FINANCIAL COMMITTEE. C M ti. [F. 309] L IB S AST AltOHiVJOT LEAGUE OF NATIONS

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1 L IB S AST AltOHiVJOT [Distributed to the Council and the Members of the League.] C M ti. [F. 309] Geneva, Ju ly 29th, 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 9th to 2 3 rd, The Financial Committee has the honour to subm it to the Council the following report on the work of its Tw enty-third Session (Special), held in London from Ju ly 19th to 23rd, 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 Settlem ent 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 N ational 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, Roum anian 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. K onrad 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: INTRODUCTION. Dr. S t r a s b u r g e r, Commissioner-General of Poland a t 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 i n s k i, Chief of Customs D epartm ent. 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 II. 29.

2 S um m a r y. Page I. Loan for the Settlem ent of 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 settlem ent of Bulgarian refugees at its present session and, if the conditions contem plated 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 statem ents 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 m ade certain recommendations with a view to furthering the negotiation of a loan. In respect of these recommendations, the Committee has ascertained th a t 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 R eparation Commission at Paris, and, on the inform ation received, are in a form which satisfies the requirem ents of the Financial Committee s report. (2) Satisfactory assurances have been received from the Bulgarian Government and the Governor of the N ational Bank as to the modification of the statutes of the Bank. The conditions affecting the security of the loan m ay now therefore be regarded as satisfied. There remains the fact th at, in the negotiations of the advances and of the loan, the Committee is of the opinion, as already stated in its June report, th a t 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 th at a settlem ent may be reached almost immediately. (W ith regard to the special question of the bills of discounted by the Banque de Paris et des Pays-Bas, the Committee tru st th at a suitable arrangem ent 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 m ain 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, th a t the President of the Council thinks it necessary to call attention to the opinion of the Financial Committee th at the Bulgarian Governm ent will find it necessary to arrive at a satisfactory agreement with the bondholders of the pre-war loans for the future and to m eet certain other pre-existing rights, and th a t he expresses the hope th at this difficulty will soon be removed. (2) M. René C h a r r o n is appointed for a period of three m onths as representative of the League of Nations to supervise the expenditure of the advances. (3) Before becoming final, the contracts for such advances as m ay be obtained by the Bulgarian Government, in accordance w ith paragraph 2 (1) above, shall be subm itted for the approval of the President of the Financial Committee.

3 3 II. F i n a n c ia l S i t u a t io n of t h e F r e e Cit y o f D a n z ig. In conform ity w ith 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 Ju ly 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 B ank 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 D epartm ent. The Committee desires to subm it the following report to the Council. The measures contem plated in this report depend both on decisions to be taken by the authorities 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 th a t it m ay thereby facilitate the negotiations which will have to be undertaken. I. The m onetary reform which Danzig carried out in 1923 w ith the aid of the League of Nations has been wholly successful, the stability of the Danzig gulden having been m aintained without difficulty and the notes of the B ank 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 m onetary stabilisation, Danzig did not escape the effects of the general crisis which swept over Central Europe during the latter p art of 1925 and led to widespread unemployment in Germany, Poland, and also in Danzig, where the num ber of unemployed rose to more than 20,000 at the beginning of The unem ploym ent problem in Danzig is partly due to the surplus of workers remaining from the m ilitary 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 purchasing power of the Polish m arket 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 m onths, 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. A lthough certain firms in Danzig are known to have received im portant contracts for the coming winter, and the fall in interest rates m ay be expected to assist trade and industry, it cannot be denied th a t the figure of 15,000 unemployed at the best period of the year indicates th at Danzig has still a long way to go before normal conditions are restored. On the whole, the development 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 estim ates and perm itted im portant increases of salaries, which were fixed on a level about 10 per cent higher than those in Germany. W hen, 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 m arket. The difficulties increased in 1926, and at present the budget is in disequilibrium, not only on account of the factors m entioned above but also owing to the delay in the establishment of the tobacco monopoly, estim ated to yield 5 million gulden, for which provision had been made in the budget for the financial year I t has been estim ated th at, 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 m onths 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 th at, in the first instance, measures should be taken to restore budget equilibrium, and th at these measures should be introduced as early as the second half of the financial year 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 num ber of officials by simplification of the administration and also by special measures such as the introduction of autom atic telephones, concentration of the handling of goods in the harbour, etc.

4 4 Adm inistrative reorganisation and dismissal of officials will only lead to more m arked reductions in expenditure after a certain lapse of time. It is, however, im portant to relieve the budget by im mediate economies, which can only be obtained by a reduction of salaries and allocations of various kinds. It has been calculated th at, if salaries in Danzig were reduced to the same level as in Germany, more than four million gulden would be saved. The Committee considers th at, by a reorganisation of State services and by readjustment of salaries and other allocations, the total budget expenditure m ay well be reduced by 10 per cent. e IV. It is also desirable to take measures to increase the revenues in Danzig. The Danzig Governm ent is a t present negotiating with various financial groups regarding the introduction of the tobacco monopoly and proposals have been form ulated for the introduction of other monopolies, e.g., alcohol. These and other fiscal reforms m ight also have the effect of establishing a certain equilibrium between charges imposed in Danzig and Poland. The Committee is glad to note th a t the negotiations w ith 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 adm inistration in her territory. The Free City s share in Customs revenue amounted during the financial period to 23,072,104 florins, and in to 19,000,000 florins approxim ately. On the basis of the receipts of the last few m onths, this share will only amount in the current year ( ) to some 8,600,000 florins. This reduction is due to the diminution in the volume of im ports 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 adm inistration being entirely m et 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 estim ated in the 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 th a t in these circumstances the Free City should have endeavoured to obtain a modification of the agreements regarding allocation at present in force. Such a modification 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 abnorm al 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 th at 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 am ount of Danzig s share during the year 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 th at an average figure m ight be considered by the parties and fixed by an agreement between them for a period of twro years beginning on January 1st, The Free City would thus have a stable budgetary asset at its disposal, and one not subject to the influence of any economic or m onetary crises. The Financial Committee has suggested the figure of 15,000,000 florins per annum. In virtue of a friendly agreement w ïth Poland, Danzig would receive for a period of twto years, beginning on Jan u ary 1st, 1927, a sum involving simply a tem porary suspension of the present basis of allocation w ithout prejudging the final solution. If the Polish Government, in exercise of its sole right of making tariff adjustm ents, 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 arrangem ent m ight be cancelled or revised. After the unofficial com m unication of the views expressed in this paragraph to the representatives 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 p u t forward : The present coefficient shall rem ain in force for two years from Septem ber 1st, 1926, but the am ounts to be received b y Danzig during this period shall be lim ited to a minimum of 14 millions and a m axim um of 20 millions. The two parties have agreed to refer these propositions to their respective Governments. The H igh Commissioner insisted, in the interests of a rapid solution of the financial difficulties of Danzig, th at the tw o delegations should do all in their power to reach an agreement between their Governments. He further stated th a t the negotiations would be continued ; th a t for the time being the present coefficient wtould be applied; and, finally, th a t the right of each p arty to submit the question to the arbitration of the H igh Commissioner would rem ain intact. The Financial Committee considers th at 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 th a t the adoption of the whole of these measures and arrangem ents forms the only possible basis for the restoration of a perm anent budgetary equilibrium. If the full adoption of these measures and arrangem ents provides a guarantee that th is equilibrium w ill be achieved, the Committee hopes th at, at its next m eeting in September,

