flptili STATE SOCIALISM PRO AND CON l'!.!:! fH.l^wll.'IMiJ ll illill^ OJorttcU UttivjctsitH ffithrata 3tl)artt. Nmb fork BENNO LOEWY LIBRARY COLLECTED BY BENNO LOEWY 1854-1919 BEQUEATHED TO CORNELL UNIVERSITY WlAt-S * "« li^« UAlb UU& FEB-6l94Btt \ Cornell University Library HD3611 .W21 olin 3 1924 032 455 200 The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924032455200 STATE SOCIALISM PRO and CON OFFICIAL DOCUMENTS AND OTHER AUTHORITATIVE SELECTIONS— SHOWING THE WORLD-WIDE REPLACE- MENT OF PRIVATE BY GOVERNMENTAL INDUSTRY BEFORE AND DURING THE WAR EDITED BY WILLIAM ENGLISH WALLING AND HARRY W. LAIDLER WITH A CHAPTER ON MUNICIPAL SOCIALISM by EVANS CLARK NEW YORK HENRY HOLT AND COMPANY 1917 i CoptribhT, 1917, HBNRY HOLT AND COMPANT FabliBhed May, 1917 ™E OUrNN i BOOEN CO. PRESS RAHWAV, N. J v./ PREFACE The tendency toward collectivism is probably the most por- tentous movement of the twentieth century. Despite its impor- tance no book has heretofore been published in the United States dealing adequately with this subject. The two admirable though exceedingly brief English publications, Emil Davies' Col- lectivist State in the Making and the Fabian Research Bureau's State and Municipal Enterprise, a supplement of the New Statesman, are the only attempts thus far made to give a comprehensive idea of the extent and purport of collectivism in Europe and America. The present volume differs from these studies in that it is primarily a source book, presenting authorita- tive selections either written by experts or selected by experts from official reports, and is not in any way an expression of the personal views of the editors. The book is in no sense a brief for State Socialism. The editors are well aware of many of the inadequacies of the present governmental industries and of other economic activities of governments. The object of the volume is simply to portray the extent of this new governmental phenomenon and to sug- gest its probable future development. It is, of course, impos- sible in a volume of this nature to include a description of all coUectivist enterprises, or to determine to a nicety the proper space to allot to each activity, and we can lay no claim to completeness or finality. The scope of our work will be seen from the table of contents and the number of pages we have been able to allot to each topic. Attention is to be centered rather on the chapters than on the five parts into which the work is divided, purely for the purpose of convenience. This division into parts is meant to be not dogmatically rigid but only suggestive. It will be found that a considerable portion of our space, though not the larger portion, has been given to the United States. "We have not iii iv PEEFACE sought, however, to put American conditions in a leading or central position. In some cases we have given America first or even sole consideration because of her leadership in cer- tain directions. On the other hand, in cases where little or nothing is going on in this country, we have sometimes ignored American conditions. The title chosen, "State Socialism — Pro and Con," should not be taken to mean that the editors have sought to reproduce partizan arguments on either side. Our object has been rather to provide the reader with the most important data, so that he rnsiy be equally free to reach a conclusion for or against collec- tivism. Only in the Introduction have we tried to give a sum- mary of what we regard as the more important arguments. Besides the special editor mentioned on the title page, the general editors were largely guided in the selection of material by consultations with experts, such as H. Parker "Willis, Secretary of the Federal Reserve Board; Harry A. Slattery, 'Secretary of the National Conservation Association; I. M. Rubinow, author of Social Insurance; Carl Vrooman, Assistant Secretary of Agri- culture; Professor E. R. A. Seligman, and W. Jett Lauck, of the Bureau of Railway Economics — ^though the editors alone are responsible for the selections finally chosen. We are also in- debted to J. G. Phelps Stokes, Alexander Trachtenberg, James W. Alexander, Caro Lloyd Strobell, Frederick Kirby, M. Louise Hunt, and other members of the Intercollegiate Socialist Society — upon the initiative of which the work was undertaken. CONTENTS PAQB iii Preface . . ... Introduction : I What la State Socialism? — Relation to "War Socialism" and to the Military State . . vii II State Socialism Before and After the War . ix III State Socialism and Related Governmental Policies: Police Power, " Subsidiary " Enterprises, Regulation, Subsidies, Taxation .... xvii IV State Socialism and Democracy . xxi V State Socialism and Socialism . . . xxvii VI State Socialism and Nationalism . . . xxxvi PART I FINANCE CHAPTER I Central Banks . 3 II Savings Banks 24 III Agbicultubal Banks 42 IV Propeett Insurance .... 60 PART II AGRICULTURE AND THE CONSERVATION OF NATURAL RESOURCES V Land Reclamation . . 69 VI Land Development . 81 VII Agricultural Collectivism . . 93 VIII Ageicuitueal Science 102 IX The United States Department op Agriculture 114 X Leading Bureaus of the United States Agricultural Department . 132 XI Forestry . . . ■ .186 XII Roads 215 XIII Fisheries 227 XIV Water Povfee ... ... 243 V CONTENTS CHAPTER XV XVI XVII XVIII XIX PART III TRANSPORTATION AND COMMUNICATION inteenationat waterways the panama canal Inland Waterways . Shipping Railways . . . . Telegraphs and Telephones FAOIi: 251 264 276 296 341 PART IV COMMERCE, INDUSTRY, AND MINING XX Mining .... 367 XXI Petroleum . . . . . . 381 XXII Government " Monopolies " 392 XXIII Manufacturing 410 XXIV " Subsidiary " Industries 422 XXV Industrial Science . ... 427 XXVI State Aid to Commerce 469 PART V COLLECTIVISM AND THE INDIVIDUAL (as citizen, consumer, producer, and taxpayer) XXVII Public Health and Social Insurance XXVIII National Aid to Recreation XXIX Municipal Ownership XXX The Food Supply XXXI Housing . . . , . XXXII The Taxation of Capital and Industry foe Social Purposes . . Index 487 536 546, 581 607 617 637 INTRODUCTION I. WHAT IS STATE SOCIALISM?— ITS CAUSES— EELA- TION TO "WAE SOCIALISM" AND THE MILITARY STATE The terms "State Socialism" and "collectivism" are em- ployed with several meanings. But they are chiefly used to mean the policy of extending the economic functions of the State. When the larger and more important economic functions of a nation are operated by its government that nation has adopted State Social- ism. When a nation has consistently and deliberately enacted measures leading in this direction, and when the regime of State Socialism is so near that no radical turning aside is probable, that nation may be said to have adopted a State Socialist policy. Is every economic activity of a government to be viewed as a step in the direction of collectivism or State Socialism? Cer- tainly not. Every sovereign government has military and police functions, and these always have an economic aspect. All mili- tary departments produce at least some part of the munitions of war. Most of them produce a large part of their military supplies. A government which changes its policy of producing only a small part of these supplies, and undertakes — as the United States is doing today — to produce a somewhat larger part is merely adopting the usual custom of governments. This is certainly not collectivism. There are also certain purely economic functions which — though they have occasionally, or for brief periods of history, remained in private hands — ^have usually been considered ordi- nary functions of the State, such as the provision of roads, cur- rency, lighthouses. It is true that such functions are more largely governmental now than they were a century or two ago, but this may be taken equally well either as indicating an orderly development of individualistic government or as a de- velopment towards collectivism. vii viii INTRODUCTION Many governmental functions have a mixed character. We must examine each activity from the point of view of its object, and of the method by which it is carried out. Those economic activities only are wholly eoUectivist as are (1) financially sup- ported by government, (2) operated by government, and (3) directed to governmental rather than to private objects. State Socialism means a preponderance of economic activities "of the government, by the government, and for the government." But an economic function may be operated by government, with government money, for the specific purpose of giving a relatively greater strength to private property or private industry, as, for example, nearly all the great land development projects, such as irrigation, etc. Or a business may be operated by government and directed to governmental objects, and yet pay a perpetual tribute to private capital, as when a government operates a railroad, but does not pay off its private bondholders. More- over, the economic operations of government are closely related to one another, as, for example, taxation, loans, and the profits and charges of governmental industries. It is only by first weigh- ing the above-mentioned three aspects of each governmental activity separately and then considering all governmental activ- ities together that we can say whether a government has adopted a State Socialist policy. State Socialism is often confused with the regime of the Mili- tary State. The economic functions of ancient Sparta and Peru, not to mention numerous other instances, were in large part under direct governmental control or operation. But these societies were held together more largely by the sheer coercion of arms than by this economic control. On the other hand, with the development of military technique, i.e., with the growing importance of the industrial aspect of military power, the eco- nomic element of such military societies becomes more pro- nounced. Thus it is probable, in the present war, that even in the Military States there are more persons engaged in supplying armies than there are persons under arms. And when we look at that still more modern branch of warfare, highly developed only by the most advanced commercial nations, namely, sea- power, the disproportion is far more marked. While only 300,000 seamen are in Great Britain's Navy, it is estimated that more INTRODUCTION ix than a million other persons are employed to keep it going, to say nothing of the supply of food and clothing. Military expenditures are not usually considered an element of collectivism; they lead rather to the ancient military state. But they are more closely related to collectivism than to the regime of private property, commercial competition, and political individualism. The same proposition holds true of governmental expenditures through private contractors. Such contractors work for governmental ohjects and are under governmental con- trol. If these two developments — military expenditures and governmental expenditures by private contract — grew up along with the continuation of private capitalism in all other fields, they might, after all, tend to strengthen private industry. But there is developing at the same time an immense amount of collectivism proper, the direct undertaking by the government itself of industrial and social (i.e., non-military) functions. As all these tendencies are working together to-day we may see a very highly developed State Socialism in several countries of Europe within a decade — as soon as the processes of reorgan- ization which must inevitably follow the war will have had a reasonable time to achieve their logical results. It is certain that all the leading nations of continental Europe were advancing steadily in the direction of State Socialism long before the war and that both Great Britain and the United States had begun to move, though later and more slowly, in the same direction — extending the economic functions of govern- ment, taking over economic activities formerly in private hands. If this tendency continues until the larger part of the economic functions of a community are nationalized or municipalized we shall have collectivism or State Socialism. For then a majority of the population will be occupied either directly or indirectly in governmental employments. Indeed, the State Socialist period may arrive earlier. II. STATE SOCIALISM BEFOEE AND AFTEE THE WAR The momentous and almost immeasurable significance of the new State Socialism has been recognized, since the war, by X INTRODUCTION almost all of the world's leading public men. A few examples will be sufSeient to remind the reader of this fact. One of the leading spokesmen for American finance is Mr. Frank Vanderlip, President of the National City Bank. Speak- ing before the National Bankers' Association at the Chicago Bankers' Club, in 1916, Mr. Vanderlip said: " State Socialism in Europe may develop problems the like of which have never concerned our minds. We may have to meet col- lective buying, state-aided industries, forms of government control of ocean-borne commerce, and novel factors in international finance. There may come out of the war changes in the forms of govern- ment that will have profound and worldwide influence." In Great Britain, so conservative a leader of public opinion as the London Times published a series of articles called "The Elements of Reconstruction"— articles later reprinted with an endorsement of Viscount Milner, one of the five war "dictators" of England — which even more definitely acknowledge the trend towards State Socialism. " The bulk of reasonable men in the Empire," say the Times' experts, whom Lord Milner blesses, "have come over to the pri- mary Socialist assertion that food production, transport, all the big industrialism, are matters not for the profit-seeking of private ownership, but for public administration." In Germany the most popular and influential work since the war is said to be Naumann's Middle Europe. The trend towards State Socialism has been strongly evident in Germany for the last half century and has been warmly welcomed by the majority of progressives for many years. Naumann's analysis and conclusions are therefore especially mature and valuable. Our English authorities, just quoted, expect State Socialism to invade only a part of industry, covering perhaps no more than half of industry and half of the people of Great Britain. Nau- mann outlines a State Socialism which would embrace by far the larger part of German industry. He says {Central Europe, English edition, pp. 153 and 155) : • " A willing people with an economic dictatorship voluntarily endured, can do infinite things. The dictatorship was incomplete, for here too previous mobilization was lacking, but it became efEec- INTEOBUOTION xi tive by degrees. What we see around us Is certainly not exactly what, in Karl Marx's phrase, is termed 'the Dictatorship of the Proletariat/ but we are yet reminded of the expression in some respects: a step towards Socialism under the leadership of the government! It is an economic dictatorship of Government Offices advised and supported by those most nearly affected." " That we Germans have glided into this State Socialism, or into this national economic business (for that is strictly what it is), as if it had always been our natural habit — that is what we have learnt about ourselves during this war." " There is in this a certain reconciliation between the economic conception of national citizenship and that of Socialism." The coUectivist tendency has been notable not only in Ger- many but in every country of the world for fully half a century. We have only to mention the strides in municipalization made in Great Britain and even in America to show that these, among the most individualistic of nations, have been no exception. The evidence given in the present volume will show that this trend, if somewhat slackened in municipalities at the present moment, continues in other directions, especially in new activities of the United States government. It may also be pointed out that in the United States we seem to be entering upon an era of agri- cultural collectivism in a number of "Western states, taking as a point of departure, no doubt, similar experipients across the border. In the Northwest the Farmers' Non-Partisan Political League has just captured the State of North Dakota with its policy of State elevators. State flour mills. State cold storage plants. State packing houses, State hail insurance. State- owned coal mines, and a State rural credit system. An organi- zation no less powerful than the National Grange endorsed on November 24, 1916, the municipal ownership of slaughter houses and the establishment of State and Municipal milk distributing agencies. The Non-Partisan League is at present spreading rapidly in eight of the leading states of the Middle West. Finally, it must be recalled that Australia and New Zealand have developed these coUectivist tendencies even more strongly perhaps than has Germany. Let us briefly consider, in a more concrete manner, the col- lectivist activities in the leading countries prior to and follow- ing the outset of the war. xii nSTTRODUCTION Considering, first, the increase of collectivism since the war commenced, we find Germany, which began the war with the greatest amount of coUectivist control, increasing such control on every hand. It has taken entire charge of the leading raw materials, dictated the maximum prices for many commodities, and undertaken the distribution of food. Many municipalities have gone into farming and other productive enterprises. Dr. Edmund Fischer, Socialist member of the Reichstag, in 1915, published an estimate that at that time no less than fifty-five per cent of the total population of Germany received their means of living directly or indirectly from the State. Individualistic England has, temporarily at least, placed a governmental commission in charge of the railroads, shipping, and mines. It has obtained a monopoly over sugar and has fixed maximum prices. It has, through the government of India, monopolized the entire export wheat trade, taking for one year from the grower whatever wheat the government thinks fit at prices which it fixes, shipping it in vessels which the govern- ment provides for sale in London on account. The