German Finance
From LoveToKnow 1911
"GERMAN FINANCE, 191021 The period from about 1895 up to the outbreak of the World War in 1914 had been one of growing economic prosperity for Germany. From time to time the advance had been interrupted by intervals of depression, but they were short-lived, and when they passed the progress continued. Between 1907 and 1913, for instance, German coal production rose from 143 million tons to 191 million tons, or roughly by one-third; the production of lignite from 621 to 87 million tons, or two-fifths; of pig iron from 13 to 29.3 million tons, or nearly one-half. Germany's imports increased in this period by 2 milliards (thousand millions) of marks 1 (£Ioo,000,000) and German exports by well over 3 milliards of marks (LIso,000,000), the total foreign trade of Germany increasing from 152 milliards (775,000,000) to 20.7 milliards of marks (LI,035,000,000).
German imperial finance reflected economic progress only to a small extent in its budget. Confederation had left the Empire itself in a weak position financially by reserving the most important sources of taxation for the individual component states. The governing theory was that direct taxes appertained to the states, while the Empire must rely on indirect taxation. In spite of the general financial and economic prosperity, the imperial debt had risen in 1910 to 5,016 millions of marks (having been 1,240 millions in 1890, 2,201 millions in 1895, 2,418 millions in 1900, and 3,323 millions in 1905). German statesmanship had been slow to adapt the needs of the imperial budget to the changing conditions. In 1909, however, an important fiscal reform was introduced. New sources of revenue to a total amount of about Soo millions of marks were tapped; the long-continued period of recurring deficits seemed at an end, and the hope of surplus income appeared justified. The additional expenditure on armaments, necessitated by the army estimates of 1912 and the naval estimates of 1913, amounting to about 185 million marks, was covered by increases in the customs duties and new property 1 Up to the outbreak of war, the German mark was practically equal to the English shilling (see Exchange, Foreign). Its subsequent depreciation in value makes it impossible to convert the later figures for paper marks, as given in this article, into their real money value. Only where gold marks are referred to, the pre-war parity with sterling holds good. - (Ed. E. B.) taxes were introduced. It was proposed to cover the extraordinary expenditure, estimated at about one milliard of marks, by a single " defence tax," levied as a capital-tax on properties of io,000 marks up to 15,000 marks at 0. '5%, increasing to 1.5% on amounts of over 5 millions, and as an income-tax, starting with 1% on incomes of 5,000 to 10,000 marks and increased to 8% on incomes of more than 50o,000 marks. This " defence tax," levied in 1914-5, brought in 976.9 millions of marks, but, as events turned out, it was merely swallowed up in the exigencies of war expenditure.
The imperial budgets for 1910-3, for total revenue and expenditure ordinary and extraordinary, showed the following figures, in thousands of marks: - 1910, revenue 2,943,419, expenditure 3,024,260; 1911, revenue 3,057,592, expenditure 2, 8 97,4 0 3; 1912, revenue 2,915,384, expenditure 2,893,337; 1913, revenue 3,698,829, expenditure 3,698,829. There was a deficit in 1910 of 80,841,500 marks, and in 1911 and 1912 there were surpluses of 160,188,800 and 22,046,400 marks respectively.
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War Finance
The pre-war " defence tax " was not an organic reform. It had provided the power to attack income and property as a source of imperial revenue, but only once. The Empire thus entered the war with an undeveloped system of taxation - without, indeed, any large current revenue from taxation which (like an income-tax) could easily be increased in proportion with the enormous requirements of the war. To introduce it during the war would not have been an easy matter, and the view prevalent in Government circles was not in favour of such a course. They counted on a war of short duration, and did not wish to exacerbate the feelings of the population, greatly distressed as it was through sacrifice of blood and life in the field as well as through the blockade, by imposing heavy burdens of taxation. They did not wish to interfere with the right of the individual states to obtain their own revenue from direct taxation, and desired to make as little alteration as possible in the existing arrangements. Therefore, the decision arrived at was that the cost of the war should be met not out of taxation, but by the issue of loans; only the interest on the loans issued was to be debited to the current budget and covered by income. The current budget itself was artificially assisted by taking out of it, at first in part and later in full, the largest items, i.e. the current expenses for the army and navy, and debiting them as extraordinary expenses of the war. In the course of the war, other expenses too, only indirectly connected with the war, such as bonuses to civil servants to compensate for the rise in prices, were debited to the war fund. On the other hand the revenue, which it was at first quite impossible to estimate, was simply included in the price of peace, although the most important part of it, for instance the customs revenue, suffered an immediate and very sharp reduction through the blockade and the resulting reduction in imports, as well as the suspension of customs duty on corn, grains and other articles of pressing need, which took place immediately on the outbreak of the war. It was a system which at first seemed to lighten the burden, but afterwards made it only heavier, and which, the longer the war continued, was found less and less adequate.
The German system of war economics was directed by the enormous demands of modern war on men and material on the one side and by the blockade on the other side. Strict economy was to be observed in all that was necessary for the war, especially in raw material required for war purposes and the not less important labour, while distribution was to be organized in such a manner that everybody received at least a share of the necessaries of life. To increase production to the utmost for the requirements of the war, and to make the whole of the economic system subservient to its satisfaction, was from the first the ruling idea. This transference of all economic activity to the needs of the war provided at the same time the financial means of carrying on the war. As the German people were increasingly, if not totally, cut off from foreign supplies, they were more and more dependent on home produce, and the profits of the war expenditure remained for the most part at home. The continuance of the regular savings system, combined with the retrenchment necessitated by the lack of opportunity for spending, 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 invigorated by proper manuring; and finally the holdings of foreign paper and securities were liquidated as far as possible by transference to neutral countries in order to gain the means of paying for obtainable imports. Thus there went on a continuous usingup 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 sustended. 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 Reichsbank 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 substitute for a moratorium was furnished by the regulation empowering 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 particular 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 (Geschditsaufsichtsgesetz). 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 avoiding 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 subscriptions 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 subscriptions 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 141 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 44 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, 2 3,9 08 9; 1 9 16, 2 4,739.3; 1917, 4 2, 188.4; 1918, 33,928.4. In the same years the total indebtedness of the Empire rose by 11.3, 22.1, 3 0.3, 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 considerable 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 swallowed 147 millions, 375.6 millions were required in 1914, 1,248 1 millions in 19 1 5, 2,518.5 millions in 1916, 4,2 4 8 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, 34 8.3, 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 railwrs - 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 0.5, 1 39.8 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 improvement 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 io%. This supplementary duty was one per mille, and the duty on the increase 5% on the first io,000 marks, rising to 50% on increases over 1,100,000. Then. came a tax on the surplus profits of companies, beginning with io% 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 Government 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 between the peace-time income and the war-time income, where such difference exceeded 3,000 marks, was made the subject of a tax calculated at 5% on the first 10,000 marks of the taxable surplus income, up to S o % if the difference in income amounted to over 201,000 marks. Then came the property-tax beginning with one per mile on the first 200,000 marks, rising to 5 per mile on a fortune of over 2 million marks. Thirdly, came a considerable increase of the tax on companies: it was based on a fixed rate of 80 /0 on the surplus profit, which obtained a reduction of 10 to 50% only when the surplus profit did not exceed a very moderate amount or where it did not exceed a very moderate return on the capital. The final extension of the war-profit tax took place in 1919. It again hit the individual with a tax on the surplus income, commencing with 5% and rising to 70% on a surplus income of only 400,000 marks. The war-tax on companies was also repeated. More particularly a tax was levied on total increase of fortune between Dec. 31 1913 and July 30 1919 and that at an extraordinarily high rate. Exemption from the tax was allowed only up to an increase of 5,000 marks, from which amount the tax began with io%, increasing to such an extent that an increase in fortune of 376,000 marks was taken in full and in no case could the taxpayer keep more than 172,000 marks of the increase. All that individuals gained during the war and the first period of transition over an increase of 172,000 marks was claimed by the State under this last extension.
The revenue from the war-tax of 1919 was estimated at 12 milliards, when it became law. In the years of the war the defence-tax, war-profits tax of 1916, and surplus-income tax of 1918 brought in the following amounts:-637.4 millions in 1914, 307.8 millions in 1915, 65.1 millions in 1916, 4,853.1 millions in 1917, 2,410.3 millions in 1918, and 4 million marks in 1919. The total yield of the defence-tax was 976.9 million marks; of the 1916 war-tax, with its increases, 5,777.1 millions; and of the 1918 war-tax 2,686.2 millions, a total of 9.4 milliards of marks.
| Revenue | Expenditure | ||||
| 191 | 2,350.8 | 8,653.8 | |||
| 1915 . | . . | . | .. . | 1,735.2 | 25,708'4 |
| 1916 . | . . | . | .. . | 2,029'4 | 27,740'9 |
| 1917 . | . . | . | .. . | 7,830.3 | 52,015.4 |
| 1918 . | . . | . | 6,795.0 | 44,030'7 |
Nothwithstanding these considerable amounts, and the increased revenue obtained through other forms of taxation, the German war budget was a most unfavourable one. The appended table gives the total revenue and expenditure of the Empire for the years 1914 to 1918, and, as already stated, a great part of the actual war costs are not included in the expenditure, as it only appears in the accounts for the years following: Revenue and Expenditure 1914-8 (in millions of marks). The war was financed, almost entirely, by an enormous increase in indebtedness, at first through issues of loans, and later, in ever-growing measure, through increasing the floating debt. The taxes and levies introduced during the war were barely sufficient to meet the current requirements, greatly increased through the interest on the debt as well as through decrease of revenue from peace-time sources. As far as the property and income-tax is concerned these were not permanent sources of income but were only available once, and terminated as soon as their result was obtained. But the expenses remained, and necessitated imperatively the replacement of the single levies through regular sources of revenue.
After the War
It was in this desperate situation financially that the war came to an end. The collapse which followed it, together with the crushing conditions of the Armistice and the Peace Treaty, disorganized the whole economic and financial life of the country. The effect of the war appeared after the defeat with frightful clearness. Of the German population 1,700,000 were killed, 1,50o,000 injured and thus had their capacity to gain a livelihood impaired. And the civil population, through the physical and moral strain of the war, showed a greatly increased mortality; more especially, countless children and old people were victims of the privations imposed by the blockade. The increased mortality of the civil population in 1914-9 is estimated at 800,000 souls. A still heavier blow was the fall in births through the separation of the sexes in consequence of the war. For the period of six years this reduction amounted to 3,700,000. Besides actual losses in numbers, there was also exhaustion of those who remained alive and the destruction of the means of productivity.
