Signor Mussolini, and the new Government appeared likely to support in the main the foreign poly of France. Of the statesmen who had fallen out at Cannes,it Genoa and at London, M. Poincaré, almost alone, was left. He has announced the intention of holding another Conference at Brussels with the avowed object of securing a complete settlement based on the imposition of sanctions against Germany and the cancellation of inter-allied debts. It is too soon to say whether he will succeed in his plans or not; but the speeches which he delivered in the Senate and in the Chamber during November, and the course of the preliminary discussions in London, which took place in December, suggest that he still proposes to treat reparations as a political and not as a financial problem. So long as that is the case, whatever agreements may be made among the Allies, no real settlement of the question is possible.

To make the position clearer it is necessary to give some account of the budget positions of France and Germany respectively. As regards France, considerable light has been thrown upon the national finances by the report of M. Bokanowski to the Chamber. But even with this aid the figures are not by any means clear, and the actual amount of the deficit has been variously stated by the Minister of Finance and by the Rapporteurs of the Financial Commissions. The total deficits appear to have amounted to 25 milliards of francs in each of the years 1920 and 1921, of which about 15 or 16 milliards were required for the special budget to which the war pensions and the cost of reconstruction are charged. In 1922, the deficit on the ordinary budget will be four or five milliards of francs, while the total deficit, including the budget for recoverable expenses and other special accounts, will amount to over 25 milliards and may reach 30 milliards. In 1923, on the present basis of taxation, the deficit on the ordinary budget will be at least seven milliards and the total deficit anything up to 35 milliards. These deficits exist despite the fact that the French Government is relieved of the upkeep of the French Army of Occupation in Germany (some 70,000 men) and obtains-or should obtain-very substantial receipts from German deliveries in kind and from the output of the Saar mines. The budgets do not include any provision for payment of interest or capital of the inter-allied debts, though they include substantial provision for the repayment of commercial debts abroad and of the Government debt to the Bank of France.

It is difficult to express any judgment as to whether these figures correctly represent the financial position of France. On this question there is considerable inconsistency in French official statements. When the payment of inter-allied debts is on the tapis there is a tendency to avow complete bankruptcy. When, however, such announcements provoke a break in the franc quite another tune is heard: France's credit is absolutely sound and no foreigner has the right to question it. On the whole, the second is probably the more accurate version. From the purely economic point of view, France is very prosperous and the mineral wealth of Alsace-Lorraine and the Saar, together with the German coal deliveries, more than compensate her for the destructionnow largely repaired-of her mines and factories in the war area. The expenditure of the Government is, on the whole, fairly economical. There are, it is true, a number of subsidies which might be dispensed with, but the costs of the civil departments as a whole have been reduced by 50% since 1919, and the Chamber exercises a salutary control on such expenses.

The financial difficulties of the State are due, in the main, to the reluctance of the French Parliament to impose a proper degree of taxation. The peasants and the small investors have a traditional right to almost complete exemption from direct taxation, and the classes that are liable are not, in fact, forced to pay. The Minister of Finance has admitted that the income tax is at present practically a voluntary contribution, and that the yield could be very largely increased by efficient administration. The various taxes which correspond to the British income tax are estimated by the Financial Commission of the Chamber to yield in 1922 less than 3 milliards of francs, the equivalent (at a rate of 60 francs to the £) of 32 shillings only per head of the = 1.12 sy population, while the total revenue from all sources is estimated at 191 milliards, the equivalent (on the same basis) of £8 3s. 6d. per head. The figures in Great Britain are £7 158. per head for income tax and nearly £20 per head for revenue from all sources. Making all allowance for the difference in the taxable capacity of the two countries, these figures are sufficient to show that, despite all assertions to the contrary, France is still a lightly taxed country. The very ease with which successive internal loans are taken up indicates the large margin of taxable capacity left untapped. It would be a matter of comparative ease for a

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vigorous financial administration to increase the revenue by 30% (which would more than cover the deficit on the ordinary budget) and there would probably be no real difficulty in increasing it by 50%. If, in addition, the French Government could count on getting in a moderate amount of reparations, such as Germany could undoubtedly pay, the budget could be stabilised within a comparatively short period.

