As President of the Board of Trade I was able to obtain a general view of the structure of German finance. In 1909 a most careful report was prepared by my direction on the whole of this subject. Its study was not reassuring. I circulated it to the Cabinet with the following covering minute:—
November 3, 1909.
Believing that there are practically no checks upon German naval expansion except those imposed by the increasing difficulties of getting money, I have had the enclosed report prepared with a view to showing how far those limitations are becoming effective. It is clear that they are becoming terribly effective. The overflowing expenditure of the German Empire strains and threatens every dyke by which the social and political unity of Germany is maintained. The high customs duties have been largely rendered inelastic through commercial treaties, and cannot meet the demand. The heavy duties upon food-stuffs, from which the main proportion of the customs revenue is raised, have produced a deep cleavage between the agrarians and the industrials, and the latter deem themselves quite uncompensated for the high price of food-stuffs by the most elaborate devices of protection for manufactures. The splendid possession of the State railways is under pressure being continually degraded to a mere instrument of taxation. The field of direct taxation is already largely occupied by State and local systems. The prospective inroad by the universal suffrage Parliament of the Empire upon this depleted field unites the propertied classes, whether Imperialists or State-right men, in a common apprehension, with which the governing authorities are not unsympathetic. On the other hand, the new or increased taxation on every form of popular indulgence powerfully strengthens the parties of the Left, who are themselves the opponents of expenditure on armaments and much else besides.
Meanwhile the German Imperial debt has more than doubled in the last thirteen years of unbroken peace, has risen since the foundation of the Empire to about £220,000,000, has increased in the last ten years by £105,000,000, and practically no attempt to reduce it has been made between 1880 and the present year. The effect of recurrent borrowings to meet ordinary annual expenditure has checked the beneficial process of foreign investment, and dissipated the illusion, cherished during the South African War, that Berlin might supplant London as the lending centre of the world. The credit of the German Empire has fallen to the level of that of Italy. It is unlikely that the new taxes which have been imposed with so much difficulty this year will meet the annual deficit.
These circumstances force the conclusion that a period of severe internal strain approaches in Germany. Will the tension be relieved by moderation or snapped by calculated violence? Will the policy of the German Government be to soothe the internal situation, or to find an escape from it in external adventure? There can be no doubt that both courses are open. Low as the credit of Germany has fallen, her borrowing powers are practically unlimited. But one of the two courses must be taken soon, and from that point of view it is of the greatest importance to gauge the spirit of the new administration from the outset. If it be pacific, it must soon become markedly pacific, and conversely.
W. S. C.
This is, I think, the first sinister impression that I was ever led to record.
We have now seen how within the space of five years Germany’s policy and the growth of her armaments led her to arouse and alarm most profoundly three of the greatest Powers in the world. Two of them, France and Russia, had been forced to bow to the German will by the plain threat of war. Each had been quelled by the open intention of a neighbour to use force against them to the utmost limit without compunction. Both felt they had escaped a bloody ordeal and probable disaster only by submission. The sense of past humiliation was aggravated by the fear of future affronts. The third Power—unorganised for war, but inaccessible and not to be neglected in the world’s affairs—Britain, had also been made to feel that hands were being laid upon the very foundation of her existence. Swiftly, surely, methodically, a German Navy was coming into being at our doors which must expose us to dangers only to be warded off by strenuous exertions, and by a vigilance almost as tense as that of actual war. As France and Russia increased their armies, so Britain under the same pressure increased her fleet. Henceforward the three disquieted nations will act more closely together and will not be taken by their adversary one by one. Henceforward their military arrangements will be gradually concerted. Henceforward they will consciously be facing a common danger.