English government has requisitioned the entire meat supply from Australia and New Zealand for army use and to prevent speculation in prices. It has established a dye research laboratory, expending $500,000 thereon, and has purchased most of the crop of natural indigo. It has doubled the income tax and has passed the first national housing act, appropriating $20,000,000 for the construction of governmental houses. Sidney Webb has this to say about the effect of the war : " To speak only of this country, the war has brought us appre- ciably nearer to the Nationalization of the Railways, Canals, and Coal supply, if not also of merchant shipping. Agriculture will not escape some local and experimental national intervention, for discharged soldiers and otherwise. The government will inevitably be driven to reclaim for collective administration a quite unexpect- edly large proportion of the tribute incomes of rent and interest that the landlords and capitalists fondly thought to be their own. The public control of mobile capital (which will certainly not again be quite free to flow whither it pleases), and 3f such requisites of increased national production as indispensable minerals, the plant and organization of ' key industries ' and ' essential trades,' is evi- dently destined to be greatly increased. Finally, although the gov- INTEODUCTION xiii ernment will long feel poor, the conviction that the nation must augment its virility will lead to a steady development of the Col- lective Provision for maternity, infancy, and the physical as well as the mental training of youth, if only to insure that as small a proportion of the population as possible shall be found to be non-efEective in the hour of national strain. From this point of view, both the prevention of accidents and disease, and the ade- quate treatment of sickness, plainly impossible to the individual, will acquire a new importance. In short, merely a s a means o f nati onal security , the coming generation is going to see a rapid increase m Uollective Ownership and Administration, in Collec- tive Eegulations, in Collective Taxation, and in Collective Provi- sion. But this was defined a quarter of a century ago, as the ' Fourfold Path ' of ' Socialism itself.' " H. G. "Wells in What is Coming? has this utopianized: " I believe that the end of the war will see, not only transit, but shipping, collieries, and large portions of the machinery of food and drink, production and distribution, no longer under the administra- tion of private ownership, but under a sort of provisional public administration. And a very large part of the British factories will be in the same case. Two years ago no one would have dared to prophesy the tremendous rearrangement of manufacturing ma- chinery which is in progress in Britain today." This tendency toward collectivism, augmented during the war, had been steadily going forward for many years preced- ing. The Fabian Eesearch Bureau pamphlet, "State and Municipal Enterprise," published as a supplement to the New Statesman, says: " The population in governmental employment today certainly exceeds the whole existing population of the United Kingdom," declares the Bureau. " Their annual income which we may take as some sort of valuation of their services or product, exceeds the entire wealth production of all the inhabitants of any but the half- dozen richest nations of the world; whilst the capital thus ad- ministered is more than double the entire wealth of the essentially individualist England that welcomed the world to the 1851 exhibi- tion — is as great, indeed, as Giifen's estimate for the entire wealth of the United Kingdom as recently as 1885." The State is being silently transformed from a mere govern- ment of men, in which the exercise of the police power is the xiv INTRODUCTION most important function, into an administration of things, en- gaging in industry and administering extensive services for the use of its citizens. A good method by which the coUectivist wave can be meas- ured is by studying the rate at which the number of government employees has been increasing recently. About 1900 a great stir was made when the number of civil employees of the Federal Government of the United States passed 300,000. In 1915 the number was already 476,000. If we add to these the 200,000 soldiers and sailors we have two-thirds of a million Federal employees. It is more difficult to estimate the number of State and city employees, since a large part of their work is done by contract. But State and city expenditures are approximately twice those of the Federal Government. It is therefore a fact that approximately twice as many persons are directly dependent upon these expenditures. "We may there- fore conclude that approximately two million persons are di- rectly dependent upon governmental expenditures in the United States, out of a total number employed of 30 million. This proportion (nearly 7 per cent) is probably twice as great as it was twenty-five years ago. The distance traversed on the road to State Socialism may be better measured in another way. The Russian government, before the war, received about half of its total income from State monopolies and State domains, the alcohol monopoly alone accounting for nearly one-fourth of the total government income. In 1913 some of the leading sources of State revenue were: Telegraphs and telephones 41 million rubles Vodka 890 " Mines 26 " Bank profits 45 " Railway profits 199 " Rent for domains 41 " (See Statesmen's Year-Booh, 1915.) The Prussian Budget of 1914 showed an income in profits from governmental enterprises, railways, f&rests, mines, and domains (land) of 448 million marks, and the income from taxes was only 523 million marks, thus indicating that approxi- INTRODUCTION xv mately half of Prussia's income is secured from State prop- erties. This total was produced as follows: Eailroads 244 million marks Forests 83 " " Mines 18 " " Domains 16 " " The effect of these State enterprises in Germany is well sum- marized by Elmer Roberts in his Monarchical Socialism in Ger- many (1913) : " The imperial government and the governments of the Ger- man states took 'profits in 1911 from the various busftiesses eon- ducted by them of $283,749,224. Estimating the capital value at 4 per cent ratio, the value of the productive state-owned prop- erties is $7,068,729,600. Eoundly, the governments operate divi- dend-yielding works, lands, and means of communication worth $7,000,000,000, and the goyernments continue to follow a policy of fresh acquisitions. Taking the federated states together, 38 per cent of all the financial requirements for governmental pur- poses were met last year out of profits on government-owned enter- prises. Including the imperial government, a newcomer with rela- tively few possessions, about one-quarter of aU the expenses of the state and the imperial governments for the army, the navy, and for all other purposes, were paid out of the net. profits on govern- ment businesses. Among the takings are no tobacco, spirit, or match monopolies." " Bavaria pays 39 per cent of all the administrative costs from public-owned properties; Saxony, 31 per cent; Wiirttemberg, 38.7 per cent; and Prussia, 47.36 per cent. Prussia, which forms about five-eights of the empire, has a constantly increasing revenue from state-owned enterprises. State-owned Enterprises in Germany (1911) Values Net Incomes Farms $198,122,725 $7,925,309 Forests 730,898,200 29,235,928 Mines 128,907,725 5,116,309 Railways 4,757,579,750 191,943,190 * Telegraphs * Telephones * Express packages 694,816,650 27,792,666 Other works 435,184,900 17,407,476 * These services are government monopolies. xvi INTRODUCTION " Upon no department of industry do any of the state govern- ments lose except upon steamers. The grand duchy of Baden runs its internal navigation lines at a loss of about $15,000 yearly. Saxony, Wiirttemberg, and Mecklenburg- Sehwerin gain on their lines some $7,000 annually, so that on the whole of the state- owned steamer lines there is a loss of $8,000." The French Budget for the years before the vyar, 1911- 1913, showed a revenue from State monopolies and indus- tries, the chief of which was the tobacco monopoly, of more than 200 million dollars, or nearly one-quarter of the total budget. Japan produced one-third of its revenue from monopolies, without including the profits from the governmentally owned railroads. Thirteen out of 48 millions were produced from her monopolies in tobacco, salt, camphor, etc. In fact, the State Socialist trend in industrial and in gov- ernmental finance had gone so far in some countries that they may be said to have adopted a State Socialist policy even before the war. It is somewhat doubtful whether a country like Eus- sia should be included in this category, since the total property of the government was considerably smaller than the national debt, but with a number of other governments the very reverse was the case. Just as the typical individualistic governments, those of Great Britain and the United States, showed national debts considerably larger than their comparatively small govern- mental properties, so governments like Prussia," Hungary, Den- mark, and several others showed surplus assets. Emil Davies in his Collectivist State in the Making, has made a special study of these cases. Davies estimates, on the other hand, that the national assets of Great Britain in 1913 were only 173 million pounds, whereas there was an indebtedness of 750 million, leaving a deficiency of 577 million pounds. Compare this deficiency with the asset value of Prussian State railways, placed by the Prussian govern- ment at 11,633,000,000 marks, a sum almost identical with the British deficiency. France occupied a middle ground. ' Her heavy debt left over from the War of 1870 loaded her with a balance of liabili- ties. But she was to fall automatically into possession of the INTRODUCTION xvii remaining railroads between 1950 and 1960, which would have given her a handsome asset balance. The careful study of the probable development of collectivism in Great Britain and other countries, made by the Fabian Ee- search Bureau,* leads it to the conclusion that, even without the stimulus of the war, collectivism might be expected within a generation to absorb the majority of the population of the world. They declare: " That the scope for extension of State and Municipal manage- ment of industry seems almost limitless ; that even if no more were accomplished in the next thirty years than the bringing under pub- lic administration, in all the countries of the civilized world, those industries and services which are today already being govern- mentally administered in one or other of the countries, the aggre- gate volume of State and Municipal capital and employment would be increased probably five or six fold; that such an increase, with- out adding a single fresh industry or service to those already suc- cessfully nationalized or municipalized in one country or another, would probably bring into the direct employment of the national or local government an actual majority of the adult population; and along with the parallel expansion of the co-operative or volun- tary associations of consumers in their own sphere would mean that probably three-fourths of all the world's industrial capital would be under collective or non-capitalistic administration, whilst three-fourths of all the households might then be enjoying the permanence, the social dignity, the security and the incomes delib- erately adjusted to the cost of living that mark the best examples of State employment. III. STATE SOCIALISM AND EELATED GOVEENMENTAL POLICIES — SUBSIDIAEY ENTEEPEISES — EEGULA- TION— SUBSIDIES— TAXATION The present volume is not prepared as an argument for State Socialism. No effort is made, for example, to claim that the development of the ordinary functions of the Post Office as it has existed for a generation should necessarily be called an illustration in State Socialist progress. Many reasons may be given why the Post Office — in its older functions — is an example * " state and Municipal Enterprise," a Supplement to New Statesman May 8, 1915. xviii INTEODUCTION of collectivism. But the argument to the contrary is almost, if not quite, as valid. Neither is it the intention to claim that all governmental industries subsidiary to conventional and traditional public enterprise are examples of collectivism. The criterion has al- ready been stated. If a government digs coal for its war-ships, this is not necessarily to be taken as an example of collectivism. But if it goes further and uses this coal to regulate coal prices or for industrial activities that have ordinarily been left in pri- vate hands in the recent past, then the governmental mining undoubtedly tends in the direction of State Socialism. -The Fabian Society's study, above quoted, shows that these sub- sidiary governmental industries are already extremely impor- tant. They say : "We place in a category by themselves a whole array of the most varied government enterprises, among which we find the greatest range and variety of manufacturing industry actually pro- ductive of material commodities. We group them together because it is specially significant of the advantages found in the organiza- tion of industry by the consumers of the product that everywhere, in every department — alike in highly evolved capitalist enterprise and in the government service — we find a persistent tendency to pro- duce for its own use, in lieu of purchasing, almost every article re- quired in the enterprise or service in question. Thus, when a large municipality takes to running its own tramway service, it finds it convenient, just as the capitalist tramway company does, to erect its own works and carsheds, generate its own electricity, build and repair its own cars, and even print its own tickets, rather than pay an unnecessary profit. The government administration of railways — in this respect exactly like the most enlightened capitalist direction— leads to the government administration of carriage building works, locomotive engine works, printing offices, whole staffs of painters and carpenters, and engineers of every grade, the manufacture of everything required by the line. When the government builds ships in its own dockyards, it finds it con- venient at the same time to make all the innumerable fittings that are required by a modern battleship, from big guns and electric dynamos down to the netting that keeps off the enemy's torpedoes. Similarly, in the administration of the innumerable institutions of the world— from prisons to infant nurseries, 'from hospitals to uni- versities, from astronomical observations to asylums— it is found convenient and economical, in many cases, to produce for use, in- stead of purchasing to somebody's profit, every conceivable article INTEODUCTION xix of food and clothing, and every imaginable kind of furniture and appliance that is required. And thus we have, on a larger or smaller scale, government mines and quarries and brickworks; government iron and steel and tin and copper works; government tanneries and saw mills and leather and wood works; government flour mills and bakeries, and slaughter houses and distilleries and breweries; government clothing factories and saddlery and boot- making establishments; government furniture factories and scien- tific instrument workshops, and the manufacture, in one place or another, of every conceivable commodity, directly under the con- trol, and for the use of, the consumer himself. Moreover, one gov- ernment department manufactures for another. In England, the Post Office gets the bulk of its mail sacks made by the Prison Department, and even obtains some of its telegraph poles from the Commissioners of Woods and Forests. This is, of course, far more common in other European countries, where the government mines of coal, iron, petroleum, salt, and what not, and the government forests, farms, vineyards, fishponds, and horse and cattle breeding establishments supply the needs of many different departments, and where the government steel works and engineering shops, ship- yards, and leather works, printing offices, and clothing factories aim at executing as many as possible of the government orders for manufactured articles. Finally, we have the further development that, in order to exclude the capitalist, one government will now, occasionally, supply another. The Italian municipal administra- tions engaging in industry have even formed a naltional federation, for purchasing in common the materials they require, for using each other's manufactures, and for utilizing co-operatively their several by-products — a characteristic twentieth-century form of Hanseatic League! The Western Australian government is supplying from its own forests a huge lot of railway sleepers to the Australian Com- monwealth railway department; the government of India supplies the raw opium worked up by the Straits Settlements Government Monopolies Department; both Austria and Hungary regularly supply other governments with salt and tobacco; the Hungarian government lately tendered in competition with the world — as it happened, unsuccessfully — for the supply of locomotives to the Eoumanian government." It is evident that a great many of these governmental activ- ities have the tendency to expand and so to cease being merely subsidiary to non-coUectivist government functions — as most of them still are today. Governmental regulation often proceeds to a point where na- tional or municipal ownership is greatly facilitated and per- XX INTRODUCTION haps made inevitable. In certain special cases we have dis- cussed regulation of this character. Eegulation sometimes begins by merely placing external limits as to prices in an industry, but proceeds gradually to such extensive organization of the industry as a whole, as to facilitate ultimate community man- agement. Illustrations of this kind of regulation may be found in the field of the governmental control of banking and of rail- ways; and also— to a lesser degree— in the technical regulation of industry along scientific lines which is involved in the fixing of "standards," especially