5 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 budget resulting from exceptional circumstances, and to repay the floating debt; (b) To undertake certain productive expenditure according to a programme to be subm itted by the Free City of Danzig. III. C o u n t e r f e it in g 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 exam ined 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 a t the June Council meeting th a t 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 i s 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 P reparatory Commission of the D isarm am ent Conference, and, in particular, th at part of the work of the Sub-Committee the preparation of which had been entrusted to them as financial experts. ANNEX I. LOAN FO R SETTLEM ENT OF BULGARIAN REFU G EES. DECISIONS BY IN T E R -A L L IE D COMMISSION AT SOFIA AND R EPA RA TIO N COMMISSION, PARIS. A. Letter fr o m G e n e r a l S e c r e t a r y o f R e p a r a t i o n C o m m issio n t o S e c r e t a r y - G e n e r a l o f L e a g u e o f N a t io n s. Paris, August 2nd, I have the honour to forward herewith certified copies of the following decisions taken with regard to the loan for the settlem ent of Bulgarian refugees : 1. A decision taken by the Inter-Allied Commission of Bulgaria on Ju ly 22nd, 1926; 2. A decision taken by the Inter-Allied Commission of Bulgaria on July 23rd, 1926; 3. A decision taken by the R eparation Commission on Ju ly 23rd, (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, [Translation.] Sofia, Ju ly 22nd, 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 settlem ent of Bulgarian refugees, to be secured by a first charge on the excise on salt and spirits, on the m atch monopoly

6 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 R eparation Commission to take measures to safeguard the securities assigned to the loan against any depreciation in value th at m ight 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 T reaty on all the assets and revenues of B ulgaria for the settlem ent of reparation and all other costs and, by virtue of all other powers which it m ay possess to this effect : Releases from the charge laid down in the said Article 132 for the settlem ent of reparation and all other costs arising under the T reaty of Neuilly or any treaties or agreements supplementary thereto, or under arrangem ents concluded between Bulgaria and the Allied and Associated Powers during the Armistice signed on Septem ber 29th, 1918, and from all other charges which m ay come within the jurisdiction of the Inter-Allied Commission, for a period to be determ ined for the redemption of the said loan, which shall not be more th an 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 m atch monopoly ; (4) All sums accruing in the form of rent, sales, or advance repaym ents in cash, interest or otherwise, b y the beneficiaries of the assistance granted under the said Refugee Loan. Furtherm ore, 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, w ith 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 m ay be necessary to m ake up the 150 per cent referred to above. The said release being granted w ithout prejudice, in each case, to any first charges, other th an those waived by the present provision, which m ay now exist on the duties, receipts and revenues above enum erated, and on the express condition th at, outside the exercise of such first charges, if any exist, no part of the securities enum erated shall be assigned to any use other than the said Refugee Loan or the advances granted on this loan, until the T reaty charges have been completely extinguished ; and The object of the said release being to ensure the repaym ent of the above-mentioned Refugee Loan during the period it remains in force, the Inter-Allied Commission agrees th a t if, during this period, any p art of the said Refugee Loan or the interest on it is not entirely liquidated, th at part of the loan or of the interest shall, until complete redem ption, continue to enjoy a first charge on such p art of the duties, receipts and resources above enum erated as m ay be necessary to cover, up to 150 per cent, the service of the unliquidated portion. It being hereby understood and declared th at, if the Inter-Allied Commission has not before December 31st, 1926, received notice from the League of N ations th a t it has been possible to put the said scheme into execution, the present decision shall be null and void, w ithout prejudice, however, to the first charge of all advances th at m ay have been made under the heading of the Refugee Loan or of any short-term loan th at m ay have been negotiated in anticipation of the said Refugee Loan. 2. Decision of Inter-Allied Commission of Bulgaria dated Ju ly 23rd, [Translation.] Sofia, Ju ly 23rd, 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 settlem ent 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 T reaty of Neuilly on all the assets and revenues of Bulgaria for the discharge of R eparation and other costs arising under the said T reaty or any treaties or agreements supplem entary thereto : Recommends th at the R eparation Commission take all the measures which it may deem necessary in conform ity w ith the T reaty of Neuilly to give effect to the arrangem ent r e c o m m e n d e d by the Financial Committee of the League of N ations for the safeguarding of the securities assigned to th e contem plated loan against any depreciation in value th at m ight 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 il l a f a l l e t t o.

7 7 3- Decision of Reparation Commission dated Ju ly 23rd, [Translation.] 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 settlem ent of Bulgarian refugees ; and (b) The telegram addressed on Ju ly 22nd to the R eparation Commission by the Inter- Allied Commission for Bulgaria worded as follows : Inter-Allied Commission for Bulgaria unanim ously decided to grant derogation to the first charge established by Article 132 of the T reaty of Neuilly for revenues required as securities for loan intended for settlem ent of Bulgarian refugees. Inter-Allied Commission for Bulgaria further decided to recommend th a t Reparation Commission should take all necessary measures of a nature to protect securities assigned to this loan against any loss of value which m ight 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 N ations approved on June 10th, 1926, by the Council of the League w ith a view to protect the securities assigned to the loan against any loss of value which m ight result from an instability of the exchange caused by reparation transfers : (a) The Bulgarian Government will have the right at any tim e during the existence of the said loan to m ake 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 paym ent of reparations under the Protocol signed at Sofia on March 21st, 1923, be suspended either in whole or in part. (b) The Bulgarian Governm ent will undertake to accept, as from the date on which such a request is m ade and from the very fact of its being made, the regulations for the operations of transfer contained in the attached schedule, which the R eparation Commission also on its part accepts, and to co-operate with the Reparation Commission in the fullest m anner for establishing and keeping in force those regulations. (c) This decision shall be void and of no effect if, before December 31st, 1926, the R eparation Commission has not received : (1) A notification from the League of Nations th a t the entire scheme approved on June 10th, 1926, has been carried into effect; and (2) A notification from the Bulgarian Government th a t 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 Commission 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 paym ents, an organisation under the nam e of the Transfer Committee, entrusted w ith the obligation of operating reparation transfers, will be constituted in m anner hereinafter provided. 2. If, before the Transfer Committee enters upon its duties, any reparation paym ents fall due, the Bulgarian Government will have to meet them in the same m anner as heretofore. 3. The Transfer Committee shall consist of: (a) A m em ber to be appointed by the unanim ous decision of the R eparation Commission, a national of the U nited States of America or of a country which was neutral during the war of , as Chairman. If the Reparation Commission shall not have reached a unanimous decision for this purpose within one m onth from the date of the request above referred to, the President for the tim e being of the Perm anent Court of International Justice at The Hague shall be requested to appoint the Chairman of the Transfer Committee ; (b) A m em ber appointed by the Trustees of the Bulgarian Refugees Loan; (c) A m em ber appointed by a decision of the R eparation Commission, taken, if necessary, by a m ajority vote, after consulting the Inter-Allied Commission of Bulgaria. These three members m ust be chosen from persons who are experts on questions of exchange.

