LIBS AST AltOHiVJOT
[Distributed to the Council and C. 437. M. 167. 1926. ti. the Members of the League.] [F. 309]
Geneva, Ju ly 29th, 1926.
LEAGUE OF NATIONS FINANCIAL COMMITTEE
REPORT TO THE COUNCIL ON THE WORK OF THE TWENTY-THIRD SESSION (SPECIAL) OF THE COMMITTEE
Held in London from July 1 9 th to 2 3 rd, 1926.
INTRODUCTION.
The Financial Committee has the honour to submit to the Council the following report on the work of its Twenty-third Session (Special), held in London from July 19th to 23rd, 1926. The following members were present:
M. D u b o is (Chairman); M. Takashi A oki (in place of M. Teiji Sekiba) ; M. d e C h a l e n d a r ; M. J a n s s e n ; M. M auro (in place of M. Bianchini) ; M. t e r M euleN ; S ir O tto N i e m e y e r ; M. P o s p is il . The following also attended part of the meetings: 1. For the Question of the Loan for the Settlement of Bulgarian Refugees:
M. M o l o f f , Bulgarian Minister of Finance; M. I v a n o f f , Governor of the National Bank of Bulgaria; M. Ca c l a m a n o s, Greek Minister in London; M. D io u r it c h , Serb-Croat-Slovene Minister in London ; M. Constantin M. L a p t e w , Roumanian Chargé d’Affaires in London. M. Viktor B raf, Czechoslovak Chargé d’Affaires in London; 2. For the Question of the Financial Situation of Danzig:
D r. v a n H a m e l , High Commissioner of the League of Nations in Danzig. Representatives of the Free City:
D r. Sahm, President of the Senate; M. Julius G e h l , Vice-President of the Senate; Dr. E. V o l k m a n n , Senator in charge of Financial Questions ; M. Konrad M e i s s n e r , President of the Bank of Danzig; Dr. F e r b e r , Government Counsellor. Representatives of Poland:
Dr. S t r a s b u r g e r , Commissioner-General of Poland at Danzig; Dr. Za c z e k , o f the Ministry of Finance; M. L a l ic k i, Counsellor at the General Commissariat of Poland at Danzig; M. B e n i s , Secretary of Legation; M. R a s in s k i, Chief of Customs Department. 3. For the Question of Counterfeiting Currency:
M. B r o e k h o f f , Commissioner of Police at Amsterdam.
^ ^ N- 850 (F). 850 (A), 8/26. Imp. Kundig. Publications of the League of Nations II. ECONOMIC AND FINANCIAL 1926. II. 29. S um m a r y.
Page I. Loan for the Settlem entof Bulgarian R e fu g e e s...... 2 II. Financial Situation of the Free City of D a n z ig ...... 3 III. Counterfeiting C u r r e n c y ...... 5 IV. D isarm am ent ...... s
I. L o a n f o r t h e S e t t l e m e n t o f B u l g a r ia n R e f u g e e s .
1.
The Financial Committee was requested by the Council to consider the question of the settle ment of Bulgarian refugees at its present session and, if the conditions contemplated in its report of June 7th had been fulfilled, to recommend to the President of the Council the measures necessary to obtain advances on a loan. The Committee has had the opportunity at its present session of hearing statements by M. Moloff, the Finance Minister of Bulgaria, and by M. Ivanoff, Governor of the National Bank. It has also had an exchange of view's with the diplomatic representatives in London of Greece, the Kingdom of the Serbs, Croats and Slovenes and Roumania, the representative of Czechoslovakia being also present. In its report of June 7th, 1926, the Committee made certain recommendations with a view to furthering the negotiation of a loan. In respect of these recommendations, the Committee has ascertained that the situation is as follows :
(1) The necessary decisions (Annex I), releasing the revenues required as security for the loan from the general charge for reparations and armies of occupation and providing safeguards against the depreciation of the leva, have now been taken by the Inter-Allied Commission at Sofia and by the Reparation Commission at Paris, and, on the information received, are in a form which satisfies the requirements of the Financial Committee’s report. (2) Satisfactory assurances have been received from the Bulgarian Government and the Governor of the National Bank as to the modification of the statutes of the Bank.
The conditions affecting the security of the loan may now therefore be regarded as satisfied. There remains the fact that, in the negotiations of the advances and of the loan, the Committee is of the opinion, as already stated in its June report, that the Bulgarian Government will find it necessary to arrive at a satisfactory agreement with the bondholders of the pre-war loans and to meet certain other pre-existing rights. Negotiations to this effect have made good progress, and it is hoped that a settlement may be reached almost immediately. (W ith regard to the special question of the bills of 1912-13 discounted by the Banque de Paris et des Pays-Bas, the Committee trust that a suitable arrangement can be made in connection with the issue of the loan.)
2 .
In these circumstances, the Financial Committee recommends to the President of the Council to authorise the following measures, to come into force as soon as the President of the Financial Committee is able to verify formally the official texts of the reparation decisions :
(1) The Bulgarian Government is authorised to enter into negotiations with bankers in order to obtain advances (not exceeding a net sum of £400,000) on the main loan to be issued on the basis of the scheme outlined in the report of the Financial Committee to the Council. The letter of authorisation should add, however, that the President of the Council thinks it necessary to call attention to the opinion of the Financial Committee that “ the Bulgarian Government will find it necessary to arrive at a satisfactory agreement with the bondholders of the pre-war loans for the future and to meet certain other pre-existing rights, and that he expresses the hope that this difficulty will soon be removed.
(2) M. René C h a r r o n is appointed for a period of three months as representative of the League of Nations to supervise the expenditure of the advances.
(3) Before becoming final, the contracts for such advances as may be obtained by the Bulgarian Government, in accordance with paragraph 2 (1) above, shall be submitted for the approval of the President of the Financial Committee. — 3 —
II. F in a n c ia l S it u a t io n of t h e F r e e Cit y o f D a n z ig .
In conformity with the request of the High Commissioner and at the express desire of the Senate of Danzig, the President of the Council, by a telegram of July ist, 1926, asked M. Janssen, a member of this Committee, to study the financial situation of the Free City, which the Senate considered to be serious. M. Janssen was able to accept this task, and visited Danzig between July 10th and 15th. He was assisted by M. Jacobsson, of the League Secretariat. The Financial Committee has considered the report presented by M. Janssen (Annex II), and has heard Dr. van Hamel, the High Commissioner of the League of Nations in Danzig, M. Sahm, President of the Senate, M. Gehl, Vice-President of the Senate, Dr. Volkmann, the Senator in Charge of Financial Questions, M. Meissner, President of the Bank of Danzig, and Dr. Ferber, Government Counsellor. On the questions which according to the Conventions in force concern Poland, the Committee heard Dr. Strasburger, the General Commissioner of Poland in Danzig, M. Zaczek, financial expert, M. Lalicki, Counsellor at the General Commissariat, M. Benis, Secretary of Legation, and M. Rasinski, Chief of Customs Department. The Committee desires to submit the following report to the Council. The measures contemplated in this report depend both on decisions to be taken by the author ities of the Free City and on an agreement to be concluded regarding certain points between the Free City and the Polish Government. The Financial Committee has been led to express its views on these different points in the hope that it may thereby facilitate the negotiations which will have to be undertaken.
I. The monetary reform which Danzig carried out in 1923 with the aid of the League of Nations has been wholly successful, the stability of the Danzig gulden having been maintained without difficulty and the notes of the Bank of Danzig being covered by more than 100 per cent, if all foreign assets of the Bank are added to the legal reserve. On the other hand, after the monetary stabilisation, Danzig did not escape the effects of the general crisis which swept over Central Europe during the latter part of 1925 and led to widespread unemployment in Germany, Poland, and also in Danzig, where the number of unemployed rose to more than 20,000 at the beginning of 1926. The unemployment problem in Danzig is partly due to the surplus of workers remaining from the military and naval factories which were founded before the war and which now experience great difficulties in starting production for civil ends. Danzig was further affected by the depreciation of the Polish zloty, which reduced the pur chasing power of the Polish market and also led to serious losses on advances granted in zloty to Polish customers. The Customs difficulties between Poland and Germany have without doubt damaged certain branches of Danzig’s trade. In recent months, however, the harbour of Danzig has greatly benefited from the increase in exports from Poland, which are partly a result of the depreciation of the zloty, partly of measures taken by Poland to favour railway transport to Danzig. This export trade, however, is not sufficient to bring any substantial relief to the Danzig labour market. Although certain firms in Danzig are known to have received important contracts for the coming winter, and the fall in interest rates may be expected to assist trade and industry, it cannot be denied that the figure of 15,000 unemployed at the best period of the year indicates that Danzig has still a long way to go before normal conditions are restored. On the whole, the develop ment in Danzig will depend on the trade conditions in Europe generally, and more particularly in Poland.
II. The financial position has been disturbed by the economic crises in Danzig and the neighbouring countries. In 1924 and 1925 actual receipts, particularly Customs, considerably exceeded the estimates and permitted important increases of salaries, which were fixed on a level about 10 per cent higher than those in Germany. When, in the latter part of 1925, expenditure on unemployment began to rise and the receipts from Customs duties declined, the position of the Treasury became difficult and the Danzig Government had recourse to the issue of Treasury bills in the open market. The difficulties increased in 1926, and at present the budget is in disequi librium, not only on account of the factors mentioned above but also owing to the delay in the establishment of the tobacco monopoly, estimated to yield 5 million gulden, for which provision had been made in the budget for the financial year 1926-27. It has been estimated that, on the basis of the stipulations actually in force, the current year will result in a deficit of about 16 millions, of which nearly half has been realised in the first three months of the year, during which the expenditure has been exceptionally heavy. The prospective deficit during the period July 1926-March 1927 of the current financial year would be about 8% millions if no new measures are taken. This deficit and the floating debt, amounting to about 12 million gulden on July !st, 1926, constitute a serious danger for the Free City. The Committee considers that, in the first instance, measures should be taken to restore budget equilibrium, and that these measures should be introduced as early as the second half of the financial year 1926-27.