for governmental contracts. It is undeniably true that governmental regulation may con- ceivably mark a development of government aid to private in- dustry rather than an early stage in the development of gov- ernmental control. As the editors of the present work have no thesis to prove, we do not undertake to decide this question. "We have been forced, however, to deal with it sufficiently to exclude from the volume that phase of regulation which clearly does not seem to have any close connection with collectivism. On the other hand, we cannot guarantee that we have not in- cluded some instances of regulation which history may show had no intimate relations with State Socialism. In every case of serious doubt we have discussed regulation and left it to the reader to decide in which direction such regulation points. The granting of subsidies by governments to private indus- tries usually implies regulation of a collective sort. In the first place, the mere continued granting of subsidies, if there was any sound economic reason for them in the first instance, indi- cates that the industry is really dependent upon the govern- ment. This being the case, governments ordinarily do not grant subsidies without demanding a certain definite measure of con- trol. If we wish to ask, then, whether a given subsidy has a collectivist character or nrfTwe must first answer this question: Does the element of governmental aid or the element of gov- ernmental control preponderate? When we answer this ques- tion we can say whether the principle of private enterprise or that of governmental enterprise is being r^atively strengthened. In order to throw more light on this problem we have included a few selections, summarizing briefiy the shipping subsidies in the leading countries of the world. INTEODFOTION xxi The question of taxation from the point of view of the stu- dent of collectivism must be handled on the same principles. Taxation is immediately connected with collectivism in one case only, namely: the taxation of private industry or private capital for the b"enefit of governmental industry. If private industry or capital were taxed for the purpose of public roads of su(ih character that these roads immediately increase the profits of private industry more than proportionately to the tax, then this might be regarded as an example of an individualistic governmental policy, rather than of collectivism. On the other hand, if such taxes were used for the purpose of developing the public schools, even the technical and trade schools which fur- nish valuable human material to private industry, this could hardly be regarded as a coUectivist policy, since the benefit of private industry from such expenditures is indirect, slow to materialize, and very uncertain — in view of the fact that the children educated cannot be forbidden to emigrate to other countries than those in which the taxes were paid. A large part, and sometimes a greater part, of the benefit of such expenditures goes to the individuals educated rather than to their future employers. IV. STATE SOCIALISM AND DEMOCEACT It is, perhaps, the prevailing view, since the war, that State Socialism has been chiefly exemplified in Germany, Russia, and other countries with anti-democratic or only slightly democratized forms of government. Any one at all familiar with the experi- ments of Australia and New Zealand will realize that this is not the case. These countries developed their present coUectivist tendency about as early as Germany and have continued it quite as far. They have been equally successful, and the collectivism of Australia is quite as noteworthy as that of Germany, though it is necessarily handicapped because restricted to a consider- ably smaller scale. The extent to which this State Socialism has proceeded is well summed up in a recent article by Elwood Mead in the Metropolitan Magazine, from which we quote the following highly significant paragraphs: xxii INTRODUCTION "We have only to compare the limited governmental activities of this country with those of democratic Australia and New Zealand to realize that it is not political freedom, but our crude and un- workable legislative methods and organization that are most at fault. Popular control in those countries is more direct than here, but there the political side of government has been subordinated to its industrial and social activities. In those countries the Government (State or National-) owns and operates the railways, the telegraph and telephone systems. It owns and operates nearly all street-car systems, all express lines and the letter and parcel posts. It owns and operates nearly all irrigation works and a large number of water works which supply cities and towns. It exercises control over and finances water works operated by the State or by municipalities — almost none are pri- vately owned. The State also owns and operates coal mines, and saw-mills in State forests. This is a recent extension of State activity, arising out of the need of placing a check on the prices charged by coal and timber monopolies. The State owns many of the wharves and docks of the seaports. It owns and operates ship- building yards and cold storage warehouses, thus placing the small producer of fruit, meat, and butter on an equality with the great shippers. It makes contracts with the steamship lines for the transportation of perishable products to Europe. It inspects all shipments of butter and meat and fresh fruit and requires them to conform to certain standards. This is done so that the un- scrupulous shipper may not destroy the market of the reputable one. As a result of this activity, freights have been lowered and service improved until now the Australian producer ships butter 13,000 miles for 1 cent per pound and fresh meat the same distance for three-quarters of a cent, and the owner of a dozen eggs living miles in the interior can transfer them to government cold storage, have them sold in London, and get the proceeds. Australia is three times the distance from London that Eureka, California, is from New York, but the Australian dairyman can ship his butter to London for one-third what it costs the one in California to get his to New York. One of the fields where the credit and co-ordinating influence of our government ought to be exercised, is in the planning and financing of works for municipal water supplies. A study of the Australian system and its results would leave no doubt about this. Here each little town has to plan and finance its system. There the State maintains a body of expert engineers who help to prepare plans and estimates of cost and of revenues n^ded to meet expenses and sinking fund requirements, and when these plans are perfected a_ State bond issue provides the money needed by all the towns and .cities of the State. As a result, there are no commissions to bond INTEODUCTION xxiii brokers, no discounts on bonds, and the interest rate has for many years been only 4 per cent. Only those who have financed water works bond issues of towns with from 2,500 to 5,000 people can fully realize how much the people of Australia save and how much the people of American towns pay as a result of this difference in governmental policy. State forest areas are numerous and widely distributed. New areas are being planted. Coal mines are leased, not sold. Thrift is encouraged by a State Savings Bank, where, in addition to the interest paid, depositers share in the profits. What this means to wage-earners is shown by the fact that nearly one-half of all the people in the Commonwealth are depositors. Out of a total popu- lation of 1,400,000 in the State of Victoria, 735,000 are depositors in the State Savings Bank. Bach State has a comprehensive, gen- erous, and successful system for aiding poor men to buy farms and clerks and mechanics in cities to pay for homes. In the city of Victoria 4,000 families have been able to secure farms in the coun- try, and 6,000 workmen their homes in the city who could never have attempted this without State aid and direction." The best part o fihis State activity is that it has not been hande d down from above like that of socialized Germany; i t has been tiftiated and is mai ntained by the free vole of the people. , 'i|heY have in cdrrg(L-this great r es p oBSibil ity anH heavy ex pense in~T5 e b elief that there can b" ^in rpally froo Rpp jety. no genuine demo c- racy so long as want and misery exist in the midst of abundance." >^ ■ — ■ ^ '■ , But the most remarkable illustration of State Socialist policy in Australia was at the time of the drought in 1914, an experi- ence that continued until after the war. We see through this example that other calamities than war may be equally effec- tive in urging a government into State Socialism. Mr. Mead also gives us an account of this experiment. The drought was one of exceptional severity, so that the people were faced with starvation and economic ruin for the future. The State rail- ways undertook to move the starving stock to other parts of the country where it could secure feed, to provide employment for the farmers and their families on the irrigation works, and, by extending State railway lines and State roads, to finance the farmers who had returned to their home by furnishing hay and grain, in part imported from North and South America. For this purpose "the State chartered ships and transported fifty thousand tons of hay from America over 7,000 miles, spending three million dollars for the purpose." In the meanwhile, the xxiv INTEODUCTION war had begun and it was diiScult to secure the shipping to sell the harvest when it was ready. The government therefore undertook the marketing of the whole wheat crop, involving the purchase of 150 million bushels. On the other hand the summary we produce of the Social- istic attitude towards the Bismarckian State Socialism of Ger- many (see the following section of this introduction) will indi- cate not only that State Socialism in general has no necessary relation to the Socialism of the International Socialist Move- ment, but that the German government adopted it largely through anti-democratic motives. Thus Bismarck explained the German State railroad policy as follows:* " I do not regard railways as in the main intended to be an object of financial competition; according to my view, railways are intended more for the service of traffic than of finance, though it would, of course, be foolish to say that they should not bring finan- cial advantages. The surpluses which the states receive in the form of net profits, or which go to shareholders in the form of dividends, are really the taxation which the states might impose upon the traffic by reason of its privilege, but which, in the case of private railways, falls to shareholders." State Socialism has no necessary connection either with democracy or with Socialism. It is true that if a so-called State Socialist policy is so undemocratic as that of Bismarck, we may decide, on strict examination, that it is not State Socialism at all, but merely the ancient use of the State for the purpose of the ruling classes. On the other hand, if those ruling classes feel sufficiently secure in the control of the State they may system- atically increase its industrial functions and its control over industry without demanding any direct or immediate profit to their private industrial enterprises, i.e., they may adopt a genuine State Socialist policy. They may feel sufficiently secure in other special privileges offered to them by the State, such as subsidized educational opportunities beyond the economic reach of the masses or even of lower middle class (except in relatively rare instances), followed by admission to the enormous and varied Civil Service, which is open to those who have secured * Quoted in Elmer Roberts' Monarchical Socialism in Germamt pp. 11, 12, "' INTEODUCTION xxv such educational privileges. Educational privileges may auto- matically be granted, the most expensive being practically open only to the well-to-do classes, while the next most expensive are almost exclusively open to the upper middle classes, etc. On the other hand, a so-called State Socialist policy under the control of a democratic government consisting of small pri- vate producers, such as that of New Zealand, may be used chiefly as a means of subsidizing these small producers at the expense of the State and other social classes ; this, of course, would mean that this "State Socialism" was being used in order to increase the relative strength of private as compared with governmental industry. But, again, the same policy of extending the economic functions of the government carried out by the same State of small producers might indeed become an example of genuine State Socialism, for the small producers might feel that they were in sufBciently secure control of the government and that their economic status was sufficiently certain so that a satisfac- tory major share in the benefits of government industry would come to them automatically without any subsidy, even in the most indirect form, for it might be their belief that the offices and other emoluments of the State would fall largely into their hands. The Fabian Research Bureau, however, contends that, when all countries are considered, the influence of State and municipal management of industry on the governmental organization of each country, though still very incomplete, seems so far as it goes, to be on the whole democratic, and that, with the altera- tion of function, governments tend to change in spirit, pro- gressively discarding the authoritarian conception of dominion with its correlative of obedience to coercive law; and adopting, instead, the more modern conception of National Housekeeping, with its correlative of conformity to the common rules designed only to secure the common comfort. It also reaches the conclusion that there is a steady trend through the world toward increasing political democracy and that the more a government engages in industrial activities as con- trasted with functions merely of police and national defense, the more essentially democratic does the administration tend to become. XXVI INTEODUCTION The well-known fact is here emphasized that there is by no means as great a range in salaries in public service as there is in private enterprise. The highest salary received by a public official in the United Kingdom, for instance, is $15,000, while the head of the railroad or telegraph department in Germany obtains scarcely as large a reward as a Berlin banker "would think sufficient for his chef or his head gardener." Nevertheless, the public brain worker has several advantages over his brother in private business. In most countries his tenure of position is permanent; his initial salary is compara- tively high, the increases in his remuneration are regular, and he usually receives an old-age pension, etc. The manual worker in public employ, the Bureau admits, is by no means so secure in his job as is the brain worker, though he has somewhat greater security of tenure than has the manual worker in private concerns. Governments, generally animated with the capitalistic viewpoint, have on the whole given him scant consideration, and it has only been since 1888, when the London School Board took a hand, that even the more democratic governments have begun to change their attitude. Generally the manual workers are taken at current rates, although several governments now are establishing a minimum higher than pre- vailing wages. In Germany certain municipalities, with the growth of the Social Democracy, have recently established the rule that their manual workers, after a few years of service, shall be promoted to permanent service and this tendency is growing. Very little democracy in the control of public industries is thus far observed. In the French government printing shop some of the employees who are paid by the piece work, choose their own foremen, select their fellows, take responsibility for discipline and determine the rate of speed, and the method of sharing the profits. This is most exceptional, however, and in many cases all organization among the workers is prohibited. This lack of democracy and of regard for the conditions of labor of the workers— due largely to the clas% control of govern- ments — is one of the things that distinguish most of the collectivism described here from the democratic collectivism which the majority of Socialists are advocating. INTEODUGTION xsvii Of overshadowing importance is the discussion in the report of the utter failure of the governments to adjust their political machinery to the new industrial functions which are being as- sumed to an ever greater degree. " Constitutions," the Fabian report admits, " have grown up according to political circumstances, without regard to the indus- trial functions that the governments now undertake, and have been determined by all sorts of different considerations, dynastic or racial, revolutionary or philosophic. Even where the government is really a democracy, this democracy has been organized to fulfil the aspirations of the people as a whole; it has not been designed to represent the specific interest either of the consumers or of the producers of any of the commodities or services provided by the government." The democratization of governments through collectivism, then, lies rather in the future than in the past or present. V. STATE SOCIALISM AND SOCIALISM Nor should State Socialism or government ownership be confused with the Socialism advocated by the International Socialist Movement. IVlorris Hillquit, the official spokesman of the Socialist Party in America, thus distinguishes gov- ernment ownership or State Socialism, as we usually find it to-day, from Socialism (Socialism Summed Up, pp. 73, 74) : " Government ownership is often introduced not as a democratic measure for the benefit of the people, but as a fiscal measure to provide revenue for the government or to facilitate its military operations. In such cases government ownership may tend to strengthen rather than to loosen the grip of capitalist governments on the people, and its effect may be decidedly reactionary. Simi- larly government ownership