Superficial critics have been apt to observe that Germany itself was saved from the ravages of the war, since it was fought, with the exception of a short incursion of the Russians in East Prussia, outside its frontiers. Herein lies a fallacy. The German industrial works were not indeed destroyed, but the greater part of the machinery and plant was used up to the utmost by war production without there being a possibility of seeing to repairs and renewals. Similarly, the agricultural areas were exhausted. Industry and commerce had lost the materials that were used up in the war; cattle had gone from the stalls; transport undertakings were crippled to an incredible extent. At the end of March 1920 only 45.9% of the existing locomotives were usable, whereas at the end of July 1914 the number under repair was only 19.1%. Germany in the late autumn of 1918 was not only in a state of military defeat and political chaos; financially and economically it was at its last gasp. What was needed was help from abroad, through importation of foodstuffs and raw materials, which alone could facilitate a transition from war to peace conditions. A complete change in the direction of its productive energies was required. During the years of war production was solely for war requirements, the Government being the sole big buyer, always eager for goods; when the demand for war requirements stopped suddenly it was necessary again to produce for peace requirements, and to find a market for them. First and foremost there was the task of again taking into the labour market the millions of people released from the army and of finding places for them in agricultural and industrial undertakings, in the works and factories and offices. Elaborate plans for this demobilization of the army had already been made during the war. They were, as so many other schemes, rendered useless by the destructive conditions of the Armistice. The periods fixed for the return and release of the army were too short, and all organization in that direction collapsed. The enormous supplies taken for the army, the value of which was estimated at several milliards of gold marks, and the return of which was imperative for the use and nourishment of the people during the first part of the period of transition, could not be stored in the given time. Moreover, Germany had to deliver up to the Allies 5,000 engines and 150,000 wagons, and the transport crisis already threatened was thereby rendered complete. In accordance with the supplementary conditions of March 1919 Germany had to hand over the biggest part of its commercial shipping, and this again greatly increased the difficulties of distribution. Worse still, the blockade still continued for months, and thus there was the severest restriction of imports of necessary provisions and raw materials, for which also only inadequate means of payment were available. Terrible were the results of these regulations. Not only was the political and social crisis rendered more acute, but the German economic position was disordered to such an extent that repeatedly a total collapse seemed unavoidable. The result was the loss of hundreds of thousands of lives among the civilian population, whose weakened condition was unable to withstand the continued privations. According to an estimate based on 375 German towns of 15,000 inhabitants and over, as against 140 deaths per io,000 in 1913 there were 175 deaths in 1919 and 158 in 1920. The mortality from tuberculosis alone was increased from 15'7 in 1917 to 27.1 in 1919, and in 1920 it was still as high as 18.4. That was not all. With the Armistice began the Allied occupation of the left bank of the Rhine and the bridgeheads on the right bank. A difficult economic situation was thus produced, which again became peculiarly acute in the spring of 1921 through the London " sanctions," for Germany lost control of her most important customs frontier; the " hole in the west " was torn open, and a flood of foreign goods, to the value of milliards of marks, poured without regulation or control into the starved country, aching for commodities of all descriptions. Whilst the German population was without the means to satisfy its re quirements in absolute necessaries, the country was flooded with foreign articles of luxury. Although masses were facing starvation, the carrying-out of the conditions, first of the Armistice and later of the Peace Treaty, permitted the classes which had profiteered out of the war and the revolution to satisfy their vulgar greed.
The Peace Treaty of Versailles, as adopted by the Allies in May 1919, and imposed on Germany by the threat of renewing the war, completed the work of economic ruin. Germany lost with its territories a total population of 5.3 million souls. With Alsace-Lorraine, moreover, Germany lost nearly threequarters of its capacity for iron production; out of pre-war deposits of iron ore valued at 2.3 milliards of marks in Germany and Luxemburg (which had a customs treaty with Germany), there remained a value of only 0.403 milliard within the new German frontiers. Germany also lost with Alsace-Lorraine 26% of its potash. It lost with the transfer of the Saar valley to France roughly 9% of its pit-coal production, and was also obliged to agree to deliver to the Allies large quantities of coal, fixed in Oct. 1920 in Spa at 2 million tons per month. It was threatened with the loss of Upper Silesia, which had produced 23% of German pit-coal, 80% of zinc and 61% of raw zinc. Germany lost, moreover, almost all its commercial shipping, all overseas cables, its colonies, - in fact all the bases of its commerce abroad. Germany lost in the N. and the E. of its empire large agricultural districts which had formerly furnished about 25% of its supply of grain and potatoes, and io to 12% of its cattle. And while the Peace Treaty thus raised for Germany the crucial question whether it would be at all possible in future to supply a population now amounting to 61 million souls with nourishment and occupation on German soil - whether indeed within its new frontiers it was not really a case, from the economic point of view, of "20 million souls too many " - the country also found itself burdened with external financial obligations of unexampled magnitude by way of reparation payments to the Allies.
The Depreciation of the Mark
The first effect of the defeat, - the internal collapse, and the terms of the Armistice and the Peace Treaty, - was the almost total breaking-down of the German currency system. The depreciation of the mark abroad had pursued a progressive course already during the war. In consequence of the blockade, and of increasing demands for war requirements in industrial production, German exports had declined much more quickly than the imports; and since the cover formerly available for excess of imports, arising from shipping charges, freights, etc., failed entirely and foreign investments were largely unrealizable, it was almost impossible to obtain credit abroad, which in normal times would have covered the deficit. By the end of the second year of the war (summer of 1916) the exchange in Switzerland, for instance, had fallen from a normal rate of 12 3.4 6 francs per 100 marks to 95.60 francs, showing a loss in exchange of 22.60%. Though depreciation still went on, in Oct. 1918 the Swiss rate was still as much as 71 50 francs and the loss in exchange not more than 42.10%. But after the end of the war the fall became steeper. The Swiss exchange was 622 francs per loo marks at the end of Nov. 1918, and the rate descended month by month to 352 francs at the end of May 1919, and then, after a brief reaction, to 26 francs at the end of Sept. 1919, 11.50 francs on Dec. 31 1919, and 6.15 francs (equal to a loss of 95%) at the end of Feb. 1920. From this point there was again a reaction in the summer of 1920, and on May 31 1920 the Swiss rate was 14.75 francs, but in the autumn of 1920 the depreciation recommenced, and towards the end of June 1921, the Swiss exchange for loo marks was 8 10 francs. (See Exchanges, Foreign, for the German exchange.) German currency depreciation during the war, as well as afterwards, was one of the factors which restricted the possibility of getting help from foreign capital. And though the value of money in Germany itself declined much more slowly than the mark exchange abroad, another result was that foreign purchasers were able to buy whatever was obtainable in Germany, stocks of goods and merchandise, town property, securities, plant and machinery, up to complete industrial enterprises, at catastrophically low prices. Another consequence was an enormous increase in German indebtedness towards foreign countries. The German mark note became the gambling counter of the world. The German notes went abroad in milliards at everfalling rates in payment for imported goods, to be bought up by big and little speculators, down to the hotel porter and the domestic servant who hoped to profit by any rise in exchange. Enormous foreign holdings of mark notes resulted also from credits given by banks in marks, also with an eye on an improvement in the exchange. Only in this way was it possible for Germany to pay for its large excess of imports over exports, which marked the destruction of Germany's economic position in these years of greatly reduced production at home. The price was a foreign indebtedness, the yearly burden of which in interest charges was estimated at the end of 1920 by competent judges at one milliard gold marks and by some critics at an even larger figure.
Apart from all other difficulties attending economic reconstruction after the war, every attempt of Germany to reach a real internal consolidation was hampered by the monetary instability. On the one hand it raised prices, and on the other it depreciated the value of property and income. While, towards the end of the war and just after, wages had often been increased beyond the rise in prices, so that a moderate increase in real wages resulted to the worker, it was not possible to continue this for any length of time in view of the unhappy state of production. Much less was it possible for people enjoying fixed incomes, officials, civil servants, and brain-workers, to increase their income in proportion with the reduction of money value, and they sank lower and lower in the social scale. The worst sufferers were people relying on incomes from rents. Every reduction in the value of money amounted to a favouring of the debtor at the expense of the creditor. Those who had invested their capital in Government securities, mortgages, etc., at fixed rates of interest, were helpless against the reduction in money value, which reduced their capital as well as the interest to a fraction of its former amount. Producers themselves might be able, through the rise in prices, to obtain some compensation for the reduction in the value of money. But any such compensation could only be reached by a very small part of the population. No doubt, as in all periods of economic revolution, some lucky people found the means of enriching themselves to an extraordinary extent. But the high profits nominally realized by many German companies, if the amount were reduced to the actual value of money, represented not only no advantage, but a loss if compared with pre-war times. The large middle class was hit particularly hard. This class, the main repository of national culture, was in danger of being swallowed by the proletariat.
Such a situation was bound to influence the State finances to a deplorable extent. Whatever services were required had to be paid for at a nominally higher rate. It was necessary too to spend enormous sums on subsidies for reducing the price of necessaries to the public, for keeping down the cost of transport, and for the relief of the unemployed. On the other hand, uneconomic State finance was itself a factor in the decline of money values. The State had to cover its financial requirements in default of taxation by further issues of paper money, increasing from week to week and month to month.' It was itself the producer of the artificial purchasing-power which brought in its train the continued rise in prices. The bank-note press, in substitution for the taxation machine, created a continually growing inflation. It was the uninterrupted use of the printing-press, as a means of meeting the expenditure, that characterized State finance in the first years after the collapse.
Taxation Reform,1919-20
The National Assembly of the new German Republic had to face the task of laying the foundations of a new financial system and re-creating it out of chaos. The old privileges of the separate states of the Empire, in depriving the central Government of the benefit of the most important sources of tax-revenues, had to go. The German Reich now had 1 On Jan. 1 1919, the regular note issue amounted to 22,188 million paper marks (as against 11,467 millions a year earlier) and the loanbank note issue to 10,109 millions (6,264 millions in 1918). On Jan.
