsfonds der Generalstaatskasse durch Ausgabe von Schatzanweisungen zu beschaffenden Mittel fiir 1889-90= 600,000 Mark vorgesehen werden." 748 THE SCIENCE OF FINANCE. characteristics which mark the funded debt as such. The more the feature of permanency in the credit of the state (empire or commune) comes into prominence, the more does the legal claim of the creditors to a repayment of the principal of the debt decline ; the state's obligation to redeem the debt is postponed or entirely done away ; the dates and the amount fixed upon for the redemption of the debt, whether by the terms of the contract with the state's creditors or by legislative enactment, are gradu- ally less and less regarded, or entirely disregarded. The earlier Prussian loans, at the beginning of the nineteenth century, were issued for a term of only 3-8 years, and their redemption was accordingly divided into 3-8 instalments. Even in the midst of the distress under which the ill-ordered national finances labored, payments continued to be made towards- the discharge of national obligations ; one million thalers a year being expended for this purpose in 1818 and 18 19. On the first English loan (to Prussia, 1818) there were to be paid, on the principal of the debt, 3 per cent, during the first year and 2^^, 2, I ^ and I per cent, in succeeding years.' Premium loans, the attraction of which lies largely in the gambling element infused into them, belong, in the history of Prussian debt, chiefly to this period, and recur from this time down to the middle of the nineteenth century. In England this fiscal expedient went out of use about the beginning of the cen- tury. The first Prussian premium loan was issued in 1796, the second in 1821, the third in 1832, the fourth and last in 1855. The terms of these loans bind the state, by the specifications of the lottery scheme which they embody, to the payment of fixed annual installments ; in order to heighten the allurement of the loan the drawing of lots for the release of bonds is arranged to take place as soon after the issue of the bonds as may be, and with as large prizes as may be.] But the scheme for the release of the bonds by lot always covers a considerable term of years, so that there is even yet (1889) a remnant of the Prussian pre- mium loan of 1855 outstanding. The same is the case with the ' Richter, Das Preussische Staatsschuldenwesen, p. 222. THE PUHLIC CREDIT OF THE PRESENT TIME. 749 premium loans issued by Baden, Bavaria, Brunswick, Dessau, Hamburg, Lubeck, Meiningen and Oldenburg, 20, 30 and 40 years ago. It is not only the form of this class of loans, but also the substance of the method, viz., the hard and fast scheme of redemption, which is to be regarded as a transitional stage in the course of development that results in the full-fledged funded debt. While this method was abandoned in England in 1828, in France in 1848, and in Austria in 1859 — for reasons already suggested by our historical survey of the facts — it is still retained in Prussia. A motion was introduced in 1856 in the Upper House to abolish the recjuirement of redemption by a fixed scheme; in 1867, in the Reichstag of the North German Confederation, Twesten made a similar proposition ; but neither of these projects came to anything. The productive character of the compact body of the Prussian national railway debt has occasioned (Law of March 27, 1882) an adherence to a fixed scheme of redemption, at the rate of three-fourths of one per cent., to be paid out of the annual net receipts. It is instruct- ive to note that this obligation, which the brilliant results of the railway business have made it possible to meet, has in point of fact been met not by an actual cancellation of exist- ing debts, but by contributions to new expenditures made by the state, which would otherwise have been covered by new loans. § 530. The funded debt of an unlimited term, without oblig- atory redemption, or, at any rate, with no other obligation than that imposed by legislative enactment, logically leads up to the form of the annuity {^rentes). In this form of debt the obligation of the state which owes the debt does not include repayment of the principal, but only the annual payment of interest. We have seen that this most highly developed form of national debt, which goes back to the beginning of public debts in the city republics of Italy and Germany, is related to the life 750 THE SCIENCE OF FINAxNCE. annuities of earlier times and has gradually developed in Eng- land into the typical form of a national debt. While this form answers in all respects to the essential nature of a developed national credit, it still suffers a few limitations. In the first place this highest development of national credit, and the resulting abolition of all obligation to repay the principal, does not abolish the fact that individual creditors may sometimes find it desirable to withdraw their loans in order to use the capital which they represent for other purposes. It follows, therefore, that a public debt in the form of annuities presupposes the stock exchange where the national bonds can always find buyers, and which will, by virtue of this fact, act as a substitute for redemption by the state. But while this restriction applies not only to the public debt in the form of annuities, but to every extensive debt owed by the state, there is still another and more important limitation to be mentioned. The interests of the state which issues the loan demand that it take the form not simply of a perpetual rent payment, but that it must take the form of interest on a certain specified capital which the state reserves the privilege of repay- ing sooner or later ; for the reason that future circumstances affecting the national credit or the money market may make it possible to borrow at a lower rate of interest and so effect a reduction or conversion. In the late adoption of the annuity form for the public debt in Prussia and other German states, as well as in Austria, it has accordingly been thought best that the securities should still retain the form of an obligation to pay a certain principal. In England this form has been readopted since 1866. In France the form in which the rentes^ are issued leaves it an open ques- tion whether there is any principal, and, consequently, whether the state has a right to redeem the debt. But the decree of March 14, 1852, (dealing with the conversion of the 5 per cent, rentes into 4)^ per cent.) established the principle^ that this right ' Stein, Finanzwissenschaft, vol. ii. (5th ed. 1886), pp. 265-267. 'Block, Dictionnaire de P administration fratifaise (1877), p. 774. THE PUBLIC CREDIT OF THE I'RESENT TIME. 75 I is "inherent in the nature of an obligation engaging to pay a perpetual annuity." In practice considerable departures from the annuity form of the public debt have been made in France ; in 1878 a loan of about 500 million francs was issued for rail- ways, the loan being in the form of a 3 per cent, rente, but not convertible, and payable in 75 yearly installments at the face value of the princi[)al. The immediate reason for this arrange- ment was that the securities issued by the private railwav com- panies, and to cover which this loan was incurred, were like- wise redeemable within a term ending between 1950 and i960; and this for the reason that the railway lines would at that time become the property of the state.' ^531. Connected with this develo])ment is the introduction of the Ledger of the Public Debt \^StaatsscJmldbucJf\ in Prussia and other German states.^ Ever since the edict dealing with the Prussian finances, dated October 22, 18 10, the principle has been adhered to of making all the bonds of the Prussian public debt payable to the bearer. By an ordinance of January 17, 1820, dealing with the future management of the public debt, all obligations then outstanding, electoral, provincial and municipal, and bearing the name of a specified creditor of the state, were retired. After the acquisi- tion of the new provinces in 1866 it was provided by laws of Feb- ruary 29, 1868, and of February 1 1, 1869, that public obligations issued by these provinces and bearing the name of the creditor need not be converted into obligations payable to the bearer, but the central administration of the national debt was authorized to make such securities payable to the bearer at the request of their holder. The case is different in other countries. In England, France, Holland, Austria, and also in some of the German states, in Hamburg and in the United States of America the practice has been, even down to the very latest times, either to write the ^ Finanzarchiv, 1884, p. 269. ^E. Francke, Finanzarchiv, 1884, pp. 265-303. \.'6h^,ibid. 1885, pp. 194-216. 752 THE SCIEN'CE OF FINANCE. public obligations payable to a creditor specified by name, or, more generally, to register them in a book kept for this purpose. [In England the state's creditor receives only the amount of interest agreed upon ; the nominal principal of the debt being entered against his name in the Great Ledger, in which the Bank of Eno^land enters the names of all holders of the consolidated debt. The creditor receives no bond in evidence of the debt. In France the Revolution, at the same time that it achieved the consolidation of the funded debt, also created, by a law of August 24, 1793, the Grand Livre de France, in which every item of debt must be entered if the claim is to be binding on the state. The holder of the public debt receives an abstract {^inscription) of the entry in the Grand Livre (in which he is usually mentioned by name), certifying the entry. The Receiver-General of each of the eighty-six departments keeps a subsidiary ledger, in which he likewise makes entries of rentes. The items of debt entered in this subsidiary ledger may, on request, be transferred to the corresponding ledger kept in any other department, or to the Great Ledger in Paris. Interest is paid on presentation of the " inscription." This reads either in the name of the creditor, or payable to bearer (being in the latter case provided with interest coupons). A desire for a change of the same kind has repeatedly been expressed in Prussia also, even as early as the enactment of the law of December 19, 1869, dealing with the consolidation of the public debt. More particularly a proposal was brought forward in the Chamber of Deputies during the session of 1880-81, which led the Prussian government to take up the matter, and, by a proposition presented to the Chamber in 1882, to prepare the way for the law of July 20, 1883, dealing with the Ledger of the Public Debt. This example w^as followed by the Kingdom of Saxon}^ in its law enacted April 25, il § 532. The decisive argument for this step was the following: While the mobility of capital was adequately provided for and satisfied by the j)ractice which had been in vogue in Prussia THE PUBLIC CREDIT OF THE I'KESENT TIME. 753 since the beginning- of the century, of issuing national bonds pay- able to the bearer, it is also true that there is a large body of capital seeking investment which is not best served by this form of securities. Foundations, trusts, church proijerty, and the like, seek a form of investment which affords the greatest jjossible security against loss, at the same time that it dispenses with adminis- tration or superintendence on part of the owner. Moreover, as the accumulation of capital goes on there is a constant increase of the number of persons seeking a form of investment that is permanent, safe and free from care. The exj^edient resorted to in the past, of depriving securities payable to the bearer of trans- ferability, had pro\-ed inadecjuate ; it does not afford the re(]ui- site security and also involves difficulties and complications. Sufificient security is to be found only in a provision abolish- ing the transferability of bonds employed for investments of this class. This can be accomj)lished bv substituting a registration of the debt in a ledger in place of an issue of bonds. At the same time the practice of issuing bonds j)avable to the bearer may be continued in order to meet the demand for a class of public secu- rities that are easily transferable. The law provides that bonds of the 4 per cent, consolidated debt may be converted into a book-debt due to a particular cred- itor specified by name ; the conversion is to take place upon j)res- entation of the bonds and by means of an entry in the book kept by the central administration of the public debt. A notice of the entry, in due form, is given the creditor. Interest is paid to the creditor or to his attorney. The fee for entering the debt on the ledger is 25 pfennigs per lOOO marks (with a minimum fee of one mark). For the issue of transferable bonds, in case the debt is withdrawn from the ledger, the fee is 50 j)fennigs per 1000 marks. The disadvantages of the new scheme are closely relatetl to its advantages. There are inconveniences in the way of any change of ownership ; any transfer to a third party involves more trouble than is the case with obligations payable to the bearer. 