is often advocated by middle-class ' re- form' parties, for the main purpose of decreasing the taxes of property owners and reducing the rates of freight, transportation, and communication for the smaller business men. " The Socialist demand for government ownership of industries of a public or quasi-public nature, spring from different motives and contemplates a different system than the similar demands of other parties. TVi p_Sf^pialiat a advocate go vgrnment ownership, pri- marilv for the purpose of eliminating private profits from the op eia:^ tion of public utilities, and conterring the benefits of such indus- xxviii INTEODUOTION tries on the employ ees and consumers. Their demand for national "or nlUliicipal ownership ofTniiirBtries is always qualified by_a^ro- vi sion for the democratic administratio n of such industries an d for the application of the profits to the increase of the employees' pnJYement of tke: service^ ^IFurth^Tinorej^tTrmst be borne in mind that when the Socialist platform declares in favor of government ownership of certain industries, the Socialist Party at the same time nominates candidates for public office pledged to carry out these measures in the spirit of that platform. In other words, what the Socialists advocate is not government ownersh ip under purely capitalist administration, but coIIective_ _aBmership uiider_a_gavetnmeuL— eO^tlL-l'ollyd or aL leaslTsireegly-^nlueBGedJjy political representatives of the working class." The use of collectivism as a form of indirect taxation of the masses of the population is bound to be greatly increased as a result of the v?ar. Not only vrill Russia and Germany, Japan and Prance doubtless continue along this vrell established line, but it is highly probable that Great Britain will nationalize her railroads and perhaps also her mines, largely from similar motives and with a similar policy in view. Already the "ma- jority" Socialists of Germany (those who support the govern- ment in the war) are beginning to advocate State ownership of coal mines with this end in prospect. Both majority and minority (the latter faction has continued openly to oppose the government since the outbreak of the war) prefer that the graduated direct taxes against the wealthy should first be placed as high as possible and that the needed governmental revenue should be raised chiefly in this way. But Cunow and other members of the pro-government faction say that it will be im- possible to pay all the interest on the enormous war debt in this manner without entirely crippling German industry. They do not wish to protect the individual capitalists from high taxes, but they do not care to attack them to the point of seriously weakening industry. The British Socialists of both wings also prefer graduated taxes. But both wings urge even more strongly the nationaliza- tion of railroads, shipping, land, and mines. They do this on the assumption that the British government, while not demo- cratic, is sufficiently democratic to make it certain that the Bis- marckian "State Socialist" policies above referred to cannot be INTEODUCTION xxix followed in Great Britain. But the majority faction (i.e., the Labor Party, which supports the government in the war) fur- ther recognizes, as an additional argument for nationalization, the fact that graduated, direct taxes on the wealthy will prob- ably not produce enough money to pay the war debt. On this point Sidney Webb is reported as saying (in a lecture of Novem- ber 17, 1915) that the taxation of the idle rich class even to the point of extinction would be a benefit to the nation, and that a large measure of such taxation was indispensable. There was no complete alternative, but there was a partial alternative in "Socialism," the national control of alcohol, tobacco, railways, coal mines, banks, insurance, and the investment of new capital. As government ownership is a policy of many years stand- ing in Germany, in which country also the Socialist movement had its earliest development, the historically developed position of the German Socialists will indicate the traditional Socialist view on the question as to when State Socialism is helpful to Socialism and when it is not. We quote from an authoritative article published in Die Neue Zeit in 1913 ("Social Democracy and Government Ownership," by H. Laufenberg) : "Bismarck made public the tremendous scope of his monop- oly plans. The railroad project alone was of vast importance to German parliamentary government. He who believes that it is a question of private or state railroads misjudges the situation entirely, declared Eugene Eichter. ' It is a matter of centraliza- tion for which there is no precedent in all Europe. ' The power of the government derived from the railroads would be trans- ferred to other departments. With the railroad project of the government accomplished, budget control by the Eeichstag would be but idle mockery. What effective criticism could be made of a railroad budget of 800 millions that extended credit to a minister and the power to make loans, exempted him in his financial operations from the consent of the Eeichstag, and limited the authority of the Eeichstag to the approval of laws? "It is true that when the project arose several of the Ehenish social democratic leaders approved of the state ownership of railroads. The second Socialist congress at Gotha also declared itself as a matter of principle in favor of the government owner- ship of railroads, as the private system was creating an unjusti- XXX INTRODUCTION fiable monopoly by means of which the private owners were able to exploit the public at their pleasure. On the other hand, the actual realization of the proposed project would not only grant the Imperial Treasury control over new tracts of public prop- erty, but the government also, once in possession of all rail- roads, would promote chiefly the interests of the aristocratic and military classes, apply the revenue to unprofitable ends, and beyond that obtain a new predominance unfavorable to the masses. For these reasons, the congress was not able to favor the plan. "But Bismarck's plans went far beyond the railroad project. Already at the time of Camphausen's proposed tax bills in 1878, which aside from the introduction of a national stamp revenue, provided for a considerable increase in the tobacco tax, he de- clared, to the amazement of all, that he regarded an increase in the tobacco tax as a transition to a tobacco monopoly. Here also the position of the party was indicated in the resolution of the congress of 1876. Fritzsche addressed the Reichstag on be- half of the party. The proposed tax on weight, he asserted, would strike the poor consumer all the more, as the cheapest grades would be burdened the most and the greatest obstacles ■ put in the way of their manufacture. The monopoly was not a socialistic measure as was being falsely asserted by liberals. ^Government ownership and Socialism were entirely different. Social democracy was demanding co-operative organizations of production and consumption as well as state regulation of the distribution of property. 'We could not expect that the pres- ent government would be able to effect, in a just way, the dis- tribution of that which had been produced in a branch of busi- ness monopolized by the State. Social democracy, on general principles, would have to express itself as opposed to such monopolies for 'the very reason that it desired not governmental but rather co-operative regulation of labor. But that would be an entirely different matter than if we desired to grant to a definite government the sole right of labor contract. We do not wish to put a new employer in place of the" many present employers, and one indeed who could abuse his control over the employees in a most reactionary manner. ' . . . "The point of view of the social democrats was presented INTKODUCTION xxxi next by representative Schuhmacher. The alcohol monopoly would be unsuitable" for essentially limiting the consumption of liquors. 'Under certain conditions, we would even help the present government towards State control, if it were a question of common welfare institutions. But with regard to spirits, if by means of State control it is designed to draw millions upon millions out of the lower classes, we cannot help.' The main speech at the second reading was again delivered by VoUmar. 'After the complete failure of the bill, the chancellor had spoken unusually provokingly against the Reichstag, designating the necessity of looking to the representatives of the people as an unparalleled humiliation and even threatening, if the opposition continued, that the German princes would regret having sur- rendered part of their rights and the "eternal union" of the empire would have to be revised by higher authority. These were not the words of a constructive statesman but rather those of a dictator. Moreover they would have liked to have had the social democrats present the bill. Arguments were not lack- ing which sought to convince me and my associates that the liquor monopoly was something entirely socialistic and conse- quently it was our duty to act in behalf of the same ; and that if we were to do this, we could very well attach our own terms to it. Our terms would be met as far as it was possible to accept them. . . . But my party once and for all cannot be had for such makeshifts. From the very beginning we shall meet the proposals of the government with the greatest distrust, and shall hardly ever be able to accept them, as long as the government opposes us in the way it now does. The social demo- crats will never shake the hand which oppresses the people.' " The Erfurt program (of 1892), to be sure, does not yet take this problem into consideration. The question whether, and in how far, the basis for the co-operative production can be laid during the present system by means of State control, is not touched upon. It contains, on the other hand, several demands, the consequences of which would result in State control. Free dispensation of medical attendance must become a part of State control of medical science, free legal advice must lead from a partial to a complete government monopoly of the whole xxxli INTRODUCTION legal system, and the taking over by the government of all labor insurance must lead to the socialization of the whole in- surance system. The possibilities therefore of a difference in opinion on the question of State ownership are contained in the program itself, as was already apparent in the early nineties at the time of the debate between VoUmar and Kautsky. According to the former's version, as he expressed himself in a speech on the tobacco monopoly, much stress was to be laid on the sovereignty of the State in controlling the whole system of political economy, "so that not only the regulating of the whole relation between employees and employer belonged to the State, but also the taking over of the manufacturing industry under its own management for its own immediate operation. Social democracy, therefore, had no reason to fight against the principle per se of State owner- ship. On the contrary, had not a series of regulations for a grad- ual preparation of a better social organization been inspired by us and finally adopted, which might very well be designated as government ownership." Against this Kautsky 's rebuttal was directed. VoUmar 's statement might very well apply to such interferences by the State as are intended to end the class strug- gle between the bourgeoisie and the proletariat and to bring about social peace and the reconciliation of classes, while an in- dependent and powerful monarchical government ruled over the classes, giving to each its due. In fact no matter how the prob- lem is viewed from the standpoint of legal philosophy, government ownership is possible, for the present, not according to labor's viewpoint, but only according to the bourgeois viewpoint and in capitalistic form. Just as stock -exchange transactions already - separate management from ownership, just so a State monopoly I is the last and to a certain extent the highest form of produe- 1 tion and ownership in the capitalistic system, and by its destruc- jtion of the legality of private ownership in products it truly spreads Socialism effectively. Yet on the other hand it allows interest and rents to remain untouched, thereby not wiping out the basis of class rule but only postponing it. The problem, therefore, resolves itself into a practical question of politics for the labor class, whether in an individual case and in the near future, government ownership of a part of production would or INTRODUCTION xxxiii would not affect favorably the social position and economic movement of labor. The drafts which contained the additional proposals inserted by the Frankfurt faction demanded the complete State owner- ship of all important branches of industry. The government also was to take over all insurance on personalty and realty, as well as all mortgages and realty debts, and the plan advanced by the South German committee proposed the systematic organi- zation of food supply under the progressive regulation of the government (asserting that its authority over agricultural prod- ucts and the disposition of these products would also gradually give the State control of agricultural production). Vollmar's most determined critic, Kautsky, makes a series of proposals of government ownership in his agrarian discussion, as, for exam- ple, State control of hail and cattle insurance, of school, charity and road systems, of medical attendance, of water power and forests, and recommends a series of regulations, for example, the fixing of lease rentals by the courts, the dissolution of estates and hunting preserves, and the general limitation of private rights; all of which would be in preparation for government ownership of all real estate. The social-democratic division of the Reichstag repeatedly supported the idea of government ownership of pharmacies. Likewise they advocated government control of the private in- surance system. . . . Social democracy, furthermore, at the time of the discussion of the bill providing for cattle and meat inspec- tion, advocated that the expense of inspection be taken from the public funds and that an obligatory government cattle insurance system be introduced. . . . Social democracy intervened in the field of transportation in behalf of an expansion of operation by the State and centralization of the provincial monopolies into a central government monopoly. It opposed the subsidizing of ocean steamship lines, which would be of advantage to the stock- holders alone. On the other hand it voted for the bill which gave the government the power to regulate the telegraphs. In contrast to the attitude at the close of the seventies, social democracy favored the taking over of the railroads by the gov- ernment, at the party congress in Mainz (1900). As the trans- portation policy in Germany lacked a uniformity in organiza- xxxiv INTRODUCTION tion and was being conducted without effective influence by rep- resentatives of popular opinion, and with reference to the finan- cial point of view only, and since all relief in transportation was being denied by other methods, a uniform German Transporta- tion policy was proposed for the taking over of the railroads by the government, effecting the overthrow of the administra- tive principle which had been chiefly fostered in Prussia. On the other hand the development of a river transportation sys- tem was advocated only in case of necessity, as there were no reasons for operating the business of the Ehenish-Westphalian industrial magnates. . , . The Potassium Chlorate Law originated in the war of com- petition in the trustified industry. At the time of the failure of the old potassium chlorate syndicate, which was primarily caused by the intervention of American capital, the government attempted to put into operation a compulsory syndicate. The bill which came before the Eeichstag, in January, 1910, was designed principally to give compulsory validity to the syndicate statute. Social democracy could point out in its proposal of complete State ownership which was presented to the commission, that the government had pursued the same aim for Prussia in 1894. But the middle-class parties declared that they would have to reject this proposal on account of the enormous amount of damages involved. The government monopoly proposed by the social- democratic members of the committee was rejected also. The bill accepted, valid until 1925, takes the place of a com- pulsory syndicate. The maximum price for the domestic market, which at the same time represents the minimum price for for- eign sale, has been fixed. In pursuance of a social-democratic proposal, receipts and expenditures would have had to appear in the budget estimate. Social democracy had also proposed a series of resolutions for the protection of labor. For this reason the federal council was to be obliged to demand the mak- ing of rate agreements fixing minimum wages and maximum hours, the schedule of which was to be determined by an appeal commissiou, provided for in the la^. As finally passed, the measure decided only that those manufactories which, in comparison to the average of 1907-1909, had lowered the annual average wage or lengthened the working hours, INTRODUCTION xxxv had to submit for the next year to a proportionate curtailment in profits. It was a tax law which hastened the formation of trusts in the industries dealing with articles of consumption — espe- cially liquor and cigarettes. The same was true of the match industry. The government at the time of the tax robbery in 1909 proposed for a second time a spirits monopoly. Purchase and sale of spirits and in connection therewith the refining and denaturing of it — in fact, the entire commission business — were to be taken over by the government ; on the other hand, the production and further manufacture of that disposed of by the government was to be left to the outside trade. The revenue derived from the spirits tax would have been increased a hun- dred millions annually, while the old dole would have remained in force for the landed