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Tsingtao, China

Tsingtao, capital of Kiaochow, China

By Jeffrey J. Smith

Historical Background

When Germany established colonies in Africa and the Pacific towards the end of the 1800s, they developed roads and harbors, which increased commerce. That in turn increased land values. Speculators rushed in to buy and sell land and captured much of the gain from the government's spending.

In 1898 the German Empire acquired a colony in China, Kiaochow, now spelled Jiaoxian or Jiaozhou, located in Shangdong (formerly Shantung) province, a peninsula jutting into the Yellow Sea. Germany leased from the weak Chinese emperor the Kiaochow district of about 200 square miles for a hundred years (99 years was the term of the British lease for Hong Kong). Its main population center was the fishing village of Tsingtao of 83,000 inhabitants (now spelled Qingdao).

Kiaochow was held under the jurisdiction of the German Navy Department, not the Colonial Office. The unusual arrangement was due to the efforts of the navy secretary, Alfred von Tirpitz (later to become grand admiral), who held the policies of the latter in low esteem. Tirpitz was sympathetic to progressive socio-political thought, and with his encouragement the Navy Department became a stronghold of land reform ideas.

Adolf W. F. Damasche, whose persuasive and organizational talents later built the Bund deutscher Bodenreformer (German Land Reform League) into a powerful body with around 100,000 members, was able to win over a number of high naval officers to the cause, who became members of the Bund. One of these was Admiral Otto von Diederichs, whose forces had conquered and occupied Kiaochow, and who served as its military governor. Admirals Diederichs and Tirpitz were determined that land speculation, which severely afflicted the German colonies in East Africa, not be permitted to take hold in the new protectorate.

The admirals appointed as Imperial Commissioner for Kiaochow the talented Ludwig Wilhelm Schrameier. As a member of the German Land Reformers, he had read the works of Henry George, the American economist who identified land speculation and land price inflation as the main cause of depressions. Henry George wrote that the public collection of the land rent would eliminate land speculation and maintain land price stability. By getting government revenue from land rent instead of taxing labor and capital, there would be prosperity without the injustice and burdens of taxing labor and enterprise.

Schramaier claimed not to have been influenced by Georgism directly, but by the practical necessities of administering the territory. He enacted a single tax of six percent of the assessed value of land and subjected each land sale to an increment tax whose rate was one third of the net profit when land was sold. The government had the prior right of purchase at the price reported, thus discouraging anyone from reporting a lower sales price in order to reduce his increment tax. The land-value increment tax in Kiaochow was the first to be adopted anywhere in the world. Schrameier also refrained from levying any other tax. That was probably the only time in history that a government collected all its revenue from land rent, and none from the value of buildings or business or from wages.

The single tax on land value worked as splendidly in practice as it had in theory. Once it was implemented, there was no more land speculation, and economic growth was very rapid. Not only did it discourage speculators, it also funded the colonial government without levying any of the usual counterproductive taxes on structures or sales or salaries, just on sites.

The price of land is an estimate by the buyer of how much rent the site will yield over the next decade plus; as economists would put it, land price is capitalized land rent. When government collects all the rent, that leaves none for owners to capitalize into price. Economic historians (see references below) estimate that at six percent, the German protectorate collected about half of Kiaochow’s available site rent. Depriving owners of half of rent, a socially generated value, did nothing to inhibit development; on the contrary, it spurred landowners to develop Tsingtao into a splendid city.

In 1915 at the beginning of World War I, the Japanese military captured Kiaochow, ending German rule forever. By then, Tsingtao had become the fourth most important trading port on the China coast. The area's population had increased to 275,000. Economic historians (below) did not note whether the Japanese abandoned the German taxing system or if the Chinese did upon evicting the Japanese at the end of World War II. Whoever installed a different taxing system, it cost Tsingtao its glory.