8 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 m anaged by the Transfer Committee. 5. The Transfer Committee will make, through the National Bank of Bulgaria, to the extent to which it considers th at 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 em ploym ent of such amounts for such purposes, other th an the purchase of foreign currency, as m ay 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 dem and all inform ation 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 m anagem ent of the National B ank of Bulgaria. The Committee in particular will have a right to examine w ithout restriction into the exchange m arket and the establishm ent of the statistics of foreign commerce. 8. If the Transfer Committee, by a decision which m ay be taken by a m ajority only, provided th at the President is among the m ajority, finds th a t concerted financial manoeuvres have been made either by the Bulgarian Governm ent or by any group for the purpose of preventing reparation transfers, the Bulgarian Government undertakes to take any measures which the Transfer Committee m ight require from it to defeat the effect of the m anœ uvres which have been detected and to prevent their repetition (including the appointm ent by the Transfer Committee of a Counsellor at the N ational 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 rem uneration of its members shall be fixed by the R eparation Commission and charged against the Bulgarian Governm ent. The members of the Committee shall not be entitled to any rem uneration except for periods during which the Committee is in operation. 10. If the Transfer Committee, after having been called into operation, at any tim e decides th a t the conditions of the Bulgarian exchange are such th at reparation transfers can thenceforth in all probability be effected w ithout danger to the stability of the exchange and if a t the same tim e the Bulgarian Governm ent undertakes to carry into effect reparation transfers in future, the Transfer Committee will suspend its operations w ithout prejudice to their resum ption at any tim e when, contrary to expectation, the Bulgarian Governm ent 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 w ithout 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 i d 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. [T ranslation.] August 5th, I have the honour to inform you th a t the official tex t of these decisions 1 has been submitted to me and th at, after verification, I have found them in conform ity with the recommendations made by the Financial Com mittee in its report to the Council of June 9th, ANNEX II. SITUATION IN DANZIG. Report by M. Janssen. On Ju ly 1st, 1926, I received the following telegram from the President of the Council: In compliance w ith request High Commissioner Danzig and desire Senate Danzig, I wish to invite you to visit Danzig w ith a view to studying financial situation. Much hope you will be able to give this valuable assistance which would be greatly appreciated. U nderstand Secretary- General is com m unicating w ith you as to details. G u a n i, President Council. 1 Decisions I, 2 and 3 (with schedule) above.

9 9 The telegram from the Secretary-General referred to was as follows: " Reference unofficial telegram have received request High Commissioner Danzig th at you should be invited visit Danzig to enquire into financial position. Am asking President Council send you formal invitation. Meantime m uch hope you will be able give this valuable assistance which we should greatly appreciate. Propose if you agree th a t 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 Ju ly io th, I arrived in Danzig, where I joined M. Jacobsson, who had preceded me by four days in order to collect and prepare m aterial for the enquiry. We both remained in Danzig until July 15th. I had the opportunity of constantly consulting th e High Commissioner, Dr. Van Hamel, and of m eeting the President and other members of the Senate, the leaders of the m ain political parties, the President and the Vice-President of the B ank of Danzig, as well as other prom inent 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 H arbour Board. During the relatively short time at m y 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 m y appreciation of the assistance I have received from M. Jacobsson. A. E c o n o m ic P o s it i o n. In pre-war days, the territory which now forms the Free City of Danzig based its economic life on the following m ain factors : (a) Danzig was an export and im port harbour not only for E astern 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 com petition 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. (: ) Im portant State factories had been established in Danzig, especially m ilitary workshops and naval wharves, which, in the decade im m ediately preceding the war, had to meet a dem and steadily rising w ith the increase of armam ents. Private industries were relatively insignificant, attempts th a t had been m ade to found ironworks in Danzig having failed completely. (d) Danzig was the centre of the E ast Prussian Adm inistration and an im portant m ilitary station. At the end of the war, Danzig became the natural harbour of Poland and thereby an im portant international trading centre, b ut 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 m arket with wiiich Danzig had been connected in a Customs union, and there were a fewr years of artificial prosperity w ith no unem ploym ent. The introduction of a stable currency in Danzig w ith the aid of the League of Nations in the autum n of 1923 coincided w ith the stabilisation of the German mark and preceded the introduction of the zloty in Poland by about eight m onths. The year 1924 wras no doubt a year of business restriction, lack of capital and reduced output, b u t the labour m arket was not yet seriously disturbed, the num ber 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 tim e apparent in Germany, namely, th at the height of the stabilisation crisis is not reached during the year im m ediately following the currency reform. The careful currency policy adopted by the German Reichsbank, aiming at the rationing of credits at m oderate rates rather than a t an im m ediate elimination of the unfit firms by free and unham pered com petition, has of course played an im portant 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 B ank of Danzig, which began its operations in February 1924, increased from 14.2 millions on March 31st to 31.9 millions on December 31st, The following table shows certain indices of economic development from the beginning of the year 1925: Note circulation Rate of discount Wholesale Cost of Import by sea Export by sea Ships cleared for sea traffic (000,000 of the Bank prices living (000 reg. Monthly gulden) of Danzig (000 tons) tons) average January I29 February March.. 3i -7 9 I April May c June July August /9 September October I 5T November December »

10 IO --- Note Rate Import Export Ships cleared circulation of discount Wholesale Cost of by sea by sea for sea traffic (000,000 of the Bank prices living (000 reg. (000 tons) gulden) of Danzig tons) Jan u ary February March April May At the beginning of July, the Bank of Danzig reduced the rate of discount to 6% per cent and the Lom bard rate to 7% per cent. It will be seen from the table th a t the note circulation has remained practically constant; th at interest rates have been reduced ; th at wholesale prices and especially the cost of living have fallen ; th at im port by sea is less th an before the war; but th a t the export trade and the activity in the harbour have attained record figures. The num ber 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 th an 21,000 in February 1926, from which it has fallen to about 15,000 in July (These figures include those of the unemployed 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, m aking a total of 90, ,000 unemployed represented 23 per cent of this total, and the present unem ploym ent 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 prim ary im portance : (a) The appreciation and return to gold parity of the pound sterling during the spring of 1925 autom atically increased the value of the Danzig gulden. The exchange rate on Germany im proved from 135 gulden = 100 German m arks, current in 1924, to 123 gulden = 100 German m arks at the beginning of May 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 num ber of unemployed in Germany from about 300,000 in the sum m er of 1925 to more th an 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 harm ful to Danzig, not only because the lack of purchasing power of the Polish m arket reduced the im port trade of Danzig (see the above table), but also because Danzig m erchants had advanced considerable am ounts in zloty to their Polish customers. The losses suffered on these advances are difficult to estim ate, b ut they have no doubt been high. The measures adopted by Poland to restrict the im port in order to reduce the requirem ents of foreign currencies led to a further reduction in the commercial transactions in Danzig. (d) The trade war between Poland and G erm any appears on the whole to have had bad effects on Danzig trade, p artly because it reduced purchasing power in Poland and partly because it prevented norm al trade relations between Danzig and her German business connections. The Free City has, however, the right of im porting certain quantities (so-called contingents ) of German goods for the needs of her own m arket (for home consum ption and for industrial production). W hen the German m arket was closed, efforts were m ade by Poland to find other m arkets, and large exports of coal and tim ber have been directed via Danzig, m ainly to Finland, the Scandinavian countries and, during the present coal strike in England, also to m arkets which are otherwise supplied only w ith 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 a t present. While in 1913 an average of 78 ships per m onth cleared the harbour, the corresponding average for the first five m onths of this year am ounted to not less than 233. This developm ent is also due to measures taken by Poland to favour railway transport to Danzig and thus to assist Danzig in the com petition with rival ports. The increased export has not brought any substantial relief to the Danzig labour m arket, the total num ber of workers employed in the handling of coal in the harbour being only 180. Coal contracts are generally negotiated directly between the firms in U pper Silesia and the foreign purchaser, leaving no profit to the m iddlem an in Danzig, while m ost of the Polish export of tim ber is sold through Danzig firms. (e) The state of agriculture is particularly affected by the com petition from Poland, which, on the other hand, provides the consumer w ith relatively cheap foodstuffs im ported free of Customs duties. While the farm ers in Danzig have to pay wages which are considerably higher th an the Polish and even higher th an those paid in the neighbouring districts of Germany, and have also to purchase their agricultural m achinery 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-B ank 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 th at the burden of taxes and social charges in Danzig is too heavy, and th a t it constitutes a serious obstacle to trade recover)''