proprietors. The project, like all the tax robberies, met with the determined opposition of social democracy. State ownership of the designated industries car- ried with it the danger that the past profits of the manufac- turer would be transformed into, secure State taxes, and, accord- ing to Bismarck's usage, the doors would be opened to usurious practices against the consumer. Yet, on the other hand, gov- ernment control could also serve to unburden from taxes the important necessities of life and to provide for a real widows' and orphans' insurance law. It might happen, as at present is the case with petroleum and threatens to be in the cigarette industry, that the domestic market would fall under the control of foreign capital and the price be fixed. One way or another, social democracy will not reject government control so long as assurance is given that in fixing the price the interests of the consumers will receive due consideration, and that labor organ- ization will not be restricted. The intellectual leaders of the two wings of the party today take the same view. Like Bernstein, Kautsky admits that na- tionalization, and still more municipalization, usually means progress: "In general it can be said that government monopolies present considerable advantages over private monopolies." Kautsky shows how little may be expected from the impend- ing nationalization of certain private monopolies. If the coal mines, for example, were bought out without any confiscation, xxxvi INTEODUCTION the State would have to pay a colossal price. This would force it to continue the present monopoly prices for coal. And it might even have to raise them, for it would have to pay the present market value for the mines, which is based upon the expectation of a still higher price in the future. Now if nationalization were carried through for the express purpose of furnishing additional governmental income, the prices would have to be raised higher yet. "Such an increase of prices would have the same effect as an ordinary tax on con- sumption when placed on a necessity or on an indispensable means of production." " The situation at the close of the war will be of the very kind to increase all the dangerous sides of governmental monopoly and to prevent all its good sides from going into effect. We must cer- tainly expect attempts to introduce governmental monopolies. We shall have to use all our power, if they cannot be prevented, to see to it that their features which are opposed to the interests of labor and of the consumer are restricted." [Karl Kautsky in Die Neue Zeit, March 7, 1915.] VI. STATE SOCIALISM AND NATIONALISM Does State Socialism, hitherto always on a national basis, lead in the direction of nationalism or in the direction of inter- nationalism? State Socialism undoubtedly tends to make of each nation a single economic unit. At the present time, a certain number of the separate economic interests of each coun- try are still international, since the above-mentioned process of unification is still in an early stage. If any nation finally be- comes a single economic unit, it is obvious that the existing international interests will disappear. As private capital would be largely nationalized, this process would nationalize also that part of private capital which is at present more or less inter- national. Thus one-half of our question is readily answered. The effect of State Socialism negatively is to increase the area of national capital and so — automatically — to decrease the area of international capital. INTEODUCTION xxxvii On the other hand, a part of the capital that is being abolished by State Socialism is, in private hands, among the most aggres- sive of the nationalistic forces of the present period. For one of the chief foundation causes of modern international conflicts has been the pressure which big business interests, investing in undeveloped countries, have brought to bear on the govern- ments of their respective lands to dominate these territories politically in order to further such investments. The nationaliza- tion of this private capital can scarcely make it more nationalistic than it is today. On the contrary, such nationalization would remove one of the chief sources of aggressive nationalism. More- over, the capitalistic interests that manufacture armament and favor wars to capture foreign markets do not as a rule pay a large part of the costs of such armament and wars. Even if a war is successful and does not cost too much, so that' it results in temporary economic gain, in some measure shared (especially through the nationalized industries) by the whole nation, these particular private interests lose less and gain more than anybody else. Nationalization in certain industries, then, tends to lessen economic nationalism, namely, in the exporting and armament industries, while in the other industries nationalization tends to increase nationalism — since it is obvious that to give all the people a somewhat larger share in the profits of the nation's business will make many of them more ready to support the nation in its economic struggles against other countries. Does State Socialism set on foot any new economic tendencies leading positively (i.e., without regard to its negative effect on private capital) either in the direction of internationalism or in the direction of nationalism ? In the volume on International Government, published by L. S. "Woolf and Fabian Society (1916), the claim is made that there are already certain ten- dencies — rather feeble — it is admitted, in the direction of Inter- national State Socialism- For example, the railways of the various countries are very intimate and the international trafSc large. Therefore a series of international agreements as to this traffic has arisen which Mr. Woolf suggests may be the nucleus of still further agreements of the same, or of a similar, character. Woolf says {International Government, p. 216) : xxxviii INTEODUOTION When two States with a common boundary have reached the stage of civilization which France and Germany had attained in the last century, complete independence of railway administration is incompatible with the modes of life and the requirements of the men and women who are called Frenchmen and Germans. An imperious Franco-German interest accordingly arises which re- quires the abolition of the national frontier so far as the railway traffic in men and goods is concerned. That "through traffic," under such conditions, should be impossible would be felt to be an absurdity and an anachronism. And this applies to nearly the whole of continental Europe. " Through traffic " becomes an in- ternational interest. But this international interest is not com- patible with many "vital national interests," for it can only be properly served by the internationalization of railway administra- tion and the substitution of international for national government. The first step towards such a substitution was taken in 1878, when an international conference met at Berne. A second con- ference was held in 1881, a third in 1886, and a fourth in 1890. The fourth Conference resulted in the signing of a Convention Internationale sur le transport des marchandises par chemins de fer by nine States — Germany, Austria-Hungary, Belgium, France, Italy, Luxemburg, Holland, Eussia, and Switzerland. The Con- vention internationalizes the administration of railways so far as concerns the transport of merchandise, and effectually abolishes the independence of national administration. This can best be shown by giving some of its more important provisions : (1) The acceptance and transport of all merchandise, other than certain defined class, is obligatory on all railways, provided that the consignor conforms with the requirements of the Con- vention. (2) A uniform system of through transport is established under a "lettre de voiture." Detailed uniform regulations as to the form of the " lettre de voiture," and as to the packing, transport, etc., of certain articles, the recovery and payment of charges, the settlement of accounts between railways, are imposed upon all administrations. (3) The responsibility of administrations for loss or damage is established. The amounts recoverable from railways for delay are fixed. (4) The court competent to try cases is the court of domicile of the railway, but all judgments are executory in all the signatory States. (5) Disputes between railways are, oil the demand of the parties, subject to arbitration of the Bureau. The Convention has thus applied international administration to the transport of merchandise. The results have been so satis- INTEODUCTION xxxix factory that a proposal was soon made to extend the international system to passengers and baggage, and a draft Convention was under consideration when the great war broke out. But in another direction the further internationalization of railway administration has been found to be both necessary and possible. On the Continent modern conditions of through traffic require some uniformity of gauge and rolling stock, and in 1882 a Conference for the " Unite technique des chemins de fer" met in Berne. Two further Con- ferences were held in 1886 and 1907. Conventions have been con- cluded at these Conferences, and have been ratified by nearly all the Continental States, regulating for all railways : (1) The maximum gauge. (2) The construction of rolling stock. (3) The loading and marking of wagons. (4) The type of lock on carriages used in the international service. Woolf presents in further support of his argument the ex- ample of certain navigable rivers which it has been found neces- sary to internationalize more or less. The chief examples are the Rhine, the Danube, and the Scheldt, which were supposedly internationalized in part by the leading European treaties of the nineteenth century. Many others of the world's largest rivers were also covered by various international agreements, including so many of the most important commercial rivers that it is not important to list them. However, we see in the present war that the status of some of these rivers is one of the chief causes of international hostility and of the increasing economic na- tionalism which we observe in all directions. Similarly, Emil Davies, another leading member of the Fabian Society, in his Collectivist State in the Making (1914), gives us examples of the international trading of State enterprises, allowing us to infer that a more rapid development of the same character lies immediately ahead of us. Mr. Davies says : The growth of State monopolies and State manufactures has led, and is inevitably leading further, to a certain amount of inter- national trading. The Post Offices, of course, do -a vast amount of international exchange, and the Universal Postal Union in Berne acts as clearing house. Reference has already been made to the export of the agricultural implements manufactured by the Hun- garian State Railway workshops. In this connection it is interesting xl INTRODUCTION to note that in 1911, when the Eoumanian State Railway adminis- tration called for tenders for a large number of locomotives, the competition was international, offers being submitted by British, American, Belgian, and German manufacturers. Among these tenders was one from the Hungarian State Railway workshops. As it happened, the order went to Germany, but the fact that the Hungarian State Railway workshops are actually competing in this manner with the world's locomotive builders is significant. Inter- national collectivist trading, however, goes further than this. In 1909 the Austrian State tobacco monopoly signed a contract with the Roumanian State tobacco monopoly, whereby the latter under- took to supply the former with 2,000 tons of tobacco annually. The Hungarian State salt monopoly in 1909 contracted to supply the Servian State salt monopoly with no less than 7,000 tcms of salt per annum for 10 years, and this same Hungarian salt monopoly does a large export trade with Russia, West Africa, and Brazil. On the other hand it may be said that, whereas private capitalists often transfer their capital from one nation to an- other, and even change their place of residence, a nation as a whole does not usually invest its capital in a foreign country, unless it is a colony, a political or economic dependency, or an ally whose military and economic strength it is purposed to develop. As an example, the foreign investments of France might be cited. These have usually been placed largely with a view to political considerations, a very great part going to Russia and very little to Germany, Austria, or other political antagonists — other countries being favored largely in proportion to their political and economic importance to France. Similarly, the railway policy of practically all countries where the roads are under governmental control is developed with the idea of encouraging, or practically subsidizing, export business, so as to be able to capture foreign trade from other nations. Such subsidies must of course be paid for in some way by the whole nation making them. For example, we read in Elmer Roberts' Monarchical Socialism in Germamy the fol- lowing summary of the German railway policy: The Bundesrat in railway matters acts \jnder general instruc- tions agreed upon by the federated governments as follows : 1. The advancement of the internal industrial and agricultural production by cheapening the cost of raw materials or equipment for production. INTEODUCTION xli 3. To facilitate the export of German products. 3. To support the trade of German commercial centers. 4. To favor German railway lines against competing foreign waterways and railways. The other countries where railroads are under governmental control have acted similarly. Such subsidies may be considered either as a bounty on exports or as a subsidy to shipping, for it is usually arranged that goods shall be carried on the ships of the exporting nation. Government ownership, or even government control, of ship- ping by means of subsidies and regulations, acts still more evi- dently to intensify the spirit of economic rivalry between na- tions, and consequently increases (inevitably) economic an- tagonism. We have quoted in our section on shipping the criti- cism of the Senate minority opposing the Ship Subsidy bill, showing a clear recognition that govemmentally owned ships would be far .more likely to draw a nation into war over shipping rights than would privately owned vessels. If the shipping of the world becomes even more closely controlled by governments than at present — possibly it will be partly owned and operated by governments — the danger of military conflict will be increased, unless, or until, some new economic organization of the world intervenes by which effective international economic control can be exercised. If government ownership is further extended in the directions indicated by the evidence in the present volume, a very consider- able amount of goods may soon be exported from government factories, as is already the case in Hungary and other countries. But it seems highly probable that such exportations will be sent only to allied or dependent countries until some interna- tional economic organization comes into existence of such a wide- spread character as to dominate the world as a whole. General international organization and control of shipping seems very far away, but it may be pointed out, parenthetically, that there have appeared since the beginning of the war certain limited but very definite and concrete examples of a tendency in this direction. For example. Great Britain has responded to the demands of France and Italy and others of her allies by permitting them to share very largely in the benefits of her xlii INTRODUCTION present rigid governmental control of shipping — which amounts almost to governmental ownership and operation. The present British control is to last only during the period of the war, but we have to note that the Entente Economic Conference (Paris, June 14 to 17, 1916) decided that one of the most important of "permanent measures of mutual assistance and collaboration among the Allies" after the war would be the common establish- ment by their governments of "direct and rapid land and sea transport service at low rates." In fact, a large part of these economic recommendations of the Allies point clearly in the direction of International State Socialism. We may quote : " The Allies have recourse either to enterprises subsidized, di- rected, or controlled, by the governments themselves, or to the grant of financial assistance for the encouragement of scientific and technical research and the development of national industries and resources; to customs duties or prohibitions of a temporary or permanent character ; or to a combination of these different methods. " Whatever may be the methods adopted, the object aimed at by the Allies is to increase production within their territories as a whole to a sufficient extent to enable them to maintain and develop their economic position and independence in relation to enemy countries. " In order to permit the interchange of their products the Allies undertake to adopt measures for facilitating their mutual trade relations both by the establishment of direct and rapid land" and sea transport services at low rates, and by the extension and im- provement of postal, telegraphic, and other communications." There have already appeared some signs of an international economic organization, beyond all question. If this economic in- tegration of the nations develops more rapidly than State Social- ism on a purely national basis, then such State Socialism would be working in the direction of internationalism — but apparently not in any other case. The probability seems to be that we shall have a period of aggressive economic nationalism intensi- fied by nationalistic State Socialism, followed by a gradual de- velopment of economic internationalism, ^t present we are still confronting the former development. Thus the National For- eign Trade Council seeks to arouse the economic nationalism of America by the following accurate summary of the economic INTRODUCTION xliii after-war policies