UNIVERSITY OF CALIFORNIA 
 
 Finances of the United States 
 in the Spanish War 
 
 THREE LECTURES 
 
 BY 
 
 CARL C. PLEHN 
 
 [Reprinted from THE UNIVERSITY CHRONICLE, Vol. I, No. 5] 
 
 BERKELEY 
 
 THE UNIVERSITY PRESS 
 
 1898 
 
UNIVERSITY OF CALIFORNIA 
 
 Finances of the United States 
 in the Spanish War 
 
 THREE LECTURES 
 
 BY 
 
 CARL C. PLEHN 
 
 [Reprinted from THE UNIVERSITY CHRONICLE, Vol. I, No. 5] 
 
 BERKELEY 
 
 THE UNIVERSITY PRESS 
 1898 
 
OUR FINANCES IN THE SPANISH WAR. 419 
 
 oft Library 
 
 FINANCES OF THE UNITED STATES 
 IN THE SPANISH WAR.* 
 
 By CARL C. PLEHN. 
 
 I. RAISING THE FUNDS. 
 
 There were many things connected with the management 
 of the war with Spain which reflected great credit on the 
 government of the United States. Not less creditable than 
 the exploits of our army and navy was the general financial 
 administration of the war. The vast sums requisite were 
 obtained promptly and without serious disturbance of the 
 money market or of the general level of prices. We floated 
 a war loan with the utmost ease at a rate of interest lower 
 than that which any nation has ever before paid during war 
 times; and for the first time in our history the credit of 
 the country was so used that it grew stronger rather than 
 weaker from its use. 
 
 While there are many features of the war revenue bill 
 itself which are open to criticism, especially in that part 
 which deals with taxation, yet the general plan for the fiscal 
 administration of the war is in almost exact accord with 
 the accepted principles of Public Finance. In this respect 
 it forms a striking contrast to the fiscal management of 
 any other war by the United States. 
 
 * Three lectures delivered before the students in History and Political Science, 
 September 22 and 29, and October 6, 1898. 
 
420 UNIVERSITY CHRONICLE. 
 
 Before beginning to study the actual administration of 
 our finances in the recent war it will be conducive to clear- 
 ness if we recall, briefly, what is generally considered to be 
 the sound method for the fiscal administration of a war. A 
 serious war usually imposes a sudden, new burden upon the 
 treasury, the exact, or even the approximate, size of which 
 it is not possible to estimate at the outset. Many of the 
 expenses of war belong to that class which financiers call 
 "extra- ordinary" to distinguish them from the usual or 
 current expenses of the government. The amount by 
 which the ordinary expenses are increased in time of war 
 depends upon many circumstances. Obviously, the chief 
 factor is the size of the forces engaged and the duration of 
 the struggle. Naturally, the chastisement of a few dozen 
 hostile Indian braves in the immediate vicinity of the regu- 
 lar army posts involves practically no "extra-ordinary" 
 expenses. Allowance is usually made in the ordinary 
 budget for the expenses a war of that kind would occasion. 
 But many circumstances less obvious than the size of the 
 forces engaged enter into the determination of the amount 
 of the "extra- ordinary" expenditures. Thus, for example, 
 a naval war, unless it happens to become the occasion for 
 the purchase of new ships, involves comparatively little 
 addition to the ordinary expenses of maintaining the navy. 
 A country which has a large standing army incurs relatively 
 less "extra-ordinary" expense when engaging in war than 
 a country which like ours has only a small regular army. 
 For very obvious reasons, practically all the expenses of 
 this war except so far as the regular navy was engaged 
 were among the "extra-ordinary" ones, and had to be met 
 by the treasury by means of distinct additions to our 
 ordinary revenues. 
 
 The ordinary expenses being provided for by the regular 
 budget the financier's whole concern in time of war is the 
 provision of the "extra-ordinary" funds. If the operations 
 of the war are likely to interfere with the ordinary revenues 
 he must furthermore be prepared to treat a part of the 
 
OUR FINANCES IN THE SPANISH WAR. 421 
 
 ordinary expenses as "extra-ordinary," at least to the 
 extent of furnishing new means to meet them. It is not 
 often possible, and still less often expedient to curtail the 
 ordinary expenditures in any way for the purpose of saving 
 money to meet the new expenses. How to increase the 
 receipts of the treasury by an amount sufficient to ensure 
 the efficient conduct of the war, without too serious dis- 
 turbance of the industries and commerce of the people, 
 upon which all the revenues depend, is the problem for the 
 finance minister to solve. The "extra-ordinary" demands 
 come thick and fast, especially at the beginning of the war 
 and they must be met and met at once. The amount 
 which may be needed at any given time is not ascertain- 
 able. But in spite of that, sufficient funds must always be 
 on hand. Upon this more than upon any other one thing 
 depends the fate of war. The war financier can never 
 plead that he has no funds, nor can he ask for time in 
 which to collect. He must have the money when it is 
 wanted and in the amounts required. No degree of skill 
 on the part of officers or bravery on the part of the men, 
 no degree of self-sacrifice at the front can compensate for 
 failure on the part of the financier to provide the ways and 
 means. His powers are, therefore, of the greatest and 
 most unusual. 
 
 Possibly the most natural source to turn to in time of 
 war for the increased revenues needed is the existing 
 system of taxes. At first thought it might seem proper to 
 attempt to obtain new income by raising the rates of the 
 old taxes. To some extent this is possible. In every well- 
 arranged tax-system there should be some taxes which can 
 be made to yield an increased revenue by simply raising the 
 rates. One of the chief reasons for the establishment and 
 the retention of the British "property and income tax," for 
 example, is found in the elasticity of the returns. But not 
 all taxes can be treated in this way. Sometimes an 
 increase in the rate of taxation will disturb industry and 
 commerce and do a greater injury to the welfare of the 
 
422 UNIVERSITY CHRONICLE. 
 
 people than is received from the damages of war. Again 
 an increase in the rates of certain taxes will diminish the 
 revenue or even destroy it entirely. In not a few taxes the 
 only way to increase the revenue is to lower the rates. 
 This is the case with most protective duties. Any change 
 in the rate of such taxes is bound to affect industry and 
 commerce, and to affect them unfavorably in the first 
 instance, whatever the subsequent effect may be. A war 
 brings perplexities enough to business without the creation 
 of artificial ones, and the financier should not interfere with 
 these taxes. It added not a little to the perplexities and 
 dangers of the civil war that the industry and commerce of 
 the people were repeatedly disturbed during the war by 
 changes in the tariff as well as by the military and naval 
 operations themselves. There are, therefore, but a limited 
 number of old taxes from which any aid can be sought. 
 In our own country owing to our one-sided system of 
 taxation, the number of them is very small indeed. The 
 financier must look elsewhere for his new revenues. 
 
 The next resource, naturally, is new taxes. But the 
 establishment of new taxes or even the restoration of old 
 taxes not in use at the time of the war is a matter requiring 
 considerable time. Even if it were an easy matter to decide 
 upon the best form of taxation and to get the necessary 
 authority from the legislative branch of the government, 
 the organization of the new administrative forces for the 
 collection of the taxes is a matter requiring time. No 
 new system of taxation reaches its normal revenue- 
 yielding powers within many months of its enactment. If 
 the taxes are entirely new the time required is longer. But 
 even if they are more or less familiar to the people from use 
 on some previous occasion, a considerable lapse of time 
 must intervene between the beginning of war and the 
 receipt of sufficient new revenues to meet any considerable 
 part of its expenses. Furthermore, the expenses of war 
 are now so enormous that any system of taxation which 
 raised, or attempted to raise, the entire amount needed 
 
OUR FINANCES IN THE SPANISH WAE. 423 
 
 during the probable duration of the war would be so 
 burdensome as to crush the people . It is therefore extremely 
 unwise, and practically impossible, to attempt to raise the 
 entire cost of the war by immediate taxation. The only 
 other resource is borrowing. 
 
 The use of the public credit, in time of war, is attended 
 by many special difficulties. The outcome of war is always 
 more or less uncertain. Even if defeat would not entirely 
 cripple the nation's resources and render the repayment of 
 the loan uncertain, or affect the payment of interest, yet 
 there are many considerations which make the lender 
 hesitate. The fact that the duration of the war, the extent 
 to which other nations may become involved, and many 
 similar considerations affecting the size of the total demand 
 upon the public credit are unknown, vastly increases the 
 difficulty of placing a loan on favorable terms. But on that 
 very account it is particularly necessary for the successful 
 administration of the war that everything should be done 
 to strengthen and preserve the nation's credit. There may 
 come a time in the progress of the war when the only 
 source from which any funds can be had is the money 
 market. If, therefore, the financier has done anything to 
 weaken the nation's credit at the beginning of the war he 
 is apt to be helpless at the close. Credit tends to weaken 
 as debt increases. 
 
 It is for this reason that resort is usually had in early 
 war-borrowings to the simplest and most primitve method 
 of debt-making: namely, that which provides revenues for 
 the payment of the interest and the repayment of the 
 principal at the very time the debt is contracted. The 
 creditor sees in the new funds flowing into the treasury the 
 security for his advances, and the guarantee of good faith 
 on the part of the government. So long as every new loan 
 is accompanied by new taxes from which its cost can be 
 met the public credit is practically secure. But if on the 
 other hand the government neglect this precaution during 
 the first stages of the war, any attempt to resort to it at a 
 
424 UNIVERSITY CHRONICLE. 
 
 later stage is apt to be regarded as the desperate device of 
 unsound financial management and the presage of coming 
 bankruptcy. 
 
 Public credit is a plant of slow growth and extremely 
 tender. It withers in a day before a breath of doubt. 
 
 Inasmuch as a successful outcome cannot be hoped for 
 in modern warfare without the funds obtainable solely by 
 public borrowing, and the necessity for loans increases the 
 longer the war continues, it behooves the modern war 
 financier to guard the nation's credit as his most precious 
 treasure. No sacrifice is too great which will strengthen it 
 and preserve it intact for the later stages of the war. 
 
 Such, stated in a form almost too condensed for perfect 
 clearness, are the principles which should guide the fiscus 
 in time of war. No better illustration of the application of 
 these principles can be found in history than is afforded by 
 our recent war. 
 
