Trade in a New World
IF peace came tomorrow — and in a war as utterly unpredictable as this present one even that could happen — the democracies would be as unprepared for peace as they were unprepared for war at the time of Munich. And the consequences of unpreparedness for peace would be no less fatal than were the consequences of the unpreparedness for war. The war is going to end sometime. To have no plans at all, to have no concept of aims beyond that of winning the war, is the quickest way to lose the peace — and is no help in fighting a war in which something tangible will have to be offered to 350 million people on the European Continent in order to incite them to rebellion against totalitarian conquerors.
The only way in which peace can fruitfully be prepared at the present time of war is the way in which a General Staff prepares war in a time of peace. Just as a General Staff prepares for offensive and for defensive, for an alliance with a neighbor and for a war against him, for a long war and for a short war, the General Staff for peace that is needed today would have to lay the groundwork for post-war action under the most varied circumstances. Whether the sovereign national state, as we have known it during the last three hundred years, will survive on the European Continent none of us can possibly know; but we can know or at least can try to know — how its survival or disappearance would influence the problems of peace and freedom.
It seems to me that a study of the economic problems offers the best starting point. The reason for this is not the belief — still widely held in this country — that economics could provide the sole or even the main basis for a postwar world. On the contrary, I am convinced that a peace which subordinates military, political, and social questions to economics would be an infinitely more serious mistake than the peacemakers of Versailles made in their subordination of economics to politics. But economics is the one field in which a considerable part of the work to be done is not political in nature but largely technical and factual; consequently, agreement on the form and type of economic instruments and institutions to be used for this or that specific purpose is much easier to obtain than would be agreement on corresponding political or social questions.
Another and much more important reason to start with the economic approach lies in the fact that we can say far more about the economic forces likely to operate in the post-war world than we can say about any other sphere. For in the economic field we have to deal with very definite trends, as against the confusion in political ideas and social systems presented by the Western world at present. These economic trends have not been introduced by dictators or spread by revolution and conquest, but have been at work ever since the end of the last war — in peace and war, during prosperity and depression. They are no longer forecasts for the future, but wellentrenched accomplished facts. And we have learned more about the structure and functions of economic institutions during the last twenty years than we had learned in the hundred years before 1914.
I
Three basic changes have been wrought in the fabric of international economic life during recent years. Each of them had been prepared gradually since the last war; and each is being brought to fruition by the present war. Every one of them by itself would make the postwar world fundamentally different in its economic structure from anything we have known before. Together — and the three are closely related to each other — they have already changed our economic world so much as to make ridiculous and unreal all the ideal economic world organizations of the blueprinters.
These three changes are: —
(1) The industrialization of the rawmaterial-producing countries that formerly were completely dependent for their finished goods upon imports from the older industrial countries of Europe and North America.
(2) The change in the international economic status and function of Europe, and the resulting change in the sources and the amount of income Europe can expect. This is partly a result of the gradual attainment of maturity by the formerly dependent rawmaterial-producing countries outside Europe, partly a result of compelling political forces within Europe itself.
(3) Finally, and most important, the shift of the centre of international economic gravity across the Atlantic from England to this country.
The man in the street knows, of course, of Japan’s rapid industrialization during the last twenty years and of the Russian five-year plans. He may even have heard of China’s industrialization — disturbed but not cut off by the SinoJapanese war. He reads of the developments of industries in Latin America with loans and expert assistance from the United States. But does he know that these are but isolated instances in a tremendous world-wide movement? Today India is about to become an important industrial producer. Australia and New Zealand are rapidly building up large-scale industries. In South Africa there has been a veritable industrialization boom since 1934. None of these new industrial countries has as yet built up a capacity that could be compared to that of the United States or Germany, or even to that of Belgium or Czechoslovakia. But in the aggregate their industries add up to a staggering total. Dispersed over the globe, often in small undercapitalized and inefficient units, the industrial capacity to be found today in raw-material-producing countries that were completely without industry in 1914 is equal to that of a first-class industrial power. Together with the new industries of Soviet Russia and Japan, the newcomers have today probably about the same capacity as the United States had in 1918.
