that these arrangements would prove insufficient. The estimates laid before the Reichstag in 1907 showed a deficit of over 6,000,000l. Baron von Stengel declared that fresh sources of revenue must be made available, but showed an uncompromising hostility to direct Imperial taxes. Direct taxation is the principal source of income of the separate States. It is largely imposed in the form of income tax, while in many places (including Berlin) income tax is also levied for municipal purposes. Baron von Stengel was unable to obtain a sufficient majority in support of his views, and he resigned in February 1908, when he was succeeded by Herr Sydow.

In November 1908 the situation described by Herr Sydow was as follows. The excess of expenditure over revenue had in the course of the preceding nine years led to the accumulation of debt to the extent of nearly 100,000,000l. The burden of this debt exercised a most unfavourable influence upon the market for Imperial loans, while the varying amounts of the matricular contributions were a source of chronic disorder to the finances of the separate States. Reform was urgently necessary to prevent increase of debt, to establish a proper balance between revenue and expenditure, and to regulate the financial relations of the States and the Empire. For this purpose an additional income of 25,000,000l. was required. As the federated States rejected the idea of an Imperial income or property tax on the ground that these sources of revenue were the foundation of their own finances and must not be touched, it was proposed to raise the money from spirits, tobacco, beer, wine, death duties, gas and electricity, and advertisements; the balance was to come from matricular contributions. The reform, in its amended shape, was finally passed in July 1909, and comprised the following taxes, estimated roughly to bring in 23,750,000l.

There was practical unanimity among all parties in the Imperial Diet that the Imperial finances should be put upon a sounder permanent basis, but the Reichstag was hampered because Imperial finance is as much a constitutional as a social question. Germany has suffered from the disadvantages which attach to all forms of federal government so far as relates to the apportionment of the cost of conducting the Imperial government. Difficulties of a similar nature have arisen in AustriaHungary, Sweden and Norway, Switzerland, and, in our own case, with regard to Ireland's share of the Imperial expenditure. The German Federal States did not wish the Imperial Government to trench upon the direct taxation, from which their principal revenues are derived, and the agrarian interest was most strongly opposed to any form of inheritance tax. On the other hand, the industrial population, while, as a whole, admitting the necessity of increased taxation, protested in each group that their manufactures could not bear an additional burden. In the main it will be observed that the agrarian interest has prevailed, and that the bulk of the new taxes will fall on the industrial classes. It is not inconceivable that the financial reform of 1909 may have the effect of impairing the good understanding which has hitherto existed between the great protected interests of Germany; and considerable significance may be attached to the fact that, for the first time, the non-agrarian part of the community has endeavoured to make the others bear their share of the additional burden. The industrial interest has for the time being failed; but with the growing transition of Germany from an agricultural to a manufacturing country it appears to be almost inevitable that the influence of the agrarians in shaping the fiscal policy of the Empire will in future be a diminishing one.

There is also reason to believe that economic causes may tend to bring about an important change in the Constitution of the Empire, that is, in the direction of strengthening the Imperial as against the federal principle.

For the time being the federal principle has demonstrated its power; but considerable importance may be attached to the fact that, under the pressure of economic necessity, the separate States are gradually surrendering their sovereign rights in the matter of

direct taxation. A similar tendency is observable with regard to the German railways. The Prussian system has already absorbed the Hessian railways, and the recent agreement between the Prussian State railways and the State railways of Bavaria, Saxony, Württemberg, Baden, Mecklenburg, Oldenburg, and Alsace-Lorraine, for the common use of goods wagons, points most emphatically to the ultimate merging of all these railways under one administration, namely, that of Prussia.