I 192 the total was about 120,000 millions.
to bear by far the largest part of the costs of the war, the interest on the war debts, the war pensions and compensations, the whole of the burdens of the Peace Treaty, etc.; these swelled the budget expenditure to such an extent that the requirements of the individual states were left far behind. The great sources of direct taxation had now to be made free for obtaining revenue for the Reich. Events had made compulsory a strong centralization in German finance. By an order of the Finance Department of the Reich on Sept. 10 1919, the management of all fiscal levies was handed over to the central Government. A further order, of Dec. 13 1919, provided for the formal right of taxation. A decisive step was taken in the National Taxation Law of March 22 1920, which fixed on a new basis the position of the three great receivers of taxes, the Reich, the individual states, and the subordinate local Governments towards each other. Whereas the pre-war rule was that the use of certain sources of taxation by the individual states forbade the Imperial Government to use such sources, the new regulations reversed the position, ruling that the use of certain sources of taxation by the Reich forbade the collection of similar taxes by the individual states and local communities unless expressly empowered to collect a supplementary levy. Counties and municipalities kept their most important independent tax sources-the taxes on landed property and industrial activities. They were obliged to levy an amusement-tax, and were entitled to tax the lowest incomes which escaped the general income-tax. In principle they became pensioners of the State, receiving of the revenue from Reich taxation two-thirds, of the companies-tax also two-thirds, of the inheritance-tax one-fifth, of the tax on acquistion of landed property one-half, and of the turnover-tax 15% (i.e. Io % for the counties and 5% for the municipalities). This was a most important step in the direction of laying a sound basis for Reich finance.
In the place of the various tax departments of the individual states there had to be created the gigantic machinery of a central Finance Department for the entire Reich. It could not come into existence without much early trouble and failure. The new department was at first quite unable to carry out the regulations, and only slowly and gradually came the introduction and collection of new taxes. And another difficulty followed quickly in consequence of the new regulations for financial management. The unification of the railways in Germany had been, like the unification of taxation, an old demand, but one which could not be carried out in times of peace, when the railways were a valuable source of revenue to the states, more especially to Prussia. Now it was accomplished, and the Reich, which previously had managed only the railways of AlsaceLorraine, from April 1 1920 took over all the railways. But the railways, instead of bringing in a profit, now found themselves with a deficit. From the moment, however, that the Reich had taken over the important sources of tax revenue, it was obliged to take over the railways as well, since the individual states were not able to carry their losses, and these losses now fell on the Treasury of the Reich.
With this basic change in organization came now the extension of the field of taxation. Between Sept. 1919 and March 1920 a system of new taxes for the whole Reich was created. The taxation of income was catjied out in three different ways.
| Amount of Income For part or the whole of the first 24,000 marks. For every additional (whole or part) 6,000 " 5,000 | Rate per cent 10 20 25 |
| 5,000 | 30 |
| 5,000 | 35 |
| 5,000 | 40 |
| 70,000 | 45 |
| 80,000 | 50 |
| 200,000 | 55 |
| " all further amounts . | 60 |
First comes the unified tax on income, which came into force on April 11920. The rate of taxation is as follows: Thus, 60% of any income exceeding 400,000 marks (now paper marks) has to be handed over as tax to the Treasury. On an income of 30,000 marks the tax is 3,600 marks; on 50,000 marks it is 10,000 marks; on 200,000 marks it is 81,600 marks; and on i,000,000 marks it is 551,600 marks.
A reduction in these rates is allowed only in so far as an existence minimum and the numbers in the family are taken into consideration. This is arranged so that, for every person subject to pay tax and for each member of his household not independently taxed, the taxable amount of income is reduced by 120 marks, provided the dutiable income does not exceed 60,000 marks, and by 60 marks where the income is between 60,000 and ioo,000 marks. A married man subject to the tax, with four children and an income of 24,000marks, will, for instance, obtain a reduction of 720 marks. Taxation of those who receive salaries or wages is assured by making the employer answerable for retaining from the salary or wage a proportionate amount in advance and paying it over to the tax collector.
To this income-tax, affecting the total income of the subject, is added, as super-tax, a levy on income from investments, in distinction from earned income, i.e. from dividends on shares, etc., interest on loans and mortgages of all kinds, interest on advances of any description, especially on deposits in banks and savings banks, rents, etc., and discounts on bills, including Treasury bills. The tax is ro % on the whole return on the capital. An exception is made only in the case of small investors over 60 years of age or incapacitated from work. These have the tax on returns from capital included in their income-tax, as follows: on an income of not more than 5,000 marks, the whole amount; up to 6,000 marks 90%, the rate being reduced with every further i,000 marks by io%. On incomes of over 14,000 marks this relief terminates.
The third form of taxing incomes is the companies-tax, which operates as a super-tax on enterprises carried on by companies, including foundations, institutions and other societies for the management of property. This tax is ro % generally, on the total dutiable income. For societies working for gain (companies with shares, societies with limited liability, etc.) there is, in addition, a special tax on the distributed profit, calculated on the proportion of the distributed amounts to the capital, so that where the profit is only 4% on the capital the tax is 2% on the distributed amounts, rising by 1% up to Io % of the distributed amounts if the profit on the capital is 6, 8, It), 12, 14, 16, r8 and over. The first 3% of profit on the capital is tax-free. The total taxation on income, from the three forms of levy, works out as follows: Income from shares, for instance, is taxed under each of the three forms. The company itself has to pay on its income in proportion to its own liability; then the distributed profit is reduced by the io% tax on return from capital; and finally the shareholder has to pay income-tax on his dividends.
| following table (in marks) indicates its working:-- Increase in Property | Amount of Tax |
| 10,000 | I,000 |
| 15,000 | 1,750 |
| 20,000 | 2,500 |
| 25,000 | 3,500 |
| 30,000 | 4,500 |
| 35,000 | 6,000 |
| 40,000 | 7,500 |
| 50,000 | 10,500 |
| 100,000 | 30,500 |
| 150,000 | 55,500 |
| 200,000 | 83,000 |
| 300,000 | 148,000 |
| 400,000 | 233,000 |
| 500,000 | 333,000 |
| 800,000 | 633,000 |
| 1,000,000 | 833,000 |
| 2,000,000 | 1,833,000 |
| 4,000,000 | 3,833,000 |
| 5,000,000 | 4,833,000 |
| 10,000,000 | 9,833,000 |
Taxation on property (capital) was also imposed in three forms. First of all came the war-tax (Kriegssteuer) on property increase, which hits any increase of over 5,000 marks in the value of property during the war and immediately after the war (difference in property between June 30 1919 and Dec. 31 1913), nobody keeping a larger increase than 172,000 marks. The Through this war-tax increase in property is for the greater part annexed. But secondly, a further tax levied for the " need of the Reich " (Reichsnotopfer) makes a deep inroad on unincreased property, as calculated on Dec. 31 1919. This affects companies, especially companies with shares, and other societies for gain, on their net property, that is without the paid-in capital and without reserve funds intended for general utility or benevolent objects, at a rate of io%. It also applies to the property of individuals, leaving only a property of 5,000 marks tax-free, though in the case of married couples this is increased to Io,000 marks tax-free, and, for those who have children, a further amount of 5,000 marks tax-free is allowed for the second and each additional child. Consideration is also extended in the case of proprietors of industrial enterprises who are liable to be hampered by the depletion of capital, the capital employed in the business being calculated not to the full amount but only up to 80% of its value.
| First 50,000 marks (in full or in part).. . | io | Next 200,000 marks 500,000 " | 35%o 40 | ||
|---|---|---|---|---|---|
| Next 50,000 marks . | 12 | 500,000 | 45 | ||
| " 100,000 " | . | 15 | 1,000,000 | . | 50 |
| " 200,000 " 200,000 | 20 25 | 2,000,000 " 2,000,000 " | 55 60 | ||
| " 200,000 " | 30 | All further amounts . | . | 65 | |
| Taxable property | Amount of tax | Taxable property | Amount of tax |
| 1,000 marks | loo marks | 350,000 marks | 56,00o marks |
| 5,000 | 500 | 400,000 | 66,000 " |
| 10,000 " | 1 ,000 | 450,000 " | 78,510 " |
| 15,000 " | 1,500 | 500,000 | 91,000 " |
| 20,000 " | 2,000 " | 550,000 | 103,500 |
| 25,000 " | 2,500 | 600,000 | 116,000 " |
| 30,000 " | 3,000 | 650,000 " | 131,000 " |
| 35,000 | 3,500 | 700,000 " | 146,000 " |
| 40,000 | 4,000 " | 750,000 | 161,000 " |
| 45,000 | 4,500 | 800,000 | 176,000 " |
| 50,000 | 5,000 | 850,000 | 193,500 " |
| 55,000 " | 5,600 | 900,000 " | 211,000 |
| 60,000 | 6,200 | 950,000 | 228,500 " |
| 65,000 " | 6,800 | 1,000,000 | 246,000 |
| 70,000 | 7,400 " | 1,500,000 | 446,000 " |
| 75,000 " | 8,000 " | 2,000,000 " | 671,000 " |
| 80,000 " | 8,600 " | 2,500,000 | 921,000 " |
| 85,000 " | 9,200 " | 3,000,000 " | 1,171,000 " |
| 90,000 " | 9,800 | 3,500,000 " | 1,446,000 |
| 95,000 | .10,400 | 4,000,000 " | 1,721,000 " |
| 100,000 " | II,000 " | 5,000,000 " | 2,271,000 " |
| 150,000 | 18,500 " | 6,000,000 | 2,871,000 " |
| 200,000 | 26,000 | 7,000,000 | 3,471,000 |
| 250,000 " | 36,000 " | 8,000,000 | 4,121,000 " |
| 300,000 | 46,000 | For each additional | |
|---|---|---|---|
| 1,000 marks 650 | |||
| marks more | |||
The rate for individuals is as follows: This works out as set forth in the following table: The tax has to be paid in cash or in war loan, but may be paid in yearly part payments, the unpaid amount being charged 5%, and it must be paid off within 26 years. If real property is given as security, where the payment is secured by entry in the official register 46 years are allowed for payment.
The third form of property-tax, inheritance duty, consists of a considerable extension of the former inheritanceand gift-tax, with the addition of a succession-tax after the pattern of the English estate duty. Inheritanceand gift-tax are calculated under six classes, according to the relationship of the beneficiary: Class I-Wife or husband and children, including illegitimate children recognized by the father.
Class 2-Descendants of the children.
Class 3-Parents, brothers and sisters.
Class 4-Grandparents, descendants of first degree of brothers and sisters, parents-in-law, step parents, children-in-law, step children and adopted children.
