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The Columbia University Libraries reserve the right to refuse to accept a copying order if, In Its judgement, fulfillment of the order would Involve violation of the copyright law. Author: Culbertson, William Smith Title: Commercial policy in war time and after Place: New York Date: 1919 9^'^2D5fl'l MASTER NEGATIVE # COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD tUSINEM 203 C09 RESTRICTIONS ON USE: Culbertson, William Smith, 1884- ... Coniincrrinl policy in war tiino and nftor; n study of flio, a]>plication of democratic ideas to international commercial relations, by "William Smith Culbertson ... with an introduc- tion by Henry C. Emery ... New York, London, D. Appleton and company, 1019. xxlil, (1|, 47.S. tl, p. 20V^. (Jfalf-title: Piohlenis of war and of re- roiist ruction. eean war, lt>14-lI)lS- Kconomic aspc<'ts -I'. S. 4. Commrrclal poliry. icrnational. i. Title. I.ll»r:iry of ('iwc/rcsr^ CopyriL'lit A ."..Snii'L' ri. r. S. — Commercial policy W <■>. ('iiiii|M'titi(in. Iii- liP— 11.-.73 HI".'?ii.10.<';i TECHNICAL MICROFORM DATA FILM SIZE: .i^mno REDUCTION RATIO: /^'^ IMAGE PLACEMENT: lA C]!^ IB IIB DATE FILMED: f -/ ?- 9^ TRACKING # : /7] 5H Oo3 73 INITIALS: ^^^^-^ FILMED BY PRESERVATION RESOURCES. BETHLEHEM. 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WICK WARE COMMERCIAL POLICY IN WAR TIME AND AFTER ij^cnool of b'uslnoss Ifbrar/ PROBLEMS OF WAR AND OF RECONSTRUctlbl^ — ^^^ H"^!^!!J:J .:^ COMMERCIAL POLICY IN WAR TIME AND AFTER A STUDY OF THE APPLICATION OF DEMOCRATIC IDEAS TO INTERNATIONAL COMMERCIAL RELATIONS BY ^ WILLIAM SMITH CULBERTSON MEMBER OF THE UKITED STATES TAKIFF COMMISSION WITH AN INTRODUCTION BY HENRY C. EMERY SOMETIME CHAIRMAN OF THE TARIFF BOARD D. APPLETON AND COMPANY NEW YORK LONDON 1919. , i t » f > : > t %'■ 'roai olj of J jiil Bates QiMk 7)203 C87 tII COPYRIGHT, 1919, BY D. APPLETON AND COMPANY TO MY WIFE f V PRINTED in; rW%. FNITEJ) BTATE§ OF AIJERICA ,i' ' >f PREFACE My aim in writing this book has not been to consider the temporary changes in industry and trade resulting from the war, nor primarily the problems of the im- mediate future, such as feeding starving peoples and restoring devastated areas. Although fully conscious of the importance of these questions, I have sought rather in the following pages to emphasize the perma- nent changes caused by the war and to discuss questions which for many years will rise for decision before the peoples of the world. In this book I have considered only those aspects of the work of reconstruction that have to do with com- mercial policy in war time and after. In Part I are reviewed the diversifying and modify ing influences of the war on American and foreign industrial conditions. In Part II are discussed our national commercial prob- lems — the tariff, anti-dumping legislation, methods for preventing discriminations against our national inter- ests, and methods for promoting, controlling, and de- mocratizing American commercial activities abroad. Finally, Part III deals with world affairs and surveys unfair trade practices between nations and their regu- lation, the permanent lessons of the war in the control of the production and distribution of food and raw ma- terials, reciprocity treaties, preferential tariff arrange- ments, the policy of the *^open door,'' colonies, foreign investments and concessions, and the League of Nations. The proposals in Part III for a series of international commissions under the League of Nations as a step toward international government is an extension of the views contained in my article published in the Quarterly Journal of Economics, August, 1918, entitled, ''Inter- vu PREFACE national Tariff Relations as Affected by the War/' which was amplified in my address on ** The Open Door and Colonial Policy" before the American Economic Asso- ciation at Richmond, Virginia, December 28, 1918. The substance of both the article and the address is incor- porated in this book through the courtesy of the editor of the Journal and the president of the Association. Portions also of my article in the Century Magazine for November, 1918, entitled, ''Commercial Policy and the War,'' are used in this book with the permission of the editor, and the editor of the American Economic Review has kindly permitted me to reprint in an appendix my article on ''The Tariff Board and Wool Legislation,'' published in March, 1913. In some portions of this book I have used freely information contained in reports of the United States Tariff Commission and have not deemed it necessary in every case to give detailed refer- ences. I wish here to make general acknowledgment of my indebtedness to these sources. The views I express in this book are personal. They are not, it need hardly be said, to be attributed to the United States Tariff Commission of which I am a mem- ber because of their publication by me. I take full and sole responsibility for all statements of fact and expres- sions of opinion. W. S. CULBERTSON. Emporia, Kansas. Postscript : A summary of the treaty of peace is given out as this book comes off the press. To what extent this book is in harmony with the principles embodied in the treaty, to what extent the treaty establishes a basis for a liberal international policy such as this book argues for and such as the League of Nations Covenant gave the peoples the right to expect, must, at this late date, be left to the reader to judge. w. s. c. CONTENTS PREFACE INTRODUCTION vii xvu PART I wab's effect on industry CHAPTER I RELATION OF COMMERCIAL POLICY TO RECONSTRUC- TION Facing the problems of reconstruction — Their nature and variety — Commercial policy as a reconstruction prob- lem — Concepts of international commerce before the war — The permanent value of nationalism — Danger from the spirit of Prussianism — Bolshevism — The optimistic fatalist — Democracy and a constructive programme necessary — America's part in the world settlement — A new social point of view — Three stages of the industrial revolution — The partnership between government and industry CHAPTER II EFFECT OF THE WAR IN DIVERSIFYING AMERICAN INDUSTRY America's industrial position in 1914 — Diversifying in- fluences set in motion by the war — New glass products, including laboratory and optical glass — Surgical in- struments — Sueded gloves — Venetians — Camphor . 20 CHAPTER III THE CHEMICAL INDUSTRIES I I, UNDER BLOCKADE AND EMBARGO Curtailment of imports of chemical products from Central Europe — The situation in the dye industry in 1914 — iz CONTENTS Effect of the shortage of dyes on American textile mills — Growth of the American dye industry — Tariff on intermediates and dyes — Effect of America's en- trance into the war in April, 1917, on the dye industry — Germany's natural advantage in potash — Growth and nature of the American potash industry — Potash beds in Alsace — Germany 's pre-war control of thorium nitrate — Its production in the United States — Un- desirability of dependence upon one nation for sup- plies of essentials ....... 33 CHAPTER IV THE CHEMICAL INDUSTRIES: II, UNDER THE WAE DEMAND Demand for war supplies a second major influence modify- ing the chemical industries — Chlorine in the manu- facture of poisonous gas — Effect of stimulating its production — Caustic soda and soda ash — Sulphuric acid — Sulphur resources of United States — The war and Chile's monopoly of nitrate of soda — Nitric acid from synthetic ammonia — Smokeless powder — T. N. T. — Picric acid — Relationship between erplo- sives and dye industry — Varnishing airplane wings — War uses of acetone — Antimony — Quicksilver — Im- portance of chemical industries .... 49 CHAPTER V AMERICAN INDUSTRIAL EXPANSION IN THE WAKE OF WAR Effect of the war on established industries of the United States — Period from August, 1914, to April, 1917 — Period from our entrance into the war to the signing of the armistice — American textile industries — In- crease in financial strength — Growth of export trade — War orders — American steel industry — Export ex- pansion — Increase in mill capacity — Unprecedented growth of American shipbuilding — Its commercial and political significance ...... 62 CHAPTER VI EFFECT OF THE WAR ON INDUSTRY ABROAD Industrial effect of the devastation of Belgium and France German chemical and textile industries as illus- CONTENTS trating the war *s effect on Germany 's industrial life — War demand in Great Britain and her textile and steel industries — Problems of her export markets — Japan 's industrial expansion during the war — Her steel in- dustry — Her shipbuilding — Her cotton industry — Increased effectiveness of Japanese competition and its extent — European competition — Scientific research, business organization, and labor .... PART II AMERICAN COMMERCIAL POLICIES 80 CHAPTER VII EQUALIZING CONDITIONS OF COMPETITION Equalizing conditions of competition as a factor in tariff policy — < ' Infant industry * ' argument — Argument for protection from military necessity — Doctrine of free trade — Diversification of industry and population and developing the nation 's productive powers — Meas- uring competitive conditions — Monetary expenses of production vs. costs in the sense of sacrifice — What monetary costs include — Materials and resources — Wages vs. labor cost per unit of product — Overhead expenses — Interest — Theoretical accuracy in cost ac- counting not necessary for tariff purposes — Monetary costs of producing sugar in the United States and Cuba — Costs of cotton yarns in the United States and England — Costs of woolen fabrics in the United States and England — Domestic costs compared with foreign prices — Value of domestic conversion costs alone — Labor standards and the tariff — The consumer — The United States Tariff Commission — Taking the tariff out of politics CHAPTER VIII ANTI-DUMPING LEGISLATION What dumping is not — Competition with cheap foreign goods — Undervaluation — Specific vs. ad valorem duties — Countervailing duties — Types of dumping Sporadic selling abroad below price at home — Dump- ing as a permanent policy — Dumping as predatory price cutting — Effect of dumping on American in- dustries — Post-war possibilities — Canadian dumping 103 CONTENTS law — Australian method of handling unfair competi- tion — American dumping legislation of 1916 — Pro- posed revisions . . . . . . .137 CHAPTER IX EXPORT TRADE AND ITS PROMOTION Nature of international trade — Necessity and desirability of export business — Expert methods in foreign coun- tries before the war — Great Britain — Germany — Post-war plans for promoting trade — Great Britain — France — Germany — Japan — Canada — Growth of American export trade during the war — In quantity, destination, and variety — Cooperative associations to promote American export trade — Export Associations Act — Objections to export associations — Activities of non-governmental bodies in promoting export trade — Promotion of export trade by the United States Govern- ment — Free ports — As there are ways in which ex- port trade should not be promoted, there are also ways in which it should be ..... . 156 CHAPTER X BARGAINING TARIFFS TO PREVENT DISCRIMINATIONS Tariff discriminations classified — Those based on policy — Concealed discriminations — Open discriminations — Necessity of bargaining provisions in a nation's tariff laws — Penalty duties — Section 2 of the Tariff Act of 1909 — Its defects — Commercial treaty provision of the Tariff Act of 1913 — A proposal for penalty duties — General and conventional tariff system of Grer- many — Maximum and minimum tariff system of France — Most-favored-nation clause in commercial treaties — The American or conditional form and in- terpretation of this clause — Opinions of Federal courts and the Department of State — The European or un- conditional form and interpretation of the most- favored-nation clause — The spirit in which a flexible tariff should be enacted — The principle of equality of treatment ........ 180 « CHAPTER XI NATIONAL CONTROL OF AMERICAN COMMERCIAL ACTIVITIES ABROAD Undemocratic tendencies in national commercial policy — Types of American commercial activity abroad — Ex- zii CONTENTS port of food and raw materials — Export of manu- factured goods — American factories abroad — Ameri- can capital to develop foreign resources — Loans of American capitalists to foreign Governments — Need for regulation — Types of complications which may arise — Neither imperialism nor laissez faire is a proper policy — Precedents for regulation and control — Need for more comprehensive control that will remove causes of international friction — Limitations of national regulation — First step toward a democratic world league is democratic life in individual nations . PART III WORLD COMMERCIAL POLICIEB CHAPTER XII WHERE NATIONAL CONTROL BREAKS DOWN Where international control begins — Anarchy in inter- national trade — How foreign trade should not be pro- moted — Bounties — Imitating trade-marks and de- signs — Depression of prices — Espionage — Tying contracts — Predatory price cutting — Discriminations in transportation — Efforts of nations to correct evils — How nations handle unfair practices within their jurisdiction — In the United States — The courts — Federal ^ Trade Commission — Interstate Commerce Commission — Attempts to control unfair competition by international action — Brussels Sugar Convention — International agreements concerning industrial prop- erty and unfair competition — International trade and commerce commissions — The penalty for refusal to act CHAPTER XIII AFTERMATH OF WAR-TIME CONTROL OF FOOD AND RAW MATERIALS Pood and raw materials as factors before the war in com- mercial policy — Foods — Significance of essential raw materials — Position of Germany with reference to raw materials — Of Japan — Of the British Empire — Of the United States — War-time control of food and raw materials by individual nations — In the United States — Food and Fuel Administrations — War Trade • • • xin 201 221 CONTENTS Board — War Industries Board — Shipping Control Committee — Examples of national control — Drift toward international control — Commission Inter- nationale de Ravitaillement — AUied Maritime Trans- port Council — Inter-Allied Food Council — Inter- Allied Munitions Council — Inter-Allied Programme Committees on Eaw Materials — Permanent effect of war-time experiences — Dangers from absence of in- ternational regulation — Possibilities of trade warfare suggested hj war experiences and plans — Necessity for joint action among nations ..... 241 CHAPTER XIV INTERNATIONAL TARIFF POLICIES Heights of tariffs primarily for domestic determination — How far they may be the subject for diplomatic dis- cussion — Trade wars — Factors determining height of tariffs of dependent colonies and of China and Siam — Discriminations and preferences more obviously and always matters of international concern — Trade war between Germany and Canada — American reciprocity experiences — Preferences within the British Empire . 263 CHAPTER XV THE OPEN DOOR AND COLONIAL TARIFFS "Open door" defined — The ** closed door'» in the old colonial system — Return of struggle for colonies in the nineteenth century — Agreements relating to the open door — Berlin Conference, 1884-5 — Algeciras Conference, 1906 — Open door in China — Ingenious ways of closing the ''door" — Colonial tariffs — The Netherlands — British dependent colonies — Spain — Germany — Italy — France — The Philippines — Colo- nies should not be instruments of commercial policy . 278 CHAPTER XVI PREFERENCES — AN INTERNATIONAL PROBLEM Economic effect of tariff preferences — Spirit in which the problem should be approached — TJndesirableness of discriminatory treaties between nations — Of tariffs favoring the mother country in dependent colonies — Of British preferential tariffs — Necessity for inter- national agreement — Concealed discriminations — Pos- 3dv 'P CONTENTS sible grounds for exceptions to the rule of equality of treatment — An International Tariff Commission pro- posed — Its powers and duties ...... 296 CHAPTER XVII FOREIGN INVESTMENT AND CONCESSIONS Foreign investments — Of Great Britain — Of France — Of Germany — Of the United States — Use of foreign in- vestments in highly developed countries — Alien Prop- erty Custodian in the United States — German world- wide control of non-f err'ous metals — German finance in Italy — Policy to be pursued — The alliance between export trade and foreign investments — Methods mak- ing it effective — Need for international regulation — Political significance of the exploitation of unde- veloped regions — Exclusive concessions and the open door — The Congo — The British in the Caribbea^n — Conflicts between financial interests and weak Govern- ments — British in Egypt — French in Morocco — Haiti and Dominican Republic — Italy in Tripoli — The Boer War — Political aims and finance — Russia in Persia — The Bagdad Railway — Concessions in China — Manchuria — The Twenty-One Demands — China in the world politics of the future — Necessity for international supervision — Failure of imperialism — Of the laissez-faire policy — Nature of international control 311 CHAPTER XVril TOWARD WORLD DEMOCRACY Place of national governments in progress in the immediate future — National security, both military and economic — Political democracy often associated with commercial and financial imperialism — Imperialistic nations can- not be formed into a successful democratic league — ^Re- sponsibilities of democracies to undeveloped regions — Undesirable sort of "league of nations'* — Holy Al- liance — Triple Alliance — Triple Entente — Mittel Europa — Paris Economic Conference — Shall the **next war" be? — Arguments for a democratic league of nations — Causes of war — What the Great War has taught in cooperation — Failure of unrestricted com- petition — Proposals for a league of nations — Sover- eignty — Covenant of the league of nations — Interna- XV CONTENTS tional commissions — Their functions and relation to the League — The need of vision APPENDICES I. American Manufacturing Industries XL Eecommendations of the Economic Conference of the Allies ...... III. Japan's Demands on China, January 18, 1915 rV. Act Creating the United States Tariff Commission V. The Tariff Board and Wool Legislation "VT. Cotton Conversion Costs and Tariff Rates VII. Anti-Dumping Legislation in Canada and the United States ..... VIII. Export Associations Act .... IX. Covenant of the League of Nations X. Act Creating the Federal Trade Commission 338 INDEX 365 368 374 378 384 422 430 434 438 463 INTRODUCTION One of the outstanding facts of the Great War so far as tiie United States is concerned is clearly our closer contact with the problems of European politics. This is not merely a case of increased interest on the part of the American people, but a situation into which we have been forced by the fact that we have become participants in the determination of European policies in a sense little dreamed of a few years ago. As a result we shall be obliged to look at many. of our home policies from a broader point of view than form- erly. This is particularly true of the tariff. For genera- tions the tariff problem has seemed to most American statesmen and to the public to be a purely domestic one. We adopted tariffs partly to raise revenue and partly to protect American industry. In any case we opened or closed our door according to our own will and with little regard to the broader questions of commercial policy the world over. The tariff was simply raised or lowered according to the particular financial needs of the moment or according to the economic theory of the party in power at any given time. Furthermore, for a century all consideration of the tariff was based on the assump- tion that the imports into this country would be largely manufactured goods and our exports would be largely raw materials. The question was merely how far im- portation of manufactured goods should be restricted with the object of stimulating the growth of manufacture at home. Even before the war the United States was beginning to assume a new position as an exporting nation, and today the situation in our foreign commerce has become nearly reversed. Manufacturers are no longer merely xvii INTRODUCTION asking for the protection of the home market in their favor, but they are asking the assistance and encourage- ment of the Government in securing markets abroad. European nations have for generations framed their tariffs with a view to improving their positions in foreign competition. In tariff making there were always con- templated the problems of commercial treaties based on negotiation between different countries. Tariffs have been arranged as much for bargaining purposes as for purposes of revenue or protection to the home producer. In recent years American students of the tariff have frequently urged this as a desirable policy for the United States to follow, but to most business men such propositions have seemed rather impractical and far away. Especially in Congress has there been an extra- ordinary indifference to this phase of the tariff ques- tion. With this indifference has gone an almost com- plete ignorance as to the broader aspects of the tariff question as they appear in European discussions and as they affected European tariff policies. In the period of reconstruction the tariff problem will play as big a role as ever. It is likely, however, that it will be debated along quite different lines from those so long familiar. Our tariff policy from now on should pay as much attention to the export problem as it form- erly paid to the relation of imports to the home pro- ducer. In the matter of the tariff, as in many other problems formerly considered purely domestic, we are bound to be more and more affected by the general inter- national situation. The indifference and ignorance re- ferred to above will prove a handicap in getting the American business public, and the politicians as well, familiar with the practical working of commercial poli- cies in this broader sense. But we are no longer con- fronted merely with the desirability or undesirability of a protective tariff. We must equip ourselves to under- stand the nature of bargaining tariffs, maximum and xviii INTRODUCTION minimum tariffs, commercial treaties, most-favored- nation treatment, anti-dumping legislation, and many others of the elements of commercial policy. Mr. Cul- bertson's broad survey of this whole range of topics is a most timely introduction to a field with which we are bound to become more and more familiar whether we like it or not. Besides the fact that our tariff in any case must from now on be treated in closer relation to the complex problems of international trade, there is the further fact that it assumes a new aspect in the light of its delation to the efforts that are being made to bring about some form of international agreement for the preven- tion of war and the maintenance of just r-elations between the nations. The conclusions of Mr. Culbertson as to the relation of our commercial policy to this broader question will doubtless call out strenuous pro- test. They are, however, worthy of very serious atten- tion. Furthermore, any thoughtful man before reject- ing them must search his mind and see whether or not others of his convictions of a more general political nature do not force him to accept the conclusions of this book as a necessary corollary to ideas already accepted by him. If he already believes firmly in the desirability of a League of Nations, it will be hard for him, after reading this book, not to recognize that problems of commercial policy, including tariffs, involve the neces- sity for some kind of an international tribunal. If, on the other hand, the reader is already convinced that the idea of a League of Nations involves nothing but com- plications and dangers to be avoided, he will probably find that the extension of the concept made by Mr. Cul- bertson furnishes him with new reasons for dreading such a departure from established policies. There is, however, a large intermediate group who find it difficult to come to any very strong conviction on the all-absorbing question of the day. They are too zix INTRODUCTION hard-headed to believe that mankind has suddenly changed, or that mere preaching regarding the harmony of nations will alter the age-long contest for prestige and power. They see clearly the new complexities and difficulties that must inevitably arise. At the same time they are too profoundly impressed with the horrors of the last four years, too receptive to the new current of ideas, to accept the fatalistic conclusion that these national rivalries and struggles must go on in the same old way in saecula saeculorxim. To this large group Mr. Culbertson's discussion of the manifold problems of commercial policy, on the basis of supplementing the old purely national control with a new international con- trol, will appeal in diverse ways. Some will find in it a practical working out of principles in detail that will make the League idea more concrete and acceptable. Others will perhaps become more fearful in realizing the array of problems that are to be faced and the number of international commissions and courts that will be necessary. The author's main contention is most clearly stated in his twelfth chapter, entitled, *' Where National Con- trol Breaks Down." Just as the old extreme theory of individualism broke down, as an adequate means of guaranteeing the individual ' ' a square deal ' ' in his eco- nomic life, so the extreme form of nationalism has in turn broken down. Such is the contention. The indi- vidual nation had to step in to protect its citizens, one against the other, in matters of ''unfair competition.'' This meant various protective statutes and the erection of various administrative bodies, such as, in the United States, the Interstate Commerce Commission, the Federal Trade Commission, and the like. The same problem, it is asserted, has now arisen as among nations. ''The economic life of the world has in many ways burst the confines of the individual state. In so far as it has, it is without a co-extensive control. Nations XX INTRODUCTION have merely accentuated the fierceness of individual competition in world trade and financing. To un- controlled individualism has been added an uncontrolled nationalism. This situation points conclusively to the necessity for an international organization vested, even if in the most rudimentary form, with the essential ele- ments of government. ' ' Two points may be suggested in this connection. One is that the commercial policy of nations has his- torically played a leading role in the continuous struggle of nations for a dominating position in the world's affairs. Political power and economic strength have gone hand in hand. Whichever of these two may have seemed the goal of national effort at any particular time, each has been a weapon for increasing the other. It is self-evident that economic strength is a vital element in securing political predominance. It is equally clear historically that political power has been used as a means, and frequently a ruthless one, of increasing economic strength. Tariffs, prohibitions, bounties, sub- sidies, commercial