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1913 the reserve of gold in the Julius Tiirm was raised to
240,000,000 marks, the additional 120,000,000 being ob-
tained from the Imperial Bank in exchange for treasury
notes of equal value covered by the security of the gold
itself. At the same time 120,000,000 marks in silver were
coined and added to the treasure at Spandau; and it was
provided that the entire mass of gold and silver coin,
360,000,000 marks ($85,680,000), should be transported to
the Imperial Bank, in case of war, on the first day of
mobilization, to serve as a metallic basis for the issue of
additional currency representing three times its value,
1,080,000,000 marks ($257,040,000). In this way a sum
of money would spring into being, as if by magic, large
enough, probably, to cover the government's entire ex-
penses for mobilization.

The results of the general propaganda for financial readi-
ness, conducted with German persistence and thorough-
ness, were remarkable. By July 23, 1914, the day on which
Austria-Hungary sent her fateful message to Serbia, the re-
serves of the Imperial Bank had risen to 1,756,000,000 marks
($417,928,000), including imperial treasury-notes, which the
Imperial Bank is authorized to include as part of the basis
for its note-circulation, while the circulation of notes stood
at 1.890,000,000 marks ($449,820,000). In other words, the
reserve had risen since 1911 from \b% to 93% of the circu-
lation. On the basis of these figures, there was still a margin
for increasing the circulation within the legal limit of 3,378,-
000,000 marks ($803,964,000), a sum equivalent to nearly
four-fifths of the entire public debt of the United States.

Mobilization of Financial Resources 415

The financial measures at the outbreak of the Great War,
while conveying the impression of reckless audacity, were
as deliberately planned as the military. The plan of opera-
tions called for a colossal emission of paper money to pro-
vide for the tremendous initiatory expenses of the war and
keep the machinery of trade and commerce in movement,
the legally enforced currency of this paper circulation, and
the safeguarding of the gold-supply. Gold is the most
timid of commodities. It takes flight at the first suspicion
of danger, or at the presence of cheaper money. The gold
in Russia disappeared over night, as it were, at the rumor
of a new issue of currency. The German Imperial Bank
battened down the hatches on its gold reserve and proceeded
to ride out the storm.

It is said that several months before the outbreak of the
war Herr Havenstein addressed a more urgent appeal to
the great banking houses cautioning them to restrict their
credits, to subject their portfolios to prudent supervision,
and not to depend too extensively on the central bank to
rediscount their commercial paper. The banks undoubt-
edly curtailed their industrial loans and new investments
and building activity were very much reduced.

The crisis brought enormous demands on the banks in
Germany as elsewhere. As has already been remarked, a
moratorium was not proclaimed, although the courts were
authorized in individual cases, where formal application
was made, to grant respites in the payment of obligations
for periods usually not exceeding three months, if the
circumstances merited this act of relief. The war was
financed in its early stages by enormous temporary loans
contracted by the government with the Imperial Bank.
These loans were of course represented by increased
note-circulation. The government's indebtedness to the
Imperial bank rose from 315,000,000 marks ($74,970,000)

416 The Great War

on July 23d to 2,348,000,000 marks ($558,824,000) on Sep-
tember 26th, when it fell very rapidly in consequence of
the influx of money from the government's first public
loan. The German mobilization of 1914, which has been
called the greatest movement of men in the world's history,
was certainly floated on the most formidable stream of
paper currency ever issued within so short a space of time.
The Imperial Bank was immediately relieved from the
obligation of redeeming its notes in specie. The following
table will illustrate the situation of the central bank at dif-
ferent intervals :

Metal Reserve Circulation

Date. marks. marks.

July 23d . . . 1,691,000,000 1,891,000,000

July 31st . . . 1,528,000,000 2,909,000,000

August 23d . . 1,596,000,000 4,000,000,000

August 31st . . 1,610,000,000 4,230,000,000

During the same period, July 23d to August 31st, the ag-
gregate discounts and advances increased from 751,000,000
marks ($178,738,000) to 4,855,000,000 marks ($1,155,490,000).