Class 5-Descendants of second degree of brothers and sisters, brothers and sisters of the parents, brothersand sisters-in-law. Class 6-Other beneficiaries (except as regards communities, churches, benevolent and utilitarian societies, foundations, etc., in which case the rate is always io %).
| Class I | Class 2 | Class 3 | Class 4 | Class 5 | Class 6 | |
| For first 20,000 marks tax- able part or full. . | 4 | 5 | 6 | 8 | io | 15 |
| For following 30,000 marks | 5 | 6 | 8 | 10 | 12 | 20 |
| 50,000 " | 6 | 8 | 10 | 12 | 15 | 25 |
| 50,000 " | 8 | 10 | 12 | 15 | 20 | 30 |
| 50,000 " | 10 | 12 | 15 | 20 | 25 | 35 |
| 100,000 " | 12 | 15 | 20 | 25 | 30 | 40 |
| 200,000 | 15 | 20 | 25 | 30 | 35 | 45 |
| 250,000 | 20 | 25 | 30 | 35 | 4 0 | 50 |
| 250,000 | 25 | 3 0 | 35 | 40 | 45 | 55 |
| 500,000 " | 30 | 35 | 4 0 | 45 | 50 | 60 |
| All further amounts. . | 35 | 4 0 | 45 | 50 | 60 | 70 |
The following are the rates of the tax per cent for the different c)asses, an allowance, however, being made for 5,000 marks being tax-free for the first five classes, and Soo marks for the sixth class: The highest rates apply where the taxable benefit exceeds one and a half million marks. The tax increases by i % of the amount; that is, if the already existing property of the beneficiary is Ioo,000 marks but not over 200,000, for each Io,000 marks; where the existing fortune exceeds 200,000, for each 20,000 marks. The increase must not exceed 100% of the tax. The total of the inheritance duty must not exceed 90% of the benefit. For a legacy arising before April i 1935 the tax is reduced i % for each year down to April i 1925, and for each earlier year 2%. Reduction down to March 31 1921 is therefore 20%.
The succession duty (estate duty) is calculated solely on the property which has been left, without reference to relationship or number of beneficiaries; it applies to landed property, business capital, and personal property in so far as it exceeds 50,000 marks. The tax does not apply to gifts between living persons. The rate of tax is, for the first 200,000 marks (part or whole), i %; for the following 300,000, 2%; for the following 500,000, 3%; for the following i,000,000, 4%; and for further amounts 5%. If the value does not exceed 200,000 marks the first 20,000 marks are tax-free.
It is necessary to consider the effect of all these taxes together on property and income, to obtain a clear idea of what the burdens mean. At the Brussels Conference of 1920, the German Government submitted to the British delegates a statement which gives examples in explanation: Example No. i.-A private individual with property worth on June 30 1919 100 million marks, showing an increase of 25 millions, dies in 1920 and leaves his property to two nephews in equal shares. One nephew has no property, the other has property stated at one million marks. Taxation on the too millions is as follows: (I) War-tax on increase. 24,828,000 marks (2) " Need of Reich " levy, on balance of 75,172,000 marks.. .
(3) Succession duty on property (27,392,450 marks) (4) Inheritance duty to be paid by nephew who has no property (5) Inheritance-tax to be paid by nephew who has property of 1,000,000.. 7,548,367 " Total taxation. .. .. .. 86,520,784 marks There remains, of the original property of 1[00,000,000, only 13,479,216.
Example No. 2.-A private individual has property worth 10,000,- 000 marks of which 4,000,000 are from shares in a company for gain, which could have paid in 1920 a dividend of 20%, if it had not 'been obliged to pay companies-tax. The rest is landed property, returning 5%. There is no increase in property. Without taxes this person would have an income of 1,100,000 marks per annum. The " Need of Reich " levy exacts 5,417,750 marks, leaving 4,582,250 marks. The untaxed income on this would be 800,00o marks from dividends and 29,112 marks from rents, or 829,112 marks. This is reduced by 160,000 marks for companies-tax, 64,000 marks for return on capital, and 315,160 marks for income-tax, leaving an income of 289,952 marks.
Example No. 3.-A private individual has property worth 1,000,000 marks; no war profit. Property rented out brings 5%. One-third of the " Need of Reich " levy (244,250 marks), 82,250 marks, is paid, leaving a balance of 162,000 marks, on which there is 62% interest to pay. On the remaining property, 917,750 marks, the income is 45,887 marks. Out of this there is to be deducted :- 62% on 162,000, 10,530 marks; return on capital-tax, 4,588 marks; income-tax, 7,272 marks; or 22,390 marks in all, leaving the remain 47,779,550 1,332,622 5,032,245 ing income at 22,497 marks. This person, who before the war, after deduction of tax, had an income of about 45,000 marks (or say £ 2,250), had thus, in 1920, after deduction of taxes an income not merely reduced by half, but, in view of the depreciation of money, no better than that of an ordinary working-man.
The work of tax reform under the young German Republic was not exhausted by this extension of direct taxation. There was added a great extension of indirect and transport taxation. Its most important item was the tax on turnover. At first it consisted in a stamp duty of one per mille, rising in the last year of war to five per mille, but by the National Assembly's regulation of Dec. 24 1919, which came into force on Jan. I 1920, it was fixed at 12%. This turnover-tax is applied also to articles of luxury, specially mentioned, at a rate ten times increased, namely 15%. Further it includes a restaurant-tax, advertisement-tax, cloakroom-tax, etc., etc., and covers certain kinds of service such as letting-out furnished rooms, taking in advertisements, holding in trust money, securities, valuables and furs, letting riding horses on hire, the rate of tax being io%. It is to be noted that the normal rate of 12% does not represent the total amount, which really is very much higher on the average, and in the case of semi-manufactured and manufactured goods it has to be paid as many times as the commodity changes hands. The tax is therefore a real tax on consumption in the largest sense. Similarly, the coal-tax is collected at 20% on the value at the pit-head, and rises in proportion with the selling-rates. Various single taxes on tobacco, matches, playing-cards and sales of real property were also to be added, as well as repeated increases in the charges for letters, telegrams, postal-orders, trunk-telephone messages and railway rates.
A gigantic increase of the burden of taxation on the whole of German national economy was the result of these reforms, though even then they were not sufficient to balance the budget of the Reich.
| f | Funded debt (Treasury bonds | Floating debt | |
| and interest- bearing | (Treasury notes without interest) | Total | |
| Treasury notes) | |||
| March 31 1918 | 71.9 | 33.3 | 105.2 |
| March 31 1919 | 92.4 | 63.7 | 156.1 |
| March 31 1920 | 92.0 | 91.5 | 183.5 |
| March 31 1921 | 78.3 | 176.6 | 244'9 |
Development of Reich Finance, 1919-21
The most significant feature of the financial position in these first years after the war was the rapid increase in the national debt. The figures each year were as follows, in milliards of marks: - The reduction shown in the funded debt in 1921 arises from cancellation by means of collection of war-tax and " Reich need " levy, and by the sale of army property. Against this the increase in floating debt in 1921 includes a part of the purchase price paid by the Reich on taking over the railways from the individual states, whilst, on the other hand, a number of other obligations are not included. If these are taken into consideration, and the Reich and the individual states are taken together, there appears for Oct. I 1920 a total debt of 294.8 milliards of marks, compared with 22 milliards 'on March 31 1914. The large increase of debt was the result of slow returns from the new taxation, the depreciation of money which continually caused a greater expenditure on goods and services and repeatedly upset the budget estimates, the subsidies given on necessaries in order to adjust prices to the depreciation of money, the large rise in the interest charge on the debt, the deficits on the railways and post-office, and finally the beginning of large payments under the provisions of the Peace Treaty.
In the regular budget for 1919 a revenue was shown of 12,753 million marks and expenditure of 15,087 millions (of which 8,389 millions was for debt alone). The deficit was covered for the most part through returns from the taxes on war profits. Not so the extraordinary budget, which showed a revenue of 4,154 millions of marks and an expenditure of 39,779 millions. The deficit of 35,625 millions had to be covered by loans. Very large items of arrears in war expenditure were included here, and it seemed justifiable to hope that, with the closing of such expenditure, the deficit would be reduced. But the opposite came to pass. The estimate for 1920, in which for the first time larger returns from the new taxes were included, forecast in the ordinary budget a revenue and expenditure of 39,891 millions, or more than three times the revenue estimated for the previous year; and under the expenditure 12,693 millions was included for the service of the Reich debt, 3,967 millions for pensions and 9,405 millions for the states and local governments as their share in the new Reich taxes. The extraordinary expenditure was estimated at 52,579 millions, of which 3,955 millions was for the paying-off of the old army and 41,440 millions for the execution of the Peace Treaty, while losses on the postal, telegraph and railway management were put down at 19,221 millions, so that there remained to be covered by loans a total of about 70 milliards, besides 32 milliards representing deficits in the individual states. Unfortunately the event did not contradict these unfavourable estimates. The revenues from direct taxation, transport duty, customs, tax on consumption and other levies, brought in 46.10 milliards, or an excess of 37.70 milliards compared with the previous year and even an excess of 6.10 milliards over the estimate, largely as a result of the " Reich need " levy, by which 9.33 milliards was collected (the estimate having been 32 milliards). From the new income-tax 9.59 milliards was received (estimated at 12 milliards), from the new tax on return of capital 909 millions (estimated 1,300 millions), from the newly extended tax on turnover 4.2 milliards (estimated 3.65 milliards). The coal-tax brought in 4.67 milliards, an increase of 3.32 milliards over the previous year; the new tobacco duty brought 1.76 milliards. But the total net revenue accruing to the Reich after deduction of the costs of collection and the amounts transferred to the states and local governments was only 27.7 milliards and the net expenditure was 73.7 milliards, in addition to 10.4 milliards for interest on debt and 18.2 milliards for subventions and for cost of management of railways and post-office. There resulted a deficit of 74.9 milliards which again could be covered only by an increase in the floating debt.
This disastrous picture was repeated in the 1921 budget. On March 26 the provisional estimate, passed in the Reichstag, provided for an expenditure of 46,945 millions in the ordinary budget and 43,667 millions in the extraordinary budget. Three months later a supplementary estimate entirely upset these figures. Expenditure in the ordinary budget was now put at 4 8 ,459 millions, the estimated deficit of 4,250 millions on the revenue side requiring to be covered by fresh tax proposals. The expenditure in the extraordinary budget was placed at J9,680 millions, against which there was an estimated revenue of io,50o millions (of which 7,800 millions would come from the " Reich need " levy). The subventions for post-office and railways were estimated at 18,383 millions. Here was a deficit, in round figures, of 50 milliards of marks, apart from one of 44 milliards on the ordinary budget. No allowance is included here for the reparation payments to the Allies.
As in the accounts for 1920, the liabilities under the Peace Treaty made a considerable showing by themselves in the budget for 1921, the estimate being 262 milliards. The delivery of live animals involved three milliards; the costs of the settlement department for the liquidation of the pre-war debts between German subjects and those of former enemy countries were provisionally placed at two milliards; for reparation deliveries, apart from shipping, cables and cattle, 8,630 millions. The cost of Allied troops of occupation on the Rhine was put down at 7,266 millions, further augmented by 757 millions for the cost of land and buildings for their use, together with further incidental expenses. For the Rhineland Commission itself 109 millions was estimated, besides 1,220 millions for economic help for the occupied territory, to which the states and local governments had to contribute. Finally there came the reparation demand, which put before Germany economically and financially a problem of tragic magnitude.