11 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 Ju ly ,000 50,000 Officials... 9,100 28,000 Form er German officials and war-invalids So-called K le in r e n tn e r n... 16,000 2,000 Persons in receipt of invalidity pensions ,000 Other p e n s io n e rs... 4,000 or not far from one-third of the total population. 125,000 It is true th a t the greater part of the pensions to war-invalids is paid for by Germany, but it must be adm itted th a t the figure is very high. The num ber 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 th at at present pensions are granted to persons having completed their 65 years, no proof of invalidity being demanded. (g) It has often been m aintained th a t 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 th a t 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 estim ate the relative im portance of the factors enum erated 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 unem ploym ent in Danzig at the beginning of February 1926 is compared with labour conditions in Germany. I t is found th at the unem ploym ent in Danzig such as it was at the beginning of February 1926 was prim arily caused by the economic crisis which began after the stabilisation of the currency in Danzig and in the neighbouring countries, and th a t it should be regarded as a reaction against the artificial activity of the inflation period. D ata are given to prove th at the unem ploym ent in Danzig corresponds to the average in Germany and is not worse th an in the great harbours of N orthern Germany. The following table, quoted from the article, shows the total num ber of unemployed, including those who are not entitled to unemployment benefits : Number Per 1,000 inhabitants Free City of D a n z ig... 21, B r e m e n... 19, H am burg... 60, It is, however, undeniable th at Danzig is especially dependent upon the currency conditions and the purchasing power in Poland, having regard to the close relations of a political and commercial character between the two States. The losses suffered by Danzig m erchants on advances granted to Polish customers m ade themselves particularly felt on the capital m arket, and it is therefore perhaps natural th a t 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 adm itted th a t it is exceedingly difficult to foresee what the future developments of trade and industry in Danzig m ay be. The official persons consulted were m ostly pessimistic perhaps too pessimistic. The Senate expects th a t unem ploym ent will rise to above 20,000 during the coming winter. There are even those who m aintain th at the num ber of industrial workers is permanently too great. They point out th at the pre-war industry was mainly based on orders from the State for m ilitary and naval purposes, and th at no similar orders can be expected in the future. The orders placed by the Polish Railway Adm inistration 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 Agriculture and f o r e s tr y , Industry and m ining... 44,446 49, Trade, transport and hotels ,158 47, Wage-earners and domestic servants 5,917 8, Liberal professions and public s e r v ic e s... 14,648 13, Persons without profession ,995 22, T o t a l , , Total dependants 171, ,411 Total population 316, ,730

12 12 It will be seen from this table th a t the absolute num ber 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 num ber of persons occupied with house construction. On the other hand, the num ber of persons occupied in trade, transport and by hotels has more th an doubled, which is no doubt a development in the right direction. A few other favourable factors affecting the labour m arket m ay be pointed out : (a) While at present the children finishing school at the age of 13 to 14 num ber 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 num ber of children born during the war period. This reduction will diminish the pressure on the labour m arket in Danzig, as in m ost other European countries. The increased num ber of children born in 1920 will not m ake itself felt before (b) Almost all the representatives of trade and industry who were consulted expressed the opinion th at the wrorst period had already been passed, and th at not a few signs of im provem ent 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 m any 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 m onths of this year had to be utilised for the repaym ent of outstanding credits, the surpluses that have since been obtained have been available for increased purchases abroad, wdiich m ay be seen from the fact th at im ports into Poland have shown an upward tendency during the last few m onths. The increased im ports for the Polish m arket which m ay 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 m onth). It is, moreover, anticipated th a t the B ank of Danzig will be able further to reduce its rate of discount. During the present depression period, the B ank 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 th an 100 per cent. The total savings deposits in Danzig am ount to about 17 million gulden, which have been collected in two years and, even though part of this m ay 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 num ber being 41, including savings banks. There has also been an introduction of more economical m ethods of working, private business again applying a regime of economy and close calculations. It wrould be wrong not to m ention these more hopeful aspects of the situation, b ut it cannot be denied th a t an unem ploym ent figure of 15,000 at the best period of the year indicates that Danzig has still a long way to go before norm al 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 m any 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 readjustm ent will more easily be obtained if the economic life is freed from lim itations 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 th at, if the m arket were free, there would be a rise to about 140 per cent of the pre-war rent. It has been proposed th at the State should make an attem pt 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 m arket. Only 300 dwellings are being built at present (and those only with the aid of the m unicipalities), as com pared with a pre-war average of 800 to 900 dwellings per annum. It is also thought th a t it would be politically easier to carry through the abolition of the rent restriction if such a measure w'ere combined w ith investm ent of capital, with a view to reducing the house shortage. Much criticism has been directed against the regulations of the labour m arket by which wages can in the last instance be fixed by an official authority. W hen a dispute arises, the two parties have to bring the question before a so-called Schlichtungsausschuss, which eventually grants an awrard. This aw ard m ay by either party be brought before the so-called Demobilmachunt S- Kommissar, who makes an attem p t to reconcile the parties. If this attem pt is unsuccessful, the Kommissar m ay declare th at 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, b ut it is m aintained th a t the wrages fixed by the official bodies have been too high. It has not been possible during the tim e available to enter more fully into this question.