The war has given tremendous momentum to this industrialization. It has also altered its direction. The industrialization programs of most of the raw-material-producing countries are no longer — as before 1939 — aimed primarily at the replacement of consumergoods imports; they are directed toward permanent industrial independence through the establishment of chemical and heavy industries. The greatest impetus for this drive comes from Great Britain, who in her desperate fight is forced to finance the building of armaments plants in the dominions and colonies outside the reach of Hitler’s bombers: tank factories in Australia and Western Canada, airplane and ordnance plants in South Africa, automobile and machine-tool factories in India. And it is established policy that every single one of these plants be easily convertible to the peacetime production of machinery and engines after the war is over. Nothing, indeed, seems truer than the remark made recently to this writer by one of the highest officials in the foreign section of the United States Department of Commerce, that ‘economists in the future will recognize industrial decentralization as one of the outstanding economic results of world wars.’
This rapid industrial development in what we still are wont to regard as ‘primitive’ countries is one of the main causes of the change in Europe’s international economic position, which in itself is one of the major new factors in international affairs. It is not, as is often said, that Europe will necessarily lose its overseas markets once the rawmaterial-producing countries have built up their own industries; actually, all experience has shown that trade between two industrialized areas can under certain conditions be substantially higher than between an industrial and an agricultural country. But the market which the raw-material-producing countries offered was never their only contribution to the income and economic status of Europe; it was not even the main one. At least as important — and in most cases far more important — for the European economy was the income from services and jobs: economic services which the developed nations of the West had to offer to the undeveloped rawmaterial producers, and jobs in administration, army, and business open to and often reserved for Europeans, particularly in colonial possessions.
How important these service functions and jobs have been as sources of European income and as foundation for Europe’s international economic functions is, of course, beyond accurate statistical proof. On the basis of his own personal experience as economist of a London merchant banking house during the early thirties, this writer would estimate that as late as 1929 about 25 per cent of England’s total national income was derived from her traditional position as the industrial centre of a raw-material world that extended far beyond the political borders of the British Empire. About one third of this in a normal predepression year would come from the sale of industrial goods overseas; another third came from jobs in colonies and economic dependencies and from the income on investments made in the past; and a full third — if not more — was the compensation for services such as shipping, insurance, banking, wholesale trade, and so forth. Yet by 1929 England’s international position had become far less imposing, and her earnings from it far smaller than they had been in 1913.
In Holland and Belgium the income from services to overseas raw-materialproducing countries and from jobs in the colonial empires was proportionately even greater than in England. Although Germany after the last war never fully regained the great position in the field of international services which she had occupied before 1914, a good 15 per cent of the pre-Hitler national income did still come in some form or other from the raw-material-producing countries outside of Europe. Some European countries like France hardly shared in these functions, and consequently had none of the income; others, like Norway and Sweden, had an amazingly high income from one single international service such as shipping or insurance. Altogether it can be said as a rough guess that about 10 per cent of the population of industrial Europe — some fifteen to twenty million people all told — used to live on the income from jobs and investments in overseas raw-material-producing countries, or from economic services rendered to such countries.
Whatever the other consequences of the industrialization of the raw-materialproducing countries, they no longer require Europe for their service functions. Not so long ago a banker in Buenos Aires who wanted to make a remittance to Montevideo — not more than one hundred and fifty miles away — paid through his agent in London to the London agent of the Montevideo banker; and both he and the banker in Montevideo paid a service fee to the London middleman. Today the two settle directly without intermediary. Insurance — one of the most lucrative and one of the most important of these services — is going native everywhere. It is a very backward country indeed that cannot today manage unaided the financing of the seasonal credit demands of its agriculture; twenty years ago the leading London and Amsterdam merchant bankers had an absolute monopoly in this field from Bombay to Lima and from Cape Town to Hongkong. And whereas the Calcutta jute mills — India’s oldest industry — would have been unthinkable even fifteen years ago without a Scotch foreman and an English head bookkeeper, there are very few white men employed there any more.
If this analysis of a world-wide trend is correct, there is only one conclusion regarding its consequences for Europe. It was most succinctly put by a member of the British War Cabinet, the present High Commissioner for the Near East, Captain Oliver Lyttelton. Discussing the post-war prospects in a public speech on May 7, Captain Lyttelton, as President of the Board of Trade in charge of England’s economic policy, said: ‘For the first time in her history Great Britain (after this war) will be internationally a debtor country. We may consequently require to have after the war, just as we have in it, a selective export policy and a control of imports.’ Translated into nonofficial language, this means, of course, that Great Britain may have to try to be as self-sufficient as possible, and that in addition she will have to direct whatever purchases she has to make to those countries that buy from her.