The Reparation Demand. - According to article 233 of the Versailles Peace Treaty the Reparation Commission fixed on May 5 1921 the amount of the war indemnity to be furnished by Germany and arranged the scheme of payments. By a renewed threat of an ultimatum the Government of the German Republic was forced on May 10 1921 to declare that they were " resolved to comply with the obligations placed on them by the Reparation Commission without reserve and without conditions." The total burden to be borne by the people of Germany was fixed at 132 milliards of gold marks, to be reduced, on the one hand, by the sums already paid on account of reparations and such sums as were to be credited to Germany according to the Peace Treaty or by decision of the Reparations Commission, but to be increased, on the other hand, by the taking-over by Germany of Belgium's debt to the Allies. Germany was required to deliver bonds in three series, of which the first two, in amounts of 12 to 38 milliards of gold marks, were to be issued at latest by July 1 and Nov. 1 1921 respectively, while the last series of 82 milliards subject to the above-mentioned modifications was also to be issued and delivered by Nov. 1 1921, but was only to be put into circulation by the Reparations Commission so far as their bonds were secured by the German annual payments. The interest on the bonds was to be 5%, the yearly sinking-fund 1%. For this purpose Germany had to provide a fixed annuity of two milliards of gold marks, besides a variable annuity corresponding to 26% of the annual value of German exports, or a proportionate sum to be fixed by further agreements. According to the existing position shown by the amount of German exports this meant an annual payment of 3 to 34 milliards of gold marks, added to which were the other burdens of the Peace Treaty, the cost of the occupation, payment for liquidation of foreign claims, and similar charges. On the basis of the current value of German money, this meant a yearly burden of about 60 milliards of paper marks.
The financial prospects for Germany in 1921, on these calculations, might be regarded, from a German point of view, as apparently only too clear. If the 1921 estimates placed the total budget expenditure at about 108 milliards, with a revenue deficit of about 54 milliards, both these amounts would be increased (until means to cover the deficit had been found) by 50-60 milliards. And with this it could not be expected that the highest point had been reached. If the depreciation of German money went still further, as it must do if Germany was forced by financial necessity to decrease the subventions for the cheapening of means of existence, and, in order to reduce the budget deficit, increased the postal and railway charges as well as the price of coal, the expenses of the Reich for official salaries, wages of labour and other requirements must grow automatically, and for this further cover must be found. A further increase of the floating debt, by resorting to the help of the printing-press in the issue of bank-notes, could only lead to a catastrophe. Only one alternative was visible, and that was to open up new sources of revenue for the Reich. But that would mean, in view of the concurrent financial requirements of the states and local governments, that year by year an amount of perhaps 200 milliards of marks would have to be drawn forcibly into the Treasury through the power of the Government from the hands of private earners of income and possessors of property. It remained to be seen whether any Government, and particularly one so weakened by national disorganization, could exercise such power.
Apart from the internal financial difficulty, there was also the economic problem: how Germany was to make payments abroad in such immense amounts annually. Germany in 1921 had not only a financial but also an economic deficit. Its imports had exceeded exports annually since the end of the war by several milliards of gold marks. Only by increasing foreign indebtedness and by transferring abroad considerable parts of the property of the German population had it been possible hitherto to cover this economic deficit, and an enormous additional economic burden had already resulted from the liability for interest on this debt. This method of adding to the foreign debt and financing the operation by transference of the substance of the people's wealth might be pursued still further in order to meet the demand for reparation payments. But its limits were bound to be relatively narrow. For permanent use there could only be one really practical means of payment, by obtaining a favourable trade balance in an excess of exports over imports. Germany must strive to restrict internal consumption still further, and, to increase production, it must reduce imports and increase exports to the utmost. It was a strange piece of irony, and a contradictory policy difficult for Germany to understand, that the very Powers which were imposing the demand for reparations were at the same time hampering and restricting German production by economically closing up the Rhineland through the " sanctions " resorted to in 1921, instead of furthering such power of production and allowing it to develop. If they wilfully stimulated the imports of luxuries into Germany through the " hole in the west," although the stoppage of such imports would help to provide reparation money for them by economies on the part of German consumers; if they sought to render German exportation more difficult by stringent customs regulations, in spite of the fact that an increase in German exports was the obvious economic method of complying with the reparation demand - in spite, indeed, of the fact that, through the export index, according to which 26% of the value of the current German export trade was to be taken as the amount of the variable annuity, any increase in exports would mean a rise in the yearly amount payable - the position would then become self-contradictory, and, for Germany, more and more hopeless.
Even without such embarrassments it remained to be seen how, on the one hand, Germany could attain the necessary increase in production in the short time contemplated, and whether, on the other hand, international commerce would be able to adjust itself economically to an acceptance of Germany's increased supply of goods and services, while at the same time producers elsewhere had to deny themselves a market in Germany owing to its being without means to buy.' It must be sufficient here to indicate these problems, which faced all parties in 1921. The German Government had in May - July declared its fixed will to overcome them and to fulfil to the utmost the obligations that had been undertaken. It 1 It should be observed that in the middle of Aug. 1921 it was calculated by the Frankfurter Zeitung that the wholesale prices of commodities had risen 16-fold in Germany since 1914. Consequently a commodity which had cost 20 marks (then equal to £1) before the war had come to cost 320 marks, which, as it happened, was also in mid-Aug. 1921 just about the value of £i in the exchange market. That is to say, £i sterling would buy in Germany just about the same amount of commodities at wholesale prices in mid-Aug. 1921 as before the war, in spite of the 16-fold rise. On the other hand, in England during the same period the rise in wholesale prices represented an addition of 80%, so that in mid-Aug. 1921 it cost there about £i 16s. to buy the same amount of commodities wholesale which could have been bought for £i before the war. Consequently, in respect of this difference at all events, German manufacturers and traders were in a position of advantage over British in being able to underbid them in the sale of goods. To equalize wholesale prices of commodities in German and English currencies in mid-Aug. 1921, either the German prices would have had to show a 29-fold, and not a 16-fold, increase as compared with the pre-war level, or else the mark exchange would have had to stand at 180, instead of 320, marks to the £i; or, correspondingly, English prices would have to be lowered. The mark, however, actually depreciated still further in Sept. and Oct. 1921, reaching on Oct. 17 an exchange of 750 to the f i. The explanation of the relatively low prices (in sterling) of German commodities at this time was presumably to be found in the higher productivity of the German workman and his lower standard of living, though the situation was also being affected by the difference in the economic conditions generally. German wages, though increased nominally about 8-fold as compared with the pre-war standard, were now much lower than British. But the fact here noted with regard to the relationship between prices and currency in the international market was in 1921 some set-off to the mischief done to Germany by the depreciation of the mark. The low German exchange was, in itself, an advantage to Germany in respect of her export trade in competition with England in the international market, so far as the German capacity for exporting goods at all could be made effective, since it lowered the cost of German goods to the foreign purchaser. English manufacturers in the summer of 1921 were in fact complaining that they were undersold. On the other hand, the depreciation of the mark was a severe handicap to Germany in buying anything abroad, including the materials required for producing goods for sale in the international market.
(Ed. E. B.) was engaged in perfecting its powers for doing so. A new period of German financial and economic management had been entered upon; and a new period of world economics had also begun, - to what end a later generation would have to discover.
(A. F.*) THE Republican Constitution 1. From the Old Reich 1 to the New. - The German constitution which arose out of the Prussian and German victories of 1866 and 1870 had culminated in three supreme organs - the Emperor (Kaiser), the Federal Council (Bundesrat), and the Reichstag (National Representative Assembly). Bismarck, by taking over into his constitution the democratic Parliament of the Frankfort Paulskirche (see 11.866) of 1848, linked that constitution with the democratic and national movement for unity which had continued to live in the mind of the German people since the Wars of Liberation against Napoleon, but which had not been able of its own strength to carry through the political transformation of Germany in accordance with its own ideas. Although Bismarck diverted this popular tendency into the paths of his own policy, he had not realized its aims. The Reichstag was linked up with the idea of 1848, but in the Federal Council the organ of the old Federation of Sovereigns survived. And this representation of the " Federated Governments " (die Verbiindeten Regierungen) was, according to the terms of the constitution, endowed with greater plenitude of power than the representation of the people, the Reichstag. The status and the construction of the Federal Council prevented the emergence of an independent and politically responsible Government, and thus obstructed evolution towards the parliamentary system. On the other hand this situation made the dynasties and governments of the individual states feel their subordination to the hegemony of Prussia less keenly; they were able to regard this subordination as the inevitable premium which they had to pay for mutual insurance under the Prussian protection. Prussian hegemony in the federally organized Empire was the natural consequence of the fact that Prussia embraced in population and territory four-sevenths of the whole Empire, and that she possessed the strongest military and administrative organization. The constitution of the Empire gave outward expression to this fact by making the king of Prussia the German emperor. But the real basis of the political power of Prussia in the Empire, as in its other aspects, lay not in the emperor's prerogatives but in the position of the Prussian Crown. The old public law of Germany always regarded its conception of monarchy as realized solely in territorial sovereignty. It remained, therefore, in this instance an open question and a matter of controversy whether the German emperor could be correctly described as monarch of the Empire and whether imperial Germany could be described as a monarchy. The political unification of Germany had not in fact been accomplished as in Italy, through the supersession of the territorial sovereignties by a national monarchy. On the contrary, the old Federation of Sovereigns (Fiirstenbund) had, after the expulsion of Austria, been more firmly compacted under the leadership of that member of the Federation which was now the strongest - Prussia; and it had been popularized and modernized by the addition of the Reichstag elected by the democratic suffrages of the whole nation.
No doubt, in the course of those succeeding. decades which brought an apparently assured position of power to the Empire in its external aspects, together with a splendid growth of economic prosperity, there arose a natural tendency towards development in the sense of the modern national State. Under the influence of this tendency the centre of gravity of public life was more and more altered in favour of the Empire; the political influence of the Reichstag and the independence of the Govern 1 The words " Deutsches Reich" were, before the revolution of Nov. 1918, invariably translated " German Empire." But the word " Reich " has, for historical reasons, been retained by the German Republican Commonwealth as its official territorial and political designation. " Reich " is an old Germanic word found in various forms in Early and Middle English, and surviving in composition in the English word " bishopric." - (Ed. E. B.) ment of the Empire were more and more strengthened. Nevertheless, this development never reached the point of giving distinct form and substance to the powers and responsibilities of a national Government. The extension of the political mentality of the people did not keep pace with that of its economic and social capacities; its political evolution could not overcome the tenacious resistance of the old powers and the obstruction of the old order of things. There remained an unsolved and apparently insoluble discord between the development that was necessary and the political dynamic forces that had been inherited, a conflict which was one of the deeper contributing causes of Germany's national disaster.
