II

But while increased national productivity is essential to our maintenance and progress, another condition equally essential looms very large on our horizon. It is the expansion of the market. The theoretic contention that (apart from misapplication of productive power) there can be no such thing as overproduction, cuts no ice either among business men or workers. For experience teaches them that industrial machinery is always tending to produce staple commodities at a faster rate than the market will take them off. This normal tendency toward overproduction, attested by the cyclical depressions which are its inevitable consequence, is the chronic cause of slacking both on the part of capital and of labor. For “regulation of output” for the maintenance of “reasonable prices,” which is the central fact of the policy of trusts and combines, is in substance identical with labor’s “ca’ canny.” This normal trouble of a restricted market has, of course, an important bearing upon Britain’s present economic outlook on the world. For the present depression shows this normal trouble aggravated by the financial and commercial dislocation of the world-market, which has been the aftermath of the Great War. Britain, as we see, is more vitally concerned with securing large, free, foreign markets than any other country. Our interest in the peace, safety, and economic recovery of the world is unique. Had not our statesmen been to so large an extent “economic illiterates,” they would have thrown their whole weight into the reconstruction at the earliest possible minute of the broken industrial, commercial, and financial machinery of Europe as soon as the war was ended.

Economic statecraft would have avoided at least three fatal blunders. The first is the economic-political dismemberment of Austro-Hungary which left her a rotting carcass in the European system. Second comes the boycott of Russia, accompanied for two years by a squandering of vast sums of money and men by the Western Powers in the work of further injuring the economic resources of that ill-governed and impoverished country. Third comes the fastening upon Germany of an immeasurable load of reparations, instead of a fixed, practicable sum. There are, of course, other troubles of a similar nature embodied in the Peace Treaties and in the post-war policy, the larger bearing of which upon our economic situation has gradually become evident. Britain requires the peace and economic recovery of Europe because only in this condition is it possible for her to obtain the expansion of markets which renders her higher productivity available. She must increase her foreign markets, and this increase is impossible unless Europe obtains a higher and reliable purchasing power.

This statement, as it stands, is liable to some misunderstanding. It may seem to suggest that Britain must sell her increased product exclusively, or mainly, in Europe. This, of course, is by no means the case. A portion of the increased productivity of which our industry is capable, should be met by the expansion of our internal market. A higher standard of comfort for the mass of our working population is, indeed, as we recognize, one condition for the achievement of higher productivity. A larger and more regular consumption of staple commodities would be a strong bulwark against trade depression in our standard conditions. But this is vitally associated with an enlargement of external markets both for buying and for selling.

Here it may be well to put in evidence some statistics measuring the importance of the slump of foreign trade in its bearing upon our economic situation. The best measure of the relative importance of our export to our home trade is given in the Census of Production (1907) where 37 per cent of the total industrial product of this nation is assigned to export trade, 38 per cent of the product of our mines and quarries, and 31 per cent of our “aggregate output.” Thus we see that virtually one-third of the work done in this country on production of material wealth has been for export trade. Now of our total export trade in 1913, amounting in value to £525,000,000, no less than £205,000,000, or two-fifths, was European. Germany was by far our largest European customer, our largest foreign customer save India. Her purchases in 1913, if allowance be made for an unascertained part of the trade ascribed to Holland and Belgium, must have amounted to about one-quarter of our European market. If we take into account the 1913 trade with Austro-Hungary, Turkey, Bulgaria, and Russia, that group of countries accounts for about one-third of our whole European trade. Now the failure of the industrial recovery of Europe, especially of Russia, and the artificially stimulated export trade of Germany have gravely injured our export market. But though that injury proceeds from European conditions, its area is by no means confined to Europe. The indirect damage done to our export trade with non-European countries, owing to the losses of European markets sustained by those countries, is at least as grave. The collapse of the demand for Asiatic, African, and other tropical and semi-tropical products on the part of European peoples has brought a large shrinkage in their purchase of our manufactures. Such are the familiar phenomena of roundabout trade, so signally ignored by political peacemakers.

So much for the export side of our national accounts. But, as we cannot sell abroad as much as we desire, we cannot afford to buy abroad. And here, as we have seen, is the crux of our situation. We must buy abroad in order to exist, therefore we must sell. No other great country feels the same pressure of necessity. How grave this pressure is appears from our balance-sheet of last year, and our prospective balance-sheet for this.