treaties, colonial policies, navigation laws, tariff wars, and ultimately real wars are inextri- cably bound up together in the history of national rivalry. Consequently any fundamental consideration of the problem of whether it is possible to soften, or to restrain within bounds, this struggle of nations for prestige and power must deal fully with the underlying facts of commercial rivalry and the possibility of its restraint or control. So much has long ago been granted by all thoughtful adherents of the League of Nations idea. In covering so fully the manifold phases of com- mercial policy in the light of his main concept, Mr. Culbertson makes a welcome and timely contribution to the chief problem of reconstruction. The second point is that in view of the fact that we are already seriously discussing the possibility of some international control of the relations of labor and capi- xxi INTKODUCTION tal, of hours of labor and conditions of employment, the proposition for some international control of com- mercial policy is relatively simple. The phrase ''com- mercial policy'* has come to mean the policy of nations toward one another in favoring or encouraging their own citizens in international competition. The rela- tions of labor and capital we have hitherto looked upon as a purely domestic problem. If we are to have inter- national agreements as to conditions of employment and international commissions and tribunals to handle these matters, to balk at an international control of com- mercial policies would be to strain at the gnat and swal- low the camel. It should also be stated that, in coming to his con- clusions, Mr. Culbertson has not done so lightly or with- out due consideration of what is enduring and valuable in the spirit of nationalism. He is not a sentimental internationalist in his philosophy. He is not an indi- vidualist free-trader in his economics. His first pub- lished work was an appreciation, written con amore, of the economic philosophy and policy of Alexander Hamil- ton, the sanest, the most profound, and the most con- vinced of the exponents of nationalistic economics. But he would not admit for a moment that he has departed in any way from Hamiltonian principles in his present recommendations. We should not forget that Hamil- ton's advocacy of a strong Federal union was looked upon by the cautious sectionalists of his time as a radical departure from safe and established policy. As Mr. E. S. Martin recently pointed out in one of his happy editorials, Washington was an adventurous soul, quite ready to meet a new situation with a bold and untried programme. The same was certainly true of Hamilton. There is no necessary and inherent conflict between the nationalism of his day and the support of a League of Nations in ours. The writer of an introduction is allowed some per- xxii INTRODUCTION fional reference, I believe, and I may perhaps say that It was under my direction that Mr. Culbertson made his early studies into' the history and principles of commer- cial policy. In the work just mentioned he has been kind enough to refer to what he believes to have been my influence on his own intellectual processes. I speak of this merely to indicate my great interest in noting the point to which he has come in his consideration of the new problems that confront us as a heritage from the war. It is significant of the widespread changes in men's minds regarding the foundations of national policy that one so steeped in the nationalistic conception of society should go so far in his concessions to the neces- sity for some form of international control. Having committed myself to this personal reference m order to make Mr. Culbertson 's position somewhat clearer to the reader, I must continue it to the extent of saying that, although heartily recommending a serious consideration of the author's treatment of his intricate subject, I am not prepared to commit myself, at the present stage of my thinking, to accepting his final conclusions. As one who has always looked upon the struggle of human groups as an inevitable part of the processes of history, this would be hard for me. On the other hand, we have all been forced by the experience of the Great War to discard many of our fundamental concepts. Believing that, despite all theories, we must give support to any serious proposal, however experi- mental, that seems to give promise of preventing a repetition of recent world experiences for the immediate future at least, I am bound to admit that logically any such effort must involve some international control of commercial policy. Whether this means a permanent change in mternational relations, or only a necessary makeshift to tide over a period of readjustment and reconstruction, is quite another matter. There are some deep historical and philosophical reasons for maintaining xxiii INTRODUCTION that a League that is not a League against something, that aims at cooperation for its own sake, and is not cooperation forced by evolutionary struggle, cannot have permanent vitality and significance. But a discus- sion of this problem would carry us too far afield, and the present time demands a consideration of how we can help to establish peace and harmony for a generation rather than of what are the permanent forces that will be operative in future ages. Henry C. Emery. COMMERCIAL POLICY IN WAR TIME AND AFTER PART I WAR'S EFFECT ON INDUSTRY { We need to beware of patchwork. The view of the Labour Party is that what has to be reconstructed after the war is not this or that Government Department, or this or that piece of social machinery; but, so far as Britain is concerned, society itself. The individual worker, or for that matter the indi- vidual statesman, immersed in daily routine — like the in- dividual soldier in a battle — easily fails to understand the magnitude and far-reaching importance of what is taking place around him. How does it fit together as a whole? How does it look from a distance? Count Okuma, one of the oldest, most experienced and ablest of the statesmen of Japan, watch- ino' the present conflict from the other side of the globe, de- clares it to be nothing less than the death of European civilisa- tion Just as in the past the civilisations of Babylon, Egypt, Greece, Carthage and the great Roman Empire have been suc- cessively destroyed, so, in the judgment of this detached observer, the civilisation of aU Europe is even now receiving its death-blow. We of the Labour Party can so far agree in this estimate as to recognise, in the present world catastrophe, if not the death, in Europe, of civilisation itself, at any rate the culmination and collapse of a distinctive industrial civihsa- tion, which the workers will not seek to reconstruct. At such times of crisis it is easier to slip into ruin than to progress into higher forms of organisation. Programme of the British Labour Party on Reconstruction. CHAPTER I RELATION OF COMMERCIAL POLICY TO RECONSTRUCTION Facing the problems of reconstruction — Their nature and variety -- Commercial policy as a reconstruction problem — Concepts ^fi,Jf J i?''^\.''°°'°'T® ^^^°'® *^® war -The permanent value of nationalism -Danger from the spirit of Prussianism i^^n^wr'""""^^" optimistic fatalist -Democracy and a constructive programme necessary — America 's part in the world sett ement - A new social point of view - Three stages Prussian military power has been in its outward symbols discredited and destroyed. The greatest of world conflicts, so replete with tragic happenings for men and nations, has ended in a complete victory for the western democracies. But we should harbor no delusive hope of having secured something of perma- nent value through military victory alone. By military success we have not solved the perplexing problems before the American Nation and the world — we have merely reached them. War is a negative thing; it has simply removed an obstruction. Victory has brought responsibility. Our task now is the rebuilding of our social, economic, and political life. We are face to face with the work of reconstruction. The war has solved some problems, clarified others and created still others." We live in a different world from that of 1914. It is different both in fact and in thought. While we were absorbed in the conflict of arms, important changes were wrought in the social economic, and political structure of the world, and al- most unconsciously we began to realize the inadequacy COIVIMERCIAL POLICY of ideas and institutions which before were regarded, except by a small minority, as not subject to criticism. The problems of reconstruction are as diverse and intricate as the life of mankind. No aspect of our social, economic, and political life has escaped the modifying influences of forces released by the war. Nevertheless, almost all of these problems existed in a more or less acute form before the war. Our interest in them has been deepened because in some cases they were contributing causes of the war and in other cases the progress of the war has made it impossible longer to ignore them with impunity. In America, and in other nations too, interest has been stimulated in a range of widely differing problems. They include labor and its right to a better and more responsible place in industry, its distribution in both agricultural and manufacturing pursuits, the employment of women and children, and the proper absorption into peaceful pursuits of the demobilized soldiers, sailors, and civilian war workers. Agricultural questions, of supreme importance, relate to the price and distribution of food, the development of the public domain, loans to farmers, and agricultural cooperation and land tenure. The conservation, de- velopment, and distribution of our great natural re- sources—lumber, coal, oil, metals, and others — have a renewed importance as a result of our war-time experi- ence. Taxation and other phases of public finance, the efficiency and purpose of our military establishment, re- ligion and education, communication and transportation, corporate organizations — these and other questions must be reconsidered in the light of recent happenings. Even our social, economic, and political institutions are being put on the defensive. Since the Russian revolu- 4 A RECONSTRUCTION PROBLEM tion we do not take so much for granted. As important as any of the problems of reconstruction are those of commercial policy. We are thinking, more now than before the war, of the wider aspects of competition be- tween nations — the tariff, foreign trade, and the activi- ties of our commercial interests abroad. The international problems of reconstruction are more baffling than the domestic problems. Territorial, dynas- tic, national, racial, and social questions which existed before the war and were contributing causes of the con- flict are to be passed on for solution during the recon- struction period. Poles, Czecho-Slovaks, Jugo-Slavs, and Armenians deservedly seek independent national existence. Dynastic houses, divested of their autocratic power, plot and hope for a reaction that will serve their selfish ends. Racial antipathies seem at times to present problems which defy solution. Revolution in some countries threatens to destroy the last securities of man's common life. Land-owning, trading, and investing classes, propagating their own interests in the guise of patriotism, becloud the issues of a democratic peace. Reconstruction in world affairs is in fact a complex task involving military control, territorial realignments, the adjustment of racial rivalries — often embittered by oppression and turned into unnatural channels by propa- ganda, colonial claims and policies, the protection and education of the economically baclnvard peoples of the world, the regulation and restraint, where desirable, of trading and financial interests, and the devising of an international organization that will tend at least toward the prevention of a recurrence of world wars. Reconstruction should mean much more than a mere rearrangement of the world that existed prior to 1914. It should bring revolutionary changes, but by orderly 5 COMIVIERCIAL POLICY (parliamentary') means. Let us consider carefully what it is we are setting out to rebuild, what it is we are to construct on the foundations of the past. The democ- ratization of our national and world life will in many places run counter to exclusive class and national in- terests w^hich can no longer plead a law or a tradition as alone a sufficient justification for their maintenance. Ideas of ** natural right/' *' vested interests/' *' personal liberty/' and '* national sovereignty" should no longer bar interference with conditions that the war has demon- strated to be intolerable because in many cases they made the war possible. No lasting peace can be brought about if we fail to reexamine the fundamental relations of men and nations and to act upon the knowledge thus obtained. It is t^le function of this book to examine those aspects of the work of reconstruction that have to do with com- mercial policy. The conquest of nature and the methods adopted by man to supply his material wants, closely correlated as they are with the progress of man's moral and spiritual life, make interesting and important chapters in the annals of the human race. Production and trade have always been vital, and as society has grown more complex and as government has concerned itself more with the interests of the people and less with the aspirations of reigning dynasties, they have increas- ingly absorbed the attention not only of business men but of statesmen. The importance of the economic factor in reconstruction must be evident to the most casual observer of the myriad activities of men in agri- culture, mining, manufacturing, shipping, trading, and finance. These activities have not always resulted in harmony ; they have led at times to antagonisms, rival- 6 A RECONSTRUCTION PROBLEM ries, and even wars. Intensified by racial feelings, na- tional aspirations, and dynastic ambitions, they have un- questionably contributed in large measure to inter- national conflicts. Under these conditions we might expect to find, at least among democratic peoples, strong political senti- ment in favor of a plan which, while just, would prevent commercial and financial rivalry from dragging nations into war. But the advocacy of such a plan has not in the past gone much beyond the stage of academic dis- cussion. Problems of commercial policy have almost universally been considered wholly from the standpoint of individual nations seeking their own advancement. The commercial nations have either sought their selfish, narrow ends under the inspiration of Machiavellian prin- ciples by any method that would achieve their purposes, or they have assumed the complacent position that they are always right and that whatever benefits them will benefit all others. The deliberate use of trade and finance by some nations to further selfish ends and the studied indifference to them of others were large factors in making inevitable the most terrible war in history. Not infrequently when the world aspect of commer- cial policy is dwelt upon the conclusion is hastily reached that nationalism is an evil that must be done away with. Patriotism is labelled chauvinism and is held up as one of the sinister influences of the world. National aims, aspirations, and ideals are described as relics of primi- tive life. Such a position fails to take account either of the facts or of human needs. The exclusive na- tionalist who sneers at international action is no more objectionable than the advocate of a world state who, with equal lack of insight, forgets the importance and 7 COMMERCIAL POLICY • value of the nation as a unit of society. As a matter of fact, both national and world action are necessary in the constructive task which is before us. We should avoid discriminatingly the evil tendencies in both, recog- nizing that each has its proper sphere. We shall not progress far toward the goal of justice and right until we lay down as one of the first principles that national- ism and internationalism are not antagonistic, but com- plementary, ideals. There are commercial problems that now and always will belong to the nation and that can be solved only by it. But there comes a time in the consideration of the problems of trade and finance when the national organization is inadequate for their solution and some degree of international action becomes imperative. Military victory should sober rather than elate us. The crushing of Germany has not removed all of our enemies. The breaking up of organized Prussianism in Central Europe is a memorable stage in the progress of democratic ideals and a step toward the universal ac- ceptance of the principles of responsible government, but in the days of reconstruction the spirit of the Prus- sian in many a tempting guise will lurk in the domestic and international programmes that will be brought for- ward. Reactionaries, having dwelt too long amid the musty traditions of the past, will appear with their plausible warnings against innovation. They will op- pose any departure from the old chaotic order of things because its preservation is profitable to them and to their class. Such men, regardless of where they live, are Prussians at heart. If their counsels prevail in the final settlement, the Allies will be accomplices to the very thing that we denounced in Germany. 8 A RECONSTRUCTION PROBLEM Bolshevism is a symptom of an unjust social condi- tion and a warning that fundamental reforms are neces- sary. Russia is being visited today with the sins of generations that have exploited and trod upon the masses. Bolshevism, with its misdirected enthusiasm and programme of destruction, may, like war, serve to remove an obstruction, but it offers no constructive prin- ciples for guidance in the future. We shall not get rid of it, however, by denouncing it. Its antidote is a con- structive programme that will carry our much lauded principles of democracy down into and through the very structure of our commercial and industrial life. Those optimistic fatalists who tell us that people are so appalled by the losses of the war that they will never again draw the sword are not the least dangerous of the enemies of a sound policy of reconstruction. They talk confidently of the world's being on the threshold of a new era when wars will be no more. They say also that people have learned to organize and pool their resources for war and that they will naturally continue their co- operation during peace. But too often definite plans for achieving this complex result are lacking. There is little comprehension of the difficulties which lie ahead or of the selfish and unscrupulous policies which must be combatted lest they be adopted by nations, dynasties, and commercial interests. We may be very certain that a permanent and just peace will not come merely be- cause the war has been full of horrors and tragedies. The cry '* never again" is not a new one. Nothing exists in the present situation that will insure the world, as a matter of course, against following the old circle of economic rivalries, balancing alliances, military prepara- tions, and war. The way to success in the days of reconstruction lies 9 COMMERCIAL POLICY neither with the paralyzing pessimist or selfish reaction- ary who feels that we must always follow the errors of the past, nor with the Bolshevist, nor with the planless optimist who believes that the new order of things will just happen. It lies with those who, giving full weight to the background of the war and holding firmly to the ideals of democracy, plan with insight and work out to its minutest detail the constructive programme of a permanent peace. In the work of rebuilding the world the American nation has a unique and important part. We entered the war in the spirit neither of conquest nor even of revenge. We saw the world menaced by a power which, if successful, would destroy all that this country has stood for. We were willing to give without stint in order that national and international justice might pre- vail and that there might be established in the world the democratic principle in political and commercial affairs. W8 felt a common interest with the peoples of Italy, France, Belgium, Great Britain, and the self-governing British dominions in their long and bitter struggle against the military powers of Central Europe. We felt that they were fighting our battles. However varied the individual aims of the nations engaged in the great struggle, undoubted evidence that our past and future were" bound up with theirs led us inevitably to cast our lot with them. Our armed forces on the sea and at Chateau Thierry, St. Mihiel, and along the Meuse trans- lated American vigor and enthusiasm into war. They went into the war without a selfish motive. They faced a hard task in the spirit of sacrifice. They were willing, if need be, to lay down their lives, as so many of the brave Allied troops had done, in order that the world 10 I h A RECONSTRUCTION PROBLEM might be redeemed. Now that their work is so nobly accomplished, we should not fail to carry on in the same spirit of devotion the work of healing the wounds of the nations. Vindictiveness, punishment, and national sel- fishness, if allowed to govern in the readjustments, will return in future generations to plague the world. The reactionary statesmanship of Metternich was triumphant at the Congress of Vienna, but only temporarily, for it forced the peoples of Europe into revolution. Germany in 1871 took from France the provinces of Alsace and Lorraine and thereby made reconciliation impossible. Our own Civil War was followed by an illiberal and irrational reconstruction which fills some of the darkest pages of American history. History has many other warnings to those on whom the direction of national and international policies rest. The world will have no gains to offset the losses of the war if the Allies content themselves with destroying Germany's militarism and national power and at the same time merely build up their own. That procedure will change the pawns in the game, but not the game. Unless the spirit of sacri- fice guides the councils of the Allies in the constructive work before them, we may expect the world to drift back into the evils of international anarchy. Unless the world view of affairs in some degree softens the exclusive na- tional views of some of the leaders of the nations, the men who have laid down their lives in the cause of better things will have died in vain. The task before national legislatures and diplomats of defining our ideals and converting them into laws and treaties is a task quite as essential as and infinitely more difficult than the raising of armies and the building of navies. The days immediately before us are critical. 11 COMMERCIAL POLICY The war has profoundly altered the economic conditions within every nation. It has modified not only our way of doing things but also our way of thinking about them. It has revolutionized our ideas concerning industry and trade. Old theories of commercial relations have been called into question or scrapped. New ideas are finding ready acceptance. More than ever before people are interested in what ought to be rather than in what is. In the United States thousands of business and pro- fessional men by giving their money and talents in the public cause have felt the broadening and inspiring effect of public service. They have learned to sacrifice and they have enjoyed it. They have submitted to the restrictions of the War Trade Board and the War In- dustries Board and have learned to recognize that even in what they once thought was their private business the public is more controlling than the private interest. They are now more willing to look upon their businesses not only as organizations for private gain, but as trusts which they hold for the public, and upon themselves not merely as seekers after gain, but as trustees. A more general recognition of the importance to society of the producer, whether on the farm or in the factory, has come as a result of our war experiences. The war could not have been won without the coopera- tion of the farmer, the laborer, the manufacturer, and the merchant. Back of the armies in the field, who deserv- ingly received our plaudits, were the men and women who toiled in factories ; the chemists, metallurgists, and other experts who worked many weary hours on the problems of war material; and the farmers, manufac- turers, and merchants — all of whom deserve praise for loyalty and credit for helping to win the war. Modern war is economic as well as military in its methods. 12 \ A RECONSTRUCTION PROBLEM Germany crumbled at last in large part because her economic system could no longer bear the strain of war. The Allies achieved success in large part because of their control of raw materials and because of their effective economic organization. We should now look upon industry and commerce as part and parcel of our life. "We should neither fight it nor ignore it. We should devise democratic means of directing and con- trolling it in the interests of public welfare. More than anything else perhaps the war. has empha- sized the world-wide influence of trade and industry. Industrial progress or change in one country can no longer be ignored in others. Policies of trade and finance pursued by one nation are of vital concern to others. Nations individually must consider their prob- lems in the light of world tendencies. More important still, nations must seek collectively the solution of the great questions which in the past have too frequently been left to take care of themselves. The war has made us more internationally minded than we were in 1914. At the same time it has increased the military and economic strength of our nation. How shall this strength be used? Surely not to further selfish national interests that will rouse the jealousy of other nations and sow the seeds of future strife. Rather let it be used to influence sceptical, and perhaps reluctant, peoples to accept ideas on which a just and permanent peace must rest. Important as the effect of the war has been in modify- ing the competitive position of nations in industrial matters and in intensifying competition, more important and fundamental changes have taken place which our nearness to our problem may prevent us from clearly 13 COMMERCIAL POLICY discerning. Industry is the concern not merely of busi- ness men but of all society. It is not an individual but a social possession. Ownership no longer means the right to do as one pleases with the business under one's con- trol. Industry has become so powerful, it has become so vital to the very existence of society, it so intimately concerns the welfare of many people, that the old doc- trine of freedom as applied to business has been dis- carded, and business men, whether they like it or not, are being treated as trustees of the interests they hold. In order to appreciate fully however, what this new attitude toward industry and trade implies, we should look back and consider how industry has come to occupy the important placo it now holds in our common life. In the latter part of the 18th century there began a movement that has come to be known as the industrial revolution. Before this epochal change began, pro- duction was carried on in the home or in small shops. Goods were made largely by hand. Division of labor was not carried far. The handicraftsman and the mer- chant were often one and the same person. The tech- nical methods used were handed down from father to son . and in essentials were centuries old. Yam was spun on the old spinning wheel ; cloth was woven on the hand loom ; shoes were made by the cobbler. Under the influence of the revolution machinery sup- planted hand production ; steam was harnessed and did the work of many human beings ; factories were built and in them were gathered laborens who no longer controlled their product but who worked for a wage. A series of great inventions brought about these changes. In 1769 the water-frame was invented by Arkwright and the use of water power in spinning was made possible. 