The military and political catastrophe with which the World War ended threatened likewise the internal political existence of the German people with a terrible twofold peril. Bitter disappointment and despair brought the complete dissolution of the national commonwealth appallingly near by producing the criminal delusion that single portions and fragments of a shattered Empire might be able to bear the dreadful consequences of defeat better than the nation as a whole in firm political unity. And at the same time the desperately bitter feeling of large sections of the people directed itself, in view of the collapse of all the old authorities, against the foundations of any and every order of the state and of society, which these sections, following the example of their neighbour, Russia, dreamed that they could overthrow by means of a world revolution and the dictatorship of the proletariat. The only salvation from these two deadly perils, which menaced the political and social existence of the German people and indeed of all Europe, was to be found, if anywhere, in the conception of a national democracy. This idea had lived through generations in the soul of the German people; it had survived failures and defeats, and it had only been relegated to the background by the successes of Bismarck's policy. What was now needed was to revive with resolute determination this idea of national German democracy. Not as a federation of sovereigns, nor as a federation of separate states (now without sovereigns) under Prussian hegemony, could the German Reich continue; it could only be perpetuated as a national commonwealth, the outward political expression of German national unity, by virtue of the sense of a common nationality and by democratic self-determination. The fundamental idea of German national democracy had therefore to be " grossdeutsch " 2 (greater German). The " kleindeutsch" (smaller German) imperial Reich had been built upon dynastic foundations, and had therefore been compelled to exclude the Germans of the Habsburg Monarchy from the empire of the Hohenzollerns. But once the empire of the Habsburgs had been shattered to pieces in the name of the principle of nationality,. the national and democratic German Republic would necessarily have been abjuring that very principle and the idea on which it was itself based, if it had not kept the door open for the Austrian Germans to enter and unite with their common stock. And, further, as the democratic idea of national unity was the only thing that could be effectively opposed to national disintegration, so it was only with the idea of complete democratic equality of rights for all members of the nation that the destructive attempts to set up a lawless class despotism of the proletariat could be successfully encountered.
It was for Germany a piece of good fortune in the midst of bad that social. democracy, which, after the collapse of the old authorities, had come to the top, should at this critical juncture have taken its stand upon the platform of political democracy and gradual social reform. The Social Democratic " Commissaries of the People " 3 promulgated the Electoral Law of Nov. 30 1918, which was drafted at their request by the Democratic Secretary of State for the Interior, Dr. Preuss. In accordance with the The idea of Greater Germany, i.e. of Germany including German Austria, had been opposed since 1848 to the idea of " kleindeutsch," i.e. Germany, excluding Austria, which was adopted and carried out by Bismarck.
The first Provisional Government by six " Commissaries of the People (Volksbeauftragte)" set up under Ebert and Haase after the revolution of Nov. 1918.
terms of that law a Constituent National Assembly (Deutsche Verfassungsgebende Nationalversammlung) was elected by all German men and women over 20 years of age, and the definitive decision with regard to the future constitution of Germany was entrusted to this democratic National Assembly. It met on Feb. 6 1919 at Weimar. The Secretary of State, now become Minister of the Interior, laid before it a draft of the new constitution of the Reich, which, it is true, had been strongly modified in a Particularist sense by the representatives of the Governments of the individual states in the States Committee. These modifications were, however, for the most part eliminated by the National Assembly and its Committee on the Constitution. On July 31 1919 the National Assembly adopted the new constitution of the Reich by 262 votes, cast by the Majority Socialists, the Centre (Catholics) and the Democrats, against a minority of 75, composed of the two parties of the Right and the party of the extreme Left. This Constitution of Weimar was promulgated by the president of the Reich on Aug. i 1 1919, and thus came into force. The fact that the young German Republic had to pass under the terms of the Peace of Versailles simultaneously with the establishment of its constitution prejudicially affected the chances of the latter's becoming familiar to the popular mind, and compromised the new order of the State in a way that was fraught with mischief.
2. Democracy and Reichstag
While the old constitution was headed by the statement of the fact that it had originated in a federation of sovereigns under the leadership of the King of Prussia, the new constitution is prefaced in deliberate contrast by the declaration of the national and democratic conception which guided its construction: The German nation, united in its peoples (Stamme) and inspired by the determination to renew and to establish its Reich in freedom anti justice, to promote peace at home and abroad, and to further social progress, has given itself this Constitution." If Germany had possessed a national monarchy, there might perhaps, even after terrible defeat, have been a possibility of preserving it. But it was quite impossible, after the collapse of the 22 dynasties and their Prussian head, to entertain the idea of restoring monarchy. The maintenance of the political unity of the German people was only practicable in the form of a democratic republic. The new constitution, nevertheless, retained the designation of " Reich " for the national commonwealth, in spite of the danger of misapprehension which might arise from the connexion existing between the words Reich (Empire) and Kaiser (Emperor) in the French and English languages. In the soul of the German people the idea of its unity has for centuries been so intimately identified with the name " Deutsches Reich " that there could really be no thought of abolishing that designation at a moment when Germany's whole destiny depended upon the vivifying power of the national sense of unity. The German democratic republic is a Reich without an emperor and without sovereigns. This is expressed by the first article of the new constitution as follows: The German Reich is a Republic. The powers of the State proceed from the people.
Linking itself with the traditions of the old German democracy which inspired the movement of 1848, yet at the same time clinging to the memory of the economic expansion of Germany during the last decades, Article 3 enacts: T he colours of the Reich are black, red and gold. The flag of the mercantile marine is black, white and red 1 with the colours of the Reich in the top inside corner.
While the constitution of the Reich is designed to realize at home the democratic State based on law, it takes its stand in its external aspects with deliberate emphasis upon the basis of international law, for Article 4 says: The universally recognized rules of international law are accounted as binding constituent parts of the law of the German Reich.
The democratic principle is carried out by the constitution of the Reich in a twofold shape; first in the forms of representative democracy, the highest organs of the German Republic - the 1 The colours of the Hohenzollern Empire.
Reichstag and the Reichsprasident - being elected by the most extensive democratic franchise; secondly, in an institution of direct democracy - the referendum, which has been introduced alongside of the other and, according to the circumstances of the occasion, is exercised as the vote of the people (V olksabstimmung), the initiative or demand of the people (V olksbegehren) and the decision of the people (Volksentscheid). The suffrage for the Reichstag was universal, equal and direct under the constitution of the Empire; the new constitution (Art. 22) has reduced the age for the exercise of the suffrage from 25 to 20; while for the " passive franchise," i.e. eligibility for the Reichstag, the lowest age limit of 25 has been retained in the Electoral Law of April 27 1920. The vote and likewise eligibility have been conferred upon women entirely on the same footing as upon men. The system of election by majority in single constituencies has been replaced by the proportional system with scrutin de liste. Finally, the election must take place on a Sunday or public holiday. These changes correspond to the demands which the Social Democrats had long ago put forward in regard to these points in their political programme.
There is the same franchise for the election of the president of the Reich as for the referendum. According to the Electoral Law now in force, which, however, will probably one day be altered, the whole territory of the Reich is divided into 35 electoral districts, each of which elects a large number of deputies on the system of strictly separate and closed lists. Thus the list is elected, not the single deputy. To every list as many seats are allotted as the number of times by which the number of votes cast for that list is divisible by 60,000. On this basis the candidates are elected in the order in which their names appear on their list. The total number of Reichstag deputies is accordingly not a fixed number; it is determined by the number of votes recorded at the election. The 35 electoral districts are combined into 17 groups of districts, and within the limits of each of these groups the parties may associate their lists in order to secure that remainders of votes under 60,000 may be reckoned conjointly. The further votes which still remain after this process throughout the whole Reich are credited to what is called the " Reichsliste" of the party for which they are cast, and a deputy is elected for every 60,000 of these remainder votes.
A remainder which exceeds 30,000 votes is counted as 60,000. It follows that out of all the votes cast for any party throughout the whole Reich 30,000 at the utmost can be lost as regards their effect upon the result of the elections. In consequence of the extent of the suffrage, which is as wide as it can possibly be, 60% of the whole population of Germany now possess the franchise. The census of 1919 showed the population of Germany to be about 60,000,000. There are therefore close upon 37,000,000 persons in the German Reich who enjoy the franchise.
The old Reichstag itself used to decide disputed elections; but the decision was frequently long delayed, often indeed until the very end of a legislative period; and its impartiality was once and again doubtful. In point of fact, such decisions bore essentially the character of the exercise of a judicial function for which Parliament, swayed by political parties, is little fitted. Yet so long as a Parliament has not be y ,one absolutely sure of its power in the State, it is wont to watch over this right as over all its other prerogatives with jealous vigilance. Under the new order in Germany the Reichstag is now strong enough to dispense with this judicial function. For the investigation of disputed elections the new constitution of the Reich (Art. 3r) transfers the decision to a court composed of judges and of members of the Reichstag. The mixed composition of the court was adopted in order that the deciding body might continue to have the benefit of expert parliamentary knowledge.
The Reichstag is elected for four years. The duration of the legislative period is a natural subject of conflict between democratic and parliamentary tendencies. Democratic tendencies are in favour of enabling the people, the electorate, to make its voice heard as frequently and as directly as possible, and it therefore urged that the duration of the representative assembly should be brief. On the other hand the efficiency of parliamentary government depends upon allowing an adequate period to elapse between the travail and the after-pangs of a general election for Parliament to have time for quiet political work. The four-year legislative period adopted in the constitution of the Reich represents a compromise between the old legislative period of five years and the demands for a two or three years' period. From the point of view of reasonable parliamentary democracy a period of four years does not seem too long, especially as there is the referendum; and, moreover, the president of the Reich can, by dissolving the Reichstag, appeal from the elected to the electors. It is true that he can do this only once on account of the same matter (Art. 25). This limitation was introduced in order to prevent any attempt by an autocratic president and a complaisant Government to weary the people by repeated dissolutions and thus impose their will.
The date of the meeting of the Reichstag is not subject to the pleasure of the Government; it has the right to convoke itself. The first meeting of a newly elected Reichstag must take place at latest on the thirtieth day after the elections; otherwise it must assemble every year on the first Wednesday of November, unless its president, on the demand of the president of the Reich or of two-thirds of the deputies, convokes it earlier. The Reichstag itself determines the close of its session and the date of its reassembling (Art. 23, 24). In other respects, too, the Reichstag enjoys the fullest rights of parliamentary autonomy, which its president, elected by itself, officially safeguards. Its proceedings are public; it is only on a proposal backed by 50 members and on a resolution supported by a two-thirds majority that the publicity of the proceedings can be suspended (Art. 29). The press cannot be called to account so long as it gives accurate reports of the Reichstag's public proceedings (Art. 30). The parliamentary immunity of the deputies is secured in the most consistent fashion. This does not merely embrace inviolability of privilege for their votes and speeches in the House and their exemption from arrest or legal proceedings without the consent of the House; they have also the right to refuse to give evidence regarding persons or facts with which they become acquainted in their quality of deputies (Art. 36-38).