754 THE SCIENCE OF FINANCE. The re-conversion into the form of a bond involves certain formal- ities, and so long as the claim remains in the form of a book-debt the creditor is not possessed of any evidence of debt which will unquestionably satisfy any third party of the existence of the book-debt, and the creditor frequently has occasion to prove the fact of his claim on the state (as e.g., in proving assets, in giving security or mortgage) . The Ledger of the Public Debt, moreover, is on other grounds not open to the public. Still, the new arrangement has come into use more and more. The Ledger of the Public Debt was opened October i, 1884, and the number of creditors who have made use of it has increased with each succeeding year since that time. The entries on April first of each year have been as follows : 1885 - - - - 643 entries of 52,192,700 marks 1886 - - - 2918 " " 155,533,900 " 1887 - - - - 4491 " " 206,642,150 " 1888 - - - 5929 " " 334,442,700 " 1889 - - - - 6781 " " 387,804,400 " Of this last named number of entries about 33 per cent, are 4,000 mark s and under 20 " " " 4,000 " " " 10,000 marks 31 " " " 10,000 " " " 50,000 " 8 " " " 50,000 " " " 100,000 " 8 " « 100,000 " over Of these entries 4230 were to the account of physical per- sons, 1025 were to the account of legal persons, and 1493 to the account of estates not possessed of a legal personality.' III. THE STOCK EXCHANGE AND THE MANAGEMENT OF THE PUBLIC DEBT. § 533. It is with the public credit as with credit in general; the employment of credit gives rise to special kinds of transac- ' Amtliche Bekanntmachung der Hauptverwaltimg der Staatsschulden, April 8, 1889. The following items are taken from the same publication : The interest on 3481 of the entries was paid by check or postofifice money-order sent by the officials in charge directly to the address of the creditor, 727 by credits at the Imperial Bank, and 4215 by direct payment at the central or branch offices of the government. THE PUBLIC CREDIT OF THE PRESENT TIME. 755 tions in credit, and the resulting special branches of the credit business in their turn give rise to special organs and organiza- tions, which become a necessity to the existence of the business in any highly developed form. The modern organization of credit in general is represented by two classes of institutions known in the language of modern business life by the names " Bank" and " Bourse" or " Exchange." The distinction between these two kinds of institutions (see vol. i. sec. 423) lies in this, that the bank receives and advances money, so that the bank's business originates the paper with which transactions in credit have to do (such as deposits, bills of exchange, bank notes, drafts, mortgages, public bonds) ; whereas the bourse is occupied with the circulation of credit-paper already in existence — its business is buying and selling of securities. The development of both these organs goes hand in hand with the development of business activity. It is onlv gradu- ally that these organs succeed in absorbing the credit busi- ness and that, in so doing, they react upon the credit business and increase its volume. The course of development is analo- gous to that of productive industry. Productive industry, too, onlv gradually develops the methods proper to a high division of labor, and so advances from the stage of house- hold industry to that of production on a large scale, from the stage of barter to that of money. The market upon which pro- ductive industry places its products is at the outset some adjacent center of exchange, which is presently succeeded by a larger market with a wider tributary area, until finally great world- markets are established, whose influence extends over many countries and vast areas, and acts to further specialize produc- tion. The case is similar with the business of transfers of the usance Of the owners of the registered debt 6073 live in Prussia, 637 in other German states, 13 in England, 1 1 in America, eight in France, seven each in Austria and Russia, five in Asia and two in Africa. The use of the Ledger by guardians and courts of ward for the safe-keeping of the property of minors, invested in Prussian consols, has hitherto been relatively incon- siderable. Only 416 entries of this kind have so far (1889) been made. 756 THE SCIENXE OF FINANCE. of capital. Answering to the stage of production by household industry we have a stage at which credit is entirely absent, any capital which one household may be unable to use productively being hoarded, while other households may suffer for want of bor- rowed capital. When the employment of credit begins to develop and the transfer of capital becomes recognized as a usual thing, it is at first simply a transfer between neighbors, burdened with all the annoyance and inconvenience which must always characterize a business relation so entirely local and bound up with such close personal relations. The effort to make the demand and supply of capital correspond in volume, length of term, rate of interest, security, etc., can be only partially suc- cessful so long as the effort is not seconded by the presence of a wide-reaching money market and the proper business organization. Just as the development of trade first establishes an easy, regular and safe exchange of commodities, and thereby relieves the jjroducers and consumers of the trouble of seeking each other out and reaching an adjustment of their mutual needs, so, as regards the exchange of capital, a like purpose is served by the development of independent business organs whose special- ized function is trade in the usance of capital. When this devel- opment is accomplished the new organs undertake the work previously done by those in need of and those in possession of capital. It is of course true, as in the nature of the case is true of all historical development, that even after this stage has been reached there is still a considerable volume of circulation of ca})ital by the old method ; widespread usage, individual habits and inclinations change only very slowly, and the circumstances and customs, both of social life and of business, vary greatly from place to place. But the tendency in any progressively developing industrial community is constantly toward a growth of these intermediary organs whose logical purpose is a pro- gressive centralization of the money market. § 534. The public credit partakes of this development in an eminent degree. THE PUBLIC CREDIT ()!• THE PRESENT TIME. 75/ The great volume of its demand for capital on the one hand, and the long- or unlimited term for which it rc(iuires its loans on the other hand, both contribute to make the public debt a very con- siderable item in the business done by these great organs of credit, and also to bring the public debt relatively early into the organized money market. The banks, by their great accumulations of dcjjosits, hax'c, at the outset, a virtual monojjoly of the means necessary to raise those great sums which a ])ublic loan demands. As a result of the vague and uncertain ideas prc\'alent in the early, undeveloped stages of banking, the banks often turned over to a borrowing state capital which had not been entrusted to them for such a purpose. The mixing up of the earlier banks of issue with the business of the public debt, and the j)art which the Marine Com- merce of Prussia played in its day as an intermediary between private persons and the administration of the public debt, belong to the stage of undeveloped banking. Mature development results in differentiation. Modern usage in P^ngland (affording a significant contrast to the usage on the Continent) has for a generation past gone so far as to restrict the term bank to those establishments alone which carr\" on a trade in short paper. Enter- prises which deal in paper of a longer term, with the placing of public loans and the like are known by other names. This sharp distinction of names is an expression of the clear distinction observed between the two kinds of business. The mature j)ublic credit presently outgrows its dependence on the Bank. It applies directly to the Bourse, the second organ of the credit business, by long usage the indisj)ensable interme- diary for long loans. The requirement of perpetuity for its loans develops hand in hand with the demand for very large loans by the state, but it is to be noticed that there has been no corresj)()ntling development on the part of the capitalists who furnish the loans to the state. The discrepancy which arises from the j)resence of these two incompatible requirements ma\- be and has been removed by the establishment of a tlailv market for securities. This is 758 THE SCIENCE OF FINANCE. the meaning of the Stock Exchange. And this function of the stock exchange is performed with increasing efficiency as the sphere of the stock exchange widens and the number and variety of securities dealt in increases, and as the number of buyers and sellers of securities in the daily market increases. To illustrate these general remarks by facts taken from the actual business life of today, there is given in what follows a survey of the exchanges of Berlin and London and the business- which is transacted from day to day in such securities as are quoted on these exchanges. § 535. The number of securities of which daily quotations are permitted' on the Berlin stock exchange is at present (1889), according to expert computation,^ 985. This number of course includes items of ver}' various degrees of importance, as e.g., a public loan of a few million marks on the one hand, and a public loan amountina to hundreds of millions on the other. The total number of items appreciably exceeds the corresponding figure for the previous year (883 on May 10, 1888). The face value of the entire aggregate of securities quoted is 54,573 millions (as against 52,563 millions on May 10, 1888); the market value being 55,669 millions. Of this total by far the greater portion is made up of public loans : 55 German Imperial, State, and Municipal Loans 9,294 million marks 108 Foreign State and Municipal Loans 28,359 " " Total 37.653 This figure of course does not represent the volume of busi- ness done on the Berlin exchange ; for it takes no account of what proportion of the total amount of any given securities enters the market of this one center of the traffic in securities. 'Besides those securities whose quotation is officially permitted there is also a con- siderable number which are dealt in without being officially quoted. "^ Handelsblatt der Nationalzeitting, Supplement to No. 316, May 22, 1889. The day for which this compilation was made was the tenth of May, 1888 and 1889. I have not been able to revise the computation, and I am inclined to question many of the items. THE PUBLIC CREDIT OE THE PRESENT TIME. 759 This is especially true as rc^^^ards foreign national bonds. But so long as we view this presentation of facts simply as indicating what takes place on a representative stock exchange it answers the purpose satisfactorily. The information it affords is espe- cially significant if we take note of the market value and the rate of interest of the \'arious securities, and the relation between the two. The aggregate market value of all German, imperial, state, and municipal bonds was 9797 millions (105 j>er cent, of the nominal value) and the aggregate annual interest was 358 millions (3.85 per cent.). The market value of foreign, state, and municijjal bonds amounted to 28,360 million marks (100 per cent.), the aggregate annual interest being 12 18 millions (4.26 per cent.). Beside public securities (163 altogether) there were 822 others, issued by private concerns. While the aggregate of pub- lic securities was 37,653 millions, the private securities amounted to only 16,920 millions, including (as is also true of the state bonds) a considerable number not owned in the country, espe- cially foreign railway bonds and railway shares (9624 millions) and foreign mortgage loans (1087 millions). The number and diversity of enterprises whose paper is quoted is very great : railways, banks, mines, breweries, sugar factories, gas and water works, machine shops, chemical factor- ies, spinning mills and dye works, building societies, and insur- ance companies. The papers were partly shares, partly bonds. The shares of 107 banks, of a nominal aggregate value of 1449 million marks, paid a dividend of 100 millions and were sold at an average price of 146.25 per cent. The dividend amounts to 7.6 per cent, of the nominal value, or 5.2 per cent, of the actual market value of the stock. The shares of 84 mines, of a nominal value of 452 millions, with a dividend of 22.7 mil- lions, were quoted at 524 millions ; that is to say, the dividends were 5 per cent, of the nominal value, or 4.2 per cent, of the market value of the stock. Shares of 38 breweries, of a nomi- nal value of 75 million marks, with a dividend of 6.1 millions. 760 THE SCIEN'CE OF FINANCE. were (juoted at 131. 2 millions; that is to say, the dividends amounted to 8.1 per cent, of the nominal value, or 4.6 per cent, of the market value of the stock. § 536. The number of securities quoted daily on the London stock exchange' is about twice as great as the number quoted on the Berlin exchange, viz., about 1800. Of this number 340 are bonds of states, provinces, colonies and cities. Nearly two-thirds of these belong within the British Empire, and some 140 are from foreign countries. Interest on the greater number of these latter securities is paid in London, only 16 of which this is not true being quoted on the Lo'ndon exchange, and these 16 are for the most part the bonds of great states, such as France, Italy, Prussia and the United States. The second great class, following the public securities, is made up of railway paper, comprising some 650 different kinds. Of these, 300 belong to railways in the British Empire, including India and the Colonies ; the remainder represent foreign railways. The third and final class comprises shares and obligations issued b^■ concerns of the most diverse kinds : banks, insurance companies, canals and docks, mines, gas and water works, street cars, telegraph companies, breweries, and a variety of other industrial and commercial concerns, numbering in all some 800. There is no computation at hand showing the nominal amount and the market value of these securities. Nor would a com- j:)arison of their aggregate ^'alue with the corresponding figure for the Berlin exchange vicld any valuable results, unless the degree of intensity represented by the figures in both cases were also determined ; that is to say, unless we could also determine to what extent each of the securities that are dealt in on the stock exchange is actually employed as an investment of capi- tal and so is an object of purchase and sale. We may, however, supj^lement the general figures given above by a few data of a more special character, of undoubted accuracy, and very significant for the pur])ose in hand. ' Iuono>iiist, July 6, i8Sq, pp. 883-8S6. ' THE PUBLIC CREDIT OK THE I'KESENT TIME. 76 1 English consols bearing interest at the rate of 2 3/4 per cent, until 1903 and 2^ per cent, after that date, and redeemable at the option of the government after IQ23, were sold at 98^. The bonds of the great English railway companies (Great East- ern, Great Western, Great Northern, Midland, London and North- western, Northeastern), bearing interest at the rate of 4 j)er cent., are (juoted at I 30-135. The shares of the London banks of dej)osit and the London and Westminster Bank, paying 15 j)er cent, dividends, are quoted at 355 per cent.; London Joint-Stock Hank, paving 12^^ per cent, dividends, are quoted at 277 per cent.; London and County Bank, paying 20 per cent, dividends, are quoted at 467^ per cent. On the other hand, the Russian 5 per cent, bonds are cjuoted at 101-103; the Greek loans of 1881 and 1884, paving 5 per cent, interest, at 92 per cent.; Hungarian 5 per cent, bonds at lOO-iOi; Mexican 6 per cent, bonds, at 95; Jaj)anese 7 per cents., at 1 10; Santo Domingo 6 per cent, bonds of 1869. at 175^. These figures (July 6, 1889) may be compared with some of the items of the Berlin exchange list (August i, 1889). The German imperial loan, bearing interest at 35^ j)er cent., is quoted at 104; the Prussian national loan, bearing interest at 33.2 per cent., is quoted at 105. The bonds of the East-Prussian Southern railwaw bearing 7)j4 pel' cent, interest, are quoted at 102 ])er cent.; the shares of the same road, which in 1887 and 1888 paid 6 per cent, dividends, are quoted at 108^4^. The shares of the bank of the Berlin Kassenverein (5^ percent, dividends) are quoted at 129; the shares of the German I^ank (9 per cent.), at 172 per cent. ; the shares of the Discount Company (12 per cent.), at 233 ^/^ ; the shares of the Tivoli Brewing Comj:)anv (7 per cent.), at 145 ; the shares of the Patzenhofer Brewing Company (55 per cent.), at 738. Taking all the securities together which are quoted on the Berlin exchange, it ap])ears on computation (^ as already indicated above) that in the course of the last year (May 10, 1888 to ^Lay 10, 1889) there has been an advance in the market \aluc in the proportion of 48 to 53 ; /. i'., about 10 per cent. 762 THE SCIENCE OF FINANCE, § 537- The few figures here given from these two great money markets are intended to show two things. In the first place, the figures of aggregates are intended to give some idea of the extent to which this form of investment affects the body of investments taken as a whole. In the second place, the juxtaposition of securities selected as types of different classes, together with the variation of mar- ket value between these different types, may serve to suggest what are the determining causes of the market value of securi- ties, and consequently of the rate of interest. (It is intended to bring out the manner and the causes by which the price of securi- ties, or what is the same thing the rate of interest, is determined in the modern developed money market through the medium of the great stock exchange, — how this rate of interest is deter- mined for the great multitude and variety of investments, not only within the limits of a single industrial community, but within the wider limits of the world-market. 