14 I A RECONSTRUCTION PROBLEM In 1T70 Hargreaves patented his spinning jenny. Nine years later Crompton further improved spinning machinery by inventing the so-called **mule.'* With these spinning inventions more yam could be spun than the old hand looms could weave. This situation was reversed in 1785, however, when Cartwright invented the power loom. Whitney invented the cotton gin in 1792 and another obstacle to rapid production was removed. Steam meanwhile had been applied to machinery. Watts' steam engine was invented in 1769 and was quickly utilized in spinning and weaving, in the iron industry, and in transportation. These great inventions were only a beginning. Machinery was gradually applied to every industry and every walk of life. No one can look today at a textile mill, a steel rolling plant, an ocean steamer, a modem farm machine, without marvelling at the ingenuity of man. These inventions stimulated production. The whole structure of society was changed. The factory system came into being. In England, where the influence of the revolution was most acutely felt, the country districts were depopulated and cities grew apace. Society tended to become divided, so far as production was con- cerned, into the ''capitalists" or employers and the laborers who worked for a wage. Wealth accumulated in the hands of one class ; the other lived often in squalor and want, herded in dismal slums of overcrowded and unsanitary cities. The labor problem came into existence. Those who were interested in the expansion of indus- try and trade were supported in their plans by the philosophy of individualism which was being advanced by an increasingly influential group of economists. This laissez-faire doctrine, as it was called, argued that if 15 COMMERCIAL POLICY A RECONSTRUCTION PROBLEM men were permitted to pursue their own interests unre- strained, their action would result in the best interests of society being served. That government was said to be best that governed least. Free competitior with a minimum of government regulation was conceived to be the best for society. An ^* invisible hand." it was argued, guided the selfish interests of man so that what he did in his own behalf promoted also the social welfare. As a matter of fact, laissez faire promoted, not human welfare, but the class interests of the mill owners and the great merchants who were supplanting the land- owning and clerical classes as the chief influences in European Governments. Individualism had some bene- ficial effects in breaking down old traditions, outworn regulations, and false economic theories, but it was entirely inadequate as a social philosophy for the great industrial society which was developing. Free compe- tition between the capitalists and laborers was unequal, and resulted in the exploitation of labor. The story of the struggle for the adequate protection of labor by law and by its own organized effort cannot be told here. But so firmly was the idea of ** liberty,'* of ** freedom," wrapped up with the interests of the ruling class that only slowly was legislation adopted to correct the evil tendencies of the doctrine that a man could do as he pleased with his ** private property.'* In the meantime there had occurred a marvelous expansion of industry. The industrial structure which today we take as a matter of course is largely a product of the 19th century. Enormous quantities of goods were produced at relatively low prices. The ordinary man could purchase things which in the 18th century were only for the rich. Goods accumulated and demanded new markets. Then came the great events 16 A i of the second phase of the industrial revolution. The world witnessed the coming of the railroad, the steam- ship, the telegraph, and the telephone. Transportation and communication welded the world together. A journey that to Marco Polo was as a historical event became a mere business undertaking. Transportation and communication, developed by industry and trade, in turn stimulated them. With the increased industrialization of Great Britain^ and later of the United States and of Germany, came the seeking for raw materials and markets in the less economically advanced parts of the world. Colonies hitherto almost forgotten became important. *' Spheres of influence" were carved out of Africa and Asia. The new large- scale industry depended for its effectiveness on division of labor, and division of labor was limited by the extent of the market. Mass production for a great market was the keynote of the new industrial regime. More goods were produced than the home market could absorb at a ^ profitable price. Foreign markets became essential. Following the growth of industry and the extension of the market came the export of capital. Investments and concessions abroad were in some cases more profitable than home enterprise. The idea of freedom and laissez faire, limited in some degree in domestic affairs, reigned supreme in foreign business ventures. Governments, instead of exercising restraint over their citizens, backed them up. Nationalism was perverted and developed into a com- bative imperialism. The Great War was in large measure the product of the second phase of the indus- trial revolution. It also brought it to a close. Under the necessity of war industry became the 17 COMMERCIAL POLICY servant of society. Competition was restricted, output was regulated, prices were fixed, profits were limited. Man demonstrated that lie could control the so-called economic laws which some individualists said controlled him. If there is one lesson that the war rias taught clearly, it is that free competition — the doctrine of laissez faire — is a failure in domestic and particularly in international life. The war initiated the third stage of the industrial revolution. In it mankind w^ill under- take to direct industry and trade in such ways as to prevent conflicts between nations and to achieve the nobler aims of society. Democratic ideas which have determined our political institutions will become also the test of adequacy in the economic relationships in both national and international affairs. Industry and government were drawn close together by the war, and their cooperation is likely to be one of the permanent results of the great struggle. Peoples have realized as never before how vital to their very existence their industries may be. They have seen clearly that modern armies and navies cannot fight if the men and the women in the factories and on the farms will not work. Government has interfered with industry more in Great Britain, France, Germany, and Japan than in the United States, chiefly because these nations were longer in the war. But even here production was curtailed in non-essential lines and stimulated in essen- tials. Raw materials were controlled and allocated. New industries were subsidized. Imports and exports were regulated for the accomplishment of the Govern- ment's purpose. Industry was made more efficient by improved management, automatic machinery, and the standardization of products. The benefits of wide research were made available for practical use. The 18 \ A RECONSTRUCTION PROBLEM facilities of production and distribution were concen- trated and the inefficient eliminated. This partnership between Government and industry will not be broken up quickly, if at all. The supplying of the needs of peoples and the repairing of the wastage of war are of too vital import to permit the economic system of nations to return to the old order of unre- stricted competition. The dangers of uncontrolled trade and finance are now apparent and the very essence of progress requires a constructive national and interna- tional programme that will meet these dangers squarely. The forces of government as well as of industry and commerce must be turned into channels that will serve, not destroy, men. We have seen their dangers as masters; we have learned and shall not forget their usefulness as servants. The fighting in France, Belgium, and Italy was not merely blasting the Allies' victorious way through the German lines; it was also shattering a political and economic system that had fastened itself on the world. Peoples are no longer satisfied merely with political democracy. They are demanding the democratization of industry, trade, and finance, both within the nation and in world affairs. This book is written in the firm belief that society need not always drift, and that the peoples of the great nations, having a vision of better things and an aspiration to attain them, can, through their leaders, act to achieve their purpose. It is written in the hope that it may be a contribution toward the establishment of a body of opinion in favor of a liberal- ized commercial policy — a policy that • takes into account the essential interests of individual nations, and at the same time subjects truly international problems to world control. 19 CHAPTER II EFFECT OF THE WAR IN DIVERSIFYINQ AMERICAN INDUSTRY America's industrial position in 1914 — Diversifying influences set in motion by the war — New glass products, including labora- tory and optical glass — Surgical instruments — Sueded gloves — Venetians — Camphor. At the time of the outbreak of the war in Europe in 1914 the United States was recognized as one of the lead- ing industrial nations of the world. The number of manufacturing establishments operating in the country just before the war was in round numbers 275,800, employing, on the average, approximately 7,000,000 wage earners. The annual value of the products turned out was a little over 24 billion dollars.^ This production represented a wide range of industrial activity. The value of manufactured food products was in round numbers $4,800,000,000; of textiles, $3,400,000,000; of iron and steel products, $3,200,000,000 ; of other metal products, $1,400,000,000; of lumber products, $1,600,- 000,000; of leather products, $1,100,000,000; of paper and printing, $1,450,000,000; of liquors and beverages, $770,000,000; of chemicals, $2,000,000,000; of stone, clay and glass products, $600,000,000 ; of tobacco manu- factures, $490,000,000; of vehicles for land transporta- tion, $1,000,000,000; of railroad repair shops, $550,- 000,000; and of products of miscellaneous industries, $1,750,000,000.2 1 Abstract of the Census of Manufactures, 1914, p. 29. Appendix I. 2 A more detailed statement is given in Appendix I. 20 See DIVERSIFYING AMERICAN INDUSTRY One important effect of the war was to diversify fur- ther the already complex industrial life of the United States. The curtailment and final stoppage of exports from Central Europe compelled the United States to erect or extend factories to produce goods that had been obtained in whole or in part from belligerent countries. The blockade of Germany established by the British Navy brought forcibly to our attention the fact that in the case of a number of essential commodities we had in this country neither the plant nor the organized technical skill necessary for their production. The curtailment of production in some lines in Great Britain resulting from the taking over of industry to supply war demands had a similar but less revolutionary effect on American industry. The British Government found it necessary to use the productive capacity of some factories for the products of which the United States had been the chief market, and to meet this decline in foreign supplies American manufacturers increased their production. Shortage of shipping was also a stimulus to the increasing diversification of Ameri- can industry. There was a tendency to produce at home those products which the uncertainties and the scarcity of ocean shipping made it increasingly difficult to obtain from abroad. Prior to April, 1917, the absorption of the European nations in the great struggle left their foreign markets unsupplied, and American industries were called upon to supply a part of this unsatisfied de- mand. The tremendous increase of export trade brought in its wake a corresponding development and extension of domestic industry and commerce. Finally, there came the enormous demand for war supplies, first by the Allies, and then, after April, 1917, by our own Govern- ment. All of these influences brought to bear on Ameri- 21 COMMERCIAL POLICY can industries by the war were constructive in effect. They built up, they extended, they diversified our in- dustrial life. Some of the most interesting effects of the war were to be seen in industries which, if judged by quantity of output, are relatively unimportant. Yet the war proved in many cases that the existence of such industries in this country was vital to our military security and economic prosperity. The industrial effects of the war may be shown best by selecting for detailed description in this and the following chapter a few of the industries in which the changes resulting from the war conditions were most striking and at the same time most typical. At the time of the outbreak of the war in Europe, the American glass industry was supplying the domestic market with a large proportion of its window glass, bot- tles, lamp chimneys, and pressed glassware. The up-to- date American mills were equipped with excellent auto- matic and semi-automatic glass-blowing machinery. We were dependent upon Germany and Austria, however, for certain special but very important glass products. These included chemical or laboratory glassware, im- portant not only in our universities but also in the research departments of many of our great industries, and optical glass of the highest grade, used for lenses of field glasses, range finders, and periscopes. Although these products were made to some extent in the United States, we were largely dependent on foreign countries for our supply. Laboratory ware includes flasks and beakers; grad- uated ware, such as burettes and pipettes ; apparatus for testing; extraction apparatus and condensers; sugar- testing ware ; reagent bottles ; and ground ware. Some 22 DIVERSIFYING AMERICAN INDUSTRY of these products are required by many of our important industries in their research work— -the testing of pro- cesses and the analysis of materials and products. Laboratory tests and analyses are essential to the tech- nological processes of such varied industries as iron and steel, sugar, fertilizers, rubber, cement, soap, oil refining, textiles, explosives, dyes and other chemicals. American glass manufacturers were called upon to supply the domestic demand for chemical and scientific glassware. The war, by eliminating foreign competition, gave them a free field for development. The research and experimental work done in Europe and made public enabled them to prepare satisfactory combinations of materials. The United States Bureau of Standards cooperated in improving the quality of the war products. One of the leading manufacturers of American chemical glassware described his experience thus :* When we decided to go into this Hne we employed the best chemists we could find. The idea was to get quality, so that after the war our quality would be known and we would have a chance to sell on a quality basis. We experimented and we made glass which, from all chemical standpoints, was superior to the original German production. The ingredients and the way they are mixed are probably different. It is a superiority that we hope will continue indefinitely, because the demand in this country has been for a better quality. The distinctive requirement is for quality, glass that will stand the laboratory tests. The technical problem is in the mixing of the materials, and it requires skill in the manufacture of it. We had trouble in getting skilled labor with technical experience. It took us about six months to really get a production that was satis- factory. Optical glass is used for the lenses of field glasses, 3 United States Tariff Commission, ' ' Tho Glass Industry as Affected by the War '' (1918), p. 16. 23 COMMERCIAL POLICY range finders, periscopes, and other optical instruments. Its production was perfected in Germany after careful experimentation and scientific research. The best known factory in this line is the Jena Glass Laboratory. It began in 1884 to produce optical glass in commercial quantities. Its founders were aided in their research by liberal subsidies granted by the Prussian Government. During the year ending June 30, 1914, the United States imported rough-cut and unwrought glass for optical pur- poses valued at $617,700, almost one-half of which came from Germany direct. This glass was ground and polished in this country. During the same year the importation of lenses and optical instruments amounted in value to $720,560. The decline in imports of optical glass, owing to the blockade of the British Navy and also to the com- mandeering for war purposes of the relatively small production in the United Kingdom and France, stimu- lated production in this country. Optical instruments are a vital necessity in military operations, particularly for artillery. Unless equipped with accurate fire-control instruments, modern armies cannot operate. The greatest skill and technical knowledge are required to prepare glass that will pass military tests. No small task, therefore, confronted the American manufacturers in developing this new branch of the glass industry. "With the assistance of the Carnegie Institution of Wash- ington and the Bureau of Standards the difficulties were surmounted and excellent optical glass was produced in quantities sufficient to supply our military needs.* Great Britain, like the United States, had depended before the war on Germany for the greater part of her supply of optical glass. Early in the war her military * Ibid., p. 12. 24 DIVERSIFYING AMERICAN INDUSTRY operations were hindered by a shortage. The report of the British Committee on Commercial and Industrial Policy, after pointing out the dependence of Great Britain upon Germany for optical and chemical glass, continues :* The supremacy of the German manufacturers was due not only to their superior scientific knowledge and organisation, but also to the support derived from tlie steady requirements of a large standing army. Since the outbreak of war it has been necessary practically to create the industries in this country from the foundation and the efforts made with Gov- ernment assistance under a department of the Ministry of Munitions specially established for the purpose appear already to have met with a considerable measure of success. The main lines of action have been the making of agreements by the Ministry of Munitions, and, where necessary, by the War Office, Admiralty, and Ministry of Munitions jointly, with selected firms, under which in return for Government financial and other assistance they have created plants to pro- duce a required output of adequate quality and variety under specified conditions, the fulfilment of which is supervised by a Government representative with wide powers, including the control of prices and methods of manufacture and the enforce- ment of a fair- wage clause and the right to secure the training and employment of female and unskilled labour. In certain cases such agreements have been made for a period of 10 years, and provide for the maintenance of a specified war reserve of the material manufactured and the availability of the plant for Government use in the event of future hostilities, and an. important feature is an undertaking by the departments con- cerned to specify in purchasing optical instruments that they shall be fitted with British-made glass. In other cases ad- vances or other arrangements have been made for the erection of buildings and the supply of modern machinery. Scientific assistance in solving numerous problems has been given by the Ministry of Munitions, and by numerous and eminent scientific men and institutions through the Ministry. . . . 5 British Blue Book, Cd. 9032 (1918), p. 7. 25 COMMERCIAL POLICY We are satisfied that the continuance of commercial and scientific assistance and of detailed control on the lines already followed will be necessary for a considerable period. This necessity is, we believe, fully admitted by the manufacturers themselves, who recognise also that such assistance must have aa its object and condition the attainment and maintenance of the highest standards of quality. It is clear, moreover, that, in order that the industries may have time and opportui^ity to adapt their organisation to peace conditions and to train an adequate supply of skilled workers, very special measures of protection against foreign competi- tion will be required at the outset, in view particularly of the great strength and reputation of the German firms. Having regard to the peculiar circumstances of the industries in ques- tion, we think that these measures will be regulated most effectively by means of the prohibition of imports from what- ever source, except under license, of certain kinds of glass and optical instruments to be specified from time to time by the organisation referred to in the following paragraph. America at one time had a good sized surgical-instru- ment industry, but about 1900 the Germans began to win the American market from our manufacturers. Their competition just before the war was being felt keenly even in the few lines in which we had for many years retained the advantage. In 1914 from 75 to 90 per cent, of our domestic consumption of instruments was being imported, and American production was con- fined to instruments of brass, copper, and other non- ferrous metals, to large iron instruments, such as veteri- nary tools, to hypodermic needles, and to the filling of special orders. Germany's position had resulted from well organized large-scale production, highly skilled laborers, relatively low labor cost, efficiency in selling, and a good supply of raw materials. The curtailment of imports from Germany in 1914 created a shortage of steel instruments in the United 26 I DIVERSIFYING AMERICAN INDUSTRY States and stimulated domestic production. Our indus- try expanded rapidly. By 1917 the output of soft-metal goods had doubled, and the increase in the production of steel instruments was between 200 and 300 per cent. An added stimulus came to the surgical-instrument industry when the United States entered the war. The Army and Navy had to be supplied. The result was, of course, a tremendous increase in output, biit a more significant and important development was a change in the processes of making the instruments. Before the war, on account of the great variety of types and pat- terns called for by American surgeons and on account of the limited demand, instruments were made largely by hand. The war brought a change destined to be permanent. Standardization was promoted by the restriction of essential instruments to a list of about 800, drawn up by the Council of National Defense. The industry installed automatic machinery and labor-saving devices such as drop forges. Small-scale production and hand labor gave way to large-scale mass production and machine methods. The industry was adapted, to a large extent, to the typical American industrial technique. The abnormal demand both for military and civilian uses and the resulting rise in prices brought an addi- tional factor of great importance into the situation. Importations from Japan began in the fall of 1916. Orders were placed in Japan for instruments which were copied from American models. The American demand stimulated and fostered the development of the Japanese industry. At first the lack of skilled workmen, tools, and materials resulted in an inferior product, but the quality improved and the prices remained surprisingly low. "We have here a good example of the far-reaching effect of the war. The removal of Germany as a com- 27 , I COMMERCIAL POLICY petitor stimulated the development of the surgical- instrument industry in the United States but it also stimulated the growth of the new industry in Japan. When Germany again becomes a competitor, we shall have a complex situation to deal with. Germany was the chief competitor of this country before the war in the knit-goods industry. Not only did she share our markets in almost all lines with the domes- tic manufacturer, but in the case of at least one line, that of sueded cotton gloves, she was in complete control. Though the cheaper cotton gloves were made extensively in this country, there was practically no production of sueded or * ' chamoisette ' * gloves. These gloves are made from a fabric which is produced by a very special process. The Germans had mastered this process and were making a closely knit product, with a velvety finish, closely resembling chamois. Over a million dozen pairs of sueded gloves were imported into this country annually before the war. The Ger- man goods ceased coming in 1916. At the same time the demand here increased owing to the increased price of leather gloves. American manufacturers, most of whom had been manufacturing silk or leather gloves, lingerie, or other kinds of women's apparel, then under- took the making of sueded gloves. In 1918 they made 1,300,000 dozen pairs, or more than the pre-war importa- tion. The American product is not so velvety as the German, but it is more elastic and less baggy. Recently the Japanese, who began to make cotton gloves in 1914, have been making sueded gloves, and their competition, as well as that of the Germans, is to be considered after normal conditions are restored. Just how severe and how destructive competition will be, it is 28 DIVERSIFYING AMERICAN INDUSTRY impossible to forecast. German costs will doubtless differ greatly from those prevailing before the war. The Japanese industry is new, and little is known of costs in Japan. Since the outbreak of the war, the British also developed the manufacture of sueded cloth both for glove making and for other purposes, and in export markets their products have already entered into com- petition with the Japanese product. But American manufacturers are paying particular attention to quality, style, and pattern, and may be able to hold their ground even against lower-priced importations. Venetians,' a cotton fabric used extensively for the lining of cloaks and coats, for making bathing suits, and for similar purposes, illustrate still another influence of the war on American industry. During the last few years they have constituted the largest single line of cotton cloth imported. Before the war fully 90 per cent, of all the Venetians used in the United States was made in the Bradford district of England, where par- ticularly the finishing of these fabrics had reached a high state of perfection. The war hampered and restricted the production of Venetians in Great Britain, and the English mills were not able to supply the full needs of the growing Ameri- can market without considerable advances in price. American manufacturers were stimulated to increased production to meet the increased demand, and in 1917-18 they were supplying probably one-half of our domestic needs. Because of the rising costs in Great Britain, they were able* during the war to undersell the English product ; but with the removal of the added protection • United States Tariff Commission, *' The Import and Pro- duction of Cotton Venetians " (1919). 