Dr I. TINBERGEN INTERNATIONAL ECONOMIE CO-OPÉRATION INTERNATIONAL ECONOMIC CO-OPERATION Elseviers Economische Bibliotheek (Elseviers Economic Library) edited by R. E. M. van dén Brink Bjr the same author have heen published in the English language: An Econometrie Approach to Business Cycle Problems (Paris, Hermann, 1937) Statistical Testing of Business-Cycle Theories: I. A Method and its Application to Investment Activity 11. Business Cycles in the United States of America 1919-1932 (Geneva, League of Nations, 1939) INTERNATIONAL ECONOMIC CO-OPERATION b! j. TINBERGEN Professor in the Netherlands School of EconomicSyformerly Expert attached to the L.o.N. Secretariat ELSEVIER AMSTERDAM – BRUSSELS – LONDON – NEW-YORK 1 94J Translated by: P. H. Breitenstein E. Inglis Arkell PRINTED IN HOLLAND BY meijer's BOEK- EN HANDELSDRUKKERIJ WORMERVEER TABLE OF CONTENTS PREFACE 7 SUMMARY 9 THE ESSENCE OF INTERNATIONAL ECONOMIC RELATIONS Introduction; the heterogenity of world economy 31 Current commercial transactions 39 Transfer of factors; territory, population and Capital 55 Financial transactions 62 The equilibrium in the balance of payments . . 79 REGULATION OF INTERNATIONAL ECONOMIC RELATIONS Aims of a regulation 103 Problems of territory and population 114 Prospects and regulation of international trade . . 123 International movements of capita! 136 Regulation of financial transactions 149 The need of an international centre 164 The Netherlands and international economie co-operation 171 Postscript, Autumn 1945 179 APPENDICES 182 PRE FACE This book is intended to rouse interest in the problems of international economie cooperation in the circles of those wh'o come into contact either with economie or with international problems. It aims at elucidating some points of misunderstanding which, I have found, are frequently met with in this field of study. Besides explanations of an economie and statistical nature it also contains some pleas of an economie-political nature. In addition to recommendations given elsewhere for a modern trade cycle policy, the renewed significance of an ‘organized’ free trade is pointed out, as well as the desirability of granting considerable capitals to countries with a low Standard of living and therefore the desirability of a continued formation of capita! —, the necessity of a reasonable settlement of the problem of war-debts and reparation-payments, and the necessity of a correct choice in the matter of parities of exchange as well as some difficulties not generally recognized in this connection. Above all this study has ultimately become a support of the idea of an international centre of economie policy, vested with more power than the Economie and Financial Organization of the League of Nations before 1939. SUMMARY THE ESSENCE OF INTERNATIONAL ECONOMIC RELATIONS Chapter I. Introduction; the heterogenity of world economy. The aim of this book is to increase the insight into and the interest in international economie relations with a public that is interested in economics. After an explanation of the essence of international economie relations there follows a discussion of the question whether a ‘regulation’ of these relations is desirable, and of some suggestions which have been made in this connection. The world’s economie system consists of a great number of national economie systems, which in some respects are independent of each other, in other respects interdependent. The latter show great differences in population and in wealth. The wealth may be in natural resources and in capita! goods; figures. In each of these national economie systems there is production: goods are produced with the aid of the three so-called factors of production: nature or land, labour and Capital. The quantity of product per head is greatly dependent on the amount of land and capita! per head of the population. Hence great differences in prosperity; figures. China and India the principal ‘development u areas’ of the world. The total product is divided among the factors labour, land and capitd in proportions which, curiously enough, do not greatly vary for different countries; broadly speaking they are 70, 10 and ao %. v In accordance with what has been observed, the following possibilities of economie intercourse between nations present themselves: 1. Exchange of products against products: current commercial intercourse; 2. Transfer of production factors; a. of persons: migration; b. of land: change of territory; c. of Capital: i.e. import and export of Capital. In the economie sphere, 2b is practically without importance; it does play a part in the political sphere, as a result of war. Then 2a and 2b may occur at the same time. In the economie sphere 2c takes the form of import and export of Capital. The importance of 2a in the economie sphere has become very slight these last 20 years. Chapter 11. Current commercial transactions. The exchange of goods and services between two nations has sense, because relatively speaking one nation can make one product more easily, another nation the other product: consequences of differences in natural resources, natural ability, technical accomplishments; examples. World-commodities are those goods which are easily transportable in proportion to their value. Every commodity has a certain distance beyond which it can hardly compete. Also for this reason big countries have, relatively speaking, less commercial traffic. There is imperfect international competition. In case of a free exchange of goods every producer would make the article with which he would obtain the highest remuneration for this trouble. This does notmean to say that all articles are produced there, where the trouble would be smallest. For in that case some nations would have to produce nearly everything, others nothing at all. They are produced there, where the difficulty of producing them is relatively smallest; as compared with the trouble to be bestowed on other products; theory of comparative cost. Countries which along the whole line have a small (great) difficulty of production, enjoy a high (low) Standard of living; wages, expressed in goods, are high (low) there. It is a misunderstanding to think that countries with high wages should be unable to compete with countries with low wages; it is not so much real wages per hour that count, it is the wages in money per unit of product. Perfect commercial equilibrium is possible with great differences in wages. However, a free international exchange also exposes a country V to disturbances: the rise of new competitors. This has given birth to the conception of limiting free exchange by import duties, quota systems or prohibitions. y Hence, current commercial intercourse can take place according to three methods: it can be leftfree, it can be hampered arbitrarily by protective measures, or it can be controlled. On closer inspection this last method can be subdivided into i. control where the guiding principle is that which would take place in the case of free trade, only preventing excrescences (too great variations, dumping) and 3. control where there is free trade within specified areas and these areas are shut off from the outer world by systematic tariff-walls. From an economie point of view there is fundamentally only the contrast between free and limited commercial intercourse. If the taking up of all productive units (Juli employment) is a certainty from the outset, unhampered exchange yields the highest total production: each unit produces that for which, relatively speaking, it is best suited. Every deviation from this means, for every country, a smaller prosperity; it can only be an advantage for some groups within certain countries, at the expense of other groups in the same country, because the total value of production of the country is smaller. If full employment is not certain beforehand, then, within the borders of one country, protection can contribute towards an increase of employment and therefore raise prosperity. It may, for a specified area, mean the breaking of the vicious circle of a depression. It may also mean the gradual completion of a change of structure that has become necessary: adapting oneself to another production now the relatively most profitable —, in consequence of new foreign competition. The danger of protection, however, is the continuation of less productive work and hence the ‘growing crooked’ of the development. Last of all, as a temporary measure, protection can raise the suitability of certain productive units (‘education’) and therefore contribute towards an ultimate increase of prosperity also of other countries. Even in the absence of artificial hindrances, competition in the world market is not so perfect as theorists sometimes believe. There is imperfect competition; the elasticity of the share of any one country in world trade with regard to the price-relation between that country and world trade is about 2. Actual data concerning international trade and its development. Chapter 111. Transfer of factors: territory, population and Capital. Transfer of territory is far less a matter of peaceful exchange than transfer of the other factors; for, when such an area is also inhabited, it also means a transfer of that population to another nation, with a different civilization or language or both. It nearly always means war. In proportion as the quantities of free territory decrease, it becomes more difficult accordingly to supply the needs of it; this holds good especially for countries with limited territory (Netherlands, Japan). Transfer of population, on the other hand, does occur in a peaceful form, i.e. in the form of migration. The population of the United States has entirely arisen from migration. After 1918, however, emigration has no longer played any part of importance; the international movement of population has largely come to a standstill, also because there is hardly any territory left that is politically free. Although the importance of emigration for over-populated areas should not be over-es- timated, it presents a serious problem, which cannot be settled by declaring the status quo as sacred or maintaining it for military considerations only. Viewed economically, by far the most important form of peaceful transfer of production factors is that of Capital. It takes the form of loans or participation, and can be given for long or short periods. The granting of long-term credit, in its real aspect, i.e. apart from the financial form under which it appears, comes down to this, that means of production or commercial stocks are placed at the disposal of a little developed area by one of the highly developed countries, and that the former, by way of interest and redemption, annually gives up part of its production. In this way the means of production concerned generally become more remunerative than they could have been at home. Moreover, this transaction raises the prosperity of the little developed areas, by which a certain levelling is brought about. For that matter, the net amount of levelling has not been very great so far: the proportion of prosperity between the rich and the poor countries has changed very little indeed these last fifty For great hindrances to capital-export are to be found in the' uncertain political conditions in the less developed areas (China), in the small technical capacities of many of these nations, and in the numerous difficulties of exchange and other financial matters (South America). Granting capita! on short term has a much smaller direct significance for the great lines of actual development, but is of eminent importance for the stability of finance, and is consequently of indirect importance. (See chapter IV). Chapter IV. The technique of financial transactions. Only gold is legal tender everywhere; payment in gold involving great cost, the fact has to be faced that every country has other, its own, means of payment. Payment to foreign countries therefore requires a ‘transfer’ of home into foreign means of payment (‘foreign exchange’, often ‘bills of exchange’). This is effected by means of an exchange at a certain price (rate of exchange). AU payments made in a certain period between a country and foreign countries, are together called the balance of paymentsyThis is subdivided into current items (balance of trade, or imports and exports of goeds; invisible imports and expofts, or payments for services in shipping, capita! and otherwise) and capita! items (import and export of Capital for long and short periods, and the balancing item of gold shipments). It is also possible for the balance ofpaymentstoshowreparationpayments. Sometimes the ‘balance of payments’ is understood to comprise all these items without gold; in the former case there is always equilibrium, in the latter not necessarily so. But even then there must be equilibrium in the long run; otherwise there would be a permanent accumulation of gold. In comparatively small quantities, however, this is possible for long periods consecutively: the U.S.A. 1929-1939. Such an equilibrium in the long run must also exist, however, and for analogous reasons, for no matter what part of a country, whether it has money of its own or not. The difference is that in the former case, by altering the rate of exchange, equilibrium can be attained even at short notice. Stability of the rates of exchange is an advantage for the certainty of calculations of trade and investment. Sometimes, however, the rates of exchange can, by the side of more or less fixed prices at home, also be used to regulate home activity. Accordingly there are two systems: I. that of fixed rates of exchange a. with gold cover or b. with other cover, and 11. floating currency. I. is usually preferred. With the gold Standard there is, at the Central Bank, a fixed relation between money and gold; the rate of exchange cor-• responding with it is called parity. The gold points indicate the limits, within which gold shipments in one direction are unremunerative. Only in case of a rigorous equilibrium in the balance of payments does the rate of exchange remain within them. If either of the gold points is reached, a movement of gold will follow. This will then see to the balancing and accordingly to a maintenance of the rate of exchange at the gold point in question. If it should last long, an exhaustion of the gold stock on one of the sides will be imminent. This can be prevented by a. indirect and b. direct action. Indirect action can be 1. automatic, resulting from the altered quantities of means of payment: a decrease of the gold stock leads to a diminution of the circulation of money, this leads to a reduction of incomes and consequently to reduced imports and lower prices, by which exports will even increase again. This automatism, however, works faultily and very slowly. Indirect action can also be 2. deliberate interference, namely a raising of the rate of discount in the country where the gold stock threatens to become exhausted, owing to which partly the same results are attained (though also very slowly), but especially short-term credits flow in from abroad (provided there are no other counteracting factors, such as lack of confidence). This process, however, can only be for a time; then an exhaustion also of these credits will arise. A good instance of this form of action is provided by the defence of the Dutch guilder in 1935/36. The direct action referred to above consists in the stoppage of the issue of gold; then, however, the gold Standard is abandoned; or in a regulation of international financial transactions. For the rest, the danger of exhausting the gold stock is smallest, of course, when a country has a large gold reserve at its disposal. Besides gold, a country can also base its currency on 1. other monetary units (gold exchange Standard) or 2. by the side of gold on other goods (raw materials, silver). Also in that case the importance of an ample reserve is evident (equalization fund). The difïerence with the gold Standard is often exaggerated. In principle, even the floating Standard does not differ very much from it. The limits between which the rate of exchange is allowed to fluctuate can be chosen more or less narrow or wide. In case of a floating exchange, the rate also helps in arranging the equilibrium: it will be endeavoured to avoid the small fluctuations in the balance of payments by operations of the equalization fund; but the level of the rate of exchange can be altered gradually in order to affect imports and exports. With slight movements the speculative influences can be avoided which occur in the case of rapid movements, and which sometimes promote a state of equilibrium, sometimes quite violate it (Germany 1923). Chapter V. Equilibrium in the balance of payments. We will now, on a somewhat broader basis, consider the problem o£ how to maintain this equilibrium in the long run. If all economie magnitudes should immediately and gompletely adapt themselves to altered data (in~tKTs~Case the rates of exchange), the rate of exchange would be indifferent to the actual course of events, i.e. to the height of production and employment as well as to the equilibrium in the balance of payments: if it were halved, all prices would immediately become twice as high, and nothing would have changed in remunerativeness, real wages, etc. Nor would anything be changed, under this condition, if the parities of all countries were to tmdergo a proportionate shifting and the regulations for cover should be altered in the opposite direction: e.g. if all parities were to be raised by 25 % and all cover reduced by 20 %. The same thing would hold good if only very gradual changes were to be brought about in the data. In other words, very slow changes in the rates of exchange are of no consequence for the equilibrium in the balance of payments; hence they can simply be fixed without any harm to that equilibrium; this is even desirable in order to give a greater degree of certainty to all calculations. In reality, however, there are also immobile or little mobile economie magnitudes: they react only after a certain delay and often also insufficiently to restore the static equilibrium. Instances are prices, wages, interest and other payments which do not vary directly with the economie situation. Then it is possible that the rate of exchange afïects both the size of production and the equilibrium in the balance of payments. If the rate of exchange is also immobile, no equilibrium is possible. Either the rate of exchange or prices should be mobile. For both to be mobile is less desirable again: it may cause too much uncertainty, as we already saw. If prices are completely immobile, the parities of buying power are under certain circumstances the correct rates of exchange. Regulating production by means of rates of exchange and, for example, of wages are not identical in their consequences. In case of an adaptation of wages the worker bears the whole burden, to the advantage of the unemployed and the non-workers. In case of an adaptation of the rate of exchange the worker and the non-worker bear the burden together. Moreover, the speculative results are quite different: adaptation of the rate of exchange causes a rise of prices at home as well as animation to buy; adaptation of wages causes a fall and a waiting attitude. Also in the case of slighter mobility it is possible, however, that the rate of exchange is not a good regulator of the equilibrium of the balance of payments. It is quite possible, for example, that in the event of a fall in the rate of exchange imports and exports rise to the same extent. Exports will rise in any case; imports would even fall if the incomes should remain the same. They \ rise, however, and it depends upon a number of elasticity- ( coefficients what will happen. Graphical illustration. In that case 1 both the rate of exchange and wages are generally bad regulators, while also the influence of imported economie fluctuations does not affect the equilibrium of the balance of payments. For employment, however, they are good regulators, though taking some more time. If the country concerned has to pay interest or reparations, these will have a much greater effect on the equilibrium of the balance of payments. Should these payments themselves be the cause of a disturbance of that equilibrium, a very great adaptation of the rate of exchange would be required or no adaptation of the rate of exchange whatever would be of any avail. The connection between intemal monetary equilibrium and equilibrium in the balance of payments. If for some time at a stretch a country spends more than its income m consequence of dishoarding or the creation of money —, it will as a rule also import more than it exports, and equilibrium is only possible when the dishoarding or the creation of money is stopped The rate of exchange may be of use in this case when it *he jatter but not when it has no mfluence on it. It can have this influence because it affects the level of activity and consequently the income. Through these considerations one gets to know at the same time the conditions which, in the case of impotence of the_ rates of exchange, are of importance for the equihbnum in the balance of payments. All the factors which detemune the hoardmg or dishoarding are also of importance in this connection such as for example the organization of the state finances and the monetary System (Germany 1923) or the presence of reparation payments, Jso factors of political uncertainty or reluctance agamst government measures (U.S.A. 1933-38)- ' So far we spoke of slow movements, or movements occurring once, in rates of exchange and wages. In practice it is attamable that a rate of exchange, after adaptation, remams fairly stable though floating (equalization fund). If the rate of exchange is n thus kept in hand, further consequences, ‘speculatie ones will occur which may result in a further disturbance of the equihbn-1923)1 bu. .1.0 in its being «-jg (Norway and Denmark 1926). Speculation of a twofold kind. based on the position of the rates of exchange (sound) and based on the movement (unhealthy). Summary: in case of a partial rigidity of economie hfe the rate of exchange can have an influence on the equihbnum of the;6balance of payments; it is also possible, however. that ; it has no sufficiënt influence. An investigation of the facts is any case that occurs. The factors affecting monetary equihbnum at home will be of importance in any case. REGULATION OF INTERNATIONAL ECONOMIC RELATIONS Chapter VI. Aims of a regulation. The chaotic situation of after 19x8 and especially after 1930 cannot be put up with again. If patchwork is to be avoided, then there ought to be a programme and consequently a purpose. This purpose should be the ‘general interest ; but in trymg to define this further, we meet with great difficulties. The principal are: i. The idea of general interest is vague, as long as no method has been found to weigh a decline in the satisfaction of one person against an advance in that of another. 2. The satisfaction of anybody’s wants is dependent on widely diverging aspects of human life: material goods, health, liberty, employment, a certain measure of certainty. The furtherance of one aspect often brings about opposition from another. 3. People often do not know their own happiness: their ideas about it are frequently incorrect or too limited. 