III. The reconstruction plan should in the first place contain provisions for reduction of expenditure. In spite of the dismissals of officials which have taken place during the last three years, the Free City appears still to have an organisation too extensive and too costly for its tasks. It should not be impossible to reduce further the number of officials by simplification of the administration and also by special measures such as the introduction of automatic telephones, concentration of the handling of goods in the harbour, etc. — 4 —
Administrative reorganisation and dismissal of officials will only lead to more marked reduc tions in expenditure after a certain lapse of time. It is, however, important to relieve the budget by immediate economies, which can only be obtained by a reduction of salaries and allocations of various kinds. It has been calculated that, if salaries in Danzig were reduced to the same level as in Germany, more than four million gulden would be saved. The Committee considers that, by a reorganisation of State services and by readjustment of salaries and other allocations, the total budget expenditure may well be reduced by 10 per cent. e IV. It is also desirable to take measures to increase the revenues in Danzig. The Danzig Government is at present negotiating with various financial groups regarding the introduction of the tobacco monopoly and proposals have been formulated for the introduction of other mono polies, e.g., alcohol. These and other fiscal reforms might also have the effect of establishing a certain equilibrium between charges imposed in Danzig and Poland. The Committee is glad to note that the negotiations with Poland regarding the standing of the Danzig tobacco monopoly within the Polish Customs tariff have been successfully concluded. V. In virtue of an agreement which has been in force since 1921, the Free City of Danzig receives between 7 and 8 per cent of the net Customs revenue and has to meet the cost of the Customs administration in her territory. The Free City’s share in Customs revenue amounted during the 1924-25 financial period to 23,072,104 florins, and in 1925-26 to 19,000,000 florins approximately. On the basis of the receipts of the last few months, this share will only amount in the current year (1926-27) to some 8,600,000 florins. This reduction is due to the diminution in the volume of imports into Poland and to the depreciation of the zloty, which has led to a corresponding fall in Danzig’s share in the Customs revenue converted into florins. It should be noted that, the cost of administration being entirely met out of the budget of the Free City, this charge has remained constant, while the difference between the gross receipts depending on the rate of the zloty and the cost of collection in florins, i.e. the net receipts, has steadily declined. The costs of collection are estimated in the 1926-27 budget at 6,485,000 florins. The net receipts which the Free City may anticipate will therefore not be much over 2,000,000 florins. It is hardly surprising that in these circumstances the Free City should have endeavoured to obtain a modification of the agreements regarding allocation at present in force. Such a modifi cation has for two years been the subject of prolonged negotiations between Poland and Danzig, each of the two parties demanding a revision of the present coefficient in its favour. These negotiations have not had any result. In view of the abnormal times through which these countries are passing, it would not seem as if such difficult negotiations could lead to any final and immediate solution. Hence the Committee, adopting M. Janssen’s conclusions, considers that a provisional short-term arrangement, not affecting the rights of the parties to pursue negotiations for a revision of the arrangement at present in force, would be the most practicable and expeditious solution. The provisional period might be fixed at two years. Taking into account the amount of Danzig’s share during the year 1924-25 and the figure to which it has fallen during the last few months, and leaving on one side the question as to which of these two periods should be considered as exceptional, the Financial Committee is of the opinion that an average figure might be considered by the parties and fixed by an agreement between them for a period of twro years beginning on January 1st, 1927. The Free City would thus have a stable budgetary asset at its disposal, and one not subject to the influence of any economic or monetary crises. The Financial Committee has suggested the figure of 15,000,000 florins per annum. In virtue of a friendly agreement wïth Poland, Danzig would receive for a period of twTo years, beginning on January 1st, 1927, a sum involving simply a temporary suspension of the present basis of allocation without prejudging the final solution. If the Polish Government, in exercise of its sole right of making tariff adjustments, should modify its duties in such a w7ay that Danzig’s share, calculated according to the coefficient at present in force, should exceed 15,000,000 florins, this arrangement might be cancelled or revised. After the unofficial communication of the views expressed in this paragraph to the repre sentatives of Danzig and Poland, further conversations took place between them in the presence of the High Commissioner, who subsequently explained to the Financial Committee that the following propositions had been put forward : The present coefficient shall remain in force for two years from September 1st, 1926, but the amounts to be received by Danzig during this period shall be limited to a minimum of 14 millions and a maximum of 20 millions. The two parties have agreed to refer these propositions to their respective Governments. The High Commissioner insisted, in the interests of a rapid solution of the financial difficulties of Danzig, that the two delegations should do all in their power to reach an agreement between their Governments. He further stated that the negotiations would be continued ; that for the time being the present coefficient wTould be applied; and, finally, that the right of each party to submit the question to the arbitration of the High Commissioner would remain intact. The Financial Committee considers that the above proposal would be as satisfactory from the point of view of re-establishing the financial position of the Free City as the suggestion first considered.
VI. The Financial Committee considers that the adoption of the whole of these measures and arrangements forms the only possible basis for the restoration of a permanent budgetary equilibrium. If the full adoption of these measures and arrangements provides a guarantee that th is equilibrium w ill be achieved, the Committee hopes that, at its next meeting in September, after considering the legal position, it will be able to recommend the contracting of a loan for the following principal purposes:
[a) To cover the deficit in the 1926-27 budget resulting from exceptional circumstances, and to repay the floating debt; (b) To undertake certain productive expenditure according to a programme to be submitted by the Free City of Danzig.
III. C ounterfeiting C u r r e n c y .
The Financial Committee has had before it the decision taken by the Council on June 10th, 1926, regarding the letter from the French Government dated June 5th (document F. 294), which suggested the framing of a draft convention for suppressing the crime of counterfeiting currency. The Committee has also examined the letter from the Netherlands Government of June 21st (document F. 296), giving details of the co-operation between the police authorities of different countries which already exists in this connection. The Committee had the advantage of hearing on this point M. Broekhoff, Commissioner of Police of the Netherlands. In accordance with the suggestion made at the June Council meeting that the Financial Committee should obtain the opinion and advice of the banks of issue in various countries, the Committee has sent out a questionnaire to these banks. It hopes, on the basis of the replies received, to report further at its next meeting.
IV. D is a r m a m e n t .
M. Pospisil and Professor Mauro (substitute for M. Bianchini) explained to the Committee what had been done at Sub-Committee B of the Preparatory Commission of the Disarmament Conference, and, in particular, that part of the work of the Sub-Committee the preparation of which had been entrusted to them as financial experts.
ANNEX I.
LOAN FOR SETTLEMENT OF BULGARIAN REFUGEES. DECISIONS BY INTER-ALLIED COMMISSION AT SOFIA AND REPARATION COMMISSION, PARIS.
A.
Letter from General Secretary of Reparation Commission to Secretary-General of
L e a g u e o f N a t io n s .
Paris, August 2nd, 1926.
I have the honour to forward herewith certified copies of the following decisions taken with regard to the loan for the settlement of Bulgarian refugees : 1. A decision taken by the Inter-Allied Commission of Bulgaria on July 22nd, 1926; 2. A decision taken by the Inter-Allied Commission of Bulgaria on July 23rd, 1926; 3. A decision taken by the Reparation Commission on July 23rd, 1926.
(Signed) G. L a m ir a u l t , For the General Secretary.
1. Decision of Inter-Allied Commission of Bulgaria dated July 22nd, 1926.
[Translation.] Sofia, July 22nd, 1926.
The Inter-Allied Commission • T Having taken cognisance of the scheme approved on June 10th, 1926, by the Council of the League of Nations concerning the issue by Bulgaria of a loan for the settlement of Bulgarian refugees, to be secured by a first charge on the excise on salt and spirits, on the match monopoly — 6 —
and possibly on other revenues, if the returns from the above-mentioned revenues should fall below 150 per cent of the sums required for the service of the loan; and A recommendation having been made to the Reparation Commission to take measures to safeguard the securities assigned to the loan against any depreciation in value that might result from fluctuations of exchange due to reparation transfers; Unanimously deciding, by virtue of the powers conferred upon it by Article 132 of the Treaty of Neuilly, to grant exceptions to the first charge laid down by this Treaty on all the assets and revenues of Bulgaria for the settlement of reparation and all other costs and, by virtue of all other powers which it may possess to this effect : Releases from the charge laid downin the saidArticle 132for the settlement of reparation and all other costs arising under the Treatyof Neuilly or anytreaties oragreements supplementary thereto, or under arrangements concluded between Bulgaria and the Allied and Associated Powers during the Armistice signed on September 29th, 1918, and from all other charges which may come within the jurisdiction of the Inter-Allied Commission, for a period to be determined for the redemp tion of the said loan, which shall not be more than fifty years from the date of the present decision;
(1) The excise on salt; (2) The excise on spirits; (3) The net receipts of the match monopoly ; (4) All sums accruing in the form of rent, sales, or advance repayments in cash, interest or otherwise, by the beneficiaries of the assistance granted under the said Refugee Loan.
Furthermore, the Inter-Allied Commission undertakes, in case the returns from the above revenues for any year fall below 150 per cent of the sums required for the service of the loan, to release from the same charge other sources of receipts, with the exception of Customs, to be selected by it on the proposal of the Council of the League of Nations, to whom the question shall be referred by the Trustees, in so far as it may be necessary to make up the 150 per cent referred to above. The said release being granted without prejudice, in each case, to any first charges, other than those waived by the present provision, which may now exist on the duties, receipts and revenues above enumerated, and on the express condition that, outside the exercise of such first charges, if any exist, no part of the securities enumerated shall be assigned to any use other than the said Refugee Loan or the advances granted on this loan, until the Treaty charges have been completely extinguished ; and The object of the said release being to ensure the repayment of the above-mentioned Refugee Loan during the period it remains in force, the Inter-Allied Commission agrees that if, during this period, any part of the said Refugee Loan or the interest on it is not entirely liquidated, that part of the loan or of the interest shall, until complete redemption, continue to enjoy a first charge on such part of the duties, receipts and resources above enumerated as may be necessary to cover, up to 150 per cent, the service of the unliquidated portion. It being hereby understood and declared that, if the Inter-Allied Commission has not before December 31st, 1926, received notice from the League of Nations that it has been possible to put the said scheme into execution, the present decision shall be null and void, without prejudice, however, to the first charge of all advances that may have been made under the heading of the Refugee Loan or of any short-term loan that may have been negotiated in anticipation of the said Refugee Loan.
2.
Decision of Inter-Allied Commission of Bulgaria dated July 23rd, 1926.
[Translation.] Sofia, July 23rd, 1926.
The Inter-Allied Commission: Having taken cognisance of the report of the Financial Committee of the League of Nations of June 9th, 1926, on the scheme for a loan for the settlement of refugees in Bulgaria, and of the decision of the Council of the League of Nations adopting this report ; and Being willing to allow, in favour of the revenues which, according to the report of the Financial Committee, are required for the service of this loan, an exception to the first charge laid down in Article 132 of the Treaty of Neuilly on all the assets and revenues of Bulgaria for the discharge of Reparation and other costs arising under the said Treaty or any treaties or agreements supplementary thereto : Recommends that the Reparation Commission take all the measures which it may deem necessary in conformity with the Treaty of Neuilly to give effect to the arrangement recommended by the Financial Committee of the League of Nations for the safeguarding of the securities assigned to the contemplated loan against any depreciation in value that might result from fluctuation of exchange. (Signed) F. D e s t a ij.l e u r . W. A. M. D o l l . A. F a l l e t t i d i V illafalletto . — 7 —
3- Decision of Reparation Commission dated July 23rd, 1926.
[Translation.]
3314. L o a n fo r t h e S e t t l e m e n t o f B u l g a r ia n R e f u g e e s .
The Reparation Commission, considering : {a) The scheme approved on June 10th, 1926, by the Council of the League of Nations for the issue of a loan by Bulgaria for the purpose of the settlement of Bulgarian refugees ; and (b) The telegram addressed on July 22nd to the Reparation Commission by the Inter- Allied Commission for Bulgaria worded as follows :
“ Inter-Allied Commission for Bulgaria unanimously decided to grant derogation to the first charge established by Article 132 of the Treaty of Neuilly for revenues required as securities for loan intended for settlement of Bulgarian refugees. Inter-Allied Commission for Bulgaria further decided to recommend that Reparation Commission should take all necessary measures of a nature to protect securities assigned to this loan against any loss of value which might result from instability of exchange. Report and text of decisions follow. — Ci n t e r d e b ”:
Agrees so far as it is concerned to give effect as hereinafter provided to the proposals of the Financial Committee of the League of Nations approved on June 10th, 1926, by the Council of the League with a view to protect the securities assigned to the loan against any loss of value which might result from an instability of the exchange caused by reparation transfers : (a) The Bulgarian Government will have the right at any time during the existence of the said loan to make to the Inter-Allied Commission a request that, in the interest of the stability of the Bulgarian exchange, purchases of foreign currency necessary for the payment of reparations under the Protocol signed at Sofia on March 21st, 1923, be suspended either in whole or in part. (b) The Bulgarian Government will undertake to accept, as from the date on which such a request is made and from the very fact of its being made, the regulations for the operations of transfer contained in the attached schedule, which the Reparation Commission also on its part accepts, and to co-operate with the Reparation Commission in the fullest manner for establish ing and keeping in force those regulations. (c) This decision shall be void and of no effect if, before December 31st, 1926, the Repara tion Commission has not received :
(1) A notification from the League of Nations that the entire scheme approved on June 10th, 1926, has been carried into effect; and (2) A notification from the Bulgarian Government that it accepts fully and unreservedly all the provisions of the present decision and of the schedule with which it is concerned.