Whether the net revenue could be increased sufficiently to ensure the service of the inter-allied debt is another matter. On the one hand, the payment of interest on this debt would represent a comparatively small addition to the existing debt charge; and it may be noted that the budget at present contains a substantial provision for repaying the capital of commercial debts abroad. It is therefore possible to conceive the payment by France of the service of this debt. On the other hand, the internal debt charge, which has resulted from the preference of past Governments for collecting revenue by means of internal borrowing rather than by taxation, alone absorbs a sum of 14 milliards of francs per annum, and if the gold value of the franc is maintained even at its present level, its repayment will constitute a serious strain on the fiscal resources of the country. It would be found easier to manage if the franc could be stabilised at a somewhat lower value. Hitherto, the French Government has maintained a commendably conservative currency policy, largely for fear of the effect on investors of a further depreciation of the currency, and has by various measures avoided very successfully the appearance of inflation. Should the Allies insist on the payment of interest on their debt, that demand might be made the excuse for a further depreciation of the franc, involving an extension of our own economic difficulties which might more than counterbalance the fiscal advantage of receiving payment on our loans.

As regards Germany, the situation is quite different. During the two years following the Armistice, Government expenditure was lavishly undertaken without reference to the revenues available. To avoid unemployment, large programmes of railway improvements and other public works were set in hand and additional public employees were continually engaged as an alternative to the payment of doles. Even when unemployment ceased, the works continued and the State employees were retained. Bread and other commodities were sold to the working classes at

a heavy loss. Since 1921, the Government has changed this policy and it has now succeeded in stopping the subsidies and in reducing the public works programme to comparatively small dimensions. On the other hand, there has been, from the outset, a genuine effort to increase revenues. Each Government since 1920 has continually increased the severity of taxation. The direct taxes-which include a 10% tax on wages as well as a drastic income tax and a variety of taxes on capital and profits— are on a scale unparalleled in any country in the world. They are only made supportable by the slow working of the assessing authorities and the constant depreciation of the mark, which indeed makes them a comparatively light burden to all except those with fixed incomes. This depreciation on the other hand has made the internal debt an almost insignificant charge. Last spring, therefore, the Government could, on a conservative estimate of receipts, anticipate a surplus on the ordinary budget (exclusive of Peace Treaty charges) of 16 milliards of marks. As a condition of the reduction of the payments for 1922, the Reparation Commission insisted on the further increase of taxation (particularly an increase in the turnover tax and the tax on coal), the raising of a forced loan, and the increase of railway and postal tariffs so as to make these undertakings self-supporting. The German Government accepted and carried through all these measures. The ordinary revenue during the first six months of the year more than covered the domestic expenditure and this was effected without the help of the new taxes or the forced loan, which did not come into operation till the end of the period. Had the mark remained stable, there is every reason to believe that the Government would have had a surplus of between 60 and 80 milliards of paper marks during the current financial year, which would have covered the cost of deliveries in kind, though it would not have been sufficient to meet also the cash payments to the Allies.

The collapse in the mark which began in July has upset all these calculations. Revenue cannot be made to respond as quickly to increases of prices as expenditure, because direct taxation has for the most part to be collected, in arrear, on the basis of the previous year's assessments. Between March and October, internal prices, following the course of the exchange, increased five-fold, the expenditure increased three-fold: the

revenue was scarcely doubled. A strong currency policy combined with an absolute cessation of all further payments to the Allies, might have stopped the rot; but the danger of any cessation of payments to the Allies is more readily appreciated in Germany than elsewhere, and without such cessation any currency reform was doomed to failure. The Government made, indeed, some gestures it asked the Allies for a moratorium and applied -in vain-for credits. The Reichsbank too began to raise its rate of discount and it has now reached 10%. But the country was not prepared for really vigorous action, and the delay in securing any agreement among the Allies made the situation hopeless. The Government went with the tide. It continued the deliveries in kind and granted the increases of wages asked for by its employees and met both by discounting Treasury Bills at the Reichsbank and printing notes. The floating debt which on the 1st January 1922 was 247,000,000,000 of paper marks, and on the 1st July was only 308,000,000,000, had increased to 450,000,000,000 on the 1st September, 603,000,000,000 on the 1st October, 839,000,000,000 on the 1st December, and 1,312,000,000,000 on the 27th December. The revised budget. prepared in September showed a deficit on the ordinary administrative expenses alone of over 300,000,000,000 of paper marks, apart from any provision for reparations.

How far does this rake's career represent the deliberate policy of the Government, and how far was it forced upon it by illconsidered exactions by the Allies? Neither explanation exactly fits the facts. The reparation payments required of Germany were indeed in excess of her financial capacity, and entailed, almost inevitably, a certain measure of inflation. But the actual payments made (representing about £400,000,000) were not sufficient to cause the collapse that has occurred. This has been due far more to the fear of the future liabilities and to the constant threats of military sanctions than to the payments hitherto exacted. When it was seen that the Allied Governments insisted on payments being made which the German Government had no resources to meet, it was obvious that the mark could not but depreciate. The foreign holders began by unloading the speculative purchases of marks which had financed the renewal of stocks after the war, and the native holders soon caught the fever. No one in his senses will keep a currency which may lose 50%