1 It is therefore intended to bring out for our special purpose what are the deter- mining factors that decide the conditions on which public loans are obtained. Let us now take a look at the exchange list of the London exchange, with a view to comparing the quotations of the vari- ous securities which it names. Consols pay an income of 2^, and this is paid for at a capi- talized value of 98^. The annual amount of this income is to remain unchanged until 1903, after which date it falls to 2^ per cent., and may then, after another twenty years, in case a fur- ther reduction of interest should make the transaction profitable for the government, be redeemed at its nominal value of lOO. The rate of 2^ per cent, paid on consols is an expression of the value in use of capital under the conditions prevalent in a wealthy country with a high tax-paying capacity and a highly developed public credit. The loans of the great English railway companies are obtained on conditions closely approximating the low rate of interest achieved by the public debt. Having been issued many years THE PUBLIC CREDIT OF THE PRESENT TIME. 763 ago, when the rate of interest for this class of securities stood at 4 per cent., these railway bonds have appreciated by about one-third, for the reason that, as shown by later loans issued by the same railway companies, the present rate of interest for securities .of this class is only 3 per cent., whereas these bonds secure the continued receipt for the future of the 4 per cent, originally stipulated. It appears, therefore, that the difference in rate of interest on English consols and that on English rail- way bonds is only one-quarter of one per cent. ; the general situation of the English money market is very much the same for both classes of obligations, while the peculiar circumstances affecting the standing of one class and of the other are j:)retty evenly balanced, the security offered by a flourishing railway business (6-8 per cent dividends) on the one side nearly balanc- ing the securit}' offered by the English public credit on the other Dividends range higher among the London banks of deposit. A share of their stock brings a yearly profit of 12^, 15 or 20 per cent. The price of the shares is consequently much higher than it was at the outset ^ — 277, 355 and 467^ per cent. But even at these prices the shares still yield interest at about 4^ per cent. The difference in price between these shares and the securities enumerated above is due to the fact that while the same abundance of capital is available for these enterprises, and while the banks enjoy the highest degree of confidence and do a flourishing business, the rate of the annual profits is uncertain, because these shares represent not a loan, as in the case of the railway bonds, but a share in the business, jThe fact of this uncertainty affects the value of the securities all the more sensibly where, as in this case, the profits are very high, and where, con- sequently, the chance of a decline in the rate of profits is rela- tively great as compared with an investment yielding a low rate of profits. Lastly, there are the foreign public loans. Russian and Hungarian loans pay, nominally and actually, 5 per cent, interest. The nominal 5 per cent. Greek loan is (luotcd at 92, and conse- 764 THE SCIENCE OF FINANCE. quently yields an actual interest on the investment of 5^ per cent.; the Mexican loan of nominally 6 per cent, sells at 95, and accordingly yields an actual interest of 6^ per cent, on the investment ; the Japanese 7 per cent, loan sells at 1 10, the actual interest on the investment being consequently 6^ percent.; the 6 per cent, loan of Santo Domingo, finally, is quoted at 17^, which goes to say that in this case there is no regular payment of interest. If we compare them with the case of the English debt, the varying rate of interest at which the Russian, Greek, Mexican and Japanese obligations are capitalized argues, that in each and all of these countries the financial and political con- ditions requisite to a high national credit are not present in the same degree as in England, and, further, that the transfer of surplus capital from a country possessed of a large accumulation of capital, such as England, to a very distant country meets with a certain peculiar element of distrust on the part of the owners, which hinders a free and uniform distribution of capital. § 538. We may now proceed to compare the selected securi- ties of the London exchange, one b}' one, with the correspond- ing securities on the Berlin exchanare. Relatively to one another the various classes of paper on the Berlin exchange range in much the same fashion as those on the London exchange. In the one case as in the other the price of a railway obligation bearing the same rate of interest is approx- imately the same as that of the corresponding state paper. The difference between the market value of shares in dividend-pay- ing business enterprises and that of a state or railway bond bear- ing interest at the same rate, recurs in Berlin as in London, but in this case as in the former the difference is (juite moderate so long as the stock in question is that of non-speculative under- takings doing a steady and unhazardous business; such, e. g., as the bank of the Berlin Kassenverein, whose shares, when counted at their market price, yield a dividend of about 4 per cent., that is to say, only some one-half per cent, more than the national bonds. In the case of speculative banking enterj)rises with less invariable THK PUBLIC CREDIT OF THE PRESENT TIME. 765 dividends the market price is lower relati\'ely to the dividends ; that is to say, the interest on the in\cstment in these securities is higher. Investments in the German Bank and in the Discount Company pay more than 5 per cent, interest. In case the cHvi- dends are uncommonly high, as in the case of the Patzenhoter Brewery, the risk of a decline in the dividends reacts on the market price of the stock, with the consequence that investments in such securities are made at an unusually high rate of interest (7^ per cent.). All the cases cited are fair typical cxamjjles of what occurs in both the markets in (jucstion. The great difference between the London exchange and that of Berlin lies in this, that the normal level of the rate of inter- est in London is a little lower. This normal level is indicated by the market value of consols in London and of the Prussian bonds in Berlin. Consols bear interest at 2^ per cent., and may be bought at 98^ ; the Prussian bonds bear interest at 3^ per cent, and are sold at 105. The English government, conse- quently, pays its creditors interest at a rate some two-thirds of one per cent, lower than the Prussian government pays its creditors. The ground of this cannot be sought in the different degree of credit enjoyed by the go\'crnments of the two countries ; for the other securities which we have cited as tvpical examples from the two countries in both cases stand in somewhat the same rela- tion to the state paper of their respective countries. The reason must therefore be sought in general causes which decisively affect the general money market of Germany as distinct from the English money market. These grounds are to be sought in peculiar circumstances affecting the money market of each of the two countries ; pecu- liarities which may be expected gradually to disappear with the progressive development of an international monev market, in a manner similar to that in which discrepancies of price in other commodities between one country and another are disappearing. The limit to the discrepancy in question is determined by the obstacles, physical and psychological, in the wav c^f a transfer of capital from one country to another. 766 THE SCIENCE OF FINANCE. § 539. The foregoing remarks are intended to show that the course of prices of securities, or what is the same thing, the rate of interest on securities, depends on two factors ; first, the general condition of the money market, which will vary with the pecu- liarities of the industrial development from which it results, and second, the peculiar circumstances affecting the standing of each particular investment in detail. Both these factors are in constant process of change and- growth. If we compare the situation today in the money mar- ket of London or Berlin with the condition and circumstances of the same market ten or twenty years ago, we find a difference between the present and the past which is common to both mar- kets, and which runs as a characteristic feature through the money markets of all countries ; this characteristic feature is the higher average rate of interest paid at the earlier period. What we have already taken note of as a difference existing between England and Germany reappears as a difference in time between the money market of today and that of earlier years. The rate of interest on" English consols twenty years ago was 3^^ per cent. ; the rate of interest on Prussian state paper was 4^ per cent. The rate of dividends or interest on railway bonds, bank stock and railway stock, relatively to the rates obtained on pub- lic securities, was the same then as now. On an average for the years 1 830-1875 the interest on English consols was 3!- per cent.; on an average for the years 1 839-1 876 the income from the shares of the banks of deposit (London and Westminster Bank, London and County Bank) was 5 per cent.,' and the divi- dends on the shares of the great railway companies averaged about the same. The income from these securities today is 3^ — 3^ per cent."^ The highest rate on investments being yielded by those railways which declare high dividends. As is true of the money market in general, so also with respect to each particular class of securities in detail ; the con- ditions have changed in the course of years. At any rate it is 'William ¥a.rr, Journal of the Statistical Society, 1876, vol. xxxix. pp. 528-530. '^Whitaker's Almanack, 1889, p. 670. .THE PUBLIC CREDIT OF THE PRESENT TIME. 767 impossible to prove conclusively in anv particular case that the standing of any one has remained entirely unchanged, while the presumption ^always is that the current of time wherein all living things lie will have had its effect at cvcrv j)oint. It might be a very difificult matter to ascertain whether the last few decades ha\'e brought fresh developments that have affected the credit of Great Britain. On the other hand, there is every presumption in fa\or of the jiosition that the progres- sive consolidation of the German Empire and of Prussia during this [)criod has affected t,heir credit favorablv. It is a fact which no one will question that Great Britain or the German Emjiire will be able to obtain credit on better terms during an era when thev are making but slight use of their credit than at a time when the contrary is true. It is likewise beyond question that the extended credit operations carried through by the Prus- sian state for the eminently productive purposes of its state railway system must make quite a different impression on the monev market than that produced bv loans of the same amount for war purposes, especially by loans issued during the war. It is certain that the credit of the French nation was lower during and immediatelv after the last great war, when large loans were placed at a rate of about 6 per cent, interest, than at present, when France pays 3^ per cent, interest (3 per cent, r'c/ifcs being quoted at 85). The case is much the same with other securities. English railwav shares approach the level of consols much more nearly at present; the interval twenty or thirty years ago was I^ per cent., it is now scarcely i per cent. It is safe to assume that the ground of this lies in the increasing consolidation of these great enterprises, and in their continued productivity and a con- viction of their permanence. The bonds of the railway com- panies, as well as the shares, have aj)proached nearer to the rate of interest received on investments in consols ; the figures were formerly 4 and 3^ per cent, respectively, while they are now 3 and 2^ per cent, respectively. In all this no notice has been taken of the obvious fact that 768 THE SCIENCE OF FINANCE. any alteration in the productivity of industry will have its influ- ence on the rise and fall of the market values of securities, espe- cially of such securities (shares) as derive their returns directly from the earnings of the business which they represent. It is also to be remarked that we have here been comparing the income ^aelded bv securities simply as interest on an hypothetically invariable amount of capital, and computed at so much per hundred of nominal capital, whereas on the stock exchange the basis of operation is always the actual value of the securities and not the nominal value. § 540. The relation of capitalists to the stock exchange is determined, in a general way, by the degree of attractiveness of the securities offered for investment, and secondarily by the degree of centralization attained, in virtue of which the exchange governs, to a greater or less extent, the entire field of invest- ment. Their relation to the exchange is governed, as regards details, by special circumstances affecting each particular class of securities. It is only through the centralizing force of the trade in securities that the business community has reached the point of affixing a single market value to any given investment, and of correcting any aberrations by a revision from day to day. I' So long as investment has not developed into the form of securities the centralizing force of the trade in investments either fails of its effect, or works out its results slowly and painfully through intermediate steps. The obligations of a German railway enjoy a credit equal to that of German state paper and