August 8, 19 1 8 
Land & Water 
25 
but that is all. Such was the effect of the war emergency 
here ; on the Continent it produced something like syncope. 
Tlie difference was not accidental. Before the war, Con- 
tinental finance, ' notably that of France and Germany, 
differed from our own in two essential respects. Whatever 
may be said for indirect taxation, it is much more at the 
mere}' of sudden changes in conditions than direct, and it is 
not nearly so capable of expansion to meet an emergency. 
We can calculate with wonderful accuracy the yield of a 
penny, on the income-tax ; though exceptional •conditions 
may depress or augment the income of the classes called 
upon to pay it, even the greatest fluctuations produce only a 
manageable effect on the sum to be realised from any given 
rate of taxation ; the most disappointing result can at any 
time be readily adjusted in the next Budget. It is based 
on something within the country, and is affected only in- 
directh- and by degrees by thf rije and fall of trade and 
changes in demand and supply. For this reason, our finan- 
ciers soon recognised in the income-tax a most effective 
financial weapon iii war. Within very wide limits indeed, 
it can be expanded or contracted at will to meet the varying 
demands of war and p>eace. 
So much for the emergency of the war ; but even in peace 
the Continental method caused difficulties which gave an 
unsound character to finance. When in the 'forties we swept 
away so many hundred taxes from our tariff, we did not 
surrender the vital part of it, regarded as a fiscal instrument. 
The result of a Parliamentary inquiry into its working in 
1840 showed that whereas the tariff as a whole only realised 
£22,122,095, no less than £18,575.071 came from nine items, 
853 taxed articles being responsible for the balance ! With 
the exception of the taxes,on wool and timber, since repealed, 
these nine articles are the same as those we tax now. This 
means that in substituting for an uncertain revenue of less 
than four millions the adaptable income-tax which was to 
supply their place, we had made, from a fiscal point of view, 
an exchange for something incalculably better. The systems 
of the Continent resembled ours of the 'forties, and the effect 
— in Germany, at least — was substantially the same. Con- 
tinental revenues were not sufficiently elastic even for the 
needs of peace. 
Peace Deficits 
The extreme difficulty of raising money enough without 
direct taxation, and the need to save the overgrown armies 
of Europe from criticism, led to another cardinal defect of 
Contmental finance. Our National Debt is almost entirejj- 
a war debt, and probably most English people xhink'that 
this is also the case with Continental debts. Largely, no 
doubt, it is, but to an almost, if not quite, equal extent the 
N'ational Debts of the Continent as they stood in .1914 were 
not, properly speaking, war debts at all, but the accumulation 
of deficits incurred in time of peace. 
This is specially true of the German Imperial Debt, which 
amounted' to nearly £'250,000,000 before this war, for the 
Empire started off free of debt and with a large part of the 
French indemnity to the good, and had had no war of any 
consequence in the forty-four years of its history. Year 
after year the German Finance Ministers were not able to 
make both ends rrieet; and were, of course, obliged to borrow 
from the accumulated savings of private people to make up 
the deficit. Austria-Hungary was in a similar position, 
except that it had, of course, a large war 4ebt to begin with. 
I have used thest- figures l)efore, but tfiey will bear repeating 
to show the reader how badly matteis were going. 
ENEMY DEBTS BEFORE THE WAR. 
Twenty-six 
German Empire. Cermau Statis. Austrian Empire. Hungary. 
i i i i 
1907 193,044,000 648,000,000 410,158,000 229,175,000 
1912 242,743,000 785,000,000 519,631,060 274,702,000 
Taken as a whole the finances of the Entente Powers were in 
a better position, for they were not steadily running into debt 
m time of peace. The debt of Italy, however, must be 
largely a peace debt, an(l though the funded debt of France 
had been ])raetically stationary for a generation, it had 
risen from £796,000,000 in 1876, after paying the indemnity 
to fiermany, to £1,036,000,000 in 1895. From the close of 
the Russo-Japanese war till 1913 the National and Imperial 
Debts of Continental Europe increased by over four liundred 
million pounds. Meanwhile we were steadily paying back 
out of realised surpluses the money borrowed for the Boer 
War, and had already reduced our liabilities by ninety 
millions since its close. 