13 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 m aintained 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 The financial year , of wrhich only five m onths fell within the period of the stable currency, closed with a surplus of 750,020 gulden, and the financial year with a surplus of 2,374,302 gulden. The closed accounts for 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 th at year. The financial adm inistration expects, however, th at, in spite of the fall in revenue during the winter of , there will be a surplus of about 1,000,000 gulden. The favourable results of the year , in spite of a considerable increase in salaries during th at year, wrere m ainly due to the surplus receipts from Customs duties, which yielded 23,072,104 gulden, as compared with an estim ated am ount of 8,283,500 gulden. It should be noted th at 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 th at year. In the autum n of 1925, outstanding revenue claims, m ostly consisting of Customs credits and other tax credits granted by the Finance D epartm ent, am ounted to about 20 millions. These claims were considerably reduced during the last m onths of 1925 and the beginning of At the end of March 1926, they am ounted to 10.4 millions. There are, however, liabilities not yet liquidated which represent a first charge on the uncollected revenue. These liabilities am ounted to about 8.2 million gulden a t the end of March 1926, so th a t 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 , and , 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 m onths 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 B ank of Danzig, mostly against mortgages on taxed property. The same conditions are also applied to the amounts due b y defaulting taxpayers when the period does not exceed three m onths; while in other cases the interest charged rises to 3 per cent above the rate of discount of the Bank, with a m axim um of 12 per cent. The following table shows the outstanding am ounts at different dates: Customs credits Outstanding Dates (including credits in direct taxes End of : respect of excise duties) June Gulden 10,700,000 1 September ,450,000 1 December ,000,000 1 March ,300,000 6,100,000 June ,000,000 1 It will be seen th at outstanding Customs and excise credits have accordingly been reduced from 10.7 millions in June 1925 to 3 millions at the end of June 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 dem and 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 m ostly 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 am ount 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 am ount of 10 million gulden, b ut 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 14 than had been expected owing to the fact th at both Germ any 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 supplem entary note cover. During the financial year , the Free City also obtained funds from the issue of Treasury bills (Schatzanweisungen). (a) In order to meet the requirem ents 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 setttlem ent of Customs duties had to be made w ith Poland), the Governm ent discounted Treasury bills am ounting to 750,000 gulden at the Mendelsohn firm in Am sterdam. A t 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 Septem ber 15th, (b) On Septem ber 25th, 1925, the Government issued 5,000,000 gold m arks (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, b ut new bills to the am ount of 5 million gold m arks were again issued on December 17th, 1925, and these bills are still outstanding. The present bills, which have a currency of three m onths and are discounted at 8 per cent (formerly 8% to 10 per cent), will fall due on Septem ber 25th, At the end of March 1926, the Treasury was obliged to provide funds for the following purposes: (a) Advances to the Gas and Electricity W orks (1.7 million gulden) and to municipalities for house construction (1.3 million gulden), m aking together 3,000,000 gulden. The house construction and the other works are started in the spring before the revenue earm arked for these purposes becomes available. (b) Advances in respect of salaries for the first m onth of the financial year (3.8 million 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 adm inistrative terminology) is also applied in Poland and Germany. (c) Advances of 3.7 millions to the Fixed P roperty Adm inistration 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 m ight be argued th a t these advances ought to have been accounted for as budget expenditure for capital purposes. (d) Advances in respect of future budgets, am ounting to 1 million gulden on account of the construction work on the W esterplatte. The total expenditure to be borne by the Free City of Danzig as her share of the construction work on the W esterplatte has been distributed among the budgets of three consecutive years, b ut the actual work has been proceeded with so quickly th a t the Danzig Treasury7has 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 investm ent were fully charged to the year in wiiich the outlay was actually made. I t is, however, obvious th a t 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 m y opinion, should be changed immediately.) (e) Cash held by different offices, am ounting to a total of about 800,000 gulden. The Treasury position at the end of March 1926 m ay th u s be summarised as follows : (a) Surpluses from previous financial years : Gulden , ,375, ,000,000 Total... 4,125,000 (b) Profits on issue of c o in a g e... 5,000,000 (c) Credits in the form of Treasury bills discounted at: the Seehandlung... 6,190,000 Mendelsohn & Co ,000 These funds were utilised as follows : Total funds av ailab le... 15,815,000 (а) Difference between outstanding revenue claims (tax credits) and liabilities incurred b u t not yet paid f o r... 2,200,000 (б) Advances to Gas and Electricity Works and for house construction. 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 ,000 Total... 15,600,000

15 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 W orks and for house construction. The remainder of the working capital of the town, which m ay be estim ated at 1,000,000 gulden, was provided for by surplus balances available from previous years. It will be seen th at the Free City was compelled to have recourse to credit operations in the financial year , although the accounts of th at year show a small surplus, the borrowed funds being needed in order to provide working capital for the Adm inistration when the surplus receipts previously obtained from Customs disappeared. These credit operations, the proceeds of which am ounted to 6,690,000 gulden on March 31st, 1926, represent an initial charge prior to whatever deficit m ay arise in the financial year II, Developments during the First Quarter of the Financial Year (M onths A pril to June). When the budget estim ates for were prepared, it was evident th a t 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 m aterial (sachliche Ausgaben). Salaries and social benefits remained the same, b ut the num ber 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 th a t a deficit will arise owing to the facts : (a) T hat Customs receipts continue to decrease ; (b) T hat the tobacco monopoly has not been established, mainly owing to the illness of the Finance Senator, Dr. Volkmann ; and (c) T hat unem ploym ent 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 m ay render the collection of direct taxes more difficult in the w inter months. The following table gives approxim ate 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 It should be explained th at 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 intim ate 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. Revenue : Customs and excise d u t i e s... German contribution to p e n s io n s... Net receipts from Kàmmereikassen... Proceeds of municipal l o a n... Other r e v e n u e... April May June Gulden Gulden Gulden 2,702,000 2,098,000 1,400,000 1,232,000 1,147, , , , , , , ,000 Total revenue... Expenditure : Requirements of the Staatshauptkasse... Requirements of K àm m ereikassen... Repayment of loan to the Hypotheken-Bank Pensions and other social expenditure.... S a la rie s... Total expenditure. Cash deficit.... 4,434,000 3,867,000 3,249,000 2,116,000 1,673,000 1,347, ,000 1,000,000 1,500,000 1,500,000 1,500,000 2,700,000 2,700,000 2,700,000 6,712,000 5,873,000 6,547,000 2,278,000 2,006,000 3,298,000 The total cash deficit for these three m onths am ounts to about 7,582,000 gulden. Of this deficit, 5,250,000 gulden have been covered by the following credit operations: (a) (b) (c) Treasury bills discounted by Mendelsohn to an am ount of 2 million gulden (in two tranches of 1 million each) ; A loan of 1,000,000 gulden from the Danzig Hypotheken-B ank, which, however, was repaid on June 25th, 1926; Two loans, together am ounting to 3,250,000 gulden, from the Municipal Savings Bank (Sparkasse der Stadt Danzig). The remaining deficit of 2.3 millions has m ainly been met by the calling-in of outstanding tax credits. 1The reduction in Customs and excise receipts during the month of June is due to the quarterly clearing with the Polish Customs Administration.