29 ii COMMERCIAL POLICY afforded by the difficulties that hampered the Bradford producers, by the enhanced transportation costs, and by the increased burden of ad valorem tariff duties based on inflated prices, when international competition re- sumes its normal course, the American industry may have difficulty in holding unaided even that share of the American market that it now supplies. Restrictions on shipping^ have had in some cases effects on industry similar to those of the curtailment of imports by the blockade of the Central Powers. The effects that these restrictions had on the supply of raw materials and the development of substitutes therefor are important and interesting,* but we are concerned here mainly with the development of new processes for making in the United States finished products that were formerly imported. One of the most interesting results of the operation of this influence is presented in the case of camphor. Natural camphor is a product of a large, evergreen tree which is indigenous to Japan proper, Formosa, a Japanese possession, and China. Japan's position in the^ camphor trade can fairly be described as monopo- listic. Some camphor is supplied by China, the Dutch East Indies, and Florida, but not in sufficient quantity to have an important effect on the market. Formosa, the most important single source of supply, became Japanese territory at the close of the China-Japanese war. In 1899 the Japanese Government took over the Formosa camphor industry, and introduced radical 7 The occasion and nature of these import restrictions are fully described, in this series, in Louis E. Van Norman, War Time Con- trol of Commerce. 8 For a detailed account of these effects on the mineral industry see, m this series, George Otis Smith, The Strategy of Minerals, 30 DIVERSIFYING AMERICAN INDUSTRY reforms in the trade. In 1903 the scope of the Govern- ment monopoly was extended to Japan itself. The Government licenses producers of camphor and camphor oil, and purchases all their product at a fixed price. About 70 per cent, of the world's supply of camphor is used in the manufacture of pyroxylin plastics, an industry which has grown rapidly in recent years, par- ticularly in America. Camphor can be produced synthetically, that is, by chemical combination of other materials. This artificial product has exactly the same characteristics as natural camphor except that it is what is called optically inac- tive. Numerous researches have been made to perfect the processes for making synthetic camphor. Oil of turpentine is the basic raw material used. So far as is known, the only plant producing synthetic camphor on a commercial scale in the United States is the one established since the outbreak of the war near Wilmington, Delaware, by E. I. duPont de Nemours and Company. The plant of this Company has a capacity of 3,000 pounds per day. The construction of an addition to it which will double that capacity has been authorized. The war has thus demonstrated that industries small in the amount of their output may be vital to the nation. Letting industry alone or merely protecting it by import duties against foreign competition does not necessarily result in the development of the sort of industrial life most desirable from a national standpoint. Before the war it was thought by some a sufficient answer to say that we could not compete with Germany in high-grade glassware and surgical instruments. That is no longer a sufficient answer. We must go a step further and ask 31 COMMERCIAL POLICY how essential the domestic production of this and other products are to our national life. Other industries not to be classed as essential, such as Venetians and sueded gloves, may be entitled to consideration from the Govern- ment that will enable them to compete on equal terms with foreign rivals. The diversification of the industrial life of a nation is desirable, and it may be wise public policy to protect industries that develop the natural and human resources of the nation even though there may be, temporarily, a slight economic sacrifice. Not the least interesting, because an unexpected, result of the war was the direction of public attention to the pre-war control by Germany of a number of important industries and to the development under war conditions by other countries of competition therein. Some cases, which have been discussed in this chapter, illustrate this point, but even more conspicuous, interest- ing, and important from the standpoint of national policy are cases in the chemical industry to which we now turn. CHAPTER III THE CHEMICAL INDUSTRIES : I, UNDER BLOCKADE AND EMBARGO Curtailment of imports of chemical products from Central Europe — The situation in the dye industry in 1914 — Effect of the shortage of dyes on American textile mills — Growth of the American dye industry — Tariff m intermediates and dyes — Effect of America's entrance into the war in April, 1917 on the dye industry — Germany 's natural advantage in potash — Growth and nature of the American potash industry — Potash beds in Alsace — Germany 's pre-war control of thorium nitrate — Its production in the United States — Undesirabil- ity o± dependence upon one nation for suppUes of essentials. Germany in 1914 held undoubted supremacy in many branches of the chemical industry, particularly those requiring scientific knowledge and technical skill. In the production of some chemical products her position may fairly be described as monopolistic. The importance to her of this advantage was increased by the fact that chemicals are frequently the raw materials of other industries. By controlling these chemical products Ger- many actually or potentially controlled in some degree industrial activities in other countries. Before the war consumers in the United States found it profitable to purchase the German product Jiecause it was reasonable as to price and of high quality. In some cases there was no alternative source of supply, even if quality and price were not altogether satisfactory. The national signifi- cance of our dependence upon Germany for essential products was not appreciated, even if known, by the public. The effect of the war on the chemical industry due 33 COMMERCIAL POLICY to the curtailment of imports from Germany should be distinguished from that due to the demand for war sup- plies which will be considered in the following chapter. Before the United States entered the w^ar, permanent changes had come about in the American chemical indus- try as a direct result of the German embargo and the British blockade. The isolation of Germany brought our dependence upon her for essential products dramatically to America 's attention. In some industries, for example, the textile industries, there resulted what were almost panic conditions. To American business men and chemists was given an opportunity to demonstrate what their resourcefulness could accomplish in an emergency. The curtailment of imports from Germany taught us more about the interrelationship of industry than we could have learned in years of normal conditions. The shutting off of German supplies has led to the establish- ment in the United States of industries which w^ill be permanent and which wuU end the monopoly formerly enjoyed b}^ Germany in some lines. The characteristic effect of the war conditions was most strikingly evident in industries producing coal-tar dyes, potash, and thorium nitrate, and these three, therefore, will be con- sidered in some detail. When war came upon the world in 1914, Germany was producing approximately three-fourths of the world's supply of coal-tar dyes.^ Even this, however, does not indicate the full measure of the world's dependence upon Germany. Dyes are made from intermediates, which in turn are made from crude coal-tar products. The making of these products, and particularly the 1 The world's production of coal-tar dyes in 1914 was as follows (Department of Commerce, Special Agent Series No. 96, p. 30) : 34 CHEMICAL INDUSTRIES manufacture of tJie intermediates, involves in many cases technical knowledge of the highest order. Secrecy and protection through patents of the processes elabor- ated by German chemists after many years of intensive and painstaking research made competition difficult. The intermediates were the keystone of Germany's dye monopoly. Through the dye combines Germany directly controlled one-half of the dye production in foreign countries and was in a position to threaten the remainder. Germany, to a large extent, owned and operated the dye factories in Great Britain and France. In America coal-tar colors valued altogether at $2,470,096 were pro- duced in 1914 by seven establishments.^ But these establishments were almost entirely dependent upon Ger- many for intermediates and one was owned by a leading German dye firm. It is true that since 1910 one firm had provided a small part of the domestic consumption of nitrobenzol and anilin an d that several other inter- Germany $68,300,000 Switzerland q 450 oOO Great Britain 6;000,'000 f/^r! qV : 5,000,000 United States 3,000,000 t^^stfia 1,500,000 S"f ?^ 1,000,000 J/lf™ • 500,000 Netherlands 200,000 Other countries 2OO 000 $92,150,000 2 The coal-tar dye industry in the United States as reported in the census of 1914 : i ^^ x* Number of establishments 7 Persons engaged in manufacture .. . 528 Wage earners (average number) 393 Value of products. $3,596,795 Coal-tar colors: founds 6,619,729 Ai7 .u® •• • • $2,470,096 All other, value $1,126,699 35 COMMERCIAL POLICY mediates were produced in this country in small quanti- ties. But these instances only tended to emphasize our lack of self-sufficiency. During the fiscal year ending June 30, 1914, we imported over 10,000,000 pounds of intermediates. As is well known, the organization of cartels was encouraged by the German Government and became a leading factor in the advance of German industry. It was particularly effective in the chemical industries. Because of the interrelation of products and the utiliza- tion of by-products, close organization effected large economies. It made the protection of patent rights easier, it made it possible to purchase raw materials at greater advantage, and it enabled the industries more effectively to meet and to suppress competition abroad. Unquestionably, a large part of the success of the Ger- man dye industry was attained through the painstaking research of German chemists and the processes which they discovered and patented by the thousand. But financial control and business organization were also large factors in its supremacy. Before the war it was controlled by two communities of interests, the one known as the Badische group, the other as the Hochst- Cassella group. The dividends of four of the large German dye concerns from 1902 to 1911 ranged, it is reported, from 196 to 300 per cent. This financial strength must be kept in mind when we are considering the competition that our industries will be called upon to face The dye industry is not large and its importance was not realized until the war brought our dependence upon Germany forcefully to the attention of the textile manu- facturers and other consumers. Color is often the determining factor in the saleability of goods. Ink and 36 CHEMICAL INDUSTRIES lithographic industries must have it. It is necessary not only in cotton, woolen, and silk fabrics, but in printing and in the manufacture of leather goods, fancy paper, straw hats, and paints. Very few textile materials are sold undyed. If dyes •vere not available for a considerable period of time, the manufacturers would be compelled to offer for sale white or grey goods. But for clothing purposes this w^ould not meet the demand of the public, as purchasers would postpone buying as long as possible. In the meantime the textile industries and those dependent upon them would suffer. By March, 1915, the Allied blockade had completely stopped exports from Germany and the conditions in our textile mills became serious. Economies were intro- duced. The world was searched for reserve supplies of coal-tar dyes. Light shades became common in many lines of goods. Designs were changed, especially in calicos and ginghams. Small figures were printed on white backgrounds. Natural dyes, such as logwood and fustic, came into more common use. Artificial or syn- thetic indigo, of which we used about 8,000,000 pounds a year and which was almost entirely supplied by Ger- many, was supplied in limited quantities and at greatly enhanced prices during the latter part of 1915 and the first part of 1916 from the reserve stocks of Oriental and other countries. China furnished 3,400,000 pounds ; Japan, Hongkong, and British India, 1,370,000 pounds ; Great Britain, ' 1,300,000 pounds; and even Salvador, 85,000 pounds. To a more limited extent resort was had once more to the more expensive and scarce natural product. American consumers thus obtained approxi- mately 80 per cent, of their normal supply of indigo. They did not have, however, the same measure of success 37 COMMERCIAL POLICY in other dyes. During the fiscal year ending June 30, 1916, for example, instead of the normal supply of alizarin, which averaged 5,500,000 pounds, we imported 1,758 pounds. Imports of dyes were far below normal, and such as were brought to this country came from Switzerland and from reserve stocks of German dyes in China. In the meantime the American dye industry was growing. Old plants had enlarged their capacity, new ones w^ere erected. American business energy and chemical skill by the fall of 1916 had banished the spectre of a dye famine which had haunted the consumer for more than a year. This does not mean, however, that all our needs were being supplied. The new dye indus- try sought the lines of least resistance. It concentrated its energy on producing a large output of the less com- plex dyes. Many important dyes, such as alizarin and the fast vat dyes for cotton, were neglected. Some of them were protected by German patents, and this coun- try, being at that time still a neutral, could not issue licenses to manufacture under these patents as Great Britain had already done. There was also the difficulty of getting the necessary raw materials for making some of the more difficult dyes. Within an incredibly short time after we were cut off from the German supply, we had invested huge sums in plants for making crudes, intermediates, and finished dyes. We were producing dyes quantitatively equal to our pre-war consumption. Our exports of dyestuffs exceeded in value our pre-war annual imports. We did not yet make a few such highly manufactured lines as the alizarins and indanthrenes, and we produced only a fraction of our requirements of indigo, but in most lines of large consumption we were able to meet all demands. 38 ' I ► • CHEMICAL INDUSTRIES We may justly be proud of our achievement in this field. When it is recalled that more than 900 distinct chemical products are made from some 300 intermediates, which themselves must first be chemically produced from 10 crude products distilled from coal tar, the vast- ness of the problem set before this youngest of our industries is apparent. The rapidity of its progress has amazed the world. In a law of September 8, 1916, Congress has said in effect that the tariff is to be one of the means of prevent- ing any attempts by a foreign competitor to destroy the new American dyestuffs industry. In revising the tariff law of 1913 to provide additional protection for the growing industry, the plan was carried out, with a few exceptions, of raising the duty on intermediates from 10 per cent, ad valorem to 15 per cent, ad valorem plus a special duty of 2i/^ cents per pound, and on finished dyes from either the free list to 30 per cent, ad valorem or from 30 per cent', ad valorem to 30 per cent, plus ^\e cents per pound. The duty of 2^/^ cents per pound on intermediates and the duty of five cents per pound on dyes are referred to as ** special duties,'' and after ^\q years they are either to be abolished or reduced gradually over a subsequent period of five years. Unfair competition was one of the methods employed by the German coal-tar dye industry to maintain its international supremacy. Unfair acts in this and other lines were no doubt in the minds of the members of Congress when they enacted the unfair-competition sec- tion of the law of September 8, 1916. By this law it is a criminal act systematically to import any article into the United States at a price substantially less than the actual market value abroad, plus freight, duty, and other charges, with the intention of destroying, injuring, or 39 Y COMMERCIAL POLICY preventing the establishment of an industry in the United States or of restraining or monopolizing the trade in the imported article. More will be said about this law in a later chapter.^ In addition to this prohibition of unfair price cutting, the law makes provision against the practice known as ** full-line forcing/' Articles will be required to pay a double duty when imported into this country under an agreement that the purchaser shall not use, buy, or deal in, or shall be restricted in his using, purchasing, or dealing in, the articles of any other person. If, for example, the German dye industry controls by patent a color needed in this country, it cannot use the necessity of the American consumer as a means of forcing him to purchase his full line of dj^es from abroad when all the colors except the one controlled by the patent can be purchased in this country. Tariff laws and legislation against unfair trade prac- tices wull not alone protect our dye industries. The German industry attained success by years of research, by conservative financing, and by industrial coordina- tion. In American industry too these must be important, in fact, dominant, factors. The fall of 1916 was important for the dye industry not only because it brought the enactment of increased tariff rates, but because the emergency needs had in large measure been met. Manufacturers were able, therefore, to devote more attention to technical detail, to the improvement of quality, and to the achievement of uniformity of product. The larger factories estab- lished research laboratories and enlisted the services of expert chemists. This is a most significant step, for if the American industry is to hold its own against its ) 3 See Chapter VIII. 40 CHEMICAL INDUSTRIES foreign competitors, it must improve its processes, reduce its costs, and develop new types of dyes. Some progress has been made in these directions, but much yet remains to be done. The entrance of the United States into the war affected the dye industry in a new way. Because of its close relationship to the explosives industry, it found difficulty in obtaining many essential raw materials that were demanded in large quantities for the making of explosives and airplanes. Toluol, acetic acid, wood alcohol, chlorine, caustic soda, and ammonia were com- mandeered by the Government. Toluol is an essential raw material for many dyes. Acetic acid is essential in the manufacture of indigo. Chlorine and ammonia are also used extensively in the making, of important dyes. Our entrance into the war naturally created an abnor- mal demand for the khaki colors and a corresponding decline in the demand for the great variety of colors used for civilian clothing. This influence has tended to limit the development of the dye industry in directions which are essential to its permanence. Our entrance into the war as a belligerent, however, was not wholly unfavorable in its influence on the dye industry. The Trading-with-the-Enemy Act,* enacted on October 6, 1917, authorized the issuance of licenses to manufacture under patents owned by enemy aliens. The Federal Trade Commission, in administering this provision, issued licenses to several companies for the manufacturing of the vat dyes for cotton. In March, 1919, this plan of handling German dye patents was 4 For a detailed account of the administration of this measure see, in this series, Louis E. Van Norman, War Time Control of Commerce. 41 COMMERCIAL POLICY superseded by the action of the Alien Property Custo- dian. These patents came under his control as ' ' enemy property," and he sold them to a corporation formed under his guidance and known as the Chemical Founda- tion, Inc. In announcing this new departure, the Alien Property Custodian 's report says : The amendment of November 4 to the Trading-with-the- Enemy Act presented for the first time an opportunity for what appears to be the most important piece of constructive work which has been possible in my department. Until the enactment of this amendment it had not been possible to take over German patents. These patents formed an obstacle to the development of the American dyestuff industry. Evidently they had not been taken out with any intention of manufactur- ing in this country or from any fear of American manufacture, which the Germans apparently thought could not be success- fully carried on under conditions prevailing in this country in regard to costs and the supply of technicians and skilled labor. Upon consideration, however, it seemed that these patents offered a possible solution for the problem, hitherto unsolvable, of protecting the new American dye industry against German competition after the war. If they were not taken out in order to prevent American competition, they must have been obtained as a weapon against competing imports. If they were sufficient to stop importation of competing Swiss, French, and English dyes, they would presumably serve, in American hands, to stop importation of German dyes. This was par- ticularly probable in the case of the products patents, since most of the coal-tar dyestuffs are definite chemicals, to which a product patent is entirely applicable. The idea was accordingly conceived that if the German chemical patents could be placed in the hands of any American institution strong enough to protect them, a real obstacle might be opposed to German importation after the war, and at the same time the American industry might be freed from the prohibition enforced by the patents against the manufacture of the most valuable dyestuffs. Accordingly, these considera- tions were laid before various associations of chemical manu- 42 ^ CHEMICAL INDUSTRIES facturers, notably the Dye Institute and the American Manu- facturing Chemists* Association. The suggestion was met with enthusiastic approval, and as a result a corporation has been organized, to be known as the Chemical Foundation, Inc., in which practically every important American manufacturer will be a stockholder, the purpose of which is to acquire by purchase these German patents and to hold them, as a trustee for American industry, " for the Americanization of such in- stitutions as may be affected thereby, for the exclusion or elimination of alien interests hostile or detrimental to the said industries and for the advancement of chemical and allied science and industry in the United States." Export statistics show in a striking way the progress of the American dye industry. During the fiscal year 1916 the exports were valued at a little over $5,000,000. In 1917 they had increased to over $11,500,000, and in 1918 they were almost $17,000,000. The significance of these figures can be realized only when it is recalled that the American dye industry can hardly be said to have existed in 1914, and that it is now not only supplying a large percentage of the American demand for dyes, but is exporting this substantial sum to other countries.^ The production of coal-tar colors in the United States in 1914 amounted to 6,619,729 pounds. In 1917 the pro- duction of finished coal-tar chemicals, exclusive of explosives and synthetic phenolic resins, was 54,550,107 pounds.® While the monopolistic position of Germany in the dye industry was achieved largely through technical skill, business organization, and unfair competitive methods, her dominant position in the potash industry was 6 The imports of all coal-tar products and natural indigo amounted in 1917 to $11,670,786. 6 See United States Tariff Commission, *' Census of Dyes and Coal-Tar Chemicals, 1917.'' 43 M /• COMMERCIAL POLICY through natural advantage. Her deposits in the Stass- furt districts are exceptionally rich, and Alsace also has rich beds. The United States had no potash industry when the war broke out in Europe. At that time we imported annually, almost entirely from Germany, about one million tons of crude potash salts which contained ap- proximately 250,000 tons of actual potash (potassium oxide). By 1917 there were in the United States 93 producers of potash, with a total production of 126,906 tons of crude, in which there were 32,540 tons of actual potash valued at nearly 14 million dollars. During 1918 the production of potash continued to increase as is shown in the following table -J Potash Produced in the United States in 1918 Sources Number of Pro- ducers Total Product- tion (short tons) Available Potash (K,0) (short tons) Natural brines 21 4 9 6 4 5 26 3 147,125 6,073 11,739 14,456 9,505 2,818 609 262 39,255 Alunite 2,619 Dust from cement mills Kolp Molasses distilling waste StefFens waste water 1,429 4,292 3,322 761 Wood ashes 365 Other sources 92 Total 78 192,587 52,135 The high price of potash has led to the use of substi- tutes, such as soda salts in the soap and glass industries, but there is no satisfactory substitute for potash as a fertilizer, its chief use. Certain soils, particularly in potato-, tobacco- and cotton-growing sections, must have potash for their upbuilding. 7 Prepared by the United States Geological Survey. 44 s CHEMICAL INDUSTRIES The most important sources of potash production in the United States are the brines from saline lakes in Nebraska, Utah, and California, kelp, and the dust from cement mills.