(c) crown copyright

Catalogue Reference:CAB/24/287 Image Reference:0031

THIS DOCUMENT IS THE PROPERTY OF HIS BRITANNIC MAJESTY'S GOVERNMENT

Printed for the Cabinet. July 1939 .

S E C R E T . Copy No.

C P . 148 ( 3 9 ) .

TO BE KEPT UNDER LOCK AND KEY.

It is requested that special care may be taken to ensure the secrecy of this document.

CABINET.

T H E F I N A N C I A L S I T U A T I O N .

THE GERMAN FINANCIAL EFFORT FOR REARMAMENT.

Note by the Chancellor of the Exchequer. I C I R C U L A T E for the i n f o r m a t i o n of m y co l l e agues a M e m o r a n d u m

p r e p a r e d i n the T r e a s u r y on the G e r m a n financial effort for r e a r m a m e n t .

( I n i t i a l l e d ) J . S .

Treasury Chambers, S.W. 1, July 3, 1939.

I . — I n t r o d u c t o r y .

T H E m a i n p a r t of t h i s note cons i s t s of a n a n a l y s i s of the p re sen t financial effort of G e r m a n y a s c o m p a r e d w i t h t h a t of t h i s coun t r y .

. 2. A s , however , t he ques t ion i s of ten a s k e d in g e n e r a l t e rms w h y th i s c o u n t r y c anno t a t a l l t i m e s do w h a t G e r m a n y does, i t m a y be w e l l to m a k e one or t w o g e n e r a l obse rva t ions on t h a t sub jec t .

3. T h e p re sen t r e g i m e i n G e r m a n y s t a r t e d i n a p e r i o d of g r e a t depress ion w i t h q u i t e a sma l l n a t i o n a l debt, a n d w a s i n a pos i t i on to use i n f l a t i ona r y methods on a v e r y l a r g e sca l e w h i l e me re l y ta lk ing u p t h e s l a ck i n emp loyment . The coun t r y i s now f u l l y e m p l o y e d a n d a s much of t h e i r b o r r o w i n g h a s been a n d r e m a i n s i n f l a t i ona r y , t hey m a y be a p p r o a c h i n g the e n d of these resources a n d the a d v a n t a g e i n t h i s one r e spec t m a y l i e i n f u t u r e on our s ide .

4. T h e p o p u l a t i o n i s doc i le a n d r e a d y to accep t r e g u l a t i o n . A complete s y s t em of r e g i m e n t a t i o n h a s been g r a d u a l l y bu i l t u p w i t h t y p i c a l G e r m a n i n d u s t r y u n t i l i t p e r m e a t e s the who l e economic m a c h i n e . T h e sy s t em i s s a i d to be based on d i s c i p l i n e , bu t t h i s d i s c i p l i n e i s enforced by the power of the p a r t y a g e n t s a n d by the f e a r of the concen t r a t ion c a m p .

5. G e r m a n y c an a n d does impose upon the m a s s e s of the people much h e a v i e r t a x a t i o n t h a n h a s been a t t e m p t e d in t h i s coun t r y .

6. A s G e r m a n y cannot expec t i n w a r to i m p o r t f rom overseas , t he po l i c y h a s been to a c q u i r e g r e a t s tocks of i m p o r t e d neces s i t i e s , to p roduce a t home subs t i t u t e s for p a r t i c u l a r t y p e s of e s s en t i a l i m p o r t s , t hough invo lv ing g r e a t

[ 1 9 5 1 7 1 ' ' " ' B

economic w a s t e , a n d to a c q u i r e p o w e r over a d j a c e n t t e r r i t o r i e s w h i c h c an s u p p l y G e r m a n needs . T h e ques t ion of the m e a n s of p a y m e n t for overseas impor t s in w a r — a n ever p re sen t a n x i e t y i n our c a s e - s c a r c e l y a r i s e s i n Germany . "We canno t be s e l f - s u p p o r t i n g even i f w e w i s h to .

I I . — N o t e on the present financial effort of Germany and this country.

1. I f not q u i t e hope less i t w o u l d be a n e x t r e m e l y difficult t a s k to set out in a n y c l e a r w a y the compar i son be tween the f inanc i a l effort m a d e by G e r m a n y a n d t h a t of t h i s count ry . W e shou ld not r e a l l y be c o m p a r i n g l i k e w i t h l i k e , s ince the r e a r e p r o f o u n d differences be tween the economic s y s t ems of the two count r i e s . T h e G e r m a n economic s y s t em i s d e t e r m i n e d by he r i n t e r n a l po l i t i c a l a n d soc ia l sys tem, w h i c h i s e n t i r e l y "different f rom o u r s :

2. A p a r t f rom t h i s a g r e a t d e a l of the s t a t i s t i c s neces sa ry to m a k e a compar i son a r e not pub l i shed i n G e r m a n y , a n d so f a r a s figures do ge t pub l i shed in t h a t c o u n t r y t h e i r p r o p a g a n d a a spec t h a s no doubt been we l l cons idered in advance .