(Signed) S. A . A r m it a g e -S m it h , General Secretary.
Schedule to the Decision of the Reparation Commission.
1. As from the date on which the Bulgarian Government addresses to the Inter-Allied Com mission of Bulgaria a request for the suspension in whole or in part in the interests of the stability of the exchange of the purchase of foreign currency necessary for reparation payments, an organisa tion under the name of the Transfer Committee, entrusted with the obligation of operating reparation transfers, will be constituted in manner hereinafter provided. 2. If, before the Transfer Committee enters upon its duties, any reparation payments fall due, the Bulgarian Government will have to meet them in the same manner as heretofore. 3. The Transfer Committee shall consist of:
(a) A member to be appointed by the unanimous decision of the Reparation Commission, a national of the United States of America or of a country which was neutral during the war of 1914-1919, as Chairman. If the Reparation Commission shall not have reached a unanimous decision for this purpose within one month from the date of the request above referred to, the President for the time being of the Permanent Court of International Justice at The Hague shall be requested to appoint the Chairman of the Transfer Committee ; (b) A member appointed by the Trustees of the Bulgarian Refugees Loan; (c) A member appointed by a decision of the Reparation Commission, taken, if necessary, by a majority vote, after consulting the Inter-Allied Commission of Bulgaria. These three members must be chosen from persons who are experts on questions of exchange. — 8 —
4- Account A of the Bulgarian Treasury at the National Bank of Bulgaria established under Article 3 of Ukase No. 10 annexed to the Protocol of Sofia shall be transferred into the name of and managed by the Transfer Committee. 5. The Transfer Committee will make, through the National Bank of Bulgaria, to the extent to which it considers that the stability of the Bulgarian currency allows, the purchases of foreign exchange requisite for reparation payments. 6. If it should have proved impossible to transfer in cash all the sums to the credit of the account of the Transfer Committee, the Committee will authorise the employment of such amounts for such purposes, other than the purchase of foreign currency, as may be proposed by the several creditor States and as the Committee does not consider likely to compromise the stability of the Bulgarian exchange. 7. The Transfer Committee shall have a right to demand all information of utility for the discharge of its duties, especially as to the preparation of and carrying into effect the budget, the situation of the Treasury and the management of the National Bank of Bulgaria. The Committee in particular will have a right to examine without restriction into the exchange market and the establishment of the statistics of foreign commerce. 8. If the Transfer Committee, by a decision which may be taken by a majority only, provided that the President is among the majority, finds that concerted financial manoeuvres have been made either by the Bulgarian Government or by any group for the purpose of preventing repara tion transfers, the Bulgarian Government undertakes to take any measures which the Transfer Committee might require from it to defeat the effect of the manœuvres which have been detected and to prevent their repetition (including the appointment by the Transfer Committee of a Counsellor at the National Bank of Bulgaria with the powers necessary to supervise the execution of any such measures). 9. The expenses of the Transfer Committee and in particular the remuneration of its members shall be fixed by the Reparation Commission and charged against the Bulgarian Govern ment. The members of the Committee shall not be entitled to any remuneration except for periods during which the Committee is in operation. 10. If the Transfer Committee, after having been called into operation, at any time decides that the conditions of the Bulgarian exchange are such that reparation transfers can thenceforth in all probability be effected without danger to the stability of the exchange and if at the same time the Bulgarian Government undertakes to carry into effect reparation transfers in future, the Transfer Committee will suspend its operations without prejudice to their resumption at any time when, contrary to expectation, the Bulgarian Government presents a new request for the total or partial suspension of reparation transfers. 11. Any question of interpretation of the present schedule shall be decided by the Transfer Committee without appeal. (Signed) S. A . A r m it a g e -S m it h .
B.
E x t r a c t f r o m L e t t e r f r o m M. D u b o is , C h a ir m a n o f t h e F in a n c ia l Co m m it t e e , to the P r e s id e n t o f t h e C o u n c il o f t h e L e a g u e o f N a t io n s .
August 5th, 1926.
[T ranslation.] I have the honour to inform you that the official text of these decisions 1 has been submitted to me and that, after verification, I have found them in conformity with the recommendations made by the Financial Committee in its report to the Council of June 9th, 1926.
ANNEX II.
SITUATION IN DANZIG.
Report by M. Janssen.
On July 1st, 1926, I received the following telegram from the President of the Council: “In compliance with request High Commissioner Danzig and desire Senate Danzig, I wish to invite you to visit Danzig with a view to studying financial situation. Much hope you will be able to give this valuable assistance which would be greatly appreciated. Understand Secretary- General is communicating with you as to details. — G u a n i, President Council.”
1 Decisions I, 2 and 3 (with schedule) above. — 9 —
The telegram from the Secretary-General referred to was as follows: " Reference unofficial telegram have received request High Commissioner Danzig that you should be invited visit Danzig to enquire into financial position. Am asking President Council send you formal invitation. Meantime much hope you will be able give this valuable assistance which we should greatly appreciate. Propose if you agree that Jacobsson should reach Danzig fifth and await your arrival which I hope could as discussed be tenth. — D r u m m o n d . ” I was glad to be able to accept this task and on July ioth, I arrived in Danzig, where I joined M. Jacobsson, who had preceded me by four days in order to collect and prepare material for the enquiry. We both remained in Danzig until July 15th. I had the opportunity of constantly consulting the High Commissioner, Dr. Van Hamel, and of meeting the President and other mem bers of the Senate, the leaders of the main political parties, the President and the Vice-President of the Bank of Danzig, as well as other prominent bankers and representatives of the Danzig Chamber of Commerce and of trade unions. I was also able to meet Dr. Strasburger, the General Commissioner of the Polish Republic in Danzig, and the President of the Harbour Board. During the relatively short time at my disposal, I have tried to study not only the financial position of the Free City but also the economic situation, which appears to me to be more difficult than I had expected. I wish to express my appreciation of the assistance I have received from M. Jacobsson.
A. E c o n o m ic P o s it io n . In pre-war days, the territory which now forms the Free City of Danzig based its economic life on the following main factors : (a) Danzig was an export and import harbour not only for Eastern Germany but also for a great part of pre-war Russia ; Danzig was, for instance, able, under the Russian Zone Tariff, to participate to some extent in the grain export from the Volga District. The competition of the two rival ports of Kônigsberg and Stettin was, however, seriously felt. (b) Agriculture prospered and was known for its excellent breed of cattle. (:■) Important State factories had been established in Danzig, especially military workshops and naval wharves, which, in the decade immediately preceding the war, had to meet a demand steadily rising with the increase of armaments. Private industries were relatively insignificant, attempts that had been made to found ironworks in Danzig having failed completely. (d) Danzig was the centre of the East Prussian Administration and an important military station. At the end of the war, Danzig became the natural harbour of Poland and thereby an important international trading centre, but she lost the advantages attending the inflow of public money from the whole of Germany. This loss did not, however, reveal itself during the inflation period. On the contrary, several new industries were founded in order to provide for the Polish market with wiiich Danzig had been connected in a Customs union, and there were a fewr years of artificial prosperity with no unemployment. The introduction of a stable currency in Danzig with the aid of the League of Nations in the autumn of 1923 coincided with the stabilisation of the German mark and preceded the introduction of the zloty in Poland by about eight months. The year 1924 wras no doubt a year of business restriction, lack of capital and reduced output, but the labour market was not yet seriously disturbed, the number of unemployed averaging about 2,000. We find in Danzig the same phenomenon as had previously been experienced in Austria, and w'as at the same time apparent in Germany, namely, that the height of the stabilisation crisis is not reached during the year immediately following the currency reform. The careful currency policy adopted by the German Reichsbank, aiming at the rationing of credits at moderate rates rather than at an immediate elimination of the unfit firms by free and unhampered competi tion, has of course played an important part in this connection. The increase in the note circulation that took place provided the means for a helpful credit policy. The notes of the Bank of Danzig, which began its operations in February 1924, increased from 14.2 millions on March 31st to 31.9 millions on December 31st, 1924. The following table shows certain indices of economic development from the beginning of the year 1925: Ships cleared Note Rate Import Export for sea traffic circulation of discount Wholesale Cost of by sea by sea (000,000 of the Bank prices living (000 reg. Monthly gulden) of Danzig (000 tons) tons) average —— 100 100 96 94 78 January • 29.7 10 158 — 60 145 I29 February . 29.8 10 157 — 42 88 103 March . . • 3i -7 9 I36 138 76 115 123 April . . ■ 30.1 9 149 140 60 112 137 May . . • 30.9 9 147 14c 67 96 139 June . . • 32.9 9 148 146 71 96 122 July . . • 34-2 9 148 146 90 122 156 August . • 33-4 9 149 147 78 177 1/9 September • 35-3 9 149 141 46 210 169 October . • 34 9 I 5T 142 28 294 201 November • 32.7 9 153 140 25 256 184 December . 34.6 9 149 135 5» 321 220 IO ---
Note Rate Import Export Ships cleared of discount Wholesale Cost of circulation by sea by sea for sea traffic of the Bank prices living (000 reg. (000,000 (000 tons) gulden) of Danzig tons) Jan u ary • 32.3 8 148 134 35 331 222 February • 31.8 8 148 133 30 313 184 March . . • 33-5 8 146 131 54 407 234 April . . • 33-3 8 142 132 35 405 263 May . . • 3 2 .6 7 143 132 — — 260
At the beginning of July, the Bank of Danzig reduced the rate of discount to 6% per cent and the Lombard rate to 7% per cent. It will be seen from the table that the note circulation has remained practically constant; that interest rates have been reduced ; that wholesale prices and especially the cost of living have fallen ; that import by sea is less than before the war; but that the export trade and the activity in the harbour have attained record figures. The number of unemployed, which had been at an average of 2,000 during the year 1924, rose to about 8,000 in April 1925 and reached a high peak of more than 21,000 in February 1926, from which it has fallen to about 15,000 in July 1926. (These figures include those of the unem ployed who, for some reason or other, are not entitled to relief, while the figures quoted on page 17 hereafter comprise only those who are in receipt of relief.) There are in Danzig about 70,000 workers and about 20,000 salaried employees, making a total of 90,000. 21,000 unemployed represented 23 per cent of this total, and the present unemployment of 15,000 is at the rate of 16 to 17 per cent. In the development of the economic position since the beginning of 1925, the following factors appear to have been of primary importance : (a) The appreciation and return to gold parity of the pound sterling during the spring of 1925 automatically increased the value of the Danzig gulden. The exchange rate on Germany improved from 135 gulden = 100 German marks, current in 1924, to 123 gulden = 100 German m arks at the beginning of May 1925. This increase in the gold value of the gulden led to a fall in the price level (see the table above) and to a consequent increase in the real value of salaries, wages, etc. (b) The general crisis which swept over Europe during the latter part of 1925 and which increased the number of unemployed in Germany from about 300,000 in the summer of 1925 to more than 2 millions at the beginning of 1926, was of course also felt in a trade centre like Danzig. (c) The depreciation of the zloty in the summer of 1925 and the acute economic depression in Poland were particularly harmful to Danzig, not only because the lack of purchasing power of the Polish market reduced the import trade of Danzig (see the above table), but also because Danzig merchants had advanced considerable amounts in zloty to their Polish customers. The losses suffered on these advances are difficult to estimate, but they have no doubt been high. The measures adopted by Poland to restrict the import in order to reduce the requirements of foreign currencies led to a further reduction in the commercial transactions in Danzig. (d) The trade war between Poland and Germany appears on the whole to have had bad effects on Danzig trade, partly because it reduced purchasing power in Poland and partly because it prevented normal trade relations between Danzig and her German business connections. The Free City has, however, the right of importing certain quantities (so-called “ contingents ”) of German goods for the needs of her own market (for home consumption and for industrial pro duction). When the German market was closed, efforts were made by Poland to find other markets, and large exports of coal and timber have been directed via Danzig, mainly to Finland, the Scandinavian countries and, during the present coal strike in England, also to markets which are otherwise supplied only with English coal. The foregoing table shows the great increases in goods exported via Danzig, the activity of the Danzig harbour never having been so intense as at present. While in 1913 an average of 78 ships per month cleared the harbour, the correspond ing average for the first five months of this year amounted to not less than 233. This develop ment is also due to measures taken by Poland to favour railway transport to Danzig and thus to assist Danzig in the competition with rival ports. The increased export has not brought any substantial relief to the Danzig labour market, the total number of workers employed in the handling of coal in the harbour being only 180. Coal contracts are generally negotiated directly between the firms in Upper Silesia and the foreign purchaser, leaving no profit to the middleman in Danzig, while most of the Polish export of timber is sold through Danzig firms. (e) The state of agriculture is particularly affected by the competition from Poland, which, on the other hand, provides the consumer with relatively cheap foodstuffs imported free of Customs duties. While the farmers in Danzig have to pay wages which are considerably higher than the Polish and even higher than those paid in the neighbouring districts of Germany, and have also to purchase their agricultural machinery at prices considerably increased by the Customs duties in the Polish tariff, the quotations on agricultural produce are being pressed down by the supplies from Poland. Danzig farmers have been compelled to borrow by discounting bills in private banks. Recently, the Danzig Hypotheken-Bank has been able to grant long-term loans at a rate of n per cent, 14 million gulden having been obtained from abroad at the rate of 8 per cent, w ith an issue price of 95 per cent. During the present summer the agriculturists have, moreover, suffered great losses by floods in the low-lying districts of the Free City. (/) The representatives of trade and industry have insisted that the burden of taxes and social charges in Danzig is too heavy, and that it constitutes a serious obstacle to trade recover)'' — I I —
The following table shows the enormous number of persons who are dependent upon the State and other public bodies for their living : Including Families Unemployed in July 1 9 2 6 ...... 15,000 50,000 Officials ...... 9,100 28,000 Former German officials and war-invalids 16,000 So-called Kleinrentnern ...... 2,000 Persons in receipt of invalidity pensions .... 25,000 Other p e n s io n e rs ...... 4,000
125,000 or not far from one-third of the total population.
