the sums paid in reparation. Nor can the balance of the budget itself be permanently maintained except on the same conditions. Loan operations may disguise the position-or postpone its practical results-but they cannot alter it. If reparation can, and must, be provided by means of the inclusion of an item in the budget-i.e., by the collection of taxes in excess of internal expenditure-it can only be paid abroad by means of an economic surplus in the country's. activities.

We have, it will be seen, attempted to give effect to both these sets of considerations by a method we believe to be both logical and practical. We estimate the amount which we think Germany can pay in gold marks by consideration of her budget possibilities; but we propose safeguards against such transfers of these mark payments into foreign exchange as would destroy stabilisation and thereby endanger future reparation.

By comparison with a system which reduced the sums considered possible on budget grounds because of considerations based upon estimates of the possible economic balance, this has the following advantages:

(a.) It enables the maximum sums to be obtained and paid to the Allies' account.

(b.) Any limitation upon transfers into foreign currencies will depend upon the exact economic position as it develops in fact and not upon a necessarily problematical estimate of it; and the limitation will only apply so far as it actually proves necessary.

(c.) Even so far as the sums paid in reparation cannot be completely transferred, they can, under certain conditions, be used by the Allies for internal investment in Germany.

Above all, we recommend our proposal for these reasons: it adjusts itself automatically to realities; the burden which should rest upon the German taxpayer should, in justice, so obviously be commensurate with that borne by the Allied taxpayer that, in our view, nothing but the most compelling and proved necessity should operate to make it lighter. It would be both speculative and unjust to attempt to forecast the possibilities of the future exchange position and to determine Germany's burden in advance with reference to a problematic estimate of it. Experience, and experience alone, can show what transfer into foreign currencies can in practice be made. Our system provides in the meantime for a proper charge upon the German taxpayer, and a corresponding deposit in gold marks to the Allies' account; and then secures the maximum conversion of these mark deposits into foreign currencies which the actual capacity of the exchange position at any given time renders possible.

IX.-The Normal Resources from which Germany should Make Payments.

With these principles in mind, we recommend that Germany should make payment from the the following

Sources:

(A.) From her ordinary budget.

(B.) From railway bonds and transport tax. (C.) From industrial debentures.

We proceed to consider each of these in turn.

(A.)-Provision from the Budget for Treaty Payments: Budget Equilibrium.

To recommend what payments Germany can make from her ordinary budget, and from what dates, is in effect to answer the first of the two specific questions put to us, i.e., how to "balance the German budget. For, in our view, if the economic and fiscal unity of the Reich is restored, if a stable currency is established, and if the budget is given temporary relief from Treaty payments, Germany should balance her budget from her own resources by a vigorous internal effort supported by the confidence which a general and stable settlement may be expected to give, and she should thereafter be able to maintain it in equilibrium, if the future charge for Treaty payments is determined by a method which assures that it will not exceed her capacity.

In other words, we do not consider that an external loan is needed as in the case of Austria and Hungary-to be devoted specifically to meeting ordinary deficits during a transition period. External money is indeed an essential part of our scheme, in part for the establishment of a new Bank of Issue; in part to prevent an interruption of deliveries in kind during the transition period; and essentially, to create the confidence upon which the whole success of the scheme depends. But we do not propose that it should be confined, or devoted specially, to meeting deficits on ordinary expenditure even during a transition period. On the contrary, as will be seen, we think that, from the beginning, internal resources should meet internal ordinary expenditure, and at a very early date should suffice in addition to make substantial contributions towards the external debt.

The present budget position is described in some detail in Part II, which includes our criticisms and recommendations as to the measures we think practicable for economising in expenditure and increasing taxation.

We confine ourselves here to our conclusions as to the provision that can be made for meeting Treaty payments.

(1.) 1924-25 Budget.-In the first year (1924-25) we consider that the ordinary budget may balance. Even if there

is a deficit we are confident that it should not be such as to endanger the stability of the currency, and that at the worst the Government can meet it by the orthodox expedientsincreases of existing taxation, further emergency taxes and internal loans.

Even if energetic measures are taken to obviate any deficit in 1924-25, we are satisfied that neither by reduction of expenditure nor by an increase in receipts can Germany be expected to provide out of budget resources for any Peace Treaty payments to the Allies, and that any demand for their payment would imperil both the structure of the budget and the stability of the currency. How relief can be otherwise provided for the reparation creditors will be considered separately.

The fundamental importance of the effect upon the stability of the Reich budget of the finances of the States (Prussia, Bavaria, &c.) and of the Communes has greatly exercised us, and we have stated our views on the system of subsidies and local expenditure in Part II.

(2.) 1925-26 Budget.-On passing to the Budget for 1925-26, it is obvious that the existing data are insufficient for a precise judgment on its detailed prospects. Certain general conclusions are, however, possible.

