Commercial development is broadly ill.u.s.trating one profound truth: that the real basis of social morality is self-interest. If English banks and insurance companies have become absolutely honest in their administration, it is because the dishonesty of any one of them threatened the prosperity of all.
Must we a.s.sume that the Governments of the world, which, presumably, are directed by men as far-sighted as bankers, are permanently to fall below the banker in their conception of enlightened self-interest? Must we a.s.sume that what is self-evident to the banker--namely, that the repudiation of engagements, or any attempt at financial plunder, is sheer stupidity and commercial suicide--is for ever to remain unperceived by the ruler? Then, when he realizes this truth, shall we not at least have made some progress towards laying the foundations for a sane international polity?
The following correspondence, provoked by the first edition of this book, may throw light on some of the points dealt with in this chapter.
A correspondent of London _Public Opinion_ criticized a part of the thesis here dealt with as a "series of half-truths," questioning as follows:
What is "natural wealth," and how can trade be carried on with it unless there are markets for it when worked? Would the writer maintain that markets cannot be permanently or seriously affected by military conquests, especially if conquest be followed by the imposition upon the vanquished of commercial conditions framed in the interests of the victor?... Germany has derived, and continues to derive, great advantages from the most-favored-nation clause which she compelled France to insert in the Treaty of Frankfurt.... Bismarck, it is true, underestimated the financial resilience of France, and was sorely disappointed when the French paid off the indemnity with such astonishing rapidity, and thus liberated themselves from the equally crushing burden of having to maintain the German army of occupation. He regretted not having demanded an indemnity twice as large. Germany would not repeat the mistake, and any country having the misfortune to be vanquished by her in future will be likely to find its commercial prosperity compromised for decades.
To which I replied:
Will your correspondent forgive my saying that while he talks of half-truths, the whole of this pa.s.sage indicates the domination of that particular half-truth which lies at the bottom of the illusion with which my book deals?
What is a market? Your correspondent evidently conceives it as a place where things are sold. That is only half the truth. It is a place where things are bought and sold, and one operation is impossible without the other, and the notion that one nation can sell for ever and never buy is simply the theory of perpetual motion applied to economics; and international trade can no more be based upon perpetual motion than can engineering. As between economically highly-organized nations a customer must also be a compet.i.tor, a fact which bayonets cannot alter. To the extent to which they destroy him as a compet.i.tor, they destroy him, speaking generally, and largely, as a customer.
The late Mr. Seddon conceived England as making her purchases with "a stream of golden sovereigns" flowing from a stock all the time getting smaller. That "practical" man, however, who so despised "mere theories," was himself the victim of a pure theory, and the picture which he conjured up from his inner consciousness has no existence in fact. England has hardly enough gold to pay one year"s taxes, and if she paid for her imports in gold she would exhaust her stock in three months; and the process by which she really pays has been going on for sixty years. She is a buyer just as long as she is a seller, and if she is to afford a market to Germany she must procure the money wherewith to pay for Germany"s goods by selling goods to Germany or elsewhere, and if that process of sale stops, Germany loses a market, not only the English market, but also those markets which depend in their turn upon England"s capacity to buy--that is to say, to sell, for, again, the one operation is impossible without the other.
If your correspondent had had the whole process in his mind instead of half of it, I do not think that he would have written the pa.s.sages I have quoted. In his endors.e.m.e.nt of the Bismarckian conception of political economy he evidently deems that one nation"s gain is the measure of another nation"s loss, and that nations live by robbing their neighbors in a lesser or greater degree. This is economics in the style of Tamerlane and the Red Indian, and, happily, has no relation to the real facts of modern commercial intercourse.
The conception of one-half of the case only, dominates your correspondent"s letter throughout. He says, "Germany has derived, and continues to derive, great advantage from the most-favored-nation clause which she compelled France to insert in the Treaty of Frankfurt," which is quite true, but leaves out the other half of the truth, somewhat important to our discussion--viz., that France has also greatly benefited, in that the scope of fruitless tariff war has been by so much restricted.
A further ill.u.s.tration: Why should Germany have been sorely disappointed at France"s rapid recovery? The German people are not going to be the richer for having a poor neighbor--on the contrary, they are going to be the poorer, and there is not an economist with a reputation to lose, whatever his views of fiscal policy, who would challenge this for a moment.
How would Germany impose upon a vanquished England commercial arrangements which would impoverish the vanquished and enrich the victor? By enforcing another Frankfurt treaty, by which English ports should be kept open to German goods? But that is precisely what English ports have been for sixty years, and Germany has not been obliged to wage a costly war to effect it.