3. A t h i r d t ype of diff iculty l i e s in t h e f a c t t h a t t h e t w o cur renc i e s a r e not comparab l e . S t e r l i n g i s on ly one v a l u e , w h e r e a s the d i f ferent k i n d s of m a r k s h a v e a l l sor t s of v a l u e s . I t i s open to a n y w r i t e r w h o chooses to convert m a r k s to £ a t the official r a t e of 1 1 - 9 to the £. A n o t h e r a u t h o r m i g h t choose 20 to the £, a n d ge t a l l h i s f igures d i f ferent by n e a r l y 70 p e r cent .

T o e s t i m a t e the e q u i v a l e n t of m a r k s i n s t e r l i n g for t he purpose of t h i s m e m o r a n d u m w e h a v e t h e f o l l o w i n g i n d e x n u m b e r s of h o u r l y w a g e s :—*

1929. Dec. 1938. G r e a t B r i t a i n (100 i n 1924) 98 -1 103 -9 G e r m a n y (100 i n 1928) . . . . . . 1 0 5 - 5 8 4 - 1

On the b a s i s of 100 in 1929 , t h e i n d e x n u m b e r s for December 1938 w o u l d the re fo re be for G r e a t B r i t a i n 1 0 5 - 9 a n d for G e r m a n y 7 9 - 7 . The G e r m a n i s to t h e B r i t i s h a s 7 5 - 2 to 100. I f t he g o l d p a r i t y of 2 0 - 4 3 m a r k s cor re sponded to m o n e t a r y e q u i l i b r i u m i n 1929, t he a p p r o p r i a t e f igure n o w w o u l d be 15 - 36 m a r k s . A l t e r n a t i v e compa r i sons based on the movement of p r i c e s s ince 1929 w o u l d g i v e h i g h e r f igures . Such m a t t e r s a s the c h a n g e in our fiscal s y s t em s ince 1929 t e n d to d i s t u r b a l l compar i sons , a n d on the who l e i t i s t h o u g h t a f a i r r a t e for c o m p a r i n g incomes or t a x e s in the t w o c o u n t r i e s w o u l d be 16 m a r k s to £ 1 . T h e r e i s no r e a l c e r t a i n t y abou t the figure, b u t w e do not k n o w h o w to i m p r o v e on i t .

4. A s r e g a r d s unofficial e s t i m a t e s of t he pos i t i on i n Ge rmany , t he t roub le i s t h a t t h e r e a r e so m a n y of t h em a n d t h a t t h e y r e a c h such conf l ic t ing r e su l t s .

5. D e a l i n g w i t h t h e m a t t e r i n g e n e r a l t e rms , t h e pos i t i on wou ld a p p e a r to be a s fo l lows :—1

T h e r e c a n be no doubt t h a t G e r m a n y h a s been s p e n d i n g abso lu te l y a l a r g e r s u m a n d i s s t i l l s p e n d i n g a n ab so lu t e l y l a r g e r s u m on a r m a m e n t s t h a n w e a r e . T h i s i s w h a t one w o u l d expec t i n v i e w of the v a s t l y g r e a t e r s ize of h e r a r m y . T h e f a c t t h a t G e r m a n y h a s more money to spend so f a r m u s t be due to one or more of t he fo l low ing c a u s e s : —

(a) she r a i s e s more by t a x a t i o n ; (b) she spends l ess on c i v i l gove rnmen t , l e av ing , the re fore , a l a r g e r b a l ance

a v a i l a b l e for d e f e n c e ; (c) she bor rows more for de fence p u r p o s e s .

No doubt a l l these t h i n g s h a v e been t r u e i n the pa s t , but , b road l y s p e a k i n g , the T r e a s u r y w o u l d be i n c l i n e d a s r e g a r d s the p r e s en t to a t t a c h l i t t l e i m p o r t a n c e to t h e l a s t t w o i t e m s a n d a g r e a t d e a l to the first.

6. A s s u m i n g , i ndeed , t h a t w e succeed i n c a r r y i n g out the b o r r o w i n g p r o g r a m m e con t emp l a t ed for t h i s y e a r , i n c l u d i n g t h a t r e q u i r e d to mee t s u p p l e ­m e n t a r y e s t i m a t e s , i t m a y w e l l be t h a t on t h e p o i n t of bor row ing w e sha l l be r u n n i n g a h e a d of G e r m a n y . A s r e g a r d s t h e cost of c i v i l government , i t m u s t be borne i n m i n d t h a t w i t h r o u g h l y the s a m e k i n d of t o t a l n a t i o n a l income t h e G e r m a n popu l a t i on i s to ou r s a s about 5 to 3. S h e i s not b a r r e n of soc i a l ^serv ices , of "which, i ndeed , she w a s l a r g e l y the p ioneer , b u t t hey a r e r u n on more economica l l i n e s t h a n our own, a n d