Its brief yet successful existence did leave a legacy. After seeing Tsingtao thrive, Sun Yat-sen, who was to become the revolutionary leader of China, studied the policy of taxing only land values when he went to school in Hawaii. At the time, the policy of public recovery of rent was well known, as was its foremost proponent, Henry George. When Sun returned to China, he sought to use land rent for public revenues for all of China; he retained the German Schrameier as his consultant.

Eventually, Sun failed but two decades later, the Nationalists adopted his program for Taiwan. During the next 50 years, the small island developed from a poor province to a modern prosperous economy with one of the most equal distributions of income in the world. In the decade of the 2000s, mainland China partially utilizes public recovery of ground rent, and Hong Kong has done so from day one in 1898 (the year after Henry George died on the other side of the Pacific Ocean).

Another way one can realize the German legacy from Kiaochow today is to taste the German recipe for brewing by drinking the savory Tsingtao beer.

1) Michael Silagi, Susan N. Faulkner. “Land Reform in Kiaochow, China: From 1898 to 1914 the Menace of Disastrous Land Speculation Was Averted by Taxation”, American Journal of Economics and Sociology, Vol. 43, No. 2 (Apr., 1984), pp. 167-177.

2) Michael Silagi, Susan N. Faulkner. “Henry George and Europe: Early Efforts to Organize Germany's Land Reformers Failed, but the Pioneers Won a National Demonstration”, American Journal of Economics and Sociology, Vol. 52, No. 1 (Jan., 1993), pp. 119-127.

3) Fred E. Foldvary. “Market-Hampering Land Speculation: Fiscal and Monetary Origins and Remedies”, American Journal of Economics and Sociology, Vol. 57, No. 4 (Oct., 1998), pp. 615-637

4) V. G. Peterson, Tseng Hsiao. “Kiao-chau” American Journal of Economics and Sociology, (Dec, 2000)

Strengths:

There is no greater strength than success. Tsingtao was an unqualified success by any economic measure of the era. It grew rapidly, its people prospered, and it so impressed China’s modern founder, Sun Yat-sen, that he made it his model for his economic policy for all of China. If any present region wishes to develop itself, it can simply do what Kiaochow did and recover ground rent while eschewing taxation. Kiaochow was also fortunate in that its rulers were not locals who normally are from the landowning class and accustomed to speculating in land but were outsiders with a different agenda, one of economic growth.

Weaknesses:

The weakness of the Kiaochow model is not economic but political: it was not the outcome of the democratic process but the decision of the powers above. To use geonomics (rent recovery in lieu of taxation on efforts), policy makers must be educated. For a populace to vote in geonomics, they themselves must be educated. It is very difficult to generate the requisite enlightenment in either rulers or the ruled. Kiaochow was also unfortunate in being a pleasant environment located in a war zone; losing its independence, it also lost its geonomics.

Opportunities:

Because Kiaochow does have a history of geonomic success and since China’s central government is now embracing a market economy and even utilizing taxes on land value to curtail rampant speculation, there is a chance that, with the proper prodding, Kiaochow might revert to geonomics. Indeed, even all of China might restore its geonomic heritage, since Sun is considered by both Communists and Nationalists to be the Father of Modern China. And because Kiaochow is such a clear before-and-after example and utilized such high rates for its land tax, the story of Kiaochow can be used to show other jurisdictions around the world the way to prosperity for all.

Threats:

What threatened Kiaochow has already occurred, namely the occupation by the Japanese military and the subsequent to conventional taxation. What prevents a return to geonomics is largely a lack of knowledge of its geonomic past, and among those who know of it, that policy’s association with foreign rulers; the modern Chinese government is sensitive about adopting anything that might excuse their colonial past. However, geonomic policy is not specific to any one culture but is the outcome of rational thought and the scientific method which appears in many cultures. Indeed, Mencius, the Chinese philosopher who taught Confucius thousands of years before Henry George, also advised rulers to tax land value but nothing else.