Although the complicated relations which exist between the Imperial finances and those of the separate Federal States have had the effect of bringing the finances of the Empire into a condition of great confusion, it would be a profound mistake to imagine that the general financial condition of Germany is unsound. On the contrary, there is ground for the belief that, having regard to her national wealth, Germany is one of the most lightly taxed of all the great Powers. In 1906 the Imperial debt amounted to 173,445,9007. and the debts of the various Federal States to 609,500,000Z., the aggregate of both Imperial and State debts being 782,945,9007., equivalent to 12l. 158. 8d. per head of the population. The national debt of the United Kingdom at March 31, 1908, was 759,826,0517., equivalent to 177. 128. per head of the population; and the national debt of France at the end of 1906 was 1,231,973,6127., equivalent to 337. 188. 8d. per head of the population. This comparison, it will be observed, is very much in favour of Germany. But when the national debts are analysed, it will be found that the real position of Germany is very much more favourable than the above figures show, because practically the whole of the debts of the Federal States are more than covered by the value of the railways and other revenue producing undertakings which they possess; indeed the railways alone have been valued at over 900,000,000l. It is true that the Imperial debt of Germany has been increasing at a rapid rate, but it is still comparatively small. In the earlier years of the Empire a good deal of extraordinary expenditure was met by payments from the French war indemnity of 213,000,000l.; and the Imperial debt first dates from the year 1877, when it amounted to only 3,534,2001.; including the new loan recently issued, it now amounts to 244,000,0007. In some quarters there is a disposition

to hold the view that the great prosperity of Germany is largely due to the huge indemnity received from France in 1871. The money received from France certainly provided the new Empire with working capital, so to speak; but, after meeting the cost of the war, providing fully for the invalidity funds, and defraying the expenditure incurred in strengthening practically all her frontiers, it may be questioned whether the indemnity added materially to the wealth of Germany. It probably facilitated the introduction of her gold standard, and it is possible that in other indirect ways it has helped her development; but, on the other hand, there is some ground for the contention that the indemnity was largely responsible for the disorganisation of the national finances. On the whole, therefore, it may be said that the war indemnity contributed but little to the greatness of modern Germany. It was inevitable that a great and populous country such as Germany, situated in the very heart of Europe, with frontiers marching with those of nearly all the principal commercial Powers of the Continent, with a fertile soil highly adapted for agricultural pursuits, with enormous mineral wealth, with rich forests and many fine natural waterways, and, above all, with a highly educated and well disciplined population, should take a leading place amongst the world Powers.

The national income and expenditure cannot be said to be disproportionate to the greatness of Germany. The total ordinary revenue for the four years 1907 to 1910, according to the estimates, is shown hereunder, together with the principal sources from which it is derived:

shown in the esti-114,502,722 123,618,178 128,017,460 130, 228, 118

The financial reforms effected last year have had a marked effect on the estimates for 1910; and attention may be directed to the huge increase in the estimated yield from excise and stamp duties, and to the almost equally large decrease in the amount to be received from matricular contributions. The railways, it will be observed, play a very small part in the Imperial finances. The extraordinary revenue for the four years named was as follows: 1907, 12,604,0637.; 1908, 12,998,1047.; 1909, 11,483,9501.; and 1910, 9,335,9871. Loans represented the principal source from which the extraordinary revenue was derived, and it is instructive to note that, notwithstanding the reforms of last year, the 1910 estimates include a provision of 7,423,9347. to be raised from this

source.

The total ordinary expenditure for the four years, together with the principal items included in the total, are shown in the following table:

Total expenditure as

shown in the esti-114,502,722 123,618,178 128,017,460 130,228,118 mates

Army

36,644,914 39,048,847 37,708,228 38,421,894 Posts and telegraphs. 26,894,593 27,496,318 28,631,621 31,376,797

Navy.

10,837,899 12,382,927

14,197,828 16,143,825 16,071,531 12,326,700

8,392,208 10,839,865

5,634,346 5,793,526

4,718,386 4,991,722 4,976,461 5,205,398

It will be observed that the ordinary expenditure on the navy has increased by about 49 per cent. since 1907, while the army expenditure has also been substantially increased during the same period. The growth of the debt charge is also noteworthy, and an increase of 61 per cent. in four years under this head is certainly somewhat alarming. The charge for 1910, however, includes provision for redemption of debt to the extent of 1,561,876l., no such provision having been made in the estimates of 1907. It is interesting to note that, although the national debt of the United Kingdom is about four times as great as the Imperial debt of