already outlined by the European belliger- ents: [Prom report on " World Trade Conditions After the European War," by National Foreign Trade Council, submitted to the Fourth National Foreign Trade Council, Pittsburgh, Pa., Jan. 25, 1917.] "The present fact is that two European economic alliances have been created, for the war abrogated the most favored nation relation between the powers which are now enemies. If the mem- bers of either the proposed Entente or Central economic alliance seek by differential tariff duties to prefer each other and their respective colonies, a discrimination against the products of the United States will automatically be created. "If special shipping arrangements are carried so far as to artificially group lower rates for Allies than for neutral commerce, the parity of ocean freight charges to and from American ports,, as compared with to and from European ports, which has been one cause of toleration of American dependence upon foreign car- riers, will be disturbed. Co-operation replacing individual effort may be the general industrial result of the war in Europe. " To shorten the period of reconstruction the following policies have been proposed or discussed : " 1. Eebuilding destroyed buildings and factories with govern- mental aid in money and materials. " 2. Supply of necessary machinery and raw material for indus- try by government. " 3. Allocation of labor through governmental employment agencies. "4. Monetary assistance to manufacturers and artisans. " 5. Distribution of seeds, animals, and machinery to farmers. " 6. Eestriction of imports to necessity, and control of shipping in conformity with such policy. " To carry out this program governments will have to make reconstruction loans. To secure best results for the money expended, necessary foreign buying of materials will be done on a national co-operative basis. To rectify their foreign exchanges and secure an income for their industries, independent of the home market, European nations have generally announced their intention to further support the foreign trade of these industries by a program including the granting of rebates in buying raw materials, and for transportation, co-operative exporting by groups of manufacturers and special financial assistance to exporters. Steps already taken indicate the following tendencies: " Exclusion of as much as possible of the profit of the foreign exporter. " Elimination of the necessity of buying raw materials from xliv INTRODUCTION enemy countries and replacement, where possible, of manual labor by mechanical energy and a larger employment of machinery." The only confusion in this statement is that it uses the word co-operation in two senses — (1) the voluntary co-operation of business interests, and (2) collectivism — a tendency that the writers evidently fear, even to the point of avoiding the word. However, the meaning is clear upon careful reading. And even the Foreign Trade Council proposes to combat this collectivism, in the case of shipping, by a counter-collectivism. It proposes to answer economic nationalism by economic nationalism, though it also favors a "bargaining tariff" which is the basis of tariff reciprocity and of economic internationalism. Finally, "State Socialism" has certain indirect but ex- tremely important psychic effects that should also ultimately greatly hasten the development of internationalism. It sup- presses anti-social individualism most thoroughly. In develop- ing the principle of national solidarity, "each for all and all for each," within the nation, it may pave the way for interna- tional solidarity. When the economic basis for internationalism (international trade) will have been sufficiently developed, this psychic preparation may hasten the advent of international State Socialism. PART I FINANCE CHAPTEE I CENTRAL BANKS t A LARGE number of different financial functions are under- taken by banks of various types ; only a few of these functions are undertaken by all banks. It is difficult to say whether gov- ernmental banking before the war had made more progress in the narrow sense of the word, or in regard to certain financial operations related to banking, or in specialized types of banks. We give special attention to savings banks and agricultural banks because governmental progress in these fields has been most ob- vious. But the great central banks of Europe, such as the Bank of England and the Bank of France — though in practice largely restricted (before the war) to banking functions in the narrow sense, together with functions in which they serve as fiscal agents for the government — have a field of potential operations almost without limit. In some directions this potential field was clear in existing pre-war legislation, a summary of which we produce. In other directions additional legislation is necessary — ^though the war has shown that it may easily and quickly be provided — in view of the already enormous power of these banks. Sometimes the power of a government over banking is exerted without the establishment of any definite institution. For ex- ample, the governments of France and several other European nations exercise a strong control over the foreign investments of their citizens by regulating the admission of securities to their •Stock Exchanges. The largest private banks of France, such as the Credit Lyonnais, undertake (separately or together) loans to foreign governments. But they must first secure the consent of the French government — which is controlled by political and military, as well as financial, considerations — or the securities cannot be listed and the French investors will not purchase the loan. Thus the surplus capital of France is nationalized and prevented from following a free international course — certainly 3 4 FINANCE a governmental banking regulation of the first magnitude, and one that largely determines from day to day the policies of the largest "private" banks of France. Perhaps it is unnecessary to remind the reader that the busi- ness operations of central governmental banks, however large, are of secondary importance when compared with the direct control and indirect influence they exercise from day to day over all other banks. The following quotations should be read with this fact in view. It should also be noted that the largest powers of these banks were in most cases only partly exercised — until the war. THE UNITED STATES [Source: The Federal Reserve Board, by H. Parker Willis (Secretary of the Board), pp. 124, 125, 160, 161.] Of the central banking systems, so-called, the French system may be taken as a fair example. In these a central banking insti- tution acts as the holder of reserve money and usually as the sole issuer of notes for a nation. Such a central institution may have a good many branches or may not. It usually deals, however, in the largest measure, with other banks, leaving these banks to do the business with individual customers. This latter point is not a universal characteristic, as seen in the case of the Bank of France, which loans to individuals in very small amounts. Whether it does its work through direct loans to individuals or through intermedia- tion of other banks, however, central banks of the kind already spoken of directly influence the market and practically control rates of interest. [Our italics.] .... In two important respects the Federal reserve bank organiza- tion is peculiar. These are as follows : (1) Owing to its close relation with the government each Fed- eral reserve bank has a special officer representing the government, who is chairman of its Board of Directors and who is designated as " Federal Eeserve Agent." (2) Every Federal reserve bank confines its discount business to other banks, a fact which at once alters the type of organization of the institution in some important particulars. We may now survey the outline of orgajjization of the Federal reserve bank as such. The fundamental control of the institution is in the hands of the Board of Directors, consisting of nine mem- bers. This Board of Directors consists of three classes, each con- CENTRAL BANKS 5 taining three members and each class being designated by a letter, as A, B, and C. Class C directors are nominated by and represent the government. Class B directors are business men not engaged in banking, who are presumed to represent in a general way the industrial, commercial, and agricultural interests of the district in which the bank is situated. Class A directors are directly repre- sentative of the banks. Both Class A and Class B directors are chosen by the banks, and for the purpose of this selection the banks in each district are divided into three groups : group one chooses one Class A and one Class B director, group two the same number, and group three the same. In group one the voters or electors are the banks of large capitalization, group two those of medium capitaliza- tion, and group three the small banks. The chairman of each Board of Directors divides the banks of the district into these three groups in such a way as to place an approximately equal number of banks in each. Bach bank has one vote, irrespective of its size. The group division, however, prevents the small banks from elect- ing men who represent them exclusively and insures approximately equal representation to banhs of somewhat greater size. [Our italics.] [SouBCE: Address of W. P. G. Harding, Governor Federal Reserve Board, before the Forum of the New York Chapter, American Institute of Banking, N. Y., Nov. 1, 1916, pp. 3, 6, 8, 9, 13, 14.] An intelligent treatment of this subject seems to require a brief review of our banking history during the past two years and an analysis of present conditions, out of which reasonable deductions as to the future may be based. The fundamental principle of the Federal Eeserve Act is the mobilization, in a scientific and effective manner, of the banking reserves of the country, not in one central reservoir, but in a number of them, distributed throughout the vari- ous sections. This process has not yet been fully accomplished, but is approaching completion. The next installment of reserves, which is the last that will be obligatory, and which will amount to about $60,000,000, will be paid in on November 16. According to the most recent statement, October 28, 1916, the twelve Federal Eeserve Banks held $407,955,000 in lawful money, while the national banks of the reserve and central reserve cities, on September 13, 1916, held $515,690,000. These last named institutions held $671,768,000 ac- cording to the last statement issued before the organization of the Federal Eeserve Banks. There is, of course, no basis for comparison between these figures and those applicable at the present time, owing to the great industrial and financial changes which have taken place 6 FINANCE during the past two years; and, as bank deposits are subject to the influence of external changes of various kinds, it is obvious that any attempt to isolate the effect of the establishment and operation of the Federal Keserve System upon these holdings of cash would be useless. We can, however, say with certainty that there is to-day a co-ordinated and efficient system of reserves available for the ordi- nary requirements of member banks, as well as for their necessities in times of stress. Methods have been provided whereby legitimate and conservative borrowers all over the country can obtain accommodations at rates approximating a standard on the kind of paper they have to offer and are relieved of the necessity of paying more in the proportion that they are able to demonstrate their own responsibility and solvency. The advantage of this reduction has been most appreciated by the small business man, who in the past may have been unable to obtain the rate of interest to which the character of his paper and his own personal standing, efficiency, and general condition of solvency entitled him. Besides meeting the needs of the general public and of the business community, the Federal Beserve System has rendered also a direct and important service to the banks them- selves, not only in making it safer for them to do business, but in actually extending their field of operations and their avenues for profit. Three distinct lines of business are now open to national banks from which, before the passage of the Federal Eeserve Act, they were absolutely barred. As you are well aware, national banks are now permitted to do an acceptance business, making their ac- ceptances either against transactions iiivolving the importation or exportation of goods, or against certain domestic transactions, as provided by the Federal Eeserve Act and defined by the regulations of the board. Then again, wherever not contrary to State law, na- tional banks may, by conforming to certain regulations, exercise fiduciary powers, which functions were formerly forbidden them. Finally, the new law has enabled a large proportion of the national banks to make loans under safe and conservative conditions upon real estate, not only upon farms, but also for periods not longer than 12 months upon other kinds of improved property. We are no longer a debtor nation. Our current obligations to Europe were liquidated many months ago. We have already absorbed the larger part of the American securities that were held in Europe when the war broke out, and our advances to other countries now exceed $1,900,000,000. Furthermore, our exports to foreign nations are now in so vast a volume as to render full and immediate settle- CENTEAL BANKS 7 ment in gold impossible. We are absorbing every month more than the world's total new production of gold, and we are receiving large sums from the hoarded stocks of nations now debtors to us. But even with this, large credits are necessary to sustain our exports. Through force of circumstances the United States is now the world's banker and must continue to act in that capacity for a long time to come, and if we make proper use of our opportunities we can remain permanently at least as one of the bankers of the world. We must expect to be called upon abroad to render much of the service that has hitherto been performed very largely by England in extending those short-term credits which the world requires in the production and transportation of all kinds of goods. The nature of the accep- tance business is such that it can best be carried on by those coun- tries that have the lowest discount rates and have the freest and most reliable gold markets. Hitherto the country enjoying these facilities to the greatest degree has been England, and partly for that reason and partly be- cause of her command of the carrying trade she has been able prac- tically to monopolize the short credits which her bankers had handled through the medium of acceptances. While we have an opportu- nity now to extend our business with all nations, including partic- ularly those neutrals whose accustomed credit facilities have been cut ofE or curtailed, the services we render must necessarily redound to our own benefit from a banking standpoint, not only because the extension of proper credits is a sound and profitable business, but also because the establishment of an acceptance market, made up of traders and bankers from all over the world, will bring to us a new element of great strength. The proper financing of our foreign trade ought to prove a most efficient means of protection for us, whenever the golden tide now fiowing so strongly toward our shores begins to ebb and finally to turn the other way, running out perhaps so fast as to reveal rocks and shoals whose existence we had forgotten. Under such circumstances, by the simple process of raising our dis- count rate we should he able to force foreign debtors to finance them- selves elsewhere and to pay us off. [Our italics.] The law empowers the Federal Eeserve Banks, with the consent of the Federal Eeserve Board, to open and maintain banking ac- counts in foreign countries and to appoint correspondents and estab- lish agencies in such coimtries for the purpose of purchasing, sell- ing, and collecting biUs of exchange, and to buy and sell with or without their indorsement, through such correspondents or agencies, biUs of exchange arising out of actual commercial transactions hav- 8 FINANCE ing not more than ninety days to run, and which bear the signature of two or more responsible parties. The business of the Federal Eeserve Banks as fiscal agents for the United States Government is not yet fully developed. So far they are acting in a limited way only as fiscal agents, but in the future financial operations of the United States Government the Federal Eeserve System will stand ready to discharge the duty of providing for issues of bonds, arranging for the retirement and re- funding of existing indebtedness, and such other financial operations as may be necessary from time to time. Its functions in the handling of routine business for the United States Treasury and the subtreasuries will no doubt be extended, as the Federal Eeserve Banks become better able to render this service. One important result of the clearing system has been to bring the member banks into more frequent and intimate contact with their Federal Eeserve Banks, so that the Eeserve Banks are now re- garded more and more as active and potential factors in the banking field and not so much as storage reservoirs for use only in emer- gencies. Very largely, no doubt, because of the abnormally low rates for money that have prevailed during the past 18 months, which have made it difiBcult for member banks to make satisfactory earnings, there has been a feeling in some quarters that the Federal Reserve Banks are dangerous competitors, actual or potential, of their own member banhs, but with the development of our foreign trade and with the constantly increasing activity of our domestic business, this feeling is gradually passing. [Our italics.] [Souece: "Bank of England is Named Agent by U. S. Reserve Board." Newspaper Dispatch, Washington, Dec. 25, 1916.] The government to-day took its first formal step through the Federal Eeserve Board, looking to the establishment of financial connections abroad through which it hopes to strengthen the