iliiilli liiiii i il'H'l'r'i' ISiiiFlljl i iPi m ON^THE'RILAT '(} KXjr^u ], TAYLOR PEDD i i^,-o, Digitized by M/croso/i; .1 'Si OforttgU IntnetBitg SltbrarH Jftljaca, Netn lotk A.A. Youyi^ Digitized by Microsoft® The date show« when this volume; was taken. To renew this book copy the call No. and give to the Ubrarian. DEC17 If! HOME USE RULES. All Books subject to Recall. All books must be returned at end of col- lege year for inspec- tion and repairs. Students must re- turn all books before leaving town. Ofl5.cers should arrange for the return flL, books wanted di^Sg their absence frij^ town. BooksL/lieqAid by more ^RSi o5& person are he|(tor^e sMerve list «" -v^ ^ «Bluj^s o^eriodi- ^fe a^of^kmphlets Si'e l^d il^he library ^Jftsi^ud^s possible." ~ For special purposes they are given out for' a limited time. Borrowers should not use their library privileges for the bene- fit o'f other persons' Books of special value and gift books, when the giver wishes it, are not allowed to circulate. Readers are asked to report all cases of books marked or muti- ' lated. 10' Do not deface bookB by marks and writing. 3 1924 095 898 106 Digitized by Microsoft® This book was digitized by Microsoft Corporation in cooperation with Corneii University Libraries, 2007. You may use and print this copy in iimited quantity for your personai purposes, but may not distribute or provide access to it (or modified or partiai versions of it) for revenue-generating or other commerciai purposes. Digitized by Microsoft® SECOND EDITION (ENLARGED) ON THE RELATION OF IMPORTS TO EXPORTS A STUDY OF THE BASIS OF A NEW NATIONAL AND IMPERIAL POLICY BY J. TAYLOR PEDDIE, F.S.S. (Author of "First Principles of Production.") Longmans, Green and Co. 39, Paternoster Row, London Fourth Avenue & 30lh Street, New York Bombay, Calcutta, and Madras 1916 Digitized by Microsoft® Digitized by Microsoft® CONTENTS. ON THE RELATION OP IMPORTS TO EXPORTS. PAGES Introductory . . . . . . . . . . vii Preface to Second Edition . . . , . . xiii Definition of National Economics . . . . xxi Freedom of Trade and the Protective Policy : definition and chart . . . . . . . . xxii Trade in its earliest form consisted in the mutual exchange or barter of articles of consumption 3-6 As it is with individuals, so it is with nations 7-9 Excess of imports is only satisfactory, &c. . . 11-13 Finance, Shipping and Insurance mainly res- ponsible for excess of imports over exports.. 14-15 British and German industrial systems com- pared . . . . . . . . . . 1 6-21 Productive capacity of British factories not equal to German or American . . . . 23-24 The ability which permits exports to exceed imports is an exactly opposite condition to one of adversity . . . . . . . . 26-29 Competition or the talents which produce some- thing is highly beneficial . . . . . . 30-31 Unreasonable to expect Nations of the World to continue to buy manufactured articles from us upon unequal terms ; development of our National and Imperial resources essential 31-36 Digitized by Microsoft® CONTENTS PAGES We are essentially a manufacturing nation ; it is necessary for us to export manufactured articles of utility in exchange for food and natural materials . . . . . . . . 36-41 There is a great deal in German methods and in the spirit from which they emanate that we should embody in our industrial life ; the position of Ireland . . . . . . 42-44 The needed explanation of the phenomenon manifested in the growing expansion of im- ports over exports ; steps we must take and those we must retrace . . . . . . . . 44-48 FOREIGN EXCHANGE— THE BILL OF EXCHANGE. Definition of par of exchange . . . . . . 49 In order to appreciate the relation of imports to exports more clearly, it is necessary to discuss influence of foreign exchange and bill of exchange . . . . . . . . . . 49-61 Dr. Ewing Pratt on the economic situation of the United States at the outbreak of War.. 61-67 Examples of the rates of exchange on London in New York, from July, 1914, to August 16th, 1915, and its meaning . . . . . . 68-71 Dr. Ewing Pratt on the sterling exchange in New York ; on the position of the United States as a Creditor Nation ; on the future of American banks in the development of American Foreign Trade .. .. .. 72-84 Object lesson for the United Kingdom and the remedy 84-88 Digitized by Microsoft® CONTENTS V NATIONAL ECONOMICS OR EMPIRICISM? PAGBS The uncertainty of our Eoonomic Future ; the greatest care should be exercised in dis- cussing questions aiiecting it . . . . . . 89-92 A review of the speeches made at the annual meetings of two of our leading Banks ; the German Financial situation and the German ability to export to correct their present adverse exchange ; the extension of Banking credits in so far as it afEects British Industry making progress . . . . . . . . . . 92-97 Review of our present system of Economic Science ; Bagehot on the study of Economic Science by men of business .. .. .. 97-100 Our weakness in the study of Economic Science may be due to the Universities . . . . 101 Dr. Cunningham on the growth of " English Industry and Commerce " . . . . 102-103 It should be possible for the Board of Trade to judge of cause and effect monthly ; we have to safeguard ourselves against German Industrialism in the future and against com- petition from America .. .. .. 103-105 Cunningham on the political aims in each era .. 106-108 Our present system of Economic Science is based upon the fundamental doctrines advocated by Adam Smith 108-113 Adam Smith's formulae . . . . . . . . 114-117 Smith sensibly argues that the conditions in which manufacture is conducted should not be impaired by legislative measures : an argu- ment in favour of low tarifis .. .. .. 117-120 Digitized by Microsoft® vi CONTENTS PAGES Smith's own personal views on the Commercial or Mercantile System in existence in his time 1 20-1 22 Smith was constantly attacking high duties, privileges and prohibitions, but did not advocate Free Imports of Manufactures ; Freedom of Trade does not mean Free Trade ; Classification and chart on Import duties .. 122-127 The fundamentals of National Economics can form the basis of an International system of Economic science ; the mean between high andlowtariSs 127-131 Smith was an advocate of National Economy based on Freedom of Trade ; the position of Ireland 131-133 It seems expedient that our Government should concern themselves as to the degree of effi- ciency which may prevail in each phase of National activity ; national power does not solely lie with the strength of our army and navy ; experience has taught us to the contrary 133-139 Are Bankers to blame for not extending Banking credits? 139-140 Dr. Ewing Pratt on the functions of American Banking Institutions and Bankers ; Mr. McAdoo on the financial resources of America ; Competition we shall have to face from America and Germany .. .. .. .. 141-145 The immediate objects we must aim for . . . . 146-148 Digitized by Microsoft® INTKODUCTORY. In submitting the first essay to the public I desire to make due acknowledgment to the writings of the late Stephen Bourne in his book on " Trade, Popula- tion, and Food " (1880) for some of the first prin- ciples which it contains. The work is now out of print. What has always impressed me most in Mr. Bourne's work is the soundness of many of his first principles, gained from experience, no doubt, at the Board of Customs, but the moment he departs from these he becomes irrelevant in many directions. For instance, his main theme is that we are a manufacturing nation, and that we must export manufactured articles of utility with which to pay for the food we consume from abroad ; which is quite true. But then he proceeds to argue that as a Free Trade nation we must buy the best that is produced or manufactured in any one part of the world at the lowest cost and in the readiest manner. Clearly you cannot have your cake and eat it as well, and his work is full of such inconsistencies. But, neverthe- less, his fundamentals are sound, and if he had con- fined himself to stating these he would have per- formed a much greater service. But there are indications that, being employed by the Government, Digitized by Microsoft® viii INTEODUCTOEY. he was anxious to serve them by making his prin- ciples conform to the views of the majority, and for that reason I regard his theories and conclusions as inconsistencies. I make no apology for embodying some of his first principles in full in the essay in view of his work being out of print — some slight corrections have been made to the context of some, in order to give a clearer expression — believing as I do that it would be impossible to state the points more clearly or to improve upon the form of words used. Not only that, but I believe that in submitting the essay in its present form, in the greatest crisis of our national life, for the consideration of the public, I may be performing a national service. In the second essay on the Foreign Exchange I have made an extensive use of quotations of an address given by Dr. Ewing Pratt, Chief of the Bureau of Foreign and Domestic Commerce, Wash- ington, a copy of which he very kindly sent to me for consideration. The case he presents from the point of view of the United States is very sound, but as the address is not in print, and therefore not available to the public for reference, I have felt justified in presenting his main points, as they confirm the main theme I have attempted to develop throughout the essays and in " First Principles of Production." National Economics has become an exact science, and it is extraordinary to note how Digitized by Microsoft® INTRODUCTORY. ix 6losely the working conditions now being adopted by the United States follow those which Germany has rigidly adhered to. There are certain essential working conditions in National Economics, which a first-class Power must adopt if it is to safeguard its political prestige ; these conditions are general in all cases, and we are no exception to the rule. But as a nation we go blindly on, believing that progress can be made without change : we love to adhere to our antiquated Free Trade system, which is, everything considered, nothing but an abstract proposition — it is negative in its results ; and obviously you cannot build the concrete upon the abstract. In other words, you cannot build up a scientific system of National Economics unless you have the essential basic conditions to work upon. And as Free Trade is abstract or negative as a fundamental, it naturally cannot provide the essential working conditions. The attitude of Free Trade adherents is as fol- lows : Whatever may happen in the external world does not concern us. We will agree to no proposals designed for the nation's welfare and its efficiency or safety which conflict with the views of the Cob- denite School. We care naught for the improved status of other external nations, even although, as iv material factor to be considered, it did not exist in Adam Smith's time or in Cobden's time. Leave us alone. We prefer to live in the abstract, the nega- tion of exact science. We prefer to live in the atmo- Digitized by Microsoft® X INTRODUCTOEY. sphere of the eighteenth century : we hate to be disillusioned. If the following essays, therefore, will in any way enable the public to realise that all questions relating to the welfare of the State should be judged from the national point of view, and not from the standpoint of any political party or indi- vidual, I shall have been amply rewarded for what- ever time I have devoted to the subject. Let my readers remember that true Democracy is in the melting pot, and that our political leaders are responsible for placing it there. We have too many of the lawyer type of politicians, and not enough of the scientific and practical. The destiny of nations is now guided by the efficiency of its system of National Economics, and we must awake to the reality of that fact. But Democracy as we know it in oin: beloved country is partly to blame for the position in which we now find ourselves to-day, or at any rate that section of it known as Trade Unionism. It has sacrificed the efficiency of the nation for its own selfish ends, and the numerous strikes that have taken place during the war is an indication of that fact. I am a great adherent of Trade Unionism as a force, but not of that system which bribes politi- cians with votes at the sacrifice of national welfai'e. They say that at the conclusion of the war we shall have a new Democracy. There can be no doubt Digitized by Microsoft® INTEODUCTORY. xi about that ; but let us see to it that those demagogues in politics are removed out of harm's way who shall seek to pervert the material and economic welfare of the State for their own political purposes. If we do that we shall maintain and sustain true Democracy upon a basis that will justify itself. It is gratifying to me to learn that the first edition of my book on " First Principles of Production," and the publicity it obtained, has been largely instru- mental in bringing about the formation of a strong Industrial Research Committee, under the auspices of the Government, and that the latter have placed a sum of £30,000 at its disposal for the purpose. At the time of issue, most of the Cabinet and ex-Cabinet Ministers bought copies of the book. Our remaining business now is to bring about a reconsideration of the national policy with regard to the character of our imports and exports, in view of the important bearing it has on the question of National Economics. J. T. P. Digitized by Microsoft® Digitized by Microsoft® PREFACE TO SECOND EDITION. In presenting the second issue of this work to the public I desire first of all to express my gratitude for the kind reception which the first issue received at the hands of the public, and in the second place to say that, in order to complete the general scheme which I had in my mind when I commenced to write on the subject, I have added to this edition an essay on " National Economics or Empiricism? " which contains the general conclusions I have arrived at from writing the previous essays, and very largely from actual experience. Part of the essay I have already given as an address to the members of the Institute of Industry at the Savoy Hotel on January 12th, 1916. I felt it necessary, however, before writing the essay to conduct a thorough research of previous economic works by British writers, in order (1) to study the process by which we have arrived at our present system of Political Economy, and (2) to see if any previous writer or writers had touched upon National Economics in the light in which it appears to me. My readers will, no doubt, be astonished to learn, as I was, that the greatest exponent of National Economics in the modern sense was Adam Smith Digitized by Microsoft® xiv PKEFACE TO SECOND EDITION himself. Many people, including myself, have credited him with being the author of our present Free Trade System, but this has been erroneous. It is quite true to say that he sowed the seed of the present system, but it has been used and per- verted by subsequent theorists in the development of their own vicious schemes, and who have mani- festly misunderstood the intentions Smith had in view. This has been due, perhaps, to a want of knowledge on their part of the real technique of the Science. My own view is that the Master purposely did not develop the fundamentals he formulated to their logical conclusion because the world of Industry, Science, and Commerce was in his time in its early stages of development, and my readers will be able to observe this for themselves from the extracts of his works which I quote in the essay herein. The investigation of Economic Science has, for the most part, hitherto been undertaken by lawyers, politicians, and men of letters, and the more I investigate the history of Economic Science during the last hundred years, the more do I marvel that practical men of business and those of a genuinely scientific turn of mind allow the national life to be guided by the abstract theories which have been advanced by these writers. The very nature of the professions they follow preclude such writers from tendering advice to men Digitized by Microsoft® PREFACE TO SECOND EDITION xv of business as to the conduct of business, yet we find them indulging in a sort of philosophical discourse from time to time on the general Science which, by reason of its general character, seems to us to be more intricate and therefore all the more difficult to undertake. To undertake work of this kind a sound preparation in the industries of the country and a close contact with the wage-earning classes seem to be desirable, for the reason that in developing Economic Science we endeavour to advance indi- vidual or social welfare by improving the conditions which surround individuals in the earning of a living. In addition to this, I believe that a close personal contact with the actual conditions which business men have to contend with in the process of manu- facture and distribution is also essential, so that for these reasons I feel it to be impossible for anyone to speak with authority without having some measure of actual experience of the subject which he may set out to develop. There are always a few exceptions to every rule, of course ; notably in the case of Walter Bagehot, whose financial work, " Lombard Street," may be considered classical, but then he was a practical banker. From a perusal of the works of most of the other FJconomic writers I cannot help but feel that they have concentrated far too much on matters that seem to me to be irrelevant to the main issue. It is true Digitized by Microsoft® xvi PEEFACE TO SECOND EDITION that Adam Smith was a classical scholar, but he had the genius to create a new and comprehensive National Policy. Many of the subsequent writers seem to have had an equally ambitious idea, but in reading their works one cannot help but be impressed with the great waste of words and energy which has occurred in the discussion and interpretation of trifling issues. In the development of Economic Science the first things to be considered are the broad principles underlying our national phases of life, and the minor issues which may arise therefrom can very well be left for detailed consideration subsequently. The position of the nation in the affairs of nations ought to be the paramount consideration, and all the national phases of life which go to make up the total strength should be the first to receive our attention in so far as their national efficiency may be con- cerned ; and the general scheme of things developed in this work, which, in the form in which it is pre- sented, is original. But close students cannot but observe that the main general theme is an evolution of the doctrine of National Economy based on Freedom of Trade so ably advocated by Adam Smith. Smith's main idea seems to have been to destroy the Mercantile System, monopolistic in nature, which existed in his time, and although his teaching successfully accomplished this object ulti- mately, yet he expressed the opinion that " to look Digitized by Microsoft® PREFACE TO SECOND EDITION xvii for the restoration of freedom of Foreign Trade in Great Britain would have been as absurd as to expect that an Oceana or Utopia should be estab- hshed in it." Close students of Smith's work will agree, judging from the quotations I quote in the new essay, that, although he advocated for Freedom of Trade, he would never have countenanced the perverted system of Free Trade that prevails with us to-day. Smith was a National Economist first, and subject to that he desired freedom of trade ; his whole teaching proves it. I am in full agreement with the assertion made by J. B. Say that the history of Political Economy is of little value, being for the most part a record of absurd and justly exploded opinions : that it belongs to a system of ideas already obsolete. On the other hand, we require to pay attention to those modes of thinking which in the past have largely and seriously influenced public opinion, and in which we may find the roots of our present Economic System. We should endeavour to destroy or ignore such of them as have adversely affected our National Life, and retain those that have by experience proved to be sound and beneficial. J. B. Say was of the opinion that Economic Science consisted mainly of production, distribution, and consumption of wealth. We go further than that, and say that Modern Economic Science con- sists mainly of Education, Chemistry, Production, Transportation, and Banking. The efficiency and A Digitized by Microsoft® xviii PREFACE TO SECOND EDITION co-ordination of each of these phases of National Life materially influences the creation and wastage of wealth. I would like to draw the attention of our Irish statesmen to this aspect of the question, particularly those who desire absolute Home Eule for Ireland. In view of the whole tendency of Economic Science they would be committing the gravest of errors were they to dissociate the Irish people and their subse- quent generations from being partners in the economic life of the people of Great Britain. It is quite true that they have not received that equitable treatment during the last seventy-five years in the economic sense which their position entitled them to, but they have to thank the theoretical economists of the last century for that. It is to be earnestly hoped, in view of the changed economic conditions, that the absolute Home Rulers and the non-Home Eulers will accommodate themselves to the altered circumstances. They can surely find a way to settle their political difficulties through the Federal System of Government, and so enable the full agricultural and industrial resources of Ireland to be developed, not only for the benefit of the Irish people, but also for the benefit of the United Kingdom as a whole. Let all concerned remember the maxim , " In unity there is strength," and from the economic point of view it is of the greatest importance to the Irish people. The material welfare of the Irish people is so bound up with that of the people on this side of the Channel that if any break were to occur it must react detrimentally upon the agricultural and indus- trial prosperity of the country. What the Irish people should really strive for is the adoption of a system of National Economics for the United Digitized by Microsoft® PEEFACE TO SECOND EDITION xix Kingdom, in which their interests are adequately safeguarded. Let them act on Adam Smith's dictum that " the Home Trade is of more importance than the Foreign Trade." Another point which seems to me to require due consideration is this, that it is impossible for our statesmen, politicians, men of business, and others who may be interested to correctly interpret the value or tendency of any legislative or commercial measure which comes before them for consideration unless there are in existence certain well-defined principles of a national purpose upon which they can base their discussions or shape their legislation. It can safely be said that a great many of the legisla- tive measures approved of in recent years would have taken on a much different character, and would have served a more useful purpose, had they been based on a clearly defined National Policy. It is with a view to making a beginning in this direction that I humbly submit the second edition of this volume to the public for consideration. Headers should study the Chart upon the next page before perusing the book. The question of the extension of Banking Credits, I am glad to say, has at last secured the attention of the public and of the banking community, and the discussion is following the lines suggested in " First Principles of Production " and in this book. One more word by way of conclusion. My American friends, in their criticism of my works, welcome me as a Protectionist. I have never sup- ported this policy, nor was it my intention, and T hope the second issue of this volume will clear up any doubt that may remain in their minds on this point. J. T. P. Digitized by Microsoft® FEEEDOM OP TRADE AND THE PROTECTIVE POLICY. DEFINITION. For some reason or other modern Economic writers, particularly in the last century, have mis- interpreted the Smithian Doctrine of National Economy based on Freedom of Trade .for Free Trade. The term Freedom of Trade is not quite the same thing as Free Trade ; hence the reason for the question which is often asked, " What is Fre* Trade? " A great deal of loose writing and conversation takes place in the discussion of these subjects, and the following Chart may help to place them in proper perspective. The public in the past have usually divided them- selves into two groups — i.e., either the Free Trade group or the Protectionist group. But very few individuals really understand the significance of either of these expressions, or what they mean. They are content to call themselves Free Traders or Protectionists, and if you were to ask them for the foundation of their belief few could give it. Individuals should be invited to take their stand upon two issues — i.e., whether they desire the Digitized by Microsoft® National Business Policy to be based on Freedom of Trade (not Free Trade, for there can be no such thing) or on Protection, which is a Prohibitive Policy. Universal Free Trade is impossible, but Universal Freedom of Trade on the lines suggested hereafter is possible because it does not infringe on the doctrine of Equality of Eights. The following Chart will indicate the proper classification : — IMPORT DUTIES Fbbedom o» I Rbstriotion op FoBBiQN Tbadb I Foreign Trade I I Fne Imports Low Tariff Duties High TarifE Prohibition Duties Cross-over point 17i to 20 per cent, ad valorem (estimated) From the above Chart it will be seen that the two extremes are Prohibition and Free Imports, both of which in a National Policy are impracticable. We cannot prohibit imports, for to do so would defeat the object of exchange. We must import in order to be able to export, and the nearest approach we can make to actual Prohibition is to adopt the restrictive or Protectionist Policy of High Tariffs, which in America, for instance, is considered a practical policy. Similarly, we cannot have Free Imports any more than we can have Free service without pay- Digitized by Microsoft® ment. National Services must be paid for, and all Foreign and Domestic Industry should be made to contribute alike, through the medium of Import Duties and Taxation, to the cost of such services. National Economics, therefore, to be based on Freedom of Trade, must come under the heading of Low Tariff Duties, for High Tariff Duties are Protective. Individuals, therefore, who advocate Low Tariff Duties can by no means be called Pro- tectionists, but they are National Economists. (For further particulars see pages 118 to 130.) Digitized by Microsoft® ON THE RELATION OF IMPORTS TO EXPORTS. In discussing the working conditions in which British industry operates it is necessary to consider the rela- tion of imports to exports, and to remove certain misconceptions which exist in many minds upon this subject. It is essential that the question should be discussed in order to clear the way for a wider and better appreciation of the views advocated herein free from political bias. f A great deal of economic literature has been written in the past on the relation of imports to exports of a highly irrelevant nature, plausible, but not convincing ; the theories that have been evolved have, nevertheless, produced wrong impressions in many quarters, and our immediate business is to endeavour to put the question into a proper per- spective. The great difficulty one has to contend with in reviewing the question is the stubborn character of Digitized by Microsoft® 2 ON THE RELATION OF the British mind; it seems reluctant to forgo old- fashioned views — especially in the economic field of activity — in dealing with questions which arise in the present period of time. It is perhaps due, as we have more than once indicated, to the fact that such problems are usually left to the framers of political constitutions to solve, thereby allowing them to become involved in the fortunes of political parties, and so creating the feeling, unjustifiably so, that they are questions of political importance. The whole system is bad, and must be re-cast, for it gives too much power, when all is said and done, to the unscrupulous politician on the look-out for votes. How the political situation is to be solved is for the future to decide, but for the present our duty is to endeavour to point out those things which are relevant, and have a bearing, directly or indirectly, on the welfare of British industry. In confining ourselves to the discussion of matters that are relevant to present issues, we can- not, of course, dwell on the early history of our foreign trade beyond stating that it arose from the same cause, as stated by Mr. Bourne, which induced Solomon to send ships to Ophir for gold, and to bring home from thence the " silver, ivory, apes, and pea- cocks." But our principal reason for avoiding a dis- cussion of the early history of our foreign trade is this, that the working conditions in which industry operates do not, as a whole, remain constant from Digitized by Microsoft® IMPORTS TO EXPORTS. 3 one generation to another. There is an old proverb which says " there can be no progress without change ' ' ; and we presume from this that so long as human activity is active and vigorous we need not expect working conditions to remain constant. References, therefore, to the origin and development of foreign trade in these essays would only tend to confuse the mind on the principles involved in the general working conditions in which we find our- selves to-day. In the running of an ordinary busi- ness, the proprietor decides the issues for himself in the light of his own experience ; he does not ask what his grandfather would have done in similar circumstances. No, the present-day proprietor knows his present-day competitors and the condi- tions he has to comply with, and acts accordingly. As the State, therefore, is nothing but a force con- stituted of such individuals, we consider it should act in like manner. For a considerable period of time we have been accustomed to see the total value of our imports exceed our exports, and why it should continue to be so puzzles the average lay mind. The average mind does not appreciate the relation of the one to the other, nor the circumstances which cause imports to exceed exports, and our immediate pur- pose is now to explain this phenomenon. Trade in its earliest form must have consisted in the mutual exchange or barter of articles of con- Digitized by Microsoft® 4 ON THE RELATION OF sumption possessed by one and needed or desired by another, and would probably take place first in supplies of food. It would early be discovered that a concentration of time and strength on the produc- tion of one class of articles would yield greater results than if each individual attempted to raise or procure everything that he needed, whilst diversity of taste, as well as circumstance, would fix the pursuits in which each would engage. One, being a tiller of the soil, would obtain the animal food he required by giving up a portion of the grain or fruit which he either found or raised by his labour and skill. At first, and in the absence of any imperish- able substance as a medium of exchange, the trans- action would be one of simple barter, and the stan- dard of value or rate of exchange be determined by the time employed in the production of each of the articles in which they dealt. This would be truly payment in kind, and so long as the produce of a day's labour was given for that which bore a similar charge, perfect equality of bargains would exist, each party gaining more than he could obtain at the same cost, but neither more than he gave to his neighbour. Soon, however, disparity in bodily strength, in skill or disposition, together with the advent of seasons and other circumstances favouring one occupation more than another, would produce inequality, and though for a time the balance might fluctuate, ultimately prosperity would probably Digitized by Microsoft® IMPORTS TO EXPORTS. 