Germany, unlike the allied nations, entered the war with closely laid fiscal plans, which had been formulated and developed through long years of preparation. The method for securing funds was based upon the military plan of a short and victorious war, with large indemnities in settlement. The reliance upon an extensive system of credit instruments was the result, the expectation being to redeem these with the funds secured from the indemnities. The defeat of the military program was consequently reflected in the breakdown of the fiscal program.
Preparatory Measures. - The credit machinery which was in existence at the declaration of the war, or which was immediately put into existence, showed that careful preparation had been made for such a crisis. A few months before the break, the amount of gold in the war chest had been increased from $21,000,000 to more than $50,000,000. Systematic attempts had been made for some years to increase the gold reserve of the country as a basis for the issue of notes when the need came. The central banking institution had been given more extensive control over the banking machinery of the country in order that the government might be better able to control the gold fund. Some preparatory attempts were even made to prevent the disturbance in the money market which usually accompanies the opening of hostilities.
The outbreak of the war called into clear relief the preparations which had been made, and their efficacy in meeting the demands. In spite of the anticipations of the government, panic seized many, and they began to demand gold from the banks. This led the central bank to suspend specie payments. The preparation for creating circulating instruments, however, was more successful. The war chest fund was transferred to the bank as a basis for note issue, and a large amount of bank notes continued to be issued, which were made legal tender, but which would not be redeemed in specie. Along with these successive issues of bank notes, treasury notes were put out by the government which were also made legal tender, and denied specie payment. As might be expected, the notes depreciated and prices became inflated. When merchants refused to accept the notes at face value, the regulation was adopted making it illegal to discount currency, whereupon prices went still higher.
Loan Policy. - A vital part of the previous preparation was to liquify the wealth of the country so as to make it available for the government. As a part of the machinery for accomplishing this, vario usbanks were established throughout the country for the purpose of extending credit upon collateral. Stocks, bonds, merchandise, and nearly anything would be accepted as the basis for credit expansion. A number of regular war loans were floated, and these banks were used extensively to issue credit as a basis for the purchase of loans. Even the loans to be purchased were sometimes taken as collateral upon the loan made. As the war progressed, however, the credit machinery became more strained and the weakness of the
» loan policy became unsuccessful to an embarrassing degree.
Use of Taxes. - As indicated above, taxes were not used in the earlier years of the war because it was considered they were not needed. It was thought that the good will of the citizens would be increased if this extra burden were not placed upon them. The failure of the military machine to accomplish its purpose as scheduled, and the consequent weakening of the accepted fiscal policy, led the Finance Minister, in desperation, to turn to taxes as a supplementary source of revenue during the latter part of the struggle. At first they were so slight as to meet scarcely the interest charge, but near the end of the war they were increased so as to secure a noticeable return. It should be noted that the imperial government was somewhat handicapped, since it could make no use of direct taxes. The first war taxes were increased telephone, telegraph, and postal rates, as well as new taxes or increased rates upon war receipts, tobacco, bills of lading, and a few other articles. Later these rates were raised, and duties were levied upon railway tickets and coal. When the war was nearly over a much more extensive use of taxes was attempted, and business transactions, beverages, and many luxuries were subject to taxation. The revenue from these sources, while not great in proportion to the need, aided somewhat in establishing a firmer fiscal system.
System in Austria and Hungary. - The fiscal systems used in Austria and Hungary followed closely that described for Germany, yet more importance was attached to taxes than was found in Germany. The impaired state of the finances at the opening of hostilities made it more difficult to carry out a sound policy for meeting the war needs. Bank credits and national loans were relied upon extensively, which resulted in a marked depreciation of the currency. This, it seemed, the taxes could not prevent. The direct tax on incomes was the principal source of revenue, although taxes were placed upon other bases. The rate on incomes was extremely high, as were those on directors' fees, land revenues, etc. The tardy introduction of extensive taxes, however, could not overcome the bad fiscal situation which had been caused by the borrowing policy.