posi- tion of the United States as a world banker and to maintain the American dollar as the standard of exchange. Under a section of the Federal Eeserve Act, the board authorized the appointment of the Bank of England as a foreign correspondent of the Federal Eeserve Bank of New York, and announced that the eleven other reserve banks might participate in the agency relations. ^ Connections with other governmental institutions, such as the Bank of France, is foreshadowed, officials say, by to-day's action. The Bank of England is the first foreign correspondent whose ap- CENTEAL BANKS 9 pointment has been authorized since the operation of the new finan- cial system in this country. In a statement announcing its action the board said: " In granting the authority to establish this agency the board has authorized the Federal Eeserve Bank of New York to maintain accounts for or with the Bank of England, so that operations both in England and in the United States are possible." It is understood that authorization of this appointment is a part of general plans for establishing financial connections that will strengthen the United States as a creditor nation in the commercial competition which probably will result when the war closes, and to provide a ready means to offset any tendency on the part of for- eign bankers to withdraw the huge supply of gold accumulated here during the war. The action marks a radical departure from the previous finan- cial policy of the' country, inasmuch as it places the governments of the United States and Great Britain, for the first time, in direct, continual financial relationship. The first effect, it is thought, will be noticeable in transactions which might otherwise involve the exportation of gold from this country, as the connection with the Bank of England will afford a channel through which American banks can readily purchase British notes and securities to meet any tendency toward gold ex- portation. It also will tend, officials believe, to bring about a better feeling and understanding between the bankers of the two countries. [SouKCE: OflScial Statement of Federal Reserve Board, March 8, 1917.] From statements which have been published from time to time, both in the American and foreign press, there appears to be a misunderstanding of the attitude of the Federal Eeserve Board with respect to investments in foreign loans in the United States. On more than one occasion the board has endeavored to remove this misunderstanding. So far from objecting to the placing of foreign loans in the American market, it regards them as a very important, natural, and proper means of settling the balances created in our favor by our large export trade. There are times when such loans should be encouraged as an essential means of maintaining and protecting our foreign trade. The board has already stated that its announcement of Novem- ber 28, 1916, did not deal with the finances of the credit of any 10 FINANCE particular country, but only with banking principles which it seemed desirable to emphasize under the conditions existing at that time. The objection then made by the board was to the undue employ- ment by our banks of their funds in the purchase of foreign loans and not to the merits of foreign loans as investments. The board was then, and is now, of the opinion that the liquid condition of our banks should not be impaired through undue or unwise use of their resources for investment operations. The position of the board with respect to this principle has not changed. It still takes the view that foreign borrowings should appeal primarily to the investor and not involve the use of bank- ing resources beyond the limits of sound practice. In view, however, of existing conditions, especially as they affect our foreign trade, the board deems it desirable and in the public interest to remove any misconception that may be left in the minds of those who read the statement issued on November 28, 1916. Since that date the country's gold reserve has been further materially strengthened and supplies a broad basis for addi- tional credit. The board considers that banks may perform a useful service in facilitating the distribution of investments, and in carrying out this process they may, with advantage, invest a reasonable amount of their resources in foreign securities. So long as this does not lead to an excessive tying up of funds and does not interfere with the liquid condition of the banks, there cannot be any objection to this course. The board did not, of course, undertake to give advice con- cerning any particular loan. It desires, however, to make clear that it did not seek to create an unfavorable attitude on the part of American investors toward desirable foreign securities, and to emphasize the point that American funds available for investment may, with advantage to the country's foreign trade and the domestic economy situation, be employed in the purchase of such securities. THE BANK OF ENGLAND [SotmcE: National Monetary Commission, Senate Document No. 492, 61st Congress, 2d Session. The English Banking 8vstem, by Hartley Withers, pp. 3-22.]' The distinctive functions of the Bank of England consist in its acting as: 1. Banker to the British Government. CENTRAL BANKS 11 2. Banker to the joint stock and private banks. 3. (a) Sole possessor of the right to issue notes which are legal tender in England; (6) sole possessor, among joint stock banks with an office in London, of the right to issue notes at all. 4. Provider of emergency currency. 5. Keeper of the gold reserve for British banking. 6. Keeper of the gold reserve which is most readily available for the purposes of international banking. These various functions iit into and supplement one another, and though their diversity is sometimes pointed to as throwing too much responsibility onto one institution, it in fact enables the Bank to carry out its duties with extraordinary ease, and with the least possible disturbance to the financial community. By the fact that it keeps the balances of the other banks, the Bank of Eng- land is enabled to conduct the payment of the interest on the British debt largely by transfers in its books. By the fact that it keeps the balances of the government and has the monopoly of the legal-tender note issue, the Bank has a great prestige in the eyes of the general public, which it communicates to the other banks which bank with it. There is an impression that the government is always behind the Bank, and that the Bank is always behind the other banks, and this feeling has certainly done much to foster the confidence of the British public in its banking system. A credit in the books of the Bank of England has come to be regarded as just as good as so much gold; and the other banks, with one exception, habitually state their "cash in hand and at the Bank of England" as one item in their balance sheets, as if there were no difference between an actual holding of gold or legal tender and a balance at the Bank of England. It thus follows at times when an increase of currency is desirable, it can be expanded by an increase in the balances of the other banks at the Bank of England, since they thus become possessed of more cash to be used as the basis of credit. Examining these functions of the Bank of England in closer detail, we find that its first and most obvious one, which originally brought it into being, of financing the British Government and acting as its banker, is now perhaps its least difficult and impor- tant duty. It also, when the government has to borrow to a greater extent, manages its issues of treasury bills, or any loan operation that the government may have to undertake, such as the creation of fresh debt in time of war, or the periodical borrowing recently necessitated by the requirements of the Irish land-purchase scheme. 12 FINANCE The variations in the amount of the government's balance at the Bank of England are a question of great importance to the out- side money market, because when this balance is big the result is that a large amount of money is in the control of the Bank of England, and the resources of the outer market are thus curtailed. The second of the Bank of England's distinctive functions— its acting as banker to the rest of the English banking community- is the one which throws upon it its most serious responsibilities and gives it most of its actual power and ease in working. The government gives it prestige in the eyes of the multitude, which considers that governments are omnipotent; the other banks give it the power of providing emergency currency by making entries in its books, and so acting as the easily efficient center of a bank- ing system in which elasticity and the economy of gold are car- ried to a perfection which is almost excessive. Nevertheless, it pays heavily for its apparently privileged position as bankers' bank [Our italics.] At first sight it would appear that these customers, keeping a regular balance of twenty-odd millions, which varies -little and on which the Bank of England pays no interest, were a source of comfortable income and no anxiety to it. But in the first place it is obvious that a liability which is regarded as cash by the rest of the banking community requires special treatment by its custodian, and in practice it is so specially treated that the Bank of England maintains a proportion of cash to liabilities which is fully twice as high as that of the strictest of the other banks. This proportion rarely is allowed to fall below 33 per cent and gen- erally ranges between 40 and 50 per cent, and it need not be said that this high level of cash holding tells heavily on the earning power of the Bank of England. Moreover, it is its position as bankers' bank that exposes the Bank of England to the responsi- bility of maintaining the gold reserve for English banking and being prepared to meet, in gold, any draft on London that any one abroad who has acquired or borrowed the right to draw wishes to turn into metal to be shipped to a foreign country. Much more important is the Bank of England's duty as cus- todian of the gold store for international banking. London is the only European center which is always prepared to honor its drafts in gold immediately and to any extent. [Our italics.] The Bank of France has the right to make payment^ in silver, and uses it by often charging a premium on gold, sufficient to cheek any demand for it; and in other centers measures are taken which make appar- ently free convertibility of credit instruments optional at the choice CENTEAL BANKS 13 of the central bank. Consequently the Bank of England has to be prepared to meet demands on it at any time from abroad, based on credits given to foreigners by the English banking community, and it has thus to observe the signs of financial weather in all parts of the world and to regulate the price of money in London so that the exchanges may not be allowed to become or remain adverse to a dangerous point. The difBculties of this task are increased by the extent to which the English banking community works independently of it, by accepting and discounting finance paper, and giving foreigners credits at rates which encourage their further creation. For the low and wholly unregulated proportion of cash to liabilities on which English banking works, enables the other banks to multiply credits ultimately based on the Bank of England's reserve, leaving the responsibility for maintaining the reserve to the Bank. This it does by raising its rate when neces- sary, and so, if it has control of the market and its rate is " effec- tive" — raising the general level of money rates in London. When its rate is not effective, the Bank of England finds itself obliged to intervene in the outer money market — consisting of the other banks and their customers — and control the rates current in it. This it does by borrowing some of the fioating funds in this market, so lessening their supply and forcing up the price of money. By means of this borrowing it diminishes the balances kept with it by the other banks, either directly or indirectly — directly if it borrows from them, indirectly if it borrows from their customers, who hand the advance to it in the shape of a check on them. The result is that so much of the "cash at the Bank of England," which the English banking community uses as part of its basis of credit, is wiped out, money — which in London generally means the price at which the bankers are prepared to lend for a day or for a short period to the discount houses — becomes dearer, the market rate of discount consequently tends to advance, the foreign exchanges move in favor of London, and the tide of gold sets in the direction of the Bank of England's vaults, and it is enabled to replenish its reserve or check the drain on it. Finally, the position of the Bank of England, and its relation to the English money market, as a local and insular affair, may be summed up by saying that the Bank, by means of the prestige which makes a credit in its books as good as gold, enables the bank- ing community to expand credits and make check currency as long as it is prepared to lend credit. And the extent to which it is pre- pared to lend credit is only regulated hy its own discretion and 14 FINANCE consideration for the proportion between its cash and liabilities. [Our italics.] Money in England is thus to a great extent a convention based on the assumption by the community that a credit in the Bank of England's books is as good as gold. This assumption the Bank cultivates by means of the high proportion of cash that it keeps in normal times. At the same time the Bank of England is obliged by the pressure of external conditions frequently to regulate the price of money in London. This necessity for regulation is a fact which is only dimly grasped by the London money market as a whole, which frequently resents the operations of the Bank of England and contends that the price of money ought to be left to the natural laws of supply and demand. The position of the London money market, however, as the only one in which gold can at all times be obtained, to any extent and without question, clearly makes some regulation of the rates at which it is prepared to work inevitable. None of the various items which compose the marhet can be expected to con- duct their business with a view to the necessities of the marhet as a whole. [Our italics.] If a banker wants to increase his holding of bills, he naturally does so at the market rate, without considering whether his doing so is likely to turn the foreign ex- changes against London and so cause a demand on London for gold. Consequently the exigencies of their daily business, and the strong competition between them, impel the banks and discount houses to do business at rates which may sometimes be dangerous to the general interest, and it is thus clearly necessary that some institu- tion with a commanding position at the head of the machine should occasionally intervene and regulate its operations. GEEMANY [SotJBCE: National Monetary Commission, Senate Document No. 508, 61st Congress, 2d Session. " Miscellaneous Articles on Ger- man Banking," 1910, pp. 15 to 23, inc.] The German Eeichsbank came into being on January 1, 1876, absorbing at the same time the Bank of Prussia (note bank). The tendency, which had existed from the beginning, to cen- tralize the note issues more and more in the Eeichsbank, was fur- thered in a great measure by the provisi^ju which authorized the Bank to establish branches all over the Empire. As far as its legal organization is concerned, the Eeichsbank is neither a government institution proper, nor a mere private cor-- CENTEAL BANKS 15 poration. The capital, divided into shares, has been furnished by private individuals, and the shares are dealt in on the exchange; they circulate indorsed in blank ; the Eeichsbank acknowledges only those as share ovmers whose names are registered on its books. The shareholders, however, have no influence whatever on the man- agement and administration of the Reichslanh. [Our italics.] The Eeichsbank is under the supervision and direction of the Imperial Government, which, however, is not liable for its business results. The direction is exercised by the Imperial Chancellor (appointed by the Kaiser, without contirmation by any other governmental au- thority) and under him by the Eeichsbank directorate. The gov- ernmental supervision is exercised by a bank curatorium, composed of the Imperial Chancellor and four other members, one of whom is named by the Emperor and three by the Federal Council (the majority of which body is appointed by the Kaiser without con- sultation) . The Eeichsbank directorate is the managing and execu- tive board, representing also the Eeichsbank in dealings with third parties. The president is the head of the directorate. The presi- dent, the vice-president, and the members of the directorate are appointed by the Emperor upon the recommendation of the Fed- eral Council. The shareholders are represented by the central com- mittee, which is, however, essentially an advisory rather than a decreeing board. At the principal branches of the Eeichsbank advi- sory subcommittees have been formed, composed of local share- holders. The Empire participates in the profits of the Eeichs- bank. At the expiration of the first period of 15 years, the Empire deemed it sufficient to demand a larger share in the net profits of the Eeichsbank. January 1, 1901, was the second term at which the privilege of the Eeichsbank might have been withdrawn. Neither at that time did the government deem it advisable to make fundamental changes in the charter of the Eeichsbank. The com- bination of private capital and state management was found to work so well that the government oifered decided opposition to all efforts toward nationalizing the Eeichsbank through the acquisition of the share capital by the Empire. But in view of the experiences of the past decade and the progressive economic development of the coun- try it was deemed advisable to strengthen the given structure by increasing the operating funds of the Bank and to devise means of rendering more effective its discount policy as against that of the