® The permanence of the production from the first two sources is problematical. Most of the kelp plants, including the two largest, have already shut down. In 1918, 39,255 short tons of available potash were recovered from brines and 4,292 short tons from kelp. High prices during the war induced the invest- ment of capital. But when competition with Europe is restored, only a high tariff will enable the domestic producer to compete in eastern markets, and it is doubt- ful whether this is warranted from the national stand- point. The potash produced from the dust of cement mills will remain a permanent source of supply. Not only is it a profitable by-product, but it utilizes the dust which is a nuisance in the cement industry. At Riverside, California, for example, there is a cement factory the dust from which has so injured the orange groves that the manufacturers have been forced to find some means of abating the nuisance. Potash will probably continue to be a by-product of the cement mills regardless of the tariff. If all mills were to install dust-collecting machinery, this source alone would yield about one-third of our normaL pre-war needs. The dust from blast furnaces may also become an important source. The transfer of Alsace from Germany to France breaks the German monopoly in potash. The Alsatian deposits are equal in quality to those of Stassfurt and are sufficient to supply the world's needs for decades. 8 For a detailed account of the development of these sources and of the potash industry during the war see, in this series, George Otis Smith, The Strategy of Minerals, 45 COMMERCIAL POLICY Both the rise of the American potash industry and the control of Alsace by France take from Germany the bargaining power with which her monopoly had endowed her and which she has at times threatened to use. In the industries producing thorium nitrate and incandescent ga^ mantles there has occurred an equally interesting development. This was another case in which Germany in part controlled an industry by controlling the intermediate product. Monazite sand, the richest deposits of which are found in Brazil and India, is the primary raw material. Germany imported it and by a complex chemical process produced thorium nitrate therefrom. All the makers of gas mantles in the United States purchased thorium nitrate from German pro- ducers except the largest American mantle concern, which preserved its independence by maintaining a plant to produce its own supply. The American costs were higher than the German, but the added cost was justi- fied by the unfair use which it was feared Germany might make of a complete monopoly. Nevertheless, the great part of the thorium nitrate consumed in making mantles in the United States came from Germany. Monazite sand is found in North and South Carolina, but before the war competition with the deposits in Brazil and India made its mining unprofitable. The war revived its production to some extent. But the most significant development has been the importation from^ Brazil of monazite sand and the development in the United States on an extensive scale of the thorium- nitrate industry. We shall no longer need to look to Germany or to any other country for this important intermediary material. The entrance of the United States into the war 46 ^ «' I CHEMICAL INDUSTRIES brought about another interesting development in this industry. Toluol, which is used extensively in making explosives, is one of the ingredients of illuminating gas, and during the war a number of plants were erected in American cities for its recovery. The removal of the toluol from the gas, however, depreciates its light-giving power when used in the ordinary open-flame gas burners, but it does not materially decrease its usefulness when the incandescent gas mantles are used. This situation has led to an increased demand for the production of mantles, and has had a stimulating influence on this in- dustry as well as on the industry producing thorium nitrate. Some of the new industrial developments in the United States during the war will not survive the post- war competition. National interests do not require the degree of self-sufficiency that the war has compelled in some lines. It would mean unnecessarily high prices and even hardship on consuming interests. There will be a readjustment when the international trade returns to normal which will eliminate some American pro- ducers. Industrial isolation is not a wholesome condition. But neither is complete industrial dependence upon a for- eign industry, occupying a monopolistic position, a wholesome condition. The war has demonstrated how essential it is to national interests to have wdthin our Nation industries that produce those materials and articles necessary to military operations and to the operation of the great industries of the United States. Adam Smith says that ''defence is of much more im- portance than opulence,'' and today an efficient defen- sive organization includes not only armies and navies, 47 COIMMERCIAL POLICY but also the great essential industries. We hope for the ending of war, but it would be folly for a nation to refuse to plan for its own safety, particularly until in- ternational government has approached closer to per- fection. The war developments in American industry are not disposed of by saying that if they cannot com- pete with their foreign competitors, they must be elim- inated. National welfare may require their preserva- tion and may make it desirable even at a price. A care- ful survey should be made to determine the essential or *'key'' industries, and tariffs, subsidies, or other aids, if necessary, should be granted in order that the percentage of these products necessary for national well-being shall in the future be produced in the United States. 4 \ i CHAPTEE IV THE CHEMICAL INDUSTRIES: H, UNDER THE WAR DEMAND Demand for war supplies a second major influence modifying the chemical industries — Chlorine in the manufacture of poison- ous gas — Effect of stimulating its production — Caustic soda and soda ash — Sulphuric acid — Sulphur resources of the United States — The war and Chile 's monopoly of nitrate of goda — Nitric acid from synthetic ammonia — Smokeless powder — T. N. T. — Picric acid — Relationship between ex- plosives and dye industry — Varnishing airplane wings — War uses of acetone — Antimony — Quicksilver — Importance of chemical industries. The demand for chemicals and chemical products in modern warfare was a second major influence on the chemical industries of America. Its influence was not revolutionary, however, until after the United States declared war in April, 1917. By that time, as has been pointed out, many fundamental changes had been caused by the curtailment of imports from Central Europe. War orders arrested some of the new develop- ments and started some radical changes. It is interest- ing to consider how different the course of the American chemical industry is today from what it probably would have been had we remained neutral. The influence has been far-reaching, not only because chemistry has played such a vital part in modern war- fare, but because the chemical industries are so inter- related that an effect on one is felt in many others. The demand for chlorine in the manufacture of poisonous gas is a case in point. The part that chlorine plays in the manufacture of poisonous gas is analogous to the 49 m COIVCVIERCIAL POLICY part played by nitric acid in the manufacture of explo- sives. The three important poison gases are chlorine itself, phosgene, and mustard gas. Both phosgene and mustard gas are compounds of chlorine and require free chlorine in their manufacture. The electrolysis of a solution of common salt yields caustic soda and chlorine in chemically equivalent amounts. But in normal times the market demand for the former far exceeds the demand for the latter, and because the chlorine is dangerous to life and destroys vegetation, it cannot be permitted to escape into the air. Hence, the production by this process of caustic soda, so necessary in soap making, paper manufacture, mer- cerizing cotton, and the purification of mineral oils, is limited by the amount of chlorine products that can be sold. As a result, there has been a tendency to over- produce chlorine in order to obtain more caustic soda. The chief peace-time use of chlorine was in making, in combination with lime, bleaching powder used exten- sively in textile and paper mills. The home production in 1914 was 155,190 tons, and the importation, chiefly from Great Britain, was 23,712 tons. Normally it was sold at very low prices, in the neighborhood of two cents per pound. As the production of caustic soda from salt by electrolysis was limited by the market for chlorine products, the deficit was manufactured from soda ash. Into this complex interrelationship the war brought many modifying factors. Immense quantities of chlorine were required, and a rapid expansion in pro- ductive capacity occurred in this country and abroad. It is probable that at the end of 1918 the productive capacity in this country was four times as great as it was in 1914, and large additional plants were being erected when the armistice was signed. The production of 50 CHEMICAL INDUSTRIES caustic soda has also increased, but not to the same de- gree as chlorine. Caustic soda, in addition to its im- portant peace uses, is an essential in making explosives, particularly picric acid. Acute competition in chlorine and chlorine products is certain to arise with the disappearance of the war demand. Peace uses probably cannot be found for the increased production^ and some of the new plants will have to shut down. International competition in bleaching powder is certain to present an important problem for consideration. A word should be added about soda ash for with the exception of sulphuric acid it is commercially the most important chemical substance. It is an essential in making explosives and is also used in the manufacture of glass, soap, wood pulp and paper, and many other products. Great Britain has for many years been an important producer. Her development in this industry began when the Leblanc soda process was the method of production. Later, while retaining the old process in some factories, she developed on a large scale the new and more efficient Solvay process. In 1881 the Solvay process was introduced into the United States and be- came the basis of the American soda-ash industry. Many complicated engineering problems have arisen and have been successfully solved. Recovery of by- products has reduced the cost. The process is con- tinuous; raw materials are fed in at one end of the large, complex plant and the products are turned out in a steady stream at the other. The large towers in which the main reactions take place are often more than 100 feet high. The Solvay process uses much less fuel and labor than the Leblanc process. Labor-saving ma- chinery has been perfected. With a low labor cost and 61 COMMERCIAL POLICY a large production, this industry has no reason to fear foreign competition. It illustrates the security that comes to an industry that combines natural advantages with large-scale mechanical production. Sulphuric and nitric acid are among the most im- portant raw materials in industry, and they have also played a decisive part in the preparation of war materials. Sulphuric acid is essential in many processes of metallurgy and industrial chemistry. It is used in re- fining petroleum and other oils, in reclaiming rubber, in making artificial fertilizers, in manufacturing anilin dyes, in making other acids, in the Leblanc process, in celluloid manufacture, in galvanizing, tinning and enamelling iron and steel. With the development under the war demand of the explosives and steel industries has come a rapid expansion of the productive capacity for sulphuric acid. In 1913 the United States produced 3,500,000 long tons of acid^ ; by 1917 it was producing twice this amount. The close of the war finds the coun- try with a surplus which may be absorbed by the dye, steel, sulphate of ammonia, and fertilizer industries. 1 The following table from an article by Frederick A. Clawson which appeared in Chemical and Mefallurgical Engineering for September 24, 1918, gives the production of sulphuric acid in 1913 in long tons: United States ^'5??'??? Germany I,6o0,000 Great Britain "^'i^^??? Ttalv 640,000 France".!'.*.;'. ^50,000 Be^'um 350,000 eS 260,000 Sweden".:::: 130,000 Japan 75,000 Bpa".::::::::: i6,ooo 52 CHEMICAL INDUSTRIES One of the most significant changes wrought by the war in the sulphuric-acid industry relates to its chief raw material. Before the war pyrites (sulphide of iron) was the chief material in this industry,^ exten- sively imported from Spain. As shipping space be- came increasingly scarce, the industry abandoned Spanish pyrites and began to use domestic sulphur. The American sulphur supply is the finest in the world. The chief production is at the Union Sulphur Com- pany's plant, which is located in Louisiana. Wells are sunk in the rock and then filled with hot water which melts the sulphur. The water is heated above the melt- ing point of sulphur (114 degrees C.) and is prevented from boiling by great pressure. Thus the melted sul- phur is forced out. It is sufficiently pure in this state for almost every purpose. Sulphur was produced at these wells before the war at a cost not exceeding six dollars per ton. It was uniformly sold at $22.50 per ton f. 0. b. New York. The low cost of production in 2 The following are the statistics on pyrites for 1913 {Chemical and MetaUurgical Engineering, September 24, 1918) ; _ Country Spain and Por- tugal Norway United States. France Italy Germany (1912) Canada Eussia (1912). Japan Hungary Great Britain.. Produc- tion,-tons 1,283,904 441,291 341,338 306,267 287,777 258,517 141,577 123,990 114,387 104,050 11,427 Net Im- port, tons Net Ex- I Consump- portjtons tion, tons 848,674 186,348 1,200,000 460,912 1,070,794 794,740 49,000 84,000 Very small 1,190,012 492,615 1,329,311 92,000 806,167 53 COIVmERCIAL POLICY the United States makes it impossible for the Sicilian sulphur, the chief foreign supply, to compete.^ Chile has a natural monopoly of nitrate of soda, the chief raw material for the manufacture of nitric acid. This mineral occurs in large beds on the barren, desert pampas of the northern provinces of Chile, and is ex- ported from Iquique and Antofagasta. Before the war about 500,000 tons were imported annually into the United States. About 400,000 tons were used for pur- poses other than the making of acid, chiefly as fertilizer. From the remainder there was produced in 1914 78,589 tons of acid of average strength, and 112,124 tons of mixed acid. This was equal to 89,000 tons of 100 per cent. acid. Of this amount, 50,000 tons was for explo- sives and 40,000 tons for other uses. At the end of 1918 the annual importation of nitrate of soda amounted to 1,600,000 tons, 1,000,000 tons of which was used in making acid. The current production of acid from nitrate of soda amounted to 650,000 tons of 100 per cent. acid. Of this five-sixths was for military purposes.* The most significant fact about the nitric-acid in- dustry is the development of the process of making acid from sjTithetic ammonia, derived from the fixation of atmospheric nitrogen. The Government expended for this purpose during the war nearly $100,000,000 and plants have been erected and are operated by the Govern- ment. It is said that American chemists have made sub- stantial improvements over the Haber and Ostwald processes which have been developed in Germany as a 3 For a detailed account of the development of the sulphur and sulphuric acid industry see, in this series, George Otis Smith, The Strategy of Minerals. * E. J. Pranke, Journal of Industrial and Engineering Chemistry ^ vol. X (1918), p. 830. 54 CHEMICAL INDUSTRIES result of twenty years of investigation and work.* Possi- bly after the war nitric acid from synthetic ammonia may be cheaper than that made from nitrates.^ Chile has for many years raised a large part of her revenue from an export tax levied on nitrate of soda. Because of Chile's monopolistic position the incidence of this tax fell on the foreign consumer. But the im- provements in processes for making nitric acid have weakened Chile's position, and she may be forced to reduce or even abandon her export tax. Sulphuric and nitric acids together with cotton linters are the most important ingredients in smokeless powder. The du Pont factories have played an important part in the war. In fact, it is not unreasonable to claim for them that they saved the cause of the Allies in 1915. When the war broke out, they had an annual capacity of 12,000,000 pounds of smokeless powder. When the war came to an end, they were producing at the rate of between four and five hundred million pounds per annum. The price of this powder has been lowered from $1.00 per pound in October, 1914, to 43i/^ cents per pound in September, 1918. The end of the war finds immense plants at 'Carney's Point, New Jersey, Nash- ville, Tennessee, Hopewell, Virginia, and Charleston, West Virginia. They bring to mind the larger question of the limitation of armaments and the control of munitions production by the Government. Smokeless powder is used as a propellant, and should not be confused with high explosives, which are used as B For a more detailed account of the sodium-nitrate situation and the production of nitric acid from atmospheric nitrogen see George Otis Smith, oy. cit, « Grinnell Jones, Journal of Industrial and Engineering Chem- istry, y oh x (1918), p. 783. 55 '' i If Ji !■ f COMMERCIAL POLICY sheU fillers. The most satisfactory shell filler, popu- larly known as T. N. T. (trinitrotoluol), is made from toluol Toluol along with benzol is stripped as a by- product from the coal gas that rises from coke ovens. Stripping plants have been installed at every by-product coke-oven plant and in many plants supplying illumi- nating gas for cities.^ Small amounts of toluol have also been obtained from other sources. The production of toluol has increased from 1,500,000 gallons in 1914 to 10,219,830 gallons in 1917. The production of benzol has increased in the same period from 4,500,000 gallons to 40,192,930 gallons.^ Toluol has important peace uses, and now that it has ceased to be in great demand for military purposes, its large production will seek other markets. It is used in making benzoic acid and sac- charine. Impure grades of it, as well as of benzol, may be used as substitutes for turpentine in making paints, varnishes, paint removers and solvents, and for other purposes. If the increased production lowers the price sufficiently, it may be mixed with gasoline and used as motor fuel. During the war the shortage of toluol created a de- mand for picric acid, which is also used as a shell filler. This demand in turn created a demand for phenol, which is produced not only from coal tar, but also is made synthetically from benzol. A small s:yTithetic-phenol industry had been maintained in Germany for military purposes, but it is a new industry in the United States. In 1917 there were 15 companies operating with an out- put of 64,146,499 pounds, valued at $23,715,805. Phenol has numerous peace uses, which inclu de the manufacture 7For a detailed account of the development of by-product coking during the war see George Otis Smith, op. cit. T^ c'lJemica^^^^^ Commission, -Census of Dyes and Coal- 56 CHEMICAL INDUSTRIES of synthetic medicinals, dyes, perfumes, flavors, photo- graphic articles, resins, and tanning materials. The relation between picric acid and the dye known as sulphur black illustrates the close relationship that exists at many points between the dye industry and the high-explosives industry. Both picric acid and sulphur black are derived from benzol. The first four chemical steps in making these products are identical, yielding dinitrophenol which may then be converted into picric acid by treatment with nitric acid or into sulphur black by treatment with sulphur and sodium sulphide. The steps are as follows : BENZOL Treated with chlorine MONOCHLORBENZOL Treated with nitric acid and sulphur acid MONOCHLORDINITROBENZOL Boiled with soda ash SODIUM DINITROPHENOL Treated with any acid DINITROPHENOL Treated with nitric acid Melted with hulphur and sodium sulphide PICRIC ACID — an explosive SULPHUR BLACK — a dye 57 COMMERCIAL POLICY This helps to make clear what is meant when it is said that the development of the dye industry is a measure of military preparedness. Some of its machinery may be turned immediately to the production of explosives, and its technical staff as well as its general equipment can be used, with comparatively little change, in the production of high explosives. Unquestionably, this was an important motive in inducing the German Govern- ment to interest itself in the strong dye industry of Germany. Airplane production has not been without its effect on the chemical industry. In the early days of the war, airplane wings were varnished with cellulose nitrate, which ignites with ease and burns with almost explosive speed, a property which has brought sudden and fiery death to many aviators. America, however, initiated the practice of varnishing with a non-inflammable *'dope'' known as cellulose acetate.® This has led to a rapid increase in the output of acetic acid and acetone. Acetone has three important uses in warfare. It was one of the articles, therefore, of which there was an acute shortage. It is used in the manufacture of '* cordite,'* the propellant of British naval shells, as a solvent for airplane wing varnishes, and in the manufacture of some substances used in gas warfare. Before the war the only source of acetone was from the distillation of wood, but the supplies were entirely inadequate to meet the war demands. The wood-distillation industry itself has been stimulated, but new sources of supply have been needed. At least four new technical processes for the manufacture of acetone have been developed and put • For a description of the development of this material see, in this series, Arthur Sweetser, The American Air Service, 58 CHEMICAL INDUSTRIES into commercial operation since the outbreak of the European War. Probably the largest output of acetone has been secured from molasses. The molasses is fermented to alcohol, and this in turn by a second fermentation process is converted into acetic acid. The acetic acid is then converted into lime salt, and this in turn into acetone by heating to a dull red heat. Another process has been developed for its production directly by fermentation from starchy material. The process yields a by-product of butyl alcohol in large amounts, and butyl alcohol is thus made commercially available for the first time. A third process makes acetone from calcium carbide at large plants which have been erected for the purpose at Shawinigan Falls, Canada. The Hercules Powder Company was offered a contract for cordite by the British Government at a very profit- able figure on the condition that the acetone necessary for its manufacture should be obtained from an entirely new source. By these terms the Hercules Company could not become a competitive bidder with the British Government for the existing supplies of acetone. The Hercules Powder Copapany developed a process for mak- ing acetone from the giant kelp, a submarine tree which grows off the California coast. It is not yet clear whether any of these processes will continue in operation when the war demand for acetone disappears. Their success will depend partly, at any rate, on the market for and the tariffs on their by- products. Some of them may be a permanent factor in the acetic-acid industry, even if they cannot make acetone in competition with the wood-distillation process. The factory using kelp has already been closed. The histories of antimony and mercury are interesting 59 COMMERCIAL POLICY in their relation to the war. During the four-year period 1913-16 the price of antimony fluctuated from 7.5 to 30.2 cents per pound, and that of mercury from $39.54 to $125.49 per flask of 75 pounds. Antimony is used in warfare chiefly for hardening lead for shrapnel bullets, and also, in the form of the sulphide, as an ingredient of some primers and as an addition to the explosive content of shells for making a smoke which will assist gunners in finding their range. Mercury's most important use is m the form of fulminate of mercury for detonators of big shells and cartridges. The war demands and ship- ping restrictions have brought about radical changes in the antimony and mercury industries. Over half the world's antimony is mined in China. Other producers are France, the United States, Algeria, and Mexico. For many years before the war the avail- able supplies of antimony ore far exceeded the world demand, and there was little to encourage development of antimony deposits other than those from which high- grade ores could be obtained. After the outbreak of the war there was a curtailment of the metal ; Chinese and South American antimony became difficult to move on account of shipping shortage, and Mexican supplies were unstable. In these circumstances considerable activity resulted, and many deposits in the United States which had remained idle for a long period were again put in operation. During 1904 and 1905 the United States led the world in the production of mercury, but since 1906 Spain has been the leading producer, and has accounted for about one-third of the total. Italy, Austria, and the United States have made up the major part of the remaining two-thirds, in proportions varying only slightly in the order named. On the outbreak of the war Austrian 60 CHEMICAL INDUSTRIES supplies were at once cut off, and Spanish supplies, con- trolled mainly in London, were held for Allied use. Spanish and Italian production has been largely in- creased since 1914, and the industry in the United States has also undergone wide expansion. The rich ores in the United States are practically exhausted and few mines have large reserves of even low-grade ore. Treatment of material carrying less than 0.25 per cent, mercury is not unusual in the United States, whereas the Spanish mines at Alamaden have been treating in recent years ore averaging 11 per cent, mercury. The decreasing grade of American ore has resulted in a steady fall in the production per furnace which has not been met by the construction of additional equipment. Many other important developments in the chemical industries might be mentioned. Incendiary bombs, smoke screens at sea, star shells, signal rockets, and other war demands have stimulated the production of important chemicals. Sufficient has been said, however, to indicate the profound effect that the war has had, both directly and indirectly, upon the chemical indus- tries. Many plants have been erected with the express understanding that they were to be scrapped when peace came. Ample allowance has been made for amortiza- tion, but the problem is not so simple as that. The building of plants, the training of skilled labor, the com- plex inter-relationship of industries, and especially the problems of national defense present a task of readjust- ment which requires all the constructive genius of our business men and statesmen. Even the hasty review here given of the effect of the war on the chemical in- dustries should make clear their vital importance in the industrial and military activities of the American people. 