The loss of international economic function is not the only factor driving toward what might be loosely called self-sufficiency in Europe. Equally important is a political consideration. In the construction of the new Europe — whatever its forms — a repetition of the process by which Hitler obtained control of the Balkan countries between 1933 and 1939 must be prevented. Nothing has made aggression easier and defense more difficult than the strangle hold which Nazi Germany obtained over the raw-material resources of Southeastern Europe. It will, however, be impossible to prevent such a repetition unless the cause of Germany’s Balkan ascendancy is removed: the inability of the Balkan countries to sell their agricultural products that forced them to accept the German offer to buy their crops. The only way to prevent the Balkan countries from selling their souls into slavery is to offer them a market for their goods. And, since Southeastern Europe cannot possibly sell its crops in competition with the far more efficient overseas producers of wheat and livestock, it will be necessary for political reasons to give the Balkan peasants preferential treatment in the industrial markets of Western Europe. The actual realization of such a priority position will be one of the most stubborn and difficult technical details of a future peace settlement; but that it will have to be accomplished can hardly be doubted. That Europe will have to strive for some form of regional economic unity and integration appears to be no longer a possibility of the future, but a necessity of the present.
II
Important though the developments in the colonial world and in Europe are, they are developments on the periphery of the international economic world. For the centre today is unquestionably the United States, as one glance at the newspaper headlines will show. And it is equally clear that this country will be even more the leading and central economic unit in any post-war international economic world — unless this international economic world itself should disappear as consequence of a Hitler victory.
Of course it is not news that the United States has become the strongest and most important economy. It was an accomplished and recognized fact by 1919. It showed in 1929 when a New York stock-exchange crash released a depression reaching into the remotest hamlets of the earth. And during the last seven years this position of the United States has manifested itself dramatically in the accumulation of almost all the world’s monetary gold in the coffers of the American Government.
But, though we have had twenty years of increasing American predominance, very few people — either in this country or in Europe — have yet understood what this implies. The shift in international economic leadership across the Atlantic does not simply mean that New York or Washington starts where London left off. It means a profound and permanent change in the whole basis of international economic life.
It was the unique feature of the nineteenth-century international system that its leading political and social power, England, was at the same time the one power most dependent upon overseas supplies of raw materials and foodstuffs. The insatiable English market for any and all raw material the outside world could produce was the driving force behind nineteenth-century economic expansion; it made possible the settlement of the wheat prairies in this country, the development of the plantations in the tropical jungles of Africa, and the opening up of the copper and nitrate mines in Chile. But in the international economic world of today — and even more in that of tomorrow — leadership is in the hands of the one power that is least dependent upon overseas supplies. The United States is not only the one industrial power that produces practically all the raw materials and foodstuffs it needs; it is also the one raw-material producer that can satisfy in abundance all its industrial needs within its own borders. Whereas the central power of yesterday could only exist on the basis of unlimited international exchange of goods and services, the leading international power of today is to all intents and purposes a closed economy.
How little this change and its meaning have been grasped can be seen in the popularity of the argument that it was ‘America’s refusal to play the part of a creditor nation’ that was largely responsible for the breakdown of the Versailles economic order. Actually, America did play the part of a creditor nation in the important respects as far as she could — and maybe a great deal further than she should have done. And the basic assumption of the whole ‘creditornation’ theory — namely, that a lowering or abolition of American tariff barriers would have resulted automatically in a great increase of imports of industrial goods from Europe — is not only unproved but probably false.
There are two kinds of international trade: complementary and competitive. Complementary trade — in which, for instance, England buys wheat which she does not grow from Argentina, in exchange against locomotives which Argentina does not manufacture — was the backbone of international trade up to 1914. But in this trade the United States cannot participate — at least not with a Europe that produces neither raw materials nor finished goods that are not also produced, and in greater quantity, in this country. Second, there is competitive trade, in which two producers of the same commodity compete for the same market on the basis of price, quality, appearance of their merchandise, and so forth. Such competition — whether national or international — is, however, possible only if the competitors are comparable in the level of their technical skill and in the perfection of their production methods. Just as it is impossible to talk of the ‘competition’ of a carriage maker in Detroit against the Ford assembly line, so it would be impossible to have any competition or any competitive trade between a national economy on the level of the carriage maker against an economy on the level of Ford.
The most important fact in the international economics of the between-war period was that European industry as a whole in its relationship to American industry was in the position of the carriage maker. When the last war ended, this country was just entering upon its most rapid expansion. Modern massproduction methods and the tremendous expansions stimulated by Allied war orders concurred to make the United States the lowest-cost producer the world has ever seen. Europe, on the other hand, was engaged during the first post-war decade in a painful process of industrial reorganization after four years of destructive warfare and four more years of equally destructive demobilization, currency chaos, and labor unrest. How great the resultant discrepancy in efficiency was can be readily seen from the fact that Germany — technically the most progressive country in Europe — did not install an assembly line until 1931.