private banks of issue. Beginning with January 1, 1901, the Eeichsbank must not dis- le FINANCE count below its ofBeial rate whenever this rate has reached or ex- ceeded four per cent. Beginning with this date the private note tanks are not 'per- mitted to discount below the official rate .of the Eeichsbank when- ever the same has reached or exceeded four per cent. [Our italics.] Moreover, their rate must not be more than one-fourth of one per cent below that of the Eeichsbank whenever this rate is less than four per cent. In case the Eeichsbank discounts at a rate below its official rate, at a so-called "private rate," the rates of the private note banks must not be more than one-eighth of one per cent below that rate. In ease a private note bank acts contrary to this pro- vision, its privilege of issuing notes may be withdrawn by judg- ment of the court. EUSSIA (Before the Revolution) [SouBCE: Senate Documents, Vol. 37, 61st Congress, 2d Session, 1909- 1910. " Organization of Banking in Russia," by Professors Idelson and Lexis, pp. 18-23, 36.] The main provisions of the new statutes of the Imperial Bank, which received the imperial sanction on June 18, 1894, are as follows : Any deficit that the bank may sustain is to be covered by the surplus, and in case the surplus is exhausted the amount is to be charged to the imperial treasury, which, on the _ other hand, is to be credited with the amount of the net profit remaining after the above-mentioned percentages have been assigned to the bank and after deduction of bonuses and pensions to employees. The bank is under the direct control of the minister of finance, who is at the head of the management. The central administration consists of a council of the bank, a governor, and two deputy governors. The bank is allowed to take notes not resting on a consummated commercial transaction but put forth with reference to the pro- spective needs of some mercantile or industrial undertaking. The rate of discount has to be fixed at least once every quarter of a year, and it may vary in the case of different kinds of business and different localities. The minister of finance may exceptionally grant an extension in the case of protested or non-protested bills or leave to pay in installments, but only if a mortgage or other pledge deemed sufficient by the council ^ the bank is offered as security. The bank grants so-called industrial loans against promissory notes bearing merely the signature of the debtor, such notes being wi CENTEAL BANKS 17 secured either by mortgages on real estate, by mortgages on the appurtenances of farmed lands or of industrial plants, by the guaranty of third parties, or by some other collateral which the minister of finance deems sufScient. When the amount of the loan does not exceed 300 rubles the managers of the branch office con- cerned may resolve to grant the credit even without such special security. The industrial credit must be intended for some specific purpose indicated by the person applying for the credit and can only be granted in order to afford the borrower working capital or to enable the agriculturist or manufacturer to provide the neces- sary outfit for his farm or factory, or in order to afford similar assistance to the artisan, the retail merchant, or to the worker in some house industry. The machines and implements that serve as security must be of Eussian manufacture. Exceptions may be made in certain cases by the finance minister, or conjointly by him and the minister of agriculture. The amount of credit allowed in the case of any individual industrial undertaking is not to exceed 500,000 rubles, and in the case of the owners of small workshops the maximum amount is 600 rubles. Loans for the pur- pose of procuring machinery, implements, etc., shall not run for more than three years. When the time of the loan exceeds six months, provision must be made for the repayment in regular installments. Loans shall not exceed 50 per cent of the appraised value of the articles mortgaged. Those loans which are granted for the pur- pose of providing working capital are not to exceed 75 per cent of the amount required in the way of such capital. The borrower must bind himself by a special document to use the money only for the particular purpose indicated and to keep up the articles that serve as security to their full value. In the case of loans of this kind the bank is authorized by paragraph 8 of the regulations to permit (with certain precautions) the articles mortgaged to remain in the hands or in the safe-keeping of the borrower. Persons enjoying the implicit confidence of the bank may be granted credit on the security of goods other than those contained in the list prepared by the council of the bank. The security may, furthermore, be left in the possession of the borrower, and the amount loaned may run as h,igh as 75 per cent of the value of the security. The bank grants six months' loans on government securities and securities guaranteed by the government up to 90 per cent of their value. In the ease of mortgage debentures the ratio is 80 per cent and in the case of other securities allowed by the council 18 FINANCE of the bank it is 75 per cent. The term for which the loan may be renewed shall not exceed three months. Special accounts cur- rent are opened against the deposit of securities, the depositor being permitted to draw up to a certain sum, paying interest only on the amount that he owes to the bank. The bank may also, as far as it has any available resources left, grant credit to the govern- ments (main administrative divisions), circles (districts), and cities. It may, in addition, by means of intermediaries, grant credit to small agriculturists, peasants, leaseholders, and artisans on the security of the products of their industry, and it may also advance money for the purchase of machinery, implements, or other equipment, or the creation of a working capital. It may like- wise make advances on merchandise in transit or about to be shipped. The intermediaries may be the provincial or district assemblies, the credit institutions, loan associations, or the artels (associations of workingmen) in so far as their statutes have re- ceived the sanction of the government and they are willing to sub- ject themselves to the prescribed conditions and the supervision of the bank. Private individuals also, residing in the same place as the borrower, in whom the bank has confidence, may be made use of as intermediaries. In the case of goods in transit the inter- mediaries are the railways and transportation companies. The intermediaries assume full responsibility for the sums advanced to them by the bank. The zemstvos (government and district assem- blies) may, however, with the sanction of the minister of finance, limit their liability to the preservation or maintenance of the goods assigned as security. The bank takes both deposits repayable on demand and deposits repayable only at the expiration of a certain time. The conditions relative to the taking of deposits are fixed by the council of the bank with the sanction of the finance minister, and any changes must be announced a month in advance. The depositors dispose of their credit balance by means of checks and drafts. No other state institution has hitherto attempted to grant credit to agriculturists and manufacturers so readily and with the exercise of such leniency in the event of difficulty of repayment. [Our italics.] In addition to the kinds of loans authorized by the statutes of the bank, long-term loans have been granted " by virtue of special provisions " up to large sums (even 6,000^000 to 9,000,000 rubles) for various purposes, as the support of banks, industrial undertak- ings, a hotel company, etc., and in aid of such undertakings as mines, harbor improvements, etc. There is no special account of CENTEAL BANKS , 19 such loans figuring in the statements of the Imperial Bank. [Our italics.] Sehmoller repiarks justly (" Grundriss" II, 321) that " the great ianks that formerly existed in Russia, as well as the Russian Imperial Bank, were and are merely subsidiary organs of the min- istry of finance." It would he a good thing if the statements of the tank were submitted to the Imperial Duma for inspection. Accord- ing to the legal provisions now in force, they are examined by the second department of the council of state in closed session. [Our italics.] [In the year 1907, deposits in the Imperial Bank were 567,000,- 000 rubles, in Municipal Banks 109,000,000 rubles, and in private banks 748,000,000 rubles. If we take into account the deposits in the governmental saving banks in the same year (356,000,000 rubles), we see that the government controls by far the larger part of the bank deposits of the nation.] HUNGAEY [SouBCE: Senate Documents, Vol. 37, 61st Congress, 2d Session, 1909- 1910. " The Austro-Hungarian Bank," by Professor Zucker- kandl, pp. 103, 108, 109.] The charter of the Austro-Hungarian Bank was renewed in 1899 (by legislation in Hungary and by imperial decree in Austria) for a term extending to the close of 1910 (or, under certain condi- tions, to the close of 1907). The term of the charter had expired in 1897, but its provisions had twice been declared to remain in force for another year. The statutes were amended in important respects and the modifications expressed the full recognition of the claims of Hungary. The sphere of activity of the two directorates was extended. The Austrian and Hungarian directorates were to consist, respec- tively, of the Austrian and Hungarian vice-governor and deputy vice-governor and of the Austrian and Hungarian members of the general council. To each of the directorates was to be attached a " central inspector " appointed by the general council, who was to be a member of the " management." The new arrangements relative to the participation of the State in the profits of the bank were less favorable to the institution than the previous ones. Out of the net annual earnings a sum was first of all to be distributed among the shareholders equal to four per cent of the paid-in capital; after that 10 per cent of the net earn- ings was to be allotted to the surplus and two per cent to the pen- 20 FINANCE sion fund; of the remainder, in so far as the total dividends did not exceed six per cent of the paid-in capital, one-half was to be assigned to the shareholders and one-half to the joint governments ; of what remained after that, one-third was to be distributed in dividends to the shareholders and two-thirds were to go to the two governments. It was provided that the joint governments should have the right (the sanction of the two parliaments having been previously obtained), on the expiration of the term of the bank's charter, or in the event of the dissolution of the corporation prior to the expi- ration of the charter, to take over the whole banking concern that constituted the object of the charter (with the exception of the mortgage department, which was to be left to the company) in the shape and form in which it existed on the balance sheet and accord- ing to the valuation expressed by the balance sheet. The share- holders were to receive 1,520 crowns for each share and, in addi- tion, the amount of the surplus. This joint right of acquisition was, however, not to be regarded as involving an agreement between the two governments for the preservation of a single bank of issue for the two halves of the monarchy. JAPAN [Source: U. S. Senate Documents, Vol 37, 61st Congress, 2d Session, 1909-1910. " The Banking System- of Japan," by Marquis Katsura, Premier and Finance Minister of Japan, Baron Sakatani, Ex-Finance Minister, and Professor 0. M. W. Sprague, pp. 136-140.] The Agricultural and Industrial Bank is a joint stock company established in every prefecture. These banks have for their object the advancing of loans for the purpose of improving and develop- ing agricultural and industrial interests. Their business is similar to that of the Hypothec Bank, only on a small scale. The banks are also placed under the same restrictions and government super- vision as the Hypothec Bank. They are authorized to issue agri- cultural and industrial debentures to an amount not exceeding five times the paid-up capital. The government delivered a sum of about 10,000,000 yen to the prefectural authorities for taking up the shares of the agricultural and industrial banks of their locali- ties, and on this amount the Bank is exempted from paying a dividend. The two banks above described being exclusively eno-aged in making long-term loans on the security of immovable prop'erty, the need arose for a financial organ which could advance long-term CENTEAL BANKS 21 loans on the security of government bonds, shares, and movable property. It was also deemed advisable to combine in such an organ the business of a trust company. The institution born of these requirements is the Industrial Bank of Japan, organized under the law relating thereto and enacted in March, 1900, as Law No. 70. The Industrial Bank is a joint stock company, and the governor and deputy governor are appointed by the government. The capital of the Bank is 17,500,000 yen, and foreigners own no small por- tion of the shares. It acts as a medium for the introduction of foreign capital, and is thus engaged in adjusting and facilitating circulation of capital at home and abroad. The Bank is authorized to issue debentures to an amount not exceeding ten times its paid-up capital, provided the amount of such debentures does not exceed the total amount of outstanding loans and negotiable instruments actually in hand. The Bank has a government subsidy to the extent of guarantee- ing a five per cent dividend for five years after its establishment in case its profit fails to come up to that dividend. The system and working of different kinds of banks in Japan, and the reasons for their adoption, are as briefly stated above. The table on page 140 shows the number, the amount of capital, etc., of these banks. It is based on actual conditions, prevailing in December, 1907. [The statistics on page 140 show that the governmental banks accounted for approximately one-third of all the deposits of Japan.] THE BANK OF NEW ZEALAND The total deposits of all the commercial banks of New Zealand in 1915 were £33,186,000. Of this amount the Bank of New Zealand (nationalized only in 1895) held more than one-half, namely, £17,646,000. (See Year Book of Australia, 1916, pp. 671-672.) This was not due to war conditions, as the same pro- portion prevailed (approximately) before the war. Besides this, the Postal Savings Banks held deposits of over £19,048,000. (See the following chapter.) Governmental banks, therefore, held £36,692,000 deposits, while private institutions held £14,540,000, or only two-sevenths of the total. THE COMMONWEALTH BANK OF AUSTRALIA This bank was founded in 1912. Owing to the fact that Aus- tralia had so long consisted of a number of separate governments. 22 FINANCE it was still " in competition with the savings banks of the various States" (Year Book of Australia, 1915, p. 669) in 1914. In that year it agreed to give up its savings bank business to the States, and the States agreed gradually to transfer their banking ac- counts to the Commonwealth Bank. An amendment passed in the same year provides that " debts due to the Bank by any corpo- ration carrying on the business of banking shall have the same priority as debts due the Commonwealth." Power was also given, in certain contingencies, to take over any State savings bank. By 1915 the Bank had secured the accounts of South Australia, West Australia, and Tasmania, besides a number of municipalities including Melbourne. As regards general mercantile business the progress of the Bank continued to be moderate. " The power to take over other banks " had not yet been exercised. (Year Book of Australia 1916, p. 669.) The remaining three state accounts, including those of the two wealthiest. New South Wales and Vic- toria, also continued to stay in other banks. At a conference in 1914, Premier Holman, of the' former State, had said: "It is not practicable for the New South Wales Government to transfer the whole of its business to the Commonwealth Bank and terminate its arrangements with trading banks, until the Commonwealth Bank is in a position to give some tangible assistance in a loan flotation if required. (Year Book of Australia, 1915, pp. 669, 670.) Commonwealth Bank of Amtralia (on December 31st) 1913 1914 1915 Assets . . . . , £5,055,000 £11,361,000 £23,933,000 Deposits 2,388,000 4,971,000 14,714,000 Savings Bank 3,733,000 6,078,000 8,186,000 [Year Book of Australia, 1915, p.670; 1916, p. 669.] Comparison of Private Banhs and Commonwealth Bank Deposits for December Quarter 1913 1914 1915 Private £149,000,000 £153,000,000 £161,453,000 Commonwealth Cheeking Accounts . 3,619,000 10,107,000 Commonwealth Savings Accounts 5,662,000 7,804,000 [Year Book of Australia, 1915, pp. 670-672; 1916, pp. 669-671.'] CENTEAL BANKS 23 ■ Profits of the Commonwealth Bank of Australia Half Year Ending June 30, 1913 Loss— £47,000 Dec. 31, 1913 Profit— 1,500 June 30, 1914 « 8,000 Dec. 31, 1914 " 13,000 June 30, 1915 " 26,000 Dec. 31, 1915 " 51,000 CHAPTER II SAVINGS BANKS There is no doubt that by far the larger part of the savings banks of the world are now nationalized or municipalized, as our quotations show. The significance of this fact lies not only in the intimate financial relation it makes between the masses of the population and the governments, but also in the further fact that governments in this way control a very large part of the financial resources of the world. It will be seen in many nations that when we add together the central banks, savings banks, and agricultural banks by far the larger part of the capital of the country lies in the hands of the government. As with the central banks, so with savings banks, the effort is constantly made by private banking interests to restrict these government agencies so as to interfere as little as possible with private banking. But our selections show that such restrictions are being gradually removed. The maximum limits of savings accounts are constantly raised and in some cases have been alto- gether rem