5 attend the one, and adversity overtake the other. Then would come the necessity of the weaker to submit to the one in a stronger position, who, such is human nature, would not be slow to take advan- tage of the opportunities afforded by the other's need to exact unequal terms; and thus the element of profit and loss would be introduced. At the outset this would probably be confined to dealings in food or other articles of prime necessity, in which the buyer would be more or less at the mercy of the seller; but in those of more durable character and less indispensable to existence or comfort, the buyer would have the advantage. Since he need not pur- chase unless he willed, he would refrain until he got, or thought he got, the best of the bargain; but so soon as, through custom, habit, or overpowering inclination, the objects of desire became as good as real necessities, the one who sought to possess them would be led to yield to the demands of their owner ; and thus the most laborious or skilled, whether of body or mind, as well as the least scrupulous, would cause every exchange to be to his advantage. Then in process of time the most durable and the least easily obtained articles would become the representatives or standard of value. When jewels and the precious metals were discovered, these, as being the most attractive, lasting, and portable of known substances, would naturally become the medium of exchange, the recognised tokens of Digitized by Microsoft® 6 ON THE RELATION OF value; and payment in kind would be transformed into what was equivalent to our present cash pay- ments, more distinctly such when metals stamped as coin had a definite nominal worth attached to each. Proceeding onward, the necessity, real or fancied, for one party to secure the food, clothing, or articles of utility and desire, although at the time destitute of the proper medium in which to make payment; and, on the other hand, the wish of the possessor to part with his goods, in the belief that deferred pay- ment would yield him a greater return than a present exchange, would lead to his acceptance of a promise to be fulfilled at a future time, and thus purchasing on credit would take its rise. Advancing a step farther, the owner of wealth accumulated beyond the power of personal employ- ment, seeing those who desired advances — either under the pressure of poverty, or the belief that the temporary possession of what they had not them- selves might gain for them more than they would have to repay — would be led to trust such persons with the use of his means on being secured a share in the profits arising from its application to purposes of manufacture or trade, and thus investment on loan or security would come about. Another form of this would be where undertakings were started too large for one or a few individuals to compass with their own labour or substance ; these would join their powers to those of others in like positions, employing Digitized by Microsoft® IMPORTS TO EXPORTS. 7 partners or agents to carry on operations for their joint benefit, and in this manner partnerships and public companies would come into existence. Now just as it is with individuals, so is it with nations; and this sketch of the various stages of progress, which must be familiar to all who have devoted thought or study to the subject, has been introduced to bring to view distinctly that which happens in the processes by which commerce is carried on. To see clearly the true bearing which imports and exports have to each other, we must personify each country, gathering all individual traders as it were into units, and disregarding all internal interchange of wealth or goods, just as we would the transfer of our purse from one pocket to the other, consider only that which takes place to or from the shores of each nation. Looking at it in this aspect, we shall see that all the several processes we have described are being carried on at one and the same time in the business of each trading nation, or at any rate in that of our own; and that the true meaning or effect of the apparent balance between imports and exports depends upon the degree or extent in which either or all of these several methods prevail. In the infancy of trade, such for instance as existed at one time in Africa, so many pounds of beads, or so many yards of calico, was sent out to be exchanged for as much ivory or oil as the untutored natives Digitized by Microsoft® 8 ON THE EELATION OF would part with. Here, although no money passed between the sellers and buyers, the money value of the goods that were sent out, together with that expended in transporting them from the place of production to that of barter, set off against the price obtained for those brought back, less the expense incurred of transporting them home, showed the true amount of profit ; and were all trade of this description, the excess of imports over exports would be the nation's exact gain. But in the present period of time, and in con- sequence of the great advance civilisation has made in recent years in Africa and elsewhere, all natural materials have a known market value, and it is only in very rare circumstances that a trader can now secure imports of natural materials of a greater value than the goods he may export. The consideration which might have been given to this aspect of the question in the middle of the nineteenth century, and later, certainly cannot be carried forward to the twentieth century, for the reason that it has no influence of consequence in any consideration which w^ may now give to the relation of imports to exports. Other nations now compete with us on equal terms in the manufacture of articles of utility, and in many cases excel us, in all the markets of the world. Similarly, the power which other nations now possess in production ipso facto enables them to compete with us on equal terms Digitized by Microsoft® IMPORTS TO EXPORTS. 9 in the purchase, or development, of natural materials in the same markets. Although in the first instance goods may be sold for money and others purchased with the proceeds brought back, one or more exchanges of goods or money may also take place at various places on the way home ; or goods may be shipped from one foreign country to another, or from our Dominions or Crown possessions to foreign countries or vice versa without coming home. As a case in point, let us take the case of a shipment of tea direct from Calcutta to New York. The London merchant makes his profit on the shipment of tea from Calcutta to New York; the shipowner on the freight rates chargeable; and the banker on the bills of exchange ; wherever that which comes home is wholly procured by that which goes out, the difference between the money value of the two will be the nation's gain or loss, and if the trade has been profitable, there will be an excess of imports. These are in truth payments in kind between the nations engaged in the transactions. Imports must exceed exports in value if the trading has been successful. These are truths so simple and elementary as scarcely to need expression, were it not for the fallacy which pervades so many statements in which it is assumed that because imports exceed exports it necessarily follows that the one must Digitized by Microsbft® 10 ON THE RELATION oF have been purchased with the other, and that the difference is wholly gain; at least so much of it as is not absolutely the produce of earnings or dividends abroad, turned from money into goods, and sent home in this state, instead of bullion or cash. Such writers appear to forget that in the present day the bulk of the trade carried on is not by means of either payment in kind or cash payments, but on credit. It is true that the individual credits are of short duration, and must be speedily balanced ; but they may be, and are, balanced by other credits, not perhaps between the same parties, but between nations thus trading together; and it is utterly impossible to say, as between these, how long or to what extent such credit may be given or taken. Once more, it does not follow that the goods thus transferred from one country to another are even paid for by credit. Of course, so far as each trader is concerned, they will be settled in one way or at one time or another, but the nations to which these traders belong may by means of other individuals be entrusting money to borrowers or be investing money in property or joint-stock undertakings, and if so, all these must be taken into account before a true balance of profit or loss can be struck; and therefore the apparent balance may in truth repre- sent only temporary or permanent investments, or the calling in of those made at times long since gone by. Digitized by Microsoft® IMPOBTS TO EXPOETS. 11 It follows, then, that an excess of imports is only satisfactory when it results : — 1. From a direct exchange of goods, those arriving being of greater value than those sent out to be bartered, and where such excess can be considered to be the profit on the transaction. 2. From money realised by the sale of exports, instead of being remitted in payment, being exchanged for goods which acquire additional value from transport home, always supposing that their value on arrival is beyond that of those whose proceeds procured their purchase. This, though somewhat differing in form, is really the same as the previous case. 3. From the money with which they are paid for being so much income accruing abroad, whether as earnings from labour, profits in trade, including bills of exchange, or dividends on investments. Under all these conditions it is possible for a constant and growing excess of imports over exports to be shown, the extent of which is the indication a,nd measure of national trading prosperity. To these must be added : — 4. When the excesses of goods imported are stored up for employment in the production of articles for export, such excesses being only temporary, and balanced by an excess of exports at a future time. Digitized by Microsoft® 12 ON THE RELAnON OF On the other hand, an even amount or an excess of exports will be satisfactory when the money they realise is beyond their value on leaving, and is : — (a) Eemitted home in cash ; (b) Lent on good security abroad ; (c) Invested in profitable undertakings or the acquisition of property in other countries. The point we now have to consider at this stage is whether all or any of these modes are in operation in our present day methods of trading. The means are clearly shown by which an excess of imports over exports can add to the national wealth. If any of these principles are not effective and in operation, then we have to consider to what extent it may be impoverishing the national wealth acquired in days gone by, when competition for international trade was not so strenuous as it is to-day. In some quarters doubts have arisen as to whether the rapid rise of our imports, prior to the war, was altogether compatible with the prosperity of our trade when unaccompanied by a corresponding Digitized by Microsoft® IMPOETS TO EXPORTS. 13 expansion of our exports. Some people asserted that the difference was more apparent than real, vaguely suggesting that the values on one side were subject to deduction and on the other to addition. Others held the view that the difference was due to the large profits on our trade, and the greatness of our income realised abroad and remitted home. The latter view is a contributory cause. But the broad facts were, that owing to the services which we rendered to the world in general in the following services, namely, finance, shipping, and insurance, we became a creditor nation and not a debtor nation. London is the international money market, and it makes large profits in the form of interest, com- missions, &c., in the discounting of bills, bills of exchange, foreign loans, investments, &c., &c. Similarly, British fire and life insurance offices are recognised to be the largest in the world, and they, including Lloyds, do a large and profitable foreign business. And similarly the services which our large steamship companies render to the world at large in the carrying of passengers and freight earn for them large profits. These services may be termed invisible exports. Therefore, before we come to consider the relation of the actual exports and imports, we have to realise that we start annually with a large credit balance in our favour in the form of invisible exports, which is liquidated by imports Digitized by Microsoft® 14 ON THE RELATION OF of various kinds, by the importation of gold, or by other credits. There is not the slightest doubt that the three industries referred to, i.e., finance, shipping, and insurance, are mainly responsible for the surplus of imports over exports, and that under the Free Trade policy we have adopted the industries men- tioned have prospered at the expense of home industries in consequence of the facilities afforded them for the free importation of goods of all kinds, including manufactured articles of utility, to pay for the services they render abroad. We cannot of course blame them for developing the opportuni- ties which we, as a State, have placed at their disposal, and in making the most of them. In the situation in which we find ourselves to-day, it is much better to be frank and state the essential facts, in order to bring about a more equal distribution of the wealth which we create by admitting the legitimate claims of industry, science, and agriculture for a better set of working conditions than exists at present. As we have shown in our article on " Finance and Industry," the great banking amalgamations that have been effected in recent years have for the most part been effected for the purpose of exercising greater control over our deposits, the facilities granted to customers, to minimise competition, and to increase profits. Those who control the financial Digitized by Microsoft® IMPORTS TO EXPORTS. 15 institutions in the City of London and elsewhere have long ago seen in which direction profits are most easily made at a minimum of risk, and it is for this reason that they have absorbed the smaller banks in order to gain a greater control and influence over our deposits, and have so altered the relation- ships which formerly existed between the country bankers and those responsible for the management of our industries. They wish the nation's capital to be kept as fluid as possible, so that they may use it in developing international finance and in bills of exchange. It should be stated here, however, that the great banks, in pursuing this policy, have built up an enormous financial industry in London, greatly to the advantage of British credit, and, consistent with the legitimate claims of industry, it should on no account be disturbed; but the fact remains that it has displaced certain other forces of British industry, which should, in view of the enormous destruction of credit values, be re-established again in this country as the one and only effective means of creating new forms of wealth after the war. Some of the most important industries which should be re- established again in this country on a substantial scale are the aniline dye industry, the glass industry, automatic machinery, the silk industry, optical glass industry, margarine industry, typewriting machines, rifles and shotguns, pharmaceutical products, &c. Digitized by Microsoft® 16 OK THE EELATION OF In a recent speech made in the House of Com- mons by Mr. Lloyd George on the subject of muni- tions of war, he stated that the British machine-tool industry was unable to cope with the demands made upon it for machine tools. He pointed out that it was essential for the country's welfare and for the successful consummation of the war that it should be developed on a more substantial scale by the Government, upon the ground that the more we satisfied our requirements from our own resources, the less gold we should have to export abroad to pay for munitions of war. In other words, he admitted that the efficiency of our national industries was not equal to the prestige which our nation occupies in the affairs of the world; that the German national industries have been equal to the demands made upon them for all kinds of munitions of war. What better proof have we than this, that of the two industrial systems employed, the German is the more efficient? And as the American industrial system is at least the equal of the German, that country must also be superior to us in that direction. Any system which is not able to stand the stress of adversity cannot possibly be a sound one in a time of prosperity. Any banker or business man will confirm this view as a principle. In support of this we have only to read an observation of Sir Francis Oppenheimer's, H.M. Commercial Attach^ for Germany, in his report to Digitized by Microsoft® IMPORTS TO EXPORTS. 17 the Government on the trade of Germany for the year 1913 (page 6), and which is as follows : — " The rise of such works, although it has been greatly assisted by the modern developments of German banking, is chiefly due to the application of science to manufacture. These leaders have increased their profits by carrying the science of by-products to its utmost limits, and they have thus very materially reduced their cost of production. They are both indefatigable and generous where scientific research is concerned. The Emperor William Institute for the Scientific Exploration of Coal, which is to be opened in 1914, is the latest proof. A German society for the study of ores is similarly in course of formation. A succession of booms has made these mammoth concerns financially independent; in Ehenish-Westphalia some of them have ended by financially assisting the banks to which they had originally owed their own pheno- menal rise. Their financial resources enable them to add new branches of manufacture to those they already control. They are continuing their steady process of concentration, each step of which leaves them further fortified. And, if further confirmation is needed, let us turn our attention to the annual report of the Deutsche Bank for the year 1913, and observe the keen intelligence with which the bank management discusses the efficiency of German industry. On Digitized by Microsoft® 18 ON THE RELATION OF page 1 of the report the management state that " Signs are not wanting that during the next few years the demand for capital on the part of German industries will be less than during the last decade. Antiquated methods have nearly everywhere been replaced by modern installations capable of meeting any competition. After this thorough modernisation of technical implements and machinery, there remains but the healthy tendency to progressively improve industrial establishments, and provide for the needs of Germany's population, which grows every year by 800,000 souls. The dividends paid in 1913 by German joint-stock companies amounted to approximately twice as much as the fresh capital they absorbed." Just think of it. Can we see any such intelligent discussion of the industrial situation in the annual reports of British banks? Nor is this all. If we examine the annual reports of the Disconto-Gesell- schaft and of the Dresdner Banks, we shall find the same keen interest and pride manifested in every- thing that concerns German industry and its wel- fare. For some reason or other, and as we have more than once stated, we have allowed ourselves to follow false economic doctrines; we have been quarrelling over the merits of Free Trade and Pro- tection, forgetting all the while that, with the great advance made in the science of banking, it was as necessary to utilise this force as it was to utilise Digitized by Microsoft® IMPORTS TO EXPORTS. 19 the principles of organisation, science and scientific methods, for the better development of international trade. It is, we think, this want of perception that has made the German people look upon us as a decadent race ; and perhaps they were not far wrong. Let us now look at the great progress made by the Deutsche Bank since its inception in 1870, the date of the Franco-Prussian War. No comment is needed on the figures printed on the next page ; they explain the position more eloquently and precisely than any words which can be found in the English vocabulary, and certainly reveal to us the new economic factors in all their nakedness and vigour, namely, banking credits, science, and organisation. Germany and America have adopted the new system, and it is essential that if we are to hold our own we must adopt counter measures. Whilst on this subject we should not lose sight of the enormous expansion of banking credits which has also taken place in America through the opera- tion of the Federal Eeserve Act, which came into operation in the month of November, 1914. We deal more fully with this question in the essay on " Foreign Exchange " which follows. American industry was in a very high state of efficiency before the declaration of war, and with the additional banking credits and facilities now afforded to it through the operation of the Federal Eeserve Act for the development pf international Digitized by Microsoft® 20 ON THE RELATION OF c O >f5 o o o HO g 1ft o ^ (N CO 2 t- t^ 00 00 OS o I-H rH I-H 00 CO 00 00 00 00 2 OS OS 1—1 OS OS rH T-4 CO (N t- CO "o~ IC y t- "t^ CO CO rH Tt< CO 00 t* lO t> CD ^ Ift -* c »— 1 00 00 o> CO 00 CO C4 Ift 00 > I> Oi TjT ca cd" ^o" TjT 05 Ir- CO 0^ 1ft « § w (M Oi o CD CO O CO d CO (N CO (N o CD (M o^ CO q_ o^ 3 m" '^" l> iS Iff o" CO 00 o H I> (M lo f—i Oi CD o O CO (N lO t> •^ 00 00 CO CD^ '^ •s F-H (N CO lO co" CD co" ii 5? i? is is 15 ss 55 5S o^ o^ HN Hm Hm f40t U5 CO o F-H a o o rH I-H I-H (N (M >—* rH « rH '"»o" I-H "cT lO "oT ~co~ ""ot" ""co~ "o" i § 1— ( 00^ '^ o c^ o o o o^ V c » « 3 «rt ^ 00 t> o t-^ (^ OS 1ft* o £^ t^ 00 00 CO CO CD 00 M 1ft CO l> (N o ■^ Os_ CO CD l> t^ no o o o o (N (N CO CO CO I> o> o o o o i-H iO "lo" ~o5" ~cd" -^ ""ift" "oT "5" C- '(Jl '■^ ^ 1— 1 1— t CD f-H o OS lO CO CO CD l> C6 "„ t-_^ t^ OS ^ o S C*l 1 1 -*■ Ir- OO CO CO t' CO •* Ti< lo l> I> os_ 00 "^ OO ~o~ ~o~ "^ 1o~ "^o" "tJcT "lo~ 1^ CD O V 00 lO CO CO (N w CD lO ^ 1 l> l> 00^ 00^ lO rH s_ CD^ CO ai 3 ? 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Ift CO (>» CO S o i6 "o" "■>o" o la »ft o I— IT' 00 00 Oi OS o 00 00 00 00 00 00 05 OS OS OS OS > w^ pH I-H T— t rH Digitized by Microsoft® IMPORTS TO EXPORTS. 21 irade, plus the millions of money we have been spending with it for munitions of war, we may be sure that it will attack the international markets with greater vigour when normal conditions return at the conclusion of the war; and we do not think we are over-stating the position when we declare that our greatest competitor in the international markets of the world in future years will, in all probability, be the United States of America. This knowledge will be gratifying to most of us, seeing that she is of our own kith and kin. But the whole position is one that requires the most careful consideration of all concerned. It is estimated by Dr. Edward Ewing Pratt — Chief of the Bureau of Foreign and Domestic Com- merce, Department of Commerce, Washington, D.C., who very kindly forwarded to the writer a copy of his address delivered at the annual meeting of the Calif ornian Bankers' Association at San Francisco, May 27, 1915 — that at the outbreak of the European War the United States owed no less than £1,500,000,000 sterling to Europe, the largest portion of which was distributed among the following nations as follows : — England £800,000,000 France 200,000,000 Germany 250,000,000 Holland 130,000,000 The above indebtedness was in part off-set by Digitized by Microsoft® •22 ON THE EELATION OP loans made by the United States to Europe and by certain European securities which were held by them. The total indebtedness of the United States to Europe at the beginning of the war was, never- theless, set out to be no less than £1,200,000,000. It will be seen, therefore, that the United States of America occupied the position of a debtor nation in international finance instead of a creditor nation. In consequence, however, of the vast sums which are now being spent in that country for munitions of war, it may safely be assumed that a large portion of this debt will be wiped out. We are aware of the argument that is frequently used that the United Kingdom is not large enough to cope with the world's demands for finished manu- factures, and that before the war we had as much as we could do to cope with the orders that were on hand. In answer to this observation, it must be remem- bered that a great part of our energy has in the past, and certainly in the present, been used up in the construction of ships of war and in the manufacture of munitions of war. It may safely be assumed, therefore, that at the conclusion of the great war there will be sufficient war material left to last us for a generation or two, and that employment will have to be found for the labour and a use found for the plants that were formerly engaged upon this class of work. Apart from this consideration, how- Digitized by Microsoft® IMPORTS TO EXPORTS. 28 ever, it has long been generally recognised that the productive capacity of our workshops is lov?er per man than in Germany or America. It is attributable to two causes, and these are : — 1. The trade union limitations placed upon their members as to the output, which is known in this country as the " ca canny " policy. 2. The want of efficiency in most of our factories, both in regard to design and in work- shop equipment. A sufficient use is not made of science, scientific methods, or automatic machinery. It is for this reason that we are most deficient in those industries more directly associated with the applied arts and chemistry. But do not let us fall into the error of blaming the British manufacturer for this condition of affairs ; the main fault lies with the State, which has failed to appreciate the First Principles of Production. Having regard to these facts, therefore, and in the interest of the future welfare of the State, it is essential that, at the conclusion of the war, we insist upon the State, with the assistance of a Ministry of Industry, introducing a better set of working condi- tions, which shall enable : — (a) British manufacturers to replace anti- quated methods by the installation of the most modern plants and equipment available with a view of increasing the productive capacity of each man. Digitized by Microsoft® 24 ON THE EELATION OF (b) The British trade unions and workmen to realise that the value of labour is not deter- mined by the wages each workman receives, but by the services rendered by each workman in return for wages received. The moment these two aspects of the question are appreciated to the full by all concerned, we shall then be able to compete on equal terms with Germany and America. Labour should remember that in consequence of our insular position we are not in a position to grow sufficient food to satiate our wants, and that our ability to command food supplies from abroad largely depends upon our ability to produce efficiently and sufficiently per individual for export. And that the installation of modern equipment such as is advocated will not only assist in making the day's work more of a pleasure, but by reason of the improved environment, will also facilitate an increase of output in the manner required. Let us remember Macaulay's words : — " As we wax hot in faction. In battle we wax cold ; Wherefore men fight not as they fought In the brave days of old. Then none were for the party. Then all were for the State ; Then the great man loved the poor. And the poor man loved the great." Digitized by Microsoft® IMPORTS TO EXPORTS. 25 The successful trading of a nation is governed very largely by the same broad principles which govern the conduct of a successful business. Trade will only come to those who lay themselves out to capture it — profits are the reward of enterprise — and we must not cavil at the success of competitors who succeed in diverting our trade; on the contrary, we should admit the principle and live up to it. The very financial strength which has for a time furnished us with the means of undue expenditure on social and other pleasures has in several ways led to the loss of our industrial power, and, ipso facto, of the capacity to sustain that very financial strengtli and national prestige. In other words, there has been a lack of cohesion between finance and industry in this country. The increased revenue and capital values which we, as a nation, have earned on our original invest- ments abroad, has been responsible for the majority of our countrymen during the last sixty years attaching certain virtues to our system of Free Trade, which has in reality, especially in a time of crisis like the present, destroyed our capacity for resist- ance on anything like the basis of a modern first- Digitized by Microsoft® 26 ON THE RELATION OP class Power. Not only that, but the financial facilities which we have in the past afforded other countries, including Germany, in the London Inter- national Money Market for industrial and other pur- poses has enabled these other nations to compete, and to excel us in many cases, in producing articles of utility for their own necessities and the markets of the world; and in the case of Germany particu- larly, has enabled it to maintain an army and navy upon a prodigious scale for the domination of the world and our own extermination. In other words, we have been burning the candle at both ends. Now this is just what we as a nation cannot pos- sibly afford. Our country only grows half the food which our people consume, and therefore for our continued existence it is absolutely essential that we should produce something else, in addition to pure financial operations, wherewith we may purchase or take in exchange from other nations the food we cannot, or to a large extent do not try to, raise for ourselves. Herein again we stand in decided con- trast to the United States, which grows more food than it can consume. Were it blockaded or shut out from access to the products of other nations, the prices of provisions would fall, and her people might be all of them better fed than even now they are. Were England isolated, the cost of everything would rapidly rise, and so soon as the accumulated stores were exhausted, half her inhabitants would starve. Digitized by Microsoft® IMPOETS TO EXPORTS. 