are therefore only obliged to pay 3^ per cent, interest, but it will take years before equally secure mortgage loans on urban real estate can be brought belo\^' 4^ per cent, interest. If these loans can be thrown into the form of securities of the ordinary kind, as has been the aim for more than a hundred vears past of the Prussian Mort- gage Loan Associations, by the formation of a corporation com- petent to issue such securities, then this interval between mort- gage loans and railway obligations in point of the rate of THE I'UHLIC CREDIT OF TllK I'KESENT TIME. 769 interest will vanish. But if it hcrcbv aj)j)ears that the interests of the persons in need of cai)ital are on the side of securities of a marketable form, it is also true that the adoj)tion of such a mar- ketable form for mortgage securities is also very attractive to capitalists. Through the progressive division of labor, this form of securities will relieve the capitalists of all the trouble- of selecting investments; all the details of this process of selec- tion being shifted to those specially engaged in the business, leaving the investor nothing beyond the decision as to the kind and price of securities desired. Instead of partnershi[) in dis- tant enterprises we shall have joint-stock shares ; instead of mortgage loans, debenture bonds; instead of all pri\-ate loans whatever, state paper. The (juestion as to the character of each of the securities, as compared with its price and as comj)ared with the price and character of all other securities, taken in conjunction with the effect produced by the influx and withdrawal of capital frt)m stock exchange investments, offers capitalists a world-wide field for speculation ; and this speculative activity in its turn, by a further specialization and division of labor, comes to the aid of the traffic in securities in making the recpiisite adjustments. § 541. The acti\'it}' of the stock exchange in its present developed form effects, for one Uii^g'. ^ most painstaking scru- tiny of those classes of investments that can be thrown into the form of marketable securities. This scrutiny, which is, in the first place, effected within the field of a j)articular stock exchange, is immediately and constantl\- made a\ailable for all the \arious exchanges in all countries by the helj) of the modern de\eloj)ed means of communication (telegraph, telej)hone). The decision reached by means of this comj)lex and wide- reaching scrutiny expresses itself in the tjuotations of the vari- ous securities on change. The incessant fluctuations to which these quotations are subject, and the growing minuteness of the fluctuations, increasing with the increasing raj)idity of fluctua- tion, are consecjuences of an ever-increasing nicety of discrimi- 770 THE SCIENCE OF FINANCE. nation. Instead of strong and sudden perturbations we have (here as in the case of any developed trade) a gentle but inces- sant ripple. And this result is possible only in so far as an ever- watchful anticipation of coming events (speculation) comes into retard the action of causes that make for a sudden rise or fall. The moral indignation with which this phase of modern busi- ness life is looked upon by so many, and which must perforce serve in lieu of a knowledge of the facts for large portions of the public, can never be satisfied until the truth is generallv accepted, that any highly developed technical process in business life is sure to be accompanied by phenomena that are questionable on moral grounds and call for efforts at reform.^ The quotations which embody the judgment of the trade on the marketable securities express: (i) the aggregate of the features which go to make up the character of each particular security, such as the rate, degree of permanence and certainty of the interest payment, and therefore of the investment itself ; (2) the rank of the individual securities relatively to all other securities, and finally (3) the relation of the particular invest- ments in question to the general condition of the money market. The selected figures from the Berlin and London exchanges given above express the influence exerted by all these factors upon the securities in question. The relation existing between the market value of any given security and the rate of interest paid by it depends in part on the varying reliability of the invest- ment, in part on the varying circumstances affecting each, and in part on the degree of general development of the money market ; this relation varies incessantly, but the fluctuations are always the outcome of a close scrutiny of facts. In any orderly national economy the obligations of the state will ordinarily stand for a normally perfect security, as well as for the lowest normal rate of interest. § 542. The administration of the public debt is aware that the price of securities, or the rate of interest at which a given ' Cf. a paper by the present writer on "Differenzgeschafte " {Volkswirt/isclia/tlicke Aufsdtze, 1882, pp. 671 et seq.) and the literature there cited. THE PUBLIC CREDIT OF THE PRESENT TIME. 77 1 loan contracted for a given purpose can be placed, depends on all the factors which we have enumerated : the condition of the national credit for the time being, the extent of its demand for loans, the situation of the general money market, the amount of available capital, and other circumstances affecting invest- ments at home and abroad. In issuing a public loan, therefore, the effort is to place it in such a way as to best allow for the fluctuations in the rate of interest and the price of securities which result from the action of these various factors. The points to be considered in this con- nection in issuing a loan arc (i) the nominal rate of interest, (2) the term for which the loan is negotiated, or in other words the question as to whether it is to be terminable on the motion of the creditors, and if so, after how long a time. The nominal rate of interest coincides with the real rate in the case of short loans, where the loan is terminable at the option of either party, so that the rate of interest originally agreed upon can readily be adjusted to the fluctuations of the market. The fluctuations of the rate of discount in such cases lead to readjustment between the creditor and debtor by a sim- ple direct alteration of the terms of the contract, just as happens in all analogous contracts (lease) when one of the parties, on dis- covering an alteration in current prices favorable to himself, brings on a raising or lowering of the price previously agreed upon by terminating the old contract. The process is more complicated in cases where this direct means of adjustment is wanting, where the agreement is either not terminable or terminable only at the option of one party, or at least not terminable until after a period of years. In such cases, inasmuch as the original agreement continues in force for a long time, the necessity of an adjustment to the altered condi- tions of the money market is constrained to find some other way. The market value of the loan rises or falls according as the rate of interest originally agreed upon exceeds or falls short of the rate obtainable for the time being. It is the office of a developed stock exchange to insure that these fluctuations in value find the 772 THE SCIENCE OF FINANCE. most exact possible expression in the market quotations from day to day. Since the length of time for which the loan is negotiated affects the course of the state's obligations, it clearly follows that the terms of the loan, as to whether it is to be terminable, and how soon it is terminable, and whether it may be terminated on the motion of one or of both parties, — all these considerations will influence the rate of interest at which public loans can be ])laced. It is for the interest of the creditors to secure the privilege of terminating the loan at their own option, while the interest of the debtor state, on the other hand, is to secure for itself the fullest discretion with regard to terminating any of its obliga- tions. But, as we have already seen, the creditor's right to terminate a loan tends on independent grounds to vanish with the development of the public credit ; this leaves no other pro- tection for the interests of the creditor than such measures as will limit the right of the state to terminate its obligations. The state for its part will find itself obliged to make certain concessions in this direction, for the reason that without these concessions the terms on which it could place its loans would be still more disadvantageous. All this holds with added force during a season of distress, when loans can in anv case be obtained only on less favorable terms, and when the great amount of loans required may itself give rise to additional difificultv. § 543. The outcome of all these considerations is almost always a compromise. The creditors are assured a given rate of interest for a series of years, which implies the chance of a rise in market value wherever the national credit improves or money gets "easier." But the state sets certain limits to these advan- tages granted the creditors by reserving the right of redemption after the lapse of a series of years. One method by which this result is accomj)lished is that which was employed in the great French loans of 1872. The state engaged to pa}' its creditors interest at the rate of 6 per cent, in point of fact, but this was accomplished by issuing obligations THE PUBLIC CREDl r Ol- TIIK FKKSENT TIME. 773 bearing- a nominal interest of 5 per cent, and selling them at 83. Since these obligations have a face value of lOO the state can- not pay less than 100 when it comes to redeem them. That is to say, the creditors can be deprived of their 6 per cent, rate of interest only at the cost of 17 j)er cent, increase of the principal of the debt. This provision was sufficiently attractive to the cap- italists to bring a superabundance of offers for the state securi- ties ; while if the French government had reserved the right of redemption after a year's time a good share of the readiness manifested by the capitalists would have disappeared. But the concession made by the governmeivt also lies entirely within the limits set by this discount of 17 per cent. The government can not be held to pay more 'in discharge of the debt than 100. Consecjuently as soon as it can place loans of less than 5 per cent, (when this loan will rise above lOO) the government is able to redeem it at 1 00. The meaning of the so-called low rate loans is that a rela- tively long time will elapse before the state can exercise its right of redemption. If, e.g:, the French loan of 1872 had been issued at a nominal rate of interest of three per cent, and obligations of a face value of 100 had been disposed of at 50, then these obli- gations would today stand at 85 instead of the 50 per cent, discount at which they were issued. The state would therefore, after a lapse of seventeen years, and in spite of a great reduction in the normal rate of interest on government paper, not be able to discharge the debt without suffering a loss, while as regards the creditors they would still have a chance of gaining a further 15 j)er cent, after having ahead v made a profit of 35 per cent. The opposite extreme to this method would have been the placing of a six per cent, loan at j)ar; this would have conceded to the creditors no chance of making a j^rofit above the interest and no chance of permanentlv drawing interest at the rate agreed on in case the normal rate of interest should decline, unless, indeed, the state had bound itself in some other wav to suspend its right to redeem.' ■ As a peculiar l)ut unusual case it may liapi)cii that the government is in receipt 774 THE SCIENCE OF FINAN'CE. § 544. At a season when there is an abundance of capital, when the public credit is gaining, and when the present has in addition the advantage of being compared with a recently pre- ceding period »f war loans (France in 1 870-1873, the United States in 1 862-1 865) such as we have witnessed of late, the advantages to be gained through a reduction of the rate of interest brings on an era of interest reduction,' the result is a lightening of the burden of the nation and a reduction of the income of the capitalists. This process of reduction of the rate of interest may be viewed from three distinct points of view : of legality, of equity, and of expediency. As to the question of legality, it is to be accepted as a matter of course that any modern state must reserve to itself, in the terms on which the loan is issued, all the rights and privileges which it wishes to exercise at all. The state can exercise no right of redemption, and therefore effect no reduction of interest, unless on the basis of the terms of the contract. The question of equity is somewhat more difficult. It is a matter of experience that, even in the case of loans in which the state has no interest, considerations of fairness and equity will modify the tendency to a reduction of interest in special cases. This serves to illustrate the truth that the determining factors in business life are not mechanical but moral forces. An exam- ple of this is afforded by the funds which have been loaned out by benevolent institutions and have afterwards not been repaid by the benevolent debtors of the institution when the normal rate of interest has declined. The fact may be cited as a case of a large surplus revenue which might advantageously be applied to the dis- charge of the debt, except for ithe obstacle that the terms on which the loan was negotiated prevent redemption of the debt until a later date, while the bonds in question bearing interest at a rate above the present normal rate have advanced in price so that they could be bought in the open market only at a considerable premium. This exceptional state of things exists at present (1889) in the United States of America. 