3. The Reichstag and the President. - According to the old constitution the assent of the Reichstag was, no doubt, required for laws, taxes and the budget; but its influence was decisive only in a negative sense; it could prevent things from being done, but it had no power of creative political action. Upon the composition of the Government and, therefore, upon the general tendency of its policy, the Reichstag had no constitutional influence. The political direction lay quite definitely with the federated governments represented in the Federal Council (Bundesrat), with the Prussian Crown at their head. The new constitution of the German Republic puts the Reichstag at the centre of the life of the State by establishing the parliamentary system of government on the broadest democratic foundations. This in no way signifies unlimited autocratic sovereignty of Parliament. On the contrary, the principle of the constitutional state, established on the basis of law, requires the co-existence of several supreme organs of the State between which parliamentary government forms the elastic link; and it requires the control of independent courts which can determine the legality of all private and public acts. In a parliamentary monarchy the hereditary crown is coordinate with the Houses of Parliament. In a republic an elected head of the State is substituted. If he is elected by Parliament his position is not coordinate with, but rather subordinate to, Parliament; he has no authority of equal standing with that of Parliament; and he is therefore unable in critical situations to supply any counterpoise to excessive manifestations of the one-sided domination of party. In a democracy the only element of equal standing and equal weight with the Parliament is a head of the State who is likewise elected by the whole people.
Accordingly, in the democratic German Republic the President of the Reich is elected by the whole German people.' He is 1 President Ebert was, however, elected by the National Constituent Assembly at Weimar. He was really provisional president, a definitive election not being considered expedient until the definitive elected for seven years. Every German who has completed his thirty-fifth year is eligible. A woman may be elected (Art. 41, 43, 109). The special Electoral Law of May 4 1920 enacts that all electors for the Reichstag have a vote for the president; that the suffrage is direct and secret; and that an absolute majority on the first ballot is decisive. Should there, however, be no absolute majority on the first ballot, then the result is decided in the second ballot by relative majority. The President of the Reich is thus as much a direct representative of the people as is the Reichstag; he is not dependent upon the Reichstag either for his original election or for his reelection. It is true that the constitution gives the resolutions of the Reichstag the greater decisive force; but, in the case of the Reichstag, the representation of the people is distributed among more than 400 deputies, while in the case of the President of the Reich it is concentrated in a single person. The position of this " plebiscitary " president may present many of the features of a tribune of the people, but the danger of degeneration into Caesarism or Bonapartism is meant to be counteracted by the strict practice of the system of parliamentary government, which makes every act of the President absolutely and without exception conditional upon the cooperation and countersignature of the Ministry of the Reich, which, again, is dependent upon the Reichstag.
Unquestionably as a democratic republic was in the circumstances the only possible form of state for Germany, it might nevertheless have been open to serious doubt whether the parliamentary system of government was suitable for that country. This system, it is maintained, cannot with any prospect of success be imposed by rigid legal statutes. It is rather the organic product of a long political development, which can only be created by tradition, political training and by the self-control of political parties, without which parliamentary party government cannot politically subsist. This kind of tradition and the selection of steady leaders, which depends upon it and is indispensable for parliamentary government, are most naturally created where there is a development that has started from aristocratic parliamentarism, has progressively widened its bases, and, finally, through the plutocratic parliamentarism of the middle classes, leads to perfect democracy. In Germany historical development did not supply these favourable conditions. The political progress of that country lagged far behind its economic and social evolution. And now, by means of the new constitution, the parliamentary system and the most complete democratization, which had become inevitable, were simultaneously introduced, and that at a time when there was an entire lack of any leadership traditional and acknowledged by the free play of custom; at a moment, too, when the external situation was the most unfortunate conceivable; and when a very powerful social movement was asserting itself in the country. This is so; and yet what was necessary had also to be rendered possible in the midst of this decisive crisis of the destinies of the German people. For a people of 60 millions the organization of a pure, direct democracy could not be entertained. Suggestions were made from many quarters that, on the model of the American constitution, the executive power should be wholly entrusted to the president elected by the people, with a ministry dependent solely upon him and not upon Parliament. But this dualistic system, which lays excessive stress upon the separation of powers, has exhibited great imperfections when confronted with the demands of modern political life. The absence of a system of parliamentary government is, perhaps, the most serious defect in the otherwise admirable edifice of the American constitution. And Germany's own experiences of the unbridged dualism of Government and Parliament under the old regime offered no inducement to reestablish it in a republican form. In spite of all the objections which have been mentioned, the new constitution had therefore to decide in favour of the parliamentary system in the confident hope that the practice of this system would itself gradually produce the political conditions requisite for its extent of the German Reich had been decided, e.g. by the destiny of Upper Silesia.
success. This is the explanation of the circumstance that the constitution contains many express rules for the conduct of the parliamentary system, which in other countries is founded upon custom and convention, not upon written laws.
The Chancellor and, upon his suggestion, the Ministers of the Reich are appointed and dismissed by the President of the Reich. (Art. 53.) In selecting the persons whom he might appoint, the President of the Reich is thus legally free, and is not confined, for instance, to the members of the Reichstag for his choice. But this is subject to precise conditions: The Chancellor and Ministers of the Reich require for the exercise of their office to possess the confidence of the Reichstag. Any and each of them must resign if the Reichstag by an express vote withdraws its confidence from him. (Art. 54.) The Chancellor lays down the guiding lines of policy and bears the responsibility for them to the Reichstag. Within these lines every Minister of the Reich conducts the affairs of the department which has been entrusted to him independently and on his own responsibility to the Reichstag. (Art. 56.) The President of the Reich can, therefore, only appoint a Government which is able to obtain the support of a majority of the Reichstag; and only so long as it commands such support can it remain in power. The Chancellor and the Ministers form a Cabinet (Kollegium), at the head of which the Chancellor of the Reich corresponds to the English Prime Minister.
The President of the Reich has in regard to foreign and internal affairs all the prerogatives which usually belong to the constitutional head of a State; but the declaration of war and the conclusion of peace are effected by legislation of the Reichstag; and political treaties concerned with matters which form the subjects of legislation require the approval of the Reichstag (Art. 45) :- All ordinances and dispositions of the President, of the Reich, including those relating to the armed forces, require for their validity the counter-signature of the Chancellor or of the competent Minister of the Reich. By the counter-signature responsibility is assumed. (Art. 50.) This likewise applies to the dissolution of the Reichstag and to the institution by the President of the Reich of a referendum of the people upon decisions of the Reichstag. If the Ministry, supported by a majority of the Reichstag, refuses its countersignature to these acts, the President of the Reich can appoint another Ministry, and can, with the counter-signature of this Ministry, dissolve the Reichstag. The people finally decide the matter by the general election.
The constitution draws a sharp distinction between political and legal responsibility; the latter signifies responsibility for the lawfulness, the former for the expediency and the success, of the acts of the Government. Political responsibility is not a legal question which could be decided by a court of justice by means of legal proceedings in accordance with statute law; it involves a judgment regarding political values, which is materially influenced by the party point of view. Political responsibility is, therefore, enforced by a vote of no confidence on the part of the Reichstag, entailing the resignation of the Ministry or of a minister, but involving no judgment at law. As a general rule the political responsibility of the Ministry covers the President of the Reich. It is only for the exceptional case of an intolerable conflict between the President of the Reich and the Reichstag that, as the counterpart of the President's prerogative of dissolution, the Reichstag is similarly given the faculty of appealing from the elected to the electors. The Reichstag by a resolution, which must be carried by a twothirds majority, can submit to the people a proposal for the deposition of the President. If this proposal be rejected by the popular vote, its rejection is taken to be equivalent to the reelection of the President for a fresh term of seven years, and it at the same time entails the dissolution of the Reichstag (Art. 43). Legal responsibility on the other hand is the same for the President of the Reich as for the Chancellor and the Ministers. On the proposal of at least roo of its members the Reichstag can by a two-thirds majority impeach President, Chancellor or Ministers for having culpably violated the constitu tion or a law of the Reich. Judgment is given after regular proceedings at law by the Court for State Affairs (Staatsgerichtshof) for the German Reich, invested with the independence of a Supreme Court of Judicature (Art. 59).
4. The Reich and the Territories.'
Although the new constitution of the Reich did not originate, like the old one, in a federation of the separate states but in the national and democratic unity of the people, it has not abolished the existence of the separate states. Notwithstanding the more compact organization of the national commonwealth and a considerable extension of its competence, the smaller commonwealths continue, although they are no longer called " States " (Staaten) but " Territories " (Lander). Whether the German Republic should now be called a federation of States (Bundesstaat) with strong national central authority, or a unified State (Einheitsstaat) with strong territorial decentralization, is hardly more than a theoretical controversy about terminology. A great obstacle in the way of genuine federal organization and at the same time of consistent political and administrative decentralization is the manner in which territory is distributed among the different German countries. This distribution arose out of the accidents of the dynastic policy of the former reigning houses. It is in many instances a patchwork of fragments of territory which have no real connexion with each other; and above all there is a vast disparity in the size of the territories. Prussia alone embraces in territorial extent and population four-sevenths of the whole Reich; it is therefore by one-third as large again as all the other territories put together and some hundred of times larger than the smallest of them. Corresponding with this proportion was the position of hegemony which Prussia enjoyed under the old constitution of the Reich, but which has now been completely abolished in constitutional law. Yet this has not solved the difficulty of treating as equals territories which are actually so unequal, whether federative organization or the decentralization of the functions of the Reich be the question at issue. The necessity of giving the new constitution a proper basis by a territorial rearrangement of the component parts of the Reich has certainly been acknowledged; but under the pressure of perils without and within this right idea could not for the present be carried out. The 2 5 territories were therefore provisionally taken over in their old extent; and the constitution of the Reich merely prescribes the procedure by which a rearrangement may be effected at some future date. Meanwhile seven of the smallest territories have spontaneously combined to form the single new territory of Thuringen (Thuringia).