In addition to the ordinary banking machinery, two new
classes of institutions were established to increase the facili-
ties for credit. In the first place, the Kriegsdarle/miskassen,
or war-loan bureaus, granted loans on approved collateral,
securities, and non-perishable commodities. These bureaus
issued notes in various denominations beginning as low as
one mark as an off^set for their loans. Such Kriegsdarkhejis-
kassenscheine, or war-loan bureau notes, were not legal
tender, although they could be legally treated by the Im-
perial Bank, when in its possession, as part of the resources
constituting its basis for note-circulation. The Bank has in
practice rigidly distinguished them from its "gold cover"
in the reports illustrating its monetary situation.

Mobilization of Financial Resources 417

Tlie Kricgskredithankm, or war-credit banks, provided
credit for parties who did not have suitable securities for
the first mentioned institutions, such as shopkeepers who
became embarrassed in conseciuence of the unfavorable
state of trade. These banks were organized generally as
joint-stock companies. Their capital was largely supple-
mented by the guarantees of corporations, nmnicipalities,
and chambers of commerce. The Imperial Bank agreed
to discount their paper to the equivalent of four times the
sum of their capital and the amount of the supplementary
guarantees. Their credits were generally extended for
periods of three months and at 4%.

The first German public war-loan excited unusual inter-
est because it was the first public loan offered to the market
by any one of the belligerent powers after the commence-
ment of hostilities. The Reichstag in its historic session
of August 4th had authorized the government to borrow
5,000,000,000 marks ($1,190,000,000) for military purposes.
On the basis of this law the public was invited to subscribe,
during the period September 10-19, for treasury notes to
the amount of 1,000.000,000 marks ($238,000,000), bearing
5% interest, payable between 1918 and 1920, and for an
indeterminate amount of public funds, bearing b% interest
also, without fixed date of maturity but not redeemable
before October 1, 1924. The government reserved the
right to transfer applications for treasury notes to the class
of subscriptions for the permanent loan, since the treas-
ury notes were positively limited in amount to the sum
mentioned. Both classes of securities were offered at
97^%, so that the German government pays interest
at 5.128! 3,% on the sums actually realized. This price
for money may be compared with 3^% interest paid
by the British government on the treasury notes issued
August 26th.

418 The Great War

In announcing the subscription for the public loan, the
German government issued the following appeal to the
patriotism of capitalists:

"We are alone, and the entire world is in arms against
us. We dare not count on the assistance of neutrals; our
own unaided resources must provide the necessary financial
means for our defense. These resources exist and should
make their appearance when the enemy is at hand, in a
crisis when we must defend our existence and our position
in the world. The victories already won by our armies in
West and East justify the expectation that, just as in 1870-
1871, the expenses incurred and the burdens imposed will
eventually be borne by those who have assailed the peaceful
life of the German Empire. But, foremost and above all,
we must help ourselves. Enormous interests are at stake.
Our enemies base their hopes on our financial debility.
German capitalists! Give proof that you are guided by
the same spirit of heroism which animates our soldiers on
the field of battle. You have savings; show that these
have been accumulated not only for your personal enjoy-
ment, but also for the needs of the Fatherland.

"Corporations, institutions, savings banks, establishments,
societies, you have all increased and prospered under the
powerful protection of the Empire. Display in these
crucial hours your gratitude, the acknowledgment of your
obligation to the government. Banks and bankers, show
by your brilliant organization what your influence on your
clientele can accomplish. It is no sacrifice, however, to sub-
scribe to a loan which is presented at a moderate price and
produces a high rate of income. None of your clients can
plead the lack of available funds, since the most ample meas-
ures have been taken to render liquid the necessary sums.

"No German subject inspired with patriotism ought to
hesitate in supporting temporarily the small loss occasioned

Mobilization of Financial Resources 419

by the transfer of his capital. The German savinfjs hanks
relax to the greatest possible extent for this occasion the
restraints on the withdrawal of funds."

