matches on which the taxes had not been paid and could not then be collected, inasmuch as these taxes accrue at the time of the removal of the articles from the place of their manufacture. These cigars, cigarettes, spirits, and matches were purchased by merchants and middlemen, in amounts far in excess of the normal needs of trade, for the purposes of speculation. Consumers of these articles paid during the month of August to these speculators the normal price of the articles, prior to the imposition of the taxes, plus the amount of the tax which had been paid neither by the manufacturer nor the merchant. It can, therefore, be readily seen that the profits derived from their business by the dealers in tobacco and alcohol products increased very materially during the month of August, and that these abnormal profits will continue to be collected from the actual consumers until the stocks removed before the 1st of August are entirely exhausted. It is, of course, not to be expected that as long as the dealers can continue to sell their wares at heretofore undreamed-of profits they will voluntarily resume their purchases of tax-paid articles from the manufacturers. Of course, the consumer is led to believe that the increase in price of his smoke and his drink is due to the internal-revenue tax, and the fact that there has been no serious diminution in the consumption of such articles would seem to indicate that the consuming public in these islands is able and willing to pay the amount of the taxes imposed, even though such amounts, instead of reverting to the insular treasury as taxes, are kept by the dealers as added profits.

Nor can it be doubted for a moment that the immediate effect of this law has been to temporarily increase the profits of the manufacturing industries affected by the taxes imposed. Most, probably all, of these manufactories did a thriving business during the months of June and July, and many of them, especially the distillers, were found on the 1st of August to have scarcely any stock whatever on hand. This is probably an unprecedented condition of affairs in the manufacturing annals of these islands. These manufacturers, therefore, sold during the months of June and July all of their old or normal stock, all of their normal output, and all of their forced output during those two months. Yet, according to some of the local periodicals, they now express surprise and disappointment because their sales during the month of August are not up to the normal level. It is very much like the youth who believed he could both eat his cake and have it.

The opposition to this law, so general at the start, appears now to have simmered down to the question of distilled spirits. It is claimed that this industry is irrevocably ruined. The manager of one of the largest distilleries in these islands, probably the largest distillery in the East, told me that before the end of July he had exhausted all of his sugar and other raw material, and that he was reluctantly obliged to refuse to fill orders for spirits, one of them for about 300,000 liters, even though higher prices were offered than ever before. In a case of this sort the surprise should lie in the fact not that the output for August should have been reduced, but that there was any output at all in August, inasmuch as the normal sales for that month had already been made in June and July.

There is submitted herewith a statement (Exhibit C) in which are given the figures, as returned by the Manila manufacturers

themselves, showing the actual stock on hand of the various alcohol and tobacco products and matches on July 1 and on August 1, 1904, and the total amounts of such articles sold by the manufacturers during the first month's operation of the law. To this statement are also added comparative figures showing the amount of each of such articles sold by manufacturers during an average normal month before the imposition of the taxes.

From these figures it will be seen that on July 1 the various distillers in Manila had on hand 746,420 liters of proof spirits and that on August 1 the stock in the same distilleries was only 171,387 liters of proof spirits. The difference between these two amounts, 575,033 proof liters, plus the amount in which the forced output exceeded the normal output for July, would give with a fair degree of approximation the number of liters of proof spirits with which the local market was overstocked, i. e., above the normal needs of trade, on August 1, 1904, when the tax on distilled spirits became operative.

What the amount of the excess over the normal output was in the month of July can not, unfortunately, now be accurately determined. However, as will be remembered, the leading distillers of Manila stated, at the second public session in which the proposed law was discussed before the Philippine Commission, that there had been a serious fall off in the output of their manufactories during the first five months of 1904. On the invitation of these distillers, and acting under instructions of the Commission, I met them at the office of one of the leading distillers, where the account books or transcripts therefrom were presented to me for examination by all of the leading distillers or by their representatives. This was near the end of June while the bill was still under consideration. At this meeting the fact was conclusively established, by the books and other documentary evidence, that the business done by the various Manila distilleries from January to May, inclusive, of 1904 was on an average equal to only 65 or 70 per cent of the business done by them during the same five months in the year 1903. This fact was admitted by all. I remember it distinctly, because it came as such an agreeable surprise to find that these distillers so kindly refrained from blaming the law for a slackness in business existing for several months before the date of its enactment.