27 Again, we may say that the necessity which compels imports to exceed exports is the very reverse of prosperity ; the ability which permits exports to exceed imports is an exactly opposite condition to one of adversity. If, then, these be truths — and that they are so it seems impossible to deny — is it wise to hide them from view, or to cavil, as some do, at those who strive to invite public attention to their existence? Like the ostrich who hides her head in the sand, we may fancy that they are best put out of sight, but the very attempt to deny their existence only serves to magnify their importance to others, and to arrest remedial attempts by ourselves. The patient who will not admit that he is ailing, and the physician who ignores the fact that his disorder is serious, are alike answerable if recovery is protracted or rendered impossible, whilst those who are not afraid to acknowledge the presence of disease, and boldly adopt the most likely measures for restoration, are those who also manifest the greatest confidence in the strength of the sufferer's constitution, and thus help best to maintain it unimpaired. Let us, then, consider what are the steps to be taken for the pre« servation and renewal of our national vigour. Considering the important bearing which a right understanding of this question must have upon the measures necessary for the preservation or restora- tion of our national life and prosperity, it is not sur- Digitized by Microsoft® 28 ■ ON THE RELATION OP prising that some thoughtful minds have been driven to a consideration of the best means for the attain- ment of these objects. Eather, is it to be wondered at that so few appear to think it of due importance, or are disposed to see that a very decided course of action is needed. It would seem as though the influx of prosperity in former years has so intoxicated all those who were drinking in its copious draughts that they could not dream of reverses or listen with patience to any who raised the voice of warning. It cannot be that the enterprise, the skill, and the industry which have created the position to which we have reached will fail us in the present time of stress. These national attributes will, if still maintained and rightly exercised, sustain and guide us until the darkness shall pass away, and the sun- shine of prosperity again overspread the land. But before that can happen we have much patient endur- ance and active exertion to pass through. It will no longer do to act upon the maxim, " Take care of the imports, and let the exports take care of them- selves." This did well enough when the world was pressing upon us to supply its wants ; not now, when we have to press our wares upon the world. The first effort we have to make is one that scarcely needs to be suggested, for it will be forced upon us by stern necessity after the war. Shortened wages for the labouring classes, and too often the absence of any wages at all, will enforce economy in Digitized by Microsoft® IMPORTS TO EXPORTS. 29 the use of the necessaries of hfe, and entire abstinence from many of the luxuries and enjoyments which have gone far to swell the amount of our imports. Diminished profits in trade and want of employment for many will teach the same lesson to the middle' classes, whilst failing incomes and smaller returns for the use of capital will place the upper ranks in a similar position of necessity. Thus shall we lessen the payments we have to make for our imports, and also reduce the price of many articles of consump- tion for which, under the influence of extravagant expenditure, we have raised the charges to an un- warrantable height. It will also be impossible to maintain the shortened hours of service which have been introduced into many employments, or to be satisfied with the insufficient amount of work per- formed in the hours thus shortened. There is the unavoidable evil attendant upon all measures of retrenchment, and the concentration of labour amongst fewer hands, that they throw many persons in all ranks out of employment, and also bring many to seek for profitable occupation of their time who have heretofore had little to think of but spending time, money, and strength in the mere enjoyment of life. Productive labour and capital have been overweighted with the unproductive members of the community, whom they have had to support ; and this observation applies equally to the Civil Services. Digitized by Microsoft® 30 ON THE EELATION OF Competition, so far as it stimulates industry and develops skill, or the talents which produce some- thing that shall add to the general stock, is highly beneficial ; but competition which has for its object the obtaining of the largest share of that which has been already produced is baneful in the extreme. If there is a railway to be made, or some public undertaking to be started, promoters, stockbrokers, solicitors, secretaries come first; then landowners, contractors, and manufacturers all rush to the front endeavouring to secure the greatest share of the money to be expended, rather than to diminish the outlay by the shareholders. If there is a public office to be filled or a charity to be bestowed, a crowd of competitors waste their time in struggling who shall obtain the prize. Thus has it come to pass that the cost of everything has been swelled, the expense of division increased, until the difference between the outlay, whether of time or money, on the first pro- duction has been far below what it ought to have been from the price paid by the ultimate consumer or person who has enjoyed the benefit. Notwith- standing all our contrivances for saving labour, all our intense devotion to business, all our exercise of skill, scarce any object is attained or accomplished which has not occasioned greater outlay between its first and final stages than was really needed. Too many hands have been employed upon it, to each of which it has paid toll rather than received help. Digitized by Microsoft® IMPORTS TO EXPORTS. 31 and a feeling has pervaded a large portion of all classes of society that they were to subsist upon appropriating that which others had produced, rather than that which their own efforts had created. There is everywhere a superabundance of producing power which will have to be placed in profitable employment. The economic situation has had much to do with enhancing the cost or lessening the volume of our actual exports of manufactured articles of utility ; this might be borne so long as we were increasing the ratio of our exports to imports, for its weight fell largely upon the foreign consumer ; but, with rivals running us so closely in the race, they will no longer consent to help us in bearing it. It would be unreasonable to expect that, however willing the nations of the world might be in their infancy to depend upon this country for their manu- factured goods and the articles of luxury they choose to consume, they would continue to purchase them from us by a larger amount of labour bestowed upon the raising of food and raw materials than we bestow upon the finished articles they take in exchange.* We have had the honour of being the pioneers in arts and manufactures, and have had our reward in the wealth we have acquired. It is now the turn of other nations to follow in our steps, at least to the extent of supplying their own wants; and this they are sure to do as they increase in numbers and knowledge. We can have no hope of • If the standard of wages paid for labour abroad in the production of food or natural materials is lower than that paid at home in the production of manufactured article? of utility for expor*- we necessarily gain, and the great wealth we have accumulated m the padt- is due to this cause. We have obtained a great deal more service than we have rendered. 32 ON THE RELATION OF retarding this progress, but we may repeat the process by which in the last century we succeeded in advancing our interests, namely, by producing efficiently, and assisting in the development of those countries whose resources are as yet undeveloped, particularly our own Dominions, Colonies, and Crown Possessions. Not only have we been very backward in develop- ing our national and imperial industries on the highest possible basis of efficiency, but we have allowed foreign countries, and Germany in par- ticular, to control those industries concerned in the development of natural materials, namely, zinc, lead, spelter, copper, tin, aniline dyes, pharma- ceutical products, palm-kernel oil, &c. If the natural resources were not to be found in our own terri- tories we should not have much to say; but when we literally control these resources and allow them to be developed by foreigners, have we any right to call ourselves an intelligent race ? The development of natural resources is an industry which is mainly conducted on the high seas, and does not require the same space and labour as is required in a manufacturing business. These natural resources can be dealt in without even being imported home, but the chief point to be remembered is that from the business standpoint they are more wealth-productive than finished manufactures; the reason being that they are more easily controlled Digitized by Microsoft® IMPORTS TO EXPOETS. 33 than the industries engaged in actual manufacture. The materials which are derived from natural material must be bought for use in actual production, and that being so, those who control them can easily obtain their asking price. In this connection the following statement recently made by Mr. Hughes, the Attorney-General in the Australian Commonwealth Parliament, on the second reading of the Enemies' Contract Amend- ment Bill, will be of interest : — " Most, if not all, the mining companies of Australia, said Mr. Hughes in his introductory remarks, had entered into contracts for the disposal of their products up to 1921. Many of the contracts contained clauses providing for suspension in the case of war and revival afterwards, the period of the war being added to the original term, so that if a contract was originally arranged to expire in 1921 and the war lasted three years, the term of the contract would be extended to 1924. The value of the annual output of base metal in Australia was estimated at not less than £13,000,000, and over this Germany's control was almost complete before the war. " Such uncertainty and doubt existed among the companies in regard to their contracts as to aSect not only their present operations, but seriously to hamper their future development. " The position in which they are placed, indeed, threatens to paralyse every efEort, not only to develop their business but to divert trade from Germany to Britain and its Allies. They are unable, for example, Digitized by Microsoft® 34 ON THE RELATION OF to enter into any contract with anyone but the agency through which German influence operates for the sale of their products. Naturally, manufacturers in Great Britain are unable to enter into contracts for the pur- chase of such products. Yet before a group of capitalists can be induced to invest £4,000,000 or £5,000,000 in the manufacture of spelter, or the zinc of commerce, they must be assured of an ample and regidar supply of the metal they require. That is precisely what cannot be assured to them under existing conditions." The companies of Australia and the capitalists of England, Mr. Hughes went on to explain, were unable now to come to the point where it was possible to divert to British or friendly channels the metal which flowed sometimes to Germany, to Belgium, to France, or to other countries, the lion's share of the profits from which went to Germany. " They are unable to do so not only because of the contract relating to the supply of metal, but also because they have contracts which give the exclusive selling agency to one firm, which for all practical pur- poses is German. We may now deal in detail with the extent to which the control over lead, zinc, copper and tin by German influence goes. The position before the war was this : Practically the output price and sale of all lead was governed by the Lead Convention ; zinc by Aaron Hirsch & Sohn, Beer Sondheimer & Co., and the Metallgesellschaft ; copper by Aaron Hirsch & Sohn. Upon the outbreak of war the Lead Con- vention was reconstituted, nominally without the German element, but to all intents and purposes the control of lead to-day is exercised by the same people Digitized by Microsoft® IMPOETS TO EXPORTS. 86 as before the war. The same element is dominant, and it is through that channel, and that channel alone, that every pound of lead is purchased by the Admiralty and the War Office." Mr. Hughes explained that the control of the metal industry originated through the operations of the firm of Merton, of Frankfort-on-Main, whose ramifications were world-wide. It is represented in almost every civilised country, and its methods are typical of the German character. " This German group have their headquarters at Frankfort-on-Main, and exercise power in every country in the world. They have daughter companies — off- shoots — in America, Africa, and Australia. The Metall- gesellschaft, which is one of the first forms in which the Merton combination expressed itself, dominates the market in America, Africa and Australia through daughter companies. The Australian Metal Company, for example, under which name the German group operates here, is a company registered in Australia. This brings me to what I mentioned at the outset that in form we have not to deal only with contracts between an alien enemy and a British subject, but with contracts between persons who are nominally British subjects — between a company registered in Australia and another company also registered in Australia. The Australian Metal Company, to all intents and purposes, is the Matallgesellschaft, and the Metall- gesellschaft is a German combination working in con- junction with the Merton group." The moral to be derived from the foregoing is this : that we ought to have had a Minister of Digitized by Microsoft® 36 OX THE RELATION OF Industry and a group of industrial banks co-operating with our industries in developing our resources of natural materials. Our present group of banks will not make advances against natural materials— they are not laid out for that class of work — hence the success of the Germans in the direction pointed out by Mr. Hughes. As we have indicated in the earlier part of this article, in a world of keen competition the weak must give way to the strong — as with individuals so it is with nations— and it should now be our imme- diate business to see to it that our national and imperial interests are strengthened and adequately safeguarded. An increasing population and thriving trade absorb more land for the erection of buildings, the means of transit, and open spaces for recreation, all of which must be obtained at the expense of the food the land can bring forth. There is thus every reason to wish for an increase in the extent of surface employed in raising food, even if it should be obtained by the reclamation of that which is waste ; there is, for instance, plenty of room in Ireland for an extension of this policy. Digitized by Microsoft® IMPOKTS To EXPORTS. 37 It is yet open to doubt whether high farming and improved machinery or modes of cultivation will hold their ground against the vast tracts of un- occupied land being every day rendered available in other countries, especially the Dominions and Colonies, and the increased facilities for bringing their produce to our markets. If they do, it will almost certainly be by the production of such foods as need to be raised near at hand, which are just those that require the larger space for growth in proportion to their food- value. The next stage, then, in our investigation must be into methods by which those for whom our own soil fails to produce the needful food are supplied with this and the other necessaries of life, and how far those or other methods are likely to continue sufficient for the present population, and to keep pace with its future growth. It clearly matters little towards this end in what manner individual labour is employed, so long as its purpose is to procure what is required, and that this aim is realised. A ton of coal or of iron, though useless in itself as food, is of equal value to a hundredweight of wheat or of meat, so long as the one is interchangeable for the other, but loses all its value when this ceases. In the earlier stages of our commercial history, this country not only produced food enough for all its inhabitants, but had some to spare wherewith it could procure the various Digitized by Microsoft® 38 ON THE RELATION OP articles it chose to obtain from abroad; and up to the period when food produced or retained at home sufficed for all who had to eat it, it was not their existence, but their comfort, their welfare, or their wealth which depended upon the continuance of the nation's trade. From the moment when it became necessary to make use of foreign food, it also became essential that our foreign trade should be made, and its extension with the same rapidity as the population increased could alone save us from starvation. We are essentially a productive and commercial nation; we have been the manufacturers for the world, but are every day becoming less exclusively so since others have discovered that they possess the same sources of mineral wealth as we do. They have increased in numbers and grown in wealth ; they have learnt by our experience, profited by our skill, are copying and improving upon our processes, and are determined no longer to be dependent upon us for that which they can produce for themselves. The Prime Minister and the Chancellor of the Exchequer recently received a deputation of leading bankers from the City of London, which urged the importance of greater thrift in the public depart- ments of the State, and Mr. Harold Cox, a member of the deputation, raised the question of the taxation of certain of our imports. The Prime Minister, in referring to this aspect of the question, in his reply suggested that it was Digitized by Microsoft® IMPOKTS TO EXPORTS. 39 not an easy matter to secure revenue and check imports and consumption. His point was not quite clear to us, although Mr. Harold Cox pointed out to him that alternatively you got one or the other, and that they were both of value. If a tax is put on imported manufactured articles of utility, its object is to check the volume imported, in order that they may be produced at home, and it is difficult to see that a tax on imports of that kind can be of a revenue-producing nature as a tax. A tax, however, on natural materials, wines, champagne, and tobacco is revenue-producing as a tax, because these articles cannot be produced by labour in this country — they are largely the product of Nature. Such a tax would not only be revenue- producing, but it would also have a tendency to check the importation and consumption of all forms of luxuries by putting up the price. Whenever it is possible to bring British labour into competition with foreign labour in the manu- facture of articles of utility, a tax on the imports of these will not affect prices, for the reasons we have already stated elsewhere. But it does have this effect, that in consequence of the increase of our national productive capacity which it brings about by restricting imports, the existing revenues of the State are stimulated at their source, such as income tax, &c., on account of the freer circulation of monsy which it creates throughout all phases of Digitized by Microsoft® 40 ON THE RELATION OF national life by the larger distribution of wages and dividends. The further benefits accruing in the adoption of this policy is this, that with the increase in pro- duction, we can afford to sell cheaper, as our standing charges are spread over the larger units of goods produced, thereby ensuring a minimum cost per unit of goods produced. We hope we have made the point quite clear, for in view of the great destruction of credit values, and the large debt we have created abroad, in consequence of the war, it will be more than ever essential that we should endeavour to increase the ratio of our exports of manufactures to imports. Not only that, but in order to regain or retain as much of the capital or credit values spent on machinery and in other directions in the manufactm^e of war munitions, it is desirable that we should alter the character of our imports, so that our demands for finished articles of utility, natural materials and food products, shall, as far as may be possible, be supplied from our own national energies — we should not import more of these than are absolutely essential to fulfil our requirements if we are to stimulate the existing revenues of the State. Con- currently with this policy, however, there should be established in this country industrial banks, having for their purpose the development of British industrial trade abroad, somewhat on the lines of Digitized by Microsoft® IMPORTS TO EXPORTS. 41 the Deutsche Bank of Berlin. Various schemes are already in process of development with this end in view, and more will no doubt be heard of this aspect of the question at a later stage. But it is undoubtedly the right policy to be pursued in order to force an increase in the ratio of our exports of finished manufactures to imports. It is in this direction only that we can hope to evolve measures neutralising, as far as may be possible, the adverse influences of the war. Germany has evolved the system of developing foreign trade through the influence of her banks with marvellous effect. She has accomplished more in this direction by her scientific methods of banking, in a shorter period of time than would have been possible under our system. Not only that, but, judged by results, her industrial resources have been equal to the demands made upon them by the war, and have defied the four countries sur- rounding her. Who shall deny, therefore, that of the industrial systems, i.e., British and German, the latter has stood the test of war with greater efficiency than the British and their Allies? We have spent millions upon millions of capital with no hope of recovery in the endeavour to equal her capacity and to meet the demands which war has suddenly thrust upon us. The test came upon our industrial system, and it was found wanting. ' It is an expensive price to pay for the false economic doctrines we have hitherto pursued. Digitized by Microsoft® 42 ON THE EELATION OF German methods may not be applicable in all particulars to our national life, but there is a great deal in them and in the spirit from which they emanate that we should study and embody in our everyday industrial life without delay. It should be borne in mind that after the war German character and efficiency will always be there, knock- ing at the door of our economic life at each available opportunity, and that, knowing them to be what they are, we must needs adopt such modifications of our economic life as are essential to counteract their activity. We should not forget that the total value of German imports and exports for the year 1913 were only about 100 millions short of our own total trade. Yet it has taken us over a century, with the added advantage of a great Empire, to reach our present position, whereas Germany reached her eminent position of 1913 practically in the short space of forty years. We care naught for the criticism which may be directed against the political life of Germany and its absolute form of monarchy — let us admit these evils; but take them away, and there is much virtue to be found in what remains. Free Traders we know attribute the great excess of imports over exports to some great virtue attached to their Free Trade policy. It is a false assumption, and the sooner they dismiss it from their minds the better will it be for the country, and particularly Digitized by Microsoft® IMPORTS TO EXPORTS. 43 Ireland; for the reason that, if we are to remain a great European Power, we must get to work to introduce a new set of working conditions having for their object, in view of the German menace, the maintenance of a larger population. Ireland, about the middle of the last century, had a population of 8,500,000, but now it amounts to slightly over 4,000,000, and there must be some reason for the great decline. One of our great objects must surely be to see Ireland maintain a population of 10,000,000 to 15,000,000 souls, and it can be done if we are willing to apply our minds to the subject, and alter the character of our imports. The question we must ask ourselves is this, viz., if the relation of our imports to our exports is sound in practice, why do we find it difficult to maintain a population beyond 48,000,000 souls in Great Britain and Ireland? Does the answer not lie in the fact that we have sacrificed industrial, scientific, educational, and agricultural claims in the pursuit of antiquated political ideals? Chasing the shadows and not the substance? Are we not inclined to measure the value of our import and export trade by its magnituda — we like to see large figures — forgetting all the while that the prosperity of a country depends more upon the condition and efficiency of its internal than upon its external trade ; and that it is possible for the internal trade of a country to render the greatest part of its external trade unnecessary, and Digitized by Microsoft® 44 ON THE EELATION OF yet be as wealth-productive as the other? By way of example, let us take the case of France. We saw her wealth in the ease with which she provided for the German indemnity in the Franco-Prussian War of 1870, and in the rapidity with which she recovered from disasters enough to have paralysed and destroyed nations even stronger than she. Her trade was not large, though with a population less than half that of Eussia, she had double her trade, but although her population exceeded that of the United Kingdom, her trade was less than half of ours. She owed this in great part to the fact that she was able to produce most of the food and other necessaries she consumed, and that she had not, as we do to a very large extent, to seek her food supplies in other countries. Why we should have to do so as extensively as we do is another matter. The needed explanation, then, of the phenomenon manifested in the growing expansion of our imports beyond that of our exports is simply this — that with a prosperous state of trade and manufactures, the mouths we have to feed and the Digitized by Microsoft® IMPOllTS TO EXPOETS. 45 food required to feed them have increased beyond the powers of our own soil to provide for ; and that other nations have been growing in intelligence, wealth, and manufacturing power, and so in the capacity for supplying their own wants, without increasing, but rather decreasing, their demands upon those products of our labour by which our ability to purchase food from them is largely main- tained. Our necessities have been multiplied by continuous seasons of diminished produce from our own soil, whilst agricultural operations have been progressively advancing abroad; thus, concurrently with lessened crops, there has been a lower revenue with which to remunerate our own agriculturists, and they have had less to expend with the manu- facturers for the home trade. That we should have been able thus long to stem these adverse currents does, indeed, manifest the progress of our resources, and the accumulations of our past prosperity in trade; but it does not at all indicate that we may not now be expending more than our income, or at least ceasing to make those accumulations which have contributed to our wealth and given us the commercial standing which we still retam. Neither does it forbid the supposition that if that wealth and that supremacy in trade and manufacture is to be preserved, we must retrace our footsteps, in some directions, and advance with greater boldness and rapidity in others. Digitized by Microsoft® 46 ON THE EELATION OF One feature in the present aspect of affairs appears to have been lost sight of, or not, at least, sufficiently appreciated — namely, the extent to which the wealth, not only the floating, but the realised capital we have — may be held as bankers rather than owners, and how large a portion of our trade we carry on as agents rather than principals, earning commissions instead of realising profits. Our traders have been much too fond of the doctrine of buying in the cheapest market and selling in the dearest — we have too many traders and too few producers. What then are the steps we must retrace? Clearly those of individual and national extrava- gance, of deterioration in the quality of our manufactures, and the honesty of our trade — of undue exaltation of wealth, and dependence upon skill or smartness in obtaining the larger share of that which already exists, rather than upon industry and perseverance in creating and preserving, not money alone, but all that really adds to the wealth of the world. What, too, are those in which we must advance? As individuals we must attach more value to honest labour, whether of the hands or the brains, employed in actual production, or the improved use and lessened destruction of that which labour has already created, and must use the hours reserved from laborious occupation as opportunities for real recreation, not for indulgence in enervating pleasures or exhausting pursuits. Digitized by Microsoft® IMPOETS TO EXPORTS. 47 As manufacturers we need to lessen the cost of distribution, to discourage costly rivalry, to increase facilities of transport, and to seek out new openings for the sale of our goods and the bringing home of natural materials, whether as food or for manufac- ture. As employees we should cease from ruinous strikes and all interference with the devotion of time, strength, and talent wherever they may be profitably employed. As capitalists we must culti- vate those close and cordial relations with labour through which alone money can be made to increase. As bankers we must assist in the development of industry at home and in the export of manufactures abroad, for which special industrial banks are needed ; and finally, as statesmen we must develop national and imperial resources, encourage industry, science, and education, and make all dead values remunerative. These aims can best be accomplished by placing a restriction upon the free importation of manufactured articles of utility, with a prefer- ence in favour of our own Dominions and Colonies, and in giving consideration to the question from a business point of view. Let politicians cease from the practice of making it a party question, and from perverting it to their own ends for the purpose of catching votes. It is a scientific question, and as such it can be measured if it is the general wish that it shall be done. Should any variation be desired from the known result in order to grant preferences Digitized by Microsoft® 48 ON THE EELATION, &c. to other States, let it be considered from the stand- point of business — i.e., what benefit, ultimate or immediate, shall accrue to us as a State from any concessions that may be conceded. But considera- tions of this kind should be left to the Minister in charge of a Ministry of Industry, just as we do in the case of the Foreign Office. Digitized by Microsoft® FOREIGN EXCHANGE— THE BILL OF EXCHANGE. Definition of Par of Exchange. — The par of exchange between two countries consists in a common basis of value, without which bills of exchange could not be drawn between contracting parties. The nations have thus found a medium of exchange in bullion — i.e., gold or silver, or in both. For instance, as between London and New York, the par of exchange is fixed at 4.86.65. The number of grains of gold contained in the British sovereign is equivalent to 4.86.65 dollars in the gold coinage of the United States ; that rate can be obtained at the New York assay office for every English sovereign of full weight, which rate may, there- fore, be termed the par of exchange as between those two centres. The same formula applies also to other centres, such as Paris and Berlin. The point will become clearer at a later stage. In order to appreciate in all its aspects the rela- tion of imports to exports more clearly, it is neces- sary to discuss the influence of the foreign exchange and the bill of exchange upon imports and exports. Prior to the declaration of war it used to be freely discussed that in the event of a great war London Digitized by Microsoft® ® 50 FOREIGN EXCHANGE. would lose its pre-eminence in international finance. Personally, we were not of that opinion, for the simple reason that so long as it is necessary for us to purchase abroad a large part of the food we con- sume, so long will the bill of exchange on London be preferred to most others. And, ipso facto, so long would London retain its pre-eminence in that par- ticular class of business. We are essentially a manufacturing nation, but the point we have more than once endeavoured to emphasise is this : that in order to sustain our ability to purchase our essential requirements abroad in the form of foodstuffs and natural materials, it is neces- sary for us to be able to manufacture efficiently and export on the lowest possible basis of cost. It will be seen from this observation, therefore, that the London Money Market has to rely in a great measure upon the ability of our industries to export in order to sustain its strength in full activity. This aspect of the question has not, we are afraid, been considered in its full bearing by those concerned. America is practically self-contained : it produces all the food it requires to sustain its industrial popu- lation. Germany is practically self-contained, as it produces about 85 per cent, to 90 per cent, of its requirements. In the case of Great Britain, its farms are in Canada, Australia, India, the United States, the Argentine, &c., and whilst it may be considered a Digitized by Microsoft® rOEEIGN EXCHANGE. 