'G. Schanz "Die Konvertirung preussischer Staatsichulden," Finanzarchiv , 1885, pp. 1085 et seq. M. Stroll, "Ueber die neueste Konversions-Aera in Deutschland," Con- rad's ya/^r(5//'t"/^fr, 1886, N. F. vol. xiii. pp. 422 et seq. THE PUBLIC CREDIT OF THE PRESENT TIME. 775 in point that the Professors' Widows' Fund of Gottingcn has been able to draw interest at 4)^ jjcr cent, on a good share of its capital because the debtors, out of a regard for the benevolent purpose of the loan, have declined to take advantage of the reduction that has occurred in the normal rate of interest and so insist on a reduction or a discharge of the debt. There is all the more urgent reason for the demand that the state shall, in a sim- ilar manner, have regard to other considerations than the course of the market; for we are accustomed to measure the doings of the state by a higher standard than that which governs the rela- tions of the market-place. But even if we concede the justice of this view, or rather if we lay stress on it, we shall by no means come to the conclusion that attention to the financial advantage of a reduction of interest is incompatible with the higher considerations of equity or of benev- olence — in short the social-political bearing of the question. In all the activity which the state (or the commune) puts forth in the field of financial and industrial policy, the decision that has to be made does not concern the question what is right or equitable absolutely, but rather what is the aggregate of inter- ests to be taken into consideration on one side and on the other. An improvement of the conditions on which the state obtains its loans means a lightening of the burdens of the taxpayers ; any regard for the public creditors is only a regard for one part of the taxpayers, if it is not, as is sometimes the case, a regard for interests lying entirely outside the compass of the state. Now, the constitution of the tax-paying body of citizens being what it is, and the tax burdens being distributed in the manner in which they are distributed under existing systems of taxation, a very considerable portion of the tax burden falls on the shoulders of people who never, or, at the best, very seldom, are in position to hold any share in the national securities. Relatively speaking, the most favorably situated with respect to such participation are the lower classes of the population in France ; but even as concerns that country the fact does not admit of question that the preponderant body of interests con- 7/6 THE SCIENCE OF FINANCE. cerncd in the question of taxation is not to be sought in the holdings of rentes among the lower classes.' But even under an imaginary condition of things, where par- ticipation in the ownership of the public debt among the lower classes prevails to the very greatest possible extent, it is impos- sible to comprehend why we should disregard the plain dictates of jusdce, which demand that the burden of the debt and of tax payment should be reduced to the lowest figure that the state of the money market and of the public credit will admit. Regard for the great number of households in moderate circumstances which depend entirely or mainly on income from the public funds, must not blind us to the fact that there is always a much greater number of households that have to contribute out of the product of their labor in order to pa)^ interest on the funds. "" It may be added that the familiar catch-words about "widows and orphans" are very frequently nothing but a cloak to the selfish greed of great capitalists. ^545. The question of expediency, as regards any reduction of interest on the public debt, depends chiefly on the considera- tion that in order to a successful move in this direction the state of the monev market and of the public credit must be such as to enable the state to raise the funds required at the lower rate of interest aimed at. A conversion is not an unmixed success if the previous holders of the public securities are not content to con- tinue holding the government paper at the lower rate of interest ; 'Of the English public debt fully one-third (34.2 per cent.) is held in small amounts (incomes of less than five pounds sterling) ; a further one-sixth (15.5 per cent.) in amounts of 5-10 pounds sterling, and still another third in amounts of 10-50 pounds income. Still the whole of the debt was (1870) distributed among only 231,349 differ- ent holders, while the number of taxpayers in Great Britain and Ireland at the same date was nearly 10 millions. — Fiuajizarchiv, 1884, p. 266. Leroy-Beaulieu (Traite de la science des finances, 1877, p. 450) estimates the number of holders of ;v;//d'.f in France in 1869 at 7-8 hundred thousand, and is of the opinion that the number had been decupled during the period 1830-1869, although the amount of the public debt during the same time had only doubled. But the number of taxpayers in France, too, is some 10 millions, and therefore fully ten times as many as the holders of rentes. -Cf. the debates in the Prussian Landtag, 1884-85. Printed in the Finanzarchiv, 1885, pp. I0Q2 et scq. THE PUBLIC CKKDIT OF" THE PRESENT TIME. 'J']'] that is to say, if the funds offered by the state in j)avnient of the debt are, in whole or in part, actually paid over to the creditors and so have to be replaced out of loans from a new set of cred- itors. It has been estimated, e.g., that the sum paid over in the conversion of the Russian public debt to the German creditors alone, amounts to 260 million marks.' The more highly the public credit of anv communitv is devel- oj)ed, the more plentiful the supi:)ly of capital, and, especiallv, the greater the influence of the owners of capital and public funds upon the national administration, the more rarely will a mistake of this kind be made, and the more fretjuently will a mistake of the opposite character be made. The reduction of interest in such cases is apt to follow the state of the money market only tardily. Apart from certain very striking cxamjiles of this (such as the long postponed reduction of the interest on the French 5 per cent, loan, which, when finally effected in 1883,* reduced the inter- est only by the inadequate figure of one-half per cent. ) , this meas- ure has been resorted to with extreme caution also in Germany. The Prussian 4^/^ per cent, public loan created by the Consol- idation Act of December 19, 1869, was, by the terms of the Act, redeemable after January i, 1885. The 4^/^ per cent, consols had by 1883 advanced to 106, and had then declined in view of the approaching redemption. The 4 per cent, consols had gone above par as early as 1880, and had advanced to 102 in 1883 and to 103^ in 1884. Due regard for the aggregate of ta.xpav- ers demanded (such is the language of the Bcghtndnng of the government's bill) a reduction of the rate of interest. Of the 45^ per cent, consols 545.78 million marks were outstanding at the beginning of 1885, requiring a yearly interest j)ayment of 24.56 million marks. A reduction of the rate of interest by ^ per cent, would mean a relief of 2.73 million marks for the tax- payers. The government was content to effect this much of a reduction, although the rate at which the 4 per cent, bonds were ^ Nationalzeitung, August 3, 1889. ' Finatizarchiv, 1885, p. 1094. The 5 per cent, retites had risen to 120. The annual saving from a reduction of one-half per cent, in the rate of interest amounts to 34 million francs. 778 THE SCIENCE OF FINANCE. quoted was proof that a further reduction could have been success- fully carried out. The reason for this course was, partly, " consid- eration for the creditors," partly a solicitude lest capital should be transferred to more alluring but less secure speculative investments. These were the considerations upon which the law of March 4, 1885, was based. A majority of the Landtag sided with the gov- ernment. There was a scattering opposition' (on part of the Ultra- montanes and the Conservatives) which even went the length of denouncing convertible public loans as vicious in principle. But this position was deprecated by the government as an "altogether infelicitous idea" \iiberaus tmgliicklicher Geda?ike^. On the other hand, the upper house advocated a more sweeping reduction of interest on the ground that a gift to the state's creditors, such as was implied in offering them the 4 per cent, bonds (then quoted at 104.70) was entirely unjustifiable. This view was advocated more especially by the former Finance Minister Camphausen. The fact is that the 3^ per cent. Prussian public funds which were nearly at par in 1885 have since then advanced to 105 and even over that figure.'' By October 1886 a reduction from 4 per cent, paper to 3 ^ per cent, (and even in part to 3 per cent.) had been effected in other German securities, especially in mortgage bonds, railway securities and railway bonds ; the entire amount of securities converted being not less than 1450 million marks. 3 It is of course evident that in the case of these securities the motives of everyday business life would act with less hindrance or scruple than in the case of the public securities. The great body of 4 per cent, paper is made up of loans issued by the Empire and the individual states. Of these secu- rities there were outstanding at the end of 1886 about 6200 mil- lion marks, which were still awaiting conversion to 3^ per cent.; that is to say, relief might be afforded the German taxpayers by this means to an amount of 30 million marks annuallv. But the question of a transition from 4 to 3^/^ per cent, is evidently the same as the earlier question of a transition from 4^ to 4 per cent. 'Cf. the defense of this position offered by M. Stroll, Conrad's /ci/trfi/ic/wr, 1886. * Quoted on the Berlin exchange August 6, 1889, at 105.20. ^StrOll, Conrad's /a//>-i//c/ter, 1886, N. F. vol. xiii. p. 424. THE PUBLIC CREDIT OF THE PRESENT TIME. 779 § 546. The fiscal measure of a reduction of the rate of interest is more frequently spoken of by the name of "conversion" or "refunding," because of the change by which paper bearing inter- est at a higher rate is replaced by paper bearing interest at a lower rate. This measure comprises both of the operations which bring the public credit of today into relation with the money market, viz., the negotiation and the discharge of debt. The more thoroughly centralized and organized the money market is, the more unavoidably is every considerable transaction in credit dependent on this central organ, whether in borrowing or in repaying borrowed capital. The reason for this is very simple. In proportion to the efficiency with which the market for securities performs its work will it become the focus both of the demand and of the suppl)' of capital. The market gathers, as it were into a central rcser\oir, all manner of securities, varying in point of the rate of interest, the degree of security of the paper, donrestic or foreign, in point of kind, etc. By this means it offers an opportunity to choose between different forms of investment, and consequently an opportunity to withdraw from any one and transfer the invest- ment to anv other. The result is that any new demand for cap- ital or for an opportunity to invest capital on entering the mar- ket is confronted w4th a great body of material from which it can pick and choose, and on which it can work out its own effect. The latest fashion in the redemption of public debts, which has long since left obligatory redemption behind it as obsolete, and which redeems or not, or redeems more or less from year to year according to the general situation of the finances — this latest method of redemption can in no way effect its purpose better than by a purchase of the securities in the open market. In placing the public loans, choice may be made either of this method, or of a direct application of the public administration to the investing public. Of this latter kind was the employment of the Grand Livre in France, above referred to, and the ramifi- cation of that institution through the provinces ; the like is true of all those forms of public debt which are of the nature of a 780 THE SCIENCE OF FINANCE. savings-bank for the people. But these forms of public debt afford no adequate reliance for the public finances on account of their irregularity and uncertainty ; the stock exchange, on the other hand, in proportion to the degree of its development, offers an effective means of obtaining large amounts of capital in a consolidated form. All this holds true with added force if the magnitude of the sums demanded, or any other circumstance affecting the situation, makes it necessary for the state to go out- side its own boundaries for a loan. In such a case the exchange is the only organ possessed by the world's money market by which to obtain control of the funds required. A striking example of this is afforded by the great French loan negotiated after the late war. IV. GOVERNMENT PAPER MONEY AND THE RESUMPTION OF SPECIE PAYMENTS. S 547. The expedience of the United States of America dur- ing the Civil War is full of instruction and warning for the nations of Europe; it shows that the sudden demands of a great war mav not onlv plunge a state whose credit and finances have pre- viously been in the most prosperous condition, deeply in debt, but may bring on the further related calamity, of far-reaching significance for the whole of the nation's industrial life — a regime of paper money. This experience serves to show, espe- cially, that apart from any of those abuses of the permanent fiscal machinery (^. g:, debts, taxes) that are apt to accompany a war epoch, there is a distinct financial danger involved in the employment of bank notes, paper monev, etc. This financial danger threatens any financial system, however stable and orderly, if only the political exigencies are present that are cal- culated to give rise to it. A discussion of paper money, therefore, has more than an historical interest, as dealing with one stage or one form of the development of public credit; — a stage which has been passed through and left behind, at least by the national economics of more mature growth. Such a discussion mav be of practical THE PUBLIC CREDIT OF THE PRESENT TIME. 78 1 value in shedding light upon conditions which exist in many states today, and which ma}' recur in other states as well, even in spite of all known precautionary measures. § 548. Reference may here be made to the observations con- tained ip the introductory portion of this work (Vol. I. Sec. 412), where, in speaking of money in general, some attention is given to the subject of substitutes for money and the degenera- tion to which such substitutes are liable. Even in the days of ancient Greece both debasement of the coin and the use of sub stitutes for coin were resorted to as fiscal expedients. Even Solon remarked that many of the Hellenic states made use of silver monev with an allov of lead or cop[>er, which was recei\'ed only at a heaw discount, if at all, in foreign trade. When the Clazomenians were twenty talents in arrears in the ])av due their mercenaries and were unable to raise the monev, they, in order to save interest on the debt, minted iron coins to the amount of twenty talents, ascribed to them the value of silver coins, and distributed them among the wealthiest men in return for silver, with which they discharged the debt. Within the country the iron coins served the same purpose as sih'er, and the latter could therefore be turned to use in foreign trade. To this extent, says' August Bockh,' iron served the purpose for the Clazomenians which paper money serves in our day. Even at that early day this expedient profited by the con- fused notions prevalent with regard to the nature of money. The two opposite views on this subject, and the wrongheadedness of both, were recognized as early as Aristotle's time.' Now we are told, savs he, that wealth consists in money. Then, again, that money is nothing but a name ; that of itself it is of no value, and what value it possesses is due to the law alone, without which it would be of no use. Plato is of the latter view, and the monev which he wishes to employ in his republic is of a nature to correspond to this principle. ^ The Utopias of later ' Die Staatshaiishaituns <^^'' Atliener (2cl eil., 185 1 ). vol. i. p. 768. ^ Politica, i. 3, 6. 3Buchsensciuitz, Besilz uml Erwerh iin griec/iisc/ieu AlUrtlium (l86q). p. 480. 782 THE SCIENCE OF FINANXE. socialistic writers are affected with a bias of the same kind. J. G. Fichte is of the opinion that a closed commercial state can make anything whatever its money by declaring that it will accept nothing in payment but this money.' Of French writers, Boisguillebert is to be cited before all others as an advocate of the view that "if men would agree among themselves they could, easily abolish money altogether.'"' H. D. Macleod has re-affirmed the same view within the last generation. 3 The apostles of Rousseau who tried to put his ideas in practice in the French Revolution (St. Just) wanted to adopt a coin that could nev'er circulate in foreign countries. '^ Indeed, an eminent German historian has in very recent times expressed the opinion that "the best exponent of value, in itself considered, is a token money with the least possible intrinsic value, which, in its most perfect development, would measure the value of other articles almost as exactly as a clock measures time or a yard-stick meas- ures space. "5 § 549. In measuring space with a yard-stick we use a (pre- viously determined) extent of space as a measure for another extent of space (to be determined). In measuring economic value we can no more employ as a standard anything that is as nearly devoid of intrinsic value as may be, than we can measure space by means of something that is as nearly devoid of exten- sion as may be. As length can be measured only by length, so value can be measured only by value. The seductive promise contained in this erroneous theory is especially dangerous because it sets up as an ideal what is in point of fact only a derangement of any orderly monetary sys- tem, and due entirely to extraordinary financial exigencies. A well-ordered monetary system admits the use of such sub- stitutes for money only as confine themselves to serving in place ' Der gesc/ilossene Handelsstaat (l8oo), p. 91. ^ Zeitschrift fur die gesatiunte Staatswissenschaft, 1869, p. 395. ^Dictionary of Political Economy (London, 1863), Art. "Credit." "•Sybel, Geschichte der Kevoltitiotiszeit (4th ed. 1877), vol iii. p. 159. sMommsen, Geschichte des romischen Miinzwesens (1860J, p. vi. THE PUBLIC CREDIT OF THE I'KESENT TIME. 783 of specie for purposes of payment and circulation, without departing from the specie basis. They are substitutes for mortey for certain purposes, without arrogating to themselves those functions of money which they are not capable of j)crforming. They are substitutes for money as a circulating medium, not as a standard of value. They may serve as a svmbol of value, but they cannot serve as a standard of value without assuming a function that is beyond their competency. It follows from their character as substitutes for money that they possess value only in virtue of the belief that thev will be redeemed in specie, and onlv to the amount of the sj)ccie obtainable for them. They cease to be evidences of debt when it is attempted to erect them into money independent of a specie basis. A distinction is accordingly to be made between paper money in the broad sense and paper money in the strict sense. The former categorv comprises — to follow the usage of everyday life — those substitutes for monev that are emploved in a well-ordered monetarv svstem. Paper monev in the stricter sense comprises only such substitutes for money as attempt to supplant specie currency by force of legal enactment, by suspen- sion of specie payments and the assigning of a legal-tender quality to the paper, the paper in this way taking the place of coin as money. It is this final step that is unsound. The idea is untenable that anything not possessed of intrinsic value can be made into monev ; paper can maintain its position in the monetary system only so long as the fact is not lost sight of that it is in origin and essential nature an evidence of debt ; its function as circula- ting medium rests on its credit, and this credit is imj)aired by a suspension of specie payments. True paper money is therefore a degenerate credit money. § 550. That the value of paper money is an open question is shown by the unavoidable fluctuations in its value. These fluctua- tions mav be masked for the time by certain legislative provi- sions, but in point of fact they can no more be avoided in the 784 THE SCIENCE OF FINANCE. case of paper monev than in that of debasement of the coin or substitution of the minor coins for standard coin. By suspen- sion of the convertibility into coin the identity of value between paper and coin is brought to an end. In place of an identity we ha\'e a divergence in \'alue between paper and specie, the extent of which is not to be determined beforehand. For, inasmuch as the paper has no intrinsic value, but acquires a value solely on the strength of a hope of its future redemption in specie, the ques- tion as to how far the value of the paper will depart from that of sjiccie depends on the degree of confidence which exists as to its convertibility. If the state's credit is exce])tionally good and the period of suspension is a relatively short one, then it may happen, in a favorable case, that the divergence in value between paper and specie is inappreciable ; such was the case in France during and immediately after the last war. But this happens only by rare exception. The most recent experiences with paper currency in Austria, Russia, and the United States have been much less favor- able. Forced circulation and inconvertibility of the paper money, together with an enormous issue of the paper, the depre- ciation of which only affords occasion for a still greater issue, — - all this has resulted in an extreme depreciation, with the second- ary consequence of a great fluctuation of values. The first recjuirement of any standard of measurement is that it must remain constant, so as to afford a reliable unit for the measure of other things. This requirement is binding on money as a measure of value. The thought given to the question of what is the best specie standard and the debate about the dif- ferent possible standards (silver, gold, or double standard) turns, in the last analysis, on the question which of them answers most satisfactorily to this recjuirement of a fixity of value. It must be conceded at the outset that in the nature of things a paper currency docs not meet this requirement. Paper can of course have no stability ; it flutters in the wind of public opinion and expectation regarding its value relatively to specie. Paper also differs from a specie currency in this, that it is deprived THE PUBLIC CREDIT OF THE PRESENT TIME. 785 of the support and regulation which the latter enjoys in the influx and withdrawal of the specie circulating in foreign countries ; gold and silver have an international value, but that is not the case with a paper currency, which has no intrinsic value, and circulates only in virtue of the enactment and compulsion of the state in question. §551. The historical data bearing on the employment of paper money and its mischievous effects may be found in sufficient abundance in the history of modern countries. It is of course a one-sided economic position to assert that we should "rather let the state perish than resort to forced circulation."' This view overlooks the fact that economic institutions are only means, and not the end of the national life. But apart from exaggerations of this sort, the testimony of history is well agreed that a paper-money regime is an abnormal condition of the politi- cal and industrial life of any nation, and that it is to be justified only as an expedient in the state's direst necessity, and is to be avoided by all means if it possibly can be avoided. The most extravagant known example of a paper-money regime was that of the French Revolution. As the regular sources of revenue failed and repeated exac- tions yielded a progressively slighter result, the successive go\crn- ments of the Revolution found themselves all the more irresist- ibly pushed to a paper currency with forced circulation (assig- nats) as their last resort. Down to January i, 1793, 3600 mil- lion francs had been put in circulation. The year 1793 doubled this amount, and the first half of 1794 added a further incre- ment of 1000 millions. The assignats, which at the beginning of 1793 had stood at 61, declined from week to week in spite of all the penal enactments of the Terror until they reached 17 per cent., although every payment and every increase of price aggregating more than 500,000 francs vyas watched by spies and visited with the penalties of imprisonment and death. The Com- mittee of Safety itself was obliged to violate its own law, in that ' This expression marks the climax of the German free-trade school and <>( their Economic Congress (Hanover, 1864). 786 THE SCIENCE OF FINANCE. it both paid prices for goods corresponding to the rapid depre- ciation of the assignats, and also obtained specie on the very- most onerous conditions for use in its purchases abroad.' By the end of May, 1795, the amount of paper money issued had risen to nearly ten milliards, and its value had declined to 7 per cent. The depreciation constantly led to further issues. By the end of August, 1795, there were 16 milliards in circulation, at a market value of 2)^ per cent. Consequently anyone who had obtained a loan of 10,000 francs in 1790 would discharge it in the summer of 1795 by paying it in assignats of the same nominal value, but which could be bought for 250 francs in specie. A tenant who paid his rent in assignats would be able to discharge the annual rent of an entire estate with a single sack of corn. The experience of Austria with its "bank bills" \^Bafico- zetteln\ at the beginning of the nineteenth century was not much more gratifying. At every succeeding conclusion of peace there was an increasing amount in circulation : Campo-Formio, 150 mil- lion gulden; Luneville, 340 millions; Pressburg, 450 millions; Vienna, 860 millions. The value of the bank bills in December 1 8 10, fell below 1200 paper gulden to 100 gulden in silver, and thenceforward fluctuated rapidly and violently by hundreds of points above and below that level. ^ The continued growth of public credit, and the greater polit- ical stability and wealth which have been achieved in the course of the nineteenth century, have acted to diminish these extreme manifestations of the paper-money system. The fluctuations in the value of paper money as compared with specie in Austria, Russia and the United States during the last generation, have moved within a narrower range. During the years 1854-1855 the depreciation of the Austrian paper money amounted to 20-30 per cent., the very highest being 42 per cent.; 3 and at the same time the Russian paper money, originating from the same cause (the Crimean War), showed a considerably less depreciation, 'Von Sybel, Geschichte der Revolutionszeit (1877), vol. iii. pp. 175, 331, 407 et seq.; Ramel, Finances de la France en Pan IX. * Wagner, Zeitschrift fur die gesainmle Staatsivissenschaft, 1861, p. 593. 3 Helferich, Zeitschrift fiir die gesammte Staatswissenschaft, 1856, p. 429. THE PUBLIC CREDIT OF THE PRESENT TIME. 787 about 16 per cent., a phenomenon which has since recurred' with the recurrence of a war situation (1859, 1866, 1870, 1877); in Austria it has recurred twice, in 1859 and 1866. But even when the depreciation and the fluctuations in the value of paper money are confined, as they latterly have been, within these relatively narrow limits, the results are still so dubious as to call for a closer consideration of the effects of a paper-money regime and the remedies for it. § 552. The fundamental fact in the fluctuation of the value of paper money (depreciation of paper, premium on specie, or discount) is the loss of confidence in the nominal value of the paper which on its face is the equivalent of a specified amount of the specie previously in circulation. This loss of confidence occurs because specie paymen^^s are susj^ended under circum- stances which afford ground for reasonable doubt as to the ability of the government issuing the paper money to redeem it in the future. The result is a divergence between the real value and the nominal value, based on the degree of probability of a future redemption, and also affected by the amount of paper money issued. The legal fiction by which the government is apt to try to conceal this divergence, viz., the recognition of both sj)ecie and paper as equally competent means of payment, cannot prevent payments from being, in point of fact, made in the cheaper money. Paper money is offered to everyone who has a payment to receive, while specie is hoarded, is hidden away, or goes abroad, for it is only the international currency, specie, and not the national currency, paper money, that has any purchasing power in transactions between one country and another. The result is similar (only more strongly marked) to what occurs in the case of a double standard (vol. i. sec. 413) when a prefer- ence is shown between two legally equivalent metals, or when the circulation is flooded with light-weight coin (debased, by intention or by inattention) or with the minor coins ; the coin ' Wagner, Die russiscke Papierwdhrung (1868), p. 142. 