16 i 6 The following table shows the short-term credits outstanding on Ju ly ist, 1926: Amount : Due on Gulden (a) Treasury bills discounted by Mendelsohn & Co... 1,000,000 July I 5th, 1926 (b) Do. d o... 1,000,000 )) 20th, )) (0) Do. d o ,000 Sept. ISth, )) (d) Lom bard Loan of 5,000,000 m arks against Treasury bills. 6,190,000» 25th,» (e) Loan by the Municipal Savings B a n k... 3,000,000» 25th, )> (/) Do. do. 250,000 July 12th, )> Total 11,940,000 The deficits th a t arise in Ju ly and August m ay partly be covered by the paym ent of 1,000,000 gulden due by the H arbour Board to the city, b ut the Treasury m ust also have recourse to credit transactions, which will augm ent the floating debt by a further amount. III. Estimated Deficit in the Financial Year on the Basis of the Stipulations in Force on Ju ly 1st, Dr. Volkmann expects th a t Customs duties and receipts from tobacco will yield less than estim ated, and th a t, on the other hand, the budget appropriations for unem ploym ent and debt service will be exceeded. 1. Danzig is inside the Polish Customs barrier, b ut the Customs A dm inistration 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 estim ated at 19,689,050 gulden in , and this am ount was obtained. In the budget for , the estim ate was reduced to 16,600,000 gulden for the following reasons : (a) Im ports during the year 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 im port 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 Ju ly 1926, b u t a few individual item s had been increased. The following table shows the receipts by Danzig from Customs : Rate of Period Receipts in Receipts in exchange of Gulden Zloty the Zloty July-Sept ,010, ,103,839 I0 8 Oct.-Dec. )> 1,156, ,942, Jan.-M arch ,008, ,976,810 XOI A p.-june» 1,074, ,975, July-Sept.» 743, ,135, Oct.-Dec.» 484, ,994, Jan.-M arch , ,895, April-June» 550,000. 2,800, Amount of of Zloty expressed in Gulden 4,432,146 6,239,692 6,036,578 5,975,964 3,722,354 1,946,293 1,882,378 1,400,000 Total receipts in Gulden 5,442,219 7>396,4I 7 7,045,028 7,050,692 4,465,636 2,43o,996 2,460,166 1,950,000 It will b e seen th at, while in the period from Ju ly is t, 1924, to June 30th, 1925, Danzig received 26.9 million gulden, in the following period, from Ju ly ist, 1925, to June 30th, 1926, she only received 11.3 million gulden. If the costs of the Customs Adm inistration are deducted, there was in the former period a net am ount of 19.7 million gulden available for June general budget requirements, while in the latter period the corresponding am ount had fallen to 4.8 million gulden. I t is calculated th at, on the basis of the present yield, the Customs revenue in will am ount to 8.6 millions, th a t is, 8 millions less th an the estim ate, as com pared w ith the costs of the Customs A dm inistration, estim ated at 6.6 millions. 2. In the budget for , provision has been made for establishing a tobacco monopoly in Danzig, which it is estim ated would yield a revenue of 5,000,000 gulden, but, as said above, no progress has so far been m ade w ith the plan. The Polish tariff imposed a high d u ty 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 exem pt from paym ent of d u ty on im ported 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 am ount of the taxes on tobacco paid by Danzig citizens, the Danzig authorities have decided to establish a tobacco monopoly. Negotiations have already begun w ith a Polish delegation regarding the status of the proposed monopoly.

17 17 3- The following table shows the num ber of unemployed in receipt of relief, the estim ated unemployment expenditure, the actual relief paym ents and the am ounts by which the payments have exceeded the estim ates (m onthly 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, , , ,420 M a y... 4,985» 345, ,472 J u n e... 4,871» 292, ,054 J u l y... 4,625» 326, ,807 A ugust... 4,402» 280, ,223 September... 4,803» 291, ,284 October.... 5,975 )) 352, ,324 November... 7,660» 529, ,655 December... 11,996» 794, ,904 Jan u ary ,814» 982, ,912 F eb ru ary ,010 )> 1,052, ,116 M a r c h... 15,254 )) 1,174,114 1,070,114 A p r i l... 12, , , ,419 M a y... 12, , , ,015 The actual expenditure thus exceeded the estim ates by about half-a-million during the first two months of the financial year 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 tim ber from Poland do not give sufficient work to counterbalance the effects of reduced purchase of Danzig commodities. The Finance Senator expects th at 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 paym ents of the short-term credit operations. At a rate of 7% per cent, and an outstanding am ount of 12 million gulden, the annual interest will am ount to about 900,000 gulden. The total deficit for the financial year m ay thus be estim ated at the following figures: Million Gulden (1) Loss of Customs d u t i e s... 8 (2) Loss of receipts from tobacco m o n o p o ly... 5 (3) Increased expenditure for u n e m p lo y m e n t... 2 to 3 (4) Increased expenditure for in terest T o t a l...16 to 17 This deficit m ay be even higher, owing to a further increase of expenditure for unem ploym ent and reduced receipts from direct taxes. It will be remem bered th at the first quarter of the financial year led to a cash deficit of about 7.5 million gulden. The spring and early sum m er are particularly difficult for the Treasury, owing to the fact th a t capital expenditure for house construction, roads, etc., reaches its m axim um 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 th a t the yearly deficit does not exceed 17 millions. (It is expected th a t the municipal budget will balance, so th a t budget can in this respect be left out of account.) The present position (July 1926) is thus as follows : Million Gulden Short-term credits m aturing every three m onths am ount to about 12 The cash deficit still to be covered in the financial year if no new measures are taken is a b o u t...8,5 to 9.5 T o t a l 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.

18 2. Changes in the fiscal system : (<i) Special tobacco taxes and the introduction of the tobacco monopoly ; (b) A new distribution of Customs receipts between Danzig and Poland ; (c) O ther changes. 3. Reduction in the requirem ents of working capital. IV. Reduction of Expenditure. The following table shows the main appropriations for the various services in the budget estim ates for the financial year : Gulden T reaty c h a r g e s... 90,000 H arbour Commission >000 W esterplatte e x p e n d itu re ,000 P a rlia m e n t ,680 General A d m in is tr a 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 e m p lo y m e n t... 7>73 >00 O ther social and health e x p e n d itu re... 6,785,910 C hurch... 1,231,220 Science, Art and E d u c a tio n... I 4,5I 5.9I Internal A dm inistration : Police expenditure Other expenditure Trade A dm inistration Ju stic e... Public Works.... A g ricu ltu re... 7,925, , ,820 6,380,600 2,221, ,280 Public undertakings : Postal, Telegraph and Telephone Services... 13,195,600 O ther u n d e r ta k in g s... 7^5,49 T ax A dm inistration : Net cost of co llection... 2,390,720 Refunds to tax p ay ers ,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 ,000 Total expenditure, including double e n t r i e s ,857,180 Total expenditure, excluding double e n t r i e s ,307,180 (The double entries arise from the fact th a t the fiscal year does not coincide w ith the calendar year and certain transfers of funds are made. It is, however, difficult to see w hat advantage is gained by this complication, which is sufficient to prevent anybody b ut an expert in public accountancy from understanding one of the m ost im portant parts of the budget the estimates of the Finance D epartm ent.) 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 am ounts to 93,615,470 gulden. Of this total, alm ost one-half, or 46.2 million gulden, represents salaries to officials. It should further be noted th a t pensions to former officials and for w ar disablem ent and expenditure for unem ploym ent am ount together to a little more than 24 millions. As salaries, pensions and u n e m p lo y m en t expenditure am ount to a total of more than 70 million gulden, there remain about 23 millions for all expenditure on m aterial, constructions, etc. W hen the budget estim ates were prepared for , expenditure on m aterial, etc., was very strictly cut down, and a further reduction t hardly possible. The question therefore arises w hether 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 num ber of officials and other emplo)6 of the Free City and M unicipality of Danzig and other local bodies.