Europe’s basic industrial inferiority after 1918 will hardly be disputed as far as heavy and durable-goods industries are concerned. In the production of automobiles, steel, tires, and machines, this country had undoubtedly a cost advantage which made it possible for American goods to compete successfully in tariff-protected European markets, and which would have made it impossible for European goods to compete even in a free American market. But in consumer goods the situation seems to have been different. That European textiles, china, glass, gloves, and shoes were cheaper than American was not only known to every American tourist of Europe but apparent in every five-and-ten-cent store throughout this country, where in the twenties the counters were full of imported goods which American industry could not then have produced at the same price.
Actually, however, this cheapness was deceptive and did not represent a real economic advantage in European costs of production. Moreover, only very limited quantities of goods could be produced at the low prices; as soon as output had to be increased, costs shot up — usually far beyond American costs of comparative merchandise.
The explanation of this apparent paradox, which was widely discussed in the European economic literature of the time, is that European consumer goods in the twenties were produced largely on machines and in factories inherited from pre-war days and actually obsolescent in a great many cases. This pre-war equipment had been written off completely; what is more, the debts against it had been wiped out by the European inflations, as had also the book value of the capital stock. As long as a manufacturer could produce on this obsolete equipment, there was no need for him to charge anything for depreciation, amortization, or repayment of debt; he could regard everything above wages and rawmaterial costs as profit. In other words, the war and the currency inflation acted as a hidden but very substantial subsidy to consumer-goods producers.
But as soon as this subsidy ceased, as soon as a European manufacturer had to buy new equipment, for instance, he had at once to shift the basis of his entire calculation and take actual costs into account. And then his costs of production rose steeply beyond those of American manufacturers, since machines, capital, and building materials were all more expensive in Europe than in this country. Costs in Europe therefore increased sharply from 1920 to 1930, parallel with the installation of new, more efficient machinery; it was not until the depression that European costs began to decline.
The best example of this situation is the experience of a Czech textile manufacturer for which the writer can vouch personally. Around 1925 this firm, famous for its original designs and its good workmanship, quickly gained a prominent position in the American market, as it could sell 15 per cent below the prices of comparable American merchandise. Orders increased rapidly; and by the spring of 1927 the demand from America had become so great that the producing capacity of the plant had to be increased to satisfy it. As soon as this was done, however, as soon as new efficient buildings were put up and new efficient machinery was bought and installed, costs went up by 40 per cent — considerably beyond the costs of the American competition. And the American market disappeared.
Even if Europe had been able to sell large quantities of industrial goods to this country, had there been no tariffs, — which, on the basis of the factual evidence, is extremely doubtful, — the benefits would have been confined only to the industrial countries of the Old Continent. No reduction in American tariffs would have enabled Rumania, for instance, to sell cotton goods, gloves, or sewing machines in this country, since Rumania did not produce industrial goods in any quantity; nor did any of the other peasant nations in Eastern and Southeastern Europe that had been made independent countries by the Versailles Treaty. But these new countries were the keystone of the Versailles system. Independent Poland, Rumania, and Yugoslavia had been the main innovations of the Versailles settlement; and the success of the post-war order in Europe was dependent upon their ability to develop into strong, democratic national states. Obviously the United States could not have bought, any industrial products in Yugoslavia or Poland; nor could this country have bought Hungarian wheat or Rumanian corn — both a good deal more expensive than Kansas wheat or Iowa corn.
In such a situation the economic textbook rules for the behavior of a creditor country prescribe the giving of loans. This is precisely what the United States did. In the seven years between 1923 and 1929 the United States lent more than three billion dollars to the European countries between the Rhine and Russia. Half of that sum went to Germany — to finance the economic reconstruction of the country. The other half went to the countries in the East and Southeast. But for the American loans Rumania and Hungary as well as Germany would have collapsed economically and socially long before 1929 or 1933. That the Versailles system lasted as long as it did is largely due to the fact that this country underwrote it through these loans, just as the American gold purchases since 1933 underwrote the economic system in the Western democracies in the years between Hitler’s rise to power and the outbreak of the present war.