 The situation, as it confronted Secretary Gage when the 
 news of the destruction of the Maine reached Washington, 
 may be summarised somewhat as follows: The Treasury 
 had a balance on hand of about $225,000,000. But, as we 
 shall see in a moment, only about $25,000,000 of this was 
 really available -for immediate use in the prosecution of the 
 war. The ordinary expenditures of the government, out- 
 side of those for the postal system, which is nearly self- 
 supporting, amounted in round numbers to $350,000,000 
 per annum. For the first time in many months these 
 expenses were being nearly met by the revenues. Indeed 
 it was estimated that at the ordinary rate of expenditures 
 there might be a slight surplus at the end of the year. 
 The tariff was expected to yield about $200,000,000, the 
 internal revenue taxes about $165,000,000, and there were 
 about $25,000,000 to be expected from miscellaneous 
 sources. 
 
 The larger part of the income, however, came from 
 taxes which could not well be tampered with. The tariff 
 had been so long a subject of controversy, that there was 
 
OUR FINANCES IN THE SPANISH WAR. 425 
 
 little desire to alter its recent settlement. For reasons 
 already made clear there were many parts of the tariff 
 which could not well be changed. Except in a very few 
 instances the income to be obtained from it would not be 
 increased by raising the rates. In the great majority of 
 instances to raise the rates would have been to lessen the 
 receipts, while to lower those rates for the purpose of 
 increasing the income by allowing larger importations would 
 have been to remove the protection afforded by them. 
 This was contrary to the avowed policy of the administra- 
 tion. It would, moreover, have served to disturb industry 
 and to preplex its leaders at a time already sufficiently 
 disquieting, and might have proved but an aggravation of 
 the disturbance caused by the war. The great body of the 
 customs rates, of which there are thousands on our tariff 
 schedules, are not productive of much revenue and are not 
 intended to be. They are there to restrict importations. 
 These certainly could not well be changed. Of the bare 
 dozen or so of articles of importation which do yield a 
 revenue, sugar, one of the most important, was likely to be 
 interfered with by the war. At the existing rates, sugar 
 imported should yield a revenue of about $80,000,000 a 
 year, but at least half of the importation was jeopardized 
 by the war itself and it would have been highly impolitic to 
 have changed the rate at this time. Iron, which was once 
 a source of considerable revenue, was, in consequence of 
 the changes which have taken place in that industry, and 
 of the protective features of the customs law, not available 
 to provide new revenues, as the importations are at best 
 small. Cotton goods, the tax upon which yields consider- 
 able revenue, were protected; so were manufactures of 
 hemp, flax and jute, of leather and of wool. Drugs, 
 medicines, and chemicals were already taxed up to the limit 
 of productiveness from a revenue point of view. In short 
 there were but four important articles imported which 
 might be used to yield additional revenue. These were 
 hides and skins, raw silk, and tea and coffee. To tax hides 
 
426 UNIVERSITY CHRONICLE. 
 
 and skins, and raw silk would, probably, under the prevail- 
 ing theory of "compensatory" duties, have involved an 
 increase in the rates on the products manufactured from 
 them, to maintain the same degree of protection that those 
 products now enjoy. That would have reopened the whole 
 tariff controversy and have rendered the outcome of the 
 war-revenue measure extremely doubtful. Clearly it were 
 wisest, considering how recently the tariff issue had been 
 temporarily settled, to leave them alone. As a matter of 
 fact, then, there are only two articles in the whole list of 
 importations which might be considered by the Secretary 
 of the Treasury in his search for new income. These were 
 tea and coffee, which might, perhaps, have been made to 
 yield together nearly $80,000,000 additional revenue. That 
 was approximately all that could be expected from the tariff. 
 
 In the war revenue bill as presented to the House of 
 Representatives by the Committee on Ways and Means, 
 of which Mr. Dingley was chairman, there was no sugges- 
 tion of using the tariff in any way for obtaining additional 
 revenue. It was not until the very end of the long dis- 
 cussion of the measure in the Senate that it was proposed 
 to put a duty of 10 cents a pound on tea. That measure 
 passed the Senate and was accepted by the conference 
 between the two Houses and by the House of Represent- 
 atives without any public discussion as to its merits. The 
 reason for this duty, as for the omission of coffee from the 
 list, is therefore not clear. The tax on tea is an important 
 matter. The yield will be over $10,000,000 per annum. 
 A similar tax on coffee, which would have been at the rate 
 of 8.5 cents per pound, would have yielded about $70,000,000 
 more. It is, therefore, somewhat surprising that it should 
 have attracted so little attention from the members of 
 Congress. 
 
 Since the revenue from the tariff was not to be increased 
 the only resource available was internal taxes. That these 
 internal taxes should have taken the same general form 
 as the taxes used during the civil war, and consequently 
 
OUR FINANCES IN THE SPANISH WAS. 427 
 
 more or less familiar to people and officers, was but 
 natural. Under the stress of war it is unwise to attempt 
 to organize entirely new taxes, such, for example, as an 
 income tax. Though an income tax had been used 
 during the civil war, that form of taxation was under the 
 shadow of an adverse decision from the Supreme Court. 
 Even if an income tax law which would have been con- 
 stitutional, according to the recent decision of the court, 
 could have been drawn, it is doubtful whether it could have 
 been made productive within any reasonable period of time. 
 Recourse might have been had to direct taxes apportioned 
 among the States according to population. These taxes 
 could then have been raised in any manner which the State 
 authorities chose. But there are two fatal objections to 
 this plan. The apportionment of taxes according to popu- 
 lation is fundamentally unjust and unequal. What it 
 amounts to practically is a graduated poll tax. The dif- 
 ferent commonwealths vary so in wealth per capita that any 
 per capita tax, however raised, would be unfair. Although 
 the census estimate of wealth in 1890 was anything but 
 satisfactory, yet the method used in that estimate was 
 uniform throughout the country; and such differences as 
 that between South Carolina, with about $350 per capita, 
 and Nevada, with $4,000 per capita, show how utterly 
 inadequate the constitutional method of raising direct taxes 
 has become. Then again, the method of taxation by which 
 most of the States raise their revenues, and which they 
 would probably follow in raising their share of any appor- 
 tioned taxes, is the worst in use in any civilized country 
 and the injustice of the apportionment would have been 
 enormously increased by the injustice in collection. The 
 second objection to this method of raising direct taxes 
 prescribed by the constitution is that it takes an inordinate 
 length of time, and war taxes should begin to yield a 
 revenue as early as possible. 
 
 The only available plan was, therefore, to seek ad- 
 ditional revenue from the existing, indirect, internal taxes, 
 
428 UNIVERSITY CHRONICLE. 
 
 the excises or, as we call them, the "internal revenue 
 taxes, and to supplement these still further by new taxes of 
 the same sort. The critical examination of the war revenue- 
 bill forms the subject of the second of these lectures, so I 
 must content myself here with the brief statement that the 
 government resorted at this critical period to increased rates 
 on some of the existing internal revenue taxes and to 
 certain of the taxes used during the Civil War. Briefly 
 summarized the revenue bill nearly doubled the existing 
 rate of taxation upon beer and other similar fermented 
 liquors; it imposed special taxes on bankers, brokers, pawn- 
 brokers, theatres, circuses, and other shows, bowling-alleys 
 and billiard rooms ; it raised the rates on tobacco of all kinds ; 
 and placed stamp taxes on stocks and bonds, commercial 
 papers, legal documents, checks and drafts, proprietary 
 medicines, toilet articles, bills of lading, insurance policies, 
 and a number of other things. Special direct taxes were 
 imposed on the oil-trust and the sugar- trust; and on 
 legacies and distributive shares of personal property. 
 
 As the war revenue bill passed the House its probable 
 yield was variously estimated at from $90,000,000 to 
 $105,000,000 per annum, the former being the better esti- 
 mate. As amended in the Senate and finally adopted, it 
 promised to yield at least $150,000,000 per annum. The 
 actual yield in addition to the regular revenue during the 
 first month was about $13,000,000 which speaks well for 
 the probable accuracy of this estimate. But the expenses 
 of war during the first few months, if not for a long time 
 after that, would be, it was estimated, at least double that 
 sum and possibly more. Therefore, unless the Treasury had 
 a considerable balance on hand, there would have been no 
 possibility of conducting the war at all without immediate 
 loans. The balance in the Treasury at the outbreak of the 
 war was $225,000,000. Upon this were a number of claims, 
 some of which, however, were not immediate. $100,000,000, 
 known as the gold reserve, had to be held for the preserva- 
 tion of the parity of all parts of the circulation and the 
 
OUR FINANCES IN THE SPANISH WAR. 429 
 
 avoidance of general financial ruin. Then there were 
 $13,000,000 of fractional silver and minor coins, a large 
 part of which was worn and unavailable, while the rest 
 was needed for currency purposes throughout the country. 
 $14,000,000 had been received from the sale of the Pacific 
 Railroads ; but although this sum was temporarily available it 
 would, if it were spent, be necessary to raise an equivalent 
 amount before January first to meet the Pacific Railroad 
 bonds which came due at that time. $33,000,000 were held 
 in trust for the redemption of the notes of national banks 
 which had failed or which were redeeming their circulation . 
 A part of this was temporarily available but it would be 
 necessary to replenish that fund at an early date if much 
 were drawn from it. There were then, out of the 
 $225,000,000, $160,000,000 of which a small part only was 
 available and that but for a short time. Anything drawn 
 upon that would have to be replaced by January first at 
 latest. Of the $65,000,000 remaining $40,000,000 were 
 necessary as the cash on hand for the ordinary operations 
 of the government. That amount corresponds to the cash 
 on hand which a merchant keeps in the till to make change 
 or to meet small bills. This left but $25,000,000 for the 
 initial expenses of the war which in our state of unpre- 
 paredness would naturally be above the average. This 
 $25,000,000 was all the unencumbered money in the 
 Treasury to meet the appropriation of $50,000,000 made by 
 Congress before war was declared. It was clear that the 
 Secretary of the Treasury could not provide the sinews of 
 war without the power to borrow, both for a short time, to 
 anticipate the revenues expected from the new taxes, and 
 for a long time to enable him to support any naval and 
 military operations which might become necessary, however 
 extensive. 
 