Would Germany close her own markets to our goods? But, again, that is precisely what she has done--again without war, and by a right which we never dream of challenging. How is war going to affect the question one way or another? I have been asking for a detailed answer to that question from European publicists and statesmen for the last ten years, and I have never yet been answered, save by much vagueness, much fine phrasing concerning commercial supremacy, a spirited foreign policy, national prestige, and much else, which no one seems able to define, but a real policy, a _modus operandi_, a balance-sheet which one can a.n.a.lyze, never. And until such is forthcoming I shall continue to believe that the whole thing is based upon an illusion.
The true test of fallacies of this kind is progression. Imagine Germany (as our Jingoes seem to dream of her) absolute master of Europe, and able to dictate any policy that she pleased. How would she treat such a European empire? By impoverishing its component parts? But that would be suicidal. Where would her big industrial population find their markets?[15] If she set out to develop and enrich the component parts, these would become merely efficient compet.i.tors, and she need not have undertaken the costliest war of history to arrive at that result. This is the paradox, the futility of conquest--the great illusion which the history of our own Empire so well ill.u.s.trates. We British "own" our Empire by allowing its component parts to develop themselves in their own way, and in view of their own ends, and all the empires which have pursued any other policy have only ended by impoverishing their own populations and falling to pieces.
Your correspondent asks: "Is Mr. Norman Angell prepared to maintain that j.a.pan has derived no political or commercial advantages from her victories, and that Russia has suffered no loss from defeat?"
What I am prepared to maintain, and what the experts know to be the truth, is that the j.a.panese people are the poorer, not the richer for their war, and that the Russian people will gain more from defeat than they could possibly have gained by victory, since defeat will const.i.tute a check on the economically sterile policy of military and territorial aggrandizement and turn Russian energies to social and economic development; and it is because of this fact that Russia is at the present moment, despite her desperate internal troubles, showing a capacity for economic regeneration as great as, if not greater than, that of j.a.pan. This latter country is breaking all modern records, civilized or uncivilized, in the burdensomeness of her taxation. On the average, the j.a.panese people pay 30 per cent.--nearly one-third--of their net income in taxation in one form or another, and so far have they been compelled to push the progressive principle that a j.a.panese lucky enough to possess an income of ten thousand a year has to surrender over six thousand of it in taxation, a condition of things which would, of course, create a revolution in any European country in twenty-four hours. And this is quoted as a result so brilliant that those who question it cannot be doing so seriously![16] On the other side, for the first time in twenty years the Russian Budget shows a surplus.
This recovery of the defeated nation after wars is not even peculiar to our generation. Ten years after the Franco-Prussian War France was in a better financial position than Germany, as she is in a better financial position to-day, and though her foreign trade does not show as great expansion as that of Germany--because her population remains absolutely stationary, while that of Germany increases by leaps and bounds--the French people as a whole are more prosperous, more comfortable, more economically secure, with a greater reserve of savings, and all the moral and social advantages that go therewith, than are the Germans. In the same way the social and industrial renaissance of modern Spain dates from the day that she was defeated and lost her colonies, and it is since her defeat that Spanish securities have just doubled in value.[17] It is since England added the "gold-fields of the world" to her "possessions" that British Consols have dropped twenty points. Such is the outcome in terms of social well-being of military success and political prestige!
CHAPTER VI
THE INDEMNITY FUTILITY
The real balance-sheet of the Franco-German War--Disregard of Sir Robert Giffen"s warning in interpreting the figures--What really happened in France and Germany during the decade following the war--Bismarck"s disillusionment--The necessary discount to be given an indemnity--The bearing of the war and its result on German prosperity and progress.
In politics it is unfortunately true that ten dollars which can be seen bulk more largely in the public mind than a million which happen to be out of sight but are none the less real. Thus, however clearly the wastefulness of war and the impossibility of effecting by its means any permanent economic or social advantage for the conqueror may be shown, the fact that Germany was able to exact an indemnity of a billion dollars from France at the close of the war of 1870-71 is taken as conclusive evidence that a nation can "make money by war."
In 1872, Sir Robert (then Mr.) Giffen wrote a notable article summarizing the results of the Franco-German War thus: it meant to France a loss of 3500 million dollars, and to Germany a total net gain of 870 millions, a money difference in favor of Germany exceeding in value the whole amount of the British National Debt!
An arithmetical statement of this kind seems at first sight so conclusive that those who have since discussed the financial outcome of the war of 1870 have quite overlooked the fact that, if such a balance-sheet as that indicated be sound, the whole financial history of Germany and France during the forty years which have followed the war is meaningless.
The truth is, of course, that such a balance-sheet is meaningless--a verdict which does not reflect upon Sir Robert Giffen, because he drew it up in ignorance of the sequel of the war. It does, however, reflect on those who have adopted the result shown on such a balance-sheet.
Indeed, Sir Robert Giffen himself made the most important reservations.
He had at least an inkling of the practical difficulties of profiting by an indemnity, and indicated plainly that the nominal figures had to be very heavily discounted.