III
The economic order of Versailles collapsed in spite of the fact that the United States followed the traditional rules of a creditor nation as far as she could, and further. This should be sufficient proof that the rules which were developed when the world’s most trade-dependent country was the leader are no longer applicable now that leadership has passed to the most self-sufficient country. Obviously the shift in the centre of international economics requires a new set of basic principles, institutions, and instruments of international economic life. What these principles, institutions, and instruments should be we have so far not even tried to find out. The study of the new conditions arising out of the shift of the centre of economic gravity across the Atlantic, the preparation of workable economic institutions for the new conditions, and the analysis of the changes which have already occurred as consequence of this shift are the most important economic tasks to be done in preparation for a future post-war world reconstruction.
It will probably be a long time before such a study will yield concrete results — even if our best economic minds put themselves seriously to the task. Yet there are a few basic approaches and principles that are already discernible. The first is that free trade is not enough. In a world in which economic leadership rests with the United States, world-wide free trade cannot, as it did in the English-led world of the nineteenth century, provide a sufficiently strong basis of international economic relations. After this war Europe will certainly not be in a position to engage in competitive trade in industrial products with the United States; European industries, after the destruction of this war, could undersell American producers only on the basis of government subsidies and organized dumping, which, of course, would make normal trade relations altogether impossible. And after the war this country will almost certainly be even less able to offer a market for complementary trade, having become, if anything, more selfsufficient in raw materials than it is now.
An attempt to restore free trade as the basic principle of international economic life would thus probably be futile. It might even be a danger to the political and economic stability of a postwar world. The raw-material-producing countries that are now putting so much energy into industrialization might well regard a proclamation of free-trade principles as an attack on the part of Western imperialism directed against their prosperity and independence.
Yet there must not be a return to the economic nationalism of small economies which proved so disastrous during the last twenty years. And, since universal free trade seems to be inapplicable, it appears likely that the approach to the problems of the future would, at least in the economic sphere, lead to a definite bias in favor of well-integrated large regional economic units with sufficient raw material and industrial capacity within their own borders to be substantially self-sufficient. Perhaps the most important development in this connection was the Delhi Conference last winter, where British India, the Dutch East Indies, Australia, New Zealand, and Britain’s East African colonies came together to lay the basis for a regional integration of the countries around the Indian Ocean. It would, indeed, be only fitting if the shift of the economic centre from England to America were accompanied by a shift of the organizing economic principle from the Englishman Adam Smith’s free trade to Henry Clay’s ‘American system’ — the most comprehensive, most balanced, and most successful regional economic system ever developed.
Free trade, in spite of the rank accorded to it in economic theory, has never been the sole or even the main principle of economic internationalism. The free movement of capital and the free movement of men have, in actual practice, been just as important pillars of the international economic system of the nineteenth century as has the free movement of goods. This writer would indeed go so far as to say that for the past hundred years international credit and international migration have been considerably more important than international trade; and in particular I would say that nothing was more important in the pre-1914 scheme of things than the free immigration into the United States.
If trade should, indeed, as appears almost certain, become a matter of political and economic necessity and convenience, instead of a matter of principle, the free exchange of capital and the free exchange of men might reassume their character as fundamentals of international economic life. Actually, both seem far more needed in any conceivable post-war world than trade. And both have been abandoned to a far greater extent in our actual present world than the exchange of goods. The nineteenth century could afford to disregard the free exchange of capital and of men; both seemed so commonplace and matter-ofcourse as to require no word of comment, while international trade, even at its freest, had countless obstacles to overcome. Today the situation is reversed. There is still a substantial volume of trade; but international capital movements and international migration have been completely stopped.
Yet, while neither Europe nor the newly industrialized raw-material producers will have much to sell or much purchasing power to buy with after the war, they will certainly need capital: machines, technical and chemical processes, roads and railways, and so forth. The first contribution to economic reconstruction would be to make possible the flow of capital to these areas. And to restore the freedom of migration in some way, to prepare the settlement of some of the surplus populations of Europe and Asia on new, free land, to finance such a movement and provide the machinery the new settlers will need, may well be the greatest contribution to permanent international economic stability that could be made after this war. Concretely, there seem to be two main areas of population pressure in Europe that would have to find release through migration: the British Isles, and the peasant countries in the Balkans. And there seem to be two possible areas of new settlement: Central and Western Canada, and Asiatic Russia — one reason why Russia will have to be in the post-war order. But the whole problem of migration and resettlement needs the most careful study, the most careful preparation and discussion, not only in its economic but also in its political and social aspects.