i n p a r t i c u l a r a m u c h l a r g e r p ropor t i on of t he cost i s f ixed on the benef ic iar ies . G e r m a n a d m i n i s t r a t i o n h a s by no means got the r e p u t a t i o n for economy and the a u t h o r i t a r i a n n a t u r e of t he Government r a t h e r i m p l i e s a n expens ive a d m i n i s t r a ­t ion. T h u s , w h i l e no doubt G e r m a n c iv i l gove rnmen t m a y be c h e a p e r t h a n o u r s pe r head , i t i s primafacie u n l i k e l y t h a t i n to t a l i t cou ld be much cheaper , excep t a s r e g a r d s debt c h a r g e s , w h e r e a f t e r s i x y e a r s of most l a v i s h bo r row ing the a n n u a l c h a r g e cannot y e t be m u c h over £100 m i l l i o n s a y e a r .

7. T h i s w o u l d l e ave the d i f ference in t h e p roduc t of t a x a t i o n a s the sole or m a i n f ac tor e x p l a i n i n g the a b i l i t y of G e r m a n y to spend l a r g e r sums on a r m a m e n t s t h a n w e do. The r e c a n be no doubt w h a t e v e r , s ince the i n f o r m a t i o n comes f rom a l l q u a r t e r s , t h a t i n f a c t G e r m a n t a x a t i o n i s h i g h e r t h a n our s i n m a n y respec t s . T h e y have , for i n s t ance , a 40 p e r cent , t a x on the profi ts of compan i e s on top of the o r d i n a r y income t a x . I m p o r t a n t a l so i s the g r e a t e r power they have of en fo rc ing t a x a t i o n i n the form of a subse rv i en t j u d i c i a r y a n d the c r ude r methods of the concen t r a t ion c a m p for offenders.

8. I n c o m p a r i n g the y i e l d of t a x a t i o n i n the t w o count r i e s , however , t he r e i s t h i s to be borne ih m i n d : G e r m a n y i s r e a l l y i n t h i s sphere , a s i n others , a y e a r or so a h e a d of u s . S h e h a s a l r e a d y a ch i eved the a lmos t complete abo l i t i on of unemp loyment , w h e r e a s w e a r e s t i l l a long w a y f rom t h a t s t a t e of a f fa i r s . I n other w o r d s , w h i l e the y i e l d of t h e t a x a t i o n s y s t em i n G e r m a n y m a y be r e a c h i n g i t s p e ak , i t i s c e r t a i n t h a t ours w i l l not r e ach i t s p e a k for another y e a r .

9. I f i t be a s k e d - w h a t p r i c e G e r m a n y h a s p a i d for he r success i n t h i s field, the a n s w e r i s to be found i n t h r e e or four d i r e c t i o n s .

(i) T h e s t a n d a r d of l i v i n g i s much lower i n G e r m a n y ; a s compared w i t h 1929 G e r m a n w a g e r a t e s a p p e a r to be down by some 20 p e r cent . , w h e r e a s i n our ca se w a g e r a t e s a r e u p by 6 p e r cent, s ince the s a m e d a t e . T h a t i s not to s a y t h a t the N a z i s h a v e a c t u a l l y r educed w a g e r a t e s , a s t a t e m e n t w h i c h i t w o u l d c e r t a i n l y be imposs ib l e to prove . T h e f a c t i s t h a t t hey se ized power, a t a t i m e of deep depres s ion a f t e r w a g e r a t e s h a d been b r o u g h t v e r y low, a n d they h a v e p reven ted a n y cons ide r ab l e r ecovery i n those r a t e s . T h e de s t ruc t i on of the T r a d e U n i o n m a c h i n e r y for s e c u r i n g w a g e i nc r e a s e s w o u l d p robab l y h a v e been effective by i tse l f , even w i t h o u t t h e d i r e c t S t a t e r e g u l a t i o n of w a g e s . -)

( i i ) T h e cost of l i v i n g i n G e r m a n y h a s n o m i n a l l y f a l l en , but the r e h a s u n d o u b t e d l y been a f a l l i n r e a l w a g e s , a n d the t a x bu rden on the w o r k i n g c l a s se s i s now e x t r e m e l y he avy . L i k e w i s e t he s t a n d a r d of l i v i n g of the m i d d l e a n d u p p e r c l a s ses h a s been g r e a t l y depressed by the e x t r e m e w e i g h t of t a x a t i o n ,

( i i i ) I n o rde r to secure more money for de fence other p a r t s of the G e r m a n economy, e.g., the r a i l w a y s , have been a l l o w e d to r u n down cons iderab ly i n efficiency o w i n g to t h e i r i n a b i l i t y to o b t a i n f u n d s for m a i n t a i n i n g t h e i r e q u i p m e n t p r o p e r l y . A s i m i l a r s t a t e of t h i n g s h a s not occur r ed y e t i n t h i s count ry .