51 great disadvantage in having to purchase a large part of her food requirements abroad, from the national point of vievsr, it has its compensating advantages in that it enables her to maintain a large mercantile fleet plying the various seas in bringing home what she requires, and in taking abroad her manufactures for sale to liquidate the cost of ouc food bill and natural resources, and possibly to cover investments. These transactions create a financial business which is the backbone of the London Money Market, and which it is not slow to take advantage of; it, of course, adds to this other foreign trans- actions ; but it nevertheless demonstrates in a very decided manner how closely British finance has to rely upon the success and efficiency of British industry in the successful pursuit of its financial business. It seems to us that a bill of exchange issued to cover the cost of food or natural materials imported to this country is a much better security for the London banker than a similar bill issued, say, to cover a shipment of goods from New York to China. The banker can, it is true, make his profit in either direction, but it would be more patriotic and bene- ficial to our national industries if he were to diminish the ratio of our invisible exports, and endeavour to increase the ratio of actual exports by helping British industries to export abroad. If the banker employed his funds more in developing home indiis- Digitized by Microsoft® 52 FOREIGN EXCHANGE. tries he would help to find profitable employment for the population, and help to get over many of the labour difficulties we have to contend with. Not only that, by adopting the policy suggested he would be encouraging the manufacturer to spend his spare capital in increasing the productive capacity of his plant by installing modern equipment, which is another way of stating that he will enable our national industries to sustain our national prestige, both from the military and political points of view. To emphasise our point more clearly it is only necessary to point out, for instance, that in 1912 Germany exported to the Argentine goods of the value of about £13,000,000 (space forbids us to go into detail), and that she took from that country very much less than she exported. Who paid the difference? Perhaps a bill of exchange on London covering the cost of the food bought by Great Britain. There seems to be very little doubt, judging from the details available, that this is the correct interpretation. German manufacturers obtained the benefit of the exchange. In this particular case proof is again shown of the need of closer co-operation between finance and industry in this country, and for both these forces to adopt a national policy which will sustain both interests. The labour interest is involved in that of industry, so that if we discuss the one, we discuss the other. Digitized by Microsoft® FOREIGN EXCHANGE. 53 In the previous article we discussed the early history of foreign exchange, which began with the simple form of barter, but with the advance of the science of banking there came as a later development the bill of exchange, issued by various nations to cover the purchase and sale of goods abroad, and also to cover finance operations. Mr. Hartley Withers, in his admirable little book on " War and Lombard Street," describes a " bill of exchange as a bill drawn by the manufacturer or shipper in a foreign country against the importer in this country to cover the cost of the payment of the goods he may have shipped. It is usually drawn payable in two, three, or six months after sight, and sight means the date on which the bill, having arrived in London, is presented to the acceptor for acceptance. " The bill is usually sold in the country of its origin to a banker or dealer in exchange, who for- wards it to his agent in London, and after it has been approved and accepted, it is discounted by the agent on behalf of the foreign banker at the current rate of discount. " When the bill falls due it has to be paid, either by the importer of the goods if it was drawn directly on him, or by a bank or accepting house which the importer has induced, by paying it a commission, to accept the bill on his account, and so produces a bill that is ranked as first class, and can be sold Digitized by Microsoft® 54 FOREIGN EXCHANGE. more easily. During the two or three months of its currency the bill has thus provided credit for the importer, giving him time to sell the produce that he has imported, and has at the same time provided a very nice liquid investment for bankers, who always hold a large number of bills of exchange among their assets. " We have seen that most of the bills drawn on London from abroad are drawn on banks and financial houses. This is often so even in the case of bills drawn against goods shipped to England, because the credit of the importing merchants does not, as a rule, stand so high as that of the banks and great houses, and so the merchants pay a com- mission to the banks and financial houses for accept- ing bills on their behalf, and thus are enabled to pay their customers abroad with a bill that is more readily sold. In the case of bills drawn against goods going from one foreign country to another, or of finance bills drawn against no shipments of goods any- whither, the banks and finance houses (who are often called accepting houses from their doing this business) are nearly always the acceptors, and so are liable to meet the bills when they fall due." The foregoing is an admirable description of the function of a bill of exchange, and for the reasons we have already shown, owing to the number of bills that are issued abroad on Great Britain to cover the cost of the shipment of food supplies, natural Digitized by Microsoft® FOREIGN EXCHANGE. 55 materials, and manufactures, and also owing to the fact that Great Britain always pays her debts in gold, it is not over-stating the case to say that the principal dealings in bills of exchange abroad consist of bills drawn on London. That this is so may be gauged from the fact that there are many trans- actions between countries which have no direct exchange relations which are settled by bills or cheques on London. It is also well known that foreign banks, like the Banque Nationale de Belgique, the Netherlands Bank, the Bank of Italy, Austro-Hungarian Bank, and others, always hold among their liquid assets substantial holdings of bills on London. These banks do this because they can always rely upon Great Britain paying her debts in gold, consequently they look upon their bills on London as gold; it is chiefly owing to this fact that the rate of exchange on London has come to be regarded par excellence the international rate of exchange. The bill of exchange on London has come to be regarded as the currency of the world ; it represents gold, yet can be handled with much greater facility; it is preferred to gold because it can be transferred with greater rapidity, with greater certainty, and with infinitely less risk than would be involved in the shipping of gold. In other words, it is regarded as being the most afficient and wholly satisfactory Digitized by Microsoft® 56 FOREIGN EXCHANGE. instrument that can be devised by which debts between the various countries can be liquidated. In view of the very large foreign trade transacted by this country, it would seem to be essential that our manufacturers and merchants should study care- fully the functions of the bill of exchange, and also the fluctuations of the various foreign exchanges, that excellent barometer which indicates the strength of the countries concerned in international trans- actions. These transactions, as already shown, cover the import and export of goods, financial and commercial operations of every kind, stocks, debentures, and coupons, remittances of money, and many other items, and are naturally of a very comprehensive and substantial character ; they are studied very care- fully by all sections of industrial activity in Germany, as they realise the importance of these services in influencing the tendency of trade. Our manufacturers must realise that trade is diverted to those countries which can produce the most efficiently, are the most energetic, and which conduct their transactions in the most intelligent manner. The foreign exchange, for example, is the barometer which enables the merchants, the bankers and the industrialists to form a true estimate of the upward or downward tendency of trade, and the general international situation. Various economic, financial, monetary, and political events influence Digitized by Microsoft® FOREIGN EXCHANGE. 57 the progress of business and the position of the foreign exchange, particularly in those countries having a forced paper currency, as they are more sensitive to political rumours or any change that may take place in the international barometer. Not only that, but owing to the improved means of transit and improved telegraphic and cable service, producers and consumers in foreign countries are brought into closer contact, so that competition for international trade is more keen than it used to be: This competition is also due, in a large measure, to the fact that Germany and America are as capable as Great Britain of satisfying the requirements of the world. And now we have to discuss the rate of exchange and what it means. Before a manufacturer enters into engagements abroad, this is an aspect of the question which he has to consider before submitting his quotations. His first object is to obtain the highest rate of exchange for the bill he may draw against the goods he may ship abroad, and if he is an importer of goods he will endeavour to arrange his transactions so that he may pay as little as pos- sible in pounds sterling for the goods or stocks he may buy abroad. He will desire in both cases to have the rate of exchange in his favour. * Occasions do arise where it is impossible for the manufacturer to export or import goods owing to the position of the rate of exchange, but if it Taries Digitized by Microsoft® 58 FOEEIGN EXCHANGE. in his favour, then it may become a profitable trans- action. But what is meant by the rate of exchange? We will not discuss here the technical aspect of the ques- tion as it may concern the banker, but merely its relation to industrial problems. In the study of foreign exchange great confusion often arises in the mind of the ordinary layman owing to the twofold character of the action of exchange and its results, and of the necessity of realising in one conception the drawers and buyers of the bills, and the two countries or more to which the transactions apply. We have seen what is meant by a bill of exchange. Now, assuming that the time has arrived for the settlement of these bills, if it is found that London owes more to New York than New York to London, the supply of bills on New I'^ork in London will naturally be less than the supply of bills on London in New York. In other words, a situation would arise where the demand for bills on New York in London would be greater than the demand for bills on London in New York. There would, therefore, be a temporary fluctuation in the value of the exchange in favour of the country occupying the strongest position. The moment the surplus of debt is liquidated, either by the shipment of gold or by other credits, the rate of exchange returns to par, and the struggle commences over again. Digitized by Microsoft® FOREIGN EXCHANGE. 69 A perfect transaction would be as follows, viz. : Imagine two British manufacturers shipping to their respective agents in the United States goods of the value of £5 ,000 each ; these two transactions would be equal to the value of £10,000, and bills would be drawn to that amount on the agents, payable, say, on the 1st December, and sold in the London market at the usual discount rate. On the other hand, imagine two manufacturers in the United States shipping goods to their British customers, one to the value of £7,500 and the other to the value of £2,500, which transactions would also equal £10,000, and that the American manufacturer drew bills on their British customers payable on the 1st December, and sold them in the New York market at the usual rate of discount. On the due date — i.e., 1st December — the bankers in New York and London would have an equal amount of bills to exchange and close the transactions. It will be seen, therefore, that the debts on both sides would be liquidated without a single ounce of gold or silver being transmitted. The rate of exchange would then remain at par, but in the event of the bills payable being greater on the one side or the other, the rate of exchange would vary in favour of the country to which the greater amount of money was owing, and would not return to par until gold or some other form of credit had been shipped to correct the difference. i Digitized by Microsoft® 60 FOREIGN EXCHANGE. There do arise occasions, however, when a group of nations form parties to a transaction at a particular time. For instance, occasions arise, say, when tea is shipped from Yokohama to New York, and the owner draws a bill on the importer in New York payable in London ; the accepting bank in London therefore looks to the New York importer for pay- ment. And when a British manufacturer ships goods to Japan of a value approximating the value of the tea shipped to New York, drawing a bill in the usual way on the Japanese importer payable in London. And when a British importer imports food products from America of a value approximating the value of the tea, and has a bill drawn on him by the American exporter. It will be seen that in this instance given the transactions are all squared without the neces- sity of gold or silver having to be transmitted by one party or the other. It does not follow, of course, that all transactions between nations are squared in this manner. On the contrary, occasions do arise when the net balance of trade is against a country which can only be liquidated by the creation of tem- porary credits or a loan. The foregoing is a simple elementary illustration of the working of the foreign exchanges, given for the purpose of enlightening the industrialist as to their operation. It should be remembered, of course, that direct exchange relations between countries Digitized by Microsoft® FOREIGN EXCHANGE. 61 usually follow in proportion to the direct exchange of imports and exports. The developments of foreign exchange between nations are always more or less modified in the course of a generation : they fluctuate in favour of those nations whose trading is conducted on the most intelligent lines; this is a platitude, but it is as well to bear it in mind. Now a striking example of the fluctuation of the foreign exchange is given in the case of New York and London. In the month of August, 1914, imme- diately after the declaration of war, the rate of exchange on London in New York went considerably in favour of London. Prom the address which Dr. Ewing Pratt, the Chief of the Bureau of Poreign and Domestic Com- merce at Washington, gave to the Californian Bankers' Association at San Prancisco, on May 27th, 1915, already mentioned, he states that the economic situation of the United States at the time of the outbreak of war, whilst it was apparently stable and fundamentally strong, was not as enviable or as independent as many of them were wont to believe ; and that, as a matter of fact, it took a great European War and a catastrophe of first magnitude to show their depen- dence upon Europe. This was for the most part due to the large number of loans which had been made to the United States by Europe. The following extract, taken from Dr. Pratt's address, is most Digitized by Microsoft® 62 FOREIGN EXCHANGE. instructive and illuminating, and is given for general information and because it is not in print : — ' ' The best index of the state of our foreign trade is what is popularly known as the balance of trade, but this is a term which is often improperly inter- preted, and has been held to mean many things which it does not mean and never could mean. As popularly used, the term balance of trade means simply an excess of exports over imports or an excess of imports over exports, and it is popularly stated that when the volume of exports exceeds the volume of imports we are experiencing a favourable balance of trade; but when imports exceed exports, we are then experiencing an unfavourable balance of trade ; and it is popularly supposed that when the imports exceed the exports we must pay the balance by shipments of gold, and that when the exports exceed the imports, balances must be paid to us in gold. " As a matter of fact, nothing could be further from the truth. The excess of exports over imports is merely an apparent balance of trade,* and is only apparently favourable to us. There are many others, and as important factors, to be taken into considera- tion which do not appear on the surface, and which * Dr. Pratt cannot mean this aa a general principle.' I imagine he has in mind only the general experience of the United States before the declaration of war. There must be a point beyond which an excess of exports is of advantage to the United States, as for ins(;anoe in the situation which exists at present. Digitized by Microsoft® rOKEIGN EXCHANGE. 63 are therefore called the invisible factors in the balance of trade. ' ' TOTAL IMPORTS AND EXPORTS OF MERCHANDISE OF THE UNITED STATES AND EXCESS OF EXPORTS DURING EACH CALENDAR YEAR FROM 1900 TO 1915. Calendar Year. Imports. Exports. Excess of Exports. 1900 829,149,714 1,477,946,113 648,796,399 1901 880,419,910 1,465,375,860 584,955,950 1902 969,316,870 1,360,685,933 391,369,063 1903 995,494,327 1,484,753,083 489,358,756 1904 1,035,909,190 1,451,318,740 415,409,550 1905 1,179.144,550 1,626,990,795 447,846,245 1906 1,320,501,572 1,798,243,434 477,741,862 1907 1,423,169,820 1,923,426,205 500,256,385 1908 1,116,374,007 1,752,835,447 636,461,360 1909 1,475,520,724 1,728,198,645 252,677,921 1910 1,562,904,151 1,866,258,904 303,354,753 1911 1,532,359,160 2,092,526,746 560,167,586 1912 1,818,073,055 2,399,217,993 581,144,938 1913 1,792,596,480 2,484,081,292 691,421,812 1914 1,789,276,001 2,113,624,050 324,348,049 1915* . . 405,293,724 854,187,034 458,893,310 • Three months. (a) " The first and most important factor in this invisible balande is the payments due to European capital on investments made in the United States. Federal, State, and municipal bonds vs^ere first spld Digitized by Microsoft® 64 FOREIGN EXCHANGE. abroad in the first quarter of the nineteenth century, but beginning in 1836, when Baring Brothers pur- chased a large block of B. & 0. Eailway bonds, European, and especially English, capital has flowed steadily into the United States. In addition to the total amount of American securities held in Europe which are relatively fixed investments, there is a large floating debt, composed of produce bills, finance bills, loans against securities, overdrafts, &c., amounting in all to not less than $500,000,000. The annual net interest charged on this large body of foreign investments which we must pay to Europe amounts to something over $300,000,000. " It is a great error, however, for us to figure this as a loss. It is only necessary for us to consider that our railways, our mines, and many of our manu- factures have been developed with this capital. It is not only of great utility to us, but it is absolutely indispensable to our prosperity. We must pay the interest, but ours is the gain in internal development. Value has been added to our land, our resources have been made accessible, and the production of wealth has been increased many fold. (b) " A very large item in our invisible balance is that of expenditures of American tourists abroad. This is an increasingly important item, and in 1914 (fiscal year ending July 1), probably not less than 286,586 Americans travelled abroad, whose expendi- tures were approximately $250,000,000, Digitized by Microsoft® FOEEIGN EXCHANGE. 63 (c) " Another item in the invisible exports of the United States is that of remittances to friends. This is an item largely dependent on our very large foreign population. The total foreign-born popula- tion of the United States is about fifteen million. These people probably send home a total amount of not less than $150,000,000. (d) " The fourth important factor in this in- visible balance of trade is the tribute which we must pay to other nations because we lack a merchant marine. The payments which we have made to other nations have been very large, and amount normally to probably not far from $50,000,000. " In order to show this balance clearly it might be worth while to strike a very brief balance-sheet, and to find out exactly where we stood at the beginning of the European War. " Balance of Trade in Detail. " Our balance of trade, both visible and invisible, during the last fiscal year would, therefore, be some- thing as follows : — FOREIGN TRADE OF THE UNITED STATES DURING THE fiscal year 1914. Merchandise. Exports 2,365,000,000 Imports 1,894,000,000 Excess of exports over imports . . . . 471,000,000 P Digitized by Microsoft® 66 FOEEIGN EXCHANGE. Gold. Exports 112,000,000 Imports 67,000,000 Excess of gold exports over imports . . 45,000,000 Silver. Exports 55,000,000 Imports 30,000,000 Excess of silver exports over imports . . 25,000,000 Total Excess 540,000,000 Remittances. Interest (net) . . . . . . 250,000,000 Tourist expenditure (net) . . 170,000,000 Eemittances to friends (net) . . 150,000,000 Freight 25,000,000 595,000,000 Excess of sum remitted over trade balance $55,000,000 " This balance-sheet shows that we had pay- ments to make in Europe over and above the total amount of merchandise exported, and this fact means that we were still contracting debts in Europe at the outbreak of this war. But the situation has changed since the 1st of August, 1914, and during the first nine months of the fiscal year 1915 the situation has been reversed, and a balance-sheet for those nine months, for which the figures are now available, shows that instead of owing Europe con- siderable sums at the end of that time, Europe actually owed us $452,600,000." Digitized by Microsoft® FOREIGN EXCHANGE. 67 FOREIGN TRADE OF THE UNITED STATES DURING THE PERIOD FROM JXILY 1st TO DECEMBER 3Ist, 1914, AND JANUARY 1st, 1915, TO MARCH 31st, 1915. July 1st to Dec. 31st, 1914. Jan. 1st, 1915, to Marcli 31st, 1915. Exports Imports Merchandise. 1,067,000,000 808,000,000 $864,000,000 405,000,000 ^Tmport?^'*' "''.'!} 1259,000,000 Gold. Exports .. $139,000,000 Imports . . 27,000,000 Excess of exports over\ imports . . . . / Silver. Exports . . $26,000,000 Imports . . 13,000,000 $459,000,000 $2,700,000 45,200,000 $112,000,000 *42,500,000 ^TmportsT'*' "^."} $13,000,000 Total excess . . $384,000,000 Remittances. Interest . . $125,000,000 Tourist expen- ditures . . 50,000,000 Remittances to friendsrelief 50,000,000 Freight . . 10,000,000 Total $235,000,000 $11,800,000 7,200,000 4,600,000 $421,100,000 $62,500,000 25,000,000 25,000,000 5,000,000 Excess of trade balance over remittances . . . . $149,000,000 * Excess of imports over exports. \ $117,500,000 $3036,00,000 $452,600,000 J Digitized by Microsoft® 68 FOREIGN EXCHANGE. It will be seen from the facts mentioned by Dr. Pratt, therefore, that, owing to the dislocation of the shipping traffic and the breakdown of the general machinery of foreign exchange in London in con- sequence of the declaration of war, the rate of exchange on London went considerably against the United States. This was due to her inability to ship gold or other credits to London to liquidate the varia- tion in the exchange, which was against her. The following list of quotations will indicate the position more clearly : — KATES OF EXCHANGE ON LONDON. 1914. Sight. 60 days. Cable. July 2nd 4.88.10 4.85.75 4.88.85 July 23rd 4.88.10 4.85.75 4.88.85 July 29tli 4.93.45 nom. 4.89.50 August nom.* nom. 5.00 September nom. nom. (■5.00 14.95 October 15th . . nom. nom. 4.97J In consequence, however, of clearing the Atlantic and the Pacific Oceans of enemy ships by the British Fleet, and also of the large orders which have been placed in America by the Allies for munitions of war and food products, a real balance of trade has gone in favour of the United States for the first time in its history, as mentioned by Dr. Pratt, amounting * At the annual meeting of Lloyd's Bank the Chairman (Mr. R. V. Vassar Smith) stated that *he^M|i^^ E^^p^jg^ this period went as high FOEEIGN EXCHANGE. 69 to no less than $452,600,000 for the first nine months of her fiscal year ending in 1915, and which has enormously increased since. This is indicated by the following table, which is a continuation of that given above, and which shows the rate of exchange on London going strongly in favour of the United States : — Sight. 60 days. Cable. October 22nd, 1914 . . 4.95 4.91.50 4.95.50 November 26th „ 4.90i 4.85 4.881 December 31st „ 4.85^ 4.82 4.86.15 January 28tb, 1915 . . 4.85i 4.83^ 4.85f February 26tli, „ . . 4.80J 4.79 4.80i March 31st, „ 4.79i 4.77i 4.80 April 22nd, „ . . 4.79 4.76i 4.79f August 12th, „ 4.751 4.71 4.76J August 13th „ 4.711 4.67 4.72 August 14th „ 4.69^ 4.65 4.704 August 16th „ 4.67 4.62| 4.67i Briefly put, the position is this, that shortly after the declaration of war if an American wished to come to London and desired to change his money, a five-dollar bill — i.e., 500 cents — was only equal in value to a British sovereign, whereas on the 16th August, 1915, it would only cost him 467 cents — a reduction or a saving in his favour of 33 cents over the former transaction. Digitized by Microsoft® 70 FOEEIGN EXCHANGE. The rate of exchange of 467 cents on London is the lowest point ever reached, and may yet go lowei unless immediate steps are taken by our authorities to liquidate the variation from the normal rate by creating credits in New York or shipping a sufficient amount of gold.* What has aggravated the situa- tion more than anything is the hasty manner in which the last War Loan was floated by us. It was hardly necessary to give a rate of interest of 4J per cent. British credit was worth a better rate than that. A rate of 3J per cent, not subject to income tax would have been a sufficient inducement ; and it would not have depreciated the value of exist- ing securities. If the Government desire the public to subscribe for War Loans, they should not destroy confidence in the value of existing securities. The bankers in New York do not know to what extent our income tax may yet go, hence their disinclination to accept our War Loans as at present constituted. The most satisfactory way to get over the exchange difficulty in New York would be to create a large credit in New York, in the form of short term Gold Dollar Treasury Bills, say for £100,000,000 sterling, bearing interest at a rate not exceeding 4 per cent. As these bills would be free of income tax, they would be most acceptable to New York bankers. The normal rate of exchange on London is fixed at 4.86.65. The number of grains of gold contained in the British sovereign is equivalent to 4.86.6-5 in The rate of exchange on London in New York eventually dropped to but in consequence York it has since recovesi 4.51, but in consequence jif the llot^tipn of tiie Anglo-French Loan in New eJSigeksmm imrosofm FOREIGN EXCHANGE. 71 the gold coinage of the United States, which may therefore be termed the " par of exchange " as between the two countries ; that rate can be obtained at the New York assay office for every English sovereign of full weight. If gold is shipped to the United States in normal times, however, the im- porter has to pay the cost of shipment, insurance, loss of interest, &c., which is usually estimated at about 2J cents in the pound, so that will bring it up to 4.89.15. In normal times, therefore, when the rate of exchange drops below 4.84J, gold will begin to move from London to New York, or vice versa; when it goes above 4.89.15, gold will move from "New York to London. As the rate of exchange before the declaration of war was 4.88.85, it will be seen that the rate of exchange is now as much against us as it was against the United States shortly after the declaration of war, and for precisely the same reason. It is an excellent object lesson in the fluctuation of the rate of exchange, The great drop in the rate of exchange on London is a serious matter for us, inasmuch as the British sovereign will not go as far as usual in settling dollar debts created by the purchase of munitions of war and food products by the Allies in the United States. Dr. Pratt, however, has a most interesting observa- tion to make with regard to this aspect of the ques- tion, and as it is in many respects a sound funda- Digitized by Microsoft® 72 FOREIGN EXCHANGE. mental principle, we cannot do better than quote it in full :— " The low rate of sterling exchange in New York is not, however, altogether desirable, because an ex- change rate on London of $4.80, or thereabouts, means that the pound sterling does not go as far as usual in settling dollar debts. The English buyer of cotton or wheat in all markets must give more sterling to make up a given sum in dollars. The situation is, therefore, entirely reversed from what it was immedi- ately after the War broke out, and until late in the fall, when the balance of payments was against us and dollars were under-rated. The present situation is one which we can view, naturally, with comparative equanimity ; but next to a business man's anxiety about how to pay his own debts, comes the anxiety about how other people are to pay him and continue to buy of him. The low rate for the pound sterling makes our commodities cost more to English buyers and to all buyers who must make payment from London, without any compensating advantage to us. It is equivalent to a tax on our commerce, and amounts to an obstruction between us and our customers. It is not a very large percentage yet — about one cent on a dollar — but with trade balances piling up as they have been in the last three months, it will be larger, unless some means are found to effect settlements. " How large will this credit become ? This is a question which we cannot answer at the moment. The course of trade is now heavily in favour of the United States. In August last, there was a balance against UB of $19,400,396. Since then there have been monthly Digitized by Microsoft® FOREIGN EXCHANGE. 