It is true that the greater part of the pensions to war-invalids is paid for by Germany, but it must be admitted that the figure is very high. The number of persons in receipt of invalidity pensions is three times as great as before the war. This increase appears partly to be due to the pensions granted to war-orphans and war-widows, partly to the fact that at present pensions are granted to persons having completed their 65 years, no proof of invalidity being demanded. (g) It has often been maintained that wages in Danzig are higher than those in Germany. It has not been possible in the short time available to investigate the question, but the Senator in Charge of Social Affairs believes that wages in Danzig are on an average the same as in Germany— in a few branches higher and in others lower. * * *
It is, of course, difficult to estimate the relative importance of the factors enumerated above in regard to the present depression in Danzig. The official publication, the Danziger Statistisch-e Mitteilungen, of March 31st, 1926, contains an article in which the unemployment in Danzig at the beginning of February 1926 is compared with labour conditions in Germany. It is found that “the unemployment in Danzig such as it was at the beginning of February 1926 was primarily caused by the economic crisis which began after the stabilisation of the currency in Danzig and in the neighbouring countries”, and that it should be regarded as a reaction against the artificial activity of the inflation period. Data are given to prove that the unemployment in Danzig corresponds to the average in Germany and is not worse than in the great harbours of Northern Germany. The following table, quoted from the article, shows the total number of unemployed, including those who are not entitled to unemployment benefits : Number Per 1,000 inhabitants Free City of D anzig ...... 21,663 56.6 B r e m e n ...... 19,885 59.6 H am burg...... 60,160 53.3
It is, however, undeniable that Danzig is especially dependent upon the currency conditions and the purchasing power in Poland, having regard to the close relations of a political and commer cial character between the two States. The losses suffered by Danzig merchants on advances granted to Polish customers made themselves particularly felt on the capital market, and it is therefore perhaps natural that the report of the Bank of Danzig for the year 1925 lays great stress on the dependence of Danzig on conditions in Poland and attributes the present difficulties in Danzig mainly to the economic and financial crisis in Poland. It must be admitted that it is exceedingly difficult to foresee what the future developments of trade and industry in Danzig may be. The official persons consulted were mostly pessimistic— perhaps too pessimistic. The Senate expects that unemployment will rise to above 20,000 during the coming winter. There are even those who maintain that the number of industrial workers is permanently too great. They point out that the pre-war industry was mainly based on orders from the State for military and naval purposes, and that no similar orders can be expected in the future. The orders placed by the Polish Railway Administration for construction of wagons, etc., and for repairs have been helpful but not sufficient to provide full employment. The following table shows the distribution of the population in Danzig, the figures for 1907 and 1923 being compared : All persons, excluding dependents Percentage Distribution 1907 1923 1907 1923 Agriculture and f o r e s tr y ...... 35-533 32,329 24.55 18.65 Industry and mining...... 44,446 49,643 30.72 28.64 Trade, transport and hotels. . . . 21,158 47,545 14.62 27.43 Wage-earners and domestic servants 5,917 8,131 4.09 4.69 Liberal professions and public s e r v ic e s ...... 14,648 13,608 10.12 7.85 Persons without profession .... 22,995 22,063 15.89 12.73
T o t a l ...... 144,697 173,319 100 100 Total dependants 171,685 193,411 Total population 316,382 366,730 — 12 —
It will be seen from this table that the absolute number of industrial workers has risen, while the percentage relation has fallen. A notable reduction from 10,392 in 1907 to 8,254 in 1923 may be registered in the number of persons occupied with house construction. On the other hand, the number of persons occupied in trade, transport and by hotels has more than doubled, which is no doubt a development in the right direction. A few other favourable factors affecting the labour market may be pointed out : (a) While at present the children finishing school at the age of 13 to 14 number about 7,000, there will be a fall to 6,000 in 1928, 5,000 in 1929, 4,300 in 1930 and less than 4,000 in 1931, as a consequence of the relatively small number of children born during the war period. This reduction will diminish the pressure on the labour market in Danzig, as in most other European countries. The increased number of children born in 1920 will not make itself felt before 1936. (b) Almost all the representatives of trade and industry who were consulted expressed the opinion that the wrorst period had already been passed, and that not a few signs of improvement could be detected. The Schichau wharves, w'hich last winter were employing only 600 workers, have concluded contracts which will necessitate the employment at the beginning of next year of as many workers as the wharves ever employed in peace-time, i.e. 3,000. (c) It was also pointed out that, while the great export surplus of Poland during the first few months of this year had to be utilised for the repayment of outstanding credits, the surpluses that have since been obtained have been available for increased purchases abroad, wdiich may be seen from the fact that imports into Poland have shown an upward tendency during the last few months. The increased imports for the Polish market which may be expected to continue are distinctly the sign of a more favourable development. (d) The rates of interest have fallen considerably during the last two years. While at the beginning of 1924 the rate of interest charged on commercial bills was above 20 per cent, private banks are now charging 9 x/ 2 per cent {i.e. the official bank-rate plus a commission of 1 /4 per cent per month). It is, moreover, anticipated that the Bank of Danzig will be able further to reduce its rate of discount. During the present depression period, the Bank’s holding of commercial bills has fallen considerably, and no increase has so far followed on the recent reductions in the bank rate. If all foreign assets of the Bank are added to the metallic cover, the notes in circulation are in fact covered by more than 100 per cent. The total savings deposits in Danzig amount to about 17 million gulden, which have been collected in two years and, even though part of this may consist of funds set free during the period of liquidation, a considerable portion represents real savings. (e) The elimination of unsound firms w h ic h started business during the inflation period has for the most part been effected. Two years ago there were about 100 banks and bankers in Danzig, the present number being 41, including savings banks. There has also been an introduction of more economical methods of working, private business again applying a regime of economy and close calculations.
It wrould be wrong not to mention these more hopeful aspects of the situation, but it cannot be denied that an unemployment figure of 15,000 at the best period of the year indicates that Danzig has still a long way to go before normal conditions are restored. This difficult period of reconstruction will probably still last for at least two years. The question arises whether any measures can be taken in order to facilitate the recovery. Apart from a reduction in the fiscal and social burdens, which will be discussed later on in the report, there are not many immediate remedies which the State can apply. On the whole, Danzig will have to wait for an improvement in trade conditions in Europe generally, and particularly in Poland, and also to play her part in establishing a new equilibrium of prices, cost and production. The necessary readjustment will more easily be obtained if the economic life is freed from limitations and restrictions imposed during and after the war. It would, for instance, no doubt be to the advantage of Danzig to abolish rent restriction as speedily as possible. The rents paid at present are at 100 per cent of the pre-war rents. It is expected that, if the market were free, there would be a rise to about 140 per cent of the pre-war rent. It has been proposed that the State should make an attempt to conclude a loan the proceeds of which should be devoted to construction of houses. This plan is specially favoured by the trade unions, as a greater activity in the building trade wrould lead to a great improvement on the labour market. Only 300 dwellings are being built at present (and those only with the aid of the municipalities), as compared with a pre-war average of 800 to 900 dwellings per annum. It is also thought that it would be politically easier to carry through the abolition of the rent restriction if such a measure w'ere combined with investment of capital, with a view to reducing the house shortage. Much criticism has been directed against the regulations of the labour market by which wages can in the last instance be fixed by an official authority. When a dispute arises, the two parties have to bring the question before a so-called Schlichtungsausschuss, which eventually grants an awrard. This award may by either party be brought before the so-called Demobilmachunt’S- Kommissar, who makes an attempt to reconcile the parties. If this attempt is unsuccessful, the Kommissar may declare that the original award of the Schlichtungsausschuss, is binding. Such declarations have been made in about 30 per cent of all cases. This system has no doubt helped to keep Danzig free from strikes and lock-outs, but it is maintained that the wrages fixed by the official bodies have been too high. It has not been possible during the time available to enter more fully into this question. — 13 —