10. T h e r e i s a l so , of course , the ques t ion how long G e r m a n y can con t inue to devote so much e n e r g y to a r m a m e n t s . D o w n to the t ime of Dr . S c h a c h f s d i s a p p e a r a n c e G e r m a n y w a s p u r s u i n g a g e n e r a l economic po l i cy w h i c h , i n c e r t a in respects , cou ld be qua l i f i ed a s r a t h e r conserva t ive . T h i s a p p e a r s no longe r to be t r u e . T h e r e cen t l y p u b l i s h e d dev ices for p a y i n g for Government p u r c h a s e s i n p a p e r c a r r y i n g t a x a t i o n p r i v i l e g e s i n f u t u r e y e a r s s u g g e s t s a n a t t e m p t to e a t the i r corn w h i l e i t i s g r een , but i t i s not c l e a r t h a t t h i s i s ye t on a sca l e w h i c h w o u l d r e su l t i n m a r k e d diff icul t ies i n r a i s i n g t a x e s l a t e r on.

11. T h e above i s the b r o a d p i c t u r e . So f a r a s i t i s poss ib le to c lothe i t i n the form of s t a t i s t i c s the a t t e m p t i s m a d e i n the p a r a g r a p h s w h i c h fol low.

, 12. ' T h e r e a r e two m a j o r diff icult ies i n g i v i n g a c t u a l figures, v i z . , (a) no d e t a i l e d figures fo r S t a t e e x p e n d i t u r e , w h e t h e r on a r m a m e n t s or for c iv i l p u r p o s e s h a v e been pub l i shed for s e v e r a l y e a r s , (&) on ly v e r y incomple te figures for S t a t e

1 ;bo r row ing a r e a v a i l a b l e . ­

13. I n .1938-39 t h e R e i c h rece ived t a x r evenue of 17,691 m i l l i on R M . (£1,106 m i l l i ons ) of w h i c h 2,000 m i l l i o n R M . (£125 m i l l i o n s ) w a s p a s s e d on to the S t a t e s . 1 S t a t e a n d loca l t a x a t i o n a m o u n t e d to 4,900 m i l l i on R M . (£306 m i l l i on s ) .

[19517]"'' 2B

T o t a l t a x a t i o n , R e i c h , S t a t e and loca l w a s t h u s n e a r l y 22 ,600 m i l l i o n R M . * (£1 ,412 m i l l i o n s ) . , , ­

: T h e e x p e n d i t u r e by the S t a t e s a n d loca l a u t h o r i t i e s w a s ,6,900 m i l l i o n R M . ( £ 4 3 1 m i l l i on s ) . ' W h a t w a s the c i v i l e x p e n d i t u r e by the R e i c h , i n a d d i t i o n to the 2 ,000 m i l l i o n R M . g r a n t e d to the S t a t e s 1 W e on ly know t h a t the co r r e spond ing i t e m s for 1934 a m o u n t e d to 5,590 m i l l i o n R M . (£349 m i l l i o n s ) . W e do not know how t h a t f i gure m a y h a v e v a r i e d ; e x c e p t t h a t (1) t he debt c h a r g e , w h i c h w a s 500 m i l l i o n R M . i n 1934, m u s t s u r e l y h a v e r i s e n to 1,500 m i l l i o n R M . , a n d (2) A u s t r i a n C i v i l e x p e n d i t u r e h a s to be i n c l u d e d ; P e r h a p s the R e i c h C i v i l e x p e n d i t u r e i n 1 9 3 8 - 3 9 w a s 7,500 m i l l i o n R M . (£469 m i l l i o n s ) . T h e n t o t a l c iv i l e x p e n d i t u r e (Re i ch , S t a t e s , loca l ) w a s 1 4 , 4 0 0 t m i l l i o n R M . ( £ 9 0 0 m i l l i o n s ) .

14. B u t w e h a v e a l so to a l l ow .for the f a c t t h a t t he c o n t r i b u t i o n s to the U n e m p l o y m e n t I n s u r a n c e w e r e 1,600 m i l l i o n R M . (£100 m i l l i o n s ) i n excess of t he cost of u n e m p l o y m e n t re l i e f . S u c h a s u r p l u s m a y a p p e a r l a t e r on i n the form of S t a t e d e b t , bu t i t i s debt w h i c h does-not h a v e to be bor rowed .