4. People often differ in natural ability, accomplishments and desires: tastes and needs differ. Viewed internationally this becomes even more difficult in consequence of the great differences in the views of life, the capacities, wealth and history of the nations, which, for instance, find expression in aspirations and regime (Germany, Russia, Japan) and in consequence of the sovereignty of nations accepted hitherto. The complete solution of this problem of the organization of the international community is not the task of the economist. Like the politician he has only a modest place to occupy by the side of the expert in matters of government and other organizers, the psychologist and the pedagogue, the sociologist and many technical experts. It is to be hoped that at the Peace Conference this will also be realized with respect to the politicians. Only the economie aspect will come up for consideration here. We think we may formulate the aims as follows: (a) a production as large as possible; (b) a production as stable as possible; (c) a distribution as just as possible among 1. persons and classes, and 2. nations; (d) as few conflicts as possible, both at home and abroad, and (e) as much freedom as possible for the parts. Even then the question remains, how these aims, so far as they are contrasting, have to be weighed one against the other. As long as measurements are not possible, this must be left in many respects to the subjective views of the economie politician. The points(d) and (e) then have a more passive meaning; especially in the case of (e) it should be ascertained first, in how far the other aims leave the possibility to comply with it. Partly the attainment of one object will further that of the other; thus the number Co-operation 2 of conflicts will be diminished already, when the demands (a), (b) and (c) have been met to a greater extent than before. Most of these aims have an internal aspect for every country as well as an international aspect; in this book only the Jatter will be dealt with. This means that for some points, especially (a), even the main points will not find treatment here. The principal measures through which these aims can be attained are, as far as points (a) and (b) are concerned, a good trade cy de policy in the widest sense of the term; such an economie policy is possible when on the part of industry there is sufficiënt understanding for the róle which the authorities will have to play, in a supplementary way. In Great Britain there is a strong tendency in that direction; with regard to the United States there is reason for doubt (Myrdal’s latest book). Point (c), as far as the distribution within one and the same country is concerned, is mainly a question of taxation and social legislature. AII these measures largely take place within the separate countries, and it is especially of importance here what the big countries will do. International relations only play a minor part. Nevertheless they should meet certain requirements. The aims mentioned under (ca), (d) and (e) are, according to their nature, to a greater extern questions of international relations. A diminution of the differences in the standards of living should be efïected in the first place by export of Capital from wealthy to poor countries; a reduction of the number of international conflicts, in so far as they are economie matters, will have to be attained by banning arbitrary procedures in commercial policy and technique of payment, apart yet from the field mentioned just now. The demands whichpoints (a) and (b) —mainly concerning the internal employment policy of the big countries make upon international relations, find their origin in the disturbing influences emanating front international financial and commercial intercourse, both as to absolute height and stability. Besides endangering the stability of production of the big countries, they far more imperilled that of the smaller ones. Therefore points (a) and (b) are chiefly international questions for these small countries. For one part the disturbing influences mentioned found their origin in the sovereign power of nations in the field of commercial policy and technique of payment. Hence a curtailment of this sovereign power in behalf of international settlements is absolutely necessary; the commercial and financial systems will have to comply with certain standards. It must be impossible suddenly to close frontiers entirely or partially for products from other countries; further the monetary management must be up to certain requirements as to stability: great fluctuations in the rates of exchange or even the threat thereof, by unsatisfactory management, must in future be impossible. In this connection it will be unavoidable to find a correct settlement of the problems of war debts and reparation payments. For another part those disturbing influences, starting abroad, found their origin in depressions, with the accompanying tendency to hoard, in other countries. By international cooperation it should also be attained that all countries in so far as they are of sufficiënt importance undertake the obligation to carry on a correct economie policy. Last of all, a certain regulation and guarantee of Capital exports will also be able to contribute towards a greater stability of production. Chapter VII. Problems of territory and population. If one tries for a moment to disengage oneself from the military and political situation of the present moment and only puts the economie problem in broad outline and for a more remote future of how to supply to the world’s population a prosperity as high as possible and spread over the nations more equally, one encounters two primary facts; i. this prosperity could increase more quickly, if the population in a number of countries increased less rapidly (illustrated, for instance, with figures about Chinese agriculture); z. it would be spread more evenly, if the property in natural resources were distributed more evenly. Particularly the Anglosaxons have a very large share at their disposal. Both problems are international in character: it cannot be a matter of indifference to the outer world, if Japan, Italy and later perhaps China and India, in consequence of surplus populations, come with certain demands. Therefore the problem of how to regulate population presents itself nationally as well as intemationally, and sooner or later we shall have to come to an international policy in this connection. As a matter of fact the demand put to Japan to withdraw within her borders of 1897 will come down to a demand of population policy in the name of the United Nations. Unfortunately the discussions about these questions are rather charged with dogmatic notions connected with the moral aspect of birth control; those who object to this should realize, however, what the demand put to Japan involves, and also what consequences their standpoint will bring along for the world at large. Also the question of the more even distribution of natural resources is a problem: free possibility of purchasing raw materials is not a complete solution. The production of raw materials itself is a source of income, to which every nation has a certain right. The solution of these questions is inopportune at the moment. They do not come up for treatment until the political organization has become more stabilized. But they should be observed already. Chapteh VIII. Prospects and regulation of international trade. Although in the first few years after the war there will be an urgent demand for goods for reconstruction purposes, great anxiety is feit for the period after that with reference to the new race for export markets, while in various countries plans are being made already for a curtailment of imports (Great Britain). This threatens to become a repetition of after 1930. It is a typical result of a ‘slump-mentality’, in which every competitor is dreaded for his supply, but it is forgotten that, if he sells more, he can also buy more. It is the reverse of what was to be seen and will be seen in the periods of war and reconstruction. It is the other side of the tendency, present indeed in a time of depression, but on no account necessary for any period, not to spend part of one’s income. Closer investigation of the Japanese competition which occurred in the past and moreover in a time of depression and therefore causing particular anxiety—shows nevertheless that even then it was overlooked by many commentators that Japan at that time also bought much more than before. It is indeed true that Indonesia did not immediately and sufficiently benefit by it; but it may profit by it indirectly; it is also possible that in future more raw materials can be supplied to Japan. For the rest, Japanese competition was partly a competition of inflation, which it cannot keep up. Another mentality than the slump mentality is necessary, if ruin is to be avoided; if free trade and industry, aided by supplementary state expenditure, cannot bring this about, it will have to be replaced by socialisation. Because of the loss in initiative and freedom which this signifies it is to be hoped that free trade and industry will have sufficiënt energy to tackle enough new projects, be it with somewhat slighter chances of profit, but more certainty instead of it, and also that sufficiënt appreciation will be shown for governmental initiatives for an extension of production. If one allows oneself to be guided by the views developed in the preceding pages that: ist,full employment is necessary and possible within reasonable limits, owing to which a slump mentality is unnecessary; 2nd, commercial equilihrium is possible between nations with a high and those with a low Standard of living; 3rd, there are limits to the capacity to pay interest and redemption on war debts and reparation payments, then a proper arrangement of international commercial relations is also possible and prospects are not even unfavourable. The latter statement is illustrated by the calculations of Colin Clark, who shows what extent trade roight attain in 1960, if the tendencies of growth in production and population which we have observed since ipooshould continue and full employment as well as free trade be realized. It appears that the world’s commercial intercourse is capable of considerable development, provided there is equilibrium between rich and poor countries, and that, moreover, the price level of agricultural products gets almost twice as high as compared with that of industrial products. From the preceding arguments, especially those of chapter 2, it appears that the best kind of planning is that in which free trade is taken as a model. This does not imply that individual traders should be entirely free; on the contrary, organization in order to prevent abuscs, doublé work and too great variability and also to absorb shocks, is to be recommended. But no systematic closing of markets by tarifï walls or quota systems must take place. International consultations about the application of new products will, of course, benefit stability; but foreign competition should not be permanently locked out. Particularly the fear of the competition of countries with a low Standard of living is unfounded, resulting as it does front groupegotism and the slump mentality already mentioned. In order to view this problem in its right proportions, it is necessary to remind oneself that: i. the poor countries form an investment market for the surplus formation of Capital in, the wealthy countries; 2. they become better purchasers of the products of the wealthy countries, and 3. they, moreover, contribute towards the prosperity of the latter by reducing the cost of living. A defence against low-wage competition should only be based on economically correct means; these consist of: (a) raising one’s own economie achievements—which, for the rest, takes place regularly; this will generally be sufficiënt If not then (b) a proper economie policy, eliminating the temporary unemployment which else arises, and (c) a proper policy of wages or exchange rates, eliminating permanent unemployment by opening up new possibilities of production. By a 10 % fall in the rate of exchange, for example, ? 7/2 % rise in the volume of employment is possible, i.e., in the case of Holland, for 100,000 labourers. Also the inclination to turn one’s back on free trade in order to fulfil one s obligations to pay war debts is only comprehensible from a slump mentality. There is no reason why, xf full employment can be approached, paying war debts should be easier in case of protection than with free trade; on the contrary, in the latter case production is greater, so that it is easier to pa’y. The opinion about this in the United Kingdom is not quite clear. On the other hand it is not necessary nor desirable to let the transition from protection to free trade take place too suddenly. Also here shocks must be avoided; e.g. by spreading it over 5 or 10 years. Chapter IX. International movements of Capital. This chapter deals with (i) the provision proper of Capital and (ii) the arrangement of war debts and reparation payments, which in many respects is analogous with it. The significance of the provision proper of capita! by countries with a surplus forntation of capita! to countries with a shortage is seen by us to lie in the levelling tendency which it makes possible with regard to the standards of living. As explained before, we see the reduction of the differences in Standard of living as an important item in the programme for a consolidation of the world’s economie system. Levelling by decree, by prescribing that in poor countries higher wages are to be paid, can only have a very limited effect. The production of these countries does not allow of much higher wages without leading to unemployment. Consequently, unless the rich countries should be willing to present the poor countries in a large measure with an annual stream of goods a social policy, for which the world does not seem to be ripe as yet a raising of production is necessary. This may be done by (a) raising the skill of the population, (b) improving the methods of production, (c) increasing the capitals taking part in production. On all of these three points international cooperation is desirable. In a country like China a key position is taken by the internat political order; as long as this is not more stable, much will remain impossible. In countries such as the South American ones the financial stability used to cause many difficulties. Once this has been remedied, if necessary with help from abroad, international granting of Capital, the principal factor for raising production, can take place and be promoted by international guarantees and control. This means at the same time that formation of capital in the rich countries must not be looked upon as undesirable and superfluous. Internal economie equilibrium in these countries is imaginable both when a larger and when a smaller share of the national income is spent. With a view to international consohdation a high quota of saving is still desirable provided these savings are not hoarded. The calculations of Colm Clark show that if the rise in efficiency is maintained, large capitals will be required, even more than will be formed m case the present relation between income and savings continues. Reproduction of his figures. The war has led to great destruction of Capital in a number of countries and further to very great debts, which are partly of an international kind; particulaily the lend-lease debts to the United States. In connection with its great wealth and lts saté geographical situation this country itself has suffered no great losses of Capital, and is better able to help than anyother country. Thanks to this a great many disastrous results of the war can be reduced to smaller dimensions. The interest and redemption on these debts will be very considerable, however, and it is questionable whether i. the different countries will be able to bear them, and 2. whether it is in the interest of a stable and prosperous social system to maintain them. Some figures. Therefore it would be an act of wise statesmanship to strike part of these debts. After all it is also in the interest of the U.S.A., and in itself there is nothing meritorious in this country having a safer geographical position than the other allied nations. _ LIJ With regard to reparation payments similar arguments hold good. The actual limit put to a country’s capacity is to be found by reducing the maximum production by what is necessary (a) tor the subsistence of the population (which, on the other hand, has an influence on production) and (b) for reconstruction purposes, in so far as this is necessary to continue or résumé production. For Germany, we estimate this limit at approximately lomilliard Reichsmarks a year. They will only be able to pay this by supplies in kind —or some such arrangement —; payment in the usual way, with commercial intercourse left free, can only take place to a very small extent. The receiving countries ought to consider carefully whether or not they wish such payment in kind. Chapter X. Regulation of financial transactions. As a demand to be made on financial intercourse we formulated in chapter VI the banishment of national arbitrariness and the largest possible stability in the rates of exchange with the greatest possible freedom. The simplest theoretical solution would be the introduction of a world currency, but political unity has not got far enough for this. A system of floating currencies leaves a fairly considerable margin for national arbitrariness; it was all right for a time when everybody had to look after his own interests. But, when nations can make up their minds to a sufficiënt measure of cooperation, the preference should be given to a system having in common with that of the gold Standard fixedprices with regsrd to gold, and in which a minimum of autonomous changes can be brought about. Besides gold, the cover could also exist of government securities and warehouse bonds for raw materials. Changes, whether or not autonomous, may have to be made now and then in a world with pretty fixed prices and wages. The rates of exchange can only be maintained, both for long and for short periods, when the halances of payments are in equilibrium. This is attainable by a complete regulation of financial transactions which strongly curtails freedom and isonlydesirable as a preventive measure. A country like Russia, owing to the state being trade monopolist, will of itself possess such an arrangement. For countries with a freer economie system the equilibrium in the balance of payments can be maintained for short terms, if only sufficiënt reserves in gold or foreign exchange are at their disposal, which can be applied as balancing items. These reserves can partly be centralized in an International Equalization Fund, making coordinated action possible. The maintenance of the equilibriurn in the long run can be attained by a correct choice of parity in the case that the rate of exchange affects the inclination to hoard, which it can have via the size of incomes. It is not always, however, that the rate of exchange is a good regulator of the equilibriurn, as we saw in chapter V; it is, however, for the volume of employment. The real condition for equilibriurn in the balance of payments is closely connected with the monetary equilibrium at home. (Cf. Oerman y 1923). The demand for a correct trade cycle policy is thereby repeated, just as the international demands connected with it, viz. no autonomous changes in commercial policy and a correct settlement of debts and reparation payments. Payments must not be greater than the extra export surplus that can be obtained by a reasonable reduction of the Standard of living. This amount can be estimated. Greater payments, with a maximum of what can be performed physically (see chapter IX), can only be made in kind, or, what comes down to the same thing, if in case of payment in foreign currency the stipulation is made that this must be spent in the paying country. In the event of a proper trade cycle policy in the principal countries, a curtailment of the autonomous changes in commercial policy and financial intercourse, as well as a good arrangement of international debts and reparation payments, it may be assumed that speculative and refugee capita! movements (compare 1929 and after) will decrease to a considerable extent. Restoration of the gold Standard or a similar system is not a return to 'laisser faire’. Now that the States no longer leave economie life free of their own accord, it requires active supervision. Ought the 1939 rates of exchange to be restored ? The experiences gained in this respect after the previous war, are unfavourable: Great Britain, Norway, Denmark. In 1939 there was no economie equilibrium. The price movements since 1939 have been different, although not widely diverging for the financially important countries. The development of selling possibilities is greatly different, however; Holland is threatened by a reduced buying capacity of the German market, for which the restoration of world free trade might bring some compensation. Chapter XI. The necessity of an international centre. In the preceding chapters we saw that in several ways a curtailment of national sovereignty is necessary on behalf of an international arrangement, viz. in the field of commercial policy in order to prevent arbitrary limitations of import, in the field of financial technique in order to prevent arbitrary limitation of financial intercourse and changes of the rates of exchange. It appeared, moreover, that international cooperation is desirable with respect to a proper trade cycle policy, the reduction of the risks connected with Capital export, the management of an international currency reserve and the control of international cartels. In the long run the great problems of ‘peaceful change’, of a well-considered and undogmatic upbuilding of a world order, will also have to be tackled. In other words, we have put up a plea for a certain regulation of international economie life. We do not advocate complete regulation in details. Within certain countries regulation has perhaps gone too far already; some restraint will be welcome here, so that attention may first of all be paid to some points of international regulation, which are essential and which have sense, because: i. some kinds of regulation only have sense, if they take place intemationally (e.g. regulation of the market for raw materials); 2. arbitrariness in the international field is usually greater, in consequence o£ national sovereignty (commercial policy, financial intercourse); 3. the international field is less surveyable (capital market) and 4. in some international markets the price is a bad regulator (exchange market, wheat). The nature of the proposed regulation is suggested to a greater extent by the'liberal’ theory than is sometimes suspected. For the rest, it stands or falls with the assumption that a reasonable approach to full employment will be attained and that political international cooperation shall become a fact. The alternative to this regulation becomes clear when the history of 1919-1939 is read again. All these arguments show the necessity of an international centre with various organs that will be an instrument of observation, of study and of management, vested with the proper power; this last point is all the more necessary, because national interests are looked after in a more organized way than in 1919. Thanks to discussions among the United Nations a number of these organs are already in a state of preparation, and it may be hoped that these plans will also be carried out further. Then it should also be hoped that the staff of the Secretariat of the League of Nations will be included, which in the past 5 years performed and published such important studies. The organs ought not to be loose from each other; their decisions must not be incompatible. An instrument that vaults them over and can become the seat of real international economie and financial policy and that will teach the promotion of the general interest, is indispensable. It is very much to be hoped that no half work will be done, as in 1919. Chapter XII. The Netherlands and international economie cooperation. The position of the Netherlands among the other countries is characterized by a rather high