B. T h e F in a n c ia l P o s it io n .
I. Summary of Budget Accounts. Budget equilibrium was maintained during the difficult years of acute inflation, 1921 and 1922, The new currency of Danzig, based on the pound sterling (£x = 25 gulden), was introduced in October 1923. The financial year 1923-24, of wrhich only five months fell within the period of the stable currency, closed with a surplus of 750,020 gulden, and the financial year 1924-25 with a surplus of 2,374,302 gulden. The closed accounts for 1925-26 are not yet available, as the books are still (July 1926) kept open in order to permit the inclusion of revenue and expenditure items in respect of that year. The financial administration expects, however, that, in spite of the fall in revenue during the winter of 1925-26, there will be a surplus of about 1,000,000 gulden. The favourable results of the year 1924-25, in spite of a considerable increase in salaries during that year, wrere mainly due to the surplus receipts from Customs duties, which yielded 23,072,104 gulden, as compared with an estim ated amount of 8,283,500 gulden. It should be noted that the totals of expenditure and revenue contained in the closed accounts of a given financial year not only include cash receipts and expenditure but also outstanding revenue claims (uncollected taxes) and liabilities incurred which legally belong to that year. In the autumn of 1925, outstanding revenue claims, mostly consisting of Customs credits and other tax credits granted by the Finance Department, amounted to about 20 millions. These claims were considerably reduced during the last months of 1925 and the beginning of 1926. At the end of March 1926, they amounted to 10.4 millions. There are, however, liabilities not yet liquidated which represent a first charge on the uncollected revenue. These liabilities amounted to about 8.2 million gulden at the end of March 1926, so that the “ arrears of revenue ”, so to speak, exceeded the “ arrears of expenditure ” by about 2.2 million gulden. This figure signifies that, of the budget surpluses from 1923-24, 1924-25 and 1925-26, amounting to a total of 4,125,000 gulden, 2.2 millions are immobilised in outstanding tax credits over and above outstanding liabilities. The tax credits are as follows:
(a) So-called Customs credits granted for a period of from three to six months at a rate of interest equal to the discount rate of the Bank of Danzig. The highest rate reached was 12 per cent, the present rate being 6 y2 per cent (July 7th, 1926). These credits are virtually advances made by the Free City, as the Government is obliged to pay the bills due to Poland on the basis of assessed amounts, the postponed collections thus being undertaken solely at the risk of Danzig. Credits on the same conditions are also granted in respect of the excise duties on alcohol, tobacco and sugar. (b) Regarding direct taxes, credits are granted at the same rate of interest as the discount rate of the Bank of Danzig, mostly against mortgages on taxed property. The same condi tions are also applied to the amounts due by defaulting taxpayers when the period does not exceed three months; while in other cases the interest charged rises to 3 per cent above the rate of discount of the Bank, with a maximum of 12 per cent. The following table shows the outstanding amounts at different dates:
Customs credits Outstanding Dates (including credits in direct taxes End of : respect of excise duties) June 1 9 2 5 ...... Gulden 10,700,000 1 September 1925...... 9,450,000 1 December 1925...... 7,000,000 1 March 1 9 2 6 ...... 4,300,000 6,100,000 June 1 9 2 6 ...... 3,000,000 1
It will be seen that outstanding Customs and excise credits have accordingly been reduced from 10.7 millions in June 1925 to 3 millions at the end of June 1926. The Government, being faced with a reduction in available balances, decided to call in outstanding tax credits. It is remarkable how' easy the liquidation has been, a fact which can only be explained by reduction in imports, which, on the one hand, led to less demand for new credits and, on the other hand, liberated capital from commercial employment. Of the 3,000,000 gulden of outstanding Customs and excise credits, 2,000,000 are in respect of Customs and 1,000,000 in respect of excise duties. The outstanding direct taxes are mostly due by agriculturists, who are solvent but lack funds, especially before the harvest. The peasants in the territory of Danzig have suffered from the low quotations on grain and other agricultural products in Poland. The total of 6.1 million gulden shown in the above table is obtained after deducting from the gross amount of outstanding tax credits (8.7 millions) 2.6 millions which will probably prove impossible to collect. In addition to the budget surpluses, the Free City has a reserve constituted by the profits *rom the issue of coinage, which profits have not been included in budget revenue. Silver coins have been minted to an amount of 10 million gulden, but only 7 to 8 millions of these have been Put into circulation, the export of coins to the neighbouring States having been somewhat less
1 Exact amount not available. — 14 —
than had been expected owing to the fact that both Germany and Poland stabilised their currencies soon after Danzig had done so. The 2 to 3 millions which have not been issued are held by the Bank of Danzig, which has the right to include them in the supplementary note cover. During the financial year 1925-26, the Free City also obtained funds from the issue of Treasury bills (Schatzanweisungen). (a) In order to meet the requirements of the Treasury at the end of June 1925 (the end of the first quarter of the financial year, when salaries had to be paid in advance and the quarterly setttlement of Customs duties had to be made with Poland), the Government discounted Treasury bills amounting to 750,000 gulden at the Mendelsohn firm in Amsterdam. At the same time, 500,000 gulden of Treasury bills previously issued were renewed at 9 per cent, and these bills were still outstanding on March 31st, 1926, while the tranche of 750,000 gulden had been repaid on September 15th, 1925. (b) On September 25th, 1925, the Government issued 5,000,000 gold marks (equal to 6,190,000 gulden), which wrere discounted at the Preussische Seehandlung. (It is one of the most important functions of the Preussische Seehandlung to sell Treasury bills of the Reich and local authorities in Germany to the public.) This first tranche of Treasury bills was fully repaid on November 30th, 1925, but new bills to the amount of 5 million gold marks were again issued on December 17th, 1925, and these bills are still outstanding. The present bills, which have a currency of three months and are discounted at 8 per cent (formerly 8% to 10 per cent), will fall due on September 25th, 1926. At the end of March 1926, the Treasury was obliged to provide funds for the following purposes: (a) Advances to the Gas and Electricity Works (1.7 million gulden) and to municipalities for house construction (1.3 million gulden), making together 3,000,000 gulden. The house construc tion and the other works are started in the spring before the revenue earmarked for these purposes becomes available. (b) Advances in respect of salaries for the first month of the financial year 1926-27 (3.8 mil lion gulden) and in respect of pensions to former officials and disabled soldiers and their families (1.1 million gulden). The system of paying salaries and pensions in advance (or ftrenumerando, in the administrative terminology) is also applied in Poland and Germany. (c) Advances of 3.7 millions to the Fixed Property Administration of the Municipality of Danzig, for the purchase of land, which will be needed in the future for the laying out of streets, etc. It might be argued that these advances ought to have been accounted for as budget expenditure for capital purposes. (d) Advances in respect of future budgets, amounting to 1 million gulden on account of the construction work on the Westerplatte. The total expenditure to be borne by the Free City of Danzig as her share of the construction work on the Westerplatte has been distributed among the budgets of three consecutive years, but the actual work has been proceeded with so quickly that the Danzig Treasury7 has been obliged to advance funds for the construction. (The system of distributing costs over several budget years is applied in order to prevent a deficit being shown in the budget, as would happen if the total cost of an extraordinary investment were fully charged to the year in wiiich the outlay was actually made. It is, however, obvious that under this system the budget does not show the actual expenditure for the financial year in question and that, on the other hand, the working capital of the Treasury is being tied up in advances in respect of future budgets. Dr. Volkmann fully appreciates the defects of the present system, which, in my opinion, should be changed immediately.) (e) Cash held by different offices, amounting to a total of about 800,000 gulden.
The Treasury position at the end of March 1926 may thus be summarised as follows : (a) Surpluses from previous financial years : Gulden 1923-24 ...... 750,000 1924-25 2,375,000 1 9 2 5 -2 6 ...... 1,000,000
Total ...... 4,125,000 (b) Profits on issue ofco in a g e ...... 5,000,000 (c) Credits in the form ofTreasury bills discounted at: the Seehandlung...... 6,190,000 Mendelsohn & Co...... 500,000
Total funds available...... 15,815,000 These funds were utilised as follows : (а) Difference between outstanding revenue claims (tax credits) and lia bilities incurred but not yet paid fo r ...... 2,200,000 (б) Advances to Gas and Electricity Works and for houseconstruction . 3,000,000 (c) Advances in respect of salaries and p e n s io n s ...... 4,900,000 (d) Investm ents for purchase of l a n d ...... 3,700,000 (e) Advances in respect of future b u d g e ts ...... 1,000,000 (/) Cash ...... 800,000
Total ...... 15,600,000 — i5 —
The assets and liabilities of the Treasury in the table above include also a part of the working capital required by the Municipality of the town of Danzig, the advance of 3.7 millions being granted to the Municipal Fixed Property Administration and 3 millions to the Municipal Gas and Electricity Works and for house construction. The remainder of the working capital of the town, which may be estimated at 1,000,000 gulden, was provided for by surplus balances available from previous years. It will be seen that the Free City was compelled to have recourse to credit operations in the financial year 1925-26, although the accounts of that year show a small surplus, the borrowed funds being needed in order to provide working capital for the Administration when the surplus receipts previously obtained from Customs disappeared. These credit operations, the proceeds of which amounted to 6,690,000 gulden on March 31st, 1926, represent an initial charge prior to whatever deficit may arise in the financial year 1926-27.
II, Developments during the First Quarter of the Financial Year 1926-27 (Months April to June). When the budget estimates for 1926-27 were prepared, it was evident that the sources of revenue would not flow as richly in the coming financial year as they had done previously. The Senate therefore decided to limit as strictly as possible all appropriations for material (sachliche Ausgaben). Salaries and social benefits remained the same, but the number of officials was further reduced. The budget also provided for the introduction of a tobacco monopoly, which should yield 5 million gulden. By these measures, revenue and expenditure were made to balance, but it is now evident that a deficit will arise owing to the facts : (a) That Customs receipts continue to decrease ; (b) That the tobacco monopoly has not been established, mainly owing to the illness of the Finance Senator, Dr. Volkmann ; and (c) That unemployment expenditure has exceeded the provisions of the budget. The return from direct taxation and excise duties, as well as ordinary expenditure, has so far closely corresponded to the estimates, but the continuation of the depression may render the collection of direct taxes more difficult in the winter months. The following table gives approximate figures of actual receipts and expenditure of the main collecting and paying offices of the City for the three m onths April, May and June 1926. It should be explained that the Staatshauptkasse, the central exchequer, so to speak, receives the net surplus of certain municipal Kassen, but, on the other hand, has to pay the salaries of all municipal officials except those employed by the Gas and Electricity Works and some other undertakings. Likewise the proceeds of the Municipal Loan are accounted for at the Staatshauptkasse. The intimate connection between the financial organisation of the City and Municipality of Danzig makes it impossible to separate the current transactions of the two bodies before the accounts are finally closed. April May June Gulden Gulden Gulden Revenue : Customs and excise d u t i e s ...... 2,702,000 2,098,000 1,400,000 German contribution to p e n s io n s ...... 1,232,000 1,147,000 901,000 Net receipts from Kàmmereikassen...... — 122,000 252,000 Proceeds of municipal l o a n ...... —— 196,000 Other r e v e n u e ...... 500,000 500,000 500,000
Total revenue...... 4,434,000 3,867,000 3,249,000 Expenditure : Requirements of the Staatshauptkasse . . . 2,116,000 1,673,000 1,347,000 Requirements of Kàmmereikassen...... 396,000 — — Repayment of loan to the Hypotheken-Bank — — 1,000,000 Pensions and other social expenditure. . . . 1,500,000 1,500,000 1,500,000 S ala rie s...... 2,700,000 2,700,000 2,700,000
Total expenditure . 6,712,000 5,873,000 6,547,000 Cash deficit .... 2,278,000 2,006,000 3,298,000
The total cash deficit for these three months amounts to about 7,582,000 gulden. Of this deficit, 5,250,000 gulden have been covered by the following credit operations: (a) Treasury bills discounted by Mendelsohn to an amount of 2 million gulden (in two tranches of 1 million each) ; (b) A loan of 1,000,000 gulden from the Danzig Hypotheken-Bank, which, however, was repaid on June 25th, 1926; (c) Two loans, together amounting to 3,250,000 gulden, from the Municipal Savings Bank (Sparkasse der Stadt Danzig). The remaining deficit of 2.3 millions has mainly been met by the calling-in of outstanding tax credits.
1 The reduction in Customs and excise receipts during the month of June is due to the quarterly clearing with the Polish Customs Administration. — i 6 —
The following table shows the short-term credits outstanding on July ist, 1926:
Amount : Due on Gulden (a) Treasury bills discounted by Mendelsohn & Co...... 1,000,000 July I 5th, 1926 (b) Do. do ...... 1,000,000 )) 20th, )) (0) Do. do...... 500,000 Sept. ISth, )) (d) Lombard Loan of 5,000,000 marks against Treasury bills . 6,190,000 » 25th, » (e) Loan by the Municipal Sav ings B a n k ...... 3,000,000 » 25th, )> (/) Do. do. 250,000 July 12th, )>
Total 11,940,000
The deficits that arise in July and August may partly be covered by the payment of 1,000,000 gulden due by the Harbour Board to the city, but the Treasury must also have recourse to credit transactions, which will augment the floating debt by a further amount.