73 balances in our favour, as follows : September, $16,341,722 ; October, $56,630,650 ; November, 179,411,271 ; December, $130,976,013 ; January, $145,730,996; February, $174,682,478; March (estimated), $157,000,000. The facts already given indicate that the monthly sums which the American people needed to send abroad for interest and for other purposes are not much more than $40,000,000. Hence, in January, America sold goods to the extent of over $100,000,000 in excess of the amount she needed to sell, in order to pay for her imports and to meet her foreign obligations. The United States was thus in a position to purchase over $100,000,000 worth of foreign securities. Inasmuch as the amount of gold imported into the country in January was comparatively insig- nificant, it is evident that the United States invested this large sum of money either in international bills or securities or to the account of American bankers in foreign countries. Were the trade balance of January maintained throughout the year it would be evident that the United States would invest abroad in the current year not far from $1,000,000,000. Whether or not the United States will have as much money as this to invest abroad in 1915 cannot as yet be determined, as the amount depends upon many factors, the influence on which cannot be predicted. Were existing conditions to continue, we would confidently expect the United States to invest in the current year millions of dollars in securities of other countries, or in her own securities now held in Europe. Indeed, a very conservative estimate of the amount of money which the United States will invest abroad this year is one billion dollars. (b) " During the first few months following the Digitized by Microsoft® 74 FOEEIGN EXCHANGE. declaration of war, considerable amounts of gold were exported from the United States. In October the exports of gold exceeded the imports of gold by over 144,000,000. In December the tide turned and the imports of gold exceeded the exports ; and during the month of March, 1915, the excess of imports over exports of gold was $24,696,576. This is only another evidence of the fact that the gold is being imported to meet the large trade balances which have been piled up in our favour. It may not be an entirely desirable thing to have a large quantity of gold coming into this country, especially when so large an amount of gold has been set free for current use by the provisions of the Federal Reserve Act ; but these importations do indicate the fact that we are piling up a continued trade balance in our favour. The total excess of imports over exports of gold from December to the present time (March, 1915 — 4 months), has amounted to a total of $46,552,217. (c) " Without doubt the most important factor in foreign trade afiecting domestic prosperity is the position which the United States is assuming as a creditor nation and her present ability to loan capital to other nations. " The bugaboo of our being a debtor nation is no longer a bugaboo, because in spite of the fact that we are still indebted to foreign countries, we have started to pay off our indebtedness and are thus becoming for the first time a creditor nation. Personally I have not been very much impressed by the statements of those who say that because we are a debtor nation, or because large amounts of American securities are held by foreign countries, we should not attempt to go after Digitized by Microsoft® FOEEIGN EXCHANGE. 75 foreign business on a large scale and to make invest- ments in foreign countries and to invest in foreign securities. After all — and every banker knows that the average business concern does business on borrowed capital — there is no reason why if we can use foreign capital in developing the resources of the United States we should not do so. We can then use our own capital, if necessary, for the development of foreign countries which will become markets for our own manufactured products." The italics are ours. In our last article we clearly indicated this possibility ; but now let us go further with Dr. Pratt in his own words. We make no excuse for quoting so extensively, as his address is not in print, and it would be a pity that a case so ably presented should be lost to literature. It fully substantiates the case we have hitherto defined from our standpoint. " The secure position in which we seem to be estab- lished as a creditor nation on current account is the most important factor in the home situation. As already indicated we have reached the situation where, instead of being concerned lest our securities may be returned too fast, we are beginning to be concerned because they do not come fast enough to keep the exchange in normal condition. The short foreign loans that are being made here are the same as gold in the reserves as protection against any foreign liquidation of our securities that may develop as the work progresses. The credits of this class that have been given in no sense represent the capital withheld from home use. For Digitized by Microsoft® 76 FOREIGN EXCHANGE. if they were not taken it would be necessary that reserves in this country should be correspondingly stronger. They are an outer line of defence which must be passed before a foreign demand can reach our store of gold. Considering the surplus reserves of the national banks and the reserves and note issuing power of the Federal Reserve Banks, the situation is now so strong that an enforced contraction of credit seems to be beyond possibility. This assurance is a great boon to the business community. The large trade balances of credit balances which are being piled up abroad by the United States would naturally be liquidated through the financial clearing house of the world, namely London. They are the natural balances in our trade with the world. They have been settled for the most part through London as the clearing and banking centre and it was in this sense that the United States owed $55,000,000 to London last summer. " What with the issue of foreign securities in London prohibited and with the French and German markets all practically closed to the issue of international securities, New York has the whole field of international finance at her feet. Whether or not New York will be able to maintain after the war the great position which she now holds as an international money market is a question yet to be decided. It is sufiicient to know the un- doubted fact that New York is rapidly becoming a great international money market in which capital can be obtained by every one having adequate security to ofier and willing to pay a reasonable rate of interest. In consequence of this investment of capital abroad and all the great purchases of goods by the belligerent States, the United States are exporting an enormous Digitized by Microsoft® FOREIGN EXCHANGE. 77 quantity of goods in excess of the amount they are purchasing. " Since November, the amount of foreign securities placed in the United States has totalled over $200,000,000, and this sum represents only the actual formal loans which have been placed. In addition to these there have been credits, especially for very large amounts, the exact size of which is unknown, but which probably amounts to much over $100,000,000. " A list of the principal issues of these securities is as follows : — FOREIGN LOANS RAISED IN NEW YORK SINCE NOVEMBER, 1914. Canada. Canadian Pacific Railway Equipment Trust Note $12,690,000 Montreal 5 per cent. 3-year Debentures . . 6,900,000 British Columbia 1-year 4 J per Cent. Treasury Bills 2,700,000 Canadian Northern Railway 5 per Cent. Equipment Notes 2,000,000 Toronto Harbour 4J per Cent. Bonds . . 1,000,000 Toronto Railway 6 per Cent 1,500,000 Toronto, City of, 5J per Cent. Debenture Notes 3,000,000 Alberta, University of, 4^ per Cent. 10-year Debentures 1,000,000 Ottawa, City of, 1-year Notes, 5 per Cent. 1,000,000 Manitoba, Province of, 5 per Cent. 5-year Debentures 5,475,000 New Brunswick, Province of, 5 per Cent. 5-year Bonds 700,000 S.S. Marie, City of, 5 per Cent. 30-year Debentures 500,000 Ontario, Province of, 5 per Cent. 5-year Bonds 3,000,000 Digitized by Microsoft® 78 FOREIGN EXCHANGE. FOREIGN LOANS RAISED IN NEW YORK, &c. — Continued. Calgary, City of, 3-year Treasury Notes . . $2,000,000 Saskatchewan, Province of, 5 per Cent. 3-year Bonds 2,500,000 Do. Further issue arranged for . . 3,500,000 Montreal Trans, and Power, 2-year 6 per Cent. Notes .. .. .. .. 7,000,000 Winnipeg Electric Railway, 1 to 2-year Gold Notes, 6 per Cent 1,500,000 Province of Quebec, 3 or 5-year 5 per Cent. Gold Bonds 6,000,000 City of Quebec, 58. 1920 2,125,000 City of Toronto, 4J per Cent. Bonds due January 1st, 1949 and 1955 . . . . 2,500,000 City of Montreal, 3-year 5 per Cent. Gold Bonds 6,100,000 $74,690,000 Argentine, 6 per Cent. Notes . . . . $15,000,000 Argentine, 6 per Cent. Treasury Gold Bonds 25,000,000 Swedish, 6 per Cent. Treasury Notes . . 5,000,000 Norway, 6 per Cent. Notes .. .. 3,000,000 Germany, 5 per Cent. 9-months Treasury Notes 10,000,000 France, 5 per Cent. 1-year Treasury Bonds 50,000,000 France, Credit 10,000,000 Switzerland, 1-3-5-year 5 per Cent. Notes 15,000,000 Republic of Panama, 30-year 5s. .. 3,000,000 Russia, Credit 25,000,000 Greece, negotiated with American capitalists 7,000,000 * Grand Total to date . . . . $242,690,000 * Since this return was made other Foreign loana have been created in New York, and with the British Credit which ia about to be arranged in New York we may consider the total figure is by now considerably more than doubled. — J. T. P. Digitized by Microsoft® FOEEIGN EXCHANGE. 79 " In the shifting of securities that is bound to take place from the English holdings of Argentine and Canadian issues, they may be transferred to this country if a market for them can be found here. Their pur- chase, instead of new issues of British war bonds, would avoid all of the criticism that might be directed against the purchase of the latter as an unneutral act. More- over, it would bring us into more intimate relations with these growing countries and have a tendency to help our own trade with them. The opportunity to finance these countries has by no means passed, but the extent to which it may be improved depends upon the willingness of the American public to make these outside investments and give attention to the operation of enterprises in these countries. Bankers can negotiate the loans, but they will not be able to carry the policy far unless the buying power of the public is behind them. " One of the undoubted results of the present financial situation will be the increased use of dollar exchange. Ever since the war began the dollar has become more and more important as a medium of exchange between foreign countries, and the use of foreign exchange bills drawn in dollars and drawn on New York have become much more stable than those drawn in any other currency and on any other financial centre. If New York and the United States behind her can become a great financial clearing house and great financial market in which foreign countries can place loans and sell securities, there is no doubt but that the dollar will become an increasingly important factor in inter- national trade. " One of the most important elements which will Digitized by Microsoft® 80 FOREIGN EXCHANGE. go far towards making New York and the United States the financial centre of the world is the development of a branch bank system. Prior to the passage of the Federal Reserve Act of 1913, the national banking institutions were not permitted to extend their activities to foreign countries. The Federal Reserve Act, how- ever, has made it possible to establish branches of American banks in foreign countries and to place back of the branches the prestige, influence, and resources of the home bank. One national bank has already established five foreign branches and contemplates the establishment of other branches in the near future. Other banks in this country have established very close relations with the banking institutions of other countries, and still other banks are carefully scrutinising the field and considering the possibility of establishing branch banks and closer relations with the banks of foreign countries. " The development of the dollar exchange will of necessity be a slow process. London has been the money market of the world for centuries, and the English pound sterling has been the common denominator of value in all commercial transactions for so many years that it will take time to persuade the South American or the Chinaman or the South Sea Islander to substitute the dollar for the pound in his financial transactions. Business interests of the United States must help in this movement, and wherever possible must insist that the payment for foreign invoices be made in dollars on New York rather than pounds sterling on London. New York cannot hope to become a financial city of world-wide importance until the dollar becomes known and its value respected in the markets of the world. Digitized by Microsoft® FOREIGN EXCHANGE. 81 " A provision of the Federal Reserve Act of the greatest value to commercial interests is that which permits national banks to accept six months bills drawn against actual shipments of merchandise in foreign countries, and which provides that those bills, when within ninety days of maturity, may be re- discounted with the Federal Reserve banks. It must not be supposed, however, that the branch banks which are to be established by American banks can confine themselves solely to the foreign exchange business. They must reach out and do a business which is far beyond that of the ordinary foreign ex- change department of the national bank. The business of a branch bank which will really mean something in the development of American trade abroad, must include not only the functions of foreign exchange and the collection of drafts, the accepting of drafts on account of the customers, and open market operations in foreign exchange, but must go in for, to a considerable extent, local loans and discounts, and must take part in underwriting securities and other business commonly handled in this country by trust companies, and must occasionally render services in marketing products. In other words, the branch bank must be the outpost of American finance. " There are, however, certain elements in the situa- tion which must be taken carefully into consideration and which must be reckoned with in determining the course of trade and the continuance of prosperity into the United States. We must not overlook the fact that to a certain extent the present return to a condition of normal prosperity is built upon a certain abnormal foundation. We must not forget the fact that the character of our trade with foreign countries has been Digitized by Microsoft® 82 FOREIGN EXCHANGE. considerably limited in the past few months, and that the alterations are due to the fact that an abnormal war situation exists in Europe. The exportations of manufactured goods are largely composed of munitions of war and various materials which are for the use of the belligerent armies and navies. Nor must we forget the fact that a large part of our exports and exportations of food supplies which are being sent to Europe at abnormally high prices because certain of our com- petitors are not at present in the market, and because there is an unusual demand either for immediate con- sumption, or for the purposes of establishing a food reserve in the belligerent countries. " There seems to be little difierence of opinion among financial experts as to the fact that there will be upon the conclusion of hostilities a more or less serious reaction in the upward tendency which is exhibited in almost every line of industry at the present time. The American manufacturer must look forward to the cessation of his war contracts at the conclusion of hostilities and the return to normal business conditions in Europe ; there is bound to be a period when orders will not come in in large quantities and when conditions will not be conducive to trade expansion. The manu- facturer must also reckon with the important fact that the largest foreign market of the United States will be seriously affected for months and perhaps years after the conclusion of this war. The market in which the American manufacturer has sold a large proportion of his products going abroad has been very seriously disorganised and will remain so for a considerable period at the end of this war. " There is every indication, however, that the Digitized by Microsoft® FOREIGN EXCHANGE. 83 United States will be benefited in the long run by the conditions and problems which she has been forced to meet in the last nine months and will probably be forced to meet in the succeeding months. The emphasis which has recently been laid on the value of foreign trade cannot be anything but helpful to the interests of the United States. Each new foreign market developed by the American manufacturer means more stable trade and more stable business conditions in this country. We are all perfectly aware in the United States of the significance of a crop failure and when one of our great staple crops like cotton, or wheat, or corn, fails us, we know that it means slackened business activity and depression. This is simply because of the curtailment of the purchasing power of a large part of our customers. But it is unlikely that the wheat crops of the United States, and Canada, and Argentine, and Russia, will fail at the same time, and therefore, if our manufac- turers are doing business in all of those markets the failure of any one of them will be of relatively less importance. The greater the extension of our markets and the great diversification of our outlets for our manufactured products, the more stable will our domestic conditions become. " The hanking institutions and the hankers of the United States have something more than a passing function to 'perform in the present situation. Perhaps the most vital need in the development of our foreign trade at the present time is the need of means of financing our foreign trade. It is the hanking institutions of the country whose duty it is to finance foreign trade and who should he pre- pared at the present moment to step into the hreach and finance the developing foreign trade of the United Digitized by Microsoft® 84 FOREIGN EXCHANGE. States. The Federal Reserve Act has made it possible for the first time for the national banks of the United States to establish branch banks in foreign countries. Up to date only one national bank has taken advantage of this provision. There is plenty of room for other banking institutions, and it is hoped that singly or co-operatively they will soon enter this field. It is not, however, always necessary to establish a branch. It may be equally efiective to establish close connections with foreign banking institu- tions. The thing which is most needed is that the banks provide the American manufacturer with Ameri- can banking facilities." The italics are ours. Now the object lesson for us to be derived from the foregoing most admirable statement is this, that we must embark upon a somewhat similar policy. But before we can do this the Free Trade School must go : it is not sound enough in its conclusions ; its principles have been tested and found wanting, and we are spending millions of money right and left in the attempt to save the ship. Free Trade, as we have already mentioned, is an abstract proposi- tion and negative in its results. You cannot build up a scientific system of National Economics unless you have the essential basic conditions to build upon, and you cannot find these in an abstract or negative proposition. Our present working conditions have proved insufficient to enable our industries to develop Digitized by Microsoft® FOREIGN EXCHANGE. 85 on the highest possible basis of efficiency. There has been far too much neglect of our industrial, scientific, agricultural, and educational activities, all of which have been sacrificed at the altar of the Free Trade School, and this is clearly manifested in the collapse of the rate of exchange on London in New York. This want of appreciation of the essential working conditions in which our industries should operate has placed us at the mercy of the various trusts and rings in America, with the result that, owing to the absence of competition, we must pay whatever price they may demand for the munitions of war, machinery, and food products we require for the successful conclusion of the war; not only are the prices exorbitant, but we are compelled to pay part of the profits over again in consequence of the depre- ciated rate of exchange. As we have more than once stated, an industrial system which will not stand the test of adversity cannot be a sound one, either in theory or practice, in a time of prosperity. Our first duty, therefore, must be to place a restriction upon imports, upon the lines suggested herein, so as to correct, as far as may be possible, the adverse balance of trade and rate of exchange with the United States. There is no need, for example, to make matters worse by allowing the free importation of motor-cars for luxury and pleasure; it is in any case an unpatriotic thing to do, consider- ing that our own motor manufacturers are fully Digitized by Microsoft® 86 FOEEIGN EXCHANGE. engaged upon the production of munitions of war in this country. Our next duty is to ensure that a Ministry of Industry and Domestic Commerce is properly estab- lished, with a requisite technical staff to ensure that our Foreign and Domestic commerce is conducted upon scientific principles. National Economics, like everything else, must develop along evolutionary lines, but it cannot be based upon Empiricism, of which Free Trade is the symbol. The methods now employed in conducting the business of the country are wholly Empirical, and are under the control of people who do not comprehend the essential working conditions upon which the business of the country should be conducted. Not only that, but past experience has shown that these same people will even sacrifice our national welfare to catch votes for the particular party to which they belong. Exact Science is nothing to them ; political life is every- thing. It should be the business of the Minister of Industry to see that the financial and industrial interests of the country are co-ordinated for internal and external purposes upon a basis mutually satis- factory to all concerned, in order to further our national and imperial interests for the welfare of the State. And no other consideration should prevail. Finally, we should ensure that those demagogues in politics are removed out of harm's way who Digitized by Microsoft® POEEIGN EXCHANGE!. 87 attempt to pervert the material and economic welfare of the State for their own political purposes. The destiny of nations is now guided by the efficiency of its system of National Economics, which, expressed in other words, means Exact Science in all phases of national life, and we must awake to the reality of that fact. Shall we, then, allow our national welfare to be again flung into the cockpit of party politics, and used as an instrument for catching votes? To be sold to the highest bidder ? The moment has now come for us to decide this most vital of all questions. Are we prepared to do so ? There is only one thing to be said by way of con- clusion, and that is this : that we are glad to see the United States derive whatever material benefits are accruing from this great war. She will be an important adversary for Germany to reckon with when normal conditions of trading return. If Ger- many won the great war even now, she would not be able to dominate the world in the industrial sphere of activity as she had hoped to do. She has already lost all that she had gained by peaceful methods prior to the declaration of war, and that is saying a great deal. She has one mo"re miscalculation to add to those that have already occurred : she over- looked the position of the United States. The American industrial machine is now efficient, and waiting for the resumption of peace. As we must organise in peaoe for war, so we should organise in Digitized by Microsoft® 88 FOEEIGN EXCHANGE. war for peace. From our standpoint, therefore, is it not desirable that we should commence our share of this task at once, and put our industrial system upon the highest possible basis of efficiency, both from the manufacturing and financial points of view ? Let us take time by the forelock, and not leave the consideration of this question until the conclusion of the war. It would be futile. Digitized by Microsoft® 89 NATIONAL ECONOMICS OR EMPIRICISM? The imagination of a hoy is healthy, and the mature imagination of a man is healthy, but there is a space of life between in which the soul is in a ferment, the character undecided, the way of life uncertain, the ambition thick-sighted." — Keats. This quotation of Keats in his preface to " En- dymion " admirably sums up the transitory period through which the United Kingdom is passing in this the greatest crisis of her history. The naval and military situation is being well cared for, but the Economic future of the country is uncertain, and our National and Imperial aspirations thick- sighted. The uncertainty of our Economic future has been brought about by the tremendous expenditure incurred by all the belligerent countries in prosecut- ing the war ; by the vast sums of money which these same belligerent countries are spending in America, Digitized by Microsoft® 90 NATIONAL ECONOMICS thereby enabling that country to accumulate wealth rapidly, and so become a creditor nation instead of a debtor nation; and by the great depreciation of German currency brought about by the blockade of the German coasts by the British Fleet, which can only be rectified by a vast export of German manufactures at the conclusion of the war. The external Economic situation has undergone such a rapid transformation owing to the aforesaid circumstances that it must of necessity modify all our preconceived notions on Political Economy, particularly the system upon which our National Business Policy has been based in the past. It is our purpose, therefore, to review our past theories on Political Economy, to show its weakness, and to suggest the alternative — namely, National Economics. The greatest care should be exercised in discus- sing and deliberating upon questions affecting our National Economy, and precipitate action should, of course, be avoided. It was in view of this con- sideration that each phase of our National activity has been discussed in these essays ; it was thought desirable to begin at the beginning, and work through each phase to a general conclusion, which will now be set forth in this essay. It should be borne in mind, however, that no genuine or peimanent good can be achieved if it is to be treated in the spirit of compromise, or to be subject to passing interests Digitized by Microsoft® OE EMPIRICISM? 91 or class prejudice. We must judge all such questions from the point of view of what is good for the nation — our judgment should not be influenced by party prejudice — for any success we may achieve as indi- viduals can only be a reflex of what the nation may itself achieve in the afifairs of nations. It is a truth that in the past the nation has been sacrificed to party prejudice — to the bitter and unnecessary conflict between classes and masses — and it has been largely brought about by the absence of a National Business Policy. This in turn has resulted in the formation by sections of the com- munity of organisations designed to modify or alleviate the evils which necessarily arise from the absence of a fixed policy. And some have obtained rights and privileges at the expense of others. The external economic pressure has not been felt in the past, due, no doubt, to the vast wealth which as a nation we have accumulated in times gone by, and to the tributes paid to us in the form of interest on that wealth and the financial power which that same wealth has given to the City of London. Bat if the present war has taught us a lesson it has taught us this, that a nation cannot be saved by the strength of its naval and military and financial resources alone; it must be equally efficient in education, chemistry, production (including industry and agriculture), and transportation. In the words of Walter Bagehot — a noted writer on Economic Digitized by Microsoft® 92 NATIONAL ECONOMICS subjects — there never yet was a nation, while getting freer and freer, which ever stopped. Dp to his time the progress of the arts of life, of material civilisation, had been of unexampled rapidity in this country, as was also our mental progress, but if an impartial view be taken of our Economic progress since his time, it cannot be denied that all progress of the kind described has been retarded pro rata with the increase of the intensity of party strife. If, therefore, the lessons of history be taken to heart, we may yet find that the present great war has been a blessing in disguise. The recent speeches of the Chairmen of our lead- ing City Banks have led us to develop our present line of discussion with more interest than usual, for whilst there may have been some justification for the optimism that was shown as to the future of British Banking, it certainly cannot be said that there is any justification for optimism as to the immediate future of British Industry. One eminent banker — the Chairman of the London, City and Midland Bank — went so far as to put a few pertinent questions to Dr. Helfferich, the German Finance Minister, which the latter gentleman undoubtedly brought upon himself, and which he and other German bankers will find hard to answer. - But had Germany owned the British Fleet and Great Britain owned the German Fleet, what would have been the position? It should be remembered that in a war Digitized by Microsoft® OR EMPIRICISM? 