The results of the public subscription were as follows:


Permanent loan . 3,121.001,300 ($742,798,309.40)
Treasury notes . 1,339,727,600 ($318,855,168.80)

Total . . . 4,460,728,900 ($1,061,653,478.20)

Dr. HelfFerich, director of the Deutsche Bank, in treating
of this stupendous negotiation, declared: "There is no
parallel in history for our war loan, and it will be no easy
matter for any country on the globe to ecjual it." He
compared it with the raising of loans in France to pay the
war indemnity after 1870, the greatest financial achieve-
ment which had ever been performed at the time, when
two years were required to raise the equivalent of 4,000,-
000,000 marks. The present war seemed to him to have
afforded conclusive proof of the superiority of German
organization, and he proudly declared that "calculations
upon Germany's economical and financial debility are as
fallacious as are their (the enemies') speculations upon a
disharmony between German parties and states."

The measures adopted in Austria-Hungary to counter-
act the economic disturbances occasioned by the outbreak
of the war were similar to those in Germany. But the
Austro-Hungarian Bank discontinued the publication of
its reports, so that it is impossible to trace the variation
in its metallic reserve or obtain a survey of the other ele-
ments in the condition of this central financial institution.
Kriegsdarlehenskassen were established in Vienna and Buda-
Pesth, as in Germany, for the expansion of credit facili-
ties. They granted loans on non-perishable commodities.

420 The Great War

government bonds, and other standard collateral security at
\% above the current discount rate of the central bank, for a
maximum term of three months. Their loans were counter-
balanced by the issue of bills which circulated like currency.
The Vienna institution was authorized to issue such bills to
the aggregate value of 500,000,000 crowns ($101,500,000).

Reference has been made in Volume I to the prudent
policy of the Russian government of borrowing money
at favorable opportunities as a provision against possible
emergencies. In presenting the budget for 1914, M. Ko-
kovtsoff, the Prime Minister and Minister of Finance,
made the following significant statement:

"The possession of available funds to consolidate the
financial situation of Russia and remove any possible neces-
sity of borrowing at unfavorable periods for credit opera-
tions is particularly appropriate in view of the present
situation of the political interests of the different states."

The Russian government entered the war with large
accumulations of available cash. It had 517,000,000 roubles
($268,840,000) on account at the Imperial Bank of Russia in
St. Petersburg. Within twenty-four hours of the Austro-
Hungarian ultimatum to Serbia, the Russian Minister of
Finance, M. Bark, sent functionaries to Berlin to withdraw
securities belonging to the Russian government deposited
there amounting in value to about 20,000,000 roubles ($10,-
400,000), and he telegraphed at the same time to Berlin
bankers instructing them to remit deposits of the Russian
government of about 100,000,000 roubles ($52,000,000) to
Paris, London, and St. Petersburg. At the beginning of
the war the Russian government had credits of about
500,000,000 roubles ($260,000,000) in Paris and London.

Not alone the condition of the imperial treasury, but that
of the Bank of Russia was to all appearances very satisfac-
tory. By its regulations the bank was not permitted to issue

Reading the proclamation of a moratorium in front of the Royal Exchange, London.

Enthusiastic Frenchmen on the streets of Paris singing patriotic songs
after the declaration of war.

Mobilization of Financial Resources 421

currency for more than 300,000.000 roubles ($156,000,000)
in excess of its cover of metal. But for many years the
total value represented by the paper of the bank, in circula-
tion was actually less than the gold in its vaults. In August,
1914, the legal maximum for the circulation of bank-notes in
excess of the metallic reser\-e was increased by 1.500.000,000
roubles. The value of the notes in circulation had risen to
2,553,000,000 roubles ($1,327,560,000) on September 14,
while the metallic reserve amounted to 1,844,000,000 rou-
bles ($958,880,000). Thus the reserve was still equivalent
to about 72% of the circulation, a far from hazardous ratio.
In the meantime the government had drawn on its credit
at the bank for 286,000,000 roubles ($148,720,000), had
probably consumed a portion of its credits abroad, and had
proceeded to the issue of treasury notes for 400.000.000
roubles ($208,000,000) on August 28th at b%, for 300,000,000
roubles ($156,000,000) on September 1st at 5%, and again
for 300,000,000 roubles on September 4th at \%.

According to the original budget estimates for 1914 reve-
nue and expenditures should have balanced at 3,558,261,000
roubles ($1,850,295,000). As finally authorized this was in-
creased to 3,613,569,000 roubles. The fact that there was
actually a deficit of about 565,000,000 roubles ($293,800,000)
in the receipts as anticipated in the budget is chiefly due
to the suppression of the sale of spirits under the state

For about three hundred and fifty years the government
had shared in one way or another in the profits of the sale
of distilled liquors. The unprecedented act of self-denial
in relinquishing the revenue from this long-established
source was almost a revolutionary event in the history of
Russian state finance.