If our foreign trade for 1921 is revalued on the basis of the prices prevailing in 1913, the comparison works out as follows:

VALUES ON BASIS OF 1913 PRICES (000’s omitted)

Imports

Exports (British goods)

Exports (Foreign and Colonial)

The excess of imports over exports here disclosed is a new and disconcerting feature in our economic outlook. For unless we can substantially reduce that excess by expansion of our visible and invisible exports, we are in a thoroughly unsound condition. The visible balance was much worse for 1920 than for 1921, but it was redressed by the inflated shipping earnings of that year. The following is an approximate trade balance for 1921 (given in millions of pounds), in comparison with 1920 and 1913.

Exports of merchandise

Shipping earnings

Finance and insurance earnings

Income from investments

Total

Deduct imports

Final balance

Though the returns of recent months show some improvement, the need of expanding foreign markets, and an accompanying expansion of our shipping and financial profits, are of permanent importance in their bearing on our policy of economic and financial reconstruction. Economists, financiers, and enlightened business men in Britain are virtually unanimous as to the essentials of that policy, though there are differences upon methods of attainment.

We see Europe strangled in a coil of troubles, and hampering world-recovery by its helplessness. Almost every nation suffers from inflation, instability of exchanges, extravagance in arms and doles, failure to balance budgets, crushing taxation, tariffs and embargoes, public indebtedness, and reparations. These interact so as to produce the appearance of a vicious circle, a conception which is apt to exercise a paralyzing influence upon the will of politicians. It seems politically impossible for a country in the case of Austria or Poland to stop inflation. It seems idle to call on Germany, or even France, to balance her budget on the existing basis of obligations. Reduction of armaments in so dangerous a Europe seems impracticable to Continental powers. Tariffs appear imperative in order to stop foreign goods from low exchange countries from flooding the markets of high exchange countries, and so the natural process of stabilizing exchanges is made impossible.

This entanglement, however, is not an endless chain. There is a quite definite point of entrance, a prime condition for the success of the general financial policy, adumbrated, first at Brussels two years ago, and lately at Genoa. We can only unravel the coil by seizing firm hold of the reparation end.

The priority claim for the reparation settlement is not merely one of political emergency, critical as that may be, but one of economic rationale. Let the Allies once agree upon a drastic reduction of the terms of the London ultimatum, accompanied by a remission of British claims for pensions and allowances. Let them recognize that at present Germany has not, and cannot attain by any improvement of her taxing system or cancelment of subsidies, any considerable export surplus out of which to make a large payment in gold marks. Let them realize that the provision of material for the repair of the devastated areas, with arrangements for some ascending scale of monetary payments to begin as soon as Germany attains a genuine trade surplus, is the only method consistent with and contributory to the restoration of Europe, and the recovery of the nations stricken with famine or languishing in trade depression.

How will the healing influence of a sound settlement of reparations work upon the other maladies? It will operate in some way as this. A total payment, reduced to something like the Keynes figure, with a moratorium for the monetary portion, would greatly facilitate the process of real restoration in the devastated areas, because on those conditions it would be feasible to float upon the money markets of the world those reparation bonds handed by Germany to the Allied governments which in present circumstances, can have no market value. The total cancelment of the unpaid C Bonds and the easing of the terms for the payment of the A and B series are essential to enable France to carry out speedily and advantageously the actual work of repair. In other words, the real value and availability of a greatly reduced sum for reparations would be far larger than belong to figures known to be inflated and impossible. The unreality of her present hopes, and of the false expectations built on them, cannot be to the real advantage of France, while it visibly aggravates the insecurity of the whole European situation.

The next beneficent reaction would be the slowing-down of the artificially stimulated flow of German export goods into all the markets where our goods would normally compete with theirs. This, in itself, would do something for the recovery of our export trade, especially when the stoppage of further German inflation, with its accompanying reduction of real wages, is taken into account. For so long as Germany is forced to find these large sums in gold marks, she must go on meeting her internal bills by an ever cheapening money, in order to drive down the costs of labor to a point enabling her to undersell foreigners in their own and neutral markets. Only by thus enabling Germany to stop inflation can she be brought to balance her budget, conserve her sound foreign money for the supply of her own material needs, and cease the costly policy of subsidies by which she has broken the full shock of inflation upon the weaker classes of the nation. The more pacific atmosphere produced by a reparation settlement which won the reasonable acceptance of Germany should immediately react in solid savings upon armaments, in which France and her Continental satellites would be chief beneficiaries. The withdrawal of forces from the occupied areas, a corollary of this new policy, would leave a larger portion of the payments made by Germany available for the real work of restoration, and French statesmen might be enabled to meet their internal obligations without undue recourse to borrowing.

