ence with the actual ability of the tax-payer. It then becomes possible to provide, in some cases, for an increase of the tax where new sources of income are opened to the tax-payer within the year, and in some to lighten the tax where misfortune has diminished his income since the assessment for the year was made.* The tax then loses some of its harshness, and something of its present aspect of an arbitrary levy, and takes its place as a natural and speedy result of the good or bad fortune of the year in which it is due.

It is not worth while, however, to go farther in urging this or that point in which the method of levying an income tax in this country is defective. The law of 1894 marks no advance in this difficult branch of taxation. The whole subject is one in regard to which our legislators, national and local, are bound in a singular degree by habit and precedent. A practice once adopted becomes fixed, an old method is good and a new one is visionary, and the appeal to the experience of other countries is pronounced un-American. The framers of the new law have made no exceptional mistake in resolutely shutting their eyes to what may be learned elsewhere on this subject. They have taken the course which might easily have been predicted, in going to the legislation of the Civil War† for the model to be followed at the present time; but they have followed that model without thought or discrimination, and without the defence of overwhelming necessity which could be made for their predecessors thirty years ago.

CHARLES F. DUNBAR.

* See the cases provided for in §§ 57, 58, of the Prussian law.

† For a careful study of the income tax legislation of the Civil War and the operations under it, see Dr. J. A. Hill's article, "The Civil War Income Tax," in this Journal for July, 1894, p. 416.

MORTGAGE BANKING IN GERMANY.

I.

THE present mortgage establishments of Germany fall into two classes, the mutual credit associations, or associations of borrowers, and the mortgage banks, or associations of lenders, chiefly of borrowed capital. The latter are to-day making more loans than the former, which paved the way for them; but, as the credit associations have outstanding bonds of over 2,000,000,000 marks at 3 per cent., and have been operating successfully for over a hundred years, their methods, which have been imitated throughout the continent of Europe, are worth studying, and the story of their origin also is an interesting one.

The first step towards an organized system of mortgage banking anywhere was taken immediately after the Seven Years' War. Unfortunately for the province of Silesia, the great victories of Frederick II. had almost all been won there. Buildings had been burned, cattle driven away, implements destroyed, and losses of all kinds suffered. Moreover, the prices of grain, which had been high during the war, now fell. Everybody needed money, and property was unsalable. The current rate of interest was 6 per cent., but even on the safest mortgage loans it was 10 per cent.; and the additional commission, which had been per cent., rose to from 2 to 3 per cent.

In this state of things a merchant of Berlin named Büring, in 1767, laid before Frederick a plan for a credit association, of which the text is as follows:

A PLAN*

for providing abundance of money and credit for the country and for the safest manner in which to begin assisting the impoverished nobility.

The true capital of this country consists in cash and real estate. The latter is more than ten times in excess of the former; and, if only a small part of it could be made current, it would be abundantly sufficient to secure credit and welfare for the entire country.

*This translation is made from the document as published in Der Deutsche Oekonomist of June 3, 1894.

To arrive at this, it would be necessary to establish a general Landschaftscasse, which would place a certain valuation on all the estates of the nobility when voluntarily demanded, record it, and lend them onehalf or two-thirds thereof on mortgage, so that they might thus pay off their annoying creditors.

These payments should be made in the following manner:

First.- Provincial mortgage coupons, or debentures, are to be made out, payable to bearer, of from five hundred to one thousand thalers at 4 per cent., which the above-mentioned Hypothekencasse shall guarantee by its signature, both as to principal and interest, on the strength of the estates mortgaged to it. With these coupons, or debentures, the Casse shall pay half or two-thirds the value of the estate, as may be determined.

Second. But the debtor, being the owner of the estate, shall pay from 4 to 5 per cent. interest semi-annually to the Casse; the Casse, on the contrary, only once a year the interest of 4 per cent. to the holders of the bonds. With these bonds the debtor can pay his creditors, and this shall be done under the supervision of the Casse; and thus the old debts of the estate shall be settled.

Third. The per cent. or 1 per cent. will thus remain at the disposal of the Casse for the payment of expenses and salaries; and the gross sum remaining on hand after providing for these, and also the income from funds on hand as a result of the semi-annual interest payments, shall form a separate fund to provide for accidents, such as death of live stock, hail-storms, fire, droughts, and war. For in such cases the nobility whom these things would strike would be unable to take care of their interest payments; and, moreover, the estates would be damaged. To be safe, in such case the estate should at once be revalued, and the damage made good from this fund, the damage being, as a matter of course, estimated according to the ratio between the amount loaned and the entire valuation of the estate. In other respects the estimate of damages shall be made according to the Cammerprincipien.

Since now your Royal Majesty is so gracious as to advance a capital for the support of this work, the interest of this could also be devoted to that purpose. If any one should fail to pay his interest promptly, his estate should at once be offered for sale. I am in favor of no receivership; for on that rests an eternal curse.

Fourth.-Care must be taken with reference to the estates of crown tenants that the consent only of the three nearest Lehnvetter shall be required, or, still better, that a Lehnstamm shall be provided.