61 CHAPTER V AMERICAN INDUSTRIAL EXPANSION IN THE WAKE OF WAR Effect of the war on established industries of the United States — Period from August, 1914, to April, 1917 — Period from our entrance into the war to the signing of the armistice American textile industries — Increase in financial strength --Growth of export trade — War orders — American steel industry — Export expansion — Increase in mill capacity — Unprecedented growth of American shipbuilding — Its com- mercial and political significance. The war conditions brought about some striking de- velopments in the established manufacturing industries of the United States. In considering these developments it is necessary to distinguish between two periods, the first covering the time from the outbreak of the war in Europe to the declaration of war by the United States, and the second beginning with the entrance of this country into the war and lasting until the signing of the armistice. As very important among the American manufacturing industries, special attention will here be given to the textile and the iron and steel industries. The shipbuilding industry, which under stress of war conditions attained unprecedented prominence, will also receive consideration. In the first period the disturbed world conditions brought to American industry in general almost un- restricted stimulation and prosperity. American pro- ducers were called upon to supply at least three new demands. In the first place, European industries which had shared the American market with American manu- facturers were less and less able to keep up their ex- port trade. Either they were, as in the case of Belgium, 62 AMERICAN INDUSTRIAL EXPANSION Germany, and Austria, debarred entirely from foreign markets, or they were, as in the case of France and Great Britain, primarily occupied with supplying the military needs of the Allies. As European competitors with- drew from the American market, the American indus- tries endeavored to supply the full demand. In the second place, there was an analogous development in other neutral markets. America, like Japan in the Far East,^ became an important factor in supplying markets •vvhose needs before the war had been very largely met by European countries. The textile industries, for example, which had not been considered formidable competitors of England and Germany in most neutral markets, developed a considerable and promising export trade. In the third place, American industries, and especially the explosives, arms, and steel industries, re- ceived numerous war orders from the belligerents. During the second period, beginning with the declara- tion of war by the United States, w^ar orders of the United States Government at once became the over- shadowing influence. The War Industries Board, the War Trade Board, and^the Fuel Administration were created and set about deliberately to mobilize American industry for the winning of the war. Restrictions were established on non-essential production and use of fuel ; import and transportation priorities were granted to war industries.- Speaking of the extent to which war demands occupied the capacity of many of our im- portant industries, Dr. F. W. Taussig says :^ . iSee Chapter VI. 2 For a detailed account of the Government 's regulation of dis- tribution see, in this series, Louis E. Van Norman, War Time Con- trol of Commerce. 8*'Price Fixing as Seen by a Price Fixer,'* Quarterly Journal of Economics, February, 1919. 63 COMMERCIAL POLICY Almost the entire supply of many important articles was wanted for government use — partly by the United States Government itself, partly by contractors working for the Gov- ernment, partly by the Allies. The extent of the indirect demand (from contractors) was not always known; but it played a great part, and was of essentially the same character as that of the Government itself. When things were at their height, the total non-private demand for iron and steel ab- sorbed 85 per cent to 90 per cent of the tonnage. This was the maximum ; but at no time between the autumn of 1917 and the autumn of 1918 was the non-private demand for less than 60 per cent. For copper the proportions of maximum and mini- mum non-private demand for public use were no less. Nine- tenths of the nickel was taken, during the war period as a whole, for Government and Allies' use and at least as much of the aluminum. For other commodities the requirements, though not such as to dominate the market completely were yet so great as to threaten to demoralize it. During the war period half of the zinc and half of the quicksilver were taken for government use. Of the coarser cotton fabrics, as much as 60 per cent was at one time taken by the Government; of the country's entire output of cotton manufactures, as much as 30 per cent. For southern pine lumber the Government's demand, through the entire period of war, was for more than a fifth of the cut, and during the summer of 1918, when the peak was reached, for more than a third. For spruce and fir (Wash- ington and Oregon) the proportion of the whole was less; but certain sizes suitable for ship timbers, and certain kinds suit- able for aircraft, were completely taken over, and the "side- cut " from these became an almost dominant factor in the com- mercial market. Of sulphuric acid nearly 40 per cent was taken when things were at their height; and of nitric acid as much as 65 per cent. In this period an unprecedented change was brought about in the American shipbuilding industry. The work of transporting men and supplies to Europe, the withdrawal of Germany's large mercantile marine from international trade, and the destruction of vessels by submarines called for additional ships and led to the 64 AMERICAN INDUSTRIAL EXPANSION inauguration of a huge programme of construction. Of all the industrial changes caused by the war, the growth of the shipbuilding industry will perhaps be the most significant, because a strong American mercnant marine seems likely to become a determining factor in both the commercial and the general international policy of this country. The American textile, steel, and shipbuilding indus- tries played a part in the war no less important than that played by the chemical industries. Vast quantities of clothing, equipment, shells, ordnance, arms, armor plate, and ships were necessary. The measure of success attained in manufacturing these in quantities adequate to meet the needs first of the Allies and then of the rapidly expanding American Army manifested the adaptability and the potential capacity of American in- dustry. Many of the war-time developments will prove of permanent value. New commodities were produced which can be adapted to peace needs. Financial organi- zation has been ipiproved and made more secure. New uses for raw materials ha\^ been devised, new raw ma- terials and new sources of raw materials have been de- veloped. Foreign trade has been extended both in magnitude and in range of markets. The outbreak of the war in 1914 found in the United States all the leading branches of the cotton, woolen, and silk industries in a strong position. They had been built up under a system of high protection by the initiative and business skill of American manufacturers. Fac- tories were in operation which were marvels of equip- ment and organization. Machinery had been perfected. Combing and spinning machinery, Jacquard and auto- matic looms, printing machines — these and many others 65 Il \ COMMERCIAL POLICY were not excelled anywhere. A skilled body of workers had been trained. These industries were affected by the war from the first. The shortage of dyestuffs, already considered,* was for a time serious. Substitutes were adopted, pat- terns changed, and all the corners of the earth searched for reserve supplies. Prices of dyes mounted unprece- dentedly. But the rise of the American dye industry before long removed almost all these difficulties. Shortly after the outbreak of the war in Europe a great increase in the export demand for goods developed as a result of the war restrictions on European industry, and war prosperity led to a like increase in the home demand. The textile industries experienced the greatest prosperity in their history. Many mills, formerly in debt for equip- ment or for working capital, have become independent of the commission houses, which formerly dominated their output and their selling policy. This has been especially true of southern cotton mills, and their independence will increase their competitive strength. In the future these mills will not only save heavy interest and other special charges, but will be in a better position to engage in export trade. The increase in their export trade will very likely be retained, in part at least, by the American textile mills. American manufacturers have become familiar with ex- port procedure, and foreign buyers have learned the merits of American textiles. The United States has be- come the second largest exporter of manufactures of cotton. The exports of cotton goods increased from the pre-war record of $53,740,000 in the fiscal year 1913 to $112,050,000 in 1916, and increased further in 1918 to $169,398,000. Although there was a rise in prices which * Chapter III. 66 AMERICAN INDUSTRIAL EXPANSION exaggerated the actual growth of this trade, there was, nevertheless, a very substantial increase in quantity. The increase in the export of the more important cloths is shown by the figures in the following table : Exports op American Cotton Fabrics, 1913-18 (In thousands of yards) Cotton Fabrics Unbleached Bleached . . Colored . . . Total . 1913 1916 1917 000 213,190 39,495 192,044 omitted 176,627 76,500 297,445 157,197 101,566 431,431 444,729 550,572 690,194 1918 98,858 144,402 441,667 684,927 Our exports of manufactures of wool increased from the pre-war record of $4,790,000 in the fiscal year 1914 to $53,980,000 in 1916, but after the United States en- tered the war, the productive capacity of American mills was largely occupied with war orders, and the quantity available for export declined. In 1917-18 the exports decreased to $17,750,000. ' The exports of domestic silk manufactures rose from $2,390,000 in 1913 to $5,204,000 in 1916 and then to $12,140,000 in 1918. Although the increased exports of manufactures of wool and silk may not be maintained when the pre-war sources of supply are again available, the American cotton-goods industry may be expected to hold and even to better the position in the world's export trade which it has gained during the war. The American exports of unbleached cotton cloth to Oriental markets have declined, as the table overleaf shows. During the war the Japanese took over that share of the Indian and Chinese markets that we had supplied. But in unbleached cottons we increased our 67 II COMMERCIAL POLICY Exports or Unbleached Cotton Cloth, 1913-18 {In thousands of yards) Country^ China Aden British Africa British India Central America . . . Canada Chile Colombia Philippine Islands. . Other West Indies.. Australia Cuba Venezuela Argentina United Kingdom. . . . Haiti Mexico All ojther 1913 Total 78,161 24,680 15,269 12,606 11,849 9,368 8,346 7,282 6,746 4,873 4,675 2,782 1,854 1,378 1,257 1,031 443 20,930 213,190 1916 9,231 20,615 6,225 12,439 14,996 8,163 9,668 5,083 9,823 6,029 4,131 6,125 2,431 3,900 20,642 4,812 7,126 25,188 176,627 1917 1918 2,013 4,100 16,856 1,710 11,354 7,429 3,399 791 26,187 12,165 8,683 9,968 14,293 10,770 5,167 2,999 8,462 7,325 6,770 6,074 3,972 1,570 6,406 4,711 3,521 728 4,463 3,950 4,757 497 4,065 2,554 10,924 10,541 15,905 10,976 157,197 98,858 * Arranged according to relative quantities in 1913. exports to Latin America. These exports to Mexico, for example, amounted in 1913 to less than 500,000 yards. In 1917 they amounted to almost 11,000,000 yards. In bleached cotton cloth the exports to Canada and Latin America, as shown by the first table opposite, substan- tially increased. These exports to Mexico, for example, rose from a little over 550,000 yards in 1913 to almost 21,000,000 yards in 1918. There has been also, as the second table opposite shows, a marked increase in exports from the United States of colored cotton cloth. The exports to Central America, for example, which in 1913 were a little over 18,500,000 yards, had increased in' 1917 to almost 34,000,000 yards. Other similar increases are indicated in the table. In • 68 AMERICAN INDUSTRIAL EXPANSION Exports of Bleached Cotton Cloth, 1913-18 (In thousands of yards) Exports of Colored Cotton Cloth, 1913-18 {In thousands of yards) Country Philippine Islands. . Central America Colombia Haiti Cuba Canada Dominican Republic. Other West Indies. . Australia Ecuador China Venezuela Mexico AU other Total 1913 69,519 18,698 18,310 18,036 16,260 12,950 10,026 8,346 2,621 2,380 2,275 1,807 1,652 9,164 192,044 1916 45,107 13,133 21,729 20,731 44,999 41,833 11,237 13,691 7,746 3,273 1,198 8,304 24,800 39,664 297,445 1917 63,999 33,928 21,161 17,112 38,186 59,403 16,065 18,207 9,562 6,398 1,385 13,814 50,285 81,926 431,431 Country 1913 1916 1917 1918 Philippine Islands. . Canada Cuba Central America. . . . Chile Dominican Republic. Bolivia 16,995 4,803 3,032 2,397 1,871 1,218 1,135 1,105 827 796 553 35 4,728 18,154 5,481 9,513 4,204 878 1,945 1,201 2,001 409 6,750 8,523 2,685 14,756 14,100 8,293 13,604 7,294 4,108 3,006 3,118 3,619 1,399 5,956 13,178 5,904 : 17,987 1 36,188 11,854 15,984 5,370 10,011 2,687 1 088 Haiti 3 786 British India Colombia 761 2 420 Mexico Argentina All other - . . . . 21,083 6,890 26,280 Total 39,t95 76,506 101,566 144,402 1918 76,060 19,702 8,036 11,041 57,397 36,787 13,251 14,425 7,366 2,331 1,810 3,376 76,286 113,798 441,666 1918 the marked falling off of exports of colored cotton cloth, as in the case of both bleached and unbleached 69 COMMERCIAL POLICY fabrics, was due to the occupation of the American mills with American war orders. With the entrance of the United States into the war, new influences began to appear in American textile in- dustries. There were restrictions upon exports and tremendous demands for war supplies. Added to the increased demand from the prosperous home markets and the almost insatiable demands from foreign coun- tries, whose usual sources of supply had been closed, was the enormous demand from the American Government for war requirements. A large proportion of textile machinery was devoted to Government business and civilian needs were given second place. The silk mills, faced with a possible restriction of their use of fuel, as well as of tin, logwood and other materials, anxiously sought to show that silk was not a luxury but an essential in clothing the nation. The war has demonstrated the value to this country of being the main source of supply of raw cotton. About three-fifths of the world's production of cotton is raised in the United States. We normally export about two- thirds of our supply, chiefly to England, Germany, and France. Japan gets some of her cotton from this coun- try and some from China, although the greater part of her supply comes from India. The war led to an expansion in almost every line of cotton manufacture, including particularly such war ma- terials as duck, gun cotton, absorbent cotton, and bandage cloth. The substitution of fibre webbing for leather straps is one of the war changes that probably will be permanent. The war demand fell chiefly on heavy fabrics, such as duck and coarse sheetings. The lack of linen for airplane wings was met by the develop- ment of special cotton fabrics made of fine yarns. 70 AMERICAN INDUSTRIAL EXPANSION The American woolen industry much more than the cotton industry depends upon foreign countries for its supply of raw material. The British Dominions — Australia, New Zealand, and South Africa — furnished in normal times a considerable proportion of our needs, although during the war this supply was almost entirely taken over and controlled by the British Government. During the war our manufacturers relied largely on Argentina to supplement the supply of domestic wools. One of the effects of our experience in the war very likely to be permanent is the increased use of cotton and shoddy mixed with new wool for textile manufactures. At the time of the entrance of the United States into the war the War Department would permit no adulteration of clothing or other equipment made for the Army. But it was soon recognized under pressure of the need to conserve the limited supply of wool that wool shoddy (now more tactfully called ** reworked wool^') and even cotton might improve overcoats and blankets. Re- worked wool, as the trade has known for years, may be of better quality than low grades of raw wool. The resourcefulness of American textile mills is well illustrated by the rapidity with which carpet mills turned to the production of duck so greatly needed by the Army. America is the leading manufacturer of machine-made carpets, and this industry proved a na- tional asset, demonstrating its quick adaptability in turning out large quantities of an essential war material. Another important effect of the war has been the establishment of the United States as the silk-manufac- turing center of the world. All of the raw silk con- sumed in this country is imported. It is produced prin- cipally in low-wage countries, chiefly in Japan and 71 COMMERCIAL POLICY China, with lesser amounts in Ital}', Asiatic Turkey, and France. In 1913, 66 per cent, of our silk came from Japan, 22 per cent, from China, and 10 per cent, from Italy. The silk industry enjoyed great prosperity during the war. The manufacture of silk hosiery especially in- creased with great rapidity. The part that the in- dustry played in supplying war needs was chiefly in the production of silk powder bags for big military guns. This war demand has left its permanent effect on the industry. As a direct result of the Government demand for powder bags, the utilization of silk waste has de- veloped in a most striking way. It should be said parenthetically that the silk industry consists of two main branches, the thrown-silk industry and the spun- silk industry. In the former the silk filament is simply unwound from the cocoon and "thrown" into yarn; in the latter silk waste from the throwing operation or from pierced or otherwise defective cocoons is worked over and spun in much the same manner as cotton yarns. It is this branch of the industry that has been most stimulated by the war. One of the conspicuous develop- ments in the spun-silk branch of the industry has been the increased manufacture in this country of the neces- sary equipment and machinery, with the result that the American silk-spinning mills need no longer rely on Europe for any of their essential equipment. The steel industry was in a depressed condition at the beginning of the war. The annual production of steel, in terms of ingots and castings, had fallen from 31 mil- lion tons in 1912 and 1913 to 23,500,000 tons in 1914.= The war, of course, brought a very urgent demand for B The Mineral Industry, 1916, p. 404^ 72 AMERICAN INDUSTRIAL EXPANSION shells and other munitions. We know now that early in the war Germany was at the point of winning because of the shortage of munitions experienced by the Allies. The war had not progressed far, however, when Charles M. Schwab arrived in London and made the first of the great contracts which were to save the situation for the Allies and at the same time tremendously to stimulate American steel production.® In addition to the war munitions that were sent abroad, there was a marked increase in the exports of steel in general. Pig iron, billets and blooms, iron and steel bars, rails, sheets and plates, structural steel, wire, wire rods, nails and spikes, and pipes and pipe fittings were all exported in large quantities, and altogether showed an increase from 1,421,800 long tons in 1914 to 5,587,920 long tons in 1916.^ The export of machin- ery, cutlery and other forms of steel manufacture also showed a great increase after the outbreak of war. America, in addition to exporting war material and other steel to Europe, was' supplying steel for ordinary uses in South America and Oriental markets formerly controlled for the most part by Germany, Great Britain, and France. It is not surprising that the total exports of iron and steel and their manufactures, as a result of these unprecedented demands from abroad, increased from $304,606,000 in 1913 to $621,238,000 in 1916, and then to $1,125,890,000 in 1918. Some of the items of this trade are given in the table overleaf. The large Government orders for munitions and for steel for ships which resulted from the declaration of war by the United States imposed an added burden on the already hard-pressed capacity of the industry. Tnent to the extent of the whole or any portion of the increased cost which may be re- covered from the Inland Revenue as a reduction of Excess Profits Duty consequent upon any allowance made by that Department on account of such special depreciation or obsolescence. Grants-in-aid under this head will not exceed 40 per cent of the cost of the plant and buildings on account of which the grants are made. (ii) Grants-in-aid of Research. For this purpose research is to be understood to mean specialised technical research con- ducted in connexion with the actual manufacture of dyes and advanced intermediates, and, as accessory thereto, for the pur- pose of discovering new dyestuffs or intermediates and the discrimination of those of value for the purposes of the in- 109 !li 1,1 II % COMMERCIAL POLICY dustry, or new processes for the production of known dye- stuffs and the improvement of their quality. It is considered that this technical research, whilst distinct from the actual technical routine of manufacturing operations, is nevertheless an inherent part of the industry and properly enters into the cost of production, since experience shows that in normal times a constant flow of new colors or varieties of colors is neces- sary for the maintenance of those dye-using trades which are subject to outside competition. Further, whilst the industry is in process of establishment, the functions of the research department are doubly important, as, besides the task already mentioned, it has as its primary duty the development of processes for the production of colours of which, though the fundamentals of their manufacture may be known, there is no output in this country or only an insufficient one. Research of this character, which must be carried out in close connexion with actual manufacturing operations, involves expenditure on equipment, some of which at least may not result in any commercial advantages for a considerable time; and in the special circumstances of the industry it appears to be a proper subject of State aid. Under this proposed plan no dyes are to be imported into Great Britain without special license. A Trades and Licensing Committee, consisting of a chairman appointed by the Board of Trade, four members representing color users, and four members representing dj'e manufac- turers, is to determine what colors and intermediates shall be licensed to be imported into the country and in what quantities. Licenses will, no doubt, be refused in the case of all dyes that are being manufactured in Great Britain in quantities sufficient to supply the Brit- ish consumer. A recent order of the Australian Govern- ment prohibiting the importation of dyes and dyestuffs not of British manufacture indicates that the British Dominions may cooperate in fostering the British dye industry. A significant factor in the situation is that the dye 110 ^; EQUALIZING CONDITIONS OF COMPETITION industry in Great Britain is coming under Government control. Two large concerns manufacturing dyes in Great Britain, the British Dyes, Limited, and Levinstein, Limited, have been combined. The British Dyes, Limited, has been organized since the outbreak of the war. A large part of its capital was supplied directly by the British Government, and the board of directors is controlled by representatives of the Government. Levinstein, Limited, was controlled by private capital. A third large company in England is L. B. Holliday and Company, Limited.* This plan of State assistance to the dye industry in Great Britain is very significant. It is an alternative for a protective tariff. Prohibition of import, licenses, loans, subsidies, and grants, together with a tendency to nationalize industry, have very far-reaching possibili- ties. Passing over the difficulties of administration and the adjustment of difficulties within the country itself, there should be mentioned the possibility of discrimina- tions against foreign producers, and also the difficulty that will arise in any attempt to export dyes produced in factories that have been assisted by the State. If such assistance enables these factories to undersell for- eign competitors, there will be a tendency to raise countervailing tariffs against them. Each nation will have to determine from its peculiar situation what essential industries should be encouraged from the standpoint of national safety. In the United States practically all the great staple trades are well established, but our experience with *'key" or ** pivotal" industries was not unlike that of Great Britain. In some cases direct state aid may prove desirable, but in most cases — synthetic dyes included — the tariff is the 8 Commerce Reports, December 30, 1918, p. 1203, 111 V i COMMERCIAL POLICY most satisfactory method of establishing national security. Before a more general theory of protection is sug- gested, brief reference should be made to the origin and application of the free-trade doctrine. In the seven- teenth and eighteenth centuries the interference of the State with industry and trade became so disturbing that thinkers began to lean to the other extreme, and by the end of the eighteenth century many were willing to say that there should be no State control. Rather they said : **Let commerce take its natural course, remove restric- tions, adopt free trade, let competition have free play, and let Governments keep their hands off, laissez faire,** These ideas have been wholesome as a protest against authority and regulation. Many times have they served effectively against outworn institutions; they have afforded a standard by which to measure cause and effect in economic life. It is when they have been urged as a positive policy that they have frequently misled. Perhaps the most woeful failure of this practice of laissez faire has been in industry, where individuals, pleading their divhie right to run their own affairs, have established a system of exploitation under which society is still struggling. Many thinkers who have abandoned the ideas of laissez faire in industry and other social relations hold it desirable in international trade, and, therefore, are opposed to a protective tariff except on a few special grounds. Unfortunately, the problems of commercial policy are not so simple as they appear to those who regard free trade as a ** harbinger of an Utopia.'