The next reaction of the reparation settlement would be the establishment of freer commerce. This would come through the removal or reduction of the tariffs and export embargoes which every state has thrown up to safeguard its industries against the surging tide of uncontrolled trade. Just in proportion as these barriers are thrown down and trade flows freely from one country to another, can a parity of price levels be attained. In no other way is that stabilization of the exchanges which we need as the basis of confidence in business life attainable. Only thus can we, or any other country, hope to obtain any substantial relaxation of the burdens of taxation. For only thus can the burden be lightened at both ends by the sensible reduction of expenditure on armaments. Trade once stimulated, rising prices will be reflected in higher money incomes and an automatic lightening of the great fixed charges for interest and pensions which constitute so big a portion of our annual expenditure.

Cut down the indemnity, cancel inter-Allied indebtedness, stop inflation, enable states to pay their way, secure stability of external payments, reduce governmental waste, and ease taxation. By these means shall we secure a body of conditions favorable to a revival of trade which shall suck up unemployment in every country. Moreover, we enable peoples and their governments to concert in common the further plans needed for securing the peace and progress of a world taught at last, and by terrible experience, to realize its unity. For only with the beginnings of economic safety and revival in Western Europe shall we get the frame of mind and the external resources necessary to evoke that larger policy of co-operative credit needed to meet the case of stricken countries such as Austria and Russia, too feeble to respond to the normal economic stimuli. Only by an emergency policy of international credits, furnished on a larger scale than hitherto contemplated, can these sick countries be restored to the world which their sickness must otherwise continue to hamper and perplex.

This brings me to the dawning recognition of the necessity of an international understanding and co-operation in credits and currency which is perhaps the most important outcome of post-war economic experience. Had it been politically practicable at the Peace to endow a finance committee of a completed League of Nations with the emergency power of rationing some international fund of credit (a continuation and expansion of the allied system in the war) during a period of restoration, the worst of our troubles might have been averted.

Slowly and piecemeal Europe has been struggling toward the erection of some such system. In Britain the beginnings came with our trade depression, taking shape chiefly in governmental aids and guaranties for our export trade with countries whose purchasing power was feeble and unreliable. The Overseas Trade Acts of 1920 and 1921 empowered the Board of Trade to make advances to British firms exporting goods to certain war-stricken countries, and to guarantee a large share of any loss incurred in such trade. Comparatively little trade was done under the conditions of these Acts, and in 1921 a further amendment of the policy was incorporated in the Trade Facilities Act, the chief feature of which was “the granting of credits and the giving of guaranties in respect of export transactions, other than the sale of munitions of war, between the United Kingdom and any other country whatsoever ...” and extending the time limit for such credits to 1927. The state was to guarantee 100 per cent of the invoiced value of exported goods where the period of credits did not exceed twelve months, the state’s ultimate liability remaining fixed, as in the earlier Acts, at 42½ per cent. A certain amount of trade has been done under these conditions, though Russia was formally excluded from the application of the Act. The International Credits Organisation, set up under the Ter Meulen scheme with the approval of the League of Nations, for financing trade with impoverished nations, has so far proved sterile, chiefly because it required from the governments of the borrowers guaranties which they could not give. Another scheme outlined by Sir Edward Mountain (chairman of a large insurance company) proposed a syndicate of banks and insurance companies for the finance of export trade, with a government guaranty against half the losses.

But none of these schemes have faced effectively the real difficulty that “before the exchange risk can become an insurable risk on ordinary business lines, the distressed countries must cease to be distressed,” nor is it clear that any of the barter schemes, to which resort is sometimes possible, can go far to redeem the situation. These small, fumbling experiments have made it evident that a larger, bolder, and more fully international remedy is needed, that Russia must be brought within its scope as a chief subject of its operations, and that all the great powers must participate in a task which is not merely one of restoration but of development.

Moreover, the notion that any such work can be left entirely to private enterprise is unthinkable. Though the active work of financing such operations can best be undertaken by banking and financial groups of the several nations in co-operation, that co-operation must quite evidently extend to their governments whose several and concerted action will be needed at the outset to secure sufficient confidence in the individual traders who are required to deliver goods for payment in terms of some new sort of paper. For though governments can hardly be expected to add to their existing financial embarrassments any large financial undertakings involving current public expenditure, their early co-operation is urgently required in order to secure the stabilization of exchanges and of prices essential to secure from bankers and investors the loans needed to set the nations on their economic feet.

