(2) Next there is the problem of the Budget. For Reparation payments are a liability of the German _Government_ and must be covered by taxation. At this point it is necessary to introduce an assumption as to the relation between the gold mark and the paper mark. For whilst the liability is fixed in terms of gold marks, the revenue (or the bulk of it) is collected in terms of paper marks. The relation is a very fluctuating one, best measured by the exchange value of the paper mark in terms of American gold dollars. This fluctuation is of more importance over short periods than in the long run. For in the long run _all_ values in Germany, including the yield of taxation, will tend to adjust themselves to an appreciation or depreciation in the value of the paper mark outside Germany. But the process may be a very slow one, and, over the period covered by a year’s budget, unanticipated fluctuations in the ratio of the gold to the paper mark may upset entirely the financial arrangements of the German Treasury. This disturbance has of course occurred on an unprecedented scale during the latter half of 1921. Taxation in terms of paper marks, which was heavy when the dollar was worth 50 paper marks, becomes very inadequate when the dollar is worth 200 paper marks; but it is beyond the power of any Finance Minister to adjust taxation to such a situation quickly. In the first place, when the fall in the external value of the mark is proceeding rapidly, the corresponding fall in the internal value lags far behind. Until this adjustment has taken place, which may occupy a considerable time before it is complete, the taxable capacity of the people, measured in gold, is less than it was before. But even then a further interval must elapse before the gold–value of the _yield_ of taxation collectible in paper marks can catch up. The experience of the British Inland Revenue Department well shows that the yield of direct taxation must largely depend on the taxable assessments of the _previous_ period. For these reasons the collapse of the mark exchange must, if it persists, destroy beyond repair the Budget of 1921–22, and probably that of the first half of 1922–23 also. But I should be overstating my argument if I were to base my conclusions on the figures current at the end of 1921. In the shifting sands in which the mark is foundering it is difficult to find for one’s argument any secure foothold.