Standard of living (between England and the continent), a less agrarian character than is generally supposed and a wealth that is invested for a relatively large part in Indonesia and in foreign countries. Imports form 30 % of home production. The balance of payments shows an import surplus, backed byreceipts from shipping, interest and dividends. Accordingly free trade was always in the interest of the Netherlands, likewise a well-functioning financial intercourse and good international cooperation. Also in the non-economic field; though this was not always realised. Only hesitatingly were protective measures introduced and in 1936, properly speaking too late, the guilder was depreciated. The prospectsfor Dutch exports are certainly unfavourable at a short date and doubtful for the further future, if compared with those of other countries. At short notice will be feit as factors on the side of supply the destruction of our production plant (industrial as well as agrarian), while increased competition is feared from e.g. Great Britain with its heavy war debts to the United States. On the side of demand the smaller demand for luxury articles makes itself feit (bulbs, chocolate), which may be offset by the increased demand for means of production (engines, doek plant) and durable consumption goods (wireless sets). As for outlets, a smaller demand from Germany will have to be reckoned with, which was our greatest purchaser, while also conditions in the Far East are uncertain. For the future we may reckon with some more favourable factors, especially appearing from the computations of Colin Clark. These justify the expectation of a greatly increased demand for refined agricultural produce, in consequence of the further industrial development of Russia, the United States and China; moreover, the prices of these goods would develop relatively very favourably. Of course, the question remains whether the possibilities as calculated by Clark will not be thwarted by a wrong mentality in business circles or incorrect govemment measures. Although it would be too much to say that the Netherlands cannot do without free trade, it is evident that it would greatly benefit by a possible continuation of the tendency to free trade, which is found, for example, in the United States. By it many markets would become accessible again, to which it has a claim by virtue of its achievements. On the other hand, if things get thus far, the Netherlands ought loyally to cooperate and not to oppose possible competition from the Far East. It must reply to this by raising its own achievements, both in the foreign and in the home markets; if this should not succeed, an adaptation of the rate of exchange or of wages is necessary. On no account should unemployment be put up with; a correct trade cycle policy is necessary. As for Capital export, after the period of reconstruction in which we shall presnmably have to import Capital, it will be possible and necessary for this to take place to a very large extent in our own kingdom. What was said in chapter IX about promoting the granting of capital to less developed territories, may be repeated here. May the political evolution be followed by a strenger feeling of responsibility in Holland itself for the Indonesian population. It is possible for the further industrialization of Indonesia to be systematically connected with the extension of that production in the Netherlands, for which there will be a demand, in proportion as the Indonesian population increases in prosperity. As for financial intercourse, there is not the slightest doubt that the Netherlands will heartily participate in an international cooperation. FIRST PART THE ESSENCE OF INTERNATIONAL ECONOMIC RELATIONS Chapter I INTRODUCTION THE HETEROGENITY OF WORLD ECONOMY The war has shown us in such a painful manner that there has been a lack of international cooperation in the years lying immediately behind us, that further demonstration is unnecessary. This lack of cooperation has made itself most feit in the field of pure politics; economie problems were somewhat more in the back-ground, especially in the last few years before the Second World War. But it appears, if one goes further back, that economie problems have played an important part in causing many of the controversies of an intricate nature, fromwhich that war arose. And in any case, economie relations do form to such an important extent the foundation of our society that good international cooperation must of necessity include as an essential part, good economie cooperation. This essay deals with this economie cooperation. In doing this, we shall first (in the First Part) go into the essence of international economie relations; in the Second Part we shall discuss whether a certain planning of these relations is desirable, and what concrete forms international cooperation in the field of economy will have to assume. For a good idea of the essence of international economie relations, one should start from the fact that world economy consists of a fairly large number of national households; according to the way of grouping, it will be possible to distinguish from 30 to 60 such units; and of them the greater, and sometimes the smaller, are even not in the least homogeneous. In several respects these national households are independent, or nearly independent, of each other; in other respects they are greatly dependent on each other. Each of these national households is characterized by the size of its population and that of its wealth; and there are great differences in the one as well as in the other. In k other words there is great heterogenity. The wealth of a national household consists on one side of natural wealth such as land for agricultural purposes,minerals,advantages of natural means of communication, geographical position, or climate; on the other side, of the possession of Capital goods, i.e. of goods partly produced by human labour, which are important for further production and consumption. The table on page 33 gives a few figures about the population and the wealth of some of the most important national households. On the ground of the great differences in wealth in land and in Capital goods as shown in this table, Wagemann, the well-known Gei man statistician, has divided the world into four areas. By ‘highly capitalistic’ areas he means the areas withadense population and a great utilization of machinery per head of the population. As the density of the population is the reverse of the quantity of land per head of the population, it may also be said that these are the countries with relatively linie land (or space, if you like) and with a relatively large Capital. They are chiefly Europe and the United States; also Japan. A second group of countries forms the ‘half-capitalistic’ area; they are poor in land and in Capital; these ape especially China and India. A third group consists of the‘new capitalistic’ countries; here there is comparative wealth of land and Capital; they are the Dominions and South America. The remaining territory, which in view of its population may be called insignificant and is chiefly formed by large parts of Africa, Wagemann called Table i POPULATION, AREA PER HEAD AND CAPITAL PER HEAD FOR THE PRINCIPAL COUNTRIES Countries Population on 31 Dec. 1938 in millions Area in sq. kil. per 1000 inhabitants1 Capital in I.U.2 per head of the working population3 U.S.A. 131 6l 4360 Canada Gr. Britain and II 870 4240 N. Ireland 48 S-i 5000 France 43 I3-I 2740 Netherlands 9 4.0 2910 Germany and Austria 76 7-S 2670 Italy 44 7-3 1460 Poland 3S n-3 1200 Australia 7 1130 44OO Russia 170 124 1130 Japan 73 5-5 1350 India 395 12.8 580 China 500 ï33 180 the non-capitalistic group. It is rich in land, but poor in Capital. In each of the national households there is production: goods and services are created with the aid of the three so-called production factors: labour, nature and Capital. These three production factors are the same clements which we have already discussed. The labour is supplied by the" population, and the natural forces are especially those of the soil. As everybody knows, the most diverging goods 1 About 1936; Statistisches Jahrbuch für das deutsche Reich, 1937. P- 7- 2 Dollars with the purchasing power of 1925-1934. 3 Colin Clark, The Economics of 1960, p. 80. Co-operation 3 and services are produced; agricultural and dairy products such as wheat, rice, potatoes, cotton, butter etc., mineral raw materials, such as coal, oil, and iron; finished products such as clothing, houses, means of communication, and services, such as the transport of goods, the distribution of articles of consumption among the consumers, the picture i, shows, or the dressing of ladies’ hair. If one wishes to get an idea of the total quantity of goods produced by a country, the simplest way of doing so is by assuming a certain value per unit, that is to say a price, for every sort of product, for instance the value which that article had in the United States, in a certain period, expressed in dollars. Colin Clark, the well-known English statistician, who has made many investigations in this field, has expressed the production of all countries in the amount of dollars for which those goods could be bought in the United States on an average duringthe period 1925/1934, that is a period with five very prosperous years, and five years of crisis1. The quantity of goods which is represented by one dollar in that period, he calls an international unit (1.U.). When the value of the goods produced has been calculated in this way, the goods lost in the process of production, such as imported raw materials and worn out parts of machinel and buildings etc. have to be taken into consideration. After deducting these items, apart from some complications which are not of great importance for the layman, one gets the net product (in dollars of 1925/34), which agrees with what may be called the real national income from production. (Of course the use of other units than the LU. is also permitted). This amount, which for all countries, forms by far the greater part of the whole real national income, is a good gauge for the total quantity of 1 Colin Clark, The Economics of 1960, London 1942. goods which a given country produces1. If one calculates what this production amounts to per head of the population, very great differences appear to exist. Colin Clark mentions for instance that, calculated per head of the population, and in the supposition that 2500 hours’ work is done per year by everyone, the income in LU. in 1925/29 amounted to: The United States jgo Canada •••••••««,, 55® Great Britain and Northern Ireland . . . 502 The Netherlands Germany and Austria 292 Poland Russia pc India (including Birma and Ceylon) ... 64 China ( „ Corea and Formosa). . . 44 Apart from an incomplete use of the productive forces, such as happens in times of depression, the differences in production per head, as further investigation shows, are very greatly dependent on the quantity of land and Capital which the country considered has at its disposal. The very low figure of China, for instance, is partly connected with the fact, that in that country only about 4 acres (1.6 hectare) is available for every farm, whereas 13 acres is the most economie size. This makes it compulsory to follow methods of production which lead to a much lower return than under more favourable conditions. Further, the production is so low, because in China the quantity of Capital goods, i.e. agricultural machines, cattle, and so on, is very low per head; all in all, the Chinese farmer 1 To prevent any misunderstanding, it must be stated that by the national income from production and the total national income, without the adjective Teal’, we mean the results of the corresponding calculations based on the prices of the goods in each year under consideration. producesonly1/14ofwhat his American colleague produces. It is especially the amount of Capital per head which influences the quantity of products produced per person. If this amount of Capital is low, we shall also say that the capita! quota in production is low; prosperity is then low too; broadly speaking, it may be said that a capita! quota which is ten times as high is accompanied by a degree of prosperity which is about twice as high. Next to that, the greater or smaller skill of a population plays a part, but this must not be misunderstood. Further investigation has shown, for instance, as we have already remarked by the way that the apparent ‘backward’ methods of the Chinese farmer are, to a great extent, a result of the smaller wealth in appliances, and that they, in the given circumstances, still yield the best return. It is a well-known fact that the learning of industrial activities in the eastern countries sometimes goes surprisingly well. For the more trained and the intellectual professions this is, from the nature of things, not so simple. Where little is produced, there is little to be distributed, and consequently, in countries with a low production per head, the material prosperity is in accordance. Although happiness does not lie in material prosperity alone, the nameless misery hidden in the low figures for China and India is not to be underestimated; everyone who has read a description of a famine or a flood in China, can realize it. The total product of a country is, by means of the process of exchange, finally spread over the various groups of the population. The distribution among labour, land and Capital, that is to say among those who have an income out of their labour, through ownership of land, and through the possession of Capital, is of great importance in this. The proportions in which this division occurs are only known in round figures for most countries, but it seems, curiously enough, that from country to country there are no great differences in them. It can be ascertained with more certainty that in the United States and in England in the course of the preceding century those proportions have not greatly changed. Broadly speaking, it can be stated that some 70 % goes to labour, 20—25 % to capita! and s—lo5—10 % to land owners. This means, that in countries or in periods in which land is relatively scarce, the ‘remuneration’ per unit is much higher than in countries or years in which it is relatively abundant, and this in such a manner, that the ‘total remuneration’ of all land always remains about the same, whether we have to do with a country with almost exclusively farmers, or with a country which is almost entirely industrialized. In the above lines the heterogenity of world economy is,v we hope, clearly portrayed. In a few words it might be summarized as follows: China and India are the chief areas with a serious shortage of prosperity, in other words: the ‘depressed areas’ or, as we now say, the ‘development areas’ of the world. Now between the various national households there are diverse forms of economie traffic. For the saké of convenience, we will make a rough division of them though this, as is so often the case, is not faultless by placing side by side: 1. The traffic of products, i.e. goods and services, whichs/ is chiefly the normal commercial traffic; here the word ‘normal’ means that it refers to a more or less continuous flow of goods and services, which would also exist in static conditions; and 2. The passage from one country to another of factors of production; in static conditions this would not occur. This passage may be of a. persons, by which we mean migration (so we are not speaking of ordinary travelling, which is of little importance for the economie problems); b. land, i.e. changes of territory; c. Capital; the so-called import and export of Capital. In the economie sphere zh. plays practically no part; now and then, colonies of one country have been sold to another country or exchanged for another area, but not to any important extent. In the sphere of politics they may all be of significance; aft er wars sometimes rather considerable changes in territory have occurred, in recent times too. In the last twenty years also 2a migration was of very minor significance. And even in the iqth century emigracion, at least for the countries from which emigration took place, led to changes in the population of at most a few per cents yearly. For our consideration, which is v limited to the economie sphere, in which there is no question of one-sided passage without a quid pro quo, it is chiefly i. the normal commercial traffic, and 2. the import and export of Capital, that are of importance. But for these too, it holds good that the production for the home market is considerably greater than that for foreign markets, and that capita! formation at home far exceeds the import of Capital. We are now going to submit these forms of economie traffic to a separate contemplation. Charter II CURRENT COMMERCIAL TRANSACTIONS There is among the various national systems a multicoloured commercial intercourse in goods and services. Erom tropical regions cotton, cane sugar, coffee, cocoa, coprah and so many other raw materials are conveyed to the temperate zones, whereas industrial products such as textiles, machinery, ships and railway waggons will go in the opposite direction. Erom countries with rich ore deposits iron, copper, zinc and many other metals flow in a continuous stream to other regions; agricultural districts will ship their butter, cheese, meat, hides and wool; horticultural areas provide other countries with a choice of fruit and vegetables. Erom these few examples it becomes clear already what is the origin of the exchange of goods between two nations; one people can more easily produce one kind of goods, another a different kind, all in consequence of differences in natural resources, natural ability, technical development, etc. There will be all the more reason to convey the goods produced along vast distances as they are more easily transportable, i.e. require low transport charges in proportion to their value. Very heavy goods of comparatively little value will in general not be transported so very far. Every kind of good has a certain distance slightly varying in accordance with circumstances beyond which it will hardly be able to compete; pig iron and potatoes, for instance, only rarely cross the oceans. Generally speaking, therefore, greaW countries have smaller imports and exports in proportion to their total production than small countries, as for example is illustrated by diagram x, which gives a survey of world trade compared with the national incomes of the principal countries. In the column of imports one can National Income and Imports of a number of countries, 1930 The parts of the right hand column show the significance of each of the countries for the world’s trade, the parts in each horizontal bar show the significance of the imports of the country concerned with respect to the national income of that country read the relative importance of the different countries for world trade, while every horizontal quadrangle gives an idea of the proportion between imports and the national income of the different countries. Although, therefore, a country such as the U.S.A. is of paramount importance to world trade, yet the imports of that country are only small if compared with its national income. In order to get a closer insight into the forces controlling J international goods-traffic, it should be borne in mind that every producer produces that article which brings hint the highest remuneration for his trouble, in other words, that article which requires least trouble at a given value of production, or which in the present organisation of production involves the smallest expense. It does not necessarily follow that all goods will be produced there, where the difficulty of production in an absolute sense is smallest. For in that case some nations would have to produce almost everything, others nothing at all. They are 'J produced there, where the difficulty of producing them is relatively smallest; i.e. in relation to the care to be bestowed on other products. Let us assume that, for instance, an English producer, growing wheat, produces for an amount of £ 80 a year (calculated at the prices of the world market) and for an amount of £ 100 a year, if he makes Chemical products. And let a man in the Argentine, growing wheat, produce a value of £ 60, and by making Chemical products £ 50. Then the Englishman had better produce Chemical products and it would be best for the Argentine to till the land. For even if the Englishman should have sufficiënt Chemical products for himself and desire wheat, he can obtain more wheat for one man-year by offering Chemical products than by growing wheat, whereas the Argentine who is desirous of Chemical products can more profitably offer his wheat than run a Chemical factory. It is of no consequence that the Argentine in growing wheat produces less than the Englishman; what matters is that this still comes more natural to him than chemistry1. This is the so-called ‘theory of comparative cost’. Countries which along the whole line have small difïiculty in producing goods which means that they can produce per head and per hour a large quantity of goods of all kinds enjoy a high Standard of living: wages and other income, expressed in goods, can be highthere. The opposite holds good for countries which along the whole line have great difïiculty in producing goods: only low wages, expressed in goods, can exist there. j Roughly speaking and we pass over such complications as are of no interest for the main line of our argument the wages in the latter countries are also low and this counterbalances the low productivity. It is an error to think that countries with high wages cannot compete with countries with low wages; in the competition of products it is the price that matters, i.e. the total cost of production, and this is, as far as the amount of wages is concerned, the product of the wages per hour and the number of hours to be devoted to the production of the article. In other words, for the possibility of an international equilibrium in trade the real wages per hour are of no account; only money wages per unit of product. A perfect equilibrium of trade is possiblesideby side with great differences in wages. That American machinery can compete with Oerman in the world market, while American wages are much higher than those in Germany, is due to the far 1 Actually the matter is more complicated; the produced value is not a constant amount, hut decreases in proportion as a greater quantity of the same article is produced; sometimes it increases at first. In the present work, however, these niceties cannot be dealt with. higher production per hour in the U.S.A.; and this again is closely bound up with the large Capital quota in her production. For the same reason German industrial products can compete with Italian ones, or, in many respects at any rate, with Japanese goods. In spite of this possibility of a perfect equilibrium going J side by side with free competition, yet in practice disturbances will frequently be possible, too, as a consequence of international competition. Owing to an unexpected rise V of new competitors the chance of which is evidently greater on an international forum than within the borders of one country production may become unremunerative which may cause unemployment. Already at an early v stage this led to the idea of limiting free commercial intercourse. This limitation may be attained by a prohi- v bition of imports, by raising import duties or by quotasystems,i.e. byapartial prohibition: in that case no impoits are allowed beyond a certain maximum. This last method became widespread on the continent of Europe in the years following the 1929 depression. International trade, J therefore, can take place according to more than one method; it may be left free, it may be hampered arbitrarily