* International problems cannot be solved by a single formula. Imposi- tion of the same economic policy upon nations in dif- 112 h \ i EQUALIZING CONDITIONS OF COMPETITION ferent stages of development does not necessarily result in equality and fairness. It may result in most vicious inequality. Great Britain is not a free-trade nation solely because she believes in * ' the obvious and simple system of natural liberty'' advocated by Adam Smith and others of the classical economists, nor does she hold to the doctrine because of philanthropy. In 1848 Karl Marx argued that the movement to repeal the Corn Laws in Great Britain was merely the working out of the Ricardian theory of wages and profits — that cheap food makes low wages, low wages high profits.* If this be too severe, it is at least as near the truth as the statement that free trade in Great Britain was the application of pure philosophy to public affairs. Freedom in world com- merce is an important factor in maintaining Great Britain's position as a great power. Set in the midst of the sea at the door of Europe, she early became the chief sorting, packing, and transshipment point in the world. Her industries, which are great and varied, are largely so because of the coming and going of her ships. A large portion of the raw material her industries use 4 Karl Marx, Free Trade (Brussels, January 9, 1848), p. 31. Marx says: "The English workinjjmen have appreciated to the fullest ex- tent the significance of the struggle between the lords of the land and of capital. They know very well that the price of bread was to be reduced in order to reduce wages, and that the profit of capital would rise by as much as rent fell. ''Eicardo, the apostle of the English Free Traders, l^e leading economist of our century, entirely agrees with the workers upon this point. *'In this celebrated work upon Political Economy he says: *If instead of growing our own corn . . .we discover a new market from which we can supply ourselves ... at a cheaper price, wages will fall and profits rise. The fall in the price of agricul- tural produce reduces the wages^ not only of the laborer employed in cultivating the soil, but also of all those employed in commerce or manufacture.' " 113 \\\ t I if COMMERCIAL POLICY must come from abroad, and foreign markets are essen- tial to their prosperity. Although the war has demon- strated the limitations of free trade even for Great Britain and has led her to consider protective measures, it is probable that for a long time to come British states- men will consider that as a general policy their country's welfare depends upon free trade among the nations. To her and to other nations similarly situated (The Nether- lands, for example) the policy of free trade will seem best adapted to their national needs. Free-trade economists have frequently urged in sup- port of their doctrine that it prevents wars, but the free movement of goods in international trade is not neces- sarily a guarantee of peace. Rather it may stimulate hostility by forcing manufacturers to seek foreign markets where they come in conflict with the competition of foreign rivals. The fallacy in the argument that free trade brings peace is in the assumption that the interests of nations are always complementary and that inter- national division of labor will work without friction. Society is not a machine, and it cannot be treated as a machine. The interests of nations are sometimes antago- nistic, and they would continue to be so at times under universal free trade as they are in a world of tariffs. Free traders have frequently admitted the validity of the infant-industry and military arguments for pro- tection, J)ut have insisted that in. so far as a nation applies them, it sacrifices wealth to defense or to the (faint) possibility of an offsetting gain in the future. They hold that protection penalizes the efficient to sup- port the inefficient industries, and that if individual effort were allowed free play, it would apply itself to those industries in which the nation has a natural advan- 114 EQUALIZING CONDITIONS OF COMPETITION tage, and the maximum national wealth would be the result. At the very outset a serious objection to this position is that individual effort does not operate quickly and freely'. It is restrained on the one hand by psycho- logical factors — fear, habit, and reluctance, and on the other by the designs and plans of man. But the advocate of protection does not press this objection; he takes issue with the conclusion that the interference of govern- ment with industry tends to reduce national wealth. That free trade is the most desirable method for develop- ing the productive powers of Great Britain is no reason why it is so for all other countries. Other nations whose economic advantage lies not primarily in the extension of overseas trade but rather in the turning of vast natural resources into manufactured goods may hold with propriety to a different theory of international trade. The United States and Germany, for example, have chosen to diversify their economic life by means of tariffs, stimulating the growth of industries which without protective measures would have developed slowly, if at all, in competition with the British export industries; and it would hardly be safe to venture the assertion that these nations have shown a less productive capacity than has Great Britain, or that they are less wealthy today than they would have been had they adopted free trade. More important than the immediate availability of goods for consumption which the free- trade school emphasizes is the productive capacity of a nation. It is upon the latter that the wealth of a people really depends. In what sort of society then does the productive capacity of a people attain its maximum 1 The advocate of protection answers that it is in a well balanced, com- plex society, in which both agriculture and manufactur- ,' M I COMMERCIAL POLICY ing are given their proper places. Diversity in produc- tion and population, he contends, produces not only a more wholesome, but a wealthier nation. It is no answer to this position to point out that there are individual industries that could not exist under free trade. Viewed as separate economic units this may be true, but as a part of the national system of production it is not neces- sarily true. The stimulus of diversified interests, acting and reacting on each other, calls into play resources of mind that could not be developed in a simpler society.** Alexander Hamilton has indicated the principles upon which any sound system of protection must rest. His chief argument for protection was based on the proposi- tion that diversification of industry increases the power and wealth of the nation. **The aggregate prosperity of manufactures and the aggregate prosperity of agri- culture,'' he says,« ''are intimately connected." Ham- ilton w^as interested in discovering in what form of society the largest number of human talents would be brought into play and the greatest quantity of activity stimulated. He wrote again -J Wlien it is considered . . . , that the results of human enterprise and exertion are immensely augmented by the diversification of their objects; that there is a reciprocal re- action of the various species of industry upon each other mutually beneficial, and conducive to general prosperity, it must appear probable that the interests of a community will be most effectually promoted by diversifying the industrious pursuits of its members and by regulating the political economy so that those who have been particularly qualified by nature for arts and manufactures may find the encouragement necessary to call forth and reward the ir peculiar talents. 5 Cf. F. List, Das nationale System der politischen CEJconomie and M. E. Hirst, Life of Fnedrich List. ' 8 "Report on Manufactures," 1791, Works of Hamilton, vol iv p. 139. * 7W. S. Culbertson, Alexander Hamilton, p. 146. 116 EQUALIZING CONDITIONS OF COMPETITION It was Hamilton's belief that the enlargement of the field of enterprise would bring into action many avail- able powers which would remain latent in a more homo- geneous form of society. By encouraging manufactures it was his belief that men would be stimulated to new ambitions to produce wealth. He says :^ To cherish and stimulate the activity of the human mind by multiplying the objects of enterprise is not among the least considerable of the expedients by which the wealth of a nation may be promoted. Even things in themselves not positively advantageous sometimes become so, by their ten- dency to provoke exertion. Every new scene which is open to the busy nature of man to rouse and exert itself, is the addition of a new energy to the general stock of effort. The spirit of enterprise, useful and prolific as it is, must necessarily be contracted or. expanded, in proportion to the simplicity or variety of the occupations and productions which are to be found in a society. It must be less in a nation of mere cultivators, than in a nation of cultivators and merchants ; less in a nation of cultivators and merchants than in a nation of cultivators, artificers, and merchants. Having determined upon what industries are desirable, either on the infant-industry, military, or diversification and productivity arguments, it becomes necessary to measure their competitive strength as compared with their foreign competitors. In some cases no tariff will be necessary ; in others it will be necessary to equalize competitive conditions and to allow in addition a fair margin to care for inevitable fluctuations of industry and commerce. The competitive strength of an industry depends upon a great variety of complex factor^. Tariff problems so far as they relate to production are also industrial problems. They comprehend the availability of raw materials; freight rates, transportation, and 8 '^Report on Manufactures," 1791, Worlcs of Hamilton, vol. iv, p. »4. 117 9 i|i it ii COMMERCIAL POLICY proximity to markets; the supply of capital, business organization and management, technical progress and the development of scientific research; patents and processes; the use or absence of machinery, automatic or otherwise ; the amount, adaptability, skill, and organi- zation of labor ; and government taxes, restrictions, co- operation and assistance. How then shall the competitive strength of nations be measured ? It is here that a study of the cost of pro- duction is of service. ''Cost," it should be said at the outset, may refer to the monetary outlay necessary to put a commodity on the market, or it may refer to a very different thing — the actual labor-pain and sacrifice in- volved in production. Dr. F. W. Taussig has thus expressed this distinction :» These various outlays, or equivalents of outlay, are some- times spoken of as " expenses of production." When that tei-m IS used and is distinguished from " cost of production " emphasis is laid on the fact that the employing capitalist is concerned solely with what he pays for labor, for materials, for the use of free or fixed capital. When, on the other hand, the term cost of production is used so as to imply a distinction from expenses of production, reference is made to the sacrifices undergone; to the labor of the hired workman, and not to his wages; to the trouble, anxiety, and work of superintendence of the employer, not to his profits or ordinary gains; to the previous saving by which the capital has been accumulated, not to the interest on that capital. As will be seen at a later stage, some of the most important and difiicult problems of economics connect themselves with the distinction between cost of production in the sense of labor and sacrifice, and expenses of production in the sense of outlays. Each of these ideas must be considered in the ultimate determination of the tariff question. The actual sacrifice ' — » Principles of Economics, vol. i, p. 172. 118 EQUALIZING CONDITIONS OF COMPETITION of the laborer, manager, and capitalist is a factor to be considered in determining whether or not a given in- dustry is to receive protection. But monetary costs are helpful in determining the ability of an industry to compete. The expense of producing a given product reflects the composite strength of the industry, taking into account the different competitive factors which have been mentioned. The term "cost of production" embraces, in the first place, the cost of materials. If an industry has nearby a plentiful supply of raw material, its material cost, other things being equal, will be less than the cost to a competitor that must transport its raw material from a great distance. In like manner, if the quality of raw material — quicksilver ore, for example — is poor in one country, the material cost will be greater per unit of finished product than in the competing country where the quality of the raw material is superior. In the next place, cost of production embraces labor cost. In a study of the comparative position of nations, it is necessary to determine the labor cost per unit of product produced. Wage scales are significant in the study of the living conditions of different peoples and in determining ultimately the question whether from a social standpoint a tariff is desirable in a particular in- dustry, but in studying the competitive condition in an industry — its ability to compete in the production of a given product, the more pertinent consideration is the labor cost per unit of product. Economic writers of free-trade leanings have asserted that it is not the low- wage but the high-wage countries that are to be feared in competition. Efficiency in the latter case, it is said, is the cause of, and makes up for, the difference in wages paid to the individual. On the other hand, in tariff 119 iil COMMERCIAL POLICY controversies before Congress comparative wage scales have been presented as conclusive arguments for the protection of American industry. It has been shown that wages in foreign countries are generally lower, and sometimes very much lower, than wages in the United States. These facts have been used ostensibly to argue for the protection of American labor, but in fact as arguments for the protection of American industry. We know that wages per laborer are less in most foreign countries than they are in the United States. Important as these comparisons may be from a social point of view, their value for measuring competitive conditions is not so great as the labor cost per unit of product. It is con- ceivable that because of the high efficiency of American labor, supplemented by American machinery, in some in- dustries, the labor cost per unit of product might be less here than in a given foreign country at the same time that wages per man are higher. The answer to both of these questions is in a study of costs per unit of product in which the wages paid and the efficiency of laborers, of the machines on which they work, and of the direction of their efforts will all be taken into consideration. Finally, cost of production embraces the so-called over- head expenses or ** burden.** In them are included the expenditure for taxes, managers* salaries, general re- pair, clerical labor, depreciation, and sometimes rent and interest. They will reflect technical, financial, or mana- gerial advantages as the result of which an industry may have a lower cost per unit of product. Although a de- tailed discussion of the many factors in cost accounting need not here be entered upon, something should be said in respect to interest. There is an important reason why interest should be included in the cost of production for purposes of comparison with foreign costs, and that is 120 t| EQUALIZING CONDITIONS OF COMPETITION the fact that a commodity may be made in one country largely by hand labor with the use of little productive capital, whereas in another country the product may be made by machinery with the use of little labor. In such a situation it obviously would be unfair not to take into consideration the large interest charges upon capital in- vestment in the one country as compared with the other. Just as one may not adequately compare the efficiency of two departments in a factory, one of which uses hand processes and the other mechanical processes, without counting interest upon the capital tied up in machinery, so likewise one cannot compare the efficiency of indus- tries as between nations without taking into considera- tion the interest charges in each case. Objections have been made to the use of cost of pro- duction as an aid in tariff making, usually without suggesting any concrete substitute. It is said that definite costs cannot be obtained, and that because they vary so from factory to factory, they are of compara- tively little value. But costs are no more uncertain and do not vary more than does industrial life as a whole. Variety and difference are inherent in the problem. Cost accounting is a scientific attempt to measure the uncertainty and change in industrial life, and by meas- uring the variations it tends to bring about greater cer- tainty and greater uniformity.-^ If cost accounting is rejected as one of the media through which comparative competitive data are to be obtained, we abandon one of the best. Alone it is not adequate, but it measures with a common comparable measure the many complex com- petitive factors which enter into production. Incident to any cost investigation, of course, is a careful examina- tion of a large amount of collateral data relating to competitive conditions. 121 ili Hi COMMERCIAL POLICY Theoretical accuracy in cost accounting, important for the manufacturer, is unnecessary for tariff purposes. Although a two per cent, error in costs may be objection- able from the standpoint of the manufacturer, it is of slight importance to the legislator who is hesitating be- tween a duty of 25 per cent, and 35 per cent. Many of the technical difficulties of exact cost accounting — interest, the rate of depreciation, the allocation of over- head and general expenses, and the capital vs, reve- nue problem, need not be worked out to the limit of scientific accuracy. In the pulp and paper report of the Tariff Board under the administration of President Taft, for example, an arbitrary figure for depreciation was adopted after careful consultation with two leading engineering concerns in that industry.^** The cost prob- lem is, in fact, not so difficult as it seems to the expert, because, in the first place, a fairly accurate approxima- tion is possible, and in the second place, an approxima- tion is entirely adequate for tariff purposes. The gathering of comparative cost data is really the function of an international commission such as will be discussed subsequently.^^ But it is not beyond the ability of a domestic commission to get foreign costs sufficiently accurate for tariff purposes. The United States Tariff Commission has power to investigate the "conditions, causes, and effects relating to competition of foreign industries with those of the United States, including dumping, and cost of production. "^^ ^^j. qq^_ ditions have prevented the Tariff Commission from mak- 10 <' Report on the Pulp and Newsprint Paper Industry'' (1911), pp. 24 and 73. 1 1 Chapter XVI. 12 8ee the Act creating the Tariflf Commission, Sec. 704, printed in Appendix IV. 122 EQUALIZING CONDITIONS OF COMPETITION ing any extended investigations abroad, but some in- teresting comparisons are found in a study of the sugar industry.^® Sugar is essentially an agricultural product, and like other agricultural products is subject to the law of vary- ing costs. In the domestic beet-sugar industry, as in the cane-sugar industry in Cuba, Hawaii, Louisiana, and Porto Rico, there are competing factories producing at widely varying costs per ton of sugar produced, and the forces of demand and supply, far from tending to reduce all of these varying costs to a common level, tend rather to increase the disparity between the highest- and lowest- cost producers who can continue to compete in the same market. Leaving out of consideration a small per- centage of abnormally high-cost concerns which the forces of competition are in fact tending to eliminate, there will, therefore, be found in each region a *' mar- ginal'' firm whose costs are such as to leave it a bare living profit and many lower-cost firms that receive a progressively greater and greater profit, technically known as ''economic rent." It is obvious, therefore, that it is only the marginal firms whose costs must be met by the prevailing price in order that they may sur- vive. All of the others can suffer a greater or less diminution in price and still do a profitable business. The table on page 124 shows the output and cost per ton of sugar produced for beet-sugar factories in the continental United States and for cane-sugar factories in Cuba for 1916-17. These statistics are cited here merely to illustrate how costs may be of service in tariff making. The sugar tariff should not be determined from this table. The 13 United States Tariff Commission, '* Costs of Production in the Sugar Industry. ' ' 123 ii! 'II COMMERCIAL POLICY Output and Cost of Production per Ton op Sugar Produced FOR Beet Sugar Factories in the Continental United States AND FOR CaNE-SUGAR FACTORIES IN CUBA, CLASSIFIED BY COSTS IN Groups of Five for the Year 1916-17 Group 1 2 3 4 5 6 7 8 9 10 11 12 IS 14 15 16 17 18 19 20 21 Output Beet Sugar, United States, short tons 178,705 78,485 102,066 83,123 54,765 63,443 51,743 40,028 43,120 46,228 29,467 28,669 16,686 12,312 6,026 Cuba 442,750 489,645 136,615 94,330 151,812 286,145 289,509 157,958 196,583 146,689 106,235 117,221 85,176 55,238 120,091 154,707 92,734 60,400 82,062 81,309 39,357 Cost per Ton^ Beet Sugrar, United States $47.31 56.38 59.51 61.90 62.96 63.94 66.50 68.42 71.95 74.92 76.39 80.29 88.76 99.38 123.48 Cuba $44.57 45.31 49.70 50.58 51.23 52.46 60.04 63.09 64.54 66.77 67.33 68.07 68.94 69.41 70.49 71.33 73.27 73.05 73.71 76.02 78.65 • Cuban sugars are raw and beet sugar is granulated. Before being entered in the column the costs of the granulated beet sugar as computed from original data were reduced bj the estimated difference in cost of producing raw and granulated sugar. year 1916-17 was an abnormal one and the figures of a pre-war year should be considered also. They would show a wider difference between domestic and Cuban costs. We import from Cuba about one-half of our annual sugar consumption, and it is the cost of the Cuban marginal producer that is reflected in the New York price. Importations from other foreign countries are negligible, and although they would increase if Cuba's preferential 124 EQUALIZING CONDITIONS OF COMPETITION rate were removed, they would not be a more serious factor in competition than the Cuban sugar. How the costs in the table are to be used in tariff making depends on policy. Representative factories in the United States and Cuba might be determined upon and the tariff fixed to cover their difference in costs with a fair margin. Or it may be decided what marginal American producer should in the circumstances be al- lowed to continue in business and the tariff fixed at such a point as will protect him. In the table the Cuban marginal cost ($78.65) lies between the costs of the eleventh and twelfth group in the American cost column. Assuming that the figures in the foregoing table alone were used for determining the tariff rates, if the present tariff were removed and the price fell to the cost of the Cuban marginal producer, the American factories in the first 11 groups would, other things being equal, be able to survive and the others would be eliminated. But other things would not be equal. If some American producers were forced out, new Cuban producers would take their place, the Cuban marginal cost would rise, and more American factories would be able to stay in business. Also if the tariff were removed and the price of sugar fell in the domestic market, its consumption would increase and the fall in price would not corre- spond in amount to the duty removed. Other factors, however, should be considered likewise. Statistics, as has been said, are only of service in tariff making when used with judgment and commonsense. The tariff is not a problem in mathematics. To obtain cost data from abroad is difficult but not impossible. Only in exceptional cases, it is true, is it possible to examine the actual cost sheets of foreign con- cerns, but an intelligent study by men trained in eco- 125 I' I COMMERCIAL POLICY nomics and accounting methods of the competitive facta in foreign countries will enable them to draw con- clusions sufficiently accurate for tariff purposes. In almost every case information is available upon the sources and prices of raw materials, wage scales, and the general efficiency of labor, the amount of machinery used, the hours which employees work, and the general facts about overhead expenses. One of the most successful studies of comparative costs of production was made by the Taft Tariff Board in studying the cost of producing cotton yarns in the United States and Great Britain.^* As an illustration of the results obtained, the comparison of yarn conver- sion costs^^ in England and the United States is given in the table on the opposite page.^« Elaborate comparative data on cost of production were also obtained by the Taft Tariff Board on wool growing and on the manufacture of tops, woolen and worsted yarn and cloth, and ready-made clothing.^^ The appli- cation of these data to wool legislation proposed in the second session of the Sixty-second Congress is made in an article reprinted as an appendix to this volume.^® To take an example here : Sample No. 28 on which the Tariff Board obtained comparative costs was a man's fancy woolen suiting weighing 13 ounces per yard. The costs are on the basis of one pound of cloth, and the differences between this country and Great Britain are given. The difference in the c onversion cost for mak- c, "''/^^l^^oJ^ Manufactures,'' H. R. Doc. No. 643, 63d Cong. 1st Sess. (1913), vol. ii, pp. 398-426. ^ *u^^i^^°7T^®° ^®^* ^^ *^® ^^^* ®^ converting the raw material into the finished product and does not include cost of raw materials i«Op. cit, p. 414. 17 '< Wool and Manufactures of WooP* in four volumes, H. B. Doc. No. 342, 62d Cong., 2d Sess. (1912). ' i» Appendix V. 126 EQUALIZING CONDITIONS OF COMPETITION Comparative Cotton- Yarn Conversion Costs in England and THE United States Yarn Where made Labor Cost Other Costs Total Conversion Cest Warp No. 30: Mule England $0.013628 $0.011092 $0.024720 King U.S. .016710 .019583 .036293 English, per cent , of American 81.56 56.64 68.11 Warp No. 40: Mule England .019468 .015846 .035314 Ring U.S. .024185 .028343 .052528 English, per cent of American 80.50 56.90 67.23 Warp No. 50: Mule England .026207 .021321 .047538 Ring U.S. .033420 .032167 .072587 English, per cent of American 78.42 54.43 65.49 Filling No. 30: Mule England .013538 .011018 .024556 Ring U.S. .014194 .016636 .030830 English, per cent of American 95.38 66.16 79.65 Filling No. 40 : Mule England .019124 .015565 .034689 Ring U.S. .020769 .024341 .045110 English, per cent of American 92.08 63.96 76.90 Filling No. 50 : Mule England .025616 .023550 .046466 Ring U.S. .028720 .033650 .062378 English, per cent of American 89.19 69.98 74.41 Filling No. 60 : Mule England .033109 .016948 .060057 Ring U.S. .036762 .043022 .079845 English, per cent of American 90.06 39.39 75.22 Filling No. 70: Mule England .041828 .034034 .075872 Ring U.S. .046534 .054537 .101071 English, per cent of American 89.89 62.40 75 07 127 COMMERCIAL POLICY ! I It ing the top in a pound of cloth was $0.0049, for yarn $0,057, and for cloth $0.18, making a total difference of $0.2419 in the conversion cost of one pound of the speci- fied cloth. Its price was estimated at $0.59 per pound. The ad valorem tariff rate then necessary in the case of that sample to equalize the difference in cost of pro- duction was 41 per cent.