III. Estimated Deficit in the Financial Year 1926-27 on the Basis of the Stipulations in Force on Ju ly 1st, 1926. Dr. Volkmann expects that Customs duties and receipts from tobacco will yield less than estimated, and that, on the other hand, the budget appropriations for unemployment and debt service will be exceeded. 1. Danzig is inside the Polish Customs barrier, but the Customs Administration in Danzig is in the hands of the Free City; its expenditure is thus expressed in gulden, while the receipts are fixed in zloty. Danzig receives at present 7.8 per cent of the total Customs revenue collected by Poland and Danzig. The Customs receipts were estimated at 19,689,050 gulden in 1925-26, and this amount was obtained. In the budget for 1926-27, the estimate was reduced to 16,600,000 gulden for the following reasons :
(a) Imports during the year 1926-27 were expected to be lower on account of the trade war between Poland and Germany, the reduction of the purchasing power of the zloty and the import restrictions imposed by Poland. (b) The zloty stood at 70 per cent of its gold value.
Since the budget was prepared, the zloty has fallen to about 50 per cent of its gold value, involving a further loss. The Polish Customs tariff had not been valorised at the beginning of July 1926, but a few individual items had been increased. The following table shows the receipts by Danzig from Customs :
Amount of Total Rate of of Zloty Period Receipts in Receipts in exchange of receipts expressed in Gulden Gulden Zloty the Zloty in Gulden July-Sept. 1924 1,010,072.93 4,103,839 I0 8 4,432,146 5,442,219 Oct.-Dec. )> 1,156,724.94 5,942,564 105 6,239,692 7>396,4I 7 Jan.-March 1925 1,008,450.26 5,976,810 XOI 6,036,578 7,045,028 A p.-June » 1,074,727.83 5,975,964 100 5,975,964 7,050,692 July-Sept. » 743,282.75 4 ,135,949 90 3,722,354 4,465,636 Oct.-Dec. » 484,703.84 2,994,304 65 1,946,293 2 ,43o,996 Jan.-March 1926 577,788.99 2,895,966 67 1,882,378 2,460,166 April-June » 550,000.— 2,800,000 50 1,400,000 1,950,000
It will b e seen that, while in the period from July ist, 1924, to June 30th, 1925, Danzig received 26.9 million gulden, in the following period, from July ist, 1925, to June 30th, 1926, she only received 11.3 million gulden. If the costs of the Customs Administration are deducted, there was in the former period a net amount of 19.7 million gulden available for June general budget require ments, while in the latter period the corresponding amount had fallen to 4.8 million gulden. It is calculated that, on the basis of the present yield, the Customs revenue in 1926-27 will amount to 8.6 millions, that is, 8 millions less than the estimate, as compared with the costs of the Customs Administration, estimated at 6.6 millions. 2. In the budget for 1926-27, provision has been made for establishing a tobacco monopoly in Danzig, which it is estimated would yield a revenue of 5,000,000 gulden, but, as said above, no progress has so far been made with the plan. The Polish tariff imposed a high duty on tobacco, which, however, applies in practice only to tobacco consumed within Danzig, as the Polish tobacco monopoly (like all State monopolies under the Polish Customs law) is exempt from pay ment of duty on imported goods. Danzig, however, receives only 7.8 per cent of the yield of the tobacco duties, as of other Customs revenue. In order to obtain the full amount of the taxes on tobacco paid by Danzig citizens, the Danzig authorities have decided to establish a tobacco monopoly. Negotiations have already begun with a Polish delegation regarding the status of the proposed monopoly. — 17 —
3- The following table shows the number of unemployed in receipt of relief, the estimated unemployment expenditure, the actual relief payments and the amounts by which the payments have exceeded the estimates (monthly figures in each case) :
Number of Estimate Actual Excess of Month unemployed per month expenditure expenditure over estimates Gulden Gulden Gulden A p r i l ...... 6,245 104,000 420,420 316,420 M a y ...... 4,985 » 345,472 241,472 J u n e ...... 4,871 » 292,054 188,054 J u l y ...... 4,625 » 326,807 222,807 A ugust...... 4,402 » 280,223 176,223 September . . . 4,803 » 291,284 187,284 October . . . . 5,975 )) 352,324 248,324 November . . . 7,660 » 529,655 425,655 December . . . 11,996 » 794,904 691,904
January . . . . 15,814 » 982,912 878,912 February. . . . 17,010 )> 1,052,116 948,116 M a r c h ...... 15,254 )) 1,174,114 1,070,114 A p r i l ...... 12,004 581,670 786,089 204,419 M a y ...... 12,500 581,670 807,685 226,015
The actual expenditure thus exceeded the estimates by about half-a-million during the first two months of the financial year 1926-27. The seriousness of the position is illustrated by the fact that the unemployment expenditure was higher than the estimates even in May, when it should normally have been at its annual minimum. The increased exports of coal and timber from Poland do not give sufficient work to counterbalance the effects of reduced purchase of Danzig commo dities. The Finance Senator expects that the annual appropriations for unemployment will be exceeded by two to three million gulden. 4. The voted budget contains only a very small appropriation for the interest payments of the short-term credit operations. At a rate of 7% per cent, and an outstanding amount of 12 million gulden, the annual interest will amount to about 900,000 gulden. The total deficit for the financial year 1926-27 may thus be estimated at the following figures:
Million Gulden (1) Loss of Customs d u t i e s ...... 8 (2) Loss of receipts from tobacco m ono p o ly ...... 5 (3) Increased expenditure for unem ploym ent...... 2 to 3 (4) Increased expenditure for interest...... 0.9
T o t a l ...... 16 to 17
This deficit may be even higher, owing to a further increase of expenditure for unemployment and reduced receipts from direct taxes. It will be remembered that the first quarter of the financial year 1926-27 led to a cash deficit of about 7.5 million gulden. The spring and early summer are particularly difficult for the Treasury, owing to the fact that capital expenditure for house construction, roads, etc., reaches its maximum at that time. On the other hand, the first quarter has carried almost half of the deficit for the whole year, and there will thus remain for the following three quarters a cash deficit of 8.5 to 9.5 millions, provided that the yearly deficit does not exceed 17 millions. (It is expected that the municipal budget will balance, so that budget can in this respect be left out of account.) The present position (July 1926) is thus as follows :
Million Gulden Short-term credits maturing every three months amount to about 12 The cash deficit still to be covered in the financial year 1926-27 if no new measures are taken is a b o u t ...... 8,5 to 9.5
T o t a l ...... 20.5 to 21.5
While it will no doubt be preferable to consolidate the floating debt which has already been contracted, the current deficit should be provided for by a budget reform. The proposals which have been put forward in this respect include the following measures :
1. Reduction of expenditure :
(«) Dismissal of officials; (6) Reduction of salaries; (c) Modification of the system of social charges. 2. Changes in the fiscal system :
( 3. Reduction in the requirements of working capital. IV. Reduction of Expenditure. The following table shows the main appropriations for the various services in the budget estimates for the financial year 1926-27 : Gulden Treaty charges ...... 90,000 H arbour Commission...... 373>000 W esterplatte ex p e n d itu re ...... 100,000 P a rlia m e n t...... 461,680 General A d m in is tra tio n ...... 2,878,010 Social and health expenditure : Pensions to former officials...... 9,116,620 Pensions for war disablement, etc...... 7 >5I 9>59° U n em p lo y m en t...... 7>73°>00° Other social and health expenditure ...... 6,785,910 C hurch...... 1,231,220 Science, Art and E d u c a tio n ...... I 4,5I 5.9I ° Internal Administration : Police expenditure 7,925,785 Other expenditure 561,615 Trade Administration 361,820 Ju stic e ...... 6,380,600 Public Works .... 2,221,870 Agriculture...... 890,280 Public undertakings : Postal, Telegraph and Telephone Services...... 13,195,600 Other undertakings ...... 7^5,49° Tax Administration : Net cost of collection...... 2,390,720 Refunds to taxpayers...... 685,510 Share in taxation of local b o d ie s ...... 17,004,200 Double e n t r i e s ...... 6,550,000 Customs A d m in istra tio n ...... 6,485,430 E x c is e ...... 1,616,610 W orking c a p ita l...... 150,000 Total expenditure, including double e n trie s ...... 117,857,180 Total expenditure, excluding double entries ...... 111,307,180 (The double entries arise from the fact that the fiscal year does not coincide with the calendar year and certain transfers of funds are made. It is, however, difficult to see what advantage is gained by this complication, which is sufficient to prevent anybody but an expert in public accountancy from understanding one of the most important parts of the budget—the estimates of the Finance Department.) If double entries, refunds to taxpayers and share in taxation of local bodies are deducted, we obtain the real expenditure by the Free City, which thus amounts to 93,615,470 gulden. Of this total, almost one-half, or 46.2 million gulden, represents salaries to officials. It should further be noted that pensions to former officials and for war disablement and expenditure for unem ploy ment amount together to a little more than 24 millions. As salaries, pensions and unemployment expenditure amount to a total of more than 70 million gulden, there remain about 23 millions for all expenditure on material, constructions, etc. When the budget estimates were prepared for 1926-27, expenditure on material, etc., was very strictly cut down, and a further reduction t hardly possible. The question therefore arises whether an alleviation of the budget might be obtained by a discharge of officials, a reduction in their salaries, or a modification of the system of social charges. 1. Discharge of Officials.—The following table shows the number of officials and other emplo)6 of the Free City and Municipality of Danzig and other local bodies. — 19 — : City: 1923 1926 General Administration...... 273 232 P a rlia m e n t...... 25 20 Social, Church and Health Administrations . 286 139 Education, Science, Art, Archives...... 1,290 1,190 Internal Adm inistration : P o lic e ...... 2,036 i , 73i Economic A dm inistration...... 38 20 Ju stic e...... 469 408 Public W o rk s...... 64 55 Land A d m in is tr a tio n ...... 17 17 Agriculture and Forestry ...... 47 41 Various services...... 38 25 Post, Telegraph £nd T e le p h o n e ...... 1,838 i ,53o Tax A d m in istratio n ...... 634 336 Customs and E x c i s e ...... 2,288 1,419 Total Free C ity ...... 9-343 7,163 Municipality of Danzig...... 1,689 1,400 Other local bodies ...... 658 578 T o t a l ...... 11,690 9,144 It will be seen that the number of officials has been reduced by 2,549, or 22 Per cent, during the last three years. The greatest reductions have been made in the Customs Administration, which has been reduced by more than 600, and in the Police, Post Office and Tax Administrations, each of which has been reduced by about 300. The total number of public servants in Danzig is about 2.4 per cent of the total population. This figure is not essentially higher than the correspond ing percentages in other countries, but it should be remembered that Danzig has no military or naval services. The political apparatus of the Free City has been modelled on the institutions of a modern State, there being a Volkstag of 120 members, separate assemblies for local bodies and a Senate of 22 members, of whom 14 members are parliamentarians and 8 are the heads of the various adminis trative departments. These constitutional organs require a considerable number of higher officials. It is maintained that no great reduction in the numbers of administrative officials can be effected without limiting the functions of the State, and such limitation would meet with strong opposition, as it has been the intention of the Senate and the Volkstag to keep on the same high level as is maintained in Germany. But even if the functions of the State were thus limited' the savings would, it is reported, be insignificant, except in the case of rent restrictions and other limitations remaining from the war and the inflation period, the abolition of which would make it possible to discharge a certain number of officials. The main problem is whether or not the number of Customs officials, postal, telegraph and telephone officials, teachers and policemen can be reduced. The authorities maintain that the possibility of discharging Customs officials depends mainly on the concentration of the handling of goods in the harbour by the establishment of warrant houses. 