by protective measures, or as it has been frequently expressed in the last decade and from different quarters it may be ‘regulated’. Without a nearer explanation it is not clear what is meant by this last expression. On closer v inspection it appears that different kinds of regulation are meant by the different proposers. One form is that >1 in which, fundamentally, people allow themselves to be guided by what would happen with free international trade, only wishing to prevent excesses. Such excesses J may be selling below cost, so-called dumping, which has often been done in times of depression, when in this way a surplus of production could be disposed of and part of the cost be recovered at any rate. In a certain sense also the too great changeability of supply is an excess, to which, with international competition, one may be exposed in consequence of crises abroad, and which may be limited by allowing trade only on the basis of long-term agreements, by which the situation is each time surveyable for a certain period. Although this would already mean a fairly great interference with the freedom of trade for the various firms individually the simplest way of carrying this through would perhaps be the monopolizing of trade with the aid of certain cartellike bodies yet, in this way one would not necessarily come into permanent conflict with the international division of labour according to the theory of comparative cost. Other forms of regulation of international trade start from a division of the world into smaller areas (regions), inside which there would be free trade, but which would be ‘screened off’ on the outside, either wholly or partially. This kind of regulation fairly corresponds with the ‘economy of large areas’ as propagated from German quarters. It starts from about the same principle as the regulation, proposed by others as well, for times of depression, and which aimed at the limitation of unemployment to a minimum. This principle is that a planned economy can only be successful within an area standing under one political authority, and that this planned economy must not be traversed by measures from other self-governing countries. In other words, a certain drawback, lying in the less complete division of labour with the rest of the world, is sacrificed for the attainment of the advantage of a purposeful guidance of economie life, in consequence of which other, more desirable, purposes may be attained, such as, for example, the utilization of all productive forces. It stands to reason, however, that by-motives of a military nature have also influenced some countries applying this method. We have been unable to discover other principles of regulation in the suggestions which have been made in that direction, and therefore there is, fundamentally, and economically speaking, only the contrast of free trade and the restriction of it. What are the results of these two ways of doing business among the nations ? If the utilization of all productive units (‘full employment of the productive apparatus’) should be certain from the very outset, as the old theorists usually assumed, unhampered barter will provide the highest value of the total production. This may be illustrated as follows. We shall assume again that in Great Britain one man produces for an amount of £ xoo a year calculated at the prices ruling in a free trade world when he makes Chemical products, and for an amount of £ 80 a year when he grows wheat. These figures show, as we already stated, that Great Britain is more suitable for the production of Chemical products than of wheat. If now, in consequence of military or social considerations, protection is resorted to and the growing of wheat becomes remunerative owing to an import duty on wheat, imports of this article will decline,and at the same time the exportsof another article will decline; there are not sufficiënt producers to see to the full measure of exports of former days. Let us assume that fewer Chemical products are manufactured. It will now be evident that Great Britain as a whole will suffer from this. The people who produce for an amount of £ 80 in wheat would do better to make £ 100 of Chemical products and buy wheat for that sum in the world market. There would be a surplus of £ 20 left for them to buy other articles. Let it be assumed further that wheat was formerly imported from the Argentine. This country will now witness a decline in wheat exports and will establish an industry of her own by which she can make for herself the chemical products formerly imported from Great Britain. In Argentina, however, circumstances are such that one man produces for an amount of, say again £ 60 of wheat or £ 50 of chemical products: Argentina is relatively more suitable to grow wheat. Also this country will now suffer; instead of making chemical products herself, she would have done better to continue growing more wheat, for every man who grows £ 60 of wheat could exchange this for chemical products in the world market and receive more for it than he could have made himself. «i Only in that case does this argument not hold good when it is assumed that world market prices are not the correct Standard by which to judge whether an article is worth producing. Thus it might be justly asserted that the production of opium or perhaps even alcohol or tobacco had better not take place, in spite of the fact that high prices may be obtained for them in the world market. It might also be argued that the prices of some articles of luxury say oysters are thus high, because the very unequal division of incomes unjustly grants so much purchasing power to the wealthy that they are able to satisfy their wants, whereas the humanly speaking more urgent need for clothing for the poorer classes cannot in consequence of the lack of purchasing power raise the price of it to such a level that more articles of clothing and fewer oysters are produced. These objections would only be of importance, if and as far as a change would be brought about by the protective measures in the factors with which we are now concerned: if by them the production of noxious articles should be curtailed or the spreading of incomes made more equal. Hence we would not reject a kind of protection that had this effect; but nearly all actual measures of protection do not have it. Since neither the distribution of incomes of wheat producers nor that in the chemical industry differs much from the general distribution of incomes, this problem beiongs to a different category. Hence we may take it that in case of free trade an optimal division of labour is obtained. Any deviation from this optimal division of labour means that, in every country, a productive value smaller than the optimal one is attained and hence a lower degree of prosperity. It can only mean an advantage to certain groups within certain countries, obtained at the expense of other groups in the same country, because the total productive value of that country has become smaller. In other words, if full employment of the productive units is guaranteed in advance, free trade is preferable. Should full employment, however, not be certain, protection may, within a certain country, contribute towards a rise of the degree of employment of the apparatus and therefore raise prosperity: this is the case meant by part of the advocates of ‘regulation’. By this means protection may signify the breaking of the vicious circle of a depression for a given territory. Moreover, protection may be helpful in the gradual completion of a change in structure that has become necessary. When, in consequence of newly arisen foreign competition, it is necessary to change over to another kind of production which has become the most remunerative at that moment, it may be desirable to make this change-over J a gradual one. For instance it may be desired that a production is continued which has been rendered unremunerative by competition until the workers have been able to learn another craft or have reached a certain age-limit. This may be attained by protecting the products of the branch of \J industry concerned; but it is not the only way. The danger of protection is that once it has been started, people cannot do without it and that the less productive work is continued, by which a crooked development is promoted. In the third place protection may, as a temporary measure, help a new industry through the difficult first few years in which the production is still to be learned; in that case it may increase the efficiency of those productive units and make them ready for international competition. S Then the term 'educative tariffs’ is often used. Because they change, as it were, the data on which the international division of labour is based, they can even lead to a situation which ultimately also brings an increase of prosperity to other countries. It follows from the above that, spcaking generally and presupposing full employment, unhampered international i/ trade is to be preferred. Meanwhile it should be realized that, also in the absence of artificial obstructions, competition in the world market is not nearly so complete as is assumed in most theoretical treatises. We already pointed out that every commodity has a certain distance beyond which it can hardly compete. Apart from this handicap resulting from the charges of transport, there is one of a different nature; ignorance with regard to the market, inertia, and an attachment to certain suppliers or countries of supply also have as a result that not every reduction in the prices of one competitor will bring him all the buyers, at the expense of the other competitors. Composition of world trade (T) in, and world production (P) of the principal basic products Cereals, sugar Meat Milk Textile fibrcs Foresb products Fuel and electrlcity Metals Obher minerals Diagram 2 Badly transportable goods such as milk play a much slighter part in international trade than in international production; for easily transportable and specifically highly valuable goods, such as textile fibres, it is just the other way about. Co-operation 4 Nowadays it is customary to place the theory of imperfect competition by the side of that of free competition; the former is a far better approach to reality in the field ‘ of international trade than the latter. This is especially displayed in the value of the so-called quota elasticity of demand. When a competitor has a share x in the market (in which x, a figure smaller than i, may be called his quota), this quota will be dependent on the relation y between the price he asks and the average price of all J\ competitors, himself included. The elasticity of x with regard to y is called quota elasticity. Statistical investigations1 have shown that the latter —if one studies changes taking place in the course of a few years is about 2 for many articles and groups of articles in world trade. This means roughly that a reduction of y by 1 % results in a V increase of v by 2 %. When a man offers at 1 % less than the market, he will by doing so attract not more than 2 % v of his quota duringthe first few years. The theory of free competition, however, assumes that any, even the slightest, reduction of the relative price suffices to attract all customers. After diagram i, the diagrams 2 and 3 give some additional details regarding the structure and growth of international commerce. From diagram 2 it appears what kind of goods are of special importance for international trade. It will be clear that these are first and foremost goods that are worth transporting along great distances; the heavy, comparatively valueless goods here occur relatively less than in world production. 1 J. B. D. Derksen en A. L. G. M. Rombouts, De invloed van de prijs op de uitvoer. ’s-Gravenhage 1939; Verdere metingen van de vervangingselasticiteit, Maandschrift v. h. Centraal Bureau voor de Statistiek, Mei/Juni 1943. Development of world trade and world production since 1913. Table 2 AVERAGE IMPORT DUTIES IN A NUMBER OF COUNTRIES, 1913 AND igasl, EXPRESSED IN PER CENT OF THE PRICES OF THE COMMODITIES AU articles Industrial prod. 1913 1925 1913 1925 Argentine 26 * 28 2Q Australia (i7) (25) (16) (27) Austria 18 12 18 l6 Belgium 6 8 9 15 Canada 18 l6 26 23 Czechoslovakia 18 IQ 18 27 I Denmark 9 6 14 France x8 12 20 21 Germany (12) (12) (13) (20) Cjreat Bntam O (4) 0 (5) Hungary 18 23 x8 27 India 4 14 4 l6 Italy 17 17 18 22 Netherlands 3 4 4 6 Poland Spain 33 23 44 41 32 41 Sweden l6 z3% 20 16 Switzerland 7 II Q 14 37 United States 332 29 443 Yougoslavia • 23 23 Diagram 3 shows that since 1913 international trade has developed remarkably parallel with international production. It is true that in boom years it remains slightly behind the development in production, hut by the end of the boom period the lost ground is recaptured and during 1 Taux-Indices des Tarifs, publ. League of Nations, 1937 II 34. P- 16. 2 In 1914: 16. 3 In 1914; 25. export price index Changes in the ‘terms of trade’, i.e. of the ratio import price ind" for a number of countries, 1929—1938 the depression there is hardly any difference in course between them. This is interesting in so far as it has often been supposed that trade should have undergone the depression of after 1929 in a larger measure than production. This appearsto have only been the case to an imperceptible degree. Table 2 gives an idea of the height of import duties as existing about 1925. ' Last of all, diagram 4 illustrates for a number of countries the changes in the ‘terms of trade’, i.e. the relation, existing between the price level of export goods and that of import goods. It is evident that a country will have to work the harder for its imports as this relation reaches a lower level. From the diagram it is clear that in the great slump of after 1929 great changes occurred in that relation, which in 1937 had partly recovered. For Indonesia and Japan the development has been especially unfavourable. Charter 111 TRANSFER OF FACTORS: TERRITORY, POPULATION AND CAPITAL We have already remarked that the transfer from one J national household to another of the factors nature (alias territory) and labour (alias population) is of no great importance in the economie sphere. The transfer of land especially is, practically speaking, never a matter of peaceful exchange, but generally an exchange compelled by force of arms. When there is also a population in the territory in question, it is generally transferred with the ground to the victorious country, which often, at least for part of the population, will mean transferring it into another nation with a different culture or language, or both. Expansion of territory in former times was often possible by the occupation of uninhabitated land; nowadays, this possibility has practically ceased to exist. Holland with its endiking of new polders is an exception to this; and here, too, the possibilities must not be overestimated: the Zuiderzeepolders will be able to accommodate the surplus population of but a few years. For a country such as Japan the difhculty of the limited area is also very great. However, the transfer of population does occur in a peaceful form, namely as emigration. In the 19Ü1 century the population of the United States arose chiefly out of emigrants. The population of that country was in 1800 only 5 million, and had grown in 1930 to 123 million, an increase far exceeding the natural increase. As we already observed by the way, the possibility of migration, however, for the countries from which the population originated, was generally of but little importance. Colin Clark1 gives a number of figures illustrating this fact. For instance, the percentage of the population that emigrated from Italy, seldom amounted to more than % % a year; Ireland had an average of 1.5 % as a maximum, in the period 1880-1890. The figures are considerably lower for all other countries. After 1918, migration has played no important part at all; the movements of population have to a great extent come to a standstill, also as a result of there being no more land politically free. Although, as already said, this possibility of relieving over-population must not be overestimated, its restriction is a serious problem which cannot be settled by declaring the status quo to be sacred, or by maintaining it on military grounds only. We shall return to these problems in chapter VII. From an economie point of view, by far the most important form of peaceable transfer of production factors v is that of Capital. As a rule, it takes the form of loans from one country to another —supplied and taken up by civilians, by concerns or by governments or of participation in foreign concerns. The providing of Capital can occur as 1/ long or short loans. The usual form of providing capita! as long loans is by subscribing to debenture loans, or by participating in concerns by buying shares. In both cases securities are imported, as it is often put, by the country exporting the Capital. Short loans can be granted in various ways, too; commercial credit can be granted, as is done more or less automatically during the process of international traffic of goods, short-credit bank balances can be transferred from one country to another for operanons on the stock-exchange, or as a temporary investment, etc. 1 Loc. cit. page 16. We will not devote more time in this chapter to the financial side of credit relations, but give our attention to the real aspect. The immediate result in the real sphere of the supplying of long term capita! is often the supply, by the country granting the loan, of machines and other means of production to the country to which credit is granted. Generally the credits and also these means of production are supplied by one of the highly developed, prosperous countries to a less developed area, such as the colonies, the Dominions, or, for instance, to the South American countries. In return, the benefiting country pays J interest and redemption, i.e. places part of its production increased by the supply of Capital at the disposal of the country supplying the Capital. This often consists of rawJ materials and foodstuffs. So that, in a given year, we see a stream of capital-goods in movement let us say from England to her colonies which depends on the amount of Capital which has been exported that year, or just before; in the opposite direction a stream of raw materials and foodstuffs, which depends on the total payments of interest and redemption which must be made in that year, i.e. consequently on the supplies of Capital which have been made during a long period of years. Which of the ’ two streams is the strongest, cannot be said beforehand. For a country which has just begun to export Capital, the first stream is the greatest; when that process has already been going on for a very long time, and is perhaps beginning to weaken, it is quite possible that the reverse is true. In the course of the xqth century, immense capitals were invested in this way in the United States, but that country has now become a capita! exporting country itself. Since then, much has been invested in the Near East, the Far East, in South America and the Dominions. In the period after the First World War, a highly developed country like Germany showed a considerable import of Capital, which was a result of the serious capita! consumption, caused by the war, and of the scarcity of capita! which the financial obligations and the social policy of 1/ Germany brought with them. The economie significance of these investments is that the capita! thus flows from countries where, through its comparative abundance, its marginal product and consequently the profit rate are low, to countries where, owing to the greater scarcity of capita!, marginal product and profits are higher. The prosperity of the countries poor in Capital is increased by the investments, in spite of the payment of interest and redemption, since productivity and hence also wages in the little developed countries rise as a result. In this way, a certain levelling up of prosperity is obtained in comparison with what there would have been without the transfer of the Capital goods. y Against this converging tendency, there are also diverging ones. A country that once has at its disposal a mighty production apparatus, and, as a result, is very prosperous think especially of the United States can save a greater part of its national income, and therefore enlarge its production apparatus and increase ics prosperity, in spite of a certain export of Capital, more quickly than a poor one can. The statistical data, collected by Colin Clark1 show that the levelling-up in total the two tendencies taken together has not been very great; production per head has increased by about the same percentage per year, for most countries for which figures are known. 1 Loc. cit., graphic annex. Among others, in the last three-quarters of a century, it has developed more quickly in Sweden and Japan than in most other countries; more slowly in Russia, at least between 1921 and 1935. That the levelling-process, in spite of the considerable capitals which have gradually been imported into the less developed countries, has not been greater, is connected with the obstacles which exist for the investment of capita! in such distant countries. The uncertain politica! situation in such a country as China for instance, was a great handicap. The risks caused by it are so considerable and some experiences were so unfavourable that investors were repeatedly frightened off The great distance as wel! as ignorance as to the real situation were a reason for many investors, generally speaking of course, to prefer investments in their own country. Other causes of a comparatively slow capitalization of the less developed areas lie in the slight technical capacities of the population so far and in the numerous difficulties of currency and other financial matters. Only think, in this connection, of the many times that South American States were compelled to devaluate their currencies, or of the postponement in these countries of the payment of interest on loans. We say nothing about the more anecdotal cases of less sound financial moral, which are to be met with in the history of international furnishing of Capital. The figures on page 60 give an idea about the foreign investments of a few countries in comparison with each other, and with their national wealth. The furnishing of capita! for short loans is of much less’ direct importance for the broad lines of the development of production and consumption. On the other hand this ■, granting of credit is of great importance for the maintenance Table 3 SOME DATA ABOUT THE NATIONAL WEALTH AND FOREIGN INVESTMENTS OF FOUR COUNTRIES Country H O g c 2 .2 « w || Further data about the >* U p i) U (fi 0 p HH figures in column 5 I 2 3 4 5 6 Fr. 19Ï3 Frs 300 45 Russia 11.3; rest of Europe 16.2; Fr. col. 4.0; remainder Ï3-S Ger. 1913 Marks 350 33-5 Austria-Hungary 3.0; rest of Europe 9.5; America 7.5; remainder 3.5 Gr.B. 1914 1929 £ yy l6 3-76 3-7a Empire 1.78; U.S.A. 0.76; So. and Cen. Amer. incl. Mexico 0.76; remainder 0.46 1935 yy 21.S 3-82 1938 yy 4-°a U.S.A. 1914 9 107 i-9a 1930 yy IS-28 Europe 4.9; Asia 1.0; Canada 3.9; Cen. and South Amer. 5.2 1938 yy 220 11.8 11.i2 Canada 3.7; So. Amer. 2.5; Europe 2.3; Foreign property in U.S.A. 7.9 1943 yy 13-3 Canada 4.4; Gr. Britain t.o; other British countries 0.4; Cen. and So. Amer. 3.3; Germany 1.3; Italy 0.3 Foreign property in U.S.A. I3-ÏS 1 Ger. = Germany, Fr. = France, Gr.B. = Great Britain; U.S.A. = United States. 2 Long term investments only. 3 Only private long term investments. Then a balance of short terminvestments of—i.x and loans by the government to foreign governments (war loans) 7.7. of the stability of exchange rates. Indirectly, the importance may be very great, because a considerable indirect influence has emanated from the stability of finance on the development of international trade. We shall return to this function of the short credits in chapter IV. Chapter IV FINANCIAL TRANSACTIONS After having considered international economie intercourse from the side of goods, we will now discuss the financial – side of it. The supplies of goods and services and of securities by foreign countries must be paid for; on the other hand payments must be received from abroad for similar supplies. Now gold is the only means of payment which is valid everywhere; unfortunately, payment in gold is very expensive and very risky: it is very heavy and must be insured on account of its high value. We are thus faced with the fact that where payment in gold is often undesired, every country has other means of payment: its own banknotes or drafts, cheques and banktransfers in its own currency, which, in principle, can in many respects be put ifon a level with banknotes. Theretore, practically every payment to or from foreign countries is a conversion of home currency into foreign currency, or vice versa, a so-called transfer. This conversion may be the sale of foreign banknotes in exchange for home notes, hut will, as a rule, consist in the sale against a bank balance of foreign drafts or the conversion of a bank balance in one h currency into a balance in the other currency. All means of payment made out in the currency of a certain country are included in the name ‘foreign exchange’ in that currency. The conversion of ‘foreign exchange’ in one currency into that of another occurs in a more or less organized manner on a market which has arisen for that purpose, called ‘Exchange Market’, where a certain ratio of exchange, a ‘price’ or a rate of exchange is effected. So we speak of the rate of exchange of the guilder in London, the rate of exchange of the pound in Amsterdam, and so on. Unfortunately, the method of quotation followed in England is exactly the reverse of what is followed on the Continent. Here by the rate of exchange of the pound, say for instance ƒ B.—, is meant the price in guilders of one pound. In England the same figure 8 indicates the rate of exchange of the guilder, meaning: there are 8 guilders in one pound. The rate of exchange of the guilder, like every price, is brought about on the Exchange Market, because there is a supply of and a demand for guilders there. If one wishes to survey all transactions connected with this, one ought to know all the payments which must be made in a given period by and to the Netherlands. Payments by the Netherlands mean an offer of guilders, payments to the Netherlands a demand for guilders. The whole of these payments is called the balance of payments of the Netherlands. In the same way, every country has its balance of payments. Payments can >1 be sub-divided into a few large groups. In the first place a distinction is made between: a. current items and b. Capital items. The current items include: i. Payments for the supplying of goods, that isforimports and exports: these are often combined under the name balance of trade; 2. Payments against the so-called invisible imports and exports, i.e. the imports and exports of services. To these payments belong, for instance, payments for freight; „ „ interest on borrowed Capital; payments by tourists for services rendered to them; while also the amounts transferred by emigrants to their families are generally included in this category, just as possible war indemnities and payments for reparations. The capita! items include payments for subscribing to issues, the purchase of securities already issued, short loans, while sometimes the dispatch of gold is considered as a payment under this head. Sometimes the dispatch of gold is considered as a separate category. Both payments by and to the country under consideration are to be looked upon as payments in the above category; one can also say, payments made and sums received by that country. Combined in a table, in which as an example (in million guilders), also the figures are given for the Netherlands in the year 1938, the balance of payments thus includes the following groups of items: Credit Debit Current items Experts of goods 1086 1465 imports of goods Receipts, interest and dividends 3i7 134 interest and dividends Receipts for remaining services 324 paid in paymentsforother Total current items 1727 services 1710 total current items Exports of gold 1027 780 imports of gold Capital import 1006 1133 Capital export General total 3760 137 unexplained balance 3760 general total An example of the amounts concerned in the balances of payments of the principal countries, and the division of those amounts among the balance of trade and the remaining items is given in the accompanying survey. Table 4 SURVEY OF THE BALANCE OF CURRENT ITEMS OF THE BALANCE OF PAYMENTS (INCL. GOLD) AND OF THE CAPITAL-MOVEMENTS OF THE PRINCIPAL COUNTRIES, IN MILLIONS OF DOLLARS Countries Period Balance of current items1 Capital Movement2 Gr. Britain and N. Ireland 1924-29 — 34° United States 1924-29 — S48 — 556 France (incl. overseas terr.)3 1927-29 240 Netherlands 1926-29 — 77 Switzerland 1924-26 — 32 Belgium, Luxemb. and Belgian Congo 1929 + 69 Sweden 1924-29 — 36 20 Japan (incl. Corea and Formosa) 1927-29 + 9i + 17 Italy 1924-27 — Si Czechoslovakia 1925-29 — 44 — 42 Hungary 1924-29 + 52 + Si Poland 1924-29 + 47 + 59 Union of S. Africa 1924-29 + 44 Indonesia 1925-29 — 45 l6 Argentine 1924-29 + 145 + 98 India 1924-29 + 67 Australia 1924-29 + 181 + 86 Canada 1924-29 — 114 — 94 Germany 1924-29 + 677 1 = cred. bal.; + = deb. bal. 2 = cap. export; + = cap. import. 3 Without Indo-China. Source: League of Nations, Balances of payments, 1930, p. 11-15. Co-operation 5 The course (from 1870 to 1913) of the balances in the balance of trade and of the import-balance of gold. There is a tendency towards contrasting fluctuations, whichmeans to say that as a rule an import-balance of goods was partly financed by goldshipments. Farther, fig. 5 gives an example of the movements, for a series of years, which have occurred in the balance of trade and the imports and exports of gold. Unfortunately, there are no data available about the other items of the balance of payments for a long series of years. One can see from this diagram that when the import-balance increases, this is generally accompanied by an increase be it quantitatively smaller—in the exports of gold. So the increase in the import-balance is partly J financed by the sending of gold, partly by other items. In conclusion, fig. 6 gives an impression of the changes in the gold stocks of the principal countries since 1913. Whereas before that year the mutual proportions remained about the same for a long time, since that time this has no longer been the case, in consequence of the many disturbances to which international traffic was then subjected. The gold consignments are to be looked upon, if one v wishes to do so, as a closing item, a balancing item. The v same can be said of the capita! items, especially short credits. It is not possible to draw the line sharply; in every discussion on this point an understanding must first be arrived at. Sometimes the term balance of payments is J also used for all the items mentioned except these balancing items. If the term is used in the first sense, there is always v ‘equilibrium’ in the sense of equality between payments and receipts. A simple example may illustrate this. If,v during a certain period, ƒ 800 million has been imported and ƒ 700 million exported, then the country must buy foreign currency to the value of ƒ 800 million to pay for the imports, whereas only ƒ 700 million in foreign currency has been received for the exports. Consequently not Gold stocks of Central Banks in% of the total amounts m the principal countnes Since 1913 the U.S.A. have attracted an ever increasing part of the world’s gold stock; after 1933 this has been largely refugee Capital. sufficiënt foreign currency has been received; the balance will have to be settled either by a consignment of gold, or it may be by another ƒ 100 million of foreign currency being placed at our disposal. The latter can take place by anew credit beingopenedforusforthat amount; it may also be that we still have balances in foreign currencies of which v we can make use for this amount. In either case, however, an import of capital has taken place. Since both gold consignments and the import of gold belong to the balance of payments in the wider sense, there is, then, always automatically a state of equilibrium. If, however, the items looked upon as balancing items are not included in the definition (balance of payments in the narrower sense), there need not always be equality between payments and receipts. In the long run, there will also have to be an approximate state of equilibrium between the items of this balance of payments in the narrower sense; for a great difference maintained for a long time would mean that, in the country under consideration, either a continuous accumulation of gold and foreign exchange or a complete exhaustion of those reserves was taking place, and that can only be the case within comparatively narrow limits. Nevertheless this phenomenon can occur, to a moderate extent, for a comparatively long time at a stretch; just think of the almost continuous increase of the gold stock in the United States between 1919 and 1939, especially after 1929. And the increase of the gold stock which has been taking place in the course of centuries means that in a country not producing gold itself a small import of gold has on an average always been taking place. In comparison with the fluctuations of short duration, these permanent (‘secular’as they are called in statistical language) imports and exports of gold or foreign exchange may be neglected, and that we shall do for the saké of convenience, for the time being. In the long run, the same equilibrium which must exist in the balance of payments (in the narrower sense) of a country, must just as much, and for analogous reasons, exist for every arbitrarypart of a country: for it isequallyhardto suppose that a continuous accumulation, or exhaustion, of gold and exchange stocks should occur there. The difference between the two cases is that in the case of a whole country with respect to foreign countries, the rate of exchange of the currency could be changed in order to restore the equilibrium at short notice, whereas such an aid is not available to part of a currency area. For the certainty of trade and investment calculations, stability of the rates of exchange is an advantage; then one risk is reduced to small proportions, namely, the risk of loss by a fall in the rate of exchange. On the other hand, stable or, if one likes, immobile rates, when they are accompanied by comparatively stable prices and wages at home, can give rise to a sharpening of the movements in the volume of trade. In the last decades, this has given rise to the idea that the rates of exchange could be utilized for regulating the level of home activity. Accordingly, two systems of currency-control are thinkable: ‘i. a system of stable rates of exchange, 2. a system of so-called floating currencies, whh variable rates of exchange. With x. it is possible to imagine a system, by which the currency unit is made interchangeable under conditions to be described later with a fixed amount of gold; then we have to do with one of the forms of the gold Standard. With the pure gold Standard which no longer exists gold also circulates at home as legal tender. With the gold base Standard, gold is used exclusively as cover for the banknotes concentrated at the Central Bank, and is only exchanged for banknotes or balances, if payments to foreign countries have to be effected. With the gold exchange Standard even this stock of gold which does not yield any interest to the Central Bank is replaced by a stock of foreign exchange of countries which have the gold Standard, and which can, therefore, in a certain sense, be placed on a par with gold. Moreover, it yields interest against which, however, there is the risk which was very actual for Holland in 1931 that these foreign exchanges lose contact with gold. But, one can ia years 3.60 3-68 3.68 Great Britain, Consols 4.60 3-76 China, Reorganization loan 1913 8.33 8.36 6.00 India, 3 % % govemment stock 5-27 4-7S 3.83 Finland, state loans 7-7 8.4 4-7 It will be seen that the differences are considerable; they are attributable to at least two causes: to differences in scarcity of Capital and differences in risk premium. For a country like Finland it may be taken, certainly for 1937, that the last factor was absent; for India probably, too. For China both factors will have to be taken into account, for reasons explained above. The supposition that it must be possible by international cooperation to lower the rate of interest in China by 1/5 does not look fantastic in the light of the above figures. How much more Capital would be demanded in consequence ? Only the work of P. Douglas1 gives information about the elasticity of the demand for Capital; his results justify the assumption that this elasticity amounts to 4/3, i.e. that a reduction of the rate of interest by 20 % would lead to an increase of demand by about 27 %. Colin Clark2 values the total capita! invested in China at 35 milliardl.U.;the increase of demand by a 20% reduction of interest rates would then amount to 9 milliard I.U. For the saké of comparison we mention that, according to Clark’s calculations, an annual import of capita! might be reckoned with for the future of 3 to 4 milliard I.U. Hence it is evident that the extra Capital import resulting from a reduction of risk-premiums is of an extent not to be despised. Should it be possible to push this levelling process still further and in view of the above figure there is some ground for this considerably higher figures might even be reckoned with. Of course, these evaluations are highly speculative. They are based on very crude investigations and on tendencies which can only be ascertained in rough lines. We consider our evaluations just a sufficiënt motive for the necessity of a more thorough study of these problems. It 1 P. H. Douglas, The Theory of Wages, New York 1934 and later work. 2 C. Clark, p. 80, may be observed that with regard to investment possibilities in the near East, including South-eastern Europe, similar conclusions are reached. Particularly as to China the question is of importance which country will supply China with the necessary Capital. Russia seems to lay some claim to the opening-up of China. In this connection we wish to point out that, according to Clark’s computations at any rate, it is little probable that Russia will be able to raise the necessary capitals. It will almost entirely need for itself its capita! formation covering the period 1945-1960 of about 175 milliard LU., whereas the United States will be able to export about 60 milliard of their savings amounting to about 220 milliard I.U. It is logical, therefore and in the interest of a levelling of prosperity that the United States should have a large share in the development of China. Erom the importance we attach to this supply of Capital to the less prosperous countries it follows that we also consider the continuation of Capital formation in the prosperous countries as necessary, or at any rate highly desirable. In the last few decades it has been argued that continuation and increase of this capital-formation is undesirable and superfluous. Those who have proclaimed these views mostly based themselves on a national standpoint; they did not consider the possibility of capita! export or rejected it for one reason or another. Moreover, they started from the conception that a further increase of the Capital quota in the internal production of the prosperous countries is either impossible or does not pay. The latter view need not be rejected. It is indeed imaginable that in the country that occupies a leading position in technical development, the new technical processes corresponding with a further increase of Capital structure are not yet known. It is likewise imaginable that a further rise of the Capital quota is unrexnunerative. If there were no possibilities for capita! export it would then be better, indeed, to form less Capital and to use the released producfive power for the production of articles of consumption. In other words, a larger share of the national income would have to be spent on articles of consumption and less would have to be saved. As soon, however, as there are also export L possibilities, this is no longer the only solution. Then also less prosperous countries can in this way be aided in their development. And from the viewpoint of international stability the latter possibility is then preferable. It is also preferable because by it the total capita! wealth of the world and hence the total possibilities of prosperity for the future are increased. Thus it means a certain sacrifice by the present generation in the more prosperous countries in behalf of the less thriving nations and in behalf of the 1/ future. So we have no objections to high savings in the wealthy countries, but on condition that they are not hoarded, as often happens in times of depression. For this means that part of the productive forces remain unemployed and that is on no account to be desired. Efforts should be made to avoid this by a good employment policy. We find support for our views in the calculations of Colin Clark1. They show that for the continuation of the rise in labour productivity very considerable capitals will be required. These are estimated by him from the relation between the height of per capita production and the Capital, per head, which he believes he can compute from his very extensive statistic material. If one takes these computations as a starting-point, the need of capita! is even greater than the world savings that can be expected. He computes these savings from the relation, as found in the past, between national income and savings. With an estimated total of savings between 1945 and 1960 of over 800 milliard dollars (having the buying power of 1925~1934). there would be a deficit of over 250 milliard. Should the disposition be continued to save less on a given income than before, his estimation of the savings would even be too high and the deficit in them still greater. Likewise this deficit would be greater than Clark computed it, if a correction is made in his estimate of capita! requirements, for which there is certainly some ground in our opinionl. Even apart from the capitals which it will be possible to employ in the development of less prosperous territories, considerable capitals will be required immediately after the war for the reconstruction of the Capital goods destroyed by the war. Besides this Capital destruction the war has, for a number of countries, also led to very great national debts, which are partly of an international character. Among these international debts which, from the standpoint of a given country, can be added to the Capital destruction in material goods, the lease-lend debts to the United States occupy a very important place. On June 30, 1944 America had, on the basis of the lease-lend act, granted advances to an amount of 28 milliard dollars, 9 milliard of which had gone to the United Kingdom in the form of goods, and besides that presumably over 1 milliard dollars in the form of services. On the other hand, there was reverse lend-lease aid by Great Britain of some 2 milliard dollars. 1 It would lead us too far to enter here into greater detail. We have dealt with this problem in a discussion of Clark’s book in the Revue de I’lnstitut International de statistique, 1945. The United States themselves will be able to bear their Capital losses caused by the war more easily than other countries, because these losses, as compared with their very great wealth, are smaller. Moreover, the safe geographical situation of this country has naturally prevented the destruction of Capital by devastations. Only the diminution of stocks and the non-replacement of worn-out plant have to be recorded there as resulting from the war. Hence no country is in a better position to lend a helping hand to other States than exactly the U.S.A. Thanks to the fortunate circumstance of the safe geographical situation of their territory and of their great productive capacity it will be possible to reduce to smaller dimensions many of the disastrous consequences of the war. If the countries that have been particularly ravaged by the war should have to surmount in their own strength the results of these Capital destructions, they would have to face almost insoluble difficulties. Their labour productivity has declined to such an extent that perhaps they would even be unable to produce a minimum Standard of consumption goods; not to speak of a production, beyond that minimum, of the necessary capita! goods for the reconstruction of their devastated plant and the replenishment of their exhausted stocks. They would consequently become ‘depressed areas’ in the world for a great number of years and exercise an adverse influence on the economie conditon of the world: for instance, they would be unable to résumé their former imports to any appreciable degree. All this can be reduced to far less serious proportions, if the U.S.A. aid these countries among which also Holland is to be reckoned by supplying capita! for their reconstruction. The old efficiency in production can then be restored rather rapidly and the taking up of these countries in a more normal world economy is only a matter of a few years then. For a number of countries, however, this aid would result in new debts being added to tbose already existing, and the total amounts of interest and redemption which will then have to be raised by countries like the United Kingdom and numerous smaller ones, will be very considerable in proportion to the remaining items of the balance of payments. It is questionable whether such countries will be able to raise these sums without endangering the stability of their balances of payments and whether, in this connection, it would be in the interest of a stable and prosperous social system of the world to maintain them. If it is considered that the United Kingdom, instead of its foreign assets in 1938 of 3.6 milliard pounds sterling will have a debt after the war of at least an equally large amount, owing to which the item of interest and redemption will stand on the other side on the balance of payments —and will probably be higher—this is already a sufficiënt indication of the tremendous difficulties that are threatening. Therefore it would be an act of wise statesmanship if part of these debts were cancelled a thing for which also in the U.S.A. voices have been raised already. Such cancelling is also in the interest of the United States itself, as otherwise it will compel the debtor countries to cut-throat competition in the export markets, of which it would thoroughly feel the reaction in its own exports. A cancellation may perhaps also be motivated in this way that, after all, the exposed situation of Great Britain, as well as the safe situation of the United States with regard to the foei of war, are accidental, viewed from the standpoint of world economy and world politics; they are no mistakes or merits of the countries concerned and therefore the debt-relation arising from them has no economie foundation. Co-operation 10 1/ As for the reparation payments to be made by Germany and her allies, similar, though not identical, considerations hold good. Also hete it will be wise to be guided in the first place by the interests of a stable social world system with a prosperity as high as possible. Viewed in this way, the limits should be taken into account which, over a Jonger period, are put to the capacity of a country. If they are ignored, exhaustion will be the result, which will sooner or later revenge itself, also for countries which 1/ thought they could benefit by it. The actual limit put to capacity can be found by reducing the maximum production by what is needed (a) for a minimum subsistence of the population, and (b) for reconstruction purposes, as far as this is necessary to continue or résumé production. In this connection it should be home in mind that, if the Standard of living of the population is put too low, this will automatically revenge itself in the level of production. Under high pressure it may be possible to dodge this law for some years, for a policy of longer duration it cannot be neglected. We will illustrate our thesis with some figures. The value of Germany’s production, measured by the national income, amounted to 8a milliard Reichsmarks in 1938. We may, for the average of the first five post-war years, reckon with a production of almost the same amount; then we shall probably be far too optimistic yet as to the speed with which productivity can recover. What, now, is the value of the minimum consumption of the German people that can be maintained for years at a stretch without undermining production ? In order to estimate this amount, we consider that the Dutch people —which, by 1938, had about the same Standard of living as the Germans —in 1943 already underwent a limitation of consumption, greater than could be maintained in the long run. This reduction amounted to approximately 25 % compared with the level of 1938. A reduction meant for a longer period, therefore, cannot exceed 20 %. As in 1938 about 3/4 of the national income was spent on articles of consumption, or 62 milliard Reichsmarks, a reduction of 20 % of that amount, or 12 milliard, will be possible. Tbis amount would thus be released for reparations, except for the part necessary for the reconstruction of their own productive apparatus. For reparations could likewise be used the 20 milliard Reichsmarks, spent in 1938 on new investment and armament purposes. The devastations are now such that the reconstruction will take at least 20 to 25 milliard a year. Consequently 7 to 12 milliards remain for reparations, or say 10milliards. We look upon this figure as a maximum, and expect that later calculations, which will only be possible when the actual situation is known, will yield a lower figure. This becomes all the more probable, if the disinvestments should still increase. Moreover, a figure is to be expected for the first two years that is far below the average of the first five years, and which might very well prove to be negative, which means that Germany would in reason be incapable of any achievement. An amount, like the one calculated above, of 10 milliard Reichsmarks, could only be transferred by supplies in kind —or an arrangement equalling this; as we shall show in more detail (in chapter X), a transfer in money in the usual manner, leaving commercial intercourse unhampered, could only be effected for a small part. After the last war supplies in kind were not received with great enthusiasm by the receiving countries; the supplies of coal, for instance, were very soon feit as a competition for their own mines, and as a result they were crossed off the list after a few years’ time. With a well-organized economie life this competition need not be feared so much, but even then difficulties will remain if the supplies are too one-sided of composition. Only in case a great additional shortage has arisen of certain goods, which is sure not to be filled at short notice by home producers, will there be no objection to these supplies in kind. As is known, Russia claimed supplies in kind from Rumania in the form of work done by Rumanian labourers. It stands to reason that, in a country with great devastations, these can be usefully employed for a considerable time. Countries demanding reparation payments to high amounts should, however, be well aware of these difficulties and consider carefully whether they wish payment in kind. If not, they will have to be content, for the former reasons, with lower amounts than those mentioned above. Chapter X REGULATION OF FINANCIAL TRANSACTIONS For a realization of the international economie aims discussed in chapter VI, not only the real economie relations between countries, hut also the financial and monetary ones should be regulated. For fromthe latter may emanate, as was shown by the past, independent disturbing influences. It is particularly autonomons measures with regard to international payments, as taken by certain countries and we are thinking of the devaluation of currencies as well as the putting up of all sorts of barriers by clearing, etc. —that have often caused great harmto other countries; this national, arbitrary procedure must be discontinued. As positive demands in this domain we can formulate: the v greatest possible stability in the rates of exchange coupled with the greatest possible liberty in financial transactions. The simplest theoretical solution would undoubtedly be the introduction of a world currency. By this is meant the V introduction of one and the same currency for all countries, which consequently would be legal tender all over the world. All problems with regard to fluctuations in the rates of exchange would then become a thing of the past; it would not be necessary either to support weak currencies, and there would be no sense in a*regulation of international payments by one country. In order to realize this ideal, -4 however, the creation of this currency would have to be in one hand. In other words, only one central bank would 4 be the real central bank of the world and the others only branch-establishments of it, or there would have to be such intimate cooperation that the issue of money would be spread over a number of central banks. The cooperation would have to be very intimate, indeed! It would not be possible to tolerate that one country should, on its own authority, issue means of payment for too large an amount, owing to which the stability of the income and price relations would be threatened, also in other countries. Even too sharp discussions about the financial management might already lead to undesirable effects with regard to the confidence in the currency. If one thinks of the political relations of the moment e.g. of Russia’s desire so far to be economically closed it will be clear that this world is not yet ripe for the introduction of a smoothly functioning world currency system. Another possibility is a system of national currencies which are practically independent of each other, and consequently fluctuating with regard to each other. Apart from certain advantages conceming the possibility of adaptation to changed conditions, such a system shows many great drawbacks. The possibility of national arbitrariness is extremely great: the degree of confidence one could have in the fluctuating currencies of financially or morally weak countries would be rather small and the possibility of a disturbance of equilibrium would remain very great. In a way we have witnessed such a system after 1931, and, viewed internationally, it does not tempt to a repetition, except in case the economie policy of the great countries should remain far below the demands we formulated for it above. If in consequence of this every country itself must look after the best possible employment of its productive apparatus, fluctuating currencies may be unavoidable. v Viewed internationally, however, the preference should be given to a system which on principle has the approximately fixed relation between the currency units in common with the gold Standard, which can most easily be realized by coupling it with gold. For this purpose, as wc shall further explain, also a measure of active cooperation is necessary, but this is within the limits of possibility and has, in fact, made good progress already. The coupling to gold need not have a quite unelastic character; it is imaginable and has already become reality in the arrangements reached by the International Equalization Fund —that changes are allowed within certain limits when serious grounds can be produced. A country which loses ‘ part of its outlet through changes in international conditions and which, for social and other reasons, wishes to avoid a lowering of its wage and price level, can acquire new export possibilities by reducing its rate of exchange. Such a country should not be deprived of this possibility. It is desirable, however, that such adaptations cannot take place at any moment and to any extent, but are subject to certain limitations as regards time and extent. Thus it has also been arranged by the International Equalization Fund. In this connection it is not necessary to think of the gold Standard in one of its old forms only; at any rate, government bonds can also be accepted as cover by the side of gold, and for smaller countries also currency of the bigger ones, as for that matter was the case already in many countries. Naturally the advantage of the goldless standards is that then the improductive production of gold can be stopped The fundamental difference between the gold Standard • based on a pure gold cover, and a free Standard for which through poverty only government securities are used as a basis, of which it is then said with some pathos that it is a labour Standard, is not so very great, as we observed already in chapter IV. As we explained before, it is possible, however, to go much farther yet, and add to the means of cover other materials than gold; particularly a whole assortment of raw y materials. It may be done in this way that ‘parcels’ of raw materials, of a fixed prescribed composition, are considered as equivalent to gold. Thus it might be attained that, within certain limits, the average level of the prices of raw materials would remain constant. For the stabilization of economie fluctuations this would mean a force to the good. The prices of the separate raw materials would not be bound by it; they could continue to indicate the relative scarcity position of those goods and by this continue to contribute to a sound automatic regulation of their production and consumption. Further it would not be necessary for all central banks to accept this cover which is more difficult of administration but only some of the greatest. Nor should it be thought that the raw materials would have to be present in kind in the banks: only the warehouse-warrants relative to certain stocks would have to be transferred to the bank. t/ In the case of one of the systems indicated above, which are more or less related to the gold Standard, the rates of exchange would but for some incidental changes have ” to be stable. It is essential for this that the balances of payments are in equilibrium, both in the short and in the t' long run. This would be attainable by means of a complete regimentation of international payments, in the way that Germany knew before and many countries during the war. Owing to the many formalities connected with it and the consequent loss of time such an arrangement puts a heavy burden on the back of industrial life, which it will be better to avoid. We would not advocate it as a normal condition; but the threat of it might have a great preventive effect. If speculative or other fitful Capital movements should menace the stability of the rates of exchange, introduction of it might be necessary and also desirable. If, however, the remaining measures advocated here, are successful, the cause of such fitful capita! movements will be considerably less than before and it may be hoped that it will be unnecessary drastically to restrict financial intercourse. These considerations do not hold good for a country like Russia, with a state monopoly for foreign trade; there payments are automatically subject to the supervision of state organs and the equilibrium in the balance of payments can easily be maintained. For countries with a freer economie system a maintenance of the equilibrium for a short period is possible without special measures, if only they have sufficiënt reserves of gold or foreign currency at their disposal. In order to make this possible for all countries concerned, there should be a somewhat proportionate distribution among the various countries of the reserves available in the world, or it should be possible rapidly and simply to grant new credit to a country that is involved in difficulties. It is intended to meet these requirements by the establishment of the International Equalization Fund, owing to which also coordinated action is possible. It may be taken that no great difficulties will arise in this connection, as long as it is necessary to bridge over a temporary shortage of means of payment. In order to prevent these shortages front becoming chronic, however, there should be an equilibrium between the items of the balance of payments in thestricter sense consequently without the balancing items. As explained at length in chapter V, it is by no means certain beforehand that, at a given position of prices, wages, production and rates of exchange, there will be such an equilibrium. It bas been thought that the equilibrium can always be found by an efficiënt regulation of the rates of exchange, and for (/ a number of cases this is even probable. In such cases it may be put thus that a certain currency is overvalued or undervalued with its existing parity and that by changing this parity the equilibrium can be restored. The normal case is that, when the payments annually due to foreign countries exceed the receipts from abroad, the currency concerned is overvalued and that devaluation can restore the equilibrium; exports—intheir widest sense—will then rise more strongly than imports. However, we have also shown in chapter V that quite different situations may occur, when a reduction of the rate of exchange does not lead to a restoration of equilibrium, though it does lead, as it always will, to an increase of the volume of home production. Further investigations into the connection between the phenomena have shown us that, as far as the rate of exchange has any influence, it is in a way a secundary u influence which it exercises. What is of primary importance apart from exceptional cases —is that there should be monetary equilibrium within the country; in this sense that the incomes of the aggregate individuals and corporations are entirely spent on consumption goods, services and new investments, and that no hoarding or dishoarding occurs, with the latter of which creation of credit can be put on a par. All this to be conceived in this way that the dishoarding or creation of credit at any rate is not greater than what is necessary for a normal expansion over a longer period; in other words that no extreme inflationary policy is carried on, as was the case in Germany during the years 1920-1923, and that no cyclic fluctuations occur in the hoarding and dishoarding. This latter demand, consequently, which applies to more normal conditions, comes down to a repetition of the demand for a correct trade cycle policy. This demand is, as we already pointed out, first and foremost a demand made upon the national economie conduct of the big powers. If this fulfils the conditions of a good trade cycle policy, an important factor to the good is already active for the small countries, too. In order further to assure also these countries of a stable economie position, it will moreover be necessary to make an end of autonomous changes in commercial policy (cf. chapter VIII). Finally, a factor which does not belong to the normalv economie picture, but one which will play a part of especial importance after the war, is that of the payment of interest and redemption of war debts and of reparation payments in money. When these payments which we shall call ‘unilateral payments’, because their improductive character involves that there are no counter-items in the form of higher exports exceed a certain level, monetary equilibrium likewise threatens to be disturbed and therewith the equilibrium in the balance of payments. As in the relative literature, it is efficiënt here to dis-v tinguish between two difficulties that may occur. The first V is the so-called transfer problem, the second might be called the difficulty of achievement. The transfer problem consists in payments to foreign countries only being possible in foreign exchange, and apart from the exhausting of stocks still present or the contracting of new credits abroad this can only be obtained from a surplus of exports in the widest sense over imports. There are limits to this surplus especially for the reason that there are limits to the value of exports. As we explained in chapter 11, the value of exports cannot be increased at will or almost at will, as the classical theory would suggest;onthe contrary, there are limits to the possibilities of increase. We get a clear idea of this when we start from the fact that a reduction of the price of export products by * % results in an increase of the quantity by zx %x If we calculate for various price reductions what the total value of exports then becomes, we get the following table: Price Quantity Value 100 % 100 % 100 % 90 % 120 % 108 % 80% 140 % 112 % 75 % 15° % na y2% 70% 160 % 112 % 60% 180 % 108 % All figures are expressed in % of the original values of the three quantities concerned. It is evident that there is a maximum value which is only 12% % over the oiiginal value. If it should be assumed that the export quantity rises 3* as much in percentage as the price declines, the maximum appears to He higher, hut even then only 33 % over the original value. Statistical investigations having made it acceptable, as we saw, that the relation between the percentage of rise in quantity and the percentage of decline in price is under 3 rather than over, there are accordingly rather narrow limits to the increase of exporc value. Then it should be borne in mind that, when the quantity of exports is to rise considerably in the above example by 50 % imports will also have to 1 The figure 2 then approximately represents the so-called substition elasticity of exports. rise, owing to which the balance will become smaller than has been calculated. A closer investigation of possibilities shows that, consequently, the maximum of export balance depends both on the elasticity of exports and of imports as well as production, but that the above limits, as to relative size, give a correct picture of the situation. Regarding some more exact computations we refer to appendix I. When by the side of these figures the amounts are placed which, at the present level of war debts, a country like Great Britain would have to pay, it becomes clear that much may depend on a correct regulation of these debts and their payment. The same thing holds good for the regulation of reparation payments, as far as they would have to be made in money. The foreign assets of Great Britain had a nominal value of 3.6 milliard pounds sterling in 1938. In the beginning of 1944 1.75 milliard of it had been realized and had yielded only £ 1 milliard. The City estimated the value of the remainder at £ 0.5 or 0.6 milliard. On the other hand new debts had arisen to an amount of £ 3 milliard, besides the lend-lease debts of some £ 2 milliard; the total foreign liabilities would thus amount to £ 4 or 5 milliard. If for interest and redemption together 5 % js reckoned, a moderate percentage, this would mean a burden of 200 to 250 million pounds, against receipts of interest and dividends in 1937 of about £ 200 million! If it is considered that the value of imports and exports in 1937 was £ 953 million and £ 521 million respectively, it becomes obvious what difficulties a maintenance of these debts would entail. Fortunately it is being realized already in expert and long-sighted circles in the United States that it is not in the interest of that country either to exact the full pound. For on the one hand it would endanger the monetary stability of Great Britain and with that of a large part of the world —; on the other hand it would compel the United Kingdom, its chief competitor in the world market, to launch such an export offensive that it would thoroughly feel the repercussion of that in its own export industries. When, moreover, one considers the origin of these debts, it is partly the exposed geographical situation of the United Kingdom against the safe situation of the United States; can these factors be looked upon as a serious foundation for financial relations in an efficiënt economie system? And how far, moreover, should the importance for America be taken into account of the political attitude of Great Britain at the end of 1940, then almost the only belligerent left on the Allied side ? If one views in the same way the transfer problem for possible reparation payments in money, to be made by Germany, it follows from the export figures for 1937 and 1938, which amounted to 5 to 6 milliard Reichsmarks, that such payments in money could not easily exceed an amount of 1 milliard Reichsmarks. v Such considerations hold good to a less degree if one manages to get round the transfer problem. This is possible by demanding payments in kind, as was done by Russia with regard to Rumania, which country, as bas been pointed out, bas to supply labour for the reconstruction of Russian territories1. It would also be possible by demanding supplies in the form of goods, to which this form might be given that the payments are at first made in money, but the stipulation is made that these amounts are to be spent in the paying country. The export surplus is then raised so much if one likes: artificially —that the limits calculated 1 This text was written already in 1944. The reparation claims on Germany have now also been given the form of payments in kind. above no longer hold good. These only exist when the J receiving countries are free where and how to spend the reparation payments. After the last war Germany made supplies in kind, e.g. coal; however, the receiving countries feit them as a competition for the nadonal industry and after a short time they were crossed off the list. This feeling was based on an incorrect view, however; given a proper organization they could have benefited by these supplies without the chances of employment being injured by them. Generally it may be stated that, the better full employmentJ is maintained by a correct economie policy, the better supplies in kind can be utilized. In the case of supplies in kind, only the second difSculty V mentioned before, the difficulty of achievement, makes itself feit in the paying country; this means, as we mentioned by the way in chapter IX, that there is a limit to the physical possibilities of supply. This limit is there where further supplies would lower the Standard of living of the paying country so much that it would come below a human minimum. No doubt this minimum is a very vague idea, as the years behind us have shown clearly enough. By brutal force it is possible to press a population down to a Standard of living which is considerably perhaps even 5° % or more below what was customary here before the war; a similar procedure, however, does not tally with our conceptions of humanity. A reduction by 30 % corresponding with the level at which it is estimated that the Dutch population lived about the middle of 1944 —, already means an exhaustion at the expense of the future. Moreover, it should be borne in mind that also labour productivity is less at such a low Standard of living, so that it is doubtful, even from the conqueror’s standpoint, whether it is wise to go so far. Hence that in our compu-'i tationsoftheprecedingchapter,webelieved we mustreckon with a 20 % reduction of the living Standard at most, from which we concluded though with great uncertainty that a capacity of much more than 10 milliard Reichsmarks cannot be reckoned with. Separate measures against the ‘vagabonding Capital movements’, which in the period of 1929-1939 caused so much trouble to the leaders of finance, are hardly possible, unless it should be considered advisable to proceed to a complete regimentation of international financial intercourse. As we observed before, we should prefer to see this used as a preventive threat only. This can be done all the better, if by a correct trade cycle policy in the principal countries, a curtailment of national autonomy in trade policy and in international financial policy, as well as a satisfactory settlement of international debts and reparation payments, many causes of instability and consequently of speculative capita! transactions are removed. It might be thought that a restoration of the gold Standard or something akin to it signifies a return to 'laisser faire’ and that by advocating this restoration the experiences of the period after 1919 should be ignored. This is not the case, however. If the conclusion is reached, as we did, that in spite of the existence of all sorts of possibilities for regulation in a certain domain, the condition of liberty should be approached as much as possible, because in that way the economie aims are served best, such a policy requires active supervision as to its observance. Formerly the governments did not know any better but freedom in financial intercourse was the only possibility. Now they have tasted of the honey of regulation and must be kept away from it, which demands positive interference. This will accordingly be the task of the International Equalization Fund. Important material decisions which the Fund will have to face are thoseregarding future parities. It wouldseemthat, for the time being, the objective is to restore the parities of the West-European countries in the same relation to the dollar as existed before the war.1 The measures for the French and Belgian francs and the Dutch guilder give ground for this supposition. It is possible that these parities are only meant for a certain time. Before stabilizing them, the govemments should realize that the experiences gained after the last war with the restoration of pre-war parities, were far from favourable. We already pointed to the fact that the chronic depression in the United Kingdom after 1925, as well as the stagnation which production in Denmark and Norway showed about that time in comparison with Sweden and the world as a whole, is largely to be ascribed to the restoration of the old parities in those countries, after they had witnessed the development of a considerably lower rate of their currency during the first few years after the war. If the rates of 1939 are to be restored without detriment to the volume of employment, certain requirements must have been fulfilled. A restoration of these rates would be justified in any case, if, first, 1939 had shown a wellbalanced situation in this regard, and secondly, the changes in the conditions of competition had been equally great for all countries. There is room for doubt with regard to both these points. In 1939 there was in many countries a level of unemployment though unequal which 1 Also thistextwaswrittenin 1944. Sincethenparities have been fixed which are more in accordance with the views given here. Co-operation 11 cannot be tolerated again in post-war years. And since 1939 conditions in the various countries have developed in a different way. It is true that the difference in the development of prices is not so very great, notwithstanding the fencing off of the occupied territories. The rise of prices in the Netherlands, for example, is not much greater than in Great Britain and the U.S.A. If the cost of living index numbers are pat at 100 for 1938, the figures for the three countries are now 145, 140 and 130 respectively, and for Wholesale prices approximately 160, 160 and 135 respectively. As part of the German economie area, and after it had once been adapted, the Netherlands showed a comparatively slow rise in prices at any rate, as far as official prices are concerned —, but this was preceded by German quarters deliberately aiming at our insertion, which comes down to an increase of the former pricelevel by about 30 %. Originally the rise in prices was greater in the Anglo-saxon countries than in the German area, but since 1942 there has practically been stability. Besides price movements there are other factors, however, which should exercise an influence on the choice of the future parity. For the United Kingdom, for instance, it should be taken into account that it is to expect a tremendous shift in its balance of payments against the pound sterling in consequence of the high war debts which it has had to incur. Unless a highly satisfactory settlement of these debts is reached, it will therefore need an increase of its exports, for which a lowering of the rate of the pound may be necessary. The Netherlands will presumably have to reckon with a serious decline in the purchasing power of its outlets, notably of Germany. On the other hand there is a possibility of more favourable export opportunities springing up for this country in the event of a freer com- mercial intercourse. We do not intend to argue that from these few qualitative and incomplete observations it should follow already that a revision of parities is necessary, although a downward revision does seem justified. We v only wish to point out that a more thorough investigation is highly desirable, in which the national interests of the countries concerned should be carefully weighed against the general, international interest. It is the task of the International Equalization Fund to make such an investigation, before they proceed to a more definite fixation of parities. Chapter XI THE NECESSITY OF AN INTERNATIONAL CENTRE In the preceding chapters we have seen that in various respects a curtailment of national sovereignty is necessary with regard to economie policy, if a more stable and prosperous social system is to be realized in the world than / we have witnessed since 1914. This curtailment of national autonomy is desirable in the field of commercial policy, in order to prevent the many arbitrary and unilateral limitations in international trade, which, notably since 1930, 1/ have caused so much harm. It is equally necessary in the domain of the technique of payments, in order to prevent arbitrary limitations in financial transactions as was done by the German regulations of foreign currency, or to prevent arbitrary changes in the rates of exchange of currencies of world-wide importance, such as the British pound or the American dollar. (/ We have also seen that international cooperation is v desirable for a number of divergent purposes. Cooperation in the matter of a correct trade cycle policy is the first and most important point; cooperation in the management of an international currency reserve in order to reduce the risks of capita! export and in an international control of cartels are v/ some more forms, equally important. In the long run the countries will also have to come to the formation of a centre, from where the economie policy of the world is conceived and carried out, whatever the exact contents of this policy may be. It must be possible for the economie changes in world order which in earlier epochs could only be attaixied by war, to be brought about in future by wise leadership and after public discussion, without war, if these changes are reasonable. Hitherto an organism was lacking for this purpose. The national centres of economie v/ policy the state departments of trade and industry of the separate countries are naturally unsuited for this, because their task is the promotion of the national interests. The international centres which we have known so far were too much tied to definite, partial definitions of their tasks and, moreover, invested with very little power only. What v is needed is an organism having the authority, on behalf of the international power centre, to take all the measures of economie policy which are necessary for the welfare of the world’s social system, viewed broadly and for a long time, i.e. what Anglo-saxon writers have indicated as ‘peaceful change’. Though the post-war atmosphere will probably not allow of this happening at once in that well-considered and undogmatic way which takes no notice of any group interests, it is to be hoped that it will be possible in the long run. What I advocated above, even without these remoter objectives, comes down to proposing a certain regimentation of international economie life. I am now going to motivate this in some more detail. I am no advocate of a complete regulation of economie life in details and do not belong to the typical ‘regulators’. Regulation within certain countries, apart even from what the war has brought, has possibly gone too far already. A substantial number of regulative measures has sprung up as a defensive weapon against the great depression of after 1929 and the hindrances to international trade resulting from it. If in future we may reckon with better regulated economie conditions in the world and with a curtailed sovereignty with regard to commercial policy, a certain number of these measures can v perhaps be done away with again. I am thinking of the regulationofagricultureinmany countries, of the closing of certain branches of industry and of the restriction of production. I am therefore of opinion that some moderation in this respect may be welcome. However, if the regulation within the borders of the separate countries has perhaps gone too far, in the international field it is exactly the opposite. There is every reason to plead for more regulation there. This seeming inconsistency can be explained as follows. V/ In the first place there are forms of regulation which only have sense if they are international; think, for example, of the regulation of commodity markets, where competition has an international character. Nationally it is possible then to make shift by protecting the regulation with a tariff or quota-wall, but from an international point of view this solution is little satisfactory. In the past few decades this has been realized, too, and the most successful instances of market regulations speaking purely technically, so apart from their purpose were those where it had been possible to reach international agreement. \/ In the second place regulation in the international field is more urgent than within the borders of a country, because the existing situation in the international field generally shows more arbitrariness, in consequence of national sovereignty. In the preceding chapters, when discussing commercial and financial policy, we had again and again opportunities to remind the reader of this. ln the third place the lack of‘market knowledge’ is much greater in international than in national markets. Compared with local and regional differences in circumstances, customs, etc. international differences are much greater, of course, and thereby the chance of errors and wrong decisions. A notable instance is that of the Capital market. It is far more difficult to judge of the remunerativeness of a new investment, of the measure of solvability, and of the dangers threatening it, in the international than in the national field; for this reason a system under which a guarantee is given by a mediatory authority is particularly desirable here. In the fourth and last place it has appeared in our theoretical analysis, that exactly in the market which represents ‘par excellence’ the contact of every country with foreign countries, namely the exchange market, there is a special need of regulation, because here the price cannot under all circumstances perform its regulative function. If, therefore, I am advocating a number of regulatory measures in the international field, the surprising feature in the results of our investigation has been that the concrete contents of these regulations have to be inspired by the ‘liberal’ theory to a larger extent than is sometimes thought. Particularly with regard to commercial policy and international capita! movements it may be argued that the situation as represented by the theory of free exchange is, under certain conditions, the optimum situation, which is worth striving after. However, this conclusion stands or falls with the assumptions that it will be possible reasonably to approach a condition of full employment and that in the domain of politics international cooperation will be sufficiently close. Exactly because in the thirties these two assumptions had not been realized, it was logical that other Solutions than those of the liberal theory were sought and found adherents in a fairly large circle. It is as logical, however, to revise one’s opinion in the opposite sense ■ when the realization can be attained; on the condition of course, that full employment and international cooperation are also considered desirable in their effect. I think there is every reason for this. One need only read again the economie history of the Interbellum in order to realize what the alternative to international order means. It might be remarked that consequently I desire a return to the conditions existing before 1914 and that there was no conscious international regulation at the time; that, on the contrary, order existed and continued to exist ‘of its own accord’. It may be replied that the resemblance of the aims formulated above with the conditions existing before 1914 is in various respects only superficial, but that, even if there is a resemblance in some points, it does not follow that also in the present world such a situation would arise again v'of its own accord’. As I already observed, there was a widely accepted notion in those days that the governments should refrain from any interference in the economie sphere; this is not so now; it has been found that it can also be done differently and the temptation to interfere is much greater for various groups of interests; at present a siruation as before 1914 can °nly be realized consciously, no longer unconciously, if I may use these words. Therefore our considerations indeed prove the necessity of an international centre of economie policy. Considering the diversity of the subjects it will have to regulate, that \J centre can and must exist of different organs. It would have to be both an observation post and a centre of study, as well as and this especially an institution of guidance, supported by a proper power. This last point is all the more necessary as the interests of the individual States are looked after with so much more organization and purpose than, for instance, in 1919. In discussions of experts or representatives of the United Nations a number of organs are already being prepared. We already spoke of the International Equalization Fund and the Bank for Reconstruction and Development; it is to be hoped that more such organs will be designed and that they may function well. Then we must also hope that the staff of the existing Secretariat of the League of Nations and the International Labour Office will be taken up. These bodies have given proof of being well-equipped for making investigations in the economie and social domains. Notably of late years they have published quite a series of important studies, which will be of great use for ouüining future economie policy. These studies first of all refer to the trading policy as carried on by the principal countries in the period of 1919-1939, to the endeavours to getto a reduction of restrictions and the experiences gained from those endeavours about the technique of negotiations and the form of agreements. Other studies refer to the economie disturbances that arose after the last war and the conclusions to be drawn regarding an orderly transition of war production to peace production. So far the organs have only been mentioned individuallyN It is obvious, however, that they ought not to act independently and therefore at a given moment perhaps in conflict with each other: their decisions must not be incompatible. Hence it is highly desirable that they should be vaulted over. Of this vaulting it may be hoped that it will develop into the seat of an all-sided international economie and financial policy, of which we spoke already by the way in this chapter; the centre that is to design the peaceful change of international society as far as economie matters are concerned, and that accordingly will learn to promote the general interest in contrast with the interests of the separate countries and the interests of separate groups of producers and traders in international combination. It is beyond the scope of this book to enter into the question in what way it will have to be possible for the various national governments and groups of interests to exercise influence on the decisions taken by this centre. This question is part of the general problem of political cooperation in the international field, which we do not treat here. It must only be observed that expert knowledge for this work is essential and must not be subordinated to the representation of special interests. Both in the International Labour Office and in the Secretariat of the League of Nations experiences have been gained in this respect which do not call for repetition. We conclude by expressing the hope that the work will not be done by halves, as in 1919. For once we may have an opportunity at present to achieve something. It is very doubtful whether history will grant us this opportunity again. It appears that the forces that can be unchained to destroy our civilization are so great that one gets the feeling: now or never! Chapter XII THE NETHERLANDS AND INTERNATIONAL ECONOMIC CO-OPERATION The hope which always surged up again during the whole period of occupation and which, in spite of the arguments against it, became quite alive again during the liberation of Belgium, namely that Holland should get through the war without considerable devastations, has not been fulfilled. So we are now faced by the fact that, besides the exhaustion of our stocks and plant in the period of occupation, this country has been heavily damaged by the war. This naturally means that we have our work cut out as to relief and reconstruction work; may it be done with the necessary unity of spirit and also thereby quickly and efficiently. We shall not be able to do without international help. Thanks to the sacrifices of many, however, our prestige has certainly not suffered in the community of nations, and also on this ground we may assume that arrangements will be made. It is not the intention of this publication to enter into these arrangements of relief and reconstruction. Moreover, it would probably be too late already. In this study we wish to speak of problems of longer duration, as, for that matter, has appeared from the preceding pages. For also these problems are already raising their heads; the work of reconstruction cannot be done quite independent of future possibilities. It is right, therefore, that the thoughts of many already go out to more remote periods: how about our possibilities of existencethen ?It stands to reason that for theNetherlands, as a small country, this is a question with many international aspects; likewise that the questions of international economie co-operation are of great importance for our people. Let us begin our discussions of these problems with the question, what position the Netherlands occupy in the community of nations. However much we have suffered from the war just now, it may be assumed that, thanks to our high degree of technical development, the quality of our soil and our trade relations, we shall, after a comparatively short time, be characterized again by what characterized us before, a fairly high Standard of living lying between that of most Continental European countries and the Anglo-saxon world —, a less agrarian character than is usually thought less than 20 % of our population works in agriculture —, and a national wealth invested for a relatively large part abroad and in Indonesia. Our imports form about 25 % of the value of the national product; they consist for a considerable part of the necessary raw materials for our industry, which is the principal source where our rapidly increasing population can find a livelihood. Our balance of payments was characterized by an import surplus, which was counterbalanced by receipts for shipping services, by interest and dividends. If a reasonable arrangement can be found for the foreign loans without which we shall not be able to do during the first few years after the war, there is every reason to believe that also these things will remain as they were,thoughtheextent of our import surplus may have to become smaller. Hence comparatively large exports will be essential for the Netherlands. In accordance with the economie structure of our country, free trade was always in its interest, also formerly; likewise a well-functioning international financial system and good international cooperation. The Netherlands themselves practised free trade longer than any other country; it was not before 1933 that this country to some extent proceeded to quota-systems and to an increase of some duties. Then it defended the parity of the Dutch guilder with a grimness which was even detrimental to its own economie life; it was only in 1936 that it went off it, starting a depreciation which was the least of all countries. Likewise there was always much interest, on the part of many kinds of experts, in international cooperation in other spheres than the economie. In contrast with this the interest in international politics, however, was smaller than might have been expected; in 1938 public life could to some extent be compared with a quiet island in an already boisterous ocean. Circumstances certainly have brought about a change in this respect, and it may be assumed that the Netherlands will draw the consequences in the matter of politics. It may especially be expected that it will be ready to put up with such restrictions of its national sovereignty as are desirable in the general interest. This has important parallels also in the economie sphere. Compared with those of other countries, the prospects of Dutch exports are decidedly unfavourable for the near future, and doubtful for later. For the near future the destruction of our productive capacity makes itself feit as a factor on the side of supply. Our livestock is greatly reduced in number and underfed; we have hardly any pigs and poultry left. Our factory plant has partly been dismantled and taken away by the Germans, partly destroyed or insufficiently maintained and replaced. Rolling stock has been decimated; the railway bridges have been destroyed. Then there is the fear of increased competition by the United Kingdom, which is in urgent need of enlarged exports in connection with its war debts, and by the neutrals, who are ready to start. On the demand side the decrease in the demand for luxury articles will make itself feit, of which we produced a good xnany: bulbs, ornamental plants, grapes, chocolate articles. On the other hand it may be assuxned that the demand for means of production (engines, harbour plant) and durable consumption goods (wireless sets) will grow. As to outlets, we shall have to reckon with a smaller demand from Oerman y, which was one of our principal customers (15 % of our exports in 1938), while also the situation in Indonesia will remain uncertain for some time to come. For later years conditions may be viewed more favourably. Our productive capacity can be restored and the restrictions on the side of the supply will accordingly disappear for the greater part. As for agrarian exports, we may even hope for a favourable development. The computations of Colin Clark, quoted in chapter VIII, show that the demand for agricultural and dairy products, especially of high-grade types, is