 After much discussion and more or less unnecessary and 
 dangerous delay, especially in the Senate, Congress author- 
 ized the borrowing, at the discretion of the administration, 
 of not more than $100,000,000 at any one time on Treasury 
 
430 UNIVERSITY CHRONICLE. 
 
 certificates and of an amount not to exceed $400,000,000 on 
 10-20 bonds at three per cent. Nominally, therefore, the 
 Secretary of the Treasury had in his hands for the necessi- 
 ties of war during the first six months of its duration: 
 
 Surplus on hand $ 25,000,000 
 
 War revenues 75,000,000 
 
 Temporary loans 100,000,000 
 
 Bonds 400,000,000 
 
 Total $600,000,000 
 
 Practically, he was limited by the fact that all of this 
 money had not been appropriated and it would have been 
 folly to raise more than he had authority to spend. 
 Including the $50,000,000 appropriated before the war 
 broke out, the total war appropriations made by Congress 
 before it adjourned amounted in all to $361,788,095.11. 
 This sum covered the most generous estimates of the prob- 
 able cost of the war. It is not possible at the present time 
 to obtain a complete estimate or a detailed account of 
 the actual expenses of the war. There is little doubt, 
 however, but that they will fall well within the appropria- 
 tions. Even though the war is over, the "extra- ordinary" 
 demands on the Treasury will not cease for many months to 
 come. To the end of July, the expenses were about 
 $90,000,000; to the end of August about $115,000,000; 
 and for the six months they will probably be well within 
 $175,000,000, or within half of the appropriations. The 
 Treasury, meanwhile, has been in the receipt of about 
 $13,000,000 a month additional revenues, or about $75,000, 
 000 for six months. It has also raised $200,000,000 by 
 the sale of 10-20 bonds at three per cent., a total of 
 $275,000,000, or nearly $100,000,000 in excess of the 
 probable actual expenditure for the six months. Although 
 the accumulation of this surplus will give rise to many 
 interesting problems in the future, it was not in any sense 
 an extravagant or useless piece of financiering. As was 
 stated in the beginning of this lecture, the Treasmy must be 
 prepared to meet any demand that may arise, instantly and 
 
OUR FINANCES IN THE SPANISH WAR. 431 
 
 amply. That is an imperative necessity. As the early 
 close of the war could not have been foreseen, the fiscal 
 preparations were necessarily liberal. Indeed the amplitude 
 of the funds available was one of the most potent causes of 
 the success of the war. The excess raised was not larger 
 than was necessary to insure the instant readiness of the 
 Treasury to meet all possible demands. Had the war con- 
 tinued and the demands equalled the appropriations, the 
 Treasury would again have been obliged to use its power of 
 borrowing which the fortunate termination of the war 
 rendered unnecessary. 
 
 So far the general plan of the financial administration of 
 the war corresponds to the ideal plan. It remains to see 
 how the credit of the nation stood the strain. As a matter 
 of fact we have come out of the war stronger in credit than 
 we went in, and this in itself is a remarkable feat. Let us 
 see how it was accomplished. 
 
 At the end of April, 1898, the interest bearing debt of 
 the United States amounted in round numbers to $847,000, 
 000. $100,000,000 of this bore interest nominally at five 
 per cent., the balance at four per cent. The four per cent, 
 bonds payable in 1895 were quoted, when the plans were 
 being made for placing the new loan, at 117J. At that rate 
 they would yield the investor three and one-quarter per 
 cent, interest. There was, therefore, some surprise when 
 it was proposed to place the new loan at three per cent. It 
 was urged that nobody would buy the new bond at three per 
 cent, when he could buy one of the old ones and get three 
 and one-quarter per cent. Yet the outcome showed the 
 wisdom of the move. The bonds were subscribed to seven 
 times over and in a short time rose to a premium of 103 and 
 105. In fact the entire loan was easily placed on far better 
 terms than any nation has ever before been able to obtain 
 in time of war. This remarkable result was attained partly 
 by reason of the fact that the loan was offered for popular 
 subscriptions and the bonds were for small amounts, thus 
 creating and reaching a new market among investors of 
 
432 
 
 UNIVERSITY CHRONICLE. 
 
 small means. In part, too, it was due to the fact that the 
 new bonds at par really formed a better basis for the 
 national bank-note circulation than the old bonds at 117J, 
 and very much better than the old bonds at 123J, the price 
 which was reached before the new issue was completed. 
 An investment by a national bank of $100,000 in the old 
 bonds at 117i would yield a profit of $736.70 on the circula- 
 tion, if interest is at six per cent. ; while an investment of 
 the same amount in the new bonds at par would yield a 
 profit on the circulation of $1,302.02. The difference in 
 favor of the new bonds was $565.32, or over half of one per 
 cent. The advantage is still greater now as the old 4's are 
 at 127J.* None of these influences, however, would have 
 had any weight had it not been that new revenues sufficient 
 to meet all debt charges and part of the war expenses had 
 been provided. 
 
 Much interest centers around the successful attempt to 
 make this a popular loan. Congress after much discussion, 
 finally provided that these three per cent, bonds "redeemable 
 in coin at the pleasure of the United States after ten years 
 from the date of their issue and payable twenty years from 
 
 * COMPARATIVE ILLUSTRATION OF $100,000 INVESTMENT. 
 
 
 3's OF 1908-18 AT PAR. 
 
 4's OF 1925 AT 117i 
 
 Par value of bonds purchased 
 
 $100,000 
 90,000 
 
 5,400 
 3,000 
 
 
 $85,287.84 
 79,759.05 
 
 4,605.54 
 3,411.51 
 
 
 Circulation 
 
 Receipts: 
 Interest on circulation, 6# 
 
 Interest on bonds 
 
 Deductions : 
 Tax on circulation 
 
 900 
 60.50 
 137.48 
 
 $8,400 
 
 852.87 
 60.50 
 137.48 
 229.50 
 
 $8,017.05 
 
 Expenses 
 
 Annual cost of redemption 
 
 Sinking fund to liquidate premium 
 Net receipts ... 
 
 
 
 
 1,097.98 
 
 
 1,280.35 
 $6,736.70 
 6,000 
 
 $7,302.02 
 6,000 
 
 Receipts if capital had been invested, 6< 
 Profit on circulation 
 
 
 
 $1,302.02 
 
 $ 736.70 
 
 
 
 Advantage of 3's at par over the 4's at 117i, $565.32 or .565*. 
 
OUR FINANCES IN THE SPANISH WAR. 433 
 
 that date," should "be first offered at par as a popular loan 
 under such regulations, prescribed by the Secretary of the 
 Treasury, as will give opportunity to the citizens of the 
 United States to participate in the subscriptions to such 
 loan, and in allotting such bonds the several subscriptions 
 of individuals shall be first accepted, and the subscriptions 
 for the lowest amounts shall be first allotted." Before the 
 bill was finally passed offers had been made by various 
 banking houses to take the whole issue at a slight premium. 
 Both Congress and the Administration, however, favored 
 the experiment of interesting a large number of small 
 property-owners in the loan, even at a loss to government. 
 It was thought that such a measure would strengthen the 
 national credit by giving expression to the faith of our own 
 people in the integrity of the government. Other considera- 
 tions of a political character also entered in, but with them 
 we are not concerned. As a financial measure for the 
 strengthening and support of the public credit it proved a 
 phenomenal success. 
 
 The bonds were issued in denominations as low as $20. 
 Subscriptions were received through the post-office, and 
 every ~bona fide subscription under $500 was immediately 
 accepted. More than half of the entire issue was taken by 
 230,000 of these small subscriptions, and no subscription of 
 more than $4,500 was accepted. In all 320,000 persons 
 offered or made subscriptions, and the total amount tendered 
 the government was $1,400,000,000. This rush for the new 
 bonds was not merely a matter of patriotism or sentiment. 
 During the progress of the subscriptions the price of the 
 bonds advanced first to 102 and finally to 105 J. They now 
 stand at about 105. The lucky individuals whose subscrip- 
 tions were accepted made from three per cent, to five per 
 cent, in a few days. The popularity of these bonds was 
 greatly enhanced by the standing offers obtained by 
 Secretary Gage from two syndicates to take the entire loan 
 or any part of it that was not covered by the popular 
 subscriptions. 
 
434 UNIVERSITY CHRONICLE. 
 
 This method of floating the loan will cost the government 
 a considerable amount. In the first place it lost a possible 
 premium. How much that premium would have been 
 cannot be estimated because the bonds were sold in a 
 broader market than would have otherwise existed. But it 
 would have been at least two per cent . , for even at a higher 
 rate the bonds offer a favorable basis for national bank note 
 circulation. That is, at least $4,000,000 was lost at the 
 beginning. Then the cost of handling the loan, paying the 
 interest, etc., is increased considerably by the small size of 
 the bonds and the large number of holders. It is just as 
 much trouble to pay the 15 cent coupon of a $20 bond as 
 it is to pay the $75 coupon of a $10,000 bond. Yet in spite 
 of all this, the placing of the $200,000,000 loan of 1898 was 
 one of the most successful pieces of financiering ever accom- 
 plished by our government. It demonstrated the perfect 
 solvency of the government ; it gave us a financial prestige 
 which went a long way toward hastening the end of the 
 war; and it so strengthened our credit that, had the war 
 unfortunately continued, we should have been able to 
 obtain funds to almost any amount on the most favorable 
 terms imaginable. With a three per cent, bond selling at 
 105 during the actual continuance of military operations, 
 we can safely regard our credit as unimpaired. 
 
 The final test of the success of the financial administra- 
 tion of a war is the preservation of the public credit. 
 
 II. THE NEW TAXES. 
 
 The United States government has never resorted to 
 internal taxes, except to pay the expenses of war, and with 
 the single exception of the Mexican War, we have waged 
 no war without the use of internal taxes. The first system 
 of "internal revenue taxes", as we have learned to call 
 them, was arranged by Hamilton, 1791," in the face of the 
 most bitter opposition. An excise was declared to be "the 
 horror of all free states" and "hostile to the liberties of the 
 
OUR FINANCES IN THE SPANISH WAR. 435 
 
 people." On account of the general hostility to that form 
 of taxation a hostility which led to armed resistance in 
 the "Whiskey Rebellion" the law was but feebly enforced. 
 It was dubbed by Jefferson an "infernal system," and 
 finally came to an end in 1802. To meet the expenses of 
 the war of 1812 Congress again, reluctantly, resorted to 
 internal taxation, but the taxes then introduced were never 
 satisfactory and were hastily abandoned in 1817. From 
 that time to the outbreak of the civil war no internal taxes 
 were levied for the support of the federal government. 
 