93 of the magnitude upon which we are now engaged the strongest financial system will be the one that is supported by the strongest sea power. But apart from this, had Von Kluck been successful in taking Paris in the initial stages of the war, and had the German Higher Command secured the French coasts, what would have happened to our Financial System and our Foreign Exchanges? There is a mathematical proposition which states that " action and reaction are equal," and, speaking in the National Economic sense, this is a truth which cannot be disputed. The banker in his speech twitted Dr. HelfPerich about the depreciation of the German Exchanges, it being 21.5 in New York, and lower in other neutral financial centres in Europe. Also that German credit balances abroad had been used up and exhausted, and that the German people had sold all their American, Swiss, Dutch, Scan- dinavian, and even their Eussian securities. All this is admirable and excellent from our point of view for immediate purposes, as it will tend to shorten the war, which is the main object to be achieved. But after the war — what then? If Germany has no credit balances abroad or foreign securities to sell, she must set about correcting her Foreign Exchanges by exporting and selling manu- factured goods in large quantities abroad. The highly efficient German Industrial Machine will soon see to that, and, in view of the seriousness of Digitized by Microsoft® 94 NATIONAL ECONOMICS this aspect of the question, is it wise to taunt the Germans with their financial position at the moment? It will not do for British bankers to protect their own position only, and to feel comfort- able about it ; they should have some regard for the future welfare of British Industry, in which the population mainly earn their living. Not only that, but they should consider the question of adopting some machinery, preferably the creation of a new bank, for the purpose of extending banking credits in so far as it affects British Industry, in view of the strenuous competition which it will have to meet after the war from German Industrialism, and, as stated in the previous essays, from American Industry. Another prominent banker at the Annual Meet- ing of Lloyd's Bank defended at considerable length the absorption of the small private banks by the larger ones. We do not think that, per se, there has been much criticism directed against the large banks for absorbing small banks. Whatever criticism has been made has been against the neglect of the large banks to continue the liberal policy which the smaller banks were accustomed to pursue in the granting of credits in so far as it affected Industry. The banker referred to went on to justify this restrictive policy by calling attention to the fact that when the system of the small private bankers held Digitized by Microsoft® OR EMPIRICISM? 95 sway during the Napoleonic Wars there were 100 bank faihires in one year, notably 1793 ; whilst for the years 1810 to 1817 the true Napoleonic era, there were 600, or an average of two a week. In the present war, he contended, the only failure was that of a small institution which had really been insolvent for two years before the war, although, if our memory serves us right, there have been at least two such failures. But the point we desire to draw attention to is this, that the Sciences of Production, Chemistry, Banking, and the Foreign Exchange were in their early stages of development between 1793 and 1817, and that to draw an analogy between what happened in that period with what is happen- ing now, although it is irrelevant, clearly shows there must be an absence of anything that is objec- tionable of a really concrete nature against an exten- sion of banking credits for industrial purposes in this enlightened era. As a matter of fact, there is none if the spirit is willing, and this is confirmed by the further following observation which the same banker made in the course of his speech. In dealing with the recently directed criticism against English banking practice as compared with German, he laid down the proposition that unless the interests of a bank were subordinated to the interests of the depositors it was being run on unsound lines; we hardly think anyone would dis- agree with him on this point. He further proceeded Digitized by Microsoft® 96 NATIONAL ECONOMICS to say that " strictly no portion of a banker's deposits should be locked up in securities not easily realisable; that it was not quite the same thing as regards share capital, which was an investment of a shareholder who had no right to demand his money back. A banker could not be blamed if he dealt with the capital in a more permanent form. German banks had comparatively a much greater proportion of capital than English banks, and they were, there- fore, enabled to make' much longer loans and less liquid investments. If that were an advantage to trade, it might be worth while to consider what can be done by English finance in this direction, not through a bank dealing with depositors' money, but through a financial institution with a large capital, which could undertake investments of the kind." With the views here expressed we are in entire agreement, and this admission, coming from such a source, clearly shows that the extension of bank- ing credits for industrial purposes is making steady progress. But we would like to point out that no sound critic of English banking methods has ever suggested that English banks should tie up their depositors' money in industrial enterprises. Good sound industrial finance can be done without resort- ing to such methods, and a beginning could be made as above suggested by calling up the unpaid capital of the banks, and employing that in the direction desired. Digitized by Microsoft® OR EMPIRICISM? 97 We think, however, that the suggestion which was made that a separate bank or banks should be established to deal with this class of business is a good one ; we have ourselves all along advocated this course, for a special staff or special departments are required to cope with the business. We now feel it desirable to review and inquire into the Economic Science upon which our National Business Policy and System of Government is based. Owing to the great advance which has been made in recent years in the Sciences of Education, Chemistry, Production, Transportation, and Bank- ing, Economic Science has ceased to become one of theory, and has, as a matter of fact, reduced itself to a serious business proposition. The Economic Science, upon which our present commercial system is based, and the attitude of Government towards it, requires complete revision. Its utility and useful- ness, from the national point of view, has long ceased to exist, and only the pressure of public opinion can effect the necessary change ; and the sooner this can be brought about the better it will be for the nation, for the present system is respon- sible for the incohesion which exists in all our national effort. It is Empiricism run mad. Cunningham lays it down that " Political Economy co-ordinates recent experience, and lays down the law as to what will happen so long as social and physical conditions remain unchanged; but H Digitized by Microsoft® 98 NATIONAL ECONOMICS social and physical conditions are always changing and throwing the formulae of the Economist out of date." That " the positive doctrines of the Classical Economists were received with exaggerated defer- ence in their own day, as if they had enunciated maxims which held good for all time ; a reaction has since set in, and their teaching has been unduly dis- paraged." With this general view we agree. We shall never be able to destroy German Indus- trialism by allowing National Economic questions to be discussed in the abstract or as platitudes. The time for that has long ceased to exist, for Economic Science can now be made exact so long as it is based upon experience and result. Touching upon this aspect of the question it may be interesting at this stage to quote what Walter Bagehot had to say on the subject. In his book on Economic Studies, page 7, he writes as follows : — " Political Economy is an abstract Science which labours under a special hardship. Those who are conversant with its abstractions are usually without a true contact with its facts ; those who are in contact with its facts have usually little sympathy with and little cognizance of its abstractions. Literary men who write about it are constantly using what a great teacher calls ' unreal words ' — that is, they are using expressions with which they have no complete vivid picture to correspond. They are like physiologists who have never dissected ; like astronomers who have never seen the stars ; and, in consequence, just when Digitized by Microsoft® OR EMPIRICISM? 99 they seem to be reasoning at tteir best, their knowledge of the facts falls short. Their primitive picture fails them, and their deduction altogether misses the mark — sometimes, indeed, goes astray so far, that those who live and move among the facts, boldly say that they cannot comprehend ' how anyone can talk such nonsense.' Yet, on the other hand, these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them. Men of business have solid judgment — a wonderful guessing power of what is going to happen — each in his own trade ; but they have never practised themselves in reasoning out their judgments and in supporting their guesses by argument ; probably ' if they did so some of the finer and correcter parts of their anticipations would vanish. They are like the sensible lady to whom Coleridge said, ' Madam, I accept your conclusion, but you must let me find the logic for it.' Men of business can no more put into words much of what guides their life than they could tell another person how to speak their language. And so the ' theory of business ' leads a life of obstruction, because theorists do not see the business, and the men of business will not reason out the theories. Far from wondering that such a Science is not completely perfect, we should rather wonder that it exists at all. " Something has been done to lessen the difiiculty by statistics. These give tables of facts which hold theoretical writers and keep them straight, but the cure is not complete. Writers without experience of trade are always fancying that these tables mean something more than, or something difierent from, that which they really mean. A table of prices, for example, seems an easy and simple thing to understand, Digitized by Microsoft® 100 NATIONAL ECONOMICS and a whole literature of statistics assumes that simplicity ; but in fact there are many difi&culties. At the outset there is a difference between the men of theory and the men of practice. Theorists take a table of prices as facts settled by unalterable laws ; a stockbroker will tell you such prices can be ' made.' In actual business such is his constant expression. If you ask him what is the price of such a stock, he will say, if it be a stock at all out of the common, ' I do not know, Sir ; I will go on to the market and get them to make me a price.' " The above is a truth admirably expressed by Bagehot, and it is quoted in view of what will be said later, and in the hope that British men of business will take on the development of Economic Science as a practical business proposition, and so place themselves on a par with their German and American contemporaries ; it should not be left solely with theoretical writers. Economic Science should form part of a business man's intellectual know- ledge, and have an equal footing with a knowledge of chemistry, but, as Bagehot states in his book, " Lombard Street," it is " not easy to rouse men of business to the task ; they let the tide of business float before them, and they make money, or strive to do so, while it passes, and they are unwilling to think where it is going, believing that ' Anyhow this system will probably last my time.' " But there is a much greater duty lying before us all than the mere earning of sordid wealth in the Digitized by Microsoft® OR EMPIRICISM? 101 easiest, laziest, and most convenient manner. As patriots we have to consider the next generation, and hand on to it our National and Imperial heritage unimpaired. The cause of our shortcomings in this respect may, of course, be due to the fact that our Univer- sities prefer to treat Economic Science as an historical subject rather than as a practical present- day issue. But this in turn may be attributable to our present Economic Science and the absurd Free Trade theories, v?hich constitute its basis, being composed of v?hat may be termed abstract prin- ciples; and abstract principles, as is well known, are the negation of exact science. Knowledge cannot be based on abstractions, but only on actual experi- ence and result, and it is probably on this account that the Universities prefer to treat Economic Science as an historical study. The inherent weak- ness of our present system of Free Trade is that under that system all phases of national activity must be allowed to run loose — it is impossible to co-ordinate them for national purposes. The Universities may, therefore, not be wholly to blame, but if they are wise they will proceed to recast their system of education at the earliest possible moment, for they are the chief instrument to be used in raising our standard of knowledge to square with the progress that has been achieved in other directions. Digitized by Microsoft® 102 NATIONAL ECONOMICS The following quotation from the works of Dr. Cunningham, late Lecturer on Political Economy at Cambridge University, is instructive, and will throw a little light on the present position ; it is about the only exception we take to Dr. Cunning- ham's most admirable work on the growth of " English Industry and Commerce." In volume 2, page 864, he writes as follows : — " The story of the growth of English Industry and Commerce has not come to an end ; and no narrator can pretend to follow it to the close ; he is forced to choose some point at which he thinks it convenient to break off the thread. There are many reasons why it seems wise to the present writer not to attempt to enter on the recent economic history of the country, or to delineate the course of affairs since 1850. At that period the abandonment of Mercantilism had become complete, and the reaction against laissez faire had begun to make itself clearly felt, so far as the regulation of industry and of internal transport are concerned. " The treatment of recent history would necessarily be different from that which has been attempted in dealing with the affairs of other days. Contemporaries enjoy an admirable position for chronicling events and putting on record vivid descriptions of passing occur- rences, but they are not necessarily better fitted than those who look on from a distance, to analyse the conditions which have brought about a change. Since economic causes do not lie on the surface, there is all the more danger that men may fail to appreciate the really important forces that are at work in their genera- Digitized by Microsoft® OR EMPIRICISM? 103 tion. It does not come easy to everyone to hold himself severely aloof from the interests and sentiments of his own day, so that he can hope to form the dis- passionate judgment which is possible in tracing the course of affairs in bygone times. The financial and economic history of England during the last fifty years, has been deeply affected by the personal influence of Cobden's most notable disciple. Men who have felt the magnetic attraction which Mr. Gladstone exercised are hardly fitted to judge how far the extraordinary development of particular sides of economic life, which took place under the fiscal and legislative measures he carried, has been altogether wholesome. It will be for future ages to decide whether he was the wisest of democratic leaders, or the greatest of unconscious charlatans." We do not agree with Dr. Cunningham in the first part of the quotation ; it ought to be possible to judge cause and effect from the monthly returns given by the Board of Trade, and it should be pos- sible for the officials of that Department, by com- paring our monthly results with those of other foreign nations, to judge whether all is well with our national policy. As it is with individuals, com- panies, or corporations, so it ought to be with the nation : if it is possible in the one case it should be possible in the other. The Board of Trade monthly returns of exports and imports are merely a reflex of all national effort. Any business man will agree that the system which necessitates our waiting fifty years before we can accurately judge of cause and Digitized by Microsoft® 104 NATIONAL ECONOMICS effect must certainly be obsolete. If a business were to be run on similar lines it could have no hope of success. Business men have to carefully vratch their competitors at home and abroad, both as to the quality and price of the goods supplied. If, then, it is necessary in their case, is it to be argued that it is not necessary in the case of the State? Is the State to refuse to use its national power for the proper regulation of its industry and commerce, either through laws affecting transportation, by the creation of an efficient consular service, or by means of a tariff, in special cases, because of certain abstract principles which are not capable of definition? This is hardly to be expected, particularly as other first- class Powers chose to do so. We have not only to safeguard ourselves against German Industrialism in the future, but we must also bear in mind the large new factories which have been, and are now being, erected in America at our request, and the vast wealth which the Americans are accumulating. Before the war, America owed to Europe £1,600,000,000 sterling, and she was in reality a debtor nation; America has already wiped out this debit balance, or has off-set it by other credits, so that she stands in the position to-day of being a creditor nation instead of a debtor nation, and will in consequence be a very serious factor to consider in the future in the international markets of the world. This should not be lost sight of Digitized by Microsoft® OR EMPIRICISM? 105 In addition we have also to bear in mind that it will be essential for us to convert as much of our present capital expenditure on munitions factories in the United Kingdom into productive expenditure at the conclusion of the war, in order to reduce our liabilities. At the conclusion of the war the world will witness the extraordinary position of the pro- ductive capacity of the great nations in manufactures being greater than the world's possible demands. There may, of course, be a temporary burst of activity in manufactures of a certain kind to make good the wastage caused by war in each of the belli- gerent countries, and this feature of the situation may not be immediately noticed, but it should be borne in mind. It will be obvious, therefore, that all of our National and Imperial power will be required to reserve to ourselves and friends the trade that emanates from our own territories, including, of course, the home trade. Neutral trade will not be profitable in view of the stress of competition that will exist; certain neutrals will be obliged to purchase German manufactures to make good the German bills and currency they are now accumulating at depreciated prices. It will be to their profit to do so. Cunningham, the only economic writer who seems to have had an idea that a change in our conception of Economic Science was sooner or later Digitized by Microsoft® 106 NATIONAL ECONOMICS inevitable, in his work on the growth of " English Industry and Commerce," volume 2, page 866, writes as follows : — " In each era political aims have aSected the direction and manner of economic growth ; the story of material development is only intelligible, when the underlying sentiments and objects are clearly under- stood. But with the fall of the Mercantile System, the power of the English realm, in its narrower sense, which was for centuries the determining factor in shaping the economic growth of the country, has ceased to be treated as an adequate, far less as an exclusive object of consideration. There is a far wider outlook before us in discussing the economic policy of the realm, and we have hardly yet focused our view as to the direction in which we may most wisely try to move. Account must be taken of the great communities and dependencies beyond the sea, both as regards our political institutions, our naval and military expenditure, and our material prosperity. Not till the new forms, which the life of the British Empire is assuming under our very eyes, are more clearly defined, will it be possible to trace the process of economic readjustment which has been involved in attempting to meet these new requirements. Political and economic factors react upon one another ; the doctrine of laissez faire has vanquished the narrower nationalism of the seventeenth and eighteenth centuries ; but has it said the last word in regard to our mercantile relations with all parts of the world ? We have discarded this doctrine, deliberately and finally, in regard to the conditions of industrial life, and the management of traffic within Great Britain. Who Digitized by Microsoft® OR EMPIRICISM? 107 shall say what the issue will be when the question of its continued applicability to English commerce is once fairly raised ? " Then again, on page 867 of the same book, Cunningham states that " The rise of national enthusiasms, both on Continental Europe and in America, has had its national result in kindling an increased desire for national economic life ; and England has bereft herself of the means of bargain- ing with any foreign country so as to make better terms for the admission of her goods," which is quite true. On page 870 of the same book, Cunningham is eloquent in the following passage : — " The persuasive force of economic principles becomes greater when concrete instances, which afiect immediate interests, can be adduced in supporting them. The manufacturers in 1846 realised that by the adoption of Free Trade and the admission of foreign cereals, the demand for our manufactures would be enormously increased. They had such a belief in the superiority of our methods of production, and the eagerness of foreigners to buy on the cheapest terms, that they could not conceive that any market which was once open to our goods would ever be deliberately closed against us. Circumstances have so far changed, and our industrial rivals have so far developed in efficiency and in commercial influence, that the question is forced upon public attention whether it is prudent for us to continue to trust entirely to laissez faire, or whether we are not compelled to take active measures Digitized by Microsoft® 108 NATIONAL ECONOMICS to retain and extend the market for our goods. Under changed conditions there may be a new reading of the Whig commercial tradition, which insisted on the advisability of managing trade so that it might react on home industry. Our manufacturers may recognise that some leverage is necessary if we are to secure an open door for the sale of our goods. A duty on the corn imported from countries which tax our manu- factures heavily would be the most obvious mode of bringing pressure upon customers who look to us for the sale of their products. In so far as such duties yielded a revenue, they would be in accordance with the fiscal tradition of the Tories, which has always favoured schemes for placing the burden of taxation on as wide a basis as possible, instead of concentrating it on a single class. A modification of our fiscal policy which shall bring it into accord with the fundamental economic views of each of the historic parties, and shall render it more acceptable to the developing British Colonies, may not occur immediately ; but many circumstances are tending in that direction." These views are not at all inconsistent with those advanced by Adam Smith, whose fundamentals we shall now proceed to examine. It is generally known that our present system of Economic Science is based upon the fundamental doctrines advocated by Adam Smith in his ' ' Wealth of Nations." This work was commenced by him in 1773, and finished in 1776. Modern Political Economy is, therefore, 140 years old; but as the social and physical conditions change from one period Digitized by Microsoft® OR EMPIRICISM? 109 of time to another, it follows that Economic Science must also be subject to revision to conform to the changes effected. The fundamental doctrines of Smith's system, however, have come to be generally accepted as the basis of our Modern Economic Science, and all that modern writers can do in studying cause and effect since his time is to consider whether the conclusions, or abstract theories, which he based on his funda- mentals, and that have been added to since by subse- quent writers, have been confirmed by actual experience and result. The great and leading object of Smith's funda- mentals is to illustrate the provision made by nature in the principles of the human mind, and in the cir- cumstances of man's external situation, for a gradual and progressive augmentation in the means of national wealth ; and to demonstrate that the most effectual plan for advancing a people to greatness is to maintain that order of things which nature has pointed out ; by allowing every man, as long as he does not violate the laws of justice, to pursue his own interest in his own way, and to bring both his industry and his capital into the freest competition with those of any other man or order of men. Every system of policy which endeavours, either by extra- ordinary encouragements to draw towards a par- ticular species of industry a greater share of the capital of society than what would naturally go to it. Digitized by Microsoft® 110 NATIONAL ECONOMICS or, by extraordinary restraints, to force from a par- ticular species of industry some share of the capital which would otherwise be employed in it, is, in reality, subversive of the great purpose which /it means to promote — all of which is most excellent teaching. Adam Smith further argued that the funda- mentals on which all systems of national economy rested in his time were unsound. Up to his time the main object which writers on political economy had before their minds was the power of the nation, and quite rightly so, but the method of procedure adopted was untenable ; the system in vogue in Smith's time was the mercantile system, which was nothing but the granting by the State of monopolies and privileges to certain companies for exploitation, combined with high tariffs; economic writers there- fore set themselves to discuss and advance the interests of industry and commerce in accordance with this system and in accordance with the condi- tions prevailing abroad in their relation thereto. According to Cunningham, " the requirements et the State had been the first consideration of the seventeenth-century writers, and they had worked back to the funds in the possession of the people from which their requirements could be supplied." But Adam Smith approached the subject from the other end. The first object of political economy, as he understood it, was to provide a plentiful Digitized by Microsoft® OR EMPIRICISM? Ill revenue or subsistence for the people, and the second was to supply the State or Commonwealth with a revenue sufficient for public services. It was his achievement to treat national wealth as separable from other elements in political life, and in this way he defined the scope of the scientific study of political economy. It thus came about that he cut away the political grounds which had been commonly urged for interfering with the ordinary course of business. Adam Smith urged that if each individual were free to seek his own wealth, the national wealth would increase, and that special encouragements would be needless ; he further contended that if this conception was once clearly grasped, it became obvious that interference with any individual in the way he conducted his business could scarcely be justified on strictly economic grounds, and that national attempts to foster trades or to stimulate native industry were on the face of it absurd. Adam Smith attacked all systems for the development of the nation's resources, not on the ground of political unfairness, but simply as a matter of economic expediency ; and his objection was a purely economic one, owing to the expense and the loss incurred in what he considered to be misdirection of capital. These, then, are very briefly the views advocated by Adam Smith in his " Wealth of Nations," which ultimately became, and in a sense still are, the basis Digitized by Microsoft® 112 NATIONAL ECONOMICS of our present national business policy. It should be noted, however, that the principles advocated by Adam Smith in reality constitute the basis of national economics. Where he went wrong was in claiming, without any sort of qualification, that special encouragement by the State was needless, for in so doing he dissociated national purpose and national prestige from all industrial activity; he inclined too much towards a glorification of non-government, although we presume he had in mind, and was influenced in so doing by the old mercantile system which prevailed in his time, and which was of a monopoliBtic nature. Smith's grea' fault, or at any rate that of his subsequent adherents and disciples, was in failing to provide against the time when the other Great Powers would be as capable of producing and marketing their manufac- tures equally as well as we could — and in many cases excel us— in the international markets of the world. Some people may argue, of course, that he had enough to do to concern himself with the social and physical conditions of his time, but the obvious answer to that is this, that all theory is unsound which does not co-ordinate with actual experience and practice. In the medical profession it is stated that two extremes very often cause the same disease, such as, for instance, burns and frostbites. Adam Smith was instrumental in getting the mercantile system Digitized by Microsoft® OR EMPIRICISM? 113 abolished, and he sowed the seeds of another system which has unfortunately been developed by subse- quent theorists into the Free Trade system we have to-day, but which we believe in its present form is not at all the system Smith intended. We must render the master this justice. If the fundamentals which lie at the basis of his scheme have been utilised by theoretical writers and politicians in the last century in the development of other vicious schemes, and leading to our present system of Political Economy, Smith cannot be blamed for it. It would not be fair to do so. If, as some writers assert, the germs of the vicious methods and false or exaggerated theories of Smith's suc- cessors are to be found in the " Wealth of Nations," is it not due to an absolute ignorance of the technique of the science which has led them to pervert and misapply them? Instead of blaming Smith, is it not desirable that we should discard all the subse- quent theories that have been evolved, and that may exist, and revert back to the fundamentals he so ably established, in order to co-ordinate them with actual experience and result — i.e., with what we know to be the facts. That our present system of Political Economy is not the one he intended may be gathered from the formulae which he lays down in his work, " The Wealth of Nations," the kernel of which, in his own words, is as follows (pages 359-362), and it holds Digitized by Microsoft® 114 NATIONAL ECONOMICS good to-day. Adam Smith's formulae are as follows : — " To prohibit by a perpetual law the importation of foreign corn and cattle, is in reality to enact that the population and industry of the country shall at no time exceed what the rude ptroduce of its own soil can maintain. " There seem, however, to be two cases in which it will generally be advantageous to lay some burden upon foreign, for the encouragement of domestic industry. " The first is, when some particular sort of industry is necessary for the defence of the country. The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country, in some cases, by absolute prohibitions and in others by heavy burdens upon the shipping of foreign countries. The following are the principal dispositions of this act : — " (1) All ships, of which the owners, masters, and three-fourths of the mariners are not British subjects, are prohibited, upon pain of forfeiting ship and cargo, from trading to the British settlements and plantations, or from being employed in the coasting trade of Great Britain. " (2) A great variety of the most bulky articles of importation can be brought into Great Britain only, either in such ships as are above described, or in ships of the country where those goods are produced, and of which the owners, masters, and three-fourths of the mariners are of that particular country ; and when imported even in ships of this Digitized by Microsoft® OR EMPIRICISM? 