A critic[18] of an early edition of this book seems to have adopted most of Sir Robert Giffen"s figures, disregarding, however, certain of his reservations, and to this critic I replied as follows:
In arriving at this balance my critic, like the company-promoting genius who promises you 150 per cent. for your money, leaves so much out of the account. There are a few items not considered, _e.g._ the increase in the French army which took place immediately after the war, and as the direct result thereof, compelled Germany to increase her army by at least one hundred thousand men, an increase which has been maintained for forty years. The expenditure throughout this time amounts to at least a billion dollars. We have already wiped out the "profit," and I have only dealt with one item yet--to this we must add,--loss of markets for Germany involved in the destruction of so many French lives and so much French wealth; loss from the general disturbance throughout Europe, and still greater loss from the fact that the unproductive expenditure on armaments throughout the greater part of Europe which has followed the war, the diversion of energies which is the result of it, has directly deprived Germany of large markets and by a general check of development indirectly deprived her of immense ones.
But it is absurd to bring figures to bear on such a system of bookkeeping as that adopted by my critic. Germany had several years" preparation for the war, and has had, as the direct result thereof and as an integral part of the general war system which her own policy supports, certain obligations during forty years. All this is ignored. Just note how the same principle would work if applied in ordinary commercial matters; because, for instance, on an estate the actual harvest only takes a fortnight, you disregard altogether the working expenses for the remaining fifty weeks of the year, charge only the actual cost of the harvest (and not all of that), deduct this from the gross proceeds of the crops, and call the result "profit"! Such "finance" is really luminous. Applied by the ordinary business man, it would in an incredibly short time put his business in the bankruptcy court and himself in gaol!
But were my critic"s figures as complete as they are absurdly incomplete and misleading, I should still be unimpressed, because the facts which stare us in the face would not corroborate his statistical performance. We are examining what is from the money point of view the most successful war ever recorded in history, and if the general proposition that such a war is financially profitable were sound, and if the results of the war were anything like as brilliant as they are represented, money should be cheaper and more plentiful in Germany than in France, and credit, public and private, should be sounder. Well, it is the exact reverse which is the case. As a net result of the whole thing Germany was, ten years after the war, a good deal worse off, financially, than her vanquished rival, and was at that date trying, as she is trying to-day, to borrow money from her victim. Within twenty months of the payment of the last of the indemnity, the bank rate was higher in Berlin than in Paris, and we know that Bismarck"s later life was clouded by the spectacle of what he regarded as an absurd miracle: the vanquished recovering more quickly than the victor. We have the testimony of his own speeches to this fact, and to the fact that France weathered the financial storms of 1878-9 a great deal better than did Germany. And to-day, when Germany is compelled to pay nearly 4 per cent. for money, France can secure it for 3.... We are not for the moment considering anything but the money view--the advantages and disadvantages of a certain financial operation--and by any test that you care to apply, France, the vanquished, is better off than Germany, the victor. The French people are as a whole more prosperous, more comfortable, more economically secure, with greater reserve of savings and all the moral and social advantages that go therewith, than are the Germans, a fact expressed briefly by French Rentes standing at 98 and German Consols at 83. There is something wrong with a financial operation that gives these results.
The something wrong, of course, is that in order to arrive at any financial profit at all essential facts have to be disregarded, those facts being what necessarily precedes and what necessarily follows a war of this kind. In the case of highly organized industrial nations like England and Germany, dependent for the very livelihood of great ma.s.ses of their population upon the fact that neighboring nations furnish a market for their goods, a general policy of "piracy," imposing upon those neighbors an expenditure which limits their purchasing power, creates a burden of which the nation responsible for that policy of piracy pays its part. It is not France alone which has paid the greater part of the real cost of the Franco-German War, it is Europe--and particularly Germany--in the burdensome military system and the general political situation which that war has created or intensified.
But there is a more special consideration connected with the exaction of an indemnity, which demands notice, and that is the practical difficulty with regard to the transfer of an immense sum of money outside the ordinary operations of commerce.
The history of the German experience with the French indemnity suggests the question whether in every case an enormous discount on the nominal value of a large money indemnity must not be allowed owing to the practical financial difficulties of its payment and receipt, difficulties unavoidable in any circ.u.mstances which we need consider.
These difficulties were clearly foreseen by Sir Robert Giffen, though his warnings, and the important reservations that he made on this point, are generally overlooked by those who wish to make use of his conclusions.
These warnings he summarized as follows:
As regards Germany, a doubt is expressed whether the Germans will gain so much as France loses, the capital of the indemnity being transferred from individuals to the German Government, who cannot use it so profitably as individuals. It is doubted whether the practice of lending out large sums, though a preferable course to locking them up, will not in the end be injurious.
The financial operations incidental to these great losses and expenses seriously affect the money market. They have been a fruitful cause, in the first place, of spasmodic disturbance.