likely to develop favourably. This will become evident in the prices. Clark calculates an increase of the imports of agricultural produce between 1935/8 and 1960 in: Russia of 4.3 milliard I.U. U.S.A. „ 3.7 „ „ Japan „ 2.9 „ „ Great Britain „ 0.3 „ „ Germany „ 0.4 From this it would follow and it is not necessary to take the figures exactly in order to realize the probability of this trend that it is advisable to develop our exports to the first three countries mentioned. About the relation of prices (as compared with the average price level of industrial products) Clark States the following results: the prices of pork would rise by 70 %, of butter by over 30 %, of eggs by nearly 120 % and of cheese by 70 %. We repeat that these figures must not be viewed otherwise than as very rough estimates, dependent upon numerous factors the course of which is unknown. Thus it is possible that the mentality of industrial circles, particularly in the United States, will be in the way of a proper trade cycle policy and will reduce the possibilities for prosperity. But Clark’s computations do take a number of the chief factors into account, the course of which can be foreseen with a certain degree of approximation. Up to now they are the best evaluations at our disposal. And they clearly counterbalance the too pessimistic expectations about the future of those who are overcome with the slump mentality. Further it is evident that the Netherlands are greatly interested in a revival of international trade, and hence in a possible tendency to restore free trade. Should this be continued and there are hopeful utterances from a number of prominent people in the U.S.A. which do not make it look quite illusory it will also favourably affect the prospects for our trade. It would be an exaggeration to say that for our country free trade is a conditio sine qua non. If the trade cycle policy of the big countries should remain V far below expectations, we should have to shift for ourselves and manage it, too. We have gained some experience in regard of quota-systems and currency manipulations, and could carry on a national economie policy. But the Nations should not succeed in establishing such a centre, it will be a vital necessity to the Western-European countries, Great Britain included, to collaborate on a more modest basis. These countries cannot, as the United States and Russia could perhaps, prosper by a system of autarky. In \l the absence of a world order they would have to try to come to a regional order at least. This collaboration would be purely defensive; and only a substitute for what they really want: an ordered world economy. We still hope, however, that this regional collaboration will not be necessary: that the new international organization will be vested with sufficiënt power and will attract sufficiently able men to start a new era. Seeing the task, the enormous possibilities and the urgent needs it would indeed be foolish not to take it up! Appendix I PROFESSOR GRAHAM’S CASE FOR PROTECTION INTRODUCTORY In the Quarterly Journal of Economics of 1923 Professor Graham1 made an attempt to prove that, under certain conditions, international trade means a disadvantage to a country. His attempt concerns a country producing only two commodities, one under conditions of increasing, the other under conditions of decreasing marginal cost, of which the first is produced at a comparatively lower cost than abroad, the second at a comparatively higher cost. The statement was contested by Professor Knight2 and there followed some further discussion3, comment upon which was given by Haberler4 and Viner5 in their wellknown books on the theory of international trade6. In the V 1 Frank D. Graham, “Some Aspects of Protection Further Considered”, Qu. J. Ec. XXXVII (1922/3), p. 199. 3 F. H. Knight, “Some Fallacies in the Interpretation of Social Cost”, Qu. J. of Ec. XXXVIII (1923/4), p. 582. 3 Frank D. Graham, “Some Fallacies in the Interpretation of Social Cost, A Reply”, Qu. J. of Ec. XXXIX (1924/25), p. 324; Frank H. Knight, “On Decreasing Cost and Comparative Cost. A Rejoinder”, Qu. J. of Ec. XXXIX (1924/5) p. 331. * Gottfried Haberler, Der Internationale Handel, Berlin 1933, p. 149-156. 3 Jacob Viner, Studies in the theory of International Trade, New-York—Londen 1937, p. 475-482. 6 I have not found any comment on this discussion in: Bertil Ohlin, Interregional and International Trade, Cambridge, Mass. 1933 and R. F. Harrod, International Economics, London—Cambridge 1933. discussion two points may be distinguished. First the question arises whether the case of decreasing marginal cost has much importance in practice. Most authors contesting Professor Graham’s thesis hold that this is not so; the present author finds himself much in sympathy with this standpoint. Nevertheless the possibility of de-'' creasing costs cannot quite be denied. The second point to be considered is, then, whether or not, and if so, under what further conditions, Professor Graham’s statement is correct. In the present author’s opinion, the main points in this question have, however, not or not very clearly, been met in the discussion and the comments. This appendix is an attempt to state the problems involved in a more exact way, with the help of analytical and graphical methods. After an exposition (§§ i – 8)1 of the method and the author’s own conclusions, a critical examination of the whole discussion is given (§9). 1. Measuring the ‘advantage’ to a country of INTERNATIONAL TRADE. Strictly speaking it is not possible to teil whether or not a given country has an ‘advantage’ from the existence of international trade, since it is, on closer examination, not possible to give a precise meaning to the notion of ‘advantage’ to a country. It is possible to speak of an advantage to a single person; a given change in his situation brings him either to a higher or to a lower level of satisfaction (ophelimity). Since this satisfaction cannot be measured 1 It may be observed that in the language of theoretical economics the case to be treated in these sections is that of isolated exchange between two individuals each producing two commodities. The individuals are, however, assumed to behave as in competitive markets. and, a fortiori, a common measure for the satisfaction of the various subjects constituting a country does not exist, it is, however, impossible to add up the advantages or disadvantages for the single persons and hence also to give a precise meaning to the notion of advantage to a country. As, on the other hand, the discussion on the ‘advantages of international trade’ only has sense if some convention on this notion is accepted, we shall, in what follows, proceed as if a country as a whole also possesses a system of ‘indifference curves’, similar to those for a single person. We speak of ‘curves’ only and not of surfaces, etc., since we shall only discuss cases in which we have to do with two commodities i and 2, the consumed quantities of which, xx and x2', determine the ‘satisfaction’ of the country Ü (xi, x 2). Each indifference curve Q (aq', x 2) =C is constituted of (is the locus of) all commodity combinations xx, x 2, that yield an equal satisfaction to a country. A combination xx', x 2" yielding a higher satisfaction than a combination is situated on a ‘higher indifference curve’ etc. We make the usual assumption that these curves turn their convex side to the origin. 2. The possibility of decreasing and increasing MARGINAL COST. For simplicity’s saké we assume that there is only one productive agent, which we calllabour. Thetotal quantity of labour a is given and is fully employed. The quantities used in the production of commodities 1 and 2 are denoted bij ax and a.2; hence a 1 +a2 = a (i) The quantity ax depends on the quantity xx of commodity 1 it is desired to produce; likewise a 2 depends on x 2: «1 = Vl (*l) (2) a 2 Ti ixi) (3) The functions respectively; these expressions always have positive values. They may, however, be increasing or decreasing functions of xx and x 2. The case of increasing marginal cost is the normal case. Decreasing marginal cost for a whole branch of industry will hardly occur. Even if for a single enterprise the 'law of decreasing marginal cost’ is assumed to prevail, it need not be valid for the industry as a whole. The law will, as a rule, only exist for certain intervals of the quantity produced in a single enterprise. It is a well-known fact that no situation of competitive equilibrium is possible within such an interval. If the branch is constituted of more than one enterprise, an extension of production will usually mean the necessity of using less productive units, i.e. increasing marginal cost. Only if the most economie size of the unit exceeds the size of the branch as a whole, will there be one enterprise; then, too, competitive equilibrium within the interval of decreasing marginal cost is not possible. 3. A GRAPHICAL REPRESENTATION OF THE EQUILIBRIUM OF PRODUCTION AND INTERNATIONAL TRADE. In fig. 1 let x 1 and aq' be measured along the positive part of the horizontal axis and x 2 and x 2 along the positive part of the vertical axis. The negative halves of these axes are used for plotting ax and a 2, respectively. In the fourth quadrant we draw the cost curve % = q>1 (aq), assumed to be of the normal (convex) type. In the second quadrant the curve a 2 q>2 {x2) is drawn in a similar way; to begin with, it is also assumed to be convex. In the third quadrant the line %+ ö2 = öis indicated, being the loens of all possible applications of productive resources. From these data the ‘production curve’ may be dedneed, indicating all combinations xx, x 2 that the country is able to produce. This curve has the equation: 9>i (*i) + x2, hut then x±' will be < Fig. 2 easily discloses what the new equilibrium situation will be. With the given price relation p producers will find it advantageous to use their productive resources in another way than bef ore: in the case assumed in fig. 2, where p is lower than the price relation prevailing at point A, it will pay them to produce more of good 2 and less of good i; equilibrium will be attained only if the marginal products obtained are of equal value. This means that they will proceed to point P, where the tangent line to the production curve is parallel to the given line R S. Having produced the quantities xx, x 2, corresponding with P, the country is now free to exchange part of its production at the terms expressed in equation (5), i.e., in graphical language, it is free to move along the ‘price line’ P C. This it will do until it has reached the point of maximum satisfaction, being point C, where P C is tangent to an indifference curve. The new equilibrium is therefore represented by the two points P, C, the 'production' and the ‘consumption point’, respectively. Under conditions later to be enumerated, the satisfaction obtained in the new situation will always be greater than that obtained in the old one. For, PC, as a tangent to a convex curve, will, for any value of x 1; show a higher value of x 2 than the corresponding point of the production curve1. Since the equilibrium point in the absence of international trade, A, is necessarily a point of the production curve, the satisfaction in C always exceeds that in A, except in the particular case where A and C coincide, i.e. where the price relationp in the world market equals the price relation existing without international trade. Hence, under the conditions to be discussed, the introduction of international trade always means an advantage to a country; with the exception of such ‘boundary cases’ where the advantage is zero. 4. Non-tangent price line. This important conclusion was reached on a number of conditions, the influence of which we will investigate in the following sections. The conditions are: dx 2 1 From Pto the left, -7— for the production curve is, in absouXi dx2 lute measure, always smaller than z— for the price line; from CLX\ dx 2 Pto the right z— for the production curve is always larger dX\ than for the price line. (i) the production curve is convex; (ii) prices are equal to marginal costs; (iii)there exists a point P on the production curve for which the slope of the tangent equals the price relation p in the world market. We shall first remove the last condition. It is conceivable, in fact, that the price prevailing in the world market is lower or higher than the absolute value of the slope of any tangent to the production curve; in the case of a convex curve this only means that it is lower than that slope for T or higher than that for U, the two terminal points of the production curve. In those cases the production point will coincide with Tor C/respectively; the conclusions drawn remain valid, however, as is easily read from the diagram. 5. Concave production curve. Next we remove the first condition mentioned in section 4. This condition is closely connected with the nature of the cost curves assumed. If both cost curves are of the increasing marginal cost type, the production curve is convex. It may be convex too, however, if one of the cost curves is of another type. This depends on the degree in which the curve deviates from the normal type. We shall go into this question in section 6 below. Now we start from the other end and we assume that both cost curves are increasing marginal cost curves. Graphically, this means that both these curves are themselves concave and it easily follows that also the production curve is concave (fig. 3). Now all points on the production curve, except the terminal points, are unstable equilibria. Extension of the production of one of the goods at the expense of the other always means an increase in total value of production: the expanding industry gets more productive and the declining industry less productive than at the initial point. If the opportunity of international trading is opened at a price ratio corresponding to the slope of a line T V, point T will be the more advantageous point and similar to what we discussed above (section 3) a consumption point C will be chosen. Generally point T will, in the presence of trading opportunities, be the production point if the price of 1 in terms of 2 is lower than the figure corresponding with the line T U, whereas U will be the production point if that price is higher than that figure. As an example of this latter situation, the price line UC' is drawn, with a consumption point C'. Again the conclusion can be drawn that the introduction of international trade increases the satisfaction to be obtained for the country, with the exception of possible (but not necessarily existing) boundary cases. One boundary case is the one where the price line through U coincides with the tangent to the ophelimity curve through that point. 6. A STRAIGHT LINE AS PRODUCTION CURVE; MIXED CASES. As a special case, often made use of in simple expositions of the theory of international trade, we now consider the case where the cost curves are straight lines, the case of constant marginal costs. The production curve is now a straight line too, of which each point is a point of indifferent equilibrium. Apart from this difference with the preceding case the same conclusions are valid. More complications arise if one of the industries operates under increasing and the other under decreasing marginal costs. It then depends on the exact form of the two cost curves, whether the production curve is convex, concave or of a more coraplicated type. If one cost curve is ‘highly’ convex and the other only ‘slightly’ concave, the production curve will be convex, etc. There may be intervals where convexity and others where concavity prevails1. In order to suggest that also in these cases of a ‘mixed’ production curve our statement about the advantage of international trade holds as a rule, we consider an arbitrary case of this class (cf. fig. 4). For prices lower than the slope of T Ua stable production equilibrium will be found between U and S. The consumption point will be either at the exterior of the production curve or, in boundary cases, on that curve. 1 A more exact study must be basedon theanalyticalexpression for these properties. An interval of a curve y = f(x) is convex if dry . . < o throughout that interval. In the notations used above we have: diq>2 dtp, *EI /, „ , £*, = + «toi* da'l£ = (6) a very strong decline in prices would be necessary to attain the maximum calculated; from which it becomes probable that for technical reasons this maximum cannot be realized. The same thing holds good a fortiori in case it is taken that e‘ = 1 or s)>o. Therefore our more exact calculations corroborate the argumentation given in the text. Not mach would change in these calculations, if, on account of a criticism made by Ohlin, another objection should be taken into account that may be raised against the calculations by Keynes. This objection is that Keynes has overlooked the fact that the payment T leads to an increased income of foreign countries, resulting in an increased dexnand for export products from the paying country. Thereby exports already increase a little, even without a reduction in their price. Ohlin is even of opinion that consequently a reduction of prices is not at all necessary, and thinks that accordingly the transfer problem does not exist. This conclusion is wrong, in our view. The increase in the demand which arises in consequence of the increase of income T is only a small fraction of T, if there comes no change in the price relation between home and abroad. For a rise of income is spent first and foremost on home-made products and only for a small part on products of other countries, among which the paying country under consideration is only one. The fraction of T which is spent on products of the paying country will approximately equal the relation between its exports U‘ and the total income of the foreign countries F* and this relation is a figure far below i. Therefore our results will change only very little, if we do take Ohlin’s criticism into account. Appendix 111 SOME NON-ECONOMIC CONSIDERATIONS WITH REGARD TO ANNEXATION BY THE NETHERLANDS OF OERMAN TERRITORY (CF. CHAPTER Vil) As was observed already in chapter VII, some proposals have been launched in the current year inside and outside our country concerning an enlargement of Dutch territory at the expense of Germany. In chapter VII we only discussed briefly some economie aspects of these changes of territory, faithful to the plan of this work. It is our opinion, however, that far wider than only economie considerations must turn the balance in judging these proposals; considerations which we can only describe as ‘generally political’; besides economie clements they contain clements regarding the technique of administration, military, social-pedagogic, historicaland other clements, all of which are beyond the domain of the present writer. Hence the best solution can only be found by a cooperation of a large number of experts. Xhe considerations to which we refer have, moreover, a far wider tendency than the argumentation on which the Dutch proposals mentioned above, are mostly based. Xhe issue is not in the first place a question of reparations to the Netherlands for inflicted damage, but questions of the future stability of the whole of European life; perhaps even the saving of our civilization. A wrong solution of the problem howto deal with Oerman territory and the Oerman population conceals perils whose significance rises far above that of reparations; a correct solution can bring benefits which are of far greater importance. The stability of European life and the survival of our civilization have been seriously threatened by the inhuman mentality of national-socialism, particularly towards the Jews, hut also towards the opponents of their own race and in general with regard to the relation between man and the state, and between one state and the other. It is true that some of the national-socialisticnotions are to be considered as a continuation of or a reaction to methods, applied and propagated by the Russian communists, hut nationalsocialism is not exculpated by that: by these facts the responsibility of communism is charged as well. The fundamental question to be considered after the war is: can the German nation as a whole be made responsible for the barbarities of national-socialism, or can only the bearers of that regime be considered responsible ? No doubt the Germans are partly as much the victims of a series of coups d’état as we other nations of the continent of Europe. While they could still utter themselves freely, they were in a considerable majority against nationalsocialism. In order to ascertain the responsibilities, a thorough sociological investigation, under the guidance of first class experts, must be made, an investigation into the way in which the changes in Germany have been brought about, the importance for these of all kinds of institutions in that country and into the possibilities to prevent a similar procedure in future. In connection with this the essential question must be looked into, whether the German nation, under better leaders and with a better organization, is prepared and able to cooperate in a humanistic and stable Europe. This problem cannot and must not be judged by politicians only. The development of sociology has got far enough to make us realize that only experts trained in these matters can give well-founded advice. It is particularly in the United States, but also in Germany itself, that these experts are to be found. The investigation meant above should take place before a final peace-treaty is drawn up. A priori widely different results of this investigation can be imagined. Both the view of old Clemenceau that the Germans are incorrigible and unable to live in a stable and humanistic Europe, and the opposite view that the majority of the Germans were themselves victims of their nazi regime, can be imagined as the result. The measures that will be needed are widely different in proportion as the one or the other result is obtained. If Germany should prove to be willing and able to cooperate, no unnecessarily harsh measures should be taken against a new Germany; then after a period of transition, in which they can show their good intentions it is even possible that a strong Germany is in the interest of Europe. Should it be unwilling or incapable of such cooperation, however, quite different measures may be necessary. If cooperation is possible, a whole complex of measures is imaginable to make it strenger. This complex comprises economie as well as non-economic measures. It will, for instance, be useful to prevent wide-spread unemployment; sensible work will have to be found for ex-service men. Care will have to be taken that no new foei of infection spring up, such as certain unions of extremistic young men. On the other hand we should guard against awakening any kind of sickly nationalism. A division of German territory, however, might exactly further the growth of a nationalistic sentiment. If, therefore, the willingness in Germany to cooperate in a new Europe is strong enough, it is possible that such a division would exactly act in the wrong way. But is may also be otherwise; if Clemenceau should be right after all, a division may have a beneficial effect. What is essential, however, is that it is not the question whether the Netherlands require certain damages that is of paramount importance, but, as we said before, the much more important question how Europe is to be stabilized for the future. Also for Holland this latter question is of much greater importance. It is greatly to be hoped that those who, in this and other countries, will have to decide in these matters, will be well aware of this. We now need an internationally justified plan, well thought out in every respect, and no dilettantism prompted by temporary national interests.