goods a country can now produce, and second upon how large a share of this production can be saved for investment in new capital. Whatever tends to prolong unemployment, inefficiency, and low productivity, tends to weaken a country's ability to reestablish normal exports and imports with the world. Abnormal trade balances cannot be corrected. except as a country's production and consumption get back to normal. Toward this same end, it is also necessary to free commerce from many of its artificial restrictions. Such restrictions include price discriminations favoring certain foreign countries and disfavoring others, artificially raising the prices of export commodities, imposing restraints upon the volume of exports or imports, and placing undue and excessive tariff rates on international commerce. Normal exchange rates require normal trade relations. (e) Speculation in a country's exchange is an evil which requires correction. The case of Germany illustrates this process carried to an extreme. Germany sold huge sums of paper marks on foreign exchange markets. This dumping of paper money abroad not only depreciated the mark more than ever, but caused the most violent fluctuations that exchange has ever undergone. The practice has been adopted at times by other countries, but nowhere to the extreme and absurd degree found in Germany. Before stabilization can be hoped for, it is imperative that such a policy come definitely to an end. (f) Finally, political stability is needed for stabilization. In postwar Europe, stability was delayed by the lack of a settlement of questions pertaining to reparations from Germany, and payment of the Allied debts. Such events as the French occupation of the Ruhr tended to undermine confidence and depreciate exchange values. The assurance of continued peace is indispensable to stability. Unstable domestic politics brings exchange fluctuations. Whatever weakens confidence in the ability of governments to function effectively has an unfavorable effect upon the exchange markets. The experience of all countries with depreciated paper has been painful and costly, and has left them with the desire to restore stable conditions as rapidly as possible. How to give effect to such a desire is the problem of greatest difficulty. However, practical methods of stabilization can gradually be evolved. The Place of Money and of Government in International Economics. In summarizing the subject of world finance and currency, it is important to place emphasis where emphasis belongs. And emphasis properly falls upon two things: money and government. Instead of passing money by as an incidental factor, a mere medium of exchange governed by the laws of trade, we must make money a pivotal factor, a regulator of exchange governing in fundamental ways the course of trade. Instead of assuming that to restore production it is proper to attack directly the subject of production, we must assume that it is proper to attack the subject of sound money, because sound money is itself the chief prerequisite for the restoration of production. On the other hand, it is impossible to deal effectively with either the subject of money or of production without at the same time placing in the forefront of our attack the economic functions of government. The custom of dismissing government as a purely political subject, excluded from the scope of economics, is nowhere more futile and harmful than in the international field. It is absurd to call land, labor, and capital the factors in production, with the inference that government is not equally a factor in production. Sound performance of the economic functions of government is absolutely indispensable to any start at international reconstruction. Endless confusion and chaos have persisted in the postwar world largely because of determination to keep up the delusion that politics is politics and economics is economics and never the twain shall meet. In emphasizing the importance of money, it has been declared by Cassel: "It seems likely that the era of monetary chaos through which we are passing will become the classic example of unsound finance." The most noteworthy endeavor to cope with these problems of economic recovery, the report of the commission of experts headed by Charles G. Dawes, takes as the core of the problem the stabilization of finance, involving the reconstruction of currency and the reconstruction of financial budgets. The stabilization of the money factor is very properly made the central feature of the report. The paralyzing influences over the post-war world have been money debts and excessive money issue. The reparation debts of Germany to the Allies, the war debts of the Allies to each other, the internal debts of governments to their peoples, comprise a tremendous burden of debt entanglements which strangle repeatedly the endeavors to achieve economic restoration. The mass printing of paper money, the alternative flights of inflation and deflation, the violent fluctuations of money values, the mal-distribution of gold between nations, stifle one after another of the well-meaning attempts at economic recovery. The various nations have often been instructed that they would be all right if only they would get down to work. Work, produce, get busy-such are the secrets of recovery tossed out to the depressed countries. But such slogans are bound to be futile. They utterly ignore the part which money plays in production. The force which holds the nations back is not a lack of land, or of labor, or of capital, or of executive ability, or of the will to work. The force which holds the nations back is the disruption of the intricate international financial system. It is the vast entanglement of debt owing and money printing. The resources are there, ready for use, but they are impotent because of the deadening influence of unsound finance. The importance of government is emphasized by the obvious fact that almost the entire time and energy of the post-war governments have been devoted to the economic problems of the hour. The balancing of budgets is necessary before inflation can be brought under control. Government taxation and government expenditure are inseparably connected with the printing of paper money. Tariff policies restrict imports and exports and force into existence abnormal balances of trade. Military armament, occupation of the Ruhr, gestures of war, destroy the elements of confidence and stability. Territorial settlements and the administration of the economic clauses of the Versailles treaty create as many difficulties as they solve. Government committees, conferences, and commissions run on in a never-ending series in the repeated endeavor to repair and stabilize the productive capacity of the world. The question is not whether there is to be politics or not to be politics, nor