The outbreak of war caused a monetary panic in July, 1870, by the anxiety of people who had money engagements to meet to provide against the chances of war, and there was another monetary crash in September, 1871, owing to the sudden withdrawal by the German Government of the money it had to receive. The war thus ill.u.s.trates the tendency of wars in general to cause spasmodic disturbance in a market so delicately organized as that of London now is.
And it is to be noted in this connection that the difficulties of 1872 were trifling compared to what they would necessarily be in our day. In 1872, Germany was self-sufficing, little dependent upon credit; to-day undisturbed credit in Europe is the very life-blood of her industry; it is, in fact, the very food of her people, as the events of 1911 have sufficiently proved.
It is not generally realized how abundantly the whole history of the German indemnity bears out Sir Robert Giffen"s warning; how this flood of gold turned indeed to dust and ashes as far as the German nation is concerned.
First, anyone familiar with financial problems might have expected that the receipt of so large a sum of money by Germany would cause prices to rise and so handicap export trade in compet.i.tion with France, where the reverse process would cause prices to fall. This result was, in fact, produced. M. Paul Beaulieu and M. Leon Say[19] have both shown that this factor operated through the value of commercial bills of exchange, giving to the French exporter a bonus and to the German a handicap which affected trade most perceptibly. Captain Bernard Serrigny, who has collected in his work a wealth of evidence bearing on this subject, writes:
The rise in prices influenced seriously the cost of production, and the German manufacturers fought, in consequence, at a disadvantage with England and France. Finally the goods produced at this high cost were thrown upon the home market at the moment when the increase in the cost of living was diminishing seriously the purchasing power of the bulk of consumers. These goods had to compete, not only with home over-production due to the failure to sell abroad, but with foreign goods, which, despite the tariff, were by their lower price able to push their way into the German market, where relatively higher prices attracted them. In this compet.i.tion France was particularly prominent. In France the lack of metallic money had engendered great financial caution, and had considerably lowered prices all around, so that there was a general financial and commercial condition very different from that in Germany, where the payment of the indemnity had been followed by reckless speculation. Moreover, owing to the heavy foreign payments made by France, bills drawn on foreign centres were at a premium, a premium which const.i.tuted a sensible additional profit to French exporters, so considerable in certain cases that it was worth while for French manufacturers to sell their goods at an actual loss in order to realize the profit on the bill of exchange. The German market was thus being captured by the French at the very moment when the Germans supposed they would, thanks to the indemnity, be starting out to capture the world.
The German economist Max Wirth ("Geschichte der Handelskrisen") expressed in 1874 his astonishment at France"s financial and industrial recovery: "The most striking example of the economic force of the country is shown by the exports, which rose immediately after the signature of peace, despite a war which swallowed a hundred thousand lives and more than ten milliards (two billion dollars)." A similar conclusion is drawn by Professor Biermer ("Furst Bismarck als Volkswirt"), who indicates that the Protectionist movement in 1879 was to a large extent due to the result of the payment of the indemnity.
This disturbance of the balance of trade, however, was only one factor among several: the financial disorganization, a fict.i.tious expansion of expenditure creating a morbid speculation, precipitated the worst financial crisis in Germany which she has known in modern times.
Monsieur Lavisse summarizes the experience thus:
Enormous sums of money were lost. If one takes the aggregate of the securities quoted on the Berlin Bourse, railroad, mining and industrial securities generally, it is by thousands of millions of marks that one must estimate the value of such securities in 1870 and 1871. But a large number of enterprises were started in Germany of which the Berlin Bourse knew nothing. Cologne, Hamburg, Frankfurt, Leipzig, Breslau, Stuttgart, had all their local groups of speculative securities; hundreds of millions must be added to the thousands of millions. These differences did not represent merely a transfer of wealth, for a great proportion of the capital sunk was lost altogether, having been eaten up in ill-considered and unattractive expenditure.... There can be no sort of doubt that the money lost in these worthless enterprises const.i.tutes an absolute loss for Germany.
The decade from 1870-1880 was for France a great recuperative period, although for several other nations in Europe it was one of great depression, notably, after the "boom" of 1872, for Germany. No less an authority than Bismarck himself testifies to the double fact. We know that Bismarck was astonished and dismayed by seeing the regeneration of France after the war taking place more rapidly and more completely than the regeneration of Germany. This weighed so heavily upon his mind that in introducing his Protectionist Bill in 1879 he declared that Germany was "slowly bleeding to death," and that if the present process were continued she would find herself ruined. Speaking in the Reichstag on May 2, 1879, he said:
We see that France manages to support the present difficult business situation of the civilized world better than we do; that her Budget has increased since 1871 by a milliard and a half, and that thanks not only to loans; we see that she has more resources than Germany, and that, in short, over there they complain less of bad times.
And in a speech two years later (November 29, 1881) he returned to the same idea: