UC-NRLF mill III nil II B 3 lib 15M //^^^^^ PRICE ONE PENNY ^ " ': ' ' . : r ri' v- - ^^'^v?^ — ^ — ""^ ' ." ' '■ '■' .'- Political Economy and Fiscal Policy BY PROFESSOR BRENTANO Of Munich CASSELL AND COMPANY, LTD. London, New York, Toronto and Melbourne 1910 Political Economy and Fiscal Policy BY PROFESSOR BRENTANO Of Munich CASSELL AND COMPANY, LTD. London, New York, Toronto and Melbourne 1910 \\y_ ZC 3U(^ ^ . f A ^^ u^ ■- Political Economy and Fiscal Policy For many years past the state of the finances of the Empire has been a source of anxiety to us. From the foundation of the Empire to the present day, Germany has incurred a debt of more than /'22 1,250,000. If we estimate the capital which the Empire has sunk in the organisation of such services as the Post Office, the Imperial Printing Office and the State Railways at ^'98, 250,000, there remain ^^123,000,000 of debt, for which there is nothing to show. It is true that our costly expeditions to the Far East, to South- West Africa and to East Africa, obliged us to raise a loan of ^33,000,000, and that the con- struction of the Kaiser Wilhelm Canal ran us into a debt of ;[^5, 500,000. Altogether, however, nearly ;^ 1 00,000,000 were devoted to current expenditure — an enormous sum, which is the more alarming as the principal increase in the Imperial Debt has taken place within the last ten years. It has been maintained, and justly maintained, that it is bad economics to meet by loans expenditure which in other countries is covered by taxation, and that the credit of the Empire, if a serious war were to occur, is damaged by such proceedings. That is why we have for years past been trying to introduce financial reforms which would bring the ordinary revenue of the Empire on a level with its ex- penditure. In the year igo6 we had the finance reform of Baron von Stengel, which was expected to raise a revenue 345849 of ;^i 1,500,000. This sum, however, was not attained, the revenue being increased by about ;^ 10,000,000 only. Sydow's reform, introduced last summer, provided for a taxation estimated to yield ^24,500,000. The dis- putes that arose concerning the taxes which were rejected and those that were adopted have scarcely ceased, yet it is already clear that the new taxes will not yield the estimated amount. Another thing that ' is become evident is the fact that too low an estimate has been made of the loans necessary to cover the expenditure of the current year, 1909. In the month of August this estimate was given at ^£"14, 000,000. Two months later it w-as said to be ^^24,500, 000. But even that is not sufficient. It is now said that the supplementary demands for 1909 will amount to . ;£"26, 000,000, while the Imperial estimate for 1910 again provides for a loan of ;^7, 500,000. In this way the debt of the German Empire will be increased to a sum of considerably over ^254,000,000. What is the cause of this hopeless condition of our finances ? I will try to answer this question in dealing with a general question, namely, that of the inter- dependence of Political Economy and Fiscal Policy. In discussing this question I will, however, begin by studying a foreign country. In England, as in the other European countries, we observe a close connection between fiscal policy and political economy from the moment that the State begins to concern itself with the economic life of the country. In England, as everywhere else, what first induced the State to interfere in the economic life of the nation was the necessity to provide a growing revenue for public purposes. As early as the fifteenth century the rise of the modern State, which replaced the Feudal State, began to be evident in England. The substitution of Royal administration by means of a specially trained staff, paid in money, for that of the ancient Feudal system necessitated soldiers and an ever-increasing revenue from taxation. In order to make sure of a supply of soldiers, the Crown became the protector of the peasantry ; while industry and commerce were en- couraged with a view to securing a growing revenue from taxation. Up to that time the interests of the peasant and of the industrial and commercial classes had been sacrificed to the Hanseatic towns and to the Italians who had been paying large sums to the Crown for the privilege of exploiting England. From that time forward all the privileges previously accorded to foreigners were can- celled, and protection and monopolies were granted to English producers and traders with the object of strengthening their productive powers and increasing their ability to pay taxes. The economic policy of the State in England, from the end of the fifteenth century until the Cromwellian Commonwealth, was entirely dominated by this preponderance of the fiscal standpoint. From the time of Cromwell onwards we see the begin- ning of that encouragement by the State of the industrial and commercial activities of the country for the sake of the welfare of the people. At the outset this encouragement was based on scientific inquiry only, for no branch of industry or commerce was furthered where the necessary natural conditions were absent. Soon, however, private interests began to triumph over this rational method, and that to such an extent that even the Treasury began to suffer. The Stuart Restoration marks the beginning of an era of preferential policy. In order to win new partisans, the Stuarts granted duties and privileges to certain classes to the detriment of the community at large. Such was the corn duty imposed in favour of the great landowners, a duty that amounted to a prohibition on the import of foreign corn. It was not, however, until the reign of William III. that this preferential policy was developed into an ingeniously constructed system. The so-called "Glorious Revolution" of 1688 had made William King of England ; but his power was constantly threatened by the partisans of the exiled Stuarts. To maintain himself on the throne, he found himself forced to make friends with the mammon of unrighteousness. He took advantage of the general corruption of his day, and the marked prominence of economic interests which characterised it. He won over men of position and authority by large grants made directly to them. He propitiated the great landowners by an export bounty on corn, the mass of the rural and urban population by abolishing the hated hearth tax ; and he gained the support of the most important of all indus- tries, that of the cloth manufacturers, by prohibiting the export of wool. That of the other trades was obtained by means of laws passed in their interests, while he assured himself of the help of the influential merchants by inducing all European countries to join in an attempt to isolate France commercially, with the object of injuring the trade of that country, then the rival of English trade. Henceforth Parliament resembled a Stock Ex- change, where measures for the furtherance of private interests were bought and sold. Anyone who desired to secure the imposition of a duty had but to say so, provided he declared himself ready to vote for duties 'demanded by others. Thanks to this do nt des policy carried out systematically by William III., he succeeded not only in consolidating his rule, but also in making Parliament and people ready to bear the unheard-of burdens of the taxation imposed upon them by his wars. Another consequence of this system, which was further and further developed throughout the eighteenth century, was that finally there was no commodity left the price of which had not been increased by taxation. All further demands made by the State upon the people had, consequently, to take the form of loans. At this juncture — the year 1776 — Adam Smith's work appeared. The one thing which it made clear to every intelligent man was the fact that the whole of the financial system as it then existed was in direct oppo- sition to the highest interests of the State and of the community. Adam Smith showed how small was the number of articles the taxation of which brought in any revenue to the State ; how the majority of existing taxes had been introduced, not for the sake of the Exchequer, but in order to enable individual producers to exact higher prices from the home consumer. He maintained that if all prohibition of imports were abolished, and the duty on the import of foreign goods reduced to a rate that would bring most profit to the State, the home producer would still enjoy a considerable advantage in the home market, while the State revenue would be con- siderably increased by the yield of taxes which hitherto had yielded nothing or very little. High taxes were apt to limit consumption to such a degree that they yielded less instead of more. He furthermore maintained at the commencement of his exposition of the finances of the State, that every subject should be taxed accord- ing to his ability to pay; while his principle, that any tax which yielded profit to the State should do so at as little cost to the people's pockets as possible, was diametrically opposed to any kind of duty on articles of necessity. Seven years after the publication of Adam Smith's work, William Pitt, then twenty-four years old, became Prime Minister and Chancellor of the Exchequer. He 8 spoke of Adam Smith as a teacher and guide, and began forthwith to introduce financial reforms imbued with his spirit. He tried to do away with the convenient but fatal method of loans, which is the unavoidable corollary of a policy that confounds encouragement of and con- sideration for the private interests of the propertied classes with consideration for the interests of the com- munity. He even went so far as to create a sinking fund, with the help of which he hoped gradually to clear off the English National Debt. He also endeavoured to simplify the tariff, which had degenerated into something monstrous. It is owing to his efforts that, w^hen, in 1793, England entered upon her historical struggle with France, she was in a wealthier and more prosperous condition than any other country. But the costs of a twenty years' war, such as that between England and France, cannot be met by taxation. New loans were imperative, and soon the English National Debt had grown to such proportions that it became the wonder of the world. To provide for the payment of interest on it, Pitt resorted again to the expedients of the mercantile financial policy. Hats, gloves, perfumes, tooth-powder, pomatum, shops, female servants, bricks and horses were taxed. But the yield of these taxes was far from being sufficient to pay the interest on the National Debt. Thereupon Pitt determined to have recourse to the only method that could really meet the case, by resorting to a direct income tax of 10 per cent, on the propertied classes. It was an unheard-of and startling idea that the propertied classes should be made to pay taxes, and, what was more, according to their ability. They only paid it with much grumbling. Private liberty, so it was said, was threatened by this new obligation to declare the amount of one's income. It was only during the war that the income tax was tolerated. Hardly was peace restored, when it was again taken off. And not only tliat. In England, as in every other country in Europe, a long and terrible period of reaction followed the conclusion of peace. One of the phenomena that accompanied that reaction was the development of a Protectionist system, favouring the propertied classes to an extent such as had not been known even in the eighteenth century. During the war the rise in the price of corn had quintupled the rent and the price of land. In order to maintain them at this level after the restoration of peace, a duty was imposed on corn, which rendered all imports of foreign corn impossible. And as duties and taxes were also put on other com- modities, the Edinburgh Review was more than justified in stating in 1820: — "There are taxes upon every article which enters the mouth, or covers the back, or is placed under the foot. Taxes upon everything which it is pleasant to see, hear, feel, smell, or taste. Taxes upon warmth, light, and locomotion. Taxes on everything on earth and under the earth ; on everything that comes from abroad or is grown at home. Taxes on the raw material; taxes on every fresh value that is added to it by the industry of men. Taxes on the sauce which pampers men's appetite, and the drug which restores him to health ; on the ermine which decorates the judge, and the rope which hangs the criminal; on the poor man's salt and the rich man's spice; on the brass nails of the cofBn, and the ribbons of the bride. At bed or board, couchant or levant, we must pay. The schoolboy whips his taxed top; the beardless youth manages his taxed horse, with a taxed bridle, on a taxed road ; and the dying Englishman, pouring his medicine which has paid 7 per cent, into a spoon that has paid 15 per cent., flings himself back upon his chintz bed which has paid 22 per cent., and « lO expires in the arms of an apothecary who has paid a licence of ^loo for the privilege of putting him to death. His whole property is then immediately taxed from 2 per cent, to lo per cent. Besides the probate, large fees are demanded for burying him in the chancel. His virtues are handed down to posterity on taxed marble, and he will then be gathered to his fathers, to be taxed no more." Most of the taxes, however^ which thus burdened men's lives never reached the Treasury, but went into private pockets. For most of the duties were not imposed for revenue at all, but for protection ; they only served to enable the producer to exact higher prices from the consumer, while the consumer was rendered, by the increase in price of indispensable necessaries, less capable of contributing towards the needs of the Exchequer. Thus, the entire tariff system was in direct opposition to the fourth axiom of Adam Smith : it took far more out of the people's pockets than it put into the Treasury. This led Huskisson, in the early 'twenties, to make some timid attempts towards a revival of the policy of Pitt. But it is much easier to persist in an artificial system than to return to a natural one; the former develops a great number of private interests, which, being unable to exist without protection, offer violent resistance to any revival of sounder methods. This resistance, however, had necessarily to be overcome before long, as, owing to this very system of protection, the Treasury had been reduced to great straits. At the beginning of the 'forties the Budget showed a yearly increasing deficit. This converted Peel from Saul into Paul. He was then the leader of the Con- servative party, having been entrusted with the leader- ship on the understanding that he would maintain the system of Protection. But in him the patriot was stronger II than the party man. He saw the impossibility of meeting the ever-increasing fiscal demands while the existing economic system remained in force. This system, based on the practice of borrowing year after year, could not but lead to national ruin ; while, on the other hand, any increase of indirect taxation and of Customs duties could only lessen the revenue by diminishing the demand for the taxed articles. The following is from the Report of a Commission appointed in 1840 by the House of Commons to inquire into the effects of duties on imports : — Of 862 articles, 349 produced less than ^100 each to the Treasury, 132 produced from £100 to ,^500 each, 45 ,, ,, ^500 to ^'i,ooo each, 107 ,, ,, ;6' 1.000 to ;^5,ooo cach, 63 ,, ,, ^5,000 to ;^ 100,000 each, 10 ,, ,, ;^ 100,000 to ^500,000 each, 9 ,, ,, ^500,000 each and upwards. It further appeared: — That 17 articles produced 94)^ per cent, of the total Customs revenue of ^22,962,610, That 29 produced 3 ]% per cent. And that these 46 articles produced 98 per cent, of the total, or ;^22,599,29i. These facts determined the whole further development of English finance. They caused Peel to go back to Pitt's policy. He, like Pitt, was strongly opposed to the practice of raising loans every year as a means of meeting regularly recurring deficits, regarding it as a dangerous practice damaging to the credit of the country. He held, on the contrary, that something ought to be done every year towards reducing the National Debt, and considered that the most urgent duty of the Govern- ment was to increase the paying capacity of the taxpayer. 12 He cautiously began to decrease, and finally to abolish, one duty after another. He resorted to a direct taxation of income as a means of meeting the deficit. When he abolished the corn duties in 1846, the citadel of Protection was captured. The most influential party in the whole country — the one that had at all times been the constant supporter of all other demands for monopolies— hence- forward lost all interest in the maintenance of Protection. Once the corn duty was abolished, the Conservatives, too, became Free Traders ; and when they next came into power their leader, Disraeli, declared Protection to be "not only dead, but damned." It was, however, to Gladstone's exceptional financial genius that England owed the final disappearance of the last remnants of that system. His principles of taxation are the expression of a profound understanding of the nature of economics. He rejected the idea that the best mode of giving benefit to the labouring classes was simply to operate on the articles consumed by them. He main- tained that it was not by the taking off id. or 2d. in the pound from some article of common consumption that their condition had been bettered; but by the setting more free of the general course of trade — by putting "in action the emancipating process that gives them the widest field and the highest rate of remuneration for their labour." Hence there was no remission of strictly revenue duties on articles of luxury consumed by the lower classes, the taxation of which, indeed, formed one of the principal sources of the revenue. On the other hand, Gladstone's first Budget of 1853 introduced a free import of raw material and of partially manufactured goods, and also a reduction of the duty on manufactured articles to a maximum of 10 per cent, of their value. But it was only in the Budget of i860 that the principles of Adam Smith completely triumphed. 13 All Customs duties which merely served private in- terests, and by which the Exchequer profited little or nothing — that is to say, all Protective tariffs — were abolished. Henceforward duties were to be imposed for revenue purposes alone; only articles that the home market did not produce, and among those only parti- cularly productive articles of general consumption, were to be taxed. Duties on foreign articles, which could also be produced at home, were added ; but these duties corre- sponded exactly to the Excise duties to which the articles were subject when produced at home. The only Customs duties existing in England to-day are those on cocoa, coffee, chicory, dried foreign fruits, molasses, sugar, tea, tobacco, wine, beer and spirits, while there are correspond- ing Excise duties on beer, spirits, and certain articles in the manufacture of which alcohol is used. But at the same time Gladstone also turned his atten- tion to direct taxation. As we have seen, income tax in Pitt's days had only been regarded as a war tax, and had consequently been abolished after the fall of Napoleon. Peel, too, in 1842, had spoken of it as only a makeshift which would be dispensed with as soon as the state of the national finances would permit. But that day never came. Though Gladstone had, in 1853, aimed at the extinction of the income tax, it was never- theless maintained, being then an indispensable factor in the system of taxation. In 1861 he acknowledged it as such in words which have become famous: — "I have always thought it idle for a person holding the position of Finance Minister to trouble himself with what to him is necessarily an abstract question — namely, the question between direct and indirect taxation — each considered upon its own merits. To many people both, as is natural, appear sufficiently repulsive. As for myself, I confess that, owing to an accident of my official position rather than to any more profound cause of discrepancy, I entertain quite a different opinion. I can never thinlc of direct or indirect taxation except as I should think of two attractive sisters who have been introduced into the gay world of London, each with an ample fortune, both having the same parentage (for the parents of both I believe to be Necessity and Invention), differing only as sisters may differ, as where one is of lighter and another of darker complexion, or where there is some agreeable variety of manner, the one being more free and open, and the other somewhat more shy, retiring and insinuat- ing. I cannot conceive any reason why there should be unfriendly rivalry between the admirers of these two damsels; and I frankly own — whether it is due to a lax sense of moral obligation or not— that as Chancellor of the Exchequer, if not as a member of this House, I have always thought it not only allowable, but even an act of duty, to pay my addresses to them both. I am, therefore, as between direct and indirect taxation, per- fectly impartial." Indeed, the maintenance and further development of the income tax was imperative, if, on the one hand, capital and labour were to be directed into the most productive industries, and were thus to develop the pro- ductive capacity of the nation to the highest possible point; if Free Trade were to predominate; and if, on the other hand, the propertied classes were also to be compelled to bear their fair share of the national burden according to their increased capacity due to this economic system. Nay, more, the income tax having been found insufficient in that respect, it became necessary to complete it by the development of the death duties. Without the latter, an income derived from property would have been taxed no more heavily than an earned income. It was through the introduction of the death 15 duties that unearned incomes were made to contribute their fair share to the revenues of the country. Introduced by Gladstone in 1853, they were made progressive by Sir William Harcourt in 1894; ^^^ to-day income tax and death duties together yield about ;^52, 000,000 every year. The fundamental economic principle on which this Peel-Gladstonian finance reform was based has proved a brilliant success. Freed from all restrictions and mis- direction in the employment of capital and labour, the wealth of England increased by leaps and bounds. Within the eleven years that followed Peel's financial re- form — that is to say, from 1842 to 1853 — the taxable in- come of the country increased by 12 per cent. After the introduction of Gladstone's reform, however, it rose, from 1853 to i860 — that is, in seven years — by i6j4 per cent. But not only people with an income of from ;^ioo to ;^i5o a year and more, who alone were subject to the income tax, experienced this "intoxicating" increase of wealth. Rowley's careful calculations have shown that the average nominal wages of an English workman rose between the years 1840 and 1891 in the proportion of 61 to 100. The real value of wages, however, has increased in even greater proportion since the general reduction in the price of the necessaries of life, a reduction due to this finance reform. During the 50 years from 1840 to 1891 real wages have risen in a proportion of 43 to 100; therefore, by 132.8 per cent. This was accom- panied by so considerable a rise in the revenue from taxation that during the period from 1881 to 1901 it was possible to reduce the National Funded Debt by ;^ 130, 000, 000; whereas the total debt of the German Empire and of the Federated States shows an increase of ;^'378, 000,000 during the same period. In 18 16, after the battle of Waterloo, the English Debt amounted to ;^846,ooo,ooo — that is to say, to about as i6 much as the Debt of the German Empire and of the German Federated States taken together. At the time of the foundation of the German Empire, the English Debt had gone down to about ^791,000,000; from that time to the outbreak of the Boer war, it sank to ;^635,ooo,ooo. The Boer war increased it to ;^798, 000,000 (in 1903). But so excellently do the principles of the Free Trade system of taxation act, that within five years (from 1904 to 1909) ;^40, 000,000 were paid off; while the total Debt of the German Empire and of the Federated States increased during the same period by ;^i 14,000,000. The question arises, why, in presence of the brilliant results of the existing system, the propertied classes in England should to-day so urgently demand a return to Protection ? The answer to this leads to a consideration of the present situation in Germany. Prussia, from the days of the Chancellor Hardenberg, had been a Free Trade country. This is as true of the Conservatives as of the Liberals. Herr von Bismarck, too, had been a Free Trader until 1877, and Free Trade had always been one of the main points in the programme of the Liberal party in Prussia. It seemed, in a certain sense, to be a matter of course that in the German Empire, which had been founded by Bismarck with the help of the Liberals, the economic policy which harmonised with the views of both should be carried fully into effect. This was done, when, in 1877, the last remains of the duty on iron were removed, the duty on corn having been previously abolished in 1865. But this remission of the duty on iron proved to be a tactical error. In 1873 a depression had set in, following on the enormous expansion after the Franco- German war. This depression was experienced in Europe as well as in America, in Free Trade as well as in Protected countries. Everywhere factories were n threatened with bankruptcy; and when, about the middle of the 'seventies, an international competition in the corn markets set in, a serious depreciation in the value of agricultural land throughout Europe began to take place. The general depression Was necessarily accompanied by a considerable decline in the revenue from Customs. That circumstance, together with the ever-increasing ex- penditure of the Empire, rendered imperative a reform of the Imperial finances. It was this circumstance that led to the rupture between Prince Bismarck and the Liberal party. Prince Bismarck's original intention had been to develop the Imperial finances on the same principles which had led to such brilliant results in England. These principles were the concentration of the indirect taxation and of Customs duties on a few of the luxuries of general consumption which it was proposed to tax more heavily. One of the measures proposed with this object was the introduction of a tobacco monopoly. The Liberals, however, would not hear of a tobacco monopoly. Then Prince Bismarck had recourse to proceedings similar to those employed by William III. of England in 1688. He took advantage of the existing economic situation as a means of providing himself with a new majority. The large manufacturers, who had suffered through the crash, were promised new duties; the recently abolished duty on iron, in particular, was to be brought in again ; agriculturists were promised duties on corn ; and, abandoning at the same time the Kulturkampf, he even succeeded in conciliating the Centre party. Thus, based on the do ut des policy, two alliances were concluded : one between the large manu- facturers and the agriculturists; the other between the syndicated Parties and the Government. The manu- facturers agreed to duties which would benefit the agri- i8 culturists in order to obtain the support of the latter for the duties which they demanded; while the Govern- ment, in return for duties granted to private interests, obtained what was required in the way of revenue. About this time new theories of taxation began to replace the existing ones. Hitherto taxation in Germany had been built up upon Adam Smith's individualistic principles. Every subject was to contribute in proportion to his income towards the National expenditure. But taxation was to interfere as little as possible with the economic life of the country. Each should be allowed to arrange his business unhindered as he would have done had there been no taxation. Any alteration in the distribution of the income of the country, brought on by taxation, was previously regarded as a misfortune which had to be borne, considering the higher ends that were served by the levying of taxes, but was to be avoided as much as possible. At this time Adolph Wagner took advantage of these alterations to make demands of an entirely opposite character. He maintained that, under the existing economic organisation, the total income of the country was being unfairly distributed among the various branches of economic activity. It was a fact that taxation exercised a great influence on the distribution of the income of the country ; and this was particularly so in the case of certain death duties, taxes on transport, on income, and on property. Either this was unfair, in which case those taxes ceased to be "taxes"; or if it was fair, then it was necessary to admit the justice of any taxation which altered the distribution of wealth. Wagner writes thus : "Taxation is not merely a means of raising revenue, but at the same time such a means as will correct the dis- tribution of the income and wealth created by free competition." 19 That signified the substitution of a new principle for the leading principle which previously prevailed in the incidence of taxation. A just distribution of the burdens of taxation had thus far been the foremost consideration in the imposition of taxes. What Wagner demanded was that taxation Bhould be used as a means for altering the distribution of wealth in accordance with his conception of justice. Hitherto all such ideas had been condemned as Socialism. Now Wagner proclaimed this doctrine deliberately as the expression of State Socialism, of which he was avowedly a partisan. Up to that time his aim had generally been understood to be a new distribution of wealth by means of a taxation which would favour the lower classes at the expense of the upper classes. Now, however, it became evident that the State to which Wagner looked to exercise this "correcting" influence was anything but what Hegel calls the realisation of the "moral idea," the only aim of which is justice. It turned out to be an instrument which the most powerful classes of society utilised, it is true, as a "correct- ing " influence in the distribution of income and of wealth, but not in the interests of the lower classes, but to their own advantage. Of course, every kind of Protection signifies an interference on the part of the State with the distri- bution of the people's share in the wealth of the country. Under Protection taxation is used as a means by which the State takes out of one man's pocket what he puts into that of another, and whoever regards that proceeding as one of the characteristic features of Socialism must admit that all Protectionist policies are Socialistic — Socialistic, it is true, not in the interests of those who possess nothing, but of the propertied classes. The corn duty forces the labourer to contribute with each piece of bread which he buys out of his hard-earned wages towards 20 the maintenance not only of an artificially increased price of corn, but actually towards its further rise. The con- sequence of the rise in the price of iron owing to Customs duties, and to the trusts based upon them, is that every man living in a house in the construction of which iron is used has to pay a higher rent, and that everyone who takes a railway ticket has to pay more for it. The State itself, when constructing battleships or armoured turrets for the national defence, contributes, through the higher prices paid for steel plates, towards the maintainence and increase in the price of the shares and dividends of iron works. Nay, furthermore, in the interests of the manu- facturers, the home consumer is made to pay dearer in order that iron may be sold cheaper in foreign markets. Through the consistent application of this system of protecting the propertied classes, the consumer of spirits is obliged to subsidise the manufacturer. Indeed, it is well nigh impossible to enumerate the various contri- butions of other kinds made to the 27.6 per cent, of the population, who, according to the occupation census of the German Empire in 1907, live by agriculture out of the remaining 72.4 per cent, of the inhabitants. It is only natural that the financial consequences of such a policy should be fatal to the State. Though a return from comparative Free Trade to ProtecTion yields to the State an increased revenue as long as home production has not entirely adapted itself to the changed conditions of the market, this effect is soon exhausted. The very object of protective duties is to diminish, if not indeed to stop, imports. In pro- portion as protective duties secure their object, the revenue which they yield to the State will diminish. Further- more, Protection finally leads to an increase in the prices of all the necessaries of life, as we are learning from bitter experience. Thus the paying capacity of the tax- payer is being exhausted. 21 It is idle to attempt to answer complaints by showing those who complain that they are far from paying the Exchequer as much per head of the total population of the Empire and of the Federated States as, for instance, the English taxpayer, if at the same time only com- parisons are made between what the State actually re- ceives in Germany and in England. For the taxpayer is not burdened merely by that part of his taxes that actually goes to the Exchequer of the Empire and the Federated States, but by the whole extra sum which he must pay in consequence of the imposition of a tax, including that part of it which never reaches any State Treasury at all. To say that so much less of the yield of taxation goes to the Exchequer of the Empire and of the Federated States than is the case in England, is no defence of our system of taxation ; but, on the contrary, its severest condemnation. It is an admission that the greater part of what we have to pay in conse- quence of the imposition of certain taxes goes into the pockets of private persons. How easy it would be to improve our finances if all those sums went into the coffers of the State I Thus, the duty on rye, wheat and oats (I do not mention barley since it is impossible to ascertain from the official statistics in what proportion home-grown barley was used for brewing purposes and for food) yielded in 1908 ^5,217,280 to the Empire (See Appendix). But the imported rye amounted to only 1.9 per cent, of the total consumption of rye in Germany. In the making of bread the use of rye is giving place more and more to that of wheat. On an average, the consumption per head of the German popula- tion was 331.13 lbs. of rye and 194.26 lbs. of wheat during the years 1893 to 1900; it sank to 326.19 lbs. of rye as compared to 206.32 lbs. of wheat in the period 1901-7, and to 313.28 lbs. of rye and 199.54 lbs. of wheat in 1907-8. 22 Of the rye consumed in 1908, 98.1 per cent, was pro- duced in Germany, as against only 60.2 per cent, of the wheat consumed there; while the 8,222,131 tons of oats were entirely home-grown. Now, it is an uncontested fact that since the obligation of proving the place of origin has been abolished, the inland price of corn exceeds that of the corn price in the world market by exactly the amount of the import duty. Assuming that one-fifth of the 63,219,000 in- habitants of the German Customs Union are consuming corn which they grew themselves, an estimate which is rather too high than otherwise, the rest of the population — i.e., 50,575,200 people — were obliged to spend ^45,452,848 more, of which ;^'4o, 235,568 went into private pockets. What the corn duty of the year 1908 yielded to the Exchequer has certainly cost the taxpayer only two shillings per head ; but what he had to spend more in consequence of this tax amounts to a burden of eighteen shillings per head of the population. The same remark applies to all the other protective duties. The higher the duty, and the less, consequently, the import, the greater the demand on the taxpayer's pocket in favour of private interests. Not only does this demand not yield a sufficient revenue to the Exchequer, but it actually damages it by diminishing the taxpayer's capacity to pay other taxes. Our Chancellors of the Exchequer would be wallowing in gold if they were allowed to direct into the Treasury all that our consumers have to pay into private pockets in consequence of our Protectionist duties. But instead of that, the people's capacity to pay is being more and more exhausted by the existing high prices of all commodities. When, further- more, those who profit by these high prices are much more leniently treated on any increase of taxation, and when they are even granted reductions of taxes they had 23 hitherto paid, the inevitable result is an increasing diffi- culty to meet State expenditure by means of taxation. In these circumstances the only way out of the difficulty is to run into debt. It is therefore unfair to accuse the German people of a lack of self-sacrifice in view of the fact that, since the foundation of the German Empire, the Empire, the Federated States and the municipalities together have incurred a debt of ;^ 1,280, 000,000. For a system of Protection is invariably accompanied by the practice of meeting State expenditure by loans. And since these loans impose far greater burdens on the citizens than the sum received by the Treasury, our Chancellors of the Exchequer have no other way left to them than to draw on the future in order to meet the needs of the present. This is also illustrated by the history of the finances of another highly protected country, by the history of the financial difficulties of France. But was the new Protectionist policy at least the cause of an extraordinary economic progress of the German people ? If so, such an effect of Protection would have manifested itself immediately upon the return to that system. Yet the first ten years of Protection were in Germany, as everyw^here else, a period of economic depression. When, on the other hand, at the end of the 'eighties and the beginning of the 'nineties, a new era of prosperity set in, this extended to all countries in the world, whether Protectionist or Free Trade. And just as the latest depression was felt in Free Trade England and in Protected Germany, so are the symptoms of a revival of industry and commerce experienced in both countries. The period of great prosperity of economic life in Germany during the 'nineties can all the less be attributed to Protection, as it happened to coincide with a temporary diminution of the protective character of our commercial policy. 24 Unquestionably this revival was in Germany as well as in America quite extraordinary. In America it was due to the opening up of hitherto unsuspected resources; in Germany it was brought about by great technical progress. Both these countries have become the equals of England in many branches of industry, while in some they have even surpassed her. This fact has excited the envy of many Englishmen, and their ignorance prevent- ing them from seeing its true causes, many have come to the conclusion that the extraordinary progress in Ger- many and America was due to Protection. It is chiefly among the business men of the City of London that a demand is made to-day to abandon Free Trade. They condemn it for the very reason that it renders such abuses impossible as have been the cause of the attacks on Protection in Germany and in America. Political corruption, the accompaniment of Protection, has no terrors for them, as they hope to profit by it themselves. Syndicates and trusts are what the City longs for to-day as a better means of exploiting the public. On financial grounds also many Englishmen desire a change. Among the upper classes people speak fre- quently of the necessity of consolidating the British Empire, and, if possible, of expanding her dominion; for it is in those distant lands that their sons, both good and bad, have always been provided for, as also in the Army and Navy, which are both indispensable for the attainment of those aims. But these aims cannot be attained without the expenditure of a great deal of money, and, so long as Free Trade is in force, that money can only be procured by means of the income tax and of the death duties, both of which are paid mainly by the upper classes. Thus the latter would themselves have to bear the costs of the advantages which they hope to reap, a thought which is painful to them. This accounts for 25 Mr. Arthur Balfour's complaint of the narrowness of the basis of the British system of taxation. He de- clared it impossible to meet the increasing expenditure of the State without an increase of the duties on com- modities of every description. In other w-ords, the Conservatives demanded that the lower classes should bear the burden of the taxes that were to pay for a provision for the sons of the upper classes. The economic significance of the Budget introduced by the present Chancellor of the Exchequer (Mr. Lloyd George) in the House of Commons, and passed by that Chamber, lies precisely in the fact that it proves the falsity of Mr. Balfour's talk about the too narrow basis of the Free Trade system of taxation. He has furnished that proof more particularly by the introduction of taxes on land and on mines, according to their common value, and by a further development of the death duties. This proof has been so successful that the Protectionists have completely changed their complaints against the existing system. Hitherto they contended that, if the Free Trade system were maintained, it would be impossible to meet the increasing national expenditure. That contention having now^ been refuted by the taxation of the monopoly value of land held by a few great landowners ; and the creation of new monopolies at the cost of the community, such as a Protectionist finance reform would bring into existence, being rendered superfluous, the Protectionists complain that the Budget would yield more than was needed for the requirements of the State, and that this excess was provided intentionally to enable the State to carry out the scheme of Old Age Pensions and other social reforms. Indeed, a few have gone so far as to say frankly that the chief fault of the Budget in their eyes was that it destroyed the basis of any agitation in favour of a return to Protection. 26 The Protectionists have also included social reforms in their programme. But they do not propose to pay for them; they mean the lower classes to do so. To expect the upper classes to bear those burdens is, from their standpoint, pure Socialism. If that reproach were justified, the whole question would turn on the conflict between Socialism in favour of the lower classes and Socialism in favour of the propertied classes. But in reality the whole question turns upon the logical appli- cation of the old individualistic principle : Let every subject share in the national burden according to his capacity to pay. Hence the indignation of those who have for centuries past considered it their lordly privilege to have their taxes paid for them by others. Rather than surrender it they have broken, by their rejection of the Budget, the constitutional usages of three centuries, according to which the House of Commons alone has control over finance. The British Protectionists like to point to our German financial legislation as their ideal. After what I have said, this statement must necessarily seem strange to a German audience. In England, according to previous British Budgets and that of Mr. Lloyd George, based on Free Trade principles, all indispensable necessaries of life are exempt from taxation. Property and capital are taxed according to their capacity to pay, while the classes who hold no property pay according to their consumption of luxuries. At the same time an increasing balance in the Treasury has made it possible to reduce the English National Debt, at one time regarded as being at a fabulous height, by tens of millions of pounds, and that, in spite of numerous and costly wars in Asia and in Africa ; while we in Germany have during the same lapse of time enormously increased our National Debt, though the period was with us one of peace, in- 27 terrupted only by our expedition to China and by the Herero war. According to No. 1108 of the reports submitted to the Reichstag on January gth, 1909, the Debt of the United Kingdom and of the Local Authorities amounts to ;^ 1, 184,000.000; while that of the German Empire, of the Federated States, and of the Municipalities amounts to ;^ 1,280,000, 000. In Germany one commodity after another is being subjected to taxation, so that, like Englishmen of a century ago, we cannot use or enjoy anything from the moment we get out of bed in the morning until we return to rest at night without paying tribute upon it. Thus Germany, after being one of the cheapest countries in the world, has become one of the dearest, certainly much dearer than England, formerly considered the dearest place on earth. This is accompanied by a chronic state of financial difficulties on the part of the Empire, the Federated States and the Municipalities. Everybody knows the efforts that were made last year to remedy this evil. It is impossible to judge, however, from what I have said thus far, how inadequate were these efforts to introduce a sounder system. Even if the death duties, as submitted to the Reichstag by the Federated States, had been accepted, the yield would have only sufficed to cover for a few years the ever-growing demands of public expenditure. Whether it be eventually adopted or not, one thing is certain : in a few years we shall again have to face the question of financial reform. And then a revulsion of opinion will come. Seeing that to-day a large part of the yield of taxes goes actually into private pockets, it will not be possible to meet the growing demands of the Exchequer by any further increase of indirect taxes or duties. We shall have the same experience as that of Sir Robert Peel in 28 1841 ; any attempt at more taxation will only serve to swell our deficit. And as we cannot possibly go on existing on loans without incurring serious danger for the safety of the Empire, the State will be forced to abandon its artificial economic policy, and to adopt more natural principles. No doubt any such return will have to face the same fanatical opposition with which private interests have at all times met any measures that damage themselves, but are to the advantage of the comm^unity. Our experience in that respect last summer was a fore- taste of what we have to expect. Although hitherto it was only the pressure of financial difficulties which gave the Government the strength to overcome such resistance, the financial distress of Germany will presumably be so great before long that our Government wall find the strength necessary for such a struggle, for the very existence of the State is at stake. Therefore we can look to the future with composure. It will bring us serious struggles, but these struggles will end in the victory of what is sound and natural over what is unsound and artificial. Such a victory can alone guarantee the maintenance of the German Empire and the prosperity of the German people, and both of these are essential. X Ph <: H O Q <; «< DC >< D^ 2 O u H S Q X H CO < < w K Z o & Q W o a, t— ( W Q « m w H o § oo O o *-• ^ On •*-' o o - Ji O -a (J S 6- si o S JQ i- rt .^ Ox t ■*- (I) o H^ o ^ o U>-' 0) o CO 14-1 O O -M B (/3 > S 0) o O o s (/> C o o c o • w^ a, o a, 0) p* y^ O c-^c . D C'" tn POVO . a\ li o o J3: o M o< o 3 O-^ M b w ' N &0 moo O M c Tj- w o VO o ) O>00 O "o Sl oj fO c^ 00 m 5o s cfi ©"oo" oo' ^ lO N (s PT) M fO 00 u 3 "3 m 'C ™ u; ai t-^ N o « mo •^ C S 3 « o 00_ M 'fi Ut 00 tn ip PO '2 rt s lO" o O 0» M Total amount of increased cost for the purchasing population. (Duty K 4/5 of column 3.) o o o o O N o M_ao N iC N vn t^ CO ^ 00 ° ^- ''I vo" cfioo" PO o_ in ■* N rn PO N fO o> Duty per ton. 1 s o o «n o I G ^ 4- O M N O s o U-) OS o b 1 -a 0) u g oo o M 1 (U s > o o V ac c O C u o e •^1- G^OO o 1 14 a, 'S o w CTi b CO iM 0-! o a o •o -2 c •^ t^ >ri 4^ o PO '? >-( M M -5 "2 ts o N N Tt N 1 STr"" O t^ f» 1 CO q>vo_ N o:= oo" lOOO Hu: § -» rt en escript Corn M ^ 03 4-1 < H O H 1 Q I- vS 4) ?^ S <-> ° s — u E rt 3.23 &■■*-' -< O 4-. 4) in >^ 4) 4) ^ XI ^ T3 (n 4) 4.4 ^33 • g 5i O tn 44 w.S .5 BC t^.s 3 JJi (U 4J -a o 41 d g^^T _-cn O U 3> <7i Printed by Cassell &• Company, Limited, La Belle Sauvage, London, E.C. CoBDEN Club Publications. Tariff Makers: Their Aims and Methods. A Sequel to Fact V. Fiction. Price is. Fallacies of Protection : Being Bastiat's " Sophismes Econo- miques," translated by Dr. Stirling, with an Introductory Note by the Rt. Hon. H. H. Asquith, M.P. Price is. net. Insular Free Trade, Theory and Experience. By Russbll Rea, M.P. 6d. The Case against Protection. By E. Cozens Cooke. 3d. The "Scientific" Tariff: An Examination and Exposure. Price 3d.' Cobden's Work and Opinions. By Lord Welby and Sir Louis Malet. Price id. Thins:s Seen and Things Not Seen. Translated from the French of F. Bastiat. Price id. Shipping and Free Trade. By Russell Rea, M.P. Price 3d, The Lessons of History on Free Trade and Protection. By Sir Spencer Walpole. Price 2d. The Colonial Conference : The Cobden Club's Reply to the Preferential Proposals. Price 6d. What Colonial Preference Means, zd. Free Trade. By Lord Avebury. 3d. INTER To be obtaine " . . . "W the reader will that ar^ rich v»- practkal man. do justice ; it is use by the spea Trade in this cr who are in doubt keep at hand ag~ have done good s are thus gathere<~ "All who ai" the Report of Congress. . . . we advise all Fre_ themselves with 1 THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW AN INITIAL FINE OF 25 CENTS WILL BE ASSESSED FOR FAILURE TO RETURN THIS BOOK ON THE DATE DUE. THE PENALTY WILL INCREASE TO SO CENTS ON THE FOURTH DAY AND TO $1.00 ON THE SEVENTH DAY OVERDUE. FEB 1 9 19 34 FEP 20 193^ ntKtr 2X^^'- • L- r ,>%=> tJ U-^ M ^ MIB f i O'Sc;^ A^# %^ n EL^ L.O 2 / m? Congress, just is serviceable armo ", ikis coontry who ' ^^( f' i broadcast by Ta trade and politi Manchester Qu 8 MAR'63AE APRi3ia8aL KAY 1