115 latter kind, they are subject to double aliens' duty. If imported in ships of any other country the penalty is forfeiture of ship and goods. When this act was made the Dutch were, what they still are, the great carriers of Europe, and by this regulation they were entirely excluded from being carriers to Great Britain, or from importing to us the goods of any other European country. " (3) A great variety of the most bulky articles of importation are prohibited from being imported, even in British ships, from any country but that in which they are produced, under pain of forfeiting ship and cargo. This regulation, too, was probably intended against the Dutch. Holland was then, as now, the great emporium for all European goods, and by this regulation British ships were hindered from loading in Holland the goods of any other European country. " (4) Salt fish of all kinds, whale-fins, whalebone, oil and blubber, not caught by and cured on board British vessels, when imported into Great Britain, are subjected to double aliens' duty. The Dutch, as they are still the principal, were then the only fishers in Europe that attempted to supply foreign nations with fish. By this regulation a very heavy burden was laid upon their supplying Great Britain. " When the act of navigation was made, though England and Holland were not actually at war, the most violent animosity subsisted between the two nations. It had begun during the government of the Long Parliament, which first framed this act, and it broke out soon after in the Dutch wars during that of the Protector and of Charles the Second. It is not Digitized by Microsoft® 116 NATIONAL ECONOMICS impossible, therefore, that some of the regulations of this famous act may have proceeded from national animosity. They are as wise, however, as if they had all been dictated by the most deliberate wisdom. National animosity at that 'particular time aimed at the very same object which the most deliberate wisdom would have recommended, the diminution of the naval power of Holland, the only naval power which could endanger the security of England. " The act of navigation is not favourable to foreign commerce, or to the growth of that opulence which can arise from it. The interest of a nation in its commercial relations to foreign nations is, like that of a merchant with regard to the different people with whom he deals, to buy as cheap and to sell as dear as possible. But it will be most likely to buy cheap when by the most perfect freedom of trade it encourages all nations to bring to it the goods which it has occasion to purchase ; and, for the same reason, it will be most likely to sell dear, when its markets are thus filled with the greatest number of buyers. The act of navigation, it is true, lays no burden upon foreign ships that come to export the produce of British industry. Even the ancient aliens' duty, which used to be paid upon all goods exported as well as imported, has, by several subsequent acts, been taken from the greater part of the articles of exportation. But if foreigners, either by prohibitions or high duties, are hindered from coming to sell, they cannot always afEord to come to buy ; because coming without a cargo, they must lose the freight from their own country to Great Britain. By diminishing the number of sellers, therefore, we necessarily diminish that of buyers, and are thus likely not only to buy foreign goods dearer, Digitized by Microsoft® OR EMPIRICISM? 117 but to sell our own cheaper than if there was a more perfect freedom of trade. As defence, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England. " The second case in which it will generally be advan- tageous to lay some burden upon foreign for the encourage- ment of domestic industry, is when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former. This would not give the monopoly of the home market to domestic industry, nor turn towards a particular employment a greater share of the stock and labour of the country than what would naturally go to it. It would only hinder any part of what would naturally go to it from being turned away by the tax into a less natural direction, and would leave the competition between foreign and domestic industry, after the tax, as nearly as possible upon the same footing as before it." The italics are ours. But the particular point we desire more than anything else to emphasise in the foregoing quotation is the principle, or proposi- tion, that Smith advances — namely, that " in which it will generally be advantageous to lay some burden upon foreign for the encouragement of home industry " in certain cases. In other words. Smith sensibly argues that the conditions in which manu- facture is conducted in this country should not be impaired by legislative measures or by direct taxa- tion, but that wherever this course is deemed neces- Digitized by Microsoft® 118 NATIONAL ECONOMICS sary by Governments, then the exact increase in cost of production caused by these extraneous measures should be ascertained (which can easily be done), and that a duty corresponding to this amount should be imposed upon foreign imports of manufactures, particularly if such imports come from countries not affected by legislation of a similar nature ; Smith being anxious that the conditions in which production and distribution are carried on in this country and abroad should, as far as possible, be equal. This is clearly not an argument for Pro- tection, but an argument in favour of equality of rights. This qualification introduced by Smith in his writings does not seem to have received the con- sideration it deserved from subsequent Economic writers, and interpretations seem to have been placed on his fundamentals which he quite evidently never intended. This is somewhat borne out by the opening sentence in his essay on page 351, and which is as follows : — " By restraining, either by high duties, or by absolute prohibitions, the importation of such goods from foreign countries, as can be produced at home, the monopoly of the Home Market is more or less secured to the domestic industry employed in producing them." It should be here observed that Smith is directing his attention to high duties (note the adjective Digitized by Microsoft® OE EMtlRlCISM? 119' " iiigh ") and absolute prohibitions, which were the essence of the mercantile system of which he had had experience, and which in reality he laid himself out to destroy. In no part of his great work does he condemn the system of low tariffs — on the con- trary, he seems to have been conscious of their desirability in certain circumstances; but he seems to have avoided discussing it, preferring to leave it open for the future to decide. This was no doubt due to the fact that the world of industry, science, and commerce in his time was in its very early stages of development; he had not a sufficient experience of the subject to enable him to advance any definite expression of opinion. This hesitation may also have been due to the knowledge that any recognition he might give in favour of low tariffs would possibly prevent his attack on the mercantile system from being properly developed and driven home, and we can quite appre- ciate that frame of mind. This is more or less confirmed by the following observation by Smith on page 361 : — " la Great Britain, when any such tax is laid upon the produce of domestic industry, it is usual at the same time, in order to stop the clamorous complaints of our merchants and manufacturers that they will be undersold at home, to lay a much heavier duty upon the importation of all foreign goods of the same kind." It will be seen that Smith was quite obviously attacking the custom which seems to have prevailed Digitized by Microsoft® I'^O NATIONAL ECONOMICS in his time of the State unduly taxing foreign imports, without having any regard to the relation or proportion which such taxation ought to have to the tax which it saw fit to impose upon domestic ndustry ; he does not object to an equal tax being imposed, but he does object to the home manufac- turer obtaining any additional advantage. All the evidence goes to show, therefore, that he left the field of low tariffs open, and rightly so. It is perhaps desirable at this stage that we should quote Smith's own personal views on the Commercial or Mercantile System. At the begin- ning of Book IV, page 350, he writes as follows : — I thouglit it necessary, ttough. at the hazard of being tedious, to examine at full length this popular notion that wealth consists in money, or in gold and silver. Money in common language, as I have already observed, frequently signifies wealth ; and this ambiguity of expression has rendered this popular notion so familiar to us, that even they who are convinced of its absurdity, are very apt to forget their own principles, and in the course of their reasonings to take it for granted as a certain and undeniable truth. Some of the best English writers upon commerce set out with observing, that the wealth of a country consists, not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds. In the course of their reasonings, however, the lands, houses and consumable goods seem to slip out of their memory, and the strain of their argument frequently supposes that all wealth consists in gold and silver, and that Digitized by Microsoft® OR EMPIBICISM? 121 to multiply those metals is the great object of national industry and commerce. The two principles being established, however, that wealth consisted in gold and silver, and that those metals could be brought into a country which had no mines only by the balance of trade, or by exporting to a greater value than it imported, it necessarily became the greater object of political economy to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible the exportation of the produce of domestic industry. Its two great engines for enriching the country, therefore, were restraints upon importation, and encouragements for exportation. The restraints upon importation were of two kinds. 1. Restraints upon the importation of such foreign goods for home consumption as could be produced at home, from whatever country they were imported. 2. Restraints upon the importation of goods of almost all kinds from those particular countries with which the balance of trade was supposed to be disadvantageous. Those difierent restraints consisted sometimes in high duties, and sometimes in absolute prohibitions. Exportation was encouraged sometimes by draw- backs, sometimes by bounties, sometimes by advan- tageous treaties of commerce with foreign states, and sometimes by the establishment of colonies in distant countries. Drawbacks were given upon two different occasions. When the home manufacturers were subject to any duty or excise, either the whole or a part of it was Digitized by Microsoft® 122 NATIONAL ECONOMICS frequently drawn back upon their exportation ; and when foreign goods liable to a duty were imported in order to be exported again, either the whole or a part of this duty was sometimes given back upon such exportation. Bounties were given for the encouragement either of some beginning manufacturers, or of such sorts of industry of other kinds as were supposed to deserve particular favour. By advantageous treaties of commerce, particular privileges were procured in some foreign State for the goods and merchants of the country, beyond what were granted to those of other countries. By the establishment of colonies in distant countries, not only particular privileges, but a monopoly was frequently procured for the goods and merchants of the country which established them. The two sorts of restraints upon importation above mentioned, together with these four encouragements to exportation, constitute the six principal means by which the commercial system proposes to increase the quantity of gold and silver in any country by turning the balance of trade in its favour. If further conclusive evidence be needed in support of the interpretation we place upon Smith's economic scheme that Lov? Tariffs were not incon- sistent with Freedom of Trade, the foregoing, in our opinion, supplies it. Smith is constantly attacking High Duties, privileges, and absolute Prohibitions, and nowhere in his great work does he advocate Free Imports of Manufactures on the basis we have it Digitized by Microsoft® OR EMPIRICISM? 123 to-day. On the contrary, he recommends that Import Dutiea should be imposed of an amount equal to the Taxation which Home Industry may have to sustain in order to maintain the National Services. The following observation of his on page 356 will confirm this view : — Manufactures, those of the finer kind especially, are more easily transported from one country to another than corn or cattle. It is in the fetching and carrying manufactures, accordingly, that foreign trade is chiefly employed. In manufactures, a very small advantage mil enable foreigners to undersell our oum workmen, even in the home market. In the system which Smith himself advocates he constantly uses such expressions as " Freedom of Trade " or " the Importation of Foreign Goods," but he never uses the expression " Free Trade," being too clever in the technique of the science to admit that any such thing was practicable. The Industrial System that Smith really sought to estab- lish, as may be gathered from the quotations we quote above, was to allow every man, so long as he did not violate the laws of justice, to pursue his own interest in his own way, and to bring his Industry and his Capital, upon the liberal plan of equality, liberty, and justice, into the freest competition with those of any other man or order of men ; and, as a natural corollary of this, to allow him to purchase with this same Capital, or Credit arising therefrom. Digitized by Microsoft® 124 NATIONAL ECONOMICS his requirements in goods or manufactures in any Foreign or Home Market he might so desire, without payment of tribute to any man or order of men. But that any Manufactures individuals might so purchase abroad should bear an Import duty of an amount equal to the Taxation which Home Industry may have to sustain. In other words, Smith contended that if all systems, such as he explained, either of preference or of restraint in favour of mercantile groups, were taken away, the obvious and simple system of natural liberty established itself of its own accord. Not only that, but the industry of the country must necessarily benefit, as it was turned to a more advan- tageous employment, since the exchangeable value of its annual productions, according to the intention of the Lawgiver, must be increased. To accord to a British subject the right or privi- lege to trade anywhere at home or abroad subject to the laws, commercial or otherwise, of the United Kingdom is Freedom of Trade, and according to our interpretation is the very sound system which Smith sought to establish ; but the rights or privileges we now accord to foreigners to trade freely in our home markets without in any way contributing to the cost of our National Services is the Empirical system of Free Trade now in operation with us to-day, and Adam Smith would certainly have been the first to disown it. Digitized by Microsoft® OE EMPIRICISM? 125 The foregoing, therefore, suppUes the definition of that oft-repeated question — What is Free Trade ? - How the present system of Free Trade ever came to be introduced into our Economic life will always remain a puzzle. It certainly has not been brought into existence on any clearly defined plan ; but this is in accordance with our natural proclivity or leaning towards Empirical methods. For some reason Or other modern Economic writers, particularly in the last century, have mis- interpreted the Smithian Doctrine of National Economy, based on Freedom of Trade, for Free Trade. The term Freedom of Trade is not quite the same thing as Free Trade ; hence the reason for the question which is often asked, " What is Free Trade? " A great deal of loose writing and conversation takes place in the discussion of these subjects, and the following Chart may help to place them in proper perspective. The public in the past have usually divided them- selves into two groups — i.e., either the Free Trade group or the Protectionist group. But very few individuals really understand the significance of either of these expressions, or what they mean. They are content to call themselves Free Traders or Protectionists, and if you were to ask them for the foundation of their belief few could give it. Individuals should be invited to take their stand Digitized by Microsoft® 126 NATIONAL ECONOMICS upon two issues — i.e., whether they desire the National Business Policy to be based on Freedom of Trade (not Free Trade, for there can be no such thing) or on Protection, which is a Prohibitive Policy. Universal Free Trade is impossible, but Universal Freedom of Trade on the lines suggested hereafter is possible because it does not infringe on the doctrine of Equality of Eights. The following Chart will indicate the proper classification : — IMPORT DUTIES FSXBDOli 0» FoBKOM Trade I Free Imports Low Tariff Duties Restmction 01 FoBEiQN Trade High Tariff Duties Froiubition Cross-over point 17} to 20 per cent, ad valorem (estimated) From the above Chart it will be seen that the two extremes are Prohibition and Free Imports, both of which in a National Policy are impracticable. We cannot prohibit imports, for to do so would defeat the object of exchange. We must import in order to be able to export, and the nearest approach we can make to actual Prohibition is to adopt the restrictive or Protectionist Policy of High Tariffs, which in America, for instance, is considered a practical policy. Digitized by Microsoft® OR EMPIRICISM? 127 Similarly, we cannot have Free Imports any more than we can have Free service without pay- ment. National services must be paid for, and all Foreign and Domestic Industry should be made to contribute alike, through the medium of Import Duties and Taxation, to the cost of such services. National Economics, therefore, to be based on Freedom of Trade, must come under the heading of Low Tariff Duties, for High Tariff Duties are Protective. Individuals, therefore, who advocate Low Tariff Duties can by no means be called Pro- tectionists, but they are National Economists. The fundamentals which constitute the basis of the system of National Economics we now advocate can, without much difficulty, constitute the basis of an International System of Economic Science as between nations, and we shall be so bold as to state that no progress will ever be made in the develop- ment of an International System until they are accepted, and generally recognised, as fundamental truths. The mean between what are known as high tariffs and low tariffs we estimate to be at a point some- where between 17} per cent, and 20 per cent. ad valorem — i.e., the cross-over point is about these two figures. Broadly speaking, low tariffs within the limit, say, of 17^ per cent., are designed to cover or off-set the profits which the foreign manu- facturer may normally make upon his output, but Digitized by Microsoft® 128 NATIONAL ECONOMICS they would not stop the policy of dumping which many foreign manufacturers indulge in. Low tariffs nevertheless make the foreign manufacturer con- tribute part or the whole of his profits towards the revenue of the country imposing them. There are four factors which go to make up the cost of an article, namely : (1) Material, (2) Labour, (3) Standing Charges, and (4) Profit. Low tariffs, therefore, endeavour to off-set the fourth item, but they would not be prohibitive, since if a foreign manufacturer could sell articles or goods cover- ing the first three items, he would still be doing what he would term good business. High tariffs, or what is known as the Protectionist policy — such, for instance, as prevails in America — are prohibitive in character, since they aim at eliminating the last two of the items mentioned — i.e., standing charges and profit — thereby preventing the foreign manu- facturer from indulging in any kind of dumping policy ; it being correctly assumed that the foreign manufacturer would find no amusement in selling goods for a value which merely represented wages paid to labour and money paid for material. Business men will agree that low tariffs, having a maximum of 17^- per cent. , ad valorem, with pro- duction developed to the high state of perfection it is to-day, would not restrict the importation of foreign manufactures to any appreciable extent, and Smith was evidently aware of this. The main effect Digitized by Microsoft® OR EMPIRICISM? 129 of low tariffs would be to establish that equality of conditions in which manufacture is conducted, and this is what Adam Smith aimed at and reasoned was fair and equitable. This he confirms in the following passage already quoted above : — " It {i.e., the small tax) would not give the monopoly of the Home Market to domestic industry nor turn towards a particular employment a greater share of the stock and labour of the country than would naturally go to it." A very striking example, or illustration, of an inequality of rights which will exist at the end of the war is the imports of manufactures from America. America prides herself on being a great Democratic country, and is at the moment con- trolled by a Democratic Government, but can it be said that she is a nation with a soul ? When it comes to a question of choosing whether she will defend or fight for the principles which Democracy stands for, or adopt a materialistic policy, she decides in favour of the latter, to further which she is pre- pared to swallow her pride and dignity. At the present moment America is accumulating wealth rapidly at the expense of Great Britain and the rest of Europe in supplying, at exorbitant prices, com- modities necessary for the prosecution of the war, believing it to be a more profitable business than fighting. Before the war she was a Debtor Nation, whereas now she is a Creditor Nation, one result K Digitized by Microsoft® 130 NATIONAL ECONOMICS of which is that she has brought into existence ambitious plans for the development of her export trade after the war. In order to liquidate the tremendous costs of the war which we entered into in the cause of Demo- cracy, British manufacturers and labour will have to submit for some considerable period to a heavy income tax and other heavy direct taxation, all of which will be a handicap on enterprise and produc- tion. Is it, then, an equality of rights that American manufactures and the labour they stand for should in future be allowed to enter into free competition with our own productions without in any way con- tributing to the cost of the war and the national services we have maintained for the purpose, and will have to continue to maintain in the future ? To do so would surely be contrary to all our notions of justice and right. In the words of Adam Smith, as previously quoted : — " In manufactures a very small advantage will enable foreigners to undersell our own workmen, even in the home market. ' ' Business men do not ask that American manufactures or the manufactures of other neutral States should pay more than they have to pay themselves, but they do ask for an equal distribution of the cost of the national services, which is usually secured through taxation, over all manufactures, whether of home or foreign origin. It is to be hoped that Americans will not in any Digitized by Microsoft® OR EMPIRICISM? 131 way object to the manner of the criticism we advance in their case ; it is sometimes good to see ourselves as others see us. Another point which it seems worth while draw- ing attention to is that Adam Smith was a strong Protectionist as regards our shipping industry, as is evidenced by his support of the Act of Navigation introduced by the Government of the Long Parlia- ment ; and in this respect, had the principles of that Act been rigorously enforced during recent years, would the Germans have been allowed to use our ports as ports of call in the pursuit of business, to the detriment of our own shipping industry? It only goes to show that many of our statesmen, whilst believing they are followers of the principles of Adam Smith, are in reality following some other abstract principles evolved from nowhere and incapable of definition. Smith's teaching was not altogether unqualified, for he has regard to the political as well as to the purely economic interest, on the ground, as stated above, that " defence is of more import- ance than opulence, and that the Navigation Act is perhaps the wisest of all the commercial regulations of England." He therefore admits in principle that any regulation or measure introduced by the State, whether affecting industry or otherwise, is justifiable so long as it is designed for the greater security of the nation. Digitized by Microsoft® 132 NATIONAL ECONOMICS On page 304, Third Book, of his great work, Smith again shows his sound common-sense, and that the system he desired to establish was National Economy based upon Freedom of Trade, as follows : " According to the natural course of things, there- fore, the greater part of the capital of every growing Society is, first, directed to agriculture, afterwards to manufactures, and last of all to foreign commerce. This order of things is so very natural that in every Society that had any territory it has always, I believe, been in some degree observed." Smith then goes on to argue that Governments who develop the resources of a country in any other order follow a course that is " unnatural and retro- grade." If we examine this formula carefully, and also the treatment which our various Governments have meted out to Ireland in the last century, does it cause any astonishment at all that the population of Ireland has declined from 8,000,000 souls in the middle of the last century to 4,000,000 souls of the present day ; or that there is so much dissatisfaction in Ireland at their present unsatisfactory Economic position ? May we, therefore, not justifiably claim Smith as a National Economist, particularly in view of his dictum " that defence is of more importance than opulence ' ' ? And also from his statement on page 544, that " the greatest and most important Digitized by Microsoft® OE EMPIEICISM? 133 branch of the commerce of every nation is that which is carried on between the inhabitants of the town and the inhabitants of the country." In other words, he claims that the home trade is the most important to any country, and experience has proved this doctrine to be conclusively correct. From these observations we must conclude that Adam Smith was not altogether in sympathy with the Economic theories which dominate our com- mercial system to-day. Adam Smith preached a very sound doctrine when he advocated that the State should never inter- fere with any individual or organisation as to the manner in which they may conduct their business, but he was wrong in not qualifying his assertion that special encouragement by the State was unnecessary. Here again, however, we must intervene in favour of the Master, for we believe that what he had in mind was the special forms of encouragement given by the State in his time in the form of Eoyal Charters and exclusive privileges or other measures conducive to that end. In view of the great economic progress which has taken place in foreign countries, and where manu- facture is as skilfully condiicted as it is in this country, it does seem expedient that our State Government should concern themselves as to the degree of efficiency which may prevail in each phase of national activity, and give direction to our natural Digitized by Microsoft® 134 NATIONAL ECONOMICS laws or tendencies for the good of the State, but in an entirely different form to that which prevailed in Smith's time. To suggest that the State should use its national power for the proper regulation of its industry and commerce, either through laws affecting transporta- tion, education, science, banking, tariffs, or the creation of an efficient consular service (all of which, if undertaken upon an adequate scale, will cost money, but efficiency cannot be obtained without it), is not to suggest that the State should interfere with the actual conduct of business or with individual liberty ; far from it. Both objects can be achieved without coming into conflict, and we see a notable instance of this in the case of America. AU that the State should do is to ensure that its industry and commerce are conducted in conditions equally efficient as may prevail in other countries, as the State only has the necessary power to correct inequalities. (See Chart on page xx.) It must be obvious, particularly in view of the experience which we have derived from the present war, that national power does not solely lie with the strength of our Army and Navy, but also with the strength of our educational, productive, transporta- tion, and financial resources. And, ipso facto, the prestige of our nation, and through it our Empire, is measured entirely in the eyes of the world by the efficiency of our national power. Digitized by Microsoft® OE EMPIRICISM? 