15 . T h e a m o u n t a v a i l a b l e for de fence f rom bo r row ing i s e n t i r e l y obscure. B a l o g h , b a s i n g h imse l f on r e s u l t s t o October, cons ide r s t h a t i t m a y h a v e r eached 11,000 m i l l i o n R M . for t h e y e a r ( £ 6 8 8 m i l l i o n s ) . B u t some u n k n o w n p a r t of t h i s m u s t h a v e been bor rowed for S t a t e f inanced i nve s tmen t ( i n c l u d i n g p a r t l y the fou r y e a r p l a n i nve s tmen t s ) , roads , c a n a l s , p u b l i c b u i l d i n g s , &c.

T h e i n c r e a s e i n the disclosed i n t e r n a l debt i n the y e a r 1 9 3 8 - 3 9 w a s 11 ,813 m i l l i o n R M . ( £ 7 3 8 m i l l i o n s ) , of w h i c h long t e r m debt w a s 7 ,623 m i l l i o n R M . ( £ 4 7 7 m i l l i on s ) . B u t w e do not k n o w how m u c h of the long t e r m debt w a s n e w money a n d how m u c h w a s f u n d i n g of short t e r m debt p rev ious l y i s sued , t he " secre t d e b t . " T h e G e r m a n s dec ided a t the b e g i n n i n g of 1938 to i s sue no more " spec i a l " b i l l s . One wou ld , n a t u r a l l y , p r e sume t h a t in such cond i t ions a good d e a l of t he n e w long t e r m debt w a s for f u n d i n g , i.e., for p r o v i d i n g money to p a y off b i l l s a s t hey m a t u r e d . Now t h e s t a t i s t i c s of b i l l s of a l l c l a s se s he l d by G e r m a n b a n k s show no dec l ine bu t a n i n c r e a s e of 5,400 m i l l i o n R M . between M a r c h 1938 a n d M a r c h 1939 . A v e r y cons ide r ab l e vo lume of s p e c i a l b i l l s w a s , however , h e l d ou t s i de the B a n k i n g sys tem, a n d the r e i s n o t h i n g to show these w e r e not r edeemed o u t of long t e r m b o r r o w i n g .

On t h e who l e t h e a m o u n t spen t on defence out of bor rowed money by G e r m a n y i n 1 9 3 8 - 3 9 i s q u i t e obscure. One i s i n c l i n e d to r e g a r d £ 6 0 0 m i l l i ons ( a t 16 R M . to the £ ) a s t h e m a x i m u m . I t m a y be a g r e a t d e a l l ower . To ca l l t h e f i gure £ 5 0 0 m i l l i o n s ( i £100 m i l l i o n s ) w o u l d a l l ow for some f u n d i n g and a l so for some of the b o r r o w i n g h a v i n g been for non-defence pu rpose s , bu t i t i s a l l q u i t e s p e c u l a t i v e .

16. W e c a n n o w c o m p a r e t h e G e r m a n f igures for 1 9 3 8 - 3 9 w i t h , say , out­o w n Defence a r r a n g e m e n t s for 1 9 3 9 - 4 0 :—

Uni ted Kingdom. Germany. As proposed As guessed for

1939-40. 1938-39. &m. £m. ( £ = 16 R M . ) .

R e v e n u e ( n a t i o n a l p l u s loca l ) . . . 1,152 1,413 Prof i t on U n e m p l o y m e n t I n s u r a n c e . . . 100

, C i v i l E x p e n d i t u r e ( n a t i o n a l p l u s loca l ) . . . 905 900

A v a i l a b l e f rom B u d g e t for d e f ence 247 613 B o r r o w e d for Defence 400+. 1 5 0 0 ( i 100)

647J. ? 1,113 ( i 100) ' :17 . T h e f igure for t h e y i e l d of n a t i o n a l r evenue i s t he best a t t e s t e d of the

lot, a n d i f t h e r e i s a n e r r o r in the l o c a l r evenue i t w o u l d be b a l a n c e d by a c o r r e s p o n d i n g e r ro r i n loca l e x p e n d i t u r e . T h e f igures seem to show t h a t w e a r e

*. cf. Ba logh , In te rna t iona l Affairs, March 1939, p. 232. H e gives 22,000 mi l l i on .RM, f Ba logh s eems to make t h e civil expendi ture in 1932 10,200 mil l ion RM. , after allowing

for say 1,000 mi l l ion R M . spent On defence in that yea r . H e carr ies th is figure forward and makes an a l lowance in the end of 2,000 to 4,000 mi l l ion RM. for possible increases of local expend i ture . and also for Re ich borrowing for.civi l purposes. He .does not refer, specifical ly to debt charges , or Aust r i a . General ly his figures seem far too low.

$ Thesse figures inc lude a marg in for supp l emen t a r y es t imates , but a pre l iminary exarnina­t ion of the' supp lementar i e s threa tened th i s J u l y ind ica te a further grea t increase .

r a i s i n g th i s -year, say , £260 : m i l l i o n s less t h a n G e r m a n y r a i s e d l a s t y e a r . E v e n so, a s w e h a v e i n c l u d e d our m i s ce l l aneous r evenue w h i l e the G e r m a n figures a r e for t a x y i e ld , the. compar i son i s too f a v o u r a b l e to u s . T h e N a z i l e a d e r s h a v e boas t ed of a f u r t h e r l a r g e r i s e i n the y i e l d of t a x a t i o n this y e a r — s e e p a r a g r a p h 19 below.

