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Rh retrenchment necessitated by the lack of opportunity for spend- ing, liberated funds for investment in the war loans. In this process, however, the stocks of industry and commerce were drawn upon without being replaced; buildings, works and plant were used more fully, without attention being possible to necessary repairs; the agricultural land was farmed without its being in- vigorated by proper manuring; and finally the holdings of foreign paper and securities were liquidated as far as possible by trans- ference to neutral countries in order to gain the means of paying for obtainable imports. Thus there went on a continuous using- up of the national capital, which was spent by the Government, and became for the private possessor paper mortgage bonds of the Empire.

At the outbreak of the war, loan-banks (Darlehnskassen) for making advances of money were established, which granted loans at a low rate of interest against pledged securities and goods. At the same time, in order to safeguard the gold reserves of the Reichsbank, its obligation to redeem its notes in gold was sus- cended. The indirect, proportionate " covering guarantees " of the Reichsbank were also abolished, i.e. the provision in the Bank Law that the Reichsbank had to pay 5% per annum to the Treasury on the amount by which the bank-note issue at any time exceeded the cash reserve plus a sum of 550,000,000 marks, or, on the quarterly balance, 750,000,000 marks. The Reichs- bank was thus enabled to issue any quantity of bank-notes without increasing the discount rate. This, on the other hand, led to a constantly increasing deterioration of the proportion between the bank-note issue and the means of covering it. Still, the creation of the offices for advancing money {Darlehnskassen) and the abolition of the restriction on the note issue enabled Germany to dispense with a legal moratorium. A kind of sub- stitute for a moratorium was furnished by the regulation em- powering the law courts to grant delays, so that they could allow payments of cash and of mortgages to be deferred in cases of necessity. Men who were away at the front were in par- ticular protected from proceedings for the enforcement of judgments. Lastly, debtors unable to meet their obligations were saved from bankruptcy and the consequent wasteful realization of their assets by a law (Aug. 8 1914) which enabled them to apply for an official control of their businesses (Ge- schaftsaufsichtsgesetz). According to this law the debtor could request the bankruptcy court to appoint a trustee to exercise supervision over business assets and their disposal, thus avoid- ing the personal disabilities and the effects as to property which are the normal consequences of public bankruptcy.

These were, on general lines, the sources whence the sub- scriptions to the war issues were derived. The Empire made the funds necessary for the war available at the issuing bank by discounting Treasury bills, and then appropriated in regular intervals the accumulated cash of the population ready for investment, by issuing war loans and funding the floating debt.

This system of war finance only succeeded completely up to the autumn of 1916. The first four war loans, with their sub- scriptions of 4,460 millions (autumn 1914), 9,060 millions (spring 1915), 12,101 millions (autumn 1915) and 10,712 millions (spring 1916), brought in sufficient to cover the Treasury bills issued up to that time. Up to the autumn of 1915 there was even a considerable surplus, which helped to finance the carrying-on of the war for the succeeding months. But from the autumn of 1916 this condition of affairs was altered. The war loans issued regularly every half-year continued to produce large amounts: 10,562 millions in the autumn of 1916; 13,112 millions and 12, 626 millions in 1917; 15,001 and 10,443 millions in 1918. But the Treasury bills put into circulation regularly increased to a greater extent: in the autumn of 1916, 2 milliards remained uncovered; in the autumn of 1917 the amount had risen to 144 milliards; in the autumn of 1918 to 39 milliards; and in Nov. 1918 when the Armistice was concluded, besides the 98 milliards in war loans there were already in circulation 50 milliards in Treasury bills as floating debt of the Empire, this total being subsequently still further increased.

The reason for this state of affairs was the enormous increase

in the cost of the war and the continued rise in prices. The average cost of the war per month was estimated for the first year of the war at 1-7 milliards of marks, in the second year 2 milliards, in the third year 3 milliards, in the fourth year 3-8 milliards, and in the last year 4-4 milliards of marks. In the extraordinary budgets of the five years 1914-8, the general war expenses were as follows: 1914, 6,935-7 millions of marks; 1915, 23,908-9; 1916, 24,739-3; 1017, 42,188-4; 1918, 33,928-4. In the same years the total indebtedness of the Empire rose by 11-3, 22-1, 30-3, 36-3 and 50-9 milliards; to this must be added 13-5 milliards in obligations undertaken towards Germany's allies. The full amounts of the actual costs of the war, however, are not shown in these figures. Very considerable sums, as the accounts got more and more in arrears, only became due a con- siderable time after the war was over. These amounts and the cost of demobilization, reaching additional milliards, burdened for the most part the budgets of the years following.

The enormous increase of the State debt naturally resulted in a proportionate increase in the yearly expenses for interest. Where in 1913 the management and interest of the debt swal- lowed 147 millions, 375-6 millions were required in 1914, 1,248-1 millions in 1915, 2,518-5 millions in 1916, 4,248 millions in 1917 and as much as 6,430-9 millions of marks in 1918. At the same time important sections of the revenue declined. Customs, yielding in 1913 a revenue of 679-3 million marks, provided in 1914-8 only 560-8, 359-9, 348-3, 232-7 and 133 millions, the decline being plain evidence of the growing effect of the blockade- In the same way the profitable enterprises of the Empire (posts and telegraphs and railways at that time still not including the lines belonging to the individual states) suffered under the influence of the war, and instead of being sources of revenue became burdens; in 1913 they showed a surplus of 140-9 million marks, but in 1914-8 they required subventions of 53-6, 42-2, 5'5, I39'8 and 596-5 million marks. The revenue from spirits dwindled considerably. It became therefore more and more a pressing necessity to find funds for the war, not only by the issue of war loans, but through taxation. In the summer of 1916 the tobacco duty, the stamp duty on freight notes, and postal and telegraph charges were raised, but the resulting improve- ment in returns was meagre and insufficient even to cover the interest on the debt. In 1917 came a coal- tax and duties on passenger and goods traffic, and in 1918 a number of taxes were increased and new taxes introduced an increased bourse-tax, a turnover-tax, stamp-tax on bills, taxes on sparkling wines, beer, tea and coffee and mineral waters, etc., while the tax on spirits was extended into a monopoly. There came also increases in the direct taxes in the individual states, whose finances under the influence of the war were also suffering severely.

The most important new source of taxation, however, was the taxation of war profits. It started with the law of June 21 1916, which covered not only the profits gained on war products but any and all profit gained during the war from whatever source, i.e. the difference between the taxable property of end 1916 and end 1913, and which took from the property remaining intact a supplementary duty, in so far as the taxable property did not show a reduction of more than 10%. This supplementary duty was one per mille, and the duty on the increase 5 % on the first 10,000 marks, rising to 50% on increases over 1,100,000. Then came a tax on the surplus profits of companies, beginning with 10% on a surplus profit of 2% on the capital up to 30% on a surplus profit of 15% on the capital, and further progressive super-taxes based on the total rentability of the companies. In 1917 an advance of 20% was claimed on this war-tax of 1916, and in 1918 this was further extended. The Imperial Govern- ment proposed, besides the existing charges, a single war-tax on income, which would hit people with an income of 20,000 marks at the rate of 3 to 20 %. This was shelved through the traditional objection of the states, which were still disposed to combat the annexation of the revenue from direct taxation by the Empire. Instead, the surplus income per head, that is the difference be- tween the peace-time income and the war-time income, where such difference exceeded 3,000 marks, was made the subject of a