The field of government finance in federal countries poses many problems, and there has recently been a revival in the flow of literature on this subject. The recent contributions of Professor Maxwell' and Mr. Birch2 have emphasised that there exists a financial dilemma which is common to all federal nations. There is, however, a further problem which has not been fully perceived in the existing literature. This further problem is essentially long-run in its nature; probably that is why it has been overshadowed by the short-run political and administrative difficulties which so beset attempts to systematise federal finances. The dilemma of the federal nation can be sketched in a few paragraphs. It will be better understood if the vocabulary is first explicitly set forth. Provinces and states are used interchangeably to mean political subdivisions of a federal country or nation . A unitary country or nation is one that is not broken down into provinces or states. A collection of neighbouring unitary countries is said here to form a Balkan area; a Balkan area could be transformed into a federal country by political union. Thus nineteenth-century Australia, the thirteen American colonies, and seventeenth-century India were Balkan areas for the purposes of this paper. In every federal country there are some geographical areas where the average per capita income is lower than that in the other areas. Many factors help to account for these differences. In the literature on the subject they are generally subsumed under the heading of differences in resourcesin some areas there are more resources per capita than in others-and the term is usually meant to include the advantages of transportation, ports, climate, drainage, and soil, as well as of deposits of raw materials. It also seems to