19 19 : City: General A dm inistration P a rlia m e n t Social, Church and H ealth Administrations Education, Science, Art, A rch iv es... 1,290 1,190 Internal Adm inistration : P o lic e... 2,036 i, 73i Economic A dm inistration Ju stic e Public W o rk s Land A d m in is tr a tio n Agriculture and F o re s try Various services Post, Telegraph nd T e le p h o n e... 1,838 i,53o Tax A d m in istratio n Customs and E x c i s e... 2,288 1,419 Total Free C i ty ,163 Municipality of D anzig... 1,689 1,400 Other local b o d ie s T o t a l... 11,690 9,144 It will be seen th a t the num ber 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 Adm inistration, which has been reduced by more th an 600, and in the Police, Post Office and T ax Administrations, each of which has been reduced by about 300. The total num ber of public servants in Danzig is about 2.4 per cent of the total population. This figure is not essentially higher than the corresponding percentages in other countries, b ut it should be remembered th a t Danzig has no m ilitary 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 parliam entarians and 8 are the heads of the various administrative departm ents. These constitutional organs require a considerable num ber of higher officials. It is m aintained th at no great reduction in the num bers of administrative officials can be effected w ithout limiting the functions of the State, and such lim itation 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 m aintained in Germany. B ut 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 num ber of officials. The m ain problem is whether or not the number of Customs officials, postal, telegraph and telephone officials, teachers and policemen can be reduced. The authorities m aintain th a t the possibility of discharging Customs officials depends mainly on the concentration of the handling of goods in the harbour by the establishm ent of w arrant houses. 300 to 500 officials m ight be spared in this way. It is, however, likely th at there would be a great deal of opposition from land owners, and possibly also from the H arbour Board. In the river harbour of Danzig, m erchants 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 S tettin a considerable num ber of the ships came from other harbours in Germany. By the introduction of autom atic telephones, which is being carried out gradually as funds become available from the annual surpluses earned by the Telephone Administration, 300 officials and employés m ay be dispensed with. Complaints had been made th at 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 m aintained th a t the num ber of teachers in Danzig is relatively greater th an in corresponding districts in Germany, and th at the num ber of children per class is smaller. It is agreed by all concerned th a t the question of the reduction of the Police is directly a political question. The prim ary task of the Danzig policeman is the same as th a t of the police in other countries, b ut 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 arm y of its own. Under the present regulation, no official m ay remain in the service after the age of 65, and no new persons m ay enter the public service, except in exceptional cases after a decision of the Senate. The Finance Senator repeatedly explained th at 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 independently of the scale in force for other officials. T hat 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 Germ any and m ust provide some special attraction.

20 20 (b) In a small State like Danzig, the possibilities of advancem ent are strictly limited, and officials should therefore receive some compensation. (c) At the tim e 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, b ut it is m aintained that those articles which an official has to buy in addition to foodstuffs are more expensive than in Germ any 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. Furtherm ore, when salaries were fixed in 1924, before the pound sterling had returned to the gold parity, the rate of conversion of German m arks adopted by the law was /3 gulden = 100 m arks, while the present rate is about 123 gulden = 100 marks. This means an im provem ent of about 7 per cent in addition to the 15 per cent just mentioned. Since th a t 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, th at 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, th at the salaries of officials should be reduced to the German level. The officials have made the objection th at such a measure could not be introduced without their consent or w ithout 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 Beam ten sind unverletzlich.) N egotiations have, however, begun w ith the officials in order to arrive at some agreed settlem ent 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 am ounting 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 A dm inistration (to judges under the heading Justice, etc.). The pension charges shown under Social A dm inistration are all for former German officials and disabled soldiers. An understanding has been entered into w ith the German Government according to which Germany pays 60 per cent of the m ajor part of the pensions (40 per cent of a m inor portion). The German contribution appearing on the revenue side of the Danzig budget is estim ated at 9,197,140 gulden in the budget for 1926, so th a t th e charge falling on Danzig is only about 7 millions. Dr. Volkmann explained th a t France and D enm ark grant pensions to disabled soldiers living in the incorporated districts and th a t Danzig m ust 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, b ut 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 th an the average in Germany, and there is also a relatively greater num ber 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 p art of Germany. Danzig has no unem ploym ent 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 estim ate for being 7.5 million gulden. The Senator in Charge of Social Questions believes th a t the actual expenditure will amount to betw'een 10 and 12 million gulden, with a m onthly outlay of a little less th an 1 million in the summer m onths 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 unem ploym ent benefits, the difference of 3 to 4 thousand consisting of persons who have either not yet become entitled to unem ploym ent benefit or who have means of subsistence of their own, or belong to families with means, or who have not accepted work th a t has been offered them. The same benefits are paid in town as in the country, and no difference is m ade between workers in different branches of industry. The benefits are as follows : Gulden W o r k e r W ife E ach c h i l d The m axim um benefit of 4.50 gulden is reached by a m an with a wife and five children. This am ount is sufficient to pay for food and rent, but hardly m eets the purchase of clothes and extra expenses in the case of illness, etc. Further, a special allowance, am ounting to an average of 24 gulden per m onth, is paid during the winter m onths to help in the purchase of wood, coal, etc. The norm al benefits, plus t h i s special allowance, m ust not exceed 8 0 per cent of the wage received by the worker in his last post. The Senator in Charge of Social Affairs adm itted th at the control was far from strict.

21 21 It has been m aintained th a t the benefits are so high as seriously to diminish the inclination to work. The benefits granted in Danzig are higher th an 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 th a t if the same division into classes as th at in force in Germ any were made in Danzig a further saving of about 2 millions could be effected If, in addition, the German system of unemployment insurance, w ith contributions from both employers and workers, were introduced, the State budget would be relieved to the extent of 2 millions. In Germany, the unemployed m ay 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 m em orandum issued by the D epartm ent for Social Affairs, shows the total social charges borne by the Free City in comparison with the charges of 1913 : Social in su ran c e... Unemployment expenditure... Allocations to Kleinrentnern... Pensions to former German officials, etc... W ar-invalids : : State Total State Total contribution charges contribution charges Gulden Gulden Gulden Gulden 414,906 8,242,887 1,665,000 18,856,344 4, ,715, , ,240 3,878,407 4,013,222 9,069,520 7,573, ,906 8,242, ,977 42,125,559 The total charges will am ount 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 th at the persons in receipt of these social benefits, together with their families, am ount to almost one-third of the total population. Revenue from taxation: V. Changes in the Fiscal System. Estim ates for 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 ,280 Taxes on transactions : Land ta x... 1,000,000 Turnover t a x... 4,000,000 Luxury ta x ,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 ,307,180 Total revenue, double entries included ,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 M unicipality of D a n z i g... 10,590,000 Taxes imposed by other m u n ic ip a litie s... 5,000,000 T o t a l... 83,260,000 Taxation per head of population gulden

22 22 The taxation in the M unicipality of Danzig is, however, higher th an in other municipalities. An approxim ate 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 num ber of persons in Danzig whose sole income consists of paym ents by the State. 1. Special Tobacco Taxes and the Introduction of a Tobacco Monopoly. The revenue estimates for the financial year 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 th a t a total of 8.2 million gulden should be derived from taxation on tobacco. The tobacco monopoly has not yet been established, b ut in the beginning of Ju ly the Volkstag voted a sharp increase in the Banderole tax. It is not possible to estim ate the extra revenue which may be obtained from this increase, as it is probable th a t 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 w ith Poland. There has been m uch smuggling of tobacco from Danzig to Poland. (The tobacco factories in Danzig are able to produce about th irty times the amount of cigarettes, etc., th at can be consumed within the Free City.) These smuggled cigarettes had previously been taxed at the lower rate, am ounting to 2 gulden per 1,000 cigarettes, while the duty has now been increased to 15 gulden, which m ay 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 m axim um 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 w ith 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 m aintain 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. m atches and alcohol. As in the case of the tobacco monopoly, these fiscal reforms m ay 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 m ade 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 m ultiplied by six in order to compensate the Free City for the heavy cost of adm inistration in the harbour area and to take into account the higher consumption of im ported commodities in the town of Danzig th an in the agricultural districts of Poland. The percentage due to Danzig worked out at about 7% per cent. F urther 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 , the distribution was based on the following figures: Population % Danzig 6 x 383,995 =... 2,303, P o la n d... 27,176, T o ta l... 29,480, During the negotiations in 1924 and the beginning of 1925, the Danzig delegation subm itted statistics regarding the consum ption of im ported goods within the territory of the Free City and in Poland. On the basis of these data, the Danzig delegation m aintained th at 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 th at the principle contained in the Paris Convention of 1920, th at Customs receipts should be distributed according to the consum ption in Poland and Danzig respectively, was very difficult to apply, as political science had not been able to define the exact meaning of the term consum ption. Is it the first or the last consumer who shall be taken into account? If; for instance, Danzig im ports 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 th at the financial position of Danzig is such th at a substantia, sum m ust 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, b ut they were again started in June The following table shows estim ates and actual receipts of the Free City: Period Estimates Actual receipts Gulden Gulden ,283,500 23,072, ,689,050 (about) 19,000, ,600,000