300 to 500 officials might be spared in this way. It is, however, likely that there would be a great deal of opposition from land owners, and possibly also from the Harbour Board. In the river harbour of Danzig, merchants have been entitled to pass their commodities through the Customs at any point, and this privilege was somewhat cumbrous for the State, as practically all ships that arrived in the harbour came from or went to foreign countries, while, for instance, in Kônigsberg and Stettin a considerable number of the ships came from other harbours in Germany. By the introduction of automatic telephones, which is being carried out gradually as funds become available from the annual surpluses earned by the Telephone Administration, 300 officials and employés may be dispensed with. Complaints had been made that the postal service is overstaffed and carried on on too large a scale, but it has not been possible to enter into this question. It has also been maintained that the number of teachers in Danzig is relatively greater than in corresponding districts in Germany, and that the number of children per class is smaller. It is agreed by all concerned that the question of the reduction of the Police is directly a poli tical question. The primary task of the Danzig policeman is the same as that of the police in other countries, but the police in Danzig has also a subsidiary duty of constituting a reserve to fall back upon in the case of emergency, as Danzig has no army of its own. Under the present regulation, no official may remain in the service after the age of 65, and no new persons may enter the public service, except in exceptional cases after a decision of the Senate. The Finance Senator repeatedly explained that it is the intention of the authorities to continue the compression of the State services which was begun at the end of the inflation period three years ago. 2. Salaries. — The sixteen highest officials of the Free City receive salaries fixed inde pendently of the scale in force for other officials. That scale, which was accepted in 1924, is consistently one point higher than in Germany, the following reasons being given : (a) The Free City has no means of training its own officials, and has therefore to draw on supplies from Germany and must provide some special attraction. — 20 — (b) In a small State like Danzig, the possibilities of advancement are strictly limited, and officials should therefore receive some compensation. (c) At the time the scale was fixed, the cost of living was higher than in Germany. The cost-of-living index has fallen considerably during the last two years, but it is maintained that those articles which an official has to buy in addition to foodstuffs are more expensive than in Germany on account of the heavy Customs duties in the Polish tariff on anything which does not form one of the absolute necessities of life. Owing to the high scale applied in Danzig, the salaries were originally 15 per cent higher than those in Germany. Furthermore, when salaries were fixed in 1924, before the pound sterling had returned to the gold parity, the rate of conversion of German marks adopted by the law was 133 1 /3 gulden = 100 marks, while the present rate is about 123 gulden = 100 marks. This means an improvement of about 7 per cent in addition to the 15 per cent just mentioned. Since that time, the German salaries have, however, been increased by 12 % per "cent of the basic salary ( = 85 per cent of the total salary) of lowrer-grade officials, and by 10 per cent in respect of the higher grades. Germany also gives certain special grants varying from 5 to 15 per cent in the more expensive districts, and, although foodstuffs are cheap in Danzig, the price of other articles makes life very expensive for an official. It is probable, however, that the present salaries in Danzig are at least 10 per cent higher than the German salaries. It has been proposed by Herr Gehl, the leader of the Socialist Party, that the salaries of officials should be reduced to the German level. The officials have made the objection that such a measure could not be introduced without their consent or without the passing of a constitutional law, as the present salaries belong to their acquired rights which, under Article 92 of the Constitution, cannot be interfered with. (Article 92 says: “ Die wohlervrorbene Rechte der Beamten sind unverletzlich ”.) Negotiations have, however, begun with the officials in order to arrive at some agreed settle ment of the question. A reduction of salaries by 10 per cent would lead to a saving of about 4 y2 million gulden. The same pension rates are applied as in Germany : an official who has been in the service for ten years becomes entitled to a pension amounting to 35 per cent of his salary and one wiio has served for forty years becomes entitled to 80 per cent. There are no contributions to any pension fund. The pensions to officials who have served in Danzig are included in the various branches of the Administration (to judges under the heading “ Justice ”, etc.). The pension charges shown under Social Administration are all for former German officials and disabled soldiers. An under standing has been entered into with the German Government according to which Germany pays 60 per cent of the major part of the pensions (40 per cent of a minor portion). The German contri bution appearing on the revenue side of the Danzig budget is estimated at 9,197,140 gulden in the budget for 1926, so that the charge falling on Danzig is only about 7 millions. Dr. Volkmann explained that France and Denmark grant pensions to disabled soldiers living in the incorporated districts and that Danzig must do the same. The contribution from Germany is only a special favour granted to Danzig. 3. Modification of the System of Social Charges. — The invalidity, accident and salaried employés’ insurances are the same as in Germany, but the contributions falling on employers and workers are about 10 per cent higher in Danzig for the following reasons : (i) The Free City has a greater proportion of industrial workers than the average in Germany, and there is also a relatively greater number of persons receiving benefits ; (ii) before the war the insurance institution of East Prussia received an actual contribution of 50 per cent of its charges from the other part of Germany. Danzig has no unemployment insurance as exists in Germany, where the unemployment expenditure is covered by contributions from employers, workers and the State. In Danzig, the total cost is borne by the State and municipal budget, the estimate for 1926-27 being 7.5 million gulden. The Senator in Charge of Social Questions believes that the actual expenditure will amount to betw'een 10 and 12 million gulden, with a monthly outlay of a little less than 1 million in the summer months and x million or a little more in the winter months. Of the 14 to 15 thousand unemployed who are registered at present, about 11 thousand receive unemployment benefits, the difference of 3 to 4 thousand consisting of persons who have either not yet become entitled to unemployment benefit or who have means of subsistence of their own, or belong to families with means, or who have not accepted work that has been offered them. The same benefits are paid in town as in the country, and no difference is made between workers in different branches of industry. The benefits are as follows : Gulden W o r k e r ...... 2.50 W ife...... 0.60 Each c h ild ...... 0.45 The maximum benefit of 4.50 gulden is reached by a man with a wife and five children. This amount is sufficient to pay for food and rent, but hardly meets the purchase of clothes and extra expenses in the case of illness, etc. Further, a special allowance, amounting to an average of 24 gulden per month, is paid during the winter months to help in the purchase of wood, coal, etc. The normal benefits, plus t h i s special allowance, must not exceed 8 0 per cent of the wage received by the worker in his last post. The Senator in Charge of Social Affairs admitted that the control was far from strict. — 21 — It has been maintained that the benefits are so high as seriously to diminish the inclination to work. The benefits granted in Danzig are higher than those in Germany owing to : (i) the special winter allowance, which does not exist in Germany ; and (ii) the fact that, in the German insurance scheme, the unemployed are divided into certain wage classes and district classes (Lohnklassen and Ortsklassen). The Senator in Charge of Social Affairs calculates that, if the winter allowance were abolished, x million gulden could be saved, and that if the same division into classes as that in force in Germany were made in Danzig a further saving of about 2 millions could be effected If, in addition, the German system of unemployment insurance, with contributions from both employers and workers, were introduced, the State budget would be relieved to the extent of 2 millions. In Germany, the unemployed may not receive benefits during a longer period than 52 weeks, while in Danzig the period is unlimited. The following table, which has been quoted from a memorandum issued by the Department for Social Affairs, shows the total social charges borne by the Free City in comparison with the charges of 1913 : 1 9 1 3 : 1 9 1 5 : State Total State Total contribution charges contribution charges Gulden Gulden Gulden Gulden Social in su ran ce...... 414,906 8,242,887 1,665,000 18,856,344 Unemployment expenditure...... 4 ,789.156 5,715,556 Allocations to Kleinrentnern...... 728,192 910,240 Pensions to former German officials, etc...... 3,878,407 9,069,520 W ar-invalids...... —— 4,013,222 7,573,899 414,906 8,242,887 15.073,977 42,125,559 The total charges will amount to nearly 50 million gulden in 1926, on account of the increase in the unemployment expenditure. The seriousness of the situation is enhanced by the fact that the persons in receipt of these social benefits, together with their families, amount to almost one-third of the total population. V. Changes in the Fiscal System. Estimates for 1926-27. Revenue from taxation: Direct taxes on income and property : Gulden Income t a x ...... 14,600,000 Corporation t a x ...... 1,100,000 Capital t a x ...... 1,200,000 Trade t a x ...... 4,500,000 Various ta x e s ...... 100,280 Taxes on transactions : Land ta x ...... 1,000,000 Turnover t a x ...... 4,000,000 Luxury ta x ...... 750,000 Succession d u t i e s ...... 50,000 Customs d u t i e s ...... 16,600,000 Excise d u tie s ...... 18,776,000 Tobacco m onopoly...... 5,000,000 Total tax re v e n u e ...... 67,670,280 Other revenue...... 43,630,900 Total revenue, double entries excluded ...... 111,307,180 Total revenue, double entries included ...... 117,857,180 Of the total tax revenue, 17,004,200 gulden represents the share of local authorities. The autonomous taxation of the Municipality of Danzig is estim ated at 10,590,000 gulden and of all other municipalities at about 5 million gulden. We thus obtain the following figures: Gulden Taxes imposed by the Free C ity...... 67,670,000 Taxes imposed by the Municipality of D a n z ig ...... 10,590,000 Taxes imposed by other m unicipalities ...... 5,000,000 T o t a l ...... 83,260,000 Taxation per head of population . . . 217 gulden — 22 — The taxation in the Municipality of Danzig is, however, higher than in other municipalities. An approximate calculation (on the basis of the composite key for the distribution of taxation between municipalities and State) gives the figure of 250 gulden as the taxation per head in that municipality. These figures become particularly high on account of the great number of persons in Danzig whose sole income consists of payments by the State. 1. Special Tobacco Taxes and the Introduction of a Tobacco Monopoly. — The revenue estimates for the financial year 1926-27 contain : (i) an excise duty on tobacco (a Banderolensteuer) estimated to yield 3.2 million gulden; and (ii) a tobacco monopoly which should yield 5 million gulden, so that a total of 8.2 million gulden should be derived from taxation on tobacco. The tobacco monopoly has not yet been established, but in the beginning of July the Volkstag voted a sharp increase in the Banderole tax. It is not possible to estimate the extra revenue which may be obtained from this increase, as it is probable that consumption will be reduced. The increase in the tax had also been introduced in order to prepare the ground for a tobacco monopoly and as a step of reconciliation with Poland. There has been much smuggling of tobacco from Danzig to Poland. (The tobacco factories in Danzig are able to produce about thirty times the amount of cigarettes, etc., that can be consumed within the Free City.) These smuggled cigarettes had previously been taxed at the lower rate, amounting to 2 gulden per 1,000 cigarettes, while the duty has now been increased to 15 gulden, which may destroy the possibilities of smuggling Dr. Volkmann is at present negotiating with several foreign firms, who will be asked to participate in the tobacco monopoly. It is the intention of the Finance Senator to establish the monopoly on the Swedish pattern, i.e. a société mixte, in which all the capital needed is contributed by private persons, who receive interest on their bonds and shares up to a maximum fixed by law, and all surplus capital goes to the State. Negotiations have already been entered into with Poland as to the position of the monopoly with regard to the Polish tariff. This new taxation on tobacco by an increase in the Banderole tax and a new tobacco monopoly is supported by a very feeble majority in the Volkstag, and has been severely criticised in industrial circles, which maintain that the Danzig territory is too small for the proper working of a monopoly. It has also been proposed to introduce other monopolies, e.g. matches and alcohol. As in the case of the tobacco monopoly, these fiscal reforms may have the effect of preventing smuggling and of establishing a certain equilibrium between charges imposed in Danzig and in Poland. 