A s r e g a r d s the second i t e m of p ro f i t . on unemp loymen t in su rance , we have n o t h i n g of Lire sort at present. E a t e r on w e m a y have . Fo r examp l e , i f t h e u n e m p l o y e d fe l l to 1,000,000, the U n e m p l o y m e n t F u n d m i g h t have , s a y , £ 3 0 m i l l i on s a y e a r more to inves t . ; T h e figure for G e r m a n c iv i l e x p e n d i t u r e i s more doubt fu l t h an t h a t of t a x a t i o n . I f t he £900 m i l l i o n figure i s i n e r ro r i t i s below the t r u t h . I t seems u n l i k e l y to t h e T r e a s u r y t h a t t h e t r u e figure could be above £1 ,000 m i l l i ons .

T h e gue s s -work n a t u r e of t he figure for G e r m a n b o r r o w i n g h a s been sufficiently b r o u g h t out i n p a r a g r a p h 15 above.

18 . N o t h i n g more c a n be c l a i m e d for the f igures t h a n t h a t they confirm the g e n e r a l i m p r e s s i o n t h a t a t the p r e s en t t i m e i t i s the h e a v i e r t a x a t i o n i n G e r m a n y w h i c h i s t he i m p o r t a n t f a c to r in e n a b l i n g her to f inance a b i g g e r de fence p r o g r a m m e .

19 . I t w i l l be not i ced t h a t the above compar i son i s be tween the U n i t e d K i n g d o m (1939/40) a n d G e r m a n y ( 1938/39 ) . - T h e r e a r e no a v a i l a b l e e s t i m a t e s for G e r m a n y (1939/40) e x c ep t a s r e g a r d s R e i c h t a x a t i o n . A P r e s s r epo r t of a recent speech by H e r r R e i n h a r d t r u n s a s fo l lows :—

" Cost of Rearmament.', . I n a speech to bus iness men in B e r l i n to -day H e r r R e i n h a r d t , the S t a t e

S e c r e t a r y a t the M i n i s t r y of F i n a n c e , i m p l i c i t l y r e p l i e d to c r i t i c i s m s of t he t a x a t i o n sy s t em. .s

H e r r R e i n h a r d t s a i d t h a t the h i s to r i c a ch i evemen t s of t he F i i h r e r , e spec i a l l y r e a r m a m e n t , a n d the ' R e p a t r i a t i o n ' of G e r m a n s i n A u s t r i a , t h e S u d e t e n l a n d , Bohemia , a n d Meme l , h a d m a d e even g r e a t e r d e m a n d s on R e i c h finances t h a n the p r e c e d i n g abo l i t i on of u n e m p l o y m e n t . : Moreover , t he s e c u r i n g a n d deve lopment of t h e v i t a l r i g h t s of t he G r e a t G e r m a n R e i c h w e r e on ly poss ible w i t h s t rong a r m e d forces. I t h a d been s a i d t h a t t h e r e a r m a m e n t shou ld h a v e been s p r e a d over a g r e a t e r number of y e a r s . ' I be l ieve t h a t on l y a fool or a n abso lu t e enemy of the R e i c h wou ld m a k e t h i s a s s e r t i on . ' A d m i t t e d l y , the cost of r e a r m a m e n t w o u l d then have been l e s s a n d the cost of the w e s t e r n for t i f i ca t ions wou ld not h a v e a r i s e n a t a l l ; On the o the r h a n d , in a l l p r o b a b i l i t y G e r m a n y w o u l d h a v e h a d forced u p o n h e r l a s t y e a r a w a r w h i c h w o u l d h a v e cost m a n y t i m e s a s much .

I n a n s w e r to the ques t ion f r e q u e n t l y a sked , ' W h e r e i s a l l the money coming f r o m ? ' H e r r R e i n h a r d t p o i n t e d to the ' C o n s t a n t l y increas ing­financial s t r e n g t h of t he R e i c h . ' T a x a t i o n r evenue h a d r i s e n f r o m 6 ,600 ,000 ,000 m a r k s i n 1932 to 17 ,700 ,000 ,000 m. i n 1938 : i n the c u r r e n t financial y e a r i t w o u l d p robab l y r i s e to 22 ,000 ,000 ,000 m., a n d i t w o u l d be even h i g h e r i n 1940. F i v e h u n d r e d m i l l i o n m a r k s w e r e ob t a ined u p to M a r c h of t h i s y e a r f rom the levy on J e w i s h for tunes .