A general consensus of economic opinion here supports the resolutions of the Financial Commission of the Genoa Conference, which are quite explicit upon the course it is desirable to take. Stability of currency is the first requisite of economic reconstruction. That stability involves the adoption of a common standard of European currencies. The only standard possible at present for general adoption is gold. European governments should formally accept that standard and without delay fix the gold value of their several monetary units, according to their several conditions, either adopting the old gold parity or a new one approximating to the exchange value of the monetary unit at the time of adoption. But the successful maintenance of such a gold standard must turn upon effective international arrangements in which the co-operation of governments and their central banks is essential. For it will be necessary to “centralize and co-ordinate the demand for gold, and so to avoid those wide fluctuations in the purchasing power of gold which might otherwise result from the simultaneous and competitive efforts of a number of countries to secure metallic reserves. The Convention should embody some means of economizing the use of gold by maintaining reserves in the form of foreign balances, such, for example, as the gold exchange standard, or an international clearing system.” With the restoration of a free market for gold, and comparative stability of prices, productivity would be restored and commerce would flow with its pre-war confidence.

Suppose that the preliminary difficulties of getting the weak exchange nations to agree to the immediate adjustment of their damaged currency to a gold standard, and of getting all the strong nations (including the United States) to come into an arrangement involving the establishment of an international money policy with an internationalization of the final gold reserve, were possible, a certain considerable advance would have been made toward financial and economic restoration. It should be possible to get the economic advisers of the various governments to recognize the urgent utility of such an international plan.

But it would be foolish for us to shirk the issue of American co-operation. The Genoa Commission, indeed, expressly states that “no scheme for stabilizing the purchasing power of the monetary unit can be made effective without co-operation of policy between Europe and the United States.” Now English economists would, I think, admit that the immediate interests of America are less urgently involved in this project than those of this country or of other European countries. This admission, of course, applies to the whole European imbroglio, political as well as economic. But they would urge that, though America is better able to stand out and has less immediately to gain by coming in, the new economic position of America and in particular the growth of her foreign trade should furnish sufficient grounds for participation. For a refusal to assist directly in the financial recovery of Europe, and the hugging of an economic isolation, must become more and more embarrassing as time goes on. The direct financial stakes of America in Europe, considerable though they are, are small as compared with those which under the normal play of business motives would be profitably established during the years to come. While, therefore, the inducements to America to come into an international corporation are less potent than in our own case, they should be adequate for Americans who take a long view of their economic destiny.

There is one other important matter touched upon by the Genoa Commission deserving of attention. If “undue fluctuations in the purchasing power of gold” are to be prevented, i.e., if stability of price level be desirable, there must be some agreed policy of regulating credit. Here, of course, we touch the most sensitive organ of finance. If finance were a rigid mechanism with a quantity of gold as the general governor of action, the matter might be simply solved by some agreement on a proportion between gold and credit, operated automatically by discount rates. But though this appears to be the accepted doctrine of conservative bankers and economists, it cannot seriously be regarded as workable. Could, or would, any two central banks agree on the desirable proportion of credit to gold in their respective countries, when established banking policies differ so materially? Or, taking an even broader point, can it seriously be maintained that the same proportion of credit to gold should be maintained on the up-grade as on the down-grade of a cyclical fluctuation of trade? Granting that a more carefully concerted credit policy could cut out the peak of a cyclical fluctuation by stopping rises of prices before they reached the high level which unrestricted credit renders possible, and could, by easier money, do something for depressed trade, could such a policy be operated successfully without assigning large discretion to some representative committee empowered to take into consideration the special circumstances of world-trade at the time when action is required? A purely mechanical apparatus for correlating credit with gold and securing co-operation by the separate action of national banks hardly seems effective. A closer international government of finance would seem necessary, in order to reconcile wholesome elasticity with reasonable control. Toward such an international organ no doubt the world is moving. But its present adoption would seem to presuppose a fuller apprehension of the economic unity of the world, and of the consequent inter-penetration of national economic interests, than yet obtains in any large section of the business classes of any nation. Some measure of agreed co-operation, however, should be feasible, and the proposed association of central banks upon the one hand, and the International Corporation for emergency credits on the other, rank as serious experiments toward such co-operation.

JOHN A. HOBSON LONDON, ENGLAND