2. New Distribution of Customs Receipts between Danzig and Poland. — By an agreement made in 1921, valid for 1922, 1923 and 1924, the distribution of Customs receipts between Danzig and Poland was fixed as follows: population figures were taken as a basis of the distribution, but the Danzig population was multiplied by six in order to compensate the Free City for the heavy cost of administration in the harbour area and to take into account the higher consumption of imported commodities in the town of Danzig than in the agricultural districts of Poland. The percentage due to Danzig worked out at about 7% per cent. Further negotiations were started in 1924, Danzig and Poland each insisting upon an increase in its relative percentage. It was not found possible to arrive at a new agreement, and the old rules fixed in 1921 continued to be applied for the time being. At the beginning of 1925-26, the distribution was based on the following figures: Population % Danzig 6 x 383,995 = ...... 2,303,970 7.8 P o lan d ...... 27,176,717 92.2 T o ta l...... 29,480,687 100 During the negotiations in 1924 and the beginning of 1925, the Danzig delegation su b m itte d statistics regarding the consumption of imported goods within the territory of the Free City and in Poland. On the basis of these data, the Danzig delegation maintained that the share of the Free City in the Customs receipts ought to be somewhere between 12 and 15 per cent of the total collected. The Polish delegation did not accept the data compiled by Danzig. It would seem as if by now both parties were agreed that the principle contained in the Paris Convention of 1920, that Customs receipts should be distributed according to the consumption in Poland and Danzig respectively, was very difficult to apply, as political science had not been able to define the exact meaning o f the term “consumption”. Is it the first or the last consumer who shall be taken into account ? If; for instance, Danzig imports leather which is worked into finished articles by Danzig industry, ana these finished articles are sold to Poland, shall the leather then be considered to have been consumed in Danzig or in Poland ? The new Senate appointed in November 1925 has to a certain extent modified the arguments put forward by Danzig. It is argued that the financial position of Danzig is such th at a substantia, sum must of necessity be obtained from Customs duties. Negotiations on this basis had just beet begun when they had to be discontinued, owing to the serious illness of the Finance Senator, Dr. Volkmann, but they were again started in June 1926. The following table shows estimates and actual receipts of the Free City: Period Estimates Actual receipts Gulden Gulden 1924-2 5 ...... 8,283,500 23,072,104 1925-26 ...... 19,689,050 (about) 19,000,000 1926-27 ...... 16,600,000 — — 23 — The expenditure on Customs administration is estimated at 6,485,000 gulden in the budget for 1926-27. On the basis of the receipts obtained at present, Danzig’s share of Customs may be estimated at barely 8,600,000 gulden, leaving net receipts to Danzig of about 2,000,000 gulden. If the 16.6 million gulden were obtained, the expenditure of the Customs Administration in Danzig would amount to 39 per cent of the gross receipts — a very high percentage, as may be seen from the following comparisons : Schillings (millions omitted) Austria: 1926 (estimate) : Customs r e c e ip ts ...... 180 Customs expenditure : Customs-houses...... 4.17 Customs G u a rd ...... 6.96 Total expenditure...... 11.13 Expenditure as percentage of revenue ...... 6 .1 8 % Number of officials: Customs-houses,1,110; Customs Guard, 2,040. Total 3,150. Francs (millions omitted) Switzerland: 1925 (closed accounts) : Customs r e v e n u e ...... 213.2 Customs expenditure ...... 1 8 .1 Expenditure as percentage of revenue 8 -5 % 1925 1926 Zloty (000,000’s omitted) Poland: 1925 and 1926 (estimates): Customs revenue . . 270 245 Customs expenditure 25.8 26.9 Expenditure as percentage of revenue .... 9 -5 % 110/ The high percentage of Danzig may at least partly be explained in the following way : (a) Customs officials in Danzig are to a greater extent than in other countries utilised for the supervision of the frontier. (b) All administration on a small scale becomes relatively expensive, a rule which applies especially to Customs administration. (c) Danzig has an unfavourable frontier-line, the disadvantage of which is enhanced by the fact that merchants are entitled to pass their commodities through the Customs at any point in the harbour. It has been said above that an important reduction in expen diture could be obtained by the concentration of the handling of goods and by the establish ment of w arrant houses. {d) A large proportion (according to Danzig, two-thirds) of the goods handled by the Customs Administration is for import to Poland. (e) The Polish Customs tariff is complicated by different kinds of surtaxes, and there is a further complication in the necessity for conversion from zloty to gulden, or vice versa. 3. Other Changes in the Fiscal System. — Considering the high taxation of 217 gulden per head of population in Danzig, it would hardly be advisable to attempt to cover the deficit by an increase in taxation. It may, on the contrary, be proposed to reduce the tax on luxury articles amounting to 10 per cent, while the ordinary turnover tax is only at the rate of 1 per cent, especially as the luxury tax has been abolished in Poland as well as in Germany. The introduction of certain fiscal changes in connection with the abolition of the rent restric tion might be contemplated. At present, the yield of the building tax (Wohnungsbauabgabe), which the municipality is compelled by law to levy, is earmarked for the construction of houses. Thirty per cent of the rents which are paid at a rate of 100 per cent of pre-war rents constitutes the building tax, which is estimated to yield 5,625,000 gulden in the municipal budget of 1926-27. the 30 per cent must also be paid by a person living in his own house. In Germany, a considerable part of the corresponding building tax is being devoted to meeting general budget charges. It mi§ht be proposed to increase rents to a normal level of, say, 140 per cent of the pre-war rent by successive increases of 10 per cent per quarter, and at the same time to utilise a part of the yield °i the building tax for the needs of the budget. This proposal may be combined with the question reducing the salaries of officials. Under the present conditions there is no construction of houses for private purposes. — 24 — VI. Reduction in the Requirements of Working Capital. At present, theFree City is in need of about 7 million gulden to meet the expenditure at the end of each quarter, when the payments reach their maximum, and to keep a minimum amount of cash balances —the latter being estimated at 800,000 gulden. In addition, 5 million gulden are required for Customs and other credits. Apart from the 3 million gulden advances to the Fixed Property Administration, which really has the character of an investment, the working capital of the Municipality of Danzig has amounted to 6.5 million gulden during the last two years. The total working capital needed at present would thus be 18.5 million gulden, to which however, a certain sum should be added for advances in respect of future budgets. Dr. Volkmann thinks th a t it would be possible to reduce the requirem ents of working capital to about 12 millions, but that such a reduction could only be carried out in the course of two or three years. The provision of a fund for working capital (fonds de roulement) should preferably take place in connection with a reform of the Treasury system, by which advances in respect of future budgets, etc., would be abolished. V II. The Issue of a Long-Term Loan. It was shown above that the situation on July ist, 1926, was as follows : Million Gulden O utstanding short-term d e b t ...... 12 Deficit to be covered — July 1926-March 1927 — if no new measures are tak en ...... 8.5 to 9.5 T o t a l ...... 20.5 to 21.5 The deficit for the period July 1926-March 1927 is here calculated on the basis of the stipu lations in force at the beginning of July 1926. Even if this deficit be reduced by the various measures discussed above, the amount needed to repay outstanding short-term liabilities and to cover current deficit will probably not be less than 13 million gulden. It has been proposed that the loan to be issued should also comprise a certain amount for capital expenditure, such as the construction of houses, the introduction of automatic telephones, the building of warrant houses in the harbour, etc. In the case of a foreign loan, Danzig would need the consent of Poland under Article 7 of the Paris Convention of 1920, which reads as follows : “ The Free City may not contract foreign loans except after previous consultation with the Polish Government, which shall communicate its reply within fifteen days. In case of any objection being made on the part of the Polish Government, the question may be sub mitted by the Free City for consideration to the High Commissioner, who shall decide under the conditions laid down in Article 39 of the present Treaty. “ It shall be the duty of the High Commissioner to assure himself that the conditions of the loan are not inconsistent with the provisions of the present Treaty or with the status of the Free City. " * * * On July ist, 1926, the liabilities of the Free City were as follows : I. Long-term d e b t ...... None IT Liabilities arising from the Peace Treaties: (a) Cost of Allied occupation ...... £227,775 4.002.709 Fr. francs (b) Share of pre-war debts of the German Empire and P r u s s i a ...... 3,763,729 Gold marks (c) Payment for former German and Prussian State property ...... 117,321,000 Gold marks Total I I ...... £227,775 4.002.709 Fr. francs 121,084,729 Gold marks Amount Due on III. Floating Debt Gulden (a) Treasury bills ...... 1,000,000 15.V II.1926 (b) ,, 1,000,000 2 0 . V II.1926 (c) „ 500,000 I 5.IX- I926 (d) Lombard loan against Treasury bills amount ing to 5,000,000 German marks. . . . 6,190,000 25.IX. 1926 (e) Credit granted by the Danzig Postal Admi nistration ...... 1,500,000 25.IX. 192® (/) Loan of the SavingsB a n k ...... 3,000,000 25.IX. I92° (g) ,, ,, „ ,, ...... 250,000 12.V II.1920 Total 13,440,000 — 25 — In addition, the following State guarantees had been granted : (a) Guarantee of bills for the Danzig wharves...... £75,000 (b) Guarantee for the Schichau w harves ...... £62,500 (c) Guarantee for private firms, more th a n ...... 5,000,000 Reichsmark The amount due on account of the Allied occupation is disputed by the Free City on the ground that the occupation was mainly for the sake of the surrounding districts. The liability on account of former German and Russian State property is still subject to minor readjustments with regard to property taken over by the Harbour Board. The advance obtained from the Danzig Postal Administration at the rate of 7 per cent is really only an internal book-keeping transaction. The following table shows the liabilities of the Municipality of Danzig: I. Liabilities in German marks: Gulden {a) Redeemable loan of nominally 10,387,956 marks, repayable at 15 gulden for 100 m ark s...... 1,558,193 (b) Mortgages, etc., of nominally 3,735,538 marks, repayable at 30 gulden for 100 m a r k s ...... 1,120,661 II. Liabilities in gold marks : Gold-mark loan of 1923: 321,287 gold m arks...... = 401,609 III. Liabilities in English currency : Loan of 1925, £1,458,750'...... = 36,468,750 T o tal...... 39,549,750 In June 1926, the Trustee of the Loan of 1925, M. ter Meulen, presented his first annual report to the Financial Committee, which was glad to note that the system of supervision of the expenditure of the loan set up by the Trustee has proved entirely satisfactory. Bank of Danzig Return, dated June 30th, 1926, in Danzig Gulden. Assets: Gulden Gulden Coin and b u llio n ...... 2,014,502 Of which gold c o i n ...... 5,328 Danzig subsidiary c o in ...... 2,009,174 Balances with the Bank of England inclusive £ sterling notes 24,223,150 Bills of exchange covering is s u e ...... 11,780,067 Other bills of e x c h a n g e ...... 84,105 A dvances...... 1,549,222 Foreign ex c h a n g e...... 15,072,511 Other balances on dem and...... 856,786 Other balances at notice...... Liabilities : Capital paid u p ...... 7,500,000 R e se rv e s...... 2,059,846 Notes in circu latio n ...... 35,182,635 Deposits on d e m a n d ...... 2,378,916 Among which: (a) Public deposits, including Savings B a n k s ...... 766,446 (b) Foreign public deposits, including Banks of I s s u e ...... 922,716 (c) Private deposits...... 524,383 Deposits at n o t i c e ...... Other liabilities...... 9 ,165,952 Contingent liabilities...... 380,000