It also appeared of record in some of the leading distillers' books that in the month of May, 1904, their distilleries had been in operation on an average of but five or six hours a day, whereas in 1903 these same stills had worked from eight to twelve hours a day. But the magic effect of the passage of the internal-revenue law changed all this and for a while put an end to dull times. Beginning some time in June and continuing until July 31, or until their sugar or other raw material gave out, the Manila distilleries ran overtime manufacturing and shipping anisado, ginebra, and other liquors.

There are eight distilleries in Manila, but one is not in operation, having been closed temporarily by the department of public health. The remaining seven distilleries during the first five months of this year had been running only a little over half of the normal number of hours a day. But during the month of July and during a part of June most of these distilleries ran the full number of hours, and some of them ran overtime. It would therefore not be extravagant

to estimate that the forced output of spirits during the months of June and July would equal one month's normal output during the first five months of the year. Therefore, if 575,033 proof liters, the old stock disposed of, be increased by 552,250 proof liters, one month's normal output, it would appear that the liquor market was overstocked, i.e., above normal trade needs, on August 1 by 1,127 283 liters of proof spirits, or nearly 2,000,000 gauge liters of the strength at which anisado and the other compounded liquors are commonly sold to the actual consumer.

Now, in the statements of their estimated production of spirits for the fiscal year ending June 30, 1905 (figures given above), as made by the Manila distillers themselves, it would appear that they would produce in that year something over 6,500,000 liters of proof spirits. So, figured on this basis, the local liquor market, as far as the Manila distillers were concerned, was overstocked on August 1, 1904, with liquors sufficient to supply the normal consumption for a period of over two months. Meanwhile a certain amount of spirits are being removed every day from the distilleries for domestic consumption, which adds to an already overstocked market. Therefore, to expect that normal conditions will obtain in the liquor market before the middle or end of next October is to court disappointment, because it would be to hope for a reversal of the universally accepted commercial law governing supply and demand.

Of course these figures and the inferences made therefrom are based on the Manila distilling business taken as a whole, and no attempt is made to explain wherein some of the distillers got more and others less than their normal share of the increased business during the months of June and July. Some of the distillers were quick to take advantage of the twenty-nine days' margin allowed them for the removal of their spirits, whereas others lost their time execrating the law.

OPERATION OF THE LAW DURING THE FIRST MONTH OF ITS ENFORCEMENT.

An examination of Exhibit C, herewith, giving output by articles and comparative figures, and of Exhibit D, showing the tax collections by articles for the month of August, 1904, in the city of Manila, will be found interesting in view of the statements so often made that the imposition of these taxes on tobacco and alcoholic products would prohibit their consumption.

There were removed from the various manufactories in Manila during the month of August, for domestic consumption, 44,248 proof liters of distilled spirits, 196,885 gauge liters of fermented liquors (beer), 6,969 kilograms of manufactured tobacco, 7,289,778 cigars, 106,233,420 cigarettes, and 8,750 gross boxes of matches. Compared with the normal output during an average month before these taxes were imposed, the August output stands as follows: Distilled spirits, 8 per cent; fermented liquors (beer), 66 per cent; manufactured tobacco, 25 per cent; cigars, 80 per cent; cigarettes, 28 per cent; matches, 62 per cent; or a general average of 45 per cent. The taxes collected on these articles during the month were as follows: Distilled spirits, P10,890; fermented liquors (beer), P9,465.04; manufactured tobacco, P2,397.67; cigars, P6,715.42; cigarettes,

P73,414.90; matches, P3,500; making a total of P106,383.03. This amount is now estimated to be between 20 per cent and 25 per cent of what these taxes may be expected to yield during an average month after normal commercial conditions have been restored. The above total does not include the taxes collected on imported matches, the exact figures for which were not available. Of the total taxes collected during August, one-half, or P53,191.51, was collected during the first twenty-one days and the other half was collected during the last ten days of the month. These figures should be most encouraging to the manufacturers as showing in an unmistakable manner the revival of the various industries even at this early date. For the sake of convenience the tax collections by articles are distributed in Exhibit D in three groups, each covering the collections for a period of ten days. The percentages of increase in the tax collections from period to period are also indicated. Partial returns of collections so far made during September seem to indicate that the output of the Manila manufactories, and therefore the tax collections, during the current month will considerably exceed the output and collections during August.