On the revenue side, the lapse of a whole year of currency stability and readjustment should, of itself, increase receipts. The period of recuperation will not have been long enough completely to restore the yield of the income tax, but there will at least be gold mark profits of 1924-25 on which to frame a reasonable assessment. Consumption taxes should be directly affected by returning prosperity.

On the expenditure side it may be hoped, with some degree of confidence, that expenditure on unemployment will exhibit a notable decrease. The expenditure on the army is capable of reduction. An automatic decrease will make itself felt in the pension charge. It is not to be expected, on the other hand, that sums thus saved on these or other heads will represent a net benefit to the budget. In particular, and this remark applies also to the budgets of the immediately succeeding years, increases in the salary charges of the Reich which can probably not be entirely off-set by decreases in personnel must be anticipated.

Some increase of expenditure must therefore be expected. On balance, however, we are of opinion that the growth in receipts should be more than sufficient to counterbalance any increase in expenditure. Whatever views may be held about the eventual outcome of the 1924-25 budget, we are clear that the second year should show a substantial improvement upon it. The result of the first year therefore affects our view as to whether the result of the following year will be actually an

appreciable surplus. If it should prove that the 1924-25 budget cannot be balanced by taxation alone, the improvement to be expected in the following year might not be more than sufficient to secure the balance desired. If, on the other hand, no loans were necessary in 1924-25, any improvement in the following year would be net surplus and entirely available for meeting Peace Treaty charges.

We are clearly of the view that if the two years are taken together, receipts should be sufficient to cover ordinary expenditure and we do not exclude the possibility of a small surplus. On the other hand, it cannot be stated with certainty that the inclusion of a compulsory liability for Peace Treaty charges will not destroy the whole balance and it is obviously vital that the mistake should not be made of fixing as a first payment during recovery a sum which the circumstances may not justify.

The stability of future reparation payments and German credit in general might thus be endangered.

There is another factor that must be taken into account. For the successful operation of the scheme for dealing with the railways to which we shall refer later, it is necessary that the proceeds of the transport tax to the extent of 250 million gold marks should be withdrawn for this year from the revenue side of the budget and devoted to the payment of Treaty charges.

On the other hand that scheme also provides for the sale by the railway company of preference shares to the nominal value of 2,000 million gold marks, one quarter of the proceeds accruing to the profit of the German budget and the balance providing for past and future capital expenditure of the railways. For the successful execution of the railway scheme we attach great importance to the sale to the public of these preference shares and we feel justified in assuming that before the end of the year 1925-26 the German Government will be in effective possession of 500 million gold marks as a result of this transaction. The budget can therefore be reinforced to that extent and after making allowance for the withdrawal of 250 million gold marks in respect of the transport tax there will be a balance of 250 million gold marks which should be available for meeting Peace Treaty charges.

By the procedure we have indicated any danger of hampering future stability by a premature call upon the ordinary resources of the German budget will be obviated and there will be an additional inducement to transfer the preference shares to private ownership.

We therefore recommend that in the year 1925-26, Germany should be required to meet Peace Treaty charges out of her budget to the extent of 250 million gold marks. If, contrary to our expectation, the budget fails to realise

500 million gold marks from the sale of preference shares, we consider that any resultant deficit could be met by an internal loan.

The proceeds of the transport tax should thenceforth not figure in the revenue side of the budget except to the extent to which they exceed 250 million gold marks in 1925-26 and 290 million gold marks in subsequent years.

We once more reserve the question of providing for further reparation payments by other means.

(3.) The budget of later years.-As we have said already, Germany's credit cannot rest upon the mere establishment of budget equilibrium. It must be clear that it can be permanently maintained. It is therefore necessary for us to consider what burden Germany can bear in the near future without danger to that equilibrium. In this connection, certain assumptions have necessarily been made. It has been considered that if for two years the budget is relieved from Peace Treaty charges and a stable currency is re-established, Germany ought in 1926 to be making rapid strides towards complete recovery, and should in three years, by 1928, reach a normal economic condition. We have taken into account the probable yield of her several taxes and her taxable capacity as a whole and the probable changes in expenditure under these improving conditions, and after making full allowance for error, we have reached definite conclusions as to the sums which can be fixed for Peace Treaty charges, without endangering the stability of the budget. These results we have considered in relation to the maximum probable rate at which the national income can be expected to grow from its present point and the maximum proportion of that growth which can successfully be absorbed in taxation.

We draw the conclusion that, allowance being made for some inevitable growth in expenditure, the budgets for the three subsequent years can safely provide for the following maximum sums:

On the other hand, regard being had to the fact that it is difficult to estimate the recuperative power of Germany in 1926-27 and 1927-28, we would propose that these amounts should be regarded as subject to modification by a sum not exceeding 250 million gold marks on the following plan: if the aggregate controlled revenues as defined in Section XIV exceed 1 milliard in 1926-27 or 1,250 million in 1927-28, addition shall be made to the above contributions equal to

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