Fifth. Also that no default takes place, and that the principal and interest of these bonds always remain unaltered.

Sixth. Since for this great and important work no cash is required further than a beginning at the first purchase, it would be well that your Majesty should graciously set aside a fund for this. Otherwise, the Banco which gets money enough at 3 per cent. might undertake the realization of these bonds to bearer, and draw the 4 per cent. interest on

them.

And the Banco should furthermore be obliged to sell these bonds at par and accrued interest so long as it had any on hand. Otherwise, the Banco would draw all the interest, and the country would be ruined. *

Seventh.- All these papers can be issued to bearer; and the sale of the bonds, and also the safety of the bank-notes, would be insured. For there is no reason whatever to suppose that the realization of very large sums in cash will be desired, and in a short time these papers will be in demand at a premium. It is therefore also entirely unnecessary that the name of the debtor or of the estate shall appear on the bond.

This important work could be set on foot at once without many conferences and references, because it will be voluntary for every one to avail himself of this help or not, and no guarantee of the province will be required. The guarantee of the general Hypothekencasse is in itself a sufficient guarantee, and through the mortgaged estates and by prompt legal remedies this would be able to make good its guarantee.

Eighth. To send any such bonds out of the country should be prohibited under severe penalty, and no stranger should be permitted to purchase them either directly or through others residing here, and thus draw the interest out of the country; and in any such case the entire capital should be forfeited, half to the informer, and the other half to the general Hypothekencasse.

It may be that the stranger consumes his interest here in this country, and in this way no interest would go out of the country, and the matter would regulate itself; and this is far more advantageous than if capital were obtained at the very lowest rate of interest abroad, in which event, in the course of time, the entire amount borrowed would go out of the country in the form of interest, and afterwards this country would still remain bound to pay the entire amount borrowed out of the country. In Holland, for instance, the provincial bonds draw only 24 per cent. interest, and are not payable on demand, as these papers would be. How much more value, then, these papers would possess, which draw 4 per cent. interest, and can be exchanged for cash any day, when demanded! Would not the Hollanders, without our noticing it, fish away all our papers from us, and ruin us through ourselves?

Ninth. If all these papers should become current in trade as cash, and even the accrued interest be figured up to the date and hour, it would be necessary, in order not to damage the post-office, that per cent. postage should be paid in transmitting these papers. Otherwise, the post-office would sustain too great a loss in its business of transferring money.

In case it ever should be desired gradually to get these papers out of existence in a solid manner, which according to the science of politics is an absolute necessity, then a provision at that time should be made, forbidding all capitalists from charging more than 4 per cent. on first mortgage.

He thus clearly understands that banks of issue should not invest in mortgages.

As soon as through this plan an abundance of currency has been produced through these papers, then it is quite natural that the rate of interest will fall. The land-owners will thus have the opportunity to obtain funds at 4 per cent. interest and less. They need not, under this plan, wait for any demand by the general Hypothekencasse. They can take bonds, not cash, hand them to the general Hypothekencasse, and their mortgages will at once be satisfied. In this manner the papers will leave the world, in consequence of the fact that the general Hypothekencasse charges per cent. or 1 per cent. more than capitalists. It is a safe and invariable rule that, when a cause is to succeed and be for the benefit of the entire state, it must be arranged so as to provide both for plenty and for terminating the matter. Otherwise, the cash will lose its value (and, as the proverb says, when the end has come, the purse is worth as much as the money).

It is the greatest financial art, which must necessarily be observed in the state, to see that money, real property, and goods are kept at a fair and proportionate value with reference to each other. Otherwise, the best arrangement will fall to pieces, and one thing after another will be ruined.

It is no trick at all by this plan to cause a rise of over 50 per cent. in the value of property. But this is as unfortunate for the country as the dilapidation of the property itself.

This objection could still be made,- How is this plan to help those land-owners who already owe three-fourths or over? From the foregoing it clearly appears :—

(a) That even they would profit by it, since, as the supply of money would be increased, they would not be pressed so much by their creditors. (b) And, even if it should come to a sale of their properties, these would still be sold at from 20 to 30 per cent. more, since every buyer would know where he could obtain at once half or two-thirds of the valuation.

At present, on the other hand, properties are often sold at less than the inventory price, so that hardly one-half of the mortgage creditors are paid; and, while under this plan there might perhaps be no excess, still this ruinous loss at least could never take place.

To prepare a plan to help him who is in debt over and over again is not possible, except by making him a present in currency.

As their estates are situated, the greater part of the nobility may be regarded as ruined. There is partly insufficient live stock, causing a lack of manure, and in consequence also gradually poorer crops. How, then, are they to pay their interest? Their estates are every day deteriorating and decreasing in value. And, if you go back to their serfs, who in case of failure of crops or death of cattle are to seek help from their landlords who now are unable to help themselves, whence, in the last instance, are the dues which they must render the king to come? Through the deteriorated fields a loss will fall not only on the landowner and his subject, but on the king and the entire country.