 The entire absence of any internal taxes and of any 
 elastic element in the tax-system at the outbreak of the 
 civil war added greatly to the difficulties involved in raising 
 the revenues needed. Beginning in 1862, a vast and 
 complex system of internal taxation was built up. Of this 
 comprehensive system an acute French observer said: 
 "the citizen of the union pays a tax every hour of the day, 
 either directly or indirectly, for every act of life; on his 
 personal and real property; on his receipts and in his 
 expenses; on his business and on his pleasures."* 
 
 The heavy expenses of the war debt necessitated the 
 retention of many of these taxes even after the close of the 
 war. As the years passed by, however, the most burden- 
 some ones were removed. Still a sufficient number of 
 important internal revenue taxes were permanently retained 
 to yield about $150,000,000 a year. The continuance of 
 these taxes in time of peace, proved of great advantage 
 when war broke out. That advantage was that they pro- 
 vided the administrative organization necessary for the 
 collection of increased revenues. New taxes to be adminis- 
 tered by the same machinery could be easily imposed and 
 made remunerative within a very short time. Indeed there 
 is almost no precedent in financial history for the immediate 
 returns these new taxes yielded. The income from them 
 during the very first month was over $12,000,000. 
 
 For the reasons explained in the last lecture it was 
 
 * E. Duvergier de Hauranne. Revne de deux mondes, August 15, 1865. 
 
436 UNIVERSITY CHRONICLE. 
 
 decided to raise the larger part of the revenue needed for 
 the war by enlarging the existing system of internal taxes. 
 The taxes of this kind in use were of three principal classes : 
 
 (1) the group on spirits, yielding, in 1897, $82,008,543, 
 
 (2) the group on tobacco, yielding $30,710,297, (3) the 
 group on fermented liquors, yielding $32,472,162. The 
 war revenue bill* doubled the rates in two of these groups 
 and rehabilitated a large number of the taxes used during 
 the civil war. The principles which guided the selection of 
 the different taxes were stated by Mr. Dingley when 
 explaining the bill to the House as follows: 
 
 " They ( the Committee on Ways and Means ) naturally have had 
 recourse to the legislation of the period of the civil war, when so large 
 an amount had to be raised, and they have found, after a careful con- 
 sideration of the question of taxation, that on the whole it is better at 
 the present time, and we trust that that may be all that may be 
 necessary, that about $100, 000, 000 additional revenue should be raised, 
 and that entirely through internal revenue legislation. Hence the 
 war revenue bill which has been reported provides for internal 
 revenue taxes exclusively. 
 
 These taxes have been selected, first, because we have the machinery 
 for the collection of them now, and they can be collected with but 
 slight additions to the force and with but slight increase of expense. 
 We have selected them also because they were a source of revenue 
 successfully seized upon during the civil war, and because they are 
 taxes either upon articles of voluntary consumption or upon objects 
 where the tax will be paid by those who are ordinarily able to pay 
 them ; and we have refrained from putting a tax in a direction where it 
 would be purely upon consumption, unless the consumption was of an 
 article of voluntary consumption, so that the consumer might regulate 
 his own tax, following what is the accepted rule of taxation in all 
 countries, with a view of imposing the least burden and disturbing the 
 business of the country as little as possible." 
 
 Briefly summarized the aim of the bill was to obtain the 
 money needed as quickly as possible. The question of the 
 equal distribution of the burden among the people was not 
 
 * Introduced in the House, April 25, 1898 ; passed April 29, by a vote of 181 to 131. 
 Reported by the Senate Finance Committee, much amended, May 12. Passed the 
 Senate, June 4, by a vote of 48 to 28. Conferees' report agreed to in the House, June 
 9, and in the Senate, June 10. Signed by the President, June 13. Went into effect the 
 next day, except where, in some eases, July 1 was specified. 
 
OUR FINANCES IN THE SPANISH WAR. 437 
 
 raised. The revenue bill was strictly an emergency measure. 
 Although the Senators showed a tendency to spin fine 
 theories in regard to the operation of certain taxes, yet the 
 equality of the system as a whole was not considered. 
 Senator Allison said of it: 
 
 "In the first place, this bill is here only because the Government of 
 the United States is involved in a war with a foreign country. If 
 there were no war, there would be no necessity for this bill; and 
 therefore it may be truly called, what it is denominated, a war 
 measure." 
 
 It is not perhaps surprising, then, that the bill which was 
 framed in this spirit contains a heterogeneous collection of 
 taxes. It does not cull the fruit systematically from the 
 orchard of industry, but plucks only a part of that which 
 is most easily reached. The bill does not establish a system 
 of taxation, but a group of taxes which absolutely defies 
 classification. 
 
 We may study the war- re venue bill under the following 
 divisions: (1) Taxes already in use, the rates of which 
 have been raised. (2) New excise taxes. (3) New 
 business and corporation taxes. (4) Transaction taxes 
 and business taxes in the form of stamp taxes on business 
 documents. (5) Miscellaneous taxes. 
 
 Of the three groups of internal taxes in use at the 
 time the revenue bill was presented, one, namely, that 
 consisting of taxes on spirits was left untouched. The 
 rates imposed on the other two were doubled with the 
 exception that the special taxes on dealers in beer and on 
 brewers were left unchanged.* 
 
 The tax imposed on dealers in tobacco prior to 1890 
 was restored. The restoration of the tax on dealers in 
 tobacco was regarded partly as a measure to enable the 
 officers better to enforce the law in regard to the taxation 
 of tobacco and cigars. No explanation was advanced dur- 
 ing the discussion of the bill in Congress for not raising 
 
 * Tax on beer, ale, and porter, increased from $1 to $2 a barrel, discount seven and 
 one-half per cent. Tax on tobacco and snuff, twelve cents a pound; cigars and cigar- 
 ettes, over three pounds per 1000, $3.60 per 1000; of less weight, cigars, $1, cigarettes, 
 $1.50. 
 
438 UNIVERSITY CHRONICLE. 
 
 the rates on spirits. Had that class of goods been treated 
 as beer and tobacco were treated, no other taxes would 
 have been necessarj-. With the improved methods of 
 administration now in use there could be no reason to fear 
 the wholesale evasions which vitiated the attempt to levy 
 high rates upon spirits during the civil war. If, as was 
 suggested in the last lecture, tea and coffee had both been 
 made to contribute, and as now suggested, spirits had been 
 treated as beer and tobacco were, we should have had 
 ample revenues with the least possible additional cost. 
 The amounts would have been : 
 
 Tea $ 10,000,000 
 
 Coffee 70,000,000 
 
 Spirits 80,000,000 
 
 Beer 30,000,000 
 
 Tobacco 30,000,000 
 
 Total $220,000,000 
 
 This is $70,000,000 more than the new taxes which 
 were imposed yield, so that the additional rates need have 
 been but two-thirds of the increase suggested. Indeed, an 
 increase of half the amount suggested in the taxes on tea, 
 coffees, spirits, beer, and tobacco would have furnished 
 over $100,000,000, or more than the amount which the 
 House Committee on Ways and Means thought necessary 
 to raise by taxation. It is needless to say that such 
 taxation would have been very much more easily borne by 
 the people than the multitude of new taxes imposed. Had 
 that plan been followed there would have been few of us who 
 would know by actual experience that we were paying the 
 expenses of a war. 
 
 New excise taxes to be collected by the use of stamps 
 were imppsed on patent and proprietary medicines and 
 toilet articles, on chewing gum, and on wine.* 
 
 * MEDICINES AND TOILET ARTICLES. 
 
 Retail Price of Packages. Stamp. 
 
 1 to 5 cents i of 1 cent 
 
 5 to 10 cents i of 1 cent 
 
 10 to 15 cents of 1 cent 
 
 15 to 25 cents f of 1 cent 
 
 For each additional 25 cents I of 1 cent 
 
 Chewing gum, 4 cents for each package of not more than $1 in retail price and 4 
 cents for each additional $1 in retail price, or fraction thereof. 
 
 Wine, per bottle of one pint or less, 1 cent; per bottle of over one pint, 2 cents. 
 
OUR FINANCES IN THE SPANISH WAR. 439 
 
 Little can be said in favor of these taxes; they strike 
 a vast variety of different articles of consumption and their 
 effect is anything but uniform. Consumption is a very 
 poor basis for taxation. The rates are so moderate, how- 
 ever, that there is little temptation to shift the taxes and 
 the articles taxed are in many instances monopoly products, 
 the prices of which, it may be assumed, are already as high 
 as they can be made without decreasing the sales. In some 
 instances, therefore, these are not taxes on consumption 
 but taxes on the profits of monopoly businesses. There 
 has, indeed, been no general tendency to increase the prices 
 of these articles. To be sure the imposition of the tax has 
 checked the tendency to cut rates and to that extent may be 
 said to have raised the prices of some articles widely 
 regarded as necessities, but that effect will be only tempor- 
 ary. While, therefore, these new excise taxes have not 
 added a very desirable element to our tax system, they are 
 not seriously harmful. 
 
 The new business taxes are of two classes. The first 
 are those laid on bankers, brokers, museums and concert 
 halls, circuses and other public exhibitions, bowling-alleys 
 and billiard and pool rooms.* The second are those on 
 refiners of petroleum and sugar and on pipe line companies. 
 
 In the first of these classes the most serious difficulties 
 that have arisen are clearly revealed in connection with the 
 application of the law to foreign banks. The law makes no 
 special provision for them and they do not come properly 
 under the general provisions. Strictly speaking a branch 
 of a foreign bank doing business in this country has no 
 capital located here. Such banks would, therefore, pay but 
 $50, the minimum tax which all bankers must pay. But as 
 these houses often do a vast business such a tax would be 
 obviously unfair. The law of 1864 which was partly copied 
 in the new law was much more explicit. It provided a 
 
 * Bankers, $50 a year and $2 for each $1,000 over $25,000 of capital; brokers, $50; 
 pawnbrokers and commercial brokers, $20 ; custom-house brokers, $10 ; theaters, etc., 
 $100; circuses, $100 for each State in which they do business; bowling-alleys, etc., $5 
 for each alley or table. 
 
440 UNIVERSITY CHRONICLE. 
 
 method for determining the capital of branch banks. The 
 total capital of the bank was to be apportioned among the 
 different branches according to the amount of the business 
 done by each. This method was applied to foreign banks. 
 That old law, however, laid a tax on deposits, dividends, 
 and profits as well as upon capital, so that the burden fell 
 with greater equality upon all the banks. While the 
 inequality of this tax is best revealed by the difficulty of 
 applying the law to foreign banks, it also arises in every 
 other case. The amount of capital used is never commen- 
 surate with the business done, nor with the ability of the 
 bank to contribute. There are, for example, fifteen com- 
 mercial banks in San Francisco. In one of these the 
 capital is nineteen per cent, of the business being done, as 
 measured by the total assets and liabilities ; in another it is 
 seventy-nine per cent. Although the total assets and 
 liabilities are only an approximate measure of the bank's 
 ability to pay, yet this comparison shows that the new tax 
 is many times as heavy on the second bank as on the first. 
 Generally speaking the smaller the bank the heavier this 
 tax is likely to be. The same inequality pervades the other 
 special business taxes. A small theater or a small circus 
 pays the same tax as a large one. Probably some of the 
 smaller ones will be driven out of business. Possibly, 
 however, this is riot a result to be deplored. This whole 
 group of taxes seems to have been snatched indiscriminately 
 from the system of internal taxes which were developed 
 during the civil war. The old system was by no means a 
 complete or a just one, and the scattered sections adopted in 
 the new law form far less of a system. 
 