13.5 The science of Political Economy as we know it in this country to-day is obsolete, and it has been emphasised more in recent years by reason of the great advance that has been made in the sciences of education, chemistry, production (in which are included industry and agriculture), transportation, and banking, not only in this country, but in America and Germany. We have placed the sciences in what we think is the order of importance. Every article of utility that is produced is influenced by these five sciences. For instance, to produce successfully, you must first of all have educa- tion; secondly, you must have the technologist or analytical chemist to assist you in obtaining the best possible materials ; thirdly, you must have the latest experience and knowledge in methods of production, and also the latest and most modern machinery to assist you ; fourthly, you require the services of the transportation companies in carrying or shipping your goods to those who desire them; and fifthly, you need the banker or capitalist to finance your total operations with the greatest possible facility. It is essential, therefore, if the nation is to advance on anything like progressive lines, that the phases of activity mentioned should be made as efficient as it is possible to make them. If individuals adopt and support this policy as the basis of our national business system, they must necessarily become National Economists. Digitized by Microsoft® 136 NATIONAL ECONOMICS If the State, therefore, were to become the guiding or directing spirit, and to place each phase of national activity in its proper relation to the other, particularly as regards efficiency, then whatever portion of the total manufacturers might consume, they could at any rate rely upon having the best possible value for their money. In other words, the State should give direction, both as to object and policy, to our natural tendencies, and not allow them to drift forward in the world of commerce as an incoherent mass. It will be obvious to business men that each phase of our national life must be influenced by the weakest member. Further, if the tendency of one phase is towards a course dia- metrically opposed to that which is being pursued by the remainder, there must also occur a great waste of national energy and wealth. If, then, we allow Adam Smith's theory to come into operation so far that the individuals or corpora- tions should be allowed to earn their wealth free from interference by the State, but that the State will correct all inequalities which may prevail nationally, we could rely upon individuals and manu- facturers producing upon the highest possible basis of efficiency, and upon the lowest possible basis of coat. The more powerful individuals and manufac- turers could become in this respect, the more powerful would we become as a nation. Experience has taught us that the power and Digitized by Microsoft® OR EMPIRICISM? 137 prestige of a nation does not lie only upon its military and naval forces. The capacity to produce efficiently is at least as important as the other two. Industry has not only to bear the cost of sustaining our naval and military forces out of profits, but it has also to deliver sufficient munitions for destructive purposes, and the amount required is regulated entirely by the productive capacity of other competitive nations. And this doctrine will survive until all nations agree to live peaceably with one another, and to remove all restrictions to the free exchange of goods. This can be done on a scientific basis on the lines suggested herein, and it is not an impossible task. National Economics is a new science, and it has been evolved mainly in consequence of the great advance that has been effected in education and knowledge, in chemistry, in production, in trans- portation, and last, but not least, in the science of banking. As these forces already exist in the State, it will be seen that if National Economics is adopted as the basis of our new national business policy, we do not seek to establish anything that is new, but merely endeavour to co-ordinate the five great phases or spheres of national activity which already exist for national purposes. It is repetition of the Three Musketeers' pledge — " All for one and one for all." Business men will agree that all industries are inter- dependent, and the newi national business policy should embrace these five great forces, which should Digitized by Microsoft® 138 NATIONAL ECONOMICS be co-ordinated and developed to the highest possible state of efficiency : in the first place, for our own welfare as individuals and as organisations ; and in the second place for national defence and power. No one can dispute the fact that the patriotism of our Dominions and Colonies has been as keen, if not keener, as the patriotism manifested in this country. Yet though their constitutions are based mainly upon the British example, their patriotism has not yet forced them to adopt our present form of Economic science. And it is pure nonsense to excuse it on the ground that they are new countries. What about France, America, and Germany? No. They must first of all become true Nationalists before they can become true Imperialists, and that is the doctrine that Canada and Australia do preach. Now just as it is with individuals, so it is with nations — we have all to make ourselves efficient in whatever vocation in life we choose to follow ; and this sketch of the various stages of progress, which will be understood by all who have devoted thought or study to the subject, has been introduced to bring to view distinctly that which happens in the pro- cesses by which nations advance or decay. In order to explain more fully what is meant we quote two specific instances : — The Government recently established, under pressure from the public, an Industrial Eesearch Committee, and granted it the magnificent sum of Digitized by Microsoft® OE EMPIRICISM? 139 £30,000 for research purposes. Now, we ask, where is the sense of proportion in this? If we consider the vast sums of money that are spent yearly in production, transportation, and banking, how far do the authorities imagine £30,000 will go? Bearing upon this subject there appeared in the Evening Standard the other day the following small paragraph : — "Melbourne, 23/12/15. " In the Legislative Assembly last night Mr. Hughes, the Premier, announced that the Commonwealth was prepared to spend £500,000 if necessary on establishing and administering an institution for the conduct of scientific research in its relation to industry." Australia is, therefore, prepared, with a popula- tion of about 4,000,000 souls, to spend £500,000 on industrial research, whilst we, with a population of 46,000,000 souls, think £30,000 a sufficient sum. It is too ridiculous for words. We ought to provide a sum of £3,000,000, and nothing less will do. Now take another case in point. It is well known that the science of banking has made enormous pro- gress in recent years, and that it is now possible to grant greater credit facilities than it was in the last generation. Yet can it be said that British manu- facturers obtain any additional credit facilities to-day beyond those that were in operation in the last century ? Compare the credit facilities which a British manufacturer now receives with those enjoyed by Digitized by Microsoft® 140 NATIONAL ECONOMICS his competitors in Germany and America. Can it be said that they are at all favourable to the British manufacturer? We do not think so, nor do we think that British manufacturers have given this side of their business anything like the consideration it deserves. So long as they are accommodated within the limits their forefathers were accustomed to, they think they are being well treated. But is this state of affairs entirely the fault of those who control our banks, and through them our national wealth? Had we been bankers we should have followed precisely the same policy, having regard to our present commercial system. So long as we maintain our present system, and so long as we refuse to adopt the science of National Economics as its basis, you cannot reasonably expect that our bankers should assume the entire respon- sibility of the present system. If the sciences of education, chemistry, production, and transportation are not as fully developed in this country as they are abroad, the banker is quite justified in not assuming undue risks. If extended credit facilities are desired, then we must change the system. Each and every nation is out to fight for its own welfare and exist- ence, and we are no exception to the rule. Now what is the progress that has been made in America in this direction? In November, 1914, there passed into law through Congress a Bill known as the " Federal Eeserve Act," and this Bill became Digitized by Microsoft® OR EMPIRICISM? 141 operative whilst we were engaged in war. Had it not been for this, greater attention would, no doubt, have been given by the public in this country to the measure. The object of the Federal Eeserve Act was to provide greater credit facilities in America, indus- trially and commercially. In an address given by Dr. Ewing Pratt (Chief of the Bureau of Foreign and Domestic Commerce, Washington) to the United States bankers at San Francisco, on May 27th, 1915, he made the following observation already quoted in the previous essay, and which, we may add, has since been vigorously put into practice by the United States bankers : — " The banking institutions and the bankers of the United States have something more than a passing function to perform in the present situation. Perhaps the most vital need in the development of our foreign trade at the present time is the need of means of financing that trade. It is the banking institutions of the country whose duty it is to finance foreign trade, and who should be prepared at the present moment to step into the breach and finance the developing foreign trade of the United States. " The Federal Reserve Act has made it possible for the first time for the national banks of the United States to establish branch banks in foreign countries. Up to date only one national bank has taken advantage of this provision. There is plenty of room for other banking institutions, and it is hoped that singly or co-operatively they will soon enter this field. It is not, however, always necessary to establish a branch. Digitized by Microsoft® 142 NATIONAL ECONOMICS It may be equally efiective to establish close connections with foreign banking institutions. The thing which is most needed is that the banks provide the American manufacturer with American banking facilities." This is the advice which Dr. Ewing Pratt gave to the United States bankers, and which, as akeady stated, has been vigorously put into practice ever since. Not only that, but on November 24th last the greatest bank in America — namely, the National City Bank of New York — organised a great financial corporation of £10,000,000 to stand for the develop- ment of American trade along industrial lines, and every effort is to be made to affiliate with the corpora- tion the largest industrial, financial, and banking institutions in the United States. This is National Economics at its best, and on the board of this cor- poration are to be observed the names of prominent men in the world of industry and finance. The motive which inspires the formation of such a large corporation may be attributable to two causes : one, patriotism ; and the other, the desire to make the United States powerful and rich ; and Bagehot confirms (page 80, " Economic Studies ") that " Nations must abound in that passion if they are to have much power or much respect in the world." And have we not in the past pursued this course ourselves? The principal nations of the world are commer- cial nations ; and as the mass of men in such nations Digitized by Microsoft® OE EMPIEICISM? 143 are mainly occupied in business, it will be manifest that individual prosperity can only be a reflex of the power, prestige, and prosperity of the nation in the affairs of nations. Now let us observe what Mr. McAdoo, the Secre- tary of State to the Treasury of the United States Government, said last December in his Annual Eeport to Congress : — " Our financial resources are tte greatest in our history, and our banking system, through the creation and operation of the Federal Eeserve System, is now the strongest in the world. In every respect the economic and financial condition of the country is extraordinarily sound. It is greater than that of any other nation, and if we use our resources and our opportunities intelligently and wisely we shall establish the prosperity of this nation upon an impregnable foundation for many years to come." We have quoted this statement by Mr. McAdoo for three reasons : (1) to show that he uses the word " Economic " as applied to national prosperity; (2) he discusses the science of banking in its proper relation to the whole national problem ; (3) he does not discuss the question of Free Trade or tariffs, but indicates that the whole of their national resources are being, or have been , organised or co-ordinated for the development of international trade after peace is declared. The system of National Economics in operation at present in the United States is precisely the same Digitized by Microsoft® 144 NATIONAL ECONOMICS as that operating in Germany, the only difference being that the one operates under Democratic Government, and the other under absolute Mon- archism. But its efficacy or value has not been impaired under the control of the one or the other. Since this essay was written, a friend in New York has forwarded to us five papers that were read at a Trade Conference which was held in New York in December last, under the auspices of the National Association of Manufacturers, in co-operation with the leading banking and transportation interests of the United States, which tend to confirm the views we have been endeavouring to elaborate in this essay, and the competition we shall have to face nationally after the war. We will be content to quote the titles only of the papers that were read : — " Foreign Securities and their Influence on American Foreign Trade," by J. Santilhano, of the Guaranty Trust Company, N.Y. " An American Bank for Foreign Trade," by John J. Arnold, Vice-President, First National Bank of Chicago. " The Development of the American Discount Market and its Relation to Foreign Trade," by John E. Rovensky, Manager, Foreign Exchange Department of the National Bank of Commerce in New York. " Foreign Branches of American National Banks," by Ernest E. Ling, Manager, the Foreign Trade Depart- ment, the National City Bank of New York. " The Making of an Export Policy," by Dr. Ewing Pratt, Chief, Bureau of Foreign and Domestic Commerce. Digitized by Microsoft® OR EMPIRICISM? 145 Now let us study the other side of the picture. We all believe that Germany will be defeated, and that she will be called upon to pay a heavy indemnity. But whatever happens, owing to the great deprecia- tion of German currency, it will pay German manu- facturers to export their goods abroad at an extremely small profit, because they will be able to make a profit in bringing back the gold or other equally good credit which may be given in exchange for the goods they may sell. It will be seen, therefore, that we shall be between the upper and nether millstone after peace is declared unless we adopt a national policy. Our present industrial prosperity and the high prices obtained are artificial. We do not want to be pessimistic, but if we allow our present national business policy to continue, we should regard the future with some apprehension. The whole of our national strength will be required after peace is declared, and those gentlemen who control organised labour should be as much interested in this question as those who control organised industry. The interests of labour and capital are identical in this respect, and there is no reason in the world why both should not co-operate together. This may not suit the views of certain politicians after the war, but these gentlemen should be given short shrift. The particular experience required in the govern- ment of a modern State should be similar to that Digitized by Microsoft® 146 NATIONAL ECONOMICS involved in the conduct of a first-class business. The spirit that rules should be enterprising, and be accus- tomed in a superlative degree to anticipate the needs of the community, both in the present and future, in, the Economic field of activity. To sum up by way of conclusion, there are four ' immediate objects which the public should aim at establishing before the vpar concludes, or shortly thereafter, and these are as follows : — 1. To secure the establishment of a Ministry of Industry, with a properly qualified staff, so that our foreign, imperial, and domestic commerce may be developed on the most modern and scientific lines. 2. To secure adequate Parliamentary representa- tion in the House of Commons on behalf of national industry, finance, science, and commerce, in order that a unified and practical policy may be adopted with regard to the development of national and imperial industries, and that the disabilities under which manufacturers at present operate shall be removed. 3. To secure the establishment of an industrial bank or banks for the purpose of extending banking credits in so far as it affects industry in the develop- ment of Home, Imperial, and Foreign trade. 4. To stimulate and encourage the standardisa- tion of our educational system. The demand of industry and commerce for the expert administrator and technologist must in the future become more Digitized by Microsoft® OR EMPIRICISM? 147 exacting ; the stability of our national industries, therefore, will depend upon the standard of know- ledge prevailing in our factories and workshops. Manufacturers should co-operate with existing educational institutions, professional societies, and trade organisations, in establishing a definite medium for the exchange of ideas between leaders of industry and education, whereby definite standards of courses of study and standards of attainment will be arrived at and mutually accepted as the guarantee of efficiency in each of the industrial professions. National Economics provides the key to the new national business policy, and if we adopt it we ensure that the Government of the day, provided the right men axe put in control, shall create the requisite working conditions by which the sciences of educa- tion, chemistry, production, transportation, and banking can co-ordinate their energies, are placed in proper relation one to the other, and reach the highest possible degree of efficiency and attainment in the interest of the State. Not only that, but the bitter controversy which existed prior to the declaration of war over the merits of our so-called system of Free Trade or a revision of the tariffs will recede into the background by reason of the fact that these find their own solution under the scheme. And let us earnestly hope and pray that the new system will considerably modify, and we think it will, the bitter conflict that used to prevail before * Digitized by Microsoft® 148 NATIONAL ECONOMICS the war between classes and masses, between capital and labour. Had the fundamental doctrines of Adam Smith on human existence and the earning of a living been rightly interpreted by our statesmen, the bitter conflicts could have been avoided. But the war has given us an opportunity to think it all over, so let us attribute the space of time which has existed between Adam Smith and ourselves as having been, in the words of the opening quotation, " A space of life between, in which our national soul has been in a ferment, our national character undecided, and our national ambition thick-sighted." J. T. P. We sailed wherever ships could sail. We founded many a mighty State. Pray God our greatness may not fail Through craven fears of being great." —Tennyson. Digitized by Microsoft® Just Published. 240 Pages. Ckown 8vo. PRICE 5s. NET. By Post, 5s. 4d. FIRST PRINCIPLES OF PRODUCTION A STUDY OF THE FIEST PEINCIPLBS OF PRODUCTION AND THE RELATION OF SCIENCE TO INDUSTRY. BY J. TAYLOR PEDDIE, F.S.S. Together with Contributions by S. Roy Illingwobth, A.R.C.SC., A.I.C., B.Sc.(Lond.), Sm Norman LooKYEB, K.C.B., LL.D., F.R.S. (with Notes by Prof. E. A. Gregory), Williak Lorimbb, LL.D., and Prof. Percy Fraitkxand, F.R.S. Longmans, Green and Co. 39, Paternoster Row, London Fourth Avenue & 30th Street, New York Bombay, Calcutta, and Madras 1915 Digitized by Microsoft® FIRST PRINCIPLES OF PRODUCTION. CONTENTS. Introduction. First Principles of Production. The State and Opportunity in Industry. Tariffs, Free Trade and Industry. The Influence of Science on Political Economy. Finance and Industry. Science and Industry. The Co-operation of Science and Industry. By S. Roy Illingworth, A.R.C.Sc, A.I.C, B.Sc.Lond. The Influence op Brain Power on History and Industry. By Sir Norman Lockyer, K.C.B.,LL.D., F.R.S., WITH Notes by Professor R. A. Gregory. British Imperialism. German Kultur Defined. Steel Industry : Opportunities for Britain. By William Lorimer, LL.D. The Chemical Industries op Germany. By Professor Percy Frankland, F.R.S. Digitized by Microsoft® FIRST PRINCIPLES of PRODUCTION. Extract from tha Introduction. At the conclusion of the great War now progressing it will be necessary for the leaders of British Industry and Science to take stock of their positions. The positions which existed in their respective spheres of activity prior to the declaration of War will have to undergo considerable modification. It is neces- sary that this shall be done, for the working condi- tions which we now find about us have been greatly altered, both to our disadvantage and to our advan- tage. The adverse circumstances which have been forced upon us are in the destruction of Credit Values and in the colossal non-productive expenditure on War material, &c., which is now taking place; the destruction of Capital Values and the non-productive expenditure referred to will all have to be paid for out of the profits earned by Industry for many years to come ; and in order to enable Industry to do this without impairing its Trading capacity, it is essen- tial that the working conditions in which it operates should be improved in efficiency. N.B. — ^Politicians, Manufacturers, Men of Science, and others interested in the welfare of British Industry should read this Book. It is Educational. It has been largely responsible for the formation by the Government of a strong Committee of Men of Science to consider the qpestion of Industrial Research. A sum of £30,000 has also been placed at its disposal by the Government for that purpose. Digitized by Microsoft® FIRST PRINCIPLES of PRODUCTION. Extract from the Chapter on THE INFLUENCE OF SCIENCE ON POLITICAL ECONOMY. It is now necessary to study tlie relation of Science to Political Economy, and the strong but unseen influence it has had in exploding many of the theories now and formerly held by writers and politicians on the subject of Political Economy. The usual mistake that is made in this sphere of activity is the assumption that no change is possible in the factors which influence the views of Political Economists, as if any progress could be made without change. Politicians and writers should remember that Politics is one constant whirligig of change and progresp, and that the conditions which prevail in one period cf time wiU not necessarily prevail in another period of time. Extract from the Chapter on THE CO-OPEEATION OP SCIENCE AND INDUSTRY. By S. Rot Illingworth, A.E.C.Sc, A.I.C, B.Sc.Lond. Science in its broadest sense may be defined as exact knowledge. The significance of the use of the word ' exact ' cannot be too firmly impressed upon the mind of the non-scientific person, for upon a true appreciation of the aims and scope of Science depends the answer to the question as to what part we should expect the scientist to play in industrial concerns. Only the study of Science itself can bring home to one the distinction that should be made between Knowledge in its ordinary sense and Science (as defined above), but perhaps a sketch of the growth of a ' science ' out of the ' knowledge ' of the ancients may assist the reader to grasp the distinction, and for this purpose we may select the science of Chemistry and trace its evolution from the Alchemy of the past, but it should be distinctly understood that the same reasoning applies to all branches of Science. Digitized by Microsoft® PRESS CRITICISMS ON "FIRST PRINCIPLES of PRODUCTION." " What we must do in the way of reconstruction and how we must do it is admirably set forth in Mr. Peddie's book, in which patriotism is put on a business footing, so to speak. The author is a very sound anti-German ; he quite understands that monstrous immorality which is the essential Hun's Hunnishness, and he admits that the high character of the British manufacturer and man of business has been a great factor in the hitherto progressive prosperity of his much-loved native land. But — . But he knows that British industry has suffered from a growing lack of scientific intelligence, and is not afraid to speak out on the subject and to exhibit the appropriate remedies, even at the risk of offending those who wiU have it that the enemy can teach us nothing whatever. In a word, he is that rather rare kind of patriot who would sooner get something done than say — something ! And his book should be carefully read by all who msh to see this country fuUy prepared to hold its own in the intensified competition between nations for international trade which will follow the conclusion of military operations." — Morning Post. " Mr. Peddie tilts against the manufacturer's notion that the scientist is unpractical. In Germany and America industries have been created in the laboratory, and the manufacturers of those countries realise this fact and act upon it, and regard scientific research aa a necessary adjunct to their business. An explanation that is not infrequently given by English business men of the difficulty of com- peting with particular German industries is the greater readiness of G«rman banks to finance new industrial enterprises. But it is, Mr. Peddie contends, the very fact that the German manufacturer goes into his undertaking with the advantage of scientific assurance which enables him to obtain the required loan. Mr. Peddie gives some homely and convincing instances." — Daily Telegraph. " Mr. Taylor Peddie warns us, in conclusion, that the working conditions under which we lived before the War are undergoing modification, and that when the War is finished we shall have to consohdate our position. How is it to be done ? he asks, and he answers the question by recapitulating that the permanence and prosperity of the Empire can only be made secure by strengthening its basis with brains, science, education, and the organisation of its industrial and natural resources. Therein, he says, lies the foun- dation of the future British Imperialism. " This is a really important book. It deals with the economic problems created by present changing conditions with such skill, Digitized by Microsoft® thonghtfulnesB, and calm judgment that it commands the attention of all of Bs who are groping about in search of Ught upon the future of our country. It is a fingerpost that points the way towards a new era of prosperity, and carefully warns us of shoals and rocks to be avoided. If we called it a true text-book of Imperialism we should not overrate its claim to be read." — The PaU MaU Qazette. " The book studies, in an interesting succession of articles, how industry can be furthered by scientific organisation and by the direction of scientific authority in its various departments. Its writer's own thoughtful contentions on this theme are helped out by papers from the pens of other writers, among whom may be mentioned Mr. S. Roy Illingworth, Sir Norman Lockyer, and Dr. William Lorimer." — The Scotsman. v " This book should be carefully read by manufacturers, politicians, and public men who need to consider the problems of the trade war that will follow the conclusion of military peace. Not only must we arrange for the capturing of Germany's trade, but also for the holding of that trade. Mr. Peddie correctly foresees that credit values and wages will be reduced in Germany when industrial operations restart, and production costs will be even less than formerly."— TAe Financial News. " Business men will find this work very interesting in view of the prevailing state of industry and commerce." — Financial Times. " The organised effort now being made to increase the pro- ductive power of our factories and workshops is opening the eyes of the nation to many of the shortcomings of our industrial system. Most opportunely, therefore, do we notice the publication of a volume entitled ' First Principles of Production ' a study of the relation of Science to Industry, by Mr. J. Taylor Peddie. Oor manufacturers would do well to study this book in the light of present experience." — Colliery Guardian. " The publication of this volume is opportune, for it presents data which wiU tend to focus attention still further upon the present unsatisfactory recognition of science by the Government and manufacturing interests of this country. " A state of war has disclosed this in detail ; and demonstrated that a nation which is ill-prepared against industrial expansion in the modem sense, finds itself in an inferior position in times of war. For reasons which are still somewhat obscure, the British manu- facturer has shown in the past a distinct preference towards those industries which develop best on lines of empiricism. Many have held that this is a defect ; the present position has proved this to the hilt. Our manufacturers have surrounded themselves with an atmosphere which demands their whole attention in directing their ventures as they exist, manufacturing articles which depend upon the market already existing and the low selling price which always goes with such conditions. If empiricism were the only law Digitized by Microsoft® of manufacture (as it was some fifty years ago) they would by their application outdistance all competitors. " The treatment in this volume of such matters as the influence of tariffs and political economy on the industries of a country will enable the general reader to grasp certain essential factors as they are recognised to-day by the contending schools. Chapters on finance and industry, and science and industry, are equally valuable as an introduction to these comphcated and involved relationships, which are so little understood in certain quarters where they should really be mastered in detail. Not the least satisfactory feature of this volume is the reprinting, with notes by Professor B. A. Gregory, of Sir Norman Lockyer's address on the Influence of Brain Power on History, and articles on the Steel Industry by Dr. W. Lorimer, and on the Chemical Industries by Professoi Percy Frankland." — Nature. " Mr. J. Taylor Peddie, F.S.S., in his book, " The Krst Principles of Production " (Longmans, Green & Co., 5s.), has many valuable lessons to offer non-combatant Britain. While the Germans are pre-oocupied with the business of hating, we should turn the occasion to advantage and repair our past shortcomings. We should build up the gaps in our educational system, we should bring about the aU-essential alUance between science and industry, we should harness brain to labour. In short, we should study, with humility, Germany's industrial methods, and improve upon the German model while there is yet time. This is the hour in which to wipe out the ancient prejudice which has for too long divorced theory from practice in British industry, and has divided trade from research. The wide ramifications of British industry must be populated with chemists ; we must be reinforced in our fight for supremacy in the world's markets by the technologist, the man trained in research, and the man trained in routine. And to that end our whole system of technical education must be revised, remodeUed on Continental lines, and speeded up. That is the message Mr. Peddie has to give indus- trial Britain to-day in his timely book, and there his views thus baldly outlined are developed most interestingly. They are supple- mented by reprinted articles from distinguished and scientific thinkers lite Sir Norman Lookyer, Mr. S. Roy Illingworth, Mr. WUUam Lorimer, and Professor Frankland." — She§,eld Daily Telegraph. Just Published. 240 Pages. Crown 8vo. Price 5s. Net. By Post 5s. 4d. Publishers : Longmans, Green & Co. Digitized by Microsoft® Digitized by Microsoft® Digitized by Microsoft® Digitized by Microsoft® Digitized by Microsoft®