On February 11, 1914, M. Kokovtsoff retired from his
position as prime minister and minister of finance. It is

422 The Great War

reported that his fall was partly due to his tenacity in main-
taining the state monopoly in the sale of spirituous liquors.
He was succeeded as prime minister by M. Goremykin,
who had held the same position once before at the time of
the first Dvima in 1906, and who had been regarded as a
reactionary bureaucrat. M. Bark, an eminent lawyer, was
appointed to the post of minister of finance. The Tsar's
instructions to him as he assumed the duties of this office
directed him to "carry out a policy of radical reforms in
the financial administration of the state and the economic
life of the country," declaring that "it is inadmissible to
permit the favorable financial position of the state to de-
pend on the destruction of the moral and economic strength
of the great multitude of Russian citizens."

These words referred to the vodka monopoly and the
proposed suppression or curtailment of the consumption of
spirits. A short time later a measure received the approval
of the Imperial Council conferring powers of local option
on the communes and towns with respect to the reduction
or prohibition of the liquor traffic.

But the patriotic zeal which was born of the Great War
furnished the incentive for accomplishing the great reform
so ardently desired by public-spirited Russians. The ap-
palling drunkenness that had hindered the mobilization at
the time of the Russo-Japanese War was one of the under-
lying motives for this remarkable measure.

In the first place the government ordered the temporary
suspension of the sale of vodka with a view to prevent dis-
turbance and confusion in the mobilization. But petitions
poured in from all sides to the ministry of finance, from
administrative corporations and voluntary societies, appeal-
ing to the government not to reestablish the sale of vodka.
The prohibition was continued until August 25th, then
prolonged until October 1st, and subsequently to the end

Mobilization of Financial Resources 423

of the year, while town and provincial councils were given
the privilege of local option in respect to the traffic in the
lighter alcoholic beverages, as wine and beer. Finally
the Tsar proclaimed that the sale of vodka by the govern-
ment would not be resumed. There were about 3000
distilleries and 500 rectifying establishments in Russia, em-
ploying about 60,000 n'len and a capital of 250,000,000
roubles ($130,000,000).

In consequence of the elimination of drunkenness the
mobilization is said to have been accomplished in an
unusually punctual and orderly manner. Reports from
various parts of the empire testified to the diminution of
crime and indigence and to the enhanced efficiency of labor.
The increasing thrift of the people was revealed by the
progressive growth of deposits in the savings banks. The
monthly increment was 30,000,000 roubles ($15,600,000)
in December, 1914, and rose to 46,000,000 roubles ($23,-
920,000) in March, 1915.

Special new taxes were introduced to counterbalance
the loss of revenue from the sale of vodka. The tax on
incomes derived from urban real property was raised from
6% to 8%. The so-called industrial tax on certain com-
mercial operations was augmented 50%. The certificates
of membership in the first merchant guilds in the cities
were raised from 75 roubles ($39) to 100 roubles ($52),
while those for membership in the second guilds were
increased from 30 roubles ($15.60) to 40 roubles ($20.80).
The tax on the capital and revenue of such enterprises as
are required to publish their balances was raised b%, while
enterprises which are not obliged to publish statements of
their affairs were required to pay 1% oi their profits. The
taxes on insurance and matches and the excise on beer were
increased, and a small tax was levied on railroad tickets for
the benefit of the Red Cross. A special war income tax

424 The Great War

was imposed on all incomes exceeding 1,000 roubles ($520)
varying from 16 roubles ($8.32) up to 15,600 roubles ($8,112)
for all incomes exceeding 190,000 roubles ($98,800).