At best, it is a sorry business for'civilised nations to go on 
building up revenues and armaments during generations of 
peace to be dissipated and destroyed in a wild orgj' of war, 
but there are less and more irritating ways of doing even this. 
Obviously, if you are to be prepared for a monstrous expendi- 
ture some day, when you will be compelled to run into debt 
to an incalculable extent, you must make up your mind to 
live well within your income in normal times. To arrange 
your affairs so that you cannot pay your way even in peace, 
and then from time to time to confront your Finance Minister 
with the problem of providing money for interest amounting 
to an3thing up to fifty times the deficit he has failed to cover 
before the war, is certain to lead to a terrible crisis some day. 
But that crisis is not the crisis of war itself ; it is the crisis 
of the first years of peace following a war. Nothing seems to 
me more certain than that Europe is now heading straight 
for such a crisis, but it will be well to give a sketch of the way 
she is preparing for it. ' 
Loans and Stability 
In the spring of 1915, the German Finance Alinister took 
credit to his country for the fact that while we had been com- 
pelled to resort already to taxation Germany had financed 
the war solely out of loans. He contrived to convey the 
impression that it would not be necessary to impose any 
new taxes during the war. In order to understand this 
optimism we must remember that from the outbreak of war 
all expenditure on the army and navy, even that incurred 
on a peace footing, was immediately taken out of the normal 
budget altogether. .'\s this normally amounts to fifty-five 
milUon pounds there was naturally a very large apparent 
balance to the good after meeting the purely civil expenses 
of the Empire. That, unless Germany received a heavy 
indemnity or intended after the war to do without a standing' 
^army at all, the old state of affairs aggravated by a large 
new claim for interest would immediately reappear was 
obvious, but seems not to have disturbed a people intoxicated 
with war fever. Of course, in reality, no provision whatever 
had been made for securing the money which the Gertnans 
were borrowing every day, but until the new debt had grown 
so large as to absorb all the money normally spent on the 
army and navy the German financiers simply proposed to 
do nothing and trust to Providence. 
But the penalty that follows bad finance is certain. When 
the Reichstag met in the next spring the interest on new debt 
already amounted to more than enough to absorb all this 
balance, and it was clear that there would not be enough 
revenue in a normal year to meet the interest on new debt, 
and the civil expenditure alone. Germany had been borrow- 
' ing wholesale for nearly a year and a half without any pro- 
vision for paying for her loans. I suppose even German 
investors filled with war enthusiasm want some evidence 
of willingness to pay, and on March i6th Dr. Helfferich pro- 
posed new taxes which he calculated would provide for the 
deficit already created, and obtained what purported to be 
a balance in his Budget. Next year Germany imposed a 
special tax on war profits, and sanctioned a further increase 
of £40,000,000 in permanent taxation ; while this spring a 
strange assortment of imposts were made. These have 
increased the temporary war profits lax and added duties 
which, it is hoped, may yield £125,000,000 a year in peace. 
By this time Germany dould no longer boast of carrying 
on the war entirely by loans ; the only difference between 
our method and hers was the relative straightforwardness, 
boldness, and efficiency of methods of the two nations. 
For Hie whole German scheme was like a stucco facade 
put up to hide from the publi<; the fact that a building is 
falling to pieces. German finance was not based either on 
actual results obtained or on any clear estimate of probable 
receipts and expenditure in a normal year. Our Chancellor 
of the Exchequer places before the House of Commons a 
definite statement of the actual sum received by the Treasury 
from each source of revenue in the year just closed, and an 
estimate based generally on previous experience of the pro- 
bable yield of any increases in taxation he may have to 
propose. The Gennan Government has done nothing 
of the sort. Merging the ordinary expenditure on the army 
and navy in war charges, it has treated the ascertained costs 
for interest and civil service as though they would cover the 
whole normal expenditure of the State. It has presented 
no statement of the actual receipts from revenue, but has 
boldly reckoned them at what the Finance Minister considered 
they ou^ht to yield under ordinary cbnditions. This is 
clear from the treatmefit of the Customs tariff. In the Budget 
Statement for 1916 these were estimated at £35,650,000, 
while £37,700,000 was calmly put down as theiV probable 
yield in the year ending this spring. These are about the 
amounts that the German tariff might be expected to yield 
if there were no war going on, for Germany obtained thirty- 