Within the organization of the Reich the individual territories are not represented, like the separate states of the American Union or like the Swiss cantons, by a separate House of Parliament, but only by a non-parliamentary body (Kollegium), the Council of the Reich (Reichsrat). The Reichstag consists of a single House. In the American Senate and in the Swiss Council of Estates (St y nderat) there are two representatives of each separate state, elected by that state but representing the political opinion of their party. Not so in the Reichsrat. That body is composed of members of the Governments of the different territories or of substitutes appointed by them, who speak and vote in the name of those Governments. In view of the vast disparity in the size of the different German territories it is impossible that each of them should have the same number of votes. Each territory has at least one vote and the larger territories several votes, in the main according to population. No territory, however, may have more than two-fifths of all the votes. Without this limitation Prussia alone would command a majority in the Reichsrat, so that the representation of the other territories would have no significance. Moreover, in future, half of the Prussian votes 1 The different countries and cities federated in the German Empire (Reich) of 1871-1918 were called States (Bundesstaaten). In the constitution of the new republican Reich they (e.g. Bavaria, Wurttemberg, Saxony, etc.) are designated Territories (Lander), but also in their political aspects Free States (e.g. Freistaat Sachsen, Bayern, etc.).
are to be assigned to the provinces of Prussia, which thus for the first time will obtain direct representation in the Reich on the same footing as the other territories. At present there are 65 votes in the Council of the Reich; of these Prussia has 26, of which 13 are to be assigned to her 13 provinces, including Berlin as a province.
In composition and external aspect the Reichsrat is undeniably the successor of the old Federal Council (Bundesrat); but its real character and its constitutional position are essentially different. The Federal Council was the real seat of the authority of the Government and of the Prussian hegemony. Its President, the Imperial Chancellor, was at the same time Prussian MinisterPresident, and it was this that gave him real power; the direction of the Empire was very intimately connected with the Government of the Prussian State. In legislation the Federal Council had constitutional equal rights with the Reichstag, and as it likewise was in possession of the powers of Government, it actually predominated over the Reichstag. The Imperial Chancellor could not introduce any measure into the Reichstag without the assent of the Federal Council; and no measure or resolution passed by the Reichstag could come into force if the Federal Council did not agree to it. This position of the Federal Council had been the barrier against progress in the parliamentary system in imperial Germany, for it rendered impossible a Government really responsible to the Reichstag. In all these aspects the position of the Federal Council has now been so transformed that the path has been cleared in the German Republic for parliamentarism. The Reichsrat is presided over by a member of the Government of the Reich; but that Government is now entirely independent of the Prussian Government, and it is also independent of the Council of the Reich. It is not the Council but the Ministry of the Reich which conducts the Government and administration and issues general ordinances. Only in so far as the execution of the laws of the Reich falls within the competence of the authorities of the territories is the assent of the Reichsrat required for this purpose. For the rest, the Ministers of the Reich have to keep the Council informed regarding the conduct of the affairs of the Reich and to consult its committees in matters of importance. The Government of the Reich lays its bills in the first instance before the Reichsrat. If the Council rejects them, this does not bar the way to the Reichstag; the Government can introduce its bill together with an exposition of the dissentient views of the Council. The Council has the right to enter an objection to bills passed by the Reichstag; in that case the bill goes back to the Reichstag. If the Reichstag maintains its vote by a two-thirds majority the objection of the Council falls to the ground, unless the President of the Reich ordains that there shall be a popular referendum on the subject. If, however, the Reichstag only votes by a simple majority against the objection of the Council the bill is dropped, unless the President of the Reich institutes a referendum on the matter. The Reichsrat has thus a suspensory veto; the real seat of legislation is the Reichstag.
Neither the President nor the Government of the Reich possesses the right of veto on legislation; they must dispatch the laws which have been constitutionally enacted and must promulgate them within a month's time in the official Law Gazette of the Reich (Reichsgesetzblatt). The President can, however, submit a law passed by the Reichstag to the referendum within the month's period. Moreover, the promulgation of a law must be postponed for two months, if one-third of the members of the Reichstag demand this, and if the law has not been declared urgent by the Reichstag and the Reichsrat. If promulgation is postponed the law must be submitted to a referendum, if one-twentieth of the total electorate request it. The initiative in legislation is also admissible by way of the referendum; this is designated the popular demand (Volksbegehren). The popular demand must be based upon a fully drafted bill, the submission of which must have been demanded by onetenth of the electorate. If such a demand has been brought forward the Governnent lays the bill, accompanied by an expression of its own opinion, before the Reichstag; if the Reichstag does not pass the bill without any alteration the final decision must be taken by a referendum. On the budget, on taxation bills and on votes. for salaries the President alone can institute a referendum. Bills and resolutions passed by the Reichstag can be annulled by the referendum only if the majority of the whole electorate has participated in the popular vote. If it is a case of an alteration of the constitution for which a popular demand has been advanced, the assent of the majority of the whole electorate is requisite for the validity of the popular decision. For the rest, decisions of the Reichstag for alterations in the constitution can only be effected if two-thirds of the legally qualified members are present and if at least twothirds of those present vote. Similarly in the Reichsrat laws for altering the constitution require a two-thirds majority. If the Reichstag has voted an alteration of the constitution to which the Reichsrat objects, the President of the Reich may only promulgate the alteration if the Reichsrat does not within a period of two weeks demand a referendum on the subject.
The referendum has hitherto been tried on a comparatively small scale only, as in Switzerland and in individual American states. On so large a scale and with a mass of some 37 millions of voters it will now, under the new constitution of the German Reich, be tried for the first time. This is an experiment which cannot be made without some misgivings; there are circumstances in which it might seriously complicate legislative procedure. In view of the situation in Germany, however, this modification of pure parliamentarism in favour of the direct intervention of democracy was necessary. The hope may be entertained that it will have the effect of promoting the political education of the masses; the precautions which have just been enumerated will at any rate militate against its abuse.
5. Fundamental Rights
In the distribution of tasks between the Reich and the territories the new constitution like the old defines only the competence of the Reich, and tacitly leaves everything else to the competence of the territories. But the sphere of this competence of the Reich is materially broadened and more strictly outlined as compared with the old arrangements. The constitution of the Reich prescribes for all the German territories the republican form of government and popular representation based, like the Reichstag, upon equality of franchise; upon this representation the Government of the territory must lean. The same suffrage is also prescribed for the communal representative bodies.
In respect of legislation the competence of the Reich ipso facto excludes the competence of the territories for a variety of subjects, in particular for foreign relations, questions of citizenship 1 or nationality, freedom of migration within the Reich, emigration and immigration, extradition; similarly for the organization of the national forces and for coinage, customs, commerce, posts and telegraphs. For a very large number of other subjects the legislation of the Reich is also competent, but the territories also retain their competence as regards these subjects until the Reich exercises its prerogative. Besides this, the Reich can, in case of need, enact uniform laws dealing with public welfare and for the preservation of public order and security; and it can lay down principles for dealing with religious societies, schools, the legal status of officials, land laws, etc. In the matter of taxation the competence of the legislation of the Reich is almost unlimited. The law of the Reich prevails over the law of the territory - that is to say, territorial laws which contradict laws of the Reich are of no effect. In case of dispute the decision of the Supreme Court (Reichsgericht) may be invoked.
In administration, too, the direct competence of the Reich extends to the most important spheres, embracing foreign policy, military forces and navy, communications, especially posts, telegraphs, railways, inland navigation and waterways, customs and, for the most part, taxation as well. For the rest the laws of the Reich are executed by the administration of the territories, so far as these laws do not otherwise provide. Over this part 1 A German is both a citizen of the Reich and of the German territory or state (e.g. Prussia or Bavaria) to which he belongs.
of the activity of the authorities of the territories, however, the Reich exercises supervision, and it can give these authorities general directions. In cases of difference a Supreme Court decides. If a territory does not fulfil the duties incumbent upon it according to the constitution or the laws of the Reich, the President of the Reich, with the aid of armed forces, can make it do so. Similarly, if in any part of the Reich public security and order are seriously disturbed or imperiled, the President can adopt the measures necessary for their restoration, and he can at the same time suspend certain of the fundamental rights. He must without delay inform the Reichstag of all these measures, and, if the Reichstag so demands, he must revoke them. In the spirit of the State based upon law the constitution of the Reich contemplates at all points the decision of disputed questions of justice by independent courts. It sets up the leading principles for securing this independence and for the judges' tenure of their office for life. It prohibits emergency courts, enacts the abolition of military jurisdiction and, on the other hand, secures the existence of courts of administration for the protection of the individual against ordinances of the administrative authorities. A Supreme Court of Administration (Reichsverwaltungsgericht) is to be established by a special law.
In addition to the part which specially deals with organization and is entitled " Construction and Duties of the Reich " - in fact the whole scheme of government - the constitution sets up as its second part a declaration of rights entitled " Fundamental Rights and Duties of Germans." These rights embrace partly statute rights which are directly applicable, but, for the most part, the declaration lays down guiding lines for a programme of legislation for the Reich and the separate territories. These, in a multitude of diverse provisions, have reference to the individual, life in communities, religion and religious societies, education and schools, and economic life. In contradistinction to earlier declarations of the rights of man and of the citizen they lay stress, not merely upon the preservation of individual liberty, but above all upon the obligations and the solidarity of society. Of special importance from the point of view of organization is Art. 165, which declares that the workers and salaried employees and their organizations are to be brought into cooperation on an equal footing with the employers in the arrangement of social and economic life. The declaration prescribes the formation of workers' industrial factory councils, of district economic councils, and of an Economic Council of the Reich (Reichswirtschaftsrat). Before the last-mentioned Council social and economic bills of fundamental importance must be laid by the Government of the Reich for its opinion. The Council can also itself propose such measures and can have them advocated by one of its members before the Reichstag. The constitution does not, however, give the Economic Council of the Reich a decisive vote; the Council is, therefore, not an actual organ of legislation.
6. The Constitution of the Free State of Prussia. - From the collapse of Nov. 1918 there did not emerge a common Revolution-` ary Government for the Reich and Prussia. Accordingly in Jan. 1919, eight days after the elections for the German National Assembly, a separate Prussian Constituent Assembly was likewise elected. After many difficulties and obstacles had been overcome this Assembly completed on Nov. 30 1920 the republican constitution of Prussia.
For Prussia the revolution had infinitely greater significance than for any other German state. In view of the distinctively monarchic structure of the old Prussian State the transition to a republic was in itself something that bore the aspect of a prodigy. This change at the same time brought with it the complete alteration of the position of Prussia in the Reich, a position which had hitherto been characterized by the imperial dignity (Kaisertum) attaching to the Prussian Crown. And not only was this hegemony, the close connexion of the Prussian Government with that of the Reich, abolished; important rights and instruments of power, as, in particular, military organization and railways, passed from Prussia to the Reich. Finally this brought about a further change in the other direction in the rela