T h e me thod p r ev iou s l y fo l lowed of financing the S t a t e ' s needs by shor t ­; or m e d i u m - t e r m loans , wh i ch w e r e a f t e r w a r d s conver ted in to l ong - t e rm loans ,

r e p r e s e n t e d a c h a r g e on f u t u r e t a x r e v e n u e because the se rv ice a n d r e d e m p ­t ion of the debt h a d to be met f r o m t a x a t i o n . M a n y m i l l i a r d s more cou ld h a v e been r a i s e d by loan, bu t the financial and p o l i t i c a l p r i n c i p l e of N a t i o n a l S o c i a l i s m d e m a n d e d other w a y s of financing def i c i t s ; a l so i t w a s not d e s i r e d to close the c a p i t a l m a r k e t to p r i v a t e i n d u s t r y .

I n p r i n c i p l e t h a t p a r t of t h e e x t r a o r d i n a r y e x p e n d i t u r e of the R e i c h w h i c h cou ld not be met f rom t a x a t i o n wou ld i n f u tu r e , be covered on l y by the i s sue of i n t e r e s t - b e a r i n g t a x cer t i f i ca tes . T h e t a x cer t i f i ca tes d i d not r e p r e s e n t a f u r t h e r i n c r e a s e of t he i n t e r e s t b u r d e n of the R e i c h b u t , o n l y a ' s h i f t i n g ' of t a x e s w h i c h the R e i c h B u d g e t w a s q u i t e ab le to bear . A s f a r a s c o u l d b e seen, the r i s i n g r evenues of the R e i c h wou ld r e n d e r u n n e c e s s a r y in 1940 the i s sue of i n t e r e s t - b e a r i n g t a x cer t i f ica tes on the s ame sca le a s i n 1939 " , ,

H e r r R e i n h a r d t cou ld only be g i v i n g e s t i m a t e s based on the e x p e r i e n c e of two or. t h r ee months of the new financial y e a r . . . B u t if . i ndeed , the y i e l d of t a x a t i o n for t h e R e i c h a lone in 1 9 3 9 - 4 0 w i l l be 2 2 m i l l i a r d s , an i n c r e a s e of

4 - 3 m i l l i a r d s ( £ 2 6 9 m i l l i o n s ) over 1 9 3 8 - 3 9 , the i m p l i c a t i o n s a r e s t a g g e r i n g . I t i s not so m u c h t h a t i t g i v e s t h em more to . spend on a r m a m e n t s , because , a s i s obvious a n d a s R e i n h a r d t s a y s , t h e i r borrowing m u s t be coming down. B u t i t m e a n s t h a t t h e y h a v e over £ 8 8 0 m i l l i o n s a y e a r for de fence without b o r r o w i n g a g a i n s t o u r £ 2 4 7 m i l l i ons , a n d un l e s s t h e i r B u d g e t b r e a k s down they c a n keep i t u p indef in i t e l y . I f the c a l c u l a t i o n s a r e £100 m i l l i o n s or even £200 m i l l i o n s w r o n g a n enormous d i s p a r i t y s t i l l r e m a i n s be tween the U n i t e d K i n g d o m a n d the G e r m a n figures.

20. T h e f o l l o w i n g i s a n a n a l y s i s of G e r m a n t a x r e v e n u e for t he y e a r 1 9 3 8 - 3 9 : -

Income tax—- Millions of Marks. On w a g e s . . . . . . - . . . . . . . . . . . . 640 On s a l a r i e s . . . . . . . . . . . . . . . . . . 1,451 Other 3 ,261

C o r p o r a t i o n t a x . . . . . . . . . . . . . . . . . . 2 ,408 Other d i r e c t a n d m i s c e l l aneous t a x e s . . . . . . . . . 1,594 T u r n o v e r t a x . . . . . . . . . . . . . . . . . . 3 ,357 C u s t o m s 1,818 Other t a x e s on consumpt ion ( i n c l u d i n g r a i l w a y

traffic t a x ) 3 ,162

T o t a l . . . 17 ,691

In the B r i t i s h t a x s y s t e m the p r o p o r t i o n of income t a x d e r i v e d f rom w a g e s i s n eg l i g i b l e . W e m a y c o m p a r e the w h o l e B r i t i s h income t a x a n d s u r t a x w i t h the G e r m a n t a x on incomes o the r t h a n w a g e s . T h e G e r m a n t a x on w a g e s , t oge the r w i t h the t u rnove r t a x , cus toms a n d t a x e s on consumpt ion , m a y then be compa r ed w i t h our i n d i r e c t t a x e s . T h e f o l l o w i n g compar i son r e su l t s : -

Germany (1938-39) . Great Britain (1938-39) . Millions of

Marks. £ Income t a x (other

wages )Corporation t ax . . .Other direct t axe s

than . . .

. . . . . .