788 THE SCIENCE OF FINANCE. of full value is in such cases crowded out because the law authorizes payment in the cheaper coins. The difference in degree of severity of these pathological phenomena in the case of an unhomogeneous metallic currency as contrasted with a mixed currency of paper and specie is due to the fact that the cheaper coins have stable intrinsic value, though less than that of the dearer, while the paper has no intrinsic value whatever. The result is that the divergence of the paper from the value of specie is potentially unlimited, its degree depending entirely on the degree of confidence with which it is regarded and the amount in circulation. Debased coin, or the cheaper metal in a double standard, possesses a norm in its own intrinsic value which fixes its purchasing power. Paper money has no such intrinsic stability, and consequently fluctuates in value back and forth. The evil of which paper money is capable is therefore, as it were, a multiple of that wrought by a coin that is below standard. The latter inflicts damage but once and for a short time on those who have payments to receive, viz., during the interval while the facts about the base coin are penetrating into the popular knowledge and appreciation. With paper money this interval is an indefinite period, lasting as long as specie payments are sus- pended. Every shock to the public credit lowers the value of the paper ; every fresh depreciation of the paper is an occasion to the government for fresh issues ; and every fresh issue acts in the direction of a further decline. § 553- ^^ absolutely unvar^-ing standard of value is an unattainable ideal, even with the best possible provision for a metallic currency, because all valuable objects, including the precious metals, vary in intrinsic value, as the effect of general causes. But this difficulty is accentuated in an extreme degree in the- case of a paper currency, because such a currency has ^lo independent value whatever. The shortcoming of even the most perfect standard of value lies in this, that it is compelled to assume as a fixed norm what THE PUBLIC CREDIT OF THE PRESENT TIME. 789 is in the nature of things a variable ; and the result of this imperfection, for the business of the community, is that all pecuniary relations, between private parties among themselves and between private parties and the state, have to j>roceed on the assumption of invariability in a basis which is esscntiallv variable. All future payments due in virtue of a contract entered into today, for loans, rent, wages, salaries, etc., will con- sequently not represent just the same value when it falls due. This uncertainty is increased indefinitely under a regime of paper money. A sudden outbreak of war, even when the state in question is not a participant except as an interested third party, may cause a depreciation of the state's paper money to the extent of 20-30 per cent. (Russia in 1870); and recent loans negotiated for a short term will be found by the creditors on maturity to have shrunk by 20-30 per cent, in spite of their nominally unaltered amount. The consequence is that the entire system of pecuniary rela- tions and transactions is permeated with an clement of risk. All monetary affairs are suspended in a shimmering atmosphere of advance and decline, so that everyone concerned in business becomes perforce a participant in a game of chance, in which he gains and loses with varying fortune. Even the expedient of making all contracts payable in specie is no protection against the evil. In the great proportion of cases one's interests are better protected against the fluctuations of paper money by mak- ing contracts in terms of paper. The reason for this is to be sought in the circumstances which go to neutralize the abrupt- ness of the fluctuations of value, viz., the tardiness with which variations in discount are propagated from the great centers of business, of the foreign exchanges, the export and im[)ort trade, through the lesser ramifications of the business community into the affairs of everyday life. The case affords an illustration of the general principle that prices are not fixed with the precision observable in physical phenomena, their determination being effected through the instrumentality of less calculable human factors — customs, opinions, transactions. For a short term, 790 THE SCIENCE OF FINANCE. therefore, the employment of the paper currency would in most cases afford a relatively greater security against fluctuations than the use of specie, as the point of importance to those who receive the payments would, after all, commonly lie in the rela- tion of the payment to prices as expressed in terms of paper. § 554. An incidental effect of a paper currency is that it brings certain temporary benefits and gains to certain classes of the people, but only at the expense of the rest of the community. The chief case to be cited of this kind is the quasi-protective effect resulting from the fact that the discount on the paper money does not correspond precisely to the rise of domestic prices due to the use of the paper currency. As already pointed out, the discount which manifests itself so obviously in all busi- ness on a large scale translates itself but slowly into the prices of domestic products ; all the more slowly the more remote the locality is from the great business centers, and the less highly developed the means of communication are. In such situations the prices fixed under a specie currency may maintain themselves for years under a paper-money regime.' The result is that those branches of business which are occupied with buying products in the remote country districts at the old price and selling them at the centers of trade at the new price, augmented by the discount on paper, enjoy an exceptional advantage. This advantage is obviously greatest in cases where the depreciation of paper is great and rapid, especially if it takes place by a sudden drop, to which the prices prevalent in remote districts are able to adjust themselves but slowly if at all. The resistance offered to a resumption of specie payments by the interests that have got used to the quasi-protective advan- tages secured them by the paper-money regime is to be explained on like grounds. The retention of the paper currency is demanded as a measure of protection (United States, Austria, etc.), and viewed in this light the demand is quite intelligible. The decline of the premium on specie brings a decline of the ' Cf . Wagner, Die russische Papierwdhrmijr (1868), pp. 103 et seq. THE PUBLIC CREDIT OF THE PRESENT TIME. 79 1 prices (in paper) of articles of exj)ort, and so makes them com- pare unfavorably with the j)rices of the same articles in the pri- mary markets, which have been gradually advancing under the pressure of the premium. With a return to specie payments, therefore, the supply of products for export can be obtained only at a relative advance. What has been said of the export trade will be found to hold in much the same manner of the import of goods from abroad. As the premium advances import prices (in paper) advance, and the corresponding advance in retail prices can be effected only gradually. After this adjustment has once been effected, a resumption of specie payments will lower the import price and so give foreign an advantage over domestic goods in the home market. This advantage will be more pronounced the more fully domestic prices have been adjusted to the premium during the ijegime of paper money. The premium accordingly acts as an export bounty on the home products and as a protective tax against foreign competi- tion. This protective feature of a paper currency has something in common with the measures of industrial policy emploved (at times quite legitimately) with the same end in view. But there is in sundry respects a difference unfavorable to the paper cur- rency. In the first place, a protective duty or an export bounty is placed where a deliberate canvass of the situation shows that it will be of advantage. A blindly accidental secondary effect, following undesignedly from financial distress, is not to be compared with such an intelligently constructed measure of protection, even if it does produce a result of the same general nature. But in the second place, this circuitous wav of reaching the desired end is altogether too unwieldy and costly ; for it is always to be recognized that a paper-money system is very detri- mental to the general economic interests of the community. If special advantages are to be afforded particular branches of industry by state interference, the direct method is cheaper and more effective. 792 THE SCIENCE OF FINANCE. § 555. The governments of the great states of today when- ever they have become involved in a paper-money system, have, without exception, made efforts to clear themselves of it. An instance of the greatest magnitude is that of the United States after the Civil War. The efforts of the kingdom of Italy have also been successful. Austria has (1889) for a long time been near accomplishing the same end, and has only been pre- vented from successfully solving the problem by its being com- plicated with the presence of a silver standard. Russia is the farthest in arrears, and the ill success of her monetary policy for a generation past is but a feature of the incongruity that exists between her financial development and her growth in political power ; her position closely resembles that of the other Euro- pean states in the seventeenth and eighteenth centuries. The United States at the close of the Civil War had a debt of 2846 million dollars (August 31, 1865), 684 millions being paper money,' with funds in the treasury amounting to 88 millions. As early as December 3, 1866, Secretary McCulloch declared that specie payments could be resumed by July i, 1868. He was filled with the conviction that a nation which adopts paper money as a standard of value "violates the financial laws of the universe " and will inevitably suffer for the offense. This expectation was not fulfilled. But by a vigorous redemption of the great war debt (some $100,000,000 annually) a rapid approach to its accom- plishment was made. The gold value of the paper money on an average for the year was, in 1865, 63 per cent.; in 1868, 71.6 per cent.; in 1869, 75.2 per cent.; in 1870, 87 per cent.; in 1 87 1, 89.5 per cent.'' During the succeeding years the value of the paper closely approached that of gold, and specie pay- ment was resumed January i, 1879. During the years 1865- 1887 the entire debt was reduced from 2846 millions to 1175 million dollars (July i, 1887). Against the 630 millions of notes outstanding in 1887 there was specie in the treasury amounting to 482 million dollars. ^Annual Report of Secretary of the Treasury (McCulloch), November 30, 1867. Cf. Report of the Secretary of the Treasury, December 3, 1866. 2 Quarterly Report of the Chief of the Bureau of Statistics, September 30, 1878. THE PUBLIC CREDIT OF THE PRESENT TIME. 793 In Italy' forced circulation was introduced May i, 1866. The paper money in circulation (notes of the National Bank, etc.) reached 940 million lire by the end of 1875. The premium on specie reached its maximum of 20 ^/^ per cent, the first year of the depreciation -(during the war), and ranged during the years 1867-1 879 between 10 and i 5 per cent. Toward the close of 1880 the Italian government came forward with a proposition for the discontinuance of forced circulation, and the premium fell directly to a minimum of 2-1 per cent. (January and Febru- ary, 1881). The moderate premium which prevailed seems to have exerted but a slight influence on the course of prices and wages in the country ; that is to say, the depreciation of the paper money was inconsiderable. The premium seems to have been little else than an expression of the depreciation of the paper relatively to gold, and to have had an influence mainly on foreign trade. On September 30, 1880, the aggregate of legal-tender notes issued on account of the government and the banks amounted to 1665 million lire, while the gold and silver currency was 444 million lire. The government's project, which was accepted by Parliament early in 1881, contemplated the negotiation of a loan of 644 million lire as a means to resumption ; 400 millions of this loan, at least, to be made up of gold coin. By this means 600 million lire of paper was to be retired, while the remaining 340 million lire was to be retained in circulation (being first converted into national paper money, instead of its existing form of legal-tender bank notes) convertible on demand into gold or silver. § 556. The examples of America and Italy cited above show ■what is the accepted method of resumption in modern states. The path which has been followed in the descent during a season of financial embarrassment is retraced in the reascent. The premium which has arisen under the influence of a forced circu- lation, an impaired national credit and an inflated paper cur- 'W. Lexis, Conrad's Jah-^biicher, l88l, N. F. vol. ii. pp. 520-541. 794 THE SCIENCE OF FINANCE. rency, is gradually reduced as the influence of improved credit, the expectation of a speedy resumption and the reduction of the volume of paper money makes itself felt, until the normal level is reached, when paper and specie coincide. This temperate procedure, in which the cure reverses the steps by which the disease was contracted and developed, best answers the requirements of equity for the course of prices throughout the great body of business activity. The premium does not penetrate current prices with mechanical precision, but rather breaks against the circumference of the business world and makes its way through the system slowly, partially and fragmentarily. It is therefore also not expedient to seize upon the quotation of the premium at any given point of time as the one by which to effect resumption, and then by a single drastic measure restore specie payments at this level. This latter method (devaluation) can properly be resorted to only where there is a very serious depreciation of long standing, so that the entire system of pecuniary relations has become adjusted to the depreciated standard. If this rule is applied, it appears that the legitimate use of devaluation is essentially a thing of the past. A notable example is the reduction of bank bills in Austria in l8li to one-fifth of their nomirral value, and of the paper currency in 1820 to two-fifths. Likewise the reduc- tion of the paper money of Russia in 1839 ^o two-sevenths of its nominal value, and the probable further reduction of the Russian paper money in the future ; this has of late reached a depreciation of nearly one-half, and has suffered a premium of 35-40 per cent, since 1877. A measure still more extreme than devaluation is that of simple national insolvency, where all attempt at rehabilitating the paper currency is abandoned (as, e. g., in the case of the assignats issued during the French Revolution). But this is a phenomenon of such an ultra-barbarous nature as places it without the pale of civilized public policy, though it is but the practical outcome of a seemingly inoffensive theory. INDEX. (The numbers refer to sections.) Administration and finance 78 Administration of justice, expenditures.189 Administrative and fiscal purposes 75 Am^ 19 Ancien regime, objective taxes 298 Annuities, in Italy 473 ; in the Nether- lands 476 Apportionable public services 81 Aristocracy 178 Aristocratic development 216 Arms, the right to bear 39 Assessment, early methods 360 ; methods 380 ; of objective taxes 382 ; of subjec- tive taxes 381 ; Prussian methods 317 Auditing officials 172 Banks and the public credit 534 ; in Italy 471 Beaulieu, Paul Leroy-, 19 Beer tax, Prussia 272 Beet-sugar tax 274 Benefits, incommensurable 97 ; indirect 88 Bourse, Berlin 535 ; development 539 Brandy tax, Prussia 272 Biicher, K., and financial science 16 Budget 170 Building sites, taxation of 345 Bureaucracy 179 Cameral Science 8 Children, number of, and tax-paying capacity 105 Church 43 Citizens, participation of in public affairs 124 Civic sense 64 Civil divisions no Civil service salaries 180 Class lottery, Prussia 291 Class tax, nature of 314 ; in Prussia 313 Classes, relative tax burden 206 Classification of taxes, Adam Smith 327 ; Hoffmann 328 ; modern 329 ; Rau 328 Commonwealth 132 Communal and municipal debts 522 Communal expenditures 191 Commune 1 11 Compensatory taxes 229 ; and military service 233 ; and minor civil duties 234 ; equity 230 ; principle 235 Conflict of jurisdiction in taxation 226 Conflicting taxation 223 ; different kinds 227 Constitution and progressive taxation 215 Consumption, articles of, inspection and assessment 