 The tax on refiners of petroleum or sugar and on pipe- 
 line companies which was placed at one-quarter of one per 
 cent, on the excess of gross receipts above $250,000 a year 
 is the remnant of a tax on the gross receipts of nearly all 
 corporations which was proposed by the majority of the 
 Senate Committee on Finance. The Republican minority 
 of that committee, however, objected to such a sweeping 
 
OUR FINANCES IN THE SPANISH WAR. 441 
 
 tax, first, on the ground that it would burden many com- 
 modities several times over, and second, on the ground 
 that many corporations, and especially the smaller ones, 
 had to compete with unincorporated business houses and 
 firms, and that the latter would be given an advantage. It 
 was urged during the discussion that the tendency to form 
 corporations was a public calamity, and should be checked 
 by this form of taxation. A tax on the gross receipts of 
 railroads, bridges, canals, express companies, ferries, 
 lotteries, ships, barges, stages, steamboats, and telegraph 
 and insurance companies had been used with great success 
 during the civil war. It was proposed to renew this tax and 
 to extend it to all corporations in spite of the fact that many 
 of them were heavily taxed by other parts of the law. 
 There were very large elements of injustice in the proposed 
 tax, and the only argument advanced in favor of retaining 
 the tax on the oil and sugar trust was that they were 
 monopolies. The tax is not severe. It will not be above 
 one and one-quarter cents per hundred pounds of sugar nor 
 above one and one- half cents per hundred gallons of oil at 
 the prevailing wholesale rates, so that there will be little 
 temptation to shift the tax even if the companies would not 
 lose more by reduced sales from an attempt to raise prices 
 than they would gain by shifting the tax. There is little 
 likelihood that the tax will affect retail prices. 
 
 A very large number of transaction taxes and of busi- 
 ness taxes was levied in the form of stamp taxes on 
 business documents and on the means of communication. 
 These taxes are usually known as stamp taxes, but the 
 name indicates merely the means of collection and shows 
 nothing of the nature of the tax. In general these taxes 
 are based upon a recognition of the fact that when wealth 
 is transferred from one person to another its existence is 
 manifested and a convenient moment occurs for the 
 imposition of a tax. When such a transfer is accompanied 
 by a document which is legal evidence of the title of the 
 new owner it is easy for the government to refuse legal 
 
442 UNIVERSITY CHRONICLE. 
 
 recognition to such a document unless accompanied by the 
 evidence that the tax has been paid. It is, therefore, practi- 
 cally impossible to evade such a tax. The most convenient 
 way of collecting these taxes is by the sale of stamps which 
 are to be attached to the documents as evidence of pay- 
 ment. There are two features of these taxes which 
 commend them as emergency taxes. In the first place, 
 even at a low rate they can be made to yield a considerable 
 income, and the return is a quick one, as large the first 
 month as at any time afterward. In the second place they 
 are very inexpensive to administer: the taxpayer himself 
 acts as tax-collector and when he goes to the office to 
 purchase the stamps brings in the revenue. He cannot 
 omit to pay his tax lest his document prove illegal. During 
 the civil war and for many years afterward stamp taxes of 
 this sort were in use. Many of the provisions of the old 
 law were transferred to the new law, and the changes and 
 omissions are rarely for the better. 
 
 It would be tedious to enumerate all the transactions 
 which are taxed in this way, nor is it necessary, as I can 
 comment on but few of them. The first thing that strikes 
 one who carefully scans the long schedules of these taxes is 
 that they are frightfully unequal. Only here and there are 
 they graded according to the value of the thing taxed. 
 Thus the tax on the issue of corporation stocks is five cents 
 on each $100 of the par value, and on the transfer of a 
 stock is two cents on each $100 of the par value. But the 
 par value of a stock is a perfectly arbitrary thing, a mere 
 name. It is usually $100, but the true value may be any- 
 where from one cent to $1,000 or over, according to the 
 success of the enterprise. So, too, with checks and drafts; 
 whatever the value may be, the tax is always two cents. 
 Indeed, in this particular case the form of the tax defeats 
 its end as a revenue measure, for it has simply resulted in 
 the writing of fewer and of larger checks, and more has 
 been lost to the postal revenues through less frequent 
 remittances than has been gained from the tax on checks. 
 
OUR FINANCES IN THE SPANISH WAR. 443 
 
 All of that part of the law which deals with drafts and 
 bills of exchange is so faultily drawn as to be practically 
 unintelligible. The technical terms of banking are used in 
 strange and unusual senses, and totally incongruous things, 
 such, for example, as inland bills of exchange and certifi- 
 cates of deposit bearing interest are grouped together. 
 These provisions should have been drawn by a practical 
 banker. Had the new tax law not been supported by that 
 patriotic sentiment which so largely aided its enforcement, 
 this particular part of the law would have given rise to 
 more law suits than revenue. 
 
 Included under the stamp taxes are certain taxes 
 directed more or less vaguely at certain classes of corpora- 
 tions. These are the taxes on freight bills, express receipts, 
 parlor and sleeping car tickets, telegrams and telephone 
 messages, and passage tickets to foreign countries. The 
 rates on the last are graded according to value, but on all 
 the others are uniform at one cent each, except that no tax 
 falls on telephone messages below fifteen cents. The tax 
 on telephone messages is not collected by stamps. It is 
 easy to see that this is a most unequal system. There has 
 been much discussion as to whether it was the intention of 
 the law that the stamp should be furnished by the com- 
 panies or by their patrons. This is really a matter of little 
 moment. In some cases the tax is so slight as to be 
 entirely immaterial. In such cases the companies have 
 furnished the stamps themselves to save their patrons any 
 annoyance, and have not changed their rates. In other 
 cases the tax is so severe that if the companies furnish the 
 stamps they will be obliged to shift the tax by raising their 
 rates, in order to live. If the tax were paid by the 
 express companies it would vary from four per cent, of the 
 gross receipts down to practically nothing. For doing a 
 twenty-five-cent errand the express company would pay one 
 cent, and no more for a shipment of $1,000,000 in gold. 
 The express companies have asserted that if they have to 
 pay the tax it will take half of their profits. The tax is 
 
444 UNIVERSITY CHRONICLE. 
 
 also very severe on telegrams. The average telegram, it 
 has been estimated, costs 24.3 cents and the average profit 
 is six cents, of which the tax is 16| per cent. Whatever 
 may have been the intention of the law as to who should 
 furnish the stamp in such cases, it is clear that the tax will 
 be shifted to the patron of the company. If it is finally 
 decided that the company must furnish the stamp, then the 
 rates will have to be raised, and the patron will have to pay 
 the tax just as much as if he furnished the stamp himself. 
 Taxes which appropriate for the use of the government 
 from ten per cent, to fifty per cent, of the net profits of any 
 business are bound to be shifted. Still the companies 
 cannot escape considerable loss even by shifting the tax. 
 If they raise the rates in order to cover the tax their busi- 
 ness will fall off, while the expense of doing it will not 
 decrease in like measure. If they could raise their rates 
 without loss of business there is every reason to suppose 
 they would do so, tax or no tax. On the other hand the 
 public is the loser as well as the companies. In the first 
 place it is obliged to pay the tax, or at least a part of it, 
 and in the second place it is obliged by the increased cost to 
 curtail its use of the facilities which the companies furnish. 
 When taxation approaches confiscation it strikes directly at 
 the welfare of the whole people. 
 
 It is a curious commentary on the hasty character of this 
 legislation that the tax on those corporations against which 
 no little hostility was expressed in Congress should be only 
 a quarter of one per cent, of the gross receipts; while on 
 businesses against which nothing in particular was said the 
 tax is nearly sixteen times as heavy, or nearly four per cent, 
 of the gross receipts. 
 
 Among the miscellaneous taxes the most interesting is 
 the inheritance tax. The House bill had proposed certain 
 stamp taxes on probates of wills and letters of administra- 
 tion. This was rejected by the Senate Committee which 
 substituted the tax that was finally adopted. Inheritance 
 taxes have been growing in favor in this country, as indeed 
 
OUR FINANCES IN THE SPANISH WAR. 445 
 
 they have in all parts of the civilized world. During the last 
 fifteen years they have been introduced in many of our 
 States. The federal inheritance tax falls on legacies or 
 successions of personal property only. It falls only on 
 estates in which the personal property exceeds $10,000. 
 The rate is progressive in two ways. It rises from three- 
 quarters of one per cent, on direct heirs to five per cent, on 
 distant relatives and strangers in blood, and these rates 
 increase as the estates increase in size, from an addition of 
 one-half on estates between $25,000 and $100,000, to three- 
 fold for estates over $1,000,000. In the event of a legacy 
 passing to a distant relative or to a stranger in blood, from 
 an estate of over $1,000,000 in personal property, the rate 
 is, therefore, fifteen per cent. The surviving husband or 
 wife is exempt. A similar tax was used during the civil 
 war, but the rates were not so sharply progressive. 
 
 The main justification of inheritance taxes is found in 
 the sudden increase in the ability of the recipient to con- 
 tribute. Theoretically there is no serious objection to the 
 tax or to its rates and general arrangements; except that 
 the rates should have varied with the size of the legacy 
 rather than with the size of the estate. There is no good 
 reason why a man who receives $1,000 from the $1,000,000 
 estate of some distant relative should pay $150 when the 
 man who receives the same amount from the $10,000 estate 
 of a similar distant relative or stranger should pay only 
 $50. The size of the inheritance, not the size of the estate 
 from which it comes, is the important thing. It is likely 
 to prove very difficult to prevent evasions, especially as the 
 tax falls solely on personal property; and the high rates 
 offer a large reward for concealment. Our experience 
 with the civil war inheritance tax is not reassuring in this 
 respect; although the receipts from that tax did increase 
 from only about four per cent, of what they should have 
 been in 1866 to nearly fifty per cent, of what they should 
 have been in 1870. It is so easy to conceal personal 
 property that if persons are inclined to evade the tax they 
 
446 UNIVERSITY CHRONICLE. 
 
 can do so. A minor objection to this tax and one that 
 should be remedied at the next session of Congress is that 
 no exemption is made in favor of legacies to benevolent or 
 educational institutions, which as the law now stands must 
 pay the highest rates. Another objection is that many of 
 the states now levy inheritance taxes, and in many instances 
 the double burden will be very severe. 
 