4,712 2,408 1,594

294-5 150-5 99 -6

Income tax and sur tax . . .National Defence ContributionOther direct t axe s . . . . . .

£ millions 398-4 21 ­ 9 135-6

8,714 544-6 555-9

Customs . . . . . . ... 1,818 113-6 Customs 226-3 Consumption t axesTurnover t ax . . .

. . . . . .

3,162 3,357

197-6 209-8

Exc ise . . : 114-2

Income t ax on wages . . . 640 40 -0

8,977 534 . 4 340-5

17,691 1,105-6 896-4

T h e G e r m a n figures a r e be l i eved to i n c l u d e A u s t r i a bu t not the S u d e t e n l a n d . T h e G e r m a n n a t i o n a l i ncome for 1937 w a s e s t i m a t e d a t 7 1 m i l l i a r d s ( equ i v a l en t to £4 ,400 m i l l i o n s ) . U n f o r t u n a t e l y , t h e r e i s no r e l i a b l e e s t i m a t e of t he B r i t i s h n a t i o n a l income for c o m p a r i s o n ; p e r h a p s i t i s £ 4 , 5 0 0 m i l l i o n s . T h e p r e l i m i n a r y e s t i m a t e of t h e G e r m a n n a t i o n a l i ncome for 1938 i s 7 7 m i l l i a r d s . W i t h A u s t r i a t h e to t a l i s l i k e l y to be w e l l above 8 0 m i l l i a r d s (£5 ,000 m i l l i o n s ) .

2 1 . T h e most s t r i k i n g r e s u l t s of the above c o m p a r i s o n of t a x y i e l d s a r e (1) the ve r y h e a v y b u r d e n on the w o r k i n g c l a s se s i n G e r m a n y , (2) t h e he avy G e r m a n co rpo r a t i on t a x (40 pe r cent , of company prof i ts ) , a n d (3) t he r e l a t i v e l y modes t y i e l d of income t a x a n d o ther d i r e c t t a x e s .

T h e t u r n o v e r t a x , i t i s t r u e , f a l l s not on l y on t h e w o r k i n g c lasses , bu t on a l l incomes . B u t the s a m e a p p l i e s to cus toms a n d exc i s e d u t i e s i n both count r i e s , a n d the income t a x on w a g e s i n G e r m a n y i s more def in i te ly a w o r k i n g c l a s s impos t t h a n the i n d i r e c t t a x e s i n G r e a t B r i t a i n . L o c a l t a x a t i o n i n G e r m a n y h a s been e s t i m a t e d a t 5 m i l l i a r d s ( n e a r l y £300 m i l l i ons ) , a n d compa r e s w i t h about £ 2 1 0 m i l l i o n s i n G r e a t B r i t a i n . C o n t r i b u t i o n s f rom e m p l o y e r s a n d emp loyed for

h e a l t h a n d u n e m p l o y m e n t i n s u r a n c e , & c , a m o u n t in G e r m a n y to no less t h a n 5,273 m i l l i a r d s , or £ 3 3 0 m i l l i o n s ( twe lve months to J u n e 1938) . Fo r G r e a t B r i t a i n in 1936 they w e r e on ly £ 1 1 0 m i l l i ons , a n d a r e p r o b a b l y s t i l l u n d e r £ 1 2 0 m i l l i o n s .

111. - German Imports. 22 . T h e T r e a s u r y w e r e a s k e d for a note abou t the r ecen t i n c r e a s e i n G e r m a n

i m p o r t s a s shown by the t ab l e s compi l ed by S i r George S c h u s t e r a n d r e cen t l y p u b l i s h e d i n the " E c o n o m i s t . "

These t ab l e s w e r e t ab l e s of vo lume , a n d the i n c r e a s e i s l a r g e l y e x p l a i n e d by the lower cost of food a n d r a w m a t e r i a l s .

T h e fo l l ow ing t ab l e shows the impor t s in c e r t a i n y e a r s i n m i l l i o n s of m a r k s :—

R a w mate r i a l s Total and half-finished Food and

Imports . goods. dr ink. 1913 10,770 6,280 2 ,808 1929 13,447 7,205 3 ,823 1933 4,204 2,420 1,082 1937 5,468 3,295 1,485 1938 5,398 2,890 1,998

I m p o r t s of r a w m a t e r i a l s a n d ha l f - f in i shed goods fe l l f rom over 7,000 m i l l i o n m a r k s i n 1929 to u n d e r 3,000 m i l l i o n m a r k s i n 1938 . T h e w o r l d go ld p r i c e i n d e x for 1938 i s 4 5 - 4 pe r cent , of t h a t for 1929 . I f t h a t c a n be a p p l i e d to G e r m a n i m p o r t s the 2 ,890 m i l l i o n s of m a r k s of 1938 wou ld buy a s much a s 6 ,360 m i l l i o n s i n 1929.

Treasury Chambers, S.W. 1, July 3, 1939.