An analysis and explanation of the figures presented in Exhibits C and D may be made as follows:

DISTILLED SPIRITS.

This subject has been fairly well discussed in the preceding pages of this report. All of the articles subject to excise taxes deteriorate with age, except distilled spirits, which usually improve the longer they are kept. This will explain why dealers and middlemen found it profitable to lay in, before the taxes became effective, very large stocks of liquors and only comparatively large stocks of cigarettes and other perishable articles. It will also explain why the August output, as compared with the normal output, of the distilleries was proportionately so much smaller than the August output of the cigarette and other manufactories whose products are subject to these taxes. Why the output of the distilleries for the second ten days in August fell below the output for the first ten days by 12 per cent is not clearly apparent. The probability, however, is that in the rush of the last days of July certain customers were left unsupplied with liquors, and that these orders were filled after August 1 with tax-paid goods.

FERMENTED LIQUORS (BEER.)

The output of beer from the local brewery during August, 1904, was 66 per cent of its output in August, 1903. The price of this native beer was increased considerably after the American occupation, and on July 1 of this year the price was increased still more by the change made in the previous price in Mexican money to the same figure in Philippine currency. Up to August 1, 1904, the brewery allowed middlemen and dealers a discount on its published prices of 20 per cent on draft and 25 per cent on bottled beer. During the month of July last the brewery announced to its customers that on and after August 1, 1904, they would only be allowed 10 per cent discount on draft beer and from 12 per cent to 19 per cent discount on bottled beer, according to the amount of the purchase.

It is estimated that this cut in the discounts previously allowed the trade was just about equal to the tax, 4 centavos per liter, imposed in the internal-revenue law. Of course many dealers anticipated this cut in the discounts by purchasing more than the usual amount of beer in July, and the result was a drop in the August output from the brewery. The price of a glass of native beer has not increased since August 1, 1904, and the situation appears to be that the manufacturers make the same or greater profits than they did before the imposition of the tax; that the consumer pays no more than he did previously, or at most the difference between Mexican and Philippine currency, and that the middlemen and dealers pay the tax out of their profits. It was feared that after the imposition of the internalrevenue tax on the native beer Japanese imported beer might wage a disastrous competition with the native product, unless such foreign beer was also made subject to this tax. This office has since learned that the Japanese Government pays a bounty of 1 yen and 39 sen on each case of beer, containing 36 liters, exported from that country. This bounty is therefore just about the same per liter as the internal-revenue tax imposed here on the native product. A separate and detailed report will be made on this matter.

MANUFACTURED TOBACCO.

There is little chewing, snuff taking, or pipe smoking done in these islands. The picadura, or fine-cut tobacco, turned out mostly by small manufactories, is used almost exclusively for the making of cigarettes. The tax imposed in the internal-revenue law on this picadura is proportionately higher than the other taxes. The likelihood is that the more strictly the law is enforced with regard to this tax the greater will the output of the cigarette manufactories become Some 4,000 kilograms of manufactured tobacco exported to other countries, and on which no taxes were collected, are not included in Exhibit D.

CIGARS.

Notwithstanding the fact that large amounts of cigars were removed by dealers from the local manufactories in July to supply the August trade, and that even many of the actual consumers, anticipating an increase in the price in August, made their purchases in July, there was a reduction of only 20 per cent from the normal output in the cigars sold by the Manila manufacturers during the month of August. Cigars require a larger proportion of manual labor in their manufacture than any of the other articles subject to these taxes. For this reason the capacity of a cigar manufactory is largely a question of the number and skill of the cigar makers it employs, and it is not so easy to quickly increase its production and output. For this reason, and also because of large quantities of leaf tobacco which were damaged by the floods early in July, the output of the Manila manufactories was not as large during that month as some of the manufacturers might perhaps have wished. The August output of the cigar manufactories was, therefore, larger than it would otherwise have been. In addition to the 7,289,778 cigars sold for domestic consumption there were exported during August, mostly to China, the Straits Settlements, Australia, and Europe, 6,282,260 cigars.