 There is one very interesting point which should be 
 considered in connection with some of these taxes. In 
 spite of the fact that most of them were chosen from the 
 list of those taxes which had been used during the civil war 
 period and that, in their older form, they had been passed 
 upon by the Supreme Court, there is more than a doubt as 
 to the constitutionality of some of them at the present 
 time. All of the decisions which confirmed the constitu- 
 tionality of the particular taxes in question rest upon the 
 same ground as that which ratified the income tax of the 
 civil war. But the ground for the whole series of these 
 decisions has been entirely removed by the recent decision 
 of the Supreme Court in regard to the validity of the income 
 tax of 1894. Briefly stated, the previous decisions in 
 regard to such taxes asserted that taxes on the ownership 
 or the enjoyment of property were not direct taxes within 
 the meaning of the constitution. But in the now famous 
 case of Pollock vs. the Farmers' Loan and Trust Company, 
 which turned upon the constitutionality of the income tax 
 of 1894, the Supreme Court held that a tax "imposed 
 merely because of ownership" was just as much a direct tax 
 as one imposed on the property. In the light of this 
 decision, if an income tax is a direct tax, then an inheri- 
 tance or successions tax is a direct tax and as such is 
 unconstitutional; so too is the tax on the capital of banks, 
 and that on the gross receipts of oil arid sugar refineries. 
 It might be urged that the tax on bankers is akin to a 
 license and, therefore, does not come under the decision 
 in point. But the wording of the act does not countenance 
 any such interpretation. According to the law it is the 
 
OUR FINANCES IN THE SPANISH WAR. 447 
 
 fact that the banker uses or employs a certain amount of 
 capital that determines his tax. The rest of the special 
 taxes, those on brokers, etc., are not on their property but 
 on their business and do not come under this decision. 
 
 But there was another point decided in this same famous 
 case, according to which these three taxes are unconstitu- 
 tional, even if they are not direct taxes. It was held that, 
 even if the income tax of 1894 was not a direct tax within 
 the meaning of the constitution, it was still unconstitutional 
 because it violated that section of the constitution which 
 requires that "all Duties, Imposts, and Excises shall be 
 uniform throughout the United States," because it did not 
 fall equally upon all incomes. That is because a deduction 
 of $4,000 was allowed to be made from some incomes and 
 not from others. If the income tax of 1894 was not 
 uniform, what is to be said of the new inheritance tax, 
 which exempts all successions from estates below $10,000 
 and whose rates vary from three-quarters of one per cent, 
 to fifteen per cent, upon exactly the same amounts of 
 property? If the income tax of 1894 was unconstitutional 
 because it did not allow corporations to make the same 
 deduction that was allowed to individuals, what is the 
 character of a tax which is many times as heavy on one 
 bank as on another, or of a tax on one small group of cor- 
 porations which lets all others go free! There was no 
 attempt or intention to make these taxes uniform ; and if the 
 interpretation given to that term in the recent income tax 
 decision is to hold, these taxes are unconstitutional. That 
 decision was far more sweeping in its limitation of the 
 power of Congress to lay taxes than any other that has been 
 handed down during the century. By disregarding the long 
 recognised principle of stare decisis in regard to the income 
 tax the court overthrew almost every precedent in regard to 
 taxation by which Congress has been guided. It seems, 
 however, much more probable that the old principles will be 
 reasserted and the decision regarding the income tax reversed 
 than that these taxes will be declared unconstitutional. 
 
448 UNIVERSITY CHRONICLE. 
 
 Among the miscellaneous taxes there was also inserted 
 one upon mixed or adulterated flour. The imposition of 
 this tax is not mainly for revenue. It is for the purpose of 
 regulation and to protect the public from unknowingly 
 using inferior flour. On oleomargarine there is a similar 
 tax that has been in use for some time. It was asserted in 
 Congress that as much as seventy-five or eighty per cent, of 
 all flour sold is adulterated by the use of ground clay, 
 ground rock, "mineraline," or corn flour bleached by 
 sulphuric acid. It is not claimed that all of the articles 
 used for the adulteration of flour are injurious to health, 
 but some of them are, and none of them has the same 
 value for nutrition as wheat flour. The law requires these 
 flours to be properly labeled and by imposing a stamp 
 tax on them the government can enforce this regulation. 
 Without such a tax the federal government would not be 
 competent to invade this sphere of state activities. A 
 number of penalties are imposed for failure to comply with 
 all the regulations. From now on it will be dangerous 
 for any person to sell mixed flour under the guise of pure 
 flour. 
 
 The general system of taxation imposed by this law is 
 not particularly burdensome as a whole. In some instances 
 individual parts of the system run very close to confiscation, 
 and the system is frightfully unequal. At the same time 
 most of the unequal taxes can be wholly or partly shifted 
 and the severity of the burden is thus lightened by 
 diffusion. The inequality and injustice of the system 
 which we have noted all through the law is, perhaps, a 
 necessary feature of any system that is adopted in an 
 emergency, when the time is lacking for the full discussion 
 of a logical and just system. It emphasises the necessity, 
 so often referred to, of arranging in time of peace a just 
 and equitable system which can be readily expanded in 
 time of war. During a war no nation can afford the luxury 
 of tax reform for reform's sake. That is an enjoyment 
 which belongs to times of peace. 
 
OUR FINANCES IN THE SPANISH WAR. 449 
 
 Considerable comment has been made upon the fact 
 that the bill inaugurated new taxes and opened new 
 resources but left many better sources of revenue untouched. 
 As has been suggested in this lecture, it would have been 
 possible without the inauguration of a single new tax to 
 raise all of the revenue needed. But whether this were by 
 design or by accident it is strictly in accord with the best 
 policy for the financial management of a war. In the first 
 place, as a political measure, it is justified because it brings 
 the cost of war very forcibly to the attention of the people. 
 But in accordance with the principles outlined in the first 
 lecture it is of the utmost importance that the war financier 
 should not exhaust his resources at an early date. All 
 along through the early stages of the war his aim should 
 be to multiply resources and to preserve some large ones 
 for the later and more desperate stages of the conflict 
 should they arrive. Thus it is wiser to initiate new taxes 
 at the commencement of the war, which will grow more and 
 more productive as time goes on than to draw too heavily 
 upon the resources afforded by the existing system of 
 taxation unless that system is fairly comprehensive and 
 equitable. As the war proceeds it becomes more and more 
 difficult to establish new taxes and their yield is then often 
 dubious. Unless new resources are opened at an early date 
 they may never be available. Then again, the main 
 purpose of taxation in time of war is to sustain the nation's 
 credit. The provision, by new taxes, of revenues for con- 
 ducting the war is of secondary importance. Much strength 
 comes to a nation's credit from the reservation of obvious 
 sources of revenue for future uses. In spite of the many 
 faults of the tax system imposed by the new law when 
 viewed by itself, we must admit that as a war-revenue 
 measure it was a brilliant success. It will be judged in no 
 other light if it is promptly abolished at the end of the war. 
 
450 UNIVERSITY CHRONICLE. 
 
 III. READJUSTMENT OF THE REVENUES. 
 
 Although the war is over we cannot yet count the cost. 
 Many of the war expenses still continue. Some of the 
 troops have been discharged, but large numbers are still in 
 the ranks. The territories we have conquered must, for 
 the present at least, be garrisoned. These garrisons must 
 be maintained until a final settlement is reached and per- 
 haps for a long time thereafter. Even after the terms of 
 peace are finally settled there will be many expenses due to 
 the war, such as those connected with the return of the 
 troops to their homes. It is highly probable that the new 
 territories we have acquired will be a source of expense for 
 many years to come. An "imperial policy" demands 
 imperial revenues. 
 
 Our federal system of taxation has for years been falling 
 into disorder and will not readily respond to new demands. 
 The war and its consequences will but hasten the develop- 
 ment of changes that were inevitable. When Congress 
 meets in December our finances must be rearranged on an 
 entirely new basis. Our new peace revenues must be larger 
 than those we had before the war. Judging from the 
 present temper of the country, we shall have a vastly larger 
 army and navy, both for the home service and for our 
 colonies. Eventually Cuba, Porto Rico, and the Philip- 
 pines may be able to furnish a considerable part, if not all, 
 of the revenues needed to support the government there. 
 But for the present, at least, that is impossible. In 
 addition to the expenses connected with the enlargement of 
 our army and navy and the government of our new 
 possessions there will undoubtedly be many new expenses 
 incidental to the change in our policy. There is already a 
 strong demand for government aid in the construction of 
 the Nicaraguan Canal. Probably there will also be demands 
 for subsidies for the construction of a Pacific cable, and for 
 shipping to follow the flag into new commercial fields. 
 
OUR FINANCES IN THE SPANISH WAR. 451 
 
 Many estimates have been made of the probable increase 
 in the demands upon the Treasury after the war. There is 
 no safe ground for such estimates and they are most of 
 them utterly worthless. But although we cannot at the 
 present time tell anything definite about the amount of the 
 probable increase in our needs, yet it is obvious that our 
 old peace revenues will not be sufficient. That means that 
 the new taxes must be continued or some others substituted 
 for them which will add to the revenues we have been 
 receiving in the past. How the increased revenues will be 
 obtained becomes, therefore, a question of much importance. 
 
 In the first place, the principles governing the fiscus 
 during a war are, as has been shown in the other lectures, 
 very different from those which guide it during peace. It 
 is practically impossible to run along under the present 
 arrangements. Our new taxes are unequal and crude. 
 They were adopted in an emergency. Better and far more 
 available resources were left untouched. The main object 
 of the financier during a war is to preserve the nation's 
 credit, and to that end he should reserve some of his best 
 resources for the time of greatest stress. Consequently the 
 first emergency taxes are not apt to be well distributed. 
 Fortunately in the present case the time of greatest stress, 
 for which, as we have seen, such careful preparation was 
 made, never came. But one advantageous result of the 
 ample provision made is that we are now in a position to 
 deliberate properly on the new system which is to be 
 adopted. We have funds enough on hand to carry us 
 safely and comfortably over the intervening period. If the 
 estimate made in the first of these lectures is approximately 
 correct, there will be a surplus fund of about $100,000,000 
 with which to wind up the expenses of the war and to start 
 on the new regime. With this ample surplus we should be 
 able to afford the luxury of a thorough tax reform. 
 