A controversial investigator, intent upon gathering evi-
dence to show that the Triple Alliance had exercised a
blighting effect upon Italy, might scrutinize the record of
Italian foreign trade with much satisfaction. He would
probably be tempted to declare that the commerce of the
country languished while devotion to the Triple Alliance
was in its prime, and that Italy entered upon a period of
unparalleled commercial prosperity from the very day that
her attachment to this combination commenced to wane.
The following comparison of the value of Italian foreign
trade at various intervals, expressed in thousands of dollars
(that is, 000 omitted in each case), will afford some idea of
the change in the situation:






. . 245,128





. . 226,457




The "unfavorable" balance is largely covered by the
sums spent by foreigners in Italy and by the remittances
home from Italian emigrants. The maintenance in recent
years of parity in exchange is proof that this "unfavorable"
balance is not an abnormal circumstance. In fact the pros-
perity of Italy has progressed in unison with the increase
of this discrepancy between exports and imports.

The world had scarcely adjusted its habits of thought to
the results of the revolutionary economic development of
Germany during the last generation, when it was bewild-
ered by the discovery that in some respects the progress
of Italy during the decade and a half before the war
has been almost more phenomenal, and certainly more

Mobilization of Financial Resources 425

The united Kingdom of Italy inherited, with the glorious
tradition of the Risorgimento, or period of national regenera-
tion and unification, an oppressive burden of debt which
continued to grow, in consequence partly of prodigality in
the administration. An excess of expenditure was the
normal condition of the public finances down to 1896.
But from 1901 to 1910 there was an excess of revenue
aggregating 678,000,000 lire ($130,854,000). An important
consequence of the greater financial stability was the con-
version of the public debt.

About one-fifth of the receipts of the Italian treasury are
derived from the direct taxation of private incomes. For
purposes of assessment the personal sources of income are
divided into four categories, which are, respectively, id)
investments, Kb) productive occupations employing both
capital and labor, W labor, and id) the positions of public
functionaries; and the rate of taxation on these several
classes varies in the descending order, the highest, 20%,
being levied on the first. The establishment of this maxi-
mum rate in 1893 had the effect of reducing the net income
from 5% government securities, as belonging to the cate-
gory id) of investments, to \%. Since 1906 the govern-
ment has been able to reduce the net interest on these
securities, first to '}>Y^%, and later to 3^%, while guaran-
teeing the perpetual exemption of this quota of profit from
further encroachment by the revenue tax. These securi-
ties remained at about par until the commencement of the
war against Turkey. The outbreak of the war in Europe
in the summer of 1914 brought them down to 86 ; but they
rose to 91 before the close of the year.

Formerly there were six banks in Italy authorized to
issue notes; but irregularities in the management of the
Bank of Rome led to the reorganization of the national
banking system in 1893 and the reduction of the number

426 The Great War

of note-issuing banks to three, which are the Bank of
Italy, the Bank of Naples, and the Bank of Sicily. The
operations of the two latter are small as compared with
the first. The three are required to maintain a metallic
reserve not less in amount than 40% of their circulation.
At the end of December, 1914, the aggregate reserves of
these three banks amounted to about $291,400,000, their
note circulation to $440,700,000, and their resources and
liabilities balanced at about $1,250,000,000. These totals
were materially increased all around by the time of Italy's
entrance into the war. In addition to the circulation of the
notes of the banks, the treasury was authorized to issue
bills to the value of 700,000,000 lire ($135,100,000).

The ordinary commercial banks of the kingdom had an
aggregate capital of 556,000,000 Hre ($107,308,000) and
deposits of 1,097,000,000 Hre ($211,721,000) at the close of
1913. Savings deposits in all the classes of institutions had
increased in amount from about 200,000,000 Hre in 1882 to
7,450,000,000 lire ($1,437,850,000) in 1912.

The Italian government did not neglect the advantages
of their opportunity of observing the course of the Euro-
pean conflict for ten months before taking part in it, and
comprehensive measures were adopted for preparing the
country in both a military and an economic sense against the
contingency of war. Expenditure on an unusual scale was
required to replace the wastage of the operations in Tripoli
and bring the army to the necessary standard of efficiency
and equipment. The receipts of the treasury during the
fiscal year terminating June 30, 1914, had been 2,523,000,000
lire ($486,939,000), the expenditure 2,687,000,000 lire ($518,-
591,000). On December 8, 1914, the Finance Minister,
Signor Carcano, presented estimates according to which ex-
penses for the current year would amount to about 3,847,-

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