23 23 The expenditure on Customs adm inistration is estim ated at 6,485,000 gulden in the budget for On the basis of the receipts obtained at present, Danzig s share of Customs m ay 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 Adm inistration in Danzig would am ount to 39 per cent of the gross receipts a very high percentage, as m ay be seen from the following comparisons : Schillings (millions omitted) Austria: 1926 (estimate) : Customs r e c e i p t s Customs expenditure : C ustom s-houses Customs G u a rd Total ex p en d itu re Expenditure as percentage of r e v e n u e % Num ber of officials: Customs-houses, 1,110; Customs Guard, 2,040. Total 3,150. Switzerland: 1925 (closed accounts) : Customs r e v e n u e... Customs e x p e n d itu r e... Expenditure as percentage of revenue Poland: 1925 and 1926 (estim ates): Customs revenue.. Customs expenditure Francs (millions omitted) % Zloty (000,000 s omitted) Expenditure as percentage of revenue % 110/ The high percentage of Danzig m ay at least partly be explained in the following way : (a) Customs officials in Danzig are to a greater extent th an in other countries utilised for the supervision of the frontier. (b) All adm inistration on a small scale becomes relatively expensive, a rule which applies especially to Customs adm inistration. (c) Danzig has an unfavourable frontier-line, the disadvantage of which is enhanced by the fact th a t m erchants are entitled to pass their commodities through the Customs at any point in the harbour. It has been said above th at an im portant reduction in expenditure could be obtained by the concentration of the handling of goods and by the establishment of w arrant houses. {d) A large proportion (according to Danzig, two-thirds) of the goods handled by the Customs A dm inistration is for im port 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 attem pt 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 ta x is only a t 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 restriction might be contemplated. At present, the yield of the building tax (Wohnungsbauabgabe), which the m unicipality is compelled by law to levy, is earm arked 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 estim ated to yield 5,625,000 gulden in the municipal budget of the 30 per cent m ust 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 norm al 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 m ay be combined with the question reducing the salaries of officials. Under the present conditions there is no construction of houses for private purposes.

24 24 VI. Reduction in the Requirements of Working Capital. At present, the Free City is in need of about 7 million gulden to meet the expenditure at the end of each quarter, when the paym ents reach their m axim um, and to keep a m inim um amount of cash balances the latter being estim ated at 800,000 gulden. In addition, 5 million gulden are required for Customs and other credits. A part from the 3 million gulden advances to the Fixed P roperty A dm inistration, which really has the character of an investm ent, the working capital of the M unicipality of Danzig has am ounted to 6.5 million gulden during the last two years. The total working capital needed a t 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, b ut th a t 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 w ith 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 th a t the situation on Ju ly is t, 1926, was as follows : Million Gulden O utstanding short-term d e b t Deficit to be covered Ju ly 1926-March 1927 if no new m easures are t a k e n to 9.5 T o t a l to 21.5 The deficit for the period Ju ly 1926-March 1927 is here calculated on the basis of the stipulations in force at the beginning of Ju ly Even if this deficit be reduced by the various m easures discussed above, the am ount needed to repay outstanding short-term liabilities and to cover current deficit will probably not be less th an 13 million gulden. It has been proposed th a t the loan to be issued should also comprise a certain am ount for capital expenditure, such as the construction of houses, the introduction of autom atic telephones, the building of w arrant 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 m ay not contract foreign loans except after previous consultation with the Polish Government, which shall com m unicate its reply within fifteen days. In case of any objection being made on the part of the Polish Government, the question m ay be subm itted by the Free City for consideration to the H igh 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 th at the conditions of the loan are not inconsistent w ith the provisions of the present T reaty or with the status of the Free City. " * * * On Ju ly 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 o c c u p a tio n , 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) Paym ent for former German and Prussian S tate p r o p e rty ,321,000 Gold marks Total I I , Fr. francs 121,084,729 Gold marks Amount Due on III. Floating Debt Gulden (a) Treasury b i l l s... 1,000, V II.1926 (b),, 1,000, V II.1926 (c) 500,000 I 5.IX- I926 (d) Lom bard loan against Treasury bills am ounting to 5,000,000 German m arks.... 6,190, IX (e) Credit granted by the Danzig Postal Administration... 1,500, IX. 192 (/) Loan of the Savings B a n k... 3,000, IX. I92 (g),,,,,, , V II.1920 Total 13,440,000

25 25 In addition, the following State guarantees had been granted : (a) G uarantee of bills for the Danzig w harves... 75,000 (b) Guarantee for the Schichau w h a r v e s... 62,500 (c) G uarantee for private firms, more t h a n... 5,000,000 Reichsmark The am ount due on account of the Allied occupation is disputed by the Free City on the ground th at the occupation was m ainly for the sake of the surrounding districts. The liability on account of former German and Russian State property is still subject to minor readjustm ents w ith regard to property taken over by the H arbour Board. The advance obtained from the Danzig Postal Adm inistration at the rate of 7 per cent is really only an internal book-keeping transaction. The following table shows the liabilities of the M unicipality of Danzig: I. Liabilities in German m arks: Gulden {a) Redeemable loan of nom inally 10,387,956 marks, repayable at 15 gulden for 100 m a rk s... 1,558,193 (b) Mortgages, etc., of nominally 3,735,538 m arks, repayable at 30 gulden for 100 m a r k s... 1,120,661 II. Liabilities in gold m arks : Gold-mark loan of 1923: 321,287 gold m ark s...= 401,609 III. Liabilities in English currency : Loan of 1925, 1,4 5 8,7 5 0 '... = 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 th at 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... Of which gold c o i n... 5,328 Danzig subsidiary c o i n... 2,009,174 Balances w ith the B ank of England inclusive sterling notes Bills of exchange covering is s u e... Other bills of e x c h a n g e... A dvances... Foreign ex c h a n g e... Other balances on dem and... O ther balances at notice... Liabilities : Capital paid u p... R e se rv e s... Notes in circu latio n... Deposits on d e m a n d... Among which: (a) Public deposits, including Savings B a n k s ,446 (b) Foreign public deposits, including Banks of I s s u e ,716 (c) Private d e p o sits ,383 2,014,502 24,223,150 11,780,067 84,105 1,549,222 15,072, ,786 7,500,000 2,059,846 35,182,635 2,378,916 Deposits at n o t i c e... Other liabilities... 9,165,952 Contingent liabilities ,000