^^ In case foreign costs cannot be obtained, foreign prices may be available, and with them at hand significant comparisons may be made for tariff purposes. In fact, although the study of domestic costs is essential, the securing of foreign costs is not. It is the price of the foreign exporter, not his cost, that the domestic pro- ducer must meet. Even if the amount the foreign producer pays out as a matter of cost cannot be obtained, the price he sells his goods for can be obtained, and the question is, can the home producer meet this competi- tion? This question cannot be answered without know- ing domestic costs. Domestic prices disclose what a pro- ducer does sell his goods for, not the minimum amount that he must have to stay in business. Although a com- parison between domestic costs and foreign costs is highly desirable, when obtainable, and even a compari- son of domestic and foreign prices may be helpful, the fundamental question is touched by a comparison be^ tween domestic costs and foreign prices. A danger must not be forgotten in collecting foreign prices. Prices selected should represent the normal competitive strength of the foreign industry in its prin- cipal market. Dumping prices present a special tariff problem, dealt with in a later chapter.^^ Factory prices, 19 Appendix V, Table 10. Many other cases and the method of their computation are contained in this article. 20 Chapter VIII. 32S EQUALIZING CONDITIONS OF COMPETITION uncomplicated by middlemen 's profits and commissions, are desirable. Trade discounts, if they exist, should be allowed for. A study of domestic costs may be useful for tariff pur- poses even if neither foreign costs nor foreign prices can be obtained for making comparisons. If the domestic conversion costs are known, they at least indicate the maximum tariff duty. No one advocates that the tariff should amount to the total cost of the American product. Usually all that is asked is a tariff sufficient to equalize the difference with a fair margin. In the debate on the Tariff Act of 1913 Senator Kobert M. La Follette used the cost figures of the Taft Tariff Board on cotton cloths in this way.^i His most important table, given as an appendix to this volume," reproduces the domestic conversion cost on the 100 cotton fabrics investigated by the Tariff Board and compares them with duties in the Payne- Aldrich Tariff Act, in the bill then pending before the Senate, and in his proposed substitute bill. Sample No. 34, for example, was fancy white goods, 8.47 square yards to the pound, bleached. Its total American conver- sion cost per square yard was $0.0699, and the total English selling price per square yard, on which duty would be assessed if it were imported, was $0.1968. The Payne-Aldrich Act duty was specific, and on this fabric amounted to $0.11. The Senate bill proposed 30 per cent, ad valorem on this fabric, and at the price then Septembr'/^^^^^^^^ '^' ^';./'J^^ ^«^g- !«* ^^ss., oepiemoer y, iyi3, p. 4589 et seq. Cf. Tariff Board ^'P^ffni, ^442 ef.T'' ""• ''• '""'■ '"'• '"' ''* <^-S 2d lei ^mi^, 22 Appendix VI. 129 — I H 5? M Si; < Cm O CO K o <«} PQ "^ o <-i M O o O 13 8>udmjt44o}j 4.1UJ4S I " COMMERCIAL POLICY 8c>u!Udi[u[({ I «^ UCdBi" I '^^ BABl' C4 2uoy auojj I '-' EUiqo I ^ oo}a o^aoj I : ^ tlUKURJ I 1^ ojiqndda uijoiuiuioy | Bqno auuz iBUio I K[i)a2cJUj^V I XBoanaii I nja1 B '^ go s « < z • I— « •« B o •i^ ::: E — - a m n '^ o J3 B E ^ rt B a-^ - (Ti 6 s i: c O rt ___ ^ jS O '■*-> 1^ '*^ f!fi a o cj o O O o o ^ B ^ B S=; CQ S e3 sa o o ^ rt B = .5i 3 /is J- w H o o 2 w o a a bo E I- 1^ 1^ C4 O la ~c3 o ^ Cl IM N 1o B CS E a bo .S E « PQ ca 6 13 B s a S -2 S OI 174 § £ 3 a. M fa EXPORT TRADE Manufacturers' Association, the New England Shoe and Leather Association, and the National Implement and Vehicle Association. In a survey of non-governmental bodies for promoting our foreign trade the American chambers of commerce in various foreign commercial centers should not be overlooked. The foremost is that in Paris, which has been promoting American trade interests in France since 1894. Other American cham- bers of commerce in Europe include those of London, Naples, Milan, Amsterdam, Barcelona, and, before the war, Berlin, Brussels, and Constantinople. There are also American chambers of commerce in Buenos Aires, Rio de Janeiro, and Shanghai. There has been a rapid extension of American bank- ing interests in foreign countries during the last few years. The value of foreign banking institutions to a great trading and buying nation such as the United States is patent. At the end of the most exhaustive struggle in history, the United States^, as the great cred- itor nation of the world, will find still greater use for banks established abroad by American capital. The number .of branch banks abroad has been greatly in- creased, and there is under consideration the establish- ment of discount companies handling paper covering foreign-trade transactions somewhat similar to the well- known discount houses of London. The present distribu- tion of American banking institutions abroad is shown in the table on page 174. The figures indicate only branches, omitting sub-branches, of which there are sev- eral in some countries. The American Government itself, particularly through the Bureau of Foreign and Domestic Commerce, the Con- sular Service of the State Department, and the Foreign 175 COMMERCIAL POLICY Trade Adviser of the State Department have done effective work in promoting export trade. The Bu^-eau of Foreign and Domestic Commerce is the authorized Government agency for distributing all commercial in- formation collected by the Consular Service of the De- partment of State and by its own commercial attaches and trade commissioners. This information is dissemi- nated through a daily publication known as Commerce Reports, special monographs, and unpublished bulletins which are sent to those particularly interested. The * Bureau of Foreign and Domestic Commerce has district offices in New York, Chicago, Boston, St. Louis, San Francisco, Seattle, and New Orleans. The foreign investigations conducted by the Bureau have been of particular value to American manufacturers and exporters. The commercial-attache service of the Bureau was inaugurated in 1914. These attaches, at present located in London, Paris, The Hague, Copen- hagen, Rome, Madrid, Tokio, Peking, Buenos Aires, Rio de Janeiro, and Lima (and before the war at Berlin and Petrograd), are commercial advisers of the ambas- sadors and ministers and general promoters of the larger commercial interests of the United States. The Bureau IS making extensive plans for studying foreign markets in behalf of American manufacturers. On February 28, 1919, President Wilson approved the establishment of a central Foreign Trade Committee to be composed of representatives from each of those de- partments, commissions, and administrative boards of the Federal Government which in any way handle for- eign trade questions. The purpose of the Committee is to consider and make suggestions concerning foreign trade and commerce with a view to promoting full co- ordination of effort. 176 . •^ EXPORT TRADE The work of the Pan-American Union should also be mentioned in connection with trade promotion. Since its organization in 1907 it has done exceptionally good work in developing closer commercial relations between the United States and Latin America. Not the least among the ways in which the Government may promote the commerce of the United States is by the enactment of legislation permitting the establishment of free ports where required by the national needs. A free port or zone is an instrumentality of commerce and does not affect the established tariff policy of the country. The Tariff Commission says :^ A free zone may be defined as an isolated, inclosed, and policed area, in or adjacent to a port of entry, without resident population, furnished with the necessary facilities for lading and unlading, for supplying fuel and ship's stores, for storing goods and for reshipping them by land and water; an area within which goods may be landed, stored, mixed, blended, re- packed, manufactured, and reshipped without payment of duties and without the intervention of customs oflficials. It is subject equally with adjacent regions to all the laws relat- ing to public health, vessel inspection, postal service, labor conditions, immigration, and indeed everything except the customs. The purpose of the free zone is to encourage and expedite that part of a nation's foreign trade which its government wishes to free from the restrictions necessitated by customs duties. In other words, it aims to foster the dealing in foreign goods that are imported, not for domestic consumption, but for reexport to foreign markets, and for conditioning, or for combining with domestic products previous to export. While the dangers connected with unrestrained com- petition among nations should be recognized,^ the error 5 < ' Free Zones in Ports of the United States, ' ' Report of United States Tariff Commission to the Senate Committee on Commerce with reference to Senate Bill 4153, 62d Cong., 2d Sess. (1918). « Chapters XI and XII. 177 w COMMERCIAL POLICY of condemning international trade and its proiQotion should not be made. It may be that the system is wrong and that Governments, as has been suggested, should make buying and selling between nations a Government monopoly. In the absence of such drastic action, how- ever, It IS incumbent upon each nation to further its own interests in the rivalry for markets. Just as there are some ways by which export trade should not be pro- moted, there are some ways by which it should Un- less America has commercial interests abroad, her moral influence in the elimination of unfair practices and discrimination in international trade will be w.eak The American public asks that unfair methods be avoided in export trade, but it is willing that our export interests be pressed with the utmost vigor and promoted by every legitimate means. The extension of American export trade m manufactured good is not necessarily made at the expense of our foreign competitors. The consuming capacity of most of the importing countries will increase" With the normal growth of population and wealth in the older countries and the continued development of new countries like Argentina, Brazil, and the British self- governing dominions, the volume of international trade will grow steadily. Moreover, the probable increased purchasing power of the masses in countries such as China and India, where modern industrialism is sup- planting primitive methods, will doubtless be an im- portant factor in the world trade of the future. National and business interests run parallel up to a certain point. The policy of the Government fighting business is antiquated. Industry and trade are not things apart from our national life but an essential ele- ment of it. But in recognizing frankly the desirability of foreign trade and the necessity for organization in 178 EXPORT TRADE many lines, we must avoid the extreme of approving all that may be done in the guise of export organization. Our duty is not done when business men have been allowed to organize in order to meet on an equality their foreign competitors. The day of letting business alone or ignoring it is passed. Liberty in foreign trade is as much an anachronism as it is in domestic trade. We have removed the restraints of the Sherman law in export trade because they applied a wholly inconsistent and un- desirable rule in trade between nations. But that is only one side of the shield ; the other is strict regulation and control.'^ We have permitted our business men to organize not that they may exploit foreign peoples, not that they may make exorbitant profit, not that they may go forward and embroil this country in economic diffi- culties with other peoples, but that our resources and industrial development may continue along sound lines increasing the prosperity of the American people and assisting other nations in their upward progress toward material prosperity. 7 See Chapter XI. r (1 II # CHAPTER X BARGAINING TARIFFS TO PREVENT DISCRIMINATIONS Commercial treaty provision of the Tariff Act of 191? 7 ryZT^toe'r'^:^' duties - General and cfntn^iri't^^iff of Franop A w J ~ ^^fximum and minimum tariff system _ill''''^~¥''^^-^^''^^^<^-^^iion clause in commercial treaties Tariff discriminations for our purpose may be divided, broadly speaking, into three classes. The first are those that are not generally recognized as subjects for bargain- ing among nations. They include preferential tariffs or national reciprocity treaties or arrangements that are expressions of settled policies of peoples toward their colonies or toward other nations. Within this class fall among others, preferential tariffs between parts of the British Empire, the colonial tariffs of France, and the reciprocity policies of the United States under the Tariff Acts of 1890 and 1897. These discriminations rail n essentially international question and will be considered when the world aspects of commercial policy are dis- msscCi, The second class of tariff discriminations are concealed discriminations. Sometimes they exist in the adminis- tration of cu stomsj;eguIations or in the enforcement of 1 Chapters XIV-XVI. 180 BARGAINING TARIFFS inspection or sanitary laws. On ostensibly sanitary grounds, for example, Germany from 1883 to 1891 pro- hibited the importation of American hogs, pork, and sausages. In reality this action was taken to protect the German agrarian classes. After many efforts to remove this unjust discrimination against American pro- ducers Congress enacted a bargaining clause which was in part as follows (Sec. 5, Meat Inspection Act of August 30, 1890) : That whenever the President shall be satisfied that unjust discriminations are made by or under the authority of any foreign State against the importation to or sale in such foreign State of any product of the United States, he may direct that such products of such foreign States so discrim- inating against any product of the United States as he may deem proper shall be excluded from importation to the United States; and in such case he shall make proclamation of his direction in the premises, and therein name the time when such direction against importation shall take effect, and after such date the importation of the articles named in such procla- mation shall be unlawful. The President may at any time revoke, modify, terminate, or renew any such direction as, in his opinion, the public interest may require. Moreover, the Tariff Act of 1890 authorized the Presi- dent to impose penalty duties on certain products when imported from countries whose treatment of American products was not ** reciprocally equal and reasonable.'^ To forestall the application of these laws against her, Germany, in the Saratoga Convention of 1890,- agreed to remove the objectionable discriminations. Sometimes discriminations are concealed in tariff classifications v/here, under the guise of equality of treatment, tariff rates are made higher on the goods that are peculiarly the products of one country and lower on the peculiar ■ ■ — ■ I - III . ■ III..I. — ■ ■ ' 1 1. -I. — I. II .1 .1 — I.I- - — I ■ - I ^iii... I ,. „ ._. „„„ 2 Sen. Ex. Doc. 119, 52d Cong., 1st Sess., p. 110. 181 f COMMERCIAL POLICY goods of another. Germany's bargain-tariff schedules were arranged ingeniously in this respect so that in bargaining she need give only the minimum of conces- sions. The most conspicuous example of this specializa- tion is item No. 103 of her conventional tariff, which fixes a special rate on '4arge dappled mountain cattle or brown cattle, reared at a spot at least 300 metres above sea level, and which have at least one month's grazing each year at a spot at least 800 metres above sea level. ' ' Under this provision Alpine cattle from Switzer- land were admitted at a low rate of duty, whereas cattle irom Russia, The Netherlands, and France were required to pay a much higher rate. Concealed discriminations need not be intentional. There have been high tariff rates in the American tariff acts on lumber, for example, which in theory applied to all countries alike but which in practice affected only Canadian interests. The pro- hibitive tariffs on canned goods in certain South Ameri- can countries result, unintentionally perhaps, in a par- ticular hardship to the American canning industry. As will be pointed out later,^ concealed discrimina- tions should be a subject for investigation by an inter- national commission. Some of them are no doubt justi- fied on domestic grounds. All of them, nevertheless, should be given publicity by an impartial commission in order that the injured nation may take such action as seems wise, either by negotiation or retaliation, for the purpose of removing them. The third class of tariff discriminations are those open discriminations that may be removed by bargaining negotiations between the nations concerned. They are found in surtaxes or in national tariff systems containing discriminatory tariff rates adopted for the very purpose 3 See Chapter XVI. 182 I BARGAINING TARIFFS of providing a basis for bargaining with other nations for concessions. Such are the general and maximum tariff schedules of certain European countries. It is clearly the duty of a nation so to organize its own economic power as to be in a position to bargain for the removal of discriminations falling within the second and third classes. In some degree concealed discrimina- tions raise an international question, but in last analysis they and the discriminations of the third class must be removed by national action. The fear of penalties is one of the best means of removing them. A nation un- ready to bargain for equality of treatment is no more likely to get it than a trader is likely to succeed in barter if he has no goods to offer in return. The duty of a nation to protect itself in commercial matters cannot be escaped by attempting to turn over to an untried inter- national organization the work of removing tariff dis- criminations. International organization is desirable, but in seeking an international solution for tariff dis- criminations we should be slow to abandon such effective means of preventing discriminations as nations them- selves may employ. One method of enforcing equality of treatment is the use of penalty duties to be applied to those nations that refuse most-favored-nation treatment. Perhaps more important are the bargaining tariff sys- tems of European states. These systems, supplemented by the European interpretation of the most-favored- nation clause in commercial treaties, have been powerful factors in equalizing trade conditions and preventing trade wars. Either of these bargaining methods may be employed by the United States. The first, the penalty-duty method, can be adopted without a general revision ot 183 I COMMERCIAL POLICY the present tariff law* and without a modification of our traditional attitude toward the most-favored-nation clause in commercial treaties ; the second, the concession method, if adopted by the United States, will require a general revision of the tariff, and if all its benefits are desired, will require also the adoption of the European interpretation of the most-favored-nation clause. The adoption of penalty duties has the limitations of any method that relies on threats, either open or veiled, for the accomplishment of its end. But in the hands of skilful negotiators such duties need not be the source of international friction. Their use should be specific- ally limited to removing discriminations and enforcing equality of treatment. It should never be extended to obtaining special privileges. In the Tariff Act of 1909 Congress specifically aban- doned the special reciprocity methods followed under the Tariff Acts of 1890 and 1897,^ and adopted in Section 2 a penalty provision the purpose of which was to remove discriminations against American interests abroad. This section declared that the ''maximum tariff of the United States'' should consist of ''the dutiable list of Section 1 of this Act, and in addition thereto twenty-five per centum ad valorem.'' The President was then author- ized to extend by proclamation "the minimum tariff," i. e., the schedule rates, to the products of those coun- tries that were found not to "unduly discriminate against the United States or the products thereof" by imposing "terms or restrictions, either in the way of tariff rates or provisions, trade or other regulations, charges, exaction s, or in any other manner, directly or * Act of October 3, 1913. »See Chapter XIV, 184 BARGAINING TARIFFS indirectly, upon the importation into or the sale in such foreign country ' ' of any product of the United States or by paying an export bounty or by imposing an export duty or prohibition upon the exportation of any article to the United States. The purpose expressed in the section was to obtain "reciprocal and equivalent" treat- ment for the products of the United States. Although sound in principle, experience disclosed some defects in this bargaining provision. These were pointed out by Philander C. Knox, Secretary of State, in a letter dated December 13, 1911, addressed to Oscar W. Underwood, Chairman of the Committee on Ways and Means, and a draft of a bill avoiding these defects was submitted but never acted upon. The letter reads in part as follows :® In adjusting the tariff and trade relations of the United States with other nations under terms of the maximum and minimum tariff provided in Section 2 of the tariff law of August 5th, 1909, there were developed numerous instances of tariff and administrative discriminations against the products of the United States. Through the negotiations which fol- lowed the enactment of the law most of the flagrant instances of discrimination were removed or were equalized by com- pensations in tariff rates rendered by other countries in ex- change for the granting of tlie minimum tariff of this country. Some instances of discrimination could not be removed by negotiations and because of their minor character, when con- sidered in relation of the commerce thus involved to the entire commerce of the United States with the particular offending country and they were permitted to remain. The remarkable growth of this country's export trade in the last two years is of itself evidence of the enlarged markets obtained and equalized opportunity made possible by Section 2 of the tariff laws. Time has developed the desirability of seeking measures for ___^ - ■ ...1 ^ Her colonial empire included Togo- land, Kamerun, German South-West Africa, German East Africa, German N ew Guinea, Kiao-Chau, and c er- 10 From an address entitled ZielpunUe des Deutsclien Kolonial- wesens (Berlin, 1907). . x,^„f„ ^f Op+nhpr 1 11 The Caroline Islands were acquired by treaty of October i, 1899, and the German claim to a share of Samoa was recognized by treaty of November 14, 1899. 287 COMMERCIAL POLICY tain small islands in the South Pacific, in all just over a million square miles. The published tariff rates of German colonies show no preferences. German goods received no preferences in the colonies; colonial goods received no preferences in Germany. But the questions may be raised: Were there any concealed preferences, and if not, what motive led Germany to pursue an open-door policy ? Preferences may be concealed by arranging the free list in order to exempt from import duties articles pre- dominantly of German origin; by placing relatively lower duties on goods that are important in the com- merce between the colonies and the mother country ; by administrative regulations that, although apparently applying to all equally, favor German goods. Evidence relating to such practices is very difficult to obtain, but it seems safe to say that there is no proof that Germany ever closed the door in her colonies.^^ In the Congo Basin, which was defined to include German East Africa and part of the Kamerun, dis- criminations were prohibited by the Berlin Act of 1885. There was also a selfish motive for refraining from adopting preference. Germany was not in a Strong position in regard to colonial policy. Had she adopted preference, it might have led to retaliation by such colonial powers as Great Britain and France, and in that case Germany's loss would have been out of all propor- tion to the gain from preference, as her colonies were insignificant and undeveloped in comparison with the older and richer colonies of France and Great Britain. Italy, like Germany, did not begin to seek a colonial 12 Cf. however, German earlj policy in Kiao-Chau, Stanley K. Mornbeck, Contemporary Politics in the Far East (1916) d 29fi et seq. ^ /» i" •^^ 288 OPEN DOOR AND COLONIAL TARIFFS empire until the better parts of the earth's surface were preempted. The Italian colonies, Eritrea, Somaliland, and Libia (Tripoli), were acquired in the order named. The colony of Eritrea attained its present boundaries, approximately, by 1900. Somaliland includes the colony proper and to the north several protectorates. It was acquired in 1889 with the exception of the four chief ports of the southern part, which were leased in 1893 from the Sultan of Zanzibar and purchased in 1905. Libia was annexed by decree of November 5, 1911, al- though the treaty of peace with Turkey was not signed for almost a year and guerilla warfare continued even longer. The commercial importance of these colonies is insignificant. Exports are small, and the total trade of all three does not exceed 20 million dollars per annum. The tariffs of these Italian colonies are low. Certain preferences in favor of Italian products exist in the import schedules and in the export taxes of Somaliland, and colonial goods from Eritrea enjoy some preferences in the Italian market. For our purpose a few examples will suffice. Italian goods when entering Eritrea pay only a statistical tax of one per cent, as against eight to 15 per cent, paid by foreign goods. The imports of Italian cottons have greatly increased, whereas the im- ports of foreign cottons have declined. The same ten- dency is seen in cotton imports into Somaliland, where Italian goods also have the benefit of a preference. Cer- tain articles, particularly hides, when exported from Somaliland to Italy have a preference in the export taxes. There is a tendency to increase preferences, and they have begun to appear in the Libian tariff. France's colonial empire includes enormous areas and the utmost diversity of peoples. In Africa, where by 289 COMMERCIAL POLICY far the largest territory is controlled, it includes Tunis, Algeria, Morocco, large sections of west and Equatorial Africa, and Madagascar ; in Asia the chief possession is Indo-China; and in America and Oceania possessions are held, the most important of