384 Consumption taxes 358, 259 ; and the science 361 ; British system 365 ; peda- gogic purpose of 37 1 ; equity 365 ; internal, require concentration of indus- try 368 ; limitations of 372 ; municipal 277 ; opposition to 360 ; practical limita- tions 366; productivity 365; social grada- tion of 364 ; uses of 362 Contribution des patentes 302 Contributions 61, 96 Conversion, England 484 ; equity 544 ; expediency 545 ; Germany 545 Cost of service as principle of taxation 198 Country and city 112 Court fees 108 Credit, abuse of municipal 148 ; mort- gage 496; national 163; private and public 495 ; productive and consumptive 162 Culture-state 42 Davenant on public credit 503 Debasement of coin under Frederick the Great 486 795 796 INDEX. Debt contraction, occasions of 498 Debt, floating 168 Degressive tax legislation 219 Democracy 177 ; and tax distribution 208 ; historical limitations 209 Democratic development 217 Democratic ideas 47 Development, aristocratic 216 Development of democracy 217 Dictionnaire des finances 19 Dietzel, C, on public credit 515, 516 Differences in benefits and ability 80 Direct and indirect taxes in the Physio- cratic theory 326 Division of labor and civic duties 25 Domains, K. H. Rau's theory of 66, 67 Door and windovif tax in France 301 Double taxation, local and national 227 Dutiable articles 276 Duties, specific and ad valorem 379 Dynastic state of 17th and i8th centuries 59 Education 85, 122; expenditures 190; higher 87 England, public credit, 1700-1750 481; 1750-1815 482; Middle Ages 478; under the Tudors 479 ; under William III. 480 English income tax 309, 310, 311 English public credit, development 477 Equilibrium between expenditure and income 156 Exemption in the 19th century 204; of higher classes 203 ; of necessities 355 ; of officials 205 ; of subsistence mini- mum 220 Excise 62 ; as an extraordinary grant 226 ; in the 17th and i8th century 267; in France and Holland 268; origin 265; reform in Prussia 269 Expenditure and income, equilibrium of 156 Expenditure, irregularity 159 Expenditures, justice and police 189; municipal and communal 191 ; ordinary and extraordinary 157; public instruc- tion 190 Family, size of 104 Fees 107 Feudal state 53 Feudal system, nature of 54 Finance, beginnings of 21 Financial science, a part of political econ- omy 4 ; relation to political economy 6,7 Financiers 12 Fiscal and administrative purposes 75 Fiscal. efficiency of public bodies, relative 134 Floating debt 525 ; forms of 527 France, contribution des patentes 302 ; door and window tax 301 ; impot per- sonnel et mobilier 300 ; income tax 323 ; land tax 299 ; stamp taxes 283 ; tobacco monopoly 288 French writers 19 Functionary-state 179 Funded debt 524; forms of 529; relation to floating debt 528 Grand Livre 531 Great Ledger 531 Grist and slaughter tax, Prussia 271 ; reform 319 Highways 188 Hock, von 12 Hoffmann, J. G. 12 ; classification of taxes 328 ; theory of royalties 74 Honorary Offices, salaried 31 Import duties, in Prussia 275 ; in the Zollverein 275 Impot personnel et mobilier 300 Incidence and class rule 203 Income and property as tax source 237 ; as tax object 244 ; from property, spe- cial taxation of 356 Income tax, as a flexible supplement 337 ; classified 315 ; in England 309-31 1 ; in France 323; revenue, history 318; in Switzerland 321, 322 Income taxation since 1873, Prussia 320 Income taxes of the 19th century 308 INDEX. 797 Independent science i Indigence, relative 89 Indirect benefits 88 Indirect taxes, in mediKval finances 57 ; nature of 330 Individual and community 24 Individualism and self-government 136 Indivisible public services 82 Industrial arts, improvement in 46 Industrial establishment, public, extension of 32 Inheritance, nature of 349 Inheritance tax 239, 348 ; in United States 350; progressive 351 Inheritance taxes 342 Interest rate on public debts 543 Ital}', annuities, 473 ; banks and the public treasury 471 ; montes 472 Jakob, L. H. von 12; on public credit 511 ; theory of royalties 72 Justi, J. G. H. von, on Cameral Science 9 ; on public credit 508, 509 ; theory of royalties 71 Justice, administration of 38, 84, 189; centralization of the administration of 121 Kries, K. G., and financial science 16 Land, special benefits accruing to loi ; taxes on transfers 346 Land-tax in France 299 ; in Prussia 303 Leroy-Beaulieu, Paul 19 License tax in Prussia 307 Local affairs, administration of by central organs 145 Local differences 125 Local taxation, as a constituent in the national tax system 146; circumstances conditioning 144; national supervision of 147 Loans, effect on distribution of property 166; withdraw capital from industry 165 London exchange 536 Lottery monopoly 370 ; in Prussia 290 Lotz, J. V. E., on public credit 513 Malchus, C. A. von, on public credit 513 ; theory of royalties 72 Matrikularbeitrage 133 Media'val finances, indirect taxes in 57 Medieval towns, public loans 474 Middle Ages, early 52 Military expenditures 188 Military industrial establishments 175 Military service I42, 175; and compen- satory taxes 233 Military system, centralization of 1 2 1 Minimum of subsistence, exemption 220 Money market and the capitalists 540; and the public credit 533 Money payments and contributions in kind 174 Monopolies in medireval towns 285 ; in 17th and i8th centuries 286; original 284 Montes in Italy 472 Montesquieu on public credit 503 Mortgage credit 496 Municipal consumption taxes 277 Municipal credit, abuse of 148 Municipal debts 522 Municipal expenditures 191 National idiosyncrasies 116 National organism, influence of size on 119 National treasure in 18th century, Prussia 487 Nation, historical development of 116 Nature, state of, and historv 35 Nebenius, Fr. 12; on public credit 512 Neckeron public credit 507 Netherlands, annuities 476 ; public credit 475 Net product, doctrine and precursors 236 Neumann, F. J., and financial science 16 Objective and subjective taxes 224 Objective taxation and joint-stock com- panies 340 798 INDEX. Objective taxes io6, 334 ; and financial science 297 ; and the ancien regime 298 ; assessment under local self-gov- ernment 383 ; methods of assessment 382 ; modern 339 ; use of 338 Octroi, administration 279 ; in France 278 Ordinary and extraordinary expenditures 157 Paid services and self - administration 26 Paper money 526, 547 ; acts as protect- ive tariff 554 ; causes of depreciation 552; depreciation 551 ; evils of 553; fluctuations 550 ; proper 549 ; Utopian 548 Parieu, E. de 19 Payment and capacity 109 Peace, advance in the preservation of 41 ; preservation of 40, 83 Penny-post in England 295 Per capita distribution of expenses 79 Periodicals, American 18; German 17; Italian 18 Permanence of objects of expenditure 158 Personal and impersonal factors in taxa- tion 225 Personal property, taxes on transfers 347 Personal Service, and pecuniary support 30; and the national constitution 176 ; compulsory, 232 ; incentives to 28 ; irk- someness of 231 Personal taxes, early, extraordinary 257 ; in the mediaeval towns 56, 259 ; in the old Swiss republic 258 Physiocrats, and financial science 10 ; direct and indirect taxes 326 Pmto 506 Plurality of taxes, reasons for 253 Police, expenditures 189 Political sciences and the science of finance 5 Poor-relief 90 ; local or central adminis- tration of 128 Post 120; development in Germany and Prussia 293; in early times 292; penny- in England 295 Postage, history 294 ; reform in Germany 296 Post office, finances 187 ; monopoly 370 Price 92 ; as a form of taxation 95 ; in the public establishments 93 Primitive barbarism 36 Principles of taxation, relative value of 201 Private and public wants 363 Private enterprise and public industry 50 Progressive taxation 212; and the politi- cal constitution 215; in Prussia 213; in Switzerland 214; norm 218; since 1851 319 Property and income tax in Prussia 312 Property tax 352; nominal 241 ; on con- sumable goods 354 ; on unproductive capital 353 ; real 357 Property taxes, and consumption taxes 358 ; nominal 240 ; real and nominal 238 Proportional taxation 210 ; criticism 211. Prussia, and the Zollverein 264 ; beer and brandy tax 272 ; class lottery 291 ; class tax 313 ; grist and slaughter tax 271 ; income taxation since 1873 320; import duties 275 ; land tax 303, 304; land-tax legislation of 1861 306; land-tax reform 305 ; lottery monopoly 290 ; methods of assessment 317; na- tional treasure 487; ordinance of Jan. 17, 1820, 493; progressive taxation 213; property and income tax 312; public credit 1797-1806 488; 1806- 1810 489; 1810-1813 490; 1813-1815 491 ; 1815-1820 492; public loans, early 487 ; public debt 1820-1848 494; public debts, modern 519 ; salt monop- oly 287 ; stamp taxes 282 ; subjec- tive taxation 336 ; tariff system, devel- opment 263; tax legislation 1818-1822 270 ; tobacco monopoly 289 ; trade- license tax 307 Public and private credit 495. INDEX, 799 • Public credit 63, i6l ; 1 8th C, England and Prussia 485 ; England 477 ; Eng- land 1700-1750 481; 1750-1815 482; in modern states, stages of develop- ment 502 ; in Italy, beginnings 470 ; in the Middle Ages, England 478 ; in the Netherlands 475; theories 503; under the Tudors 479 ; under William III. 480 u Public debts, of modern states 518 ; of the German Empire 521 ; of the smaller German states 520; Prussia 519; re- demption 546 ; various kinds 523 Public economy, in process of growth 51 ; mature 65 • Public industrial establishment, extension of 32 Public industry, and private property 50 ; predominance of 33 ^ Public loans, compulsory and voluntary 499 ; gambling accessories 500 ; in mediaeval towns 474 ; in Prussia, early 487 ; method of placing 501 Public organization affected by considera- tions of expediency 118 Public organizations, intermediary 114 Public undertakings 44 Public wants 45 ; and private wants 363 ; boundlessness of 153 ; sequence of 154 Railways 120; state 186 Rau, K. H., classification of taxes 328 ; on financial science 1 1 ; on public credit 514; theory of domains and crit- icism of 66, 67 ; theory of royalties 73 ; Wagner on 68 Redemption and conversion, England 484 Relations between public bodies, historical causes of 1 1 5 Relation of financial science to political economy 6, 7 Relative value of principles of taxation 201 Rentes 530 Repartition taxes 377 Resumption of specie payments 555 Revenues, early classification of 48 ; ordin- ary and extraordinary 106; quasi- private, so-called 49 Roscher, W., and financial science 15 Royalties 60, 76-77 ; history of theories 71-74 Sacrifices, incommensurable 98 Salaries 181 Salary, amount 183; and customary stand- ard of living 184; form of 182 Sale of offices 58 Salt monopoly in 19th century 287 Say, J. B., on public credit 507 Schmalz, Th., on public debts 510 Schmoller, G., and financial science 16 Schonberg, Gustav, and financial science 16 School attendance 86; fees 108 Sciences, dependent character 2 Securities quoted in Berlin 538 ; quoted in London, 537 Self-administration and the division of labor 26 ; attractiveness of 28 ; forms of 27 ; inefficient 374 ; organization 376 Self-assessment, secret 375 Self-government as an intermediary struc- ture 137; overrated by Toulmin Smith 1 40 ; personal factor 1 4 1 ; taxation under 143; theories 139 Shifting of taxes, circumstances affecting 250 ; ethical features 249 ; in the earlier theories 248 ; and the law 245 ; as cost of production 247 ; presumed by the law 246 Sinclair, John, on public credit 505 Single tax 251 Sinking fund 483 Smith, Adam, classification of taxes 327 ; on public credit 504 ; principles of tax- ation 333 Smith, Toulmin, on self-government 140 "Social epoch" in tax distribution 207 Social-political principle of taxation 202 Solidarity of the nation 130 Sovereignty 23, 37 8oo INDEX. Special benefits, derived from public ex- penditures 102; of property 103 Speculative transactions, taxes on 343, 344 Staatsschuldbuch 531, 532 Stamp taxes in France 283 ; in Prussia 282; nature of 280; origin 281 State 113; activity on a small scale 123; evolution of 20; functions, develop- ment 34 ; origin 20 State of nature and history 35 State treasure 63; in Prussia 487 Stein, Lprenz von 69; and financial science 13; on public credit 517 ; on royalties 74 Steuart, James, on public credit 503 Stock market 541 Subjective and objective taxes 224 Subjective taxation, in Prussia, 336 ; stages of development 335 Subjective taxes 334 ; methods of assess- ment 381 Subsistence minimum, criticism 222 ; his- tory of doctrine 221 Surplus and deficit 94 Switzerland, income taxes 321, 322; pro- gressive taxation 214; salt monopoly 287 Tariff boundary determined by historical and physical circumstances 367 Tariff, development in Brandenburg-Prus- sia 263 Tax 99 ; administration, national and local 373 ; collection, coercive measures 388 ; collection, interval 387 ; distribu- tion, social epoch 207 ; distribution under democracy 208 ; farming 385 ; frauds, penalties 388 ; monopolies 369 ; on consumable goods 242 ; on non- income-bearing property 243 Tax attorney general 376 Tax liability, development 192; during the era of the Aufklarung 193; in i8th century theorj' 193 Tax officials, education 386 Tax-paying capacity, and number of chil- dren 105; and tax rate 199; and the public contributions 200 ; local differ- --ei^sTTiBR^^Uv^^^'" 264 Tax reform of 185 1 316 Tax source, income or property 237 Tax system 332 ; development 167 ; mod- ern simplification of 252 Taxation, authoritative regulation of equity in 197; compensatory 229; con- cept of equity in 196; conflict of juris- diction 226 ; conflicting 223, 227 ; equity of compensatory 230 ; ethical basis 195 ; history and science 331 ; necessity of, for the modern state 194; social-political principle 202; of speculative transac- tions 343, 344 Taxes, preferable to loans 164; develop- ment of different kinds 255 ; extraor- dinary 169; historic forms 256; kinds of 324; on building sites. 345; on land transfers 346 ; on transactions 334 ; on transactions, uses of 341 ; on transfers of personalty 347 Technology, improvements in 46 Term of loans 497 Terminability of debts and rate of inter- est 542 Tobacco-culture tax 273 Tobacco monopoly, in France 288 ; in Prussia 289 Tolls and duties, beginnings 261 ; devel- oped into public imposts 262 Town and country 112 Towns, mediaeval, finances of 55 ; per- sonal taxes in 56 Trade-license tax in Prussia 307 Transactions, taxable, ascertainment of 384 ences in 129 United States, inheritance tax 350 Umpfenbach 70 Voluntarism 135; and coercion 29, 138; faults 152; nature 151 Voluntary aids 149; scope of 150 Vuatrin and Batbie 19 Wagner, Adolph, and financial science 14 ; on royalties 74 War treasure 169 Wine-culture tax 273 ^r UNIVERSITY OF CALIFORNIA LIBRARY BERKELEY Return to desk from which borrowed This book is hvE on the last date stamped below. ,>j5a^^ j'AP ? 3 '68 -11 PM ^^-•^ Ll> DAVIS JAiy -4 ligJERLIBRARY LOAN DEC 10 1969 5ZJan'60VD REC'D LD A^'R 01 1990 DEC 12 iqc;q I ^"^ '''^ JUN 7 1962 FEB 15 1968 M 24 •gsi LD 21-^00m-9,•4^^(A5702sl6)476 YD062674 U C. BERKELEY LIBRARIES coaebBSVOS THE UNIVERSITY OF CALIFORNIA LIBRARY 'Mi' Ill ;^'iliilB ;^ifeRtvv;/'-s:'ili