 Winding up the expenses of a war is not an easy 
 process. Ordinarily government accounts are so carefully 
 kept and every receipt and expenditure so carefully checked 
 
452 UNIVERSITY CHRONICLE. 
 
 that the exact condition of each department can at any time 
 be accurately stated. But at the close of a war this 
 model condition is not found. During the progress of a 
 war the public accounts usually become badly involved. 
 Thousands of men have been granted the power to spend 
 public moneys. This spending is often done under circum- 
 stances which do not admit of strict control. "Red-tape" 
 must be cut, not unwound. The commissary in the field 
 must get supplies as best he can. Unaudited and unsettled 
 claims accumulate, which cannot be investigated until some 
 time after peace has been declared. Indeed, there are 
 many claims that do not reach the Treasury for a long 
 time. At the close of the civil war there were claims of this 
 character amounting in March, 1865, to about $285,000,000. 
 Most of these claims bear interest at a high rate and must 
 in consequence be adjusted as soon as possible. The very 
 first care of the financier at the close of the war is the 
 adjustment of these unsettled claims. 
 
 The next step is, in most cases, the conversion of the 
 public debt. War usually weakens public credit and the 
 borrowing that goes on is not often on the most favorable 
 terms. After the war and with better credit it is usually 
 possible to reduce the interest charges. For the reasons 
 already explained our credit was not in the least affected 
 during the late war, and as the war was of short duration 
 there are no debts that need adjustment or admit of con- 
 version. Fortunately, therefore, this step does not need 
 consideration. 
 
 These two things attended to, it is possible to devote 
 proper attention to the removal, reduction, or readjustment 
 of the war taxes. In the present case, for the reasons just 
 stated, we cannot hope for much decrease in the sums 
 required by the government. Readjustment rather than 
 reduction is required. The new taxes imposed for the 
 support of the war are not upon sources that can long be 
 drawn upon without far-reaching changes in our industrial 
 and economic conditions. The public revenues are simply 
 
OUR FINANCES IN THE SPANISH WAR. 453 
 
 a certain part of the wealth produced by the people, drawn 
 off by common consent to be devoted to the accomplishment 
 of certain common ends. If more is drawn from the wealth 
 produced by any given industry than is drawn from the 
 others, that industry tends to decline, and if the burden is 
 very severe the industry finally passes away entirely. 
 History is replete with instances in which whole classes of 
 the population have been ground down by unjust taxation, 
 until they either disappeared as a class or saved themselves 
 only by revolution. Taxes need not be severe or the 
 amount raised excessive to establish a tendency which will 
 eventually bring about this result. They need only to be 
 unequal. One of the most potent causes of the failure of 
 agriculture to advance in this country as other industries 
 have advanced, and one of the most obvious causes of the 
 depopulation of the rural districts is unjust and unequal 
 taxation. The taxes paid by our farmers are not very 
 severe judged by the standards of some other countries, but 
 so long as the farmer has to pay double the taxes paid by 
 other classes of the population the agricultural industries of 
 the country will not thrive. 
 
 There is a comforting but superficial doctrine held by 
 many people in this country which is denied by the plainest 
 teachings of financial history. It is known as the diffusion 
 theory of taxation. It has even been laid down as a general 
 principle that "taxes equate and diffuse themselves, and if 
 levied with certainty and uniformity they will, by a 
 diffusion and repercussion, reach and burden all property 
 with unerring certainty and equality. All taxation ulti- 
 mately and necessarily falls on consumption."* 
 
 Such a theory as this may do to blunt the conscience of 
 a legislator who is too busy "keeping solid with his 
 constituency" to devote much attention to the bill to 
 provide revenue for the support of the government. 
 But it provides little consolation to those who cannot 
 
 * David A. Wells, in the article on Taxation in Lalor's Cyclopedia of Political 
 Science. 
 
454 UNIVERSITY CHRONICLE. 
 
 keep up in the race with their competitors because they 
 are obliged to carry more than their share of the burden of 
 supporting those institutions which are established for the 
 benefit of all. If the tax on banking makes that business 
 relatively less profitable than some others, capital will 
 inevitably be withdrawn from banking and directed into 
 other channels. This process will proceed until the supply 
 of capital invested in banking has decreased, as compared 
 with the demand, sufficiently to enable a higher profit to be 
 commanded by that which remains. So far as the capital 
 remaining in this business is concerned the tax has been 
 shifted. But the business community which now pays the 
 tax is also deprived of its accustomed banking facilities 
 and is obliged to get along with less than is desirable. 
 
 The principle involved here is very simple. It applies 
 to every tax which is not general in its application but 
 which falls upon one or two industries only. It is 
 reasonable to suppose that every producer or seller is now 
 getting the highest price he possibly can for his wares, or 
 at all events is charging that price which in the long run 
 will yield him the largest possible profits. If a tax is im- 
 posed upon one commodity while others are free, the present 
 producers of that commodity cannot get a higher price 
 merely because they wish to reimburse themselves for the 
 new expenses in the form of a tax. The mere imposition 
 of a tax on this one commodity does not increase the 
 demand for it and only as certain producers withdraw 
 from the business and thus decrease the supply do prices 
 rise. If the tax is shifted in the form of higher prices by 
 those who remain in the business, it is because the produc- 
 tion of the commodity in question has been curtailed. 
 Those who remain in the industry get the average rate of 
 profits. But there has been a more or less important trans- 
 fer of capital and labor to other lines. The community is 
 not altogether so well off, because it is obliged to get along 
 with less of the commodity in question than it has been 
 accustomed to. The enjoyments, or the well-being of 
 
OUE FINANCES IN THE SPANISH WAR. 455 
 
 society, are thus curtailed, and society has to console itself 
 with other things which are less satisfactory. Capital has 
 been directed into channels not ordinarily so profitable 
 which, consequently, are not so valuable to the com- 
 munity. Then, again, among the consumers to whom the 
 tax is thus partly or wholly shifted there is the greatest 
 variety in ability to contribute to the support of the 
 government. The tax is, therefore, still very unfair. Ex- 
 penditure is of all bases for taxation the least equitable. 
 Who finally bears the tax is of no immediate concern here. 
 What we need to remember is simply that unequal taxation 
 changes the course of industry, diverting it from old chan- 
 nels and directing it into new ones, which are usually less 
 advantageous, because heretofore less successful and con- 
 spicuous. And when taxation is directed partly by jealousy 
 and envy of business success and is placed upon those 
 enterprises which have made themselves conspicuous by 
 their success, it directs industry from those lines in which 
 success has proved the necessity of enterprise and capital 
 and drives it into lines in which it is bound to be less 
 advantageous to the community. 
 
 As was shown in the last lectures, the new war taxes fall 
 very unequally upon different industries, and will in many 
 instances have to be shifted to the consumers, if the taxed 
 industries are to live at all. And we now see that the very 
 process of shifting drives capital and industry into new and 
 less advantageous channels. The conclusion is obvious. 
 We cannot and should not attempt to continue our present 
 taxes longer than is absolutely necessary. The retention 
 of these taxes merely because they yield the additional 
 revenue needed is anything but wise. A new system, just 
 and equal in its operation, is absolutely necessary. 
 
 It is a curious historical accident that our federal 
 government has never, until the present time, been obliged 
 to consider seriously what constitutes justice and equality 
 in taxation. From the beginning the tariff has been the 
 leading feature in our national finances. At first resorted 
 
456 UNIVERSITY CHRONICLE. 
 
 to in an emergency as a revenue measure, it has been 
 maintained ever since for political reasons. Except under 
 stress of war, or to meet the expenses occasioned by war, 
 we have had an income sufficient to meet all our needs from 
 the incidental revenues yielded by a measure intended 
 primarily to encourage home industries by the restriction of 
 importations and of foreign competition. There have been 
 but five years in our entire history in which the internal 
 revenues exceeded the customs revenue and those five years 
 were 1864 to 1868. Since the main portion of our revenue 
 system has been dictated more by political than by financial 
 reasons and purposes we have not gathered any useful 
 precedents which can guide in the reform necessary. The 
 problem to be solved has never presented itself to our 
 statesmen before this in any form. At the close of the war 
 of 1812, we entered finally upon the protective policy which 
 with scarcely an interruption has dominated our finances 
 ever since ; at the close of the civil war we were called upon 
 to reduce our revenues by the removal of the larger part of 
 that heterogeneous mass of incongruous taxes which had 
 been levied for war purposes. At the close of the Spanish 
 war we have a similar jumble of unjust taxes, which we 
 adopted in an emergency and which have served their turn ; 
 but otherwise the conditions confronting us are entirely 
 new. After the war of 1812 the newly espoused protective 
 system promised to afford sufficient revenue to meet the 
 increased expenditures. In 1866 we were receiving reven- 
 ues far in excess of possible needs and the problem, although 
 complicated by other factors, was mainly one of reduction. 
 But in 1898 we have a wretched extempore system of 
 internal taxation, one of the many heritages of our lack of 
 preparation for war, and yet we cannot dispense with the 
 revenues these taxes yield.- The question is, therefore, 
 purely one of tax reform; and one which must be settled, 
 so far at least as the internal taxes are concerned, solely by 
 financial considerations. 
 
 There are still other reasons why the government should 
 
Bancroft Library 
 
 OUR FINANCES IN THE SPANISH WAE. 457 
 
 turn its attention seriously to the problem of creating a new 
 and just system of taxation. The revenue-yielding power 
 of the tariff has been for years declining. Whether by 
 reason of the protection afforded by the tariff or because of 
 their own natural strength domestic manufactures have so 
 increased that foreign supplies are less necessary. In 1897 
 the government received less than $6,600,000 from iron 
 imports valued at about $16,600,000, while in 1888 the cus- 
 toms revenue from iron was $20,600,000 and the imports 
 which paid these duties were valued at $50,600,000. This is, 
 perhaps, the most striking example, but the same tendency 
 can be observed very clearly in other cases. The decay of 
 the tariff will be hastened by the new policy. For a con- 
 siderable part of the dutiable imports which really afford a 
 revenue comes from our newly acquired colonies, if they may 
 be so regarded. From 1892 to 1894 the imports from these 
 sources amounted to ten per cent, of our total imports. 
 But the revenues which these imports yield constitute a far 
 larger percentage of all the revenues, because they include 
 some of the best revenue-yielding articles, such as sugar, 
 tobacco, and hemp. If these imports are all to be admitted 
 free of duty there will be a large decrease in our customs 
 revenues. It has been estimated that five- eighths of all the 
 sugar imported into the United States in normal years 
 comes from our new acquisitions. At the present rates this 
 sugar imported would yield, perhaps, $50,000,000 a year in 
 revenue. So that unless we continue to treat our colonies 
 as foreign countries we shall not only incur increased 
 expenses for their government but lose the large revenues 
 now obtained from the duties on their products. Unless 
 the tariff is revised from a fiscal rather than, as has been 
 the case in the past, from a political point of view, it must 
 inevitably surrender its place as the main source of revenue. 
 The principles according to which the new system of 
 taxation should be arranged are simple and evident, but 
 their application will be most difficult. Taxation should be 
 in proportion to ability. Each man should contribute to 
 
458 UNIVERSITY CHRONICLE. 
 
 the common good according as he is able. If the burden 
 of taxation is evenly distributed so that each man's load is 
 proportioned to his strength, it is easily carried. 
 