whether there is to be less politics or more politics. The question is whether politics is to be sound economics or unsound economics. Instead of dismissing the politics of the situation as irrelevant, the nations must accept politics as an integral part of modern production. There is no production without politics, any more than there is production without labor or capital. It is essential to recognize that politics among the nations of the world has basic economic functions to perform. Instead of rejecting governmental economic functions on the ground that they are merely politics, it is essential to rely upon these functions for every particle of progress that the nations hope to make toward economic restoration. BIBLIOGRAPHY BASS, J. F., and MOULTON, H. G., America and the Balance Sheet of Europe. CASSEL, G., Money and Foreign Exchange After 1914. COMMISSION OF GOLD AND SILVER INQUIRY, UNITED STATES SENATE, European CROSS, IRA B., Domestic and Foreign Exchange, Chapters XII and XIV. KEYNES, J. M., Monetary Reform. MILL, J. S., Principles of Political Economy (1848), Book III, Chapters 17-20. MOULTON, H. G., and others, Germany's Capacity to Pay. Russian Debts and Russian Reconstruction. The Reparation Plan. The French Debt Problem. SELIGMAN, E. R. A., The Stabilization of Business, Chapter VI. Edited by L. D. Edie. UNITED STATES TARIFF COMMISSION, Depreciated Exchange and International Trade, 1922. YORK, THOMAS, International Exchange. CHAPTER XXXI THE EXPORT OF CAPITAL The Importance of the Machine Technique.-The modern production technology, by increasing the total volume of production, has made possible an excess of production over consumption. This excess is represented financially by the volume of annual saving and investment, and is represented physically by capital goods in such forms as machinery, railroads, factory buildings, or electrical equipment. Where the machine technique is highly developed, this supply of savings and capital is large, and it has been found profitable to invest a considerable part of the supply in foreign countries. The countries most in need of new capital are the so-called new or backward countries. At the present time, South America, Turkey, China, and Russia are examples of countries needing capital. The sources of capital to meet their needs are largely the savings of the peoples of the United States, England, France, and other countries that have been highly industrialized by the machine technique. There are, therefore, two types of countries,-those which export and those which import capital equipment. The former include the countries of Western Europe, Japan, and the United States. The latter include the balance of the world. Great Britain has been first in the export of capital equipment because she was first in the industrial revolution. Her foreign investments began as early as 1815, and at first were mostly in Europe and the United States. At the time, these countries were industrially the backward countries as compared with England. In 1857 England had about $400,000,000 invested in American railroads. France, Germany, and other nations became foreign investors as soon as they had taken over the technology of the industrial revolution. The latter part of the nineteenth century and the first part of the twentieth was a period of marked expansion along this line, and by 1914 the estimated total of foreign investment was about $40,000,000,000. It is important to emphasize that this vast sum of foreign investment was chiefly attributable to the far-reaching effects of the machine technique of production. Without the great increase in productive capacity due to the spread of factory production and mechanical methods, the excess of production over consumption in home countries would have been small. This technique was the source of the capital supply which was sent out to the less advanced nations of the world, and was the moving force behind the great developments in foreign investment. The Foreign Investments of Principal Countries.-The amount of investment by four of the principal capital exporting countries in 1914 and 1923 was approximately as follows:1 The English investments were greater than those of the other three nations combined. England invested about one-half her pre-war annual savings in foreign countries, or an annual sum of about $1,000,000,000. The grand total of England's foreign investments represented about one-fourth of her entire national wealth. The income from this enormous foreign investment was about $1,000,000,000. The World War had the effect of reducing the foreign wealth of England by about $5,000,000,000. Also, the war dried up for the time being the sources of new investment. As soon as post-war tendencies were free to assert themselves, England resumed her export of capital, although on a scale somewhat less than in former years. If England did nothing more than to reinvest abroad each year a part of her interest on foreign investments, her foreign wealth would show an important yearly increase. The distribution of English investments is significant from a double standpoint: with respect to the location of investments by countries, and with respect to the kind of industry built up in the foreign country. With respect to location, 53 per cent of total English holdings in 1913 were in North and South America, 16 per cent in Asia, 14 per cent in Africa, 12 per cent in Australia, and only 5 per cent in Europe. English investments were characterized much more than either French or German by the fact that they were located, for by far the greater part, outside of Europe proper. Mainly due to this diffusion, English investments suffered much smaller loss from the European War. The countries receiving English investments have been the world's primary sources of foodstuffs and raw materials, and important markets for manufactured articles. Thus, English investments tended to develop ever greater scurces of raw materials for her factories and ever wider markets for the finished product of her factories. With respect to the kinds of industry developed abroad, it is noteworthy that over 60 per cent of the 1 Estimates by various authorities show considerable variation. Among the more reliable sources may be mentioned-Report by the Federal Trade Commission of the United States, Coöperation in Our Export Trade, Volume 1, pp. 69-173; Sir George Paish, Journal of the Royal Statistical Society, January, 1911; Statist, February 14, 1914, and The Contemporary Review, September, 1919; Sir Edgar Crammond, idem., October, 1914, July, 1918; C. K. Hobson, Export of Capital; R. C. Leffingwell, Manchester Guardian Commercial, November 16, 1922; United States Department of Commerce, Trade Information Bulletins 144 and 215; McKenna Report to Committee of Experts on German Reparations, April 9, 1924. |