 But in the application of these simple, self-evident 
 principles to the reform of federal taxation there are many 
 difficulties. In the first place the federal government is 
 debarred by an unfortunate interpretation of the constitu- 
 tion, from using that form of taxation, which should make 
 the backbone of any correct system. That is direct tax- 
 ation. In the second place the maxim that taxation should 
 be in proportion to ability applies to the system as a whole, 
 to the totality of taxes paid by the citizen, and not to any 
 part by itself. The federal government is not the only 
 taxing authority in the land. There are also the States 
 and their different local divisons. There are few citizens 
 who do not pay taxes to at least four different authorities, 
 the federal, the state, the county, and the city or town 
 governments, and in some cases eight or more different 
 authorities may attack the same unfortunate individual 
 with their tax bills. To establish an equitable system 
 under such conditions requires a sharp definition of the 
 field of action for each different authority. Fortunately we 
 have such a division practically established by law and 
 custom. In a general way the States cannot levy indirect 
 taxes, nor the federal government direct taxes except by 
 apportionment, and that is so obviously and wickedly 
 unjust as to be excluded. It is foreign to my present 
 purpose to discuss the division of the field between the 
 State and its local divisions. But although the federal 
 government is confined to indirect taxes there is danger 
 that these taxes may draw from the same sources that the 
 state taxes draw from. The States may tax the property 
 or the income it yields directly and the federal government 
 may lay an indirect tax upon the same wealth in process of 
 transfer or acquisition. 
 
 A third group of difficulties besets the establishment of 
 a new and equitable system of taxation for the federal 
 
OUR FINANCES IN THE SPANISH WAR. 459 
 
 government. These are political in character. A strong 
 political party insists upon the continued recognition of the 
 political features of the tariff. Protection must be main- 
 tained and any revision of the tariff for fiscal purposes 
 must not interfere with that. It would be useless to discuss 
 any plan which did not allow for this fact, and it is equally 
 useless to discuss the advisability of protection, for that is 
 now the settled policy. If for revenue purposes a tax is 
 placed on the raw materials required in any protected 
 industry compensatory duties must be added to the duties 
 on the manufactured products. These difficulties are too 
 familiar to need any explanation here. Other forces in the 
 political field make for the use of the taxing power for 
 purposes other than revenue. It is so easy to make political 
 capital by placing destructive taxes on the "money power," 
 on "Wall Street," on corporations and trusts, etc., that 
 when it is proposed to make these elements bear their fair 
 share of the burden of supporting the government under 
 which they thrive, voices are sure to be heard demanding 
 that the burden be greater on these than on any other 
 elements. When behind this cry there is the threat of a 
 new sectionalism, these voices become extremely powerful. 
 
 But this third group of difficulties is not new, nor is it 
 peculiar to our own country or time, except in its specific 
 manifestations. In all times and in all countries the power 
 of taxation has been used by those politically strong to 
 strengthen themselves and to oppress those politically weak. 
 It would be unreasonable to expect that our own govern- 
 ment would escape similar influences. Our government is 
 too much of the people to be really for the people. 
 
 Such being some of the difficulties in the way of the 
 realization of the ideal system, what plans are practically 
 available? Among the most prominent plans presented in 
 the last Congress was one for an income tax. This was 
 rejected because it was felt to be impossible to frame an 
 income tax law which would be constitutional in view of 
 the recent decision of the Supreme Court in reference to 
 
460 UNIVERSITY CHRONICLE. 
 
 the income tax law of 1894. Various plans were suggested 
 for overcoming this adverse decision. Among other plans 
 it was proposed that the Supreme Court should be " packed" 
 to secure a reversal of the obnoxious opinion. This sug- 
 gestion is revolting to every honest citizen, whatever view 
 he may take of that decision. We have learned by the 
 experience of a century that the Supreme Court always 
 stands for the best good of all. The only proper way in 
 which we can overcome the legal verdict of the Supreme 
 Court is by a constitutional amendment. There is little 
 doubt that an amendment intended to give the federal 
 government the right to use any system of taxation that 
 may seem advisable would be eagerly adopted. 
 
 But until such an amendment is adopted, it is useless to 
 discuss a federal income tax. Moreover, it is quite possible 
 to arrange a just and equitable system under the present 
 distribution of powers, and it is at least a debatable 
 question whether the income tax should not be reserved for 
 the States, rather than be used by the federal government. 
 At present, the taxes used by the majority of our States 
 are frightfully unjust and oppressive, and the best sub- 
 stitute for them is an income tax. A fairly satisfactory 
 system could be arranged consisting of indirect taxes for 
 the federal government, income taxes for the States, and real 
 property taxes for the local divisions. At all events this is 
 the best solution possible under the present constitutional 
 laws. The future development will undoubtedly require a 
 different system and for that reason it is to be regretted 
 that the taxing power of Congress is so limited. So long 
 as the State governments continue an important part of 
 our political system their financial support must be assured, 
 and the form of taxation best adapted to their use is the 
 income tax. An "imperial" policy will necessarily lead to 
 greater centralization in our political system and gradually 
 the functions of the States will be absorbed by the federal 
 government. Indeed the movement in that direction was 
 already clearly discernible even before the war. A uniform 
 
OUR FINANCES IN THE SPANISH WAR. 461 
 
 bankruptcy law is but the beginning of federal economic 
 legislation. We already contemplate a uniform divorce law 
 as a desirable probability. That is the beginning of federal 
 social legislation. The federal government has already 
 begun to regulate adulterated foods. With the increase in 
 the federal military power the State militia sinks in import- 
 ance. In short there is a decided tendency to diminish 
 State activities. That the "imperialistic" movement will 
 strengthen these tendencies goes without saying. The 
 importance, therefore, of reserving the income tax for the 
 use of the State governments decreases as the power and 
 functions of the federal government increase. 
 
 Inasmuch, however, as we have a present problem to 
 solve we must solve it in the light of the present powers of 
 Congress. Viewed in this light there is but one course for 
 Congress to pursue. That course consists in raising the 
 the required revenues by the least objectionable indirect 
 taxes. The selection of the articles to be taxed in this way 
 so as to form a fairly just and equitable system is no easy 
 matter. In order that the revenues obtained be sufficiently 
 large the articles taxed must be of large consumption. 
 In order that the expenses of collection be not unduly 
 increased the number of articles taxed must not be great. 
 But a tax on the articles consumed by the largest number 
 of persons falls more heavily on the poor than on the rich. 
 What the rich man spends on tea, coffee, sugar, tobacco, 
 and beer is but a small fraction of his income. What the 
 poor man spends on these is relatively a large part of his 
 wages. The luxuries of the rich can be taxed to round out 
 the system a little, but the taxation of luxuries is not 
 productive of much revenue and the expenses of collection 
 are relatively great. 
 
 In short, no system of indirect taxes arranged with a 
 view to getting a satisfactory revenue can be altogether 
 just and equitable in and of itself. It must be supple- 
 mented by other taxes. The taxes levied by the States 
 and cities should, to make a well rounded system, be 
 
462 UNIVERSITY CHRONICLE. 
 
 graduated so that the men who already contribute heavily 
 according to their ability for the support of the federal 
 government should have some relief from the other burdens. 
 
 The experience of all nations has shown that the closest 
 approach to justice possible in the use of a system of 
 indirect taxes consists in laying moderate taxes on such 
 articles of wide consumption as salt, tea, coffee, sugar, and 
 beer; heavier taxes on such luxuries as wines, liquors, 
 tobacco, and silks. In this connection the actual systems 
 of other countries are instructive. England has customs 
 duties on spirits, beer, tea, tobacco, wine, coffee, and a few 
 other articles; and excises mainly on spirits and beer. 
 The articles in the French tariff which yield any consider- 
 able revenue are coffee, grain, sugar, petroleum, wine, and 
 cocoa; the principal excises fall on wine, spirits, and 
 tobacco. German excises fall on drinks, tobacco, and sugar; 
 and her list of revenue-yielding customs duties is about the 
 same as that of England with the addition of grain. 
 
 As was suggested in the last lecture, the United States 
 could obtain ample additional revenue (retaining the 
 protective system unaltered) by a slight increase over the 
 old rates in the internal taxes on tobacco, spirits, and beer, 
 and moderate taxes on coffee and tea imported. If to this 
 list there be added taxes on wines and other luxuries, we 
 should have a fairly satisfactory system without heavy rates 
 on any one article. Summed up in a few words the con- 
 clusion is, that Congress should first abolish the unjust and 
 unequal taxes imposed in an emergency by the war-revenue 
 bill. Then as a second step, the tariff should be revised; 
 not by juggling with the protective rates, which so long as 
 they remain protective can never be made to yield any 
 considerable revenue, but by adjusting the rates upon the 
 revenue-yielding imports. There is nothing in this sugges- 
 tion that should in any way rouse the opposition of either 
 party. And lastly there should be established a system of 
 excises or internal indirect taxes on those luxuries and 
 comforts of universal consumption which the experience of 
 
OUR FINANCES IN THE SPANISH WAR. 463 
 
 nations has shown to be most productive of revenue. In 
 short, the federal government should obtain its revenues 
 from indirect taxes on articles of widest consumption and 
 lay no taxes upon capital or upon industry. 
 
 It may be urged that such a system of federal taxes 
 would not, considered by itself, lay sufficient burden upon 
 men of wealth. But the federal system is only a part of 
 our tax system and it is not the part in which the final 
 adjustment of taxation to ability should take place. When 
 properly supplemented by the State and local systems of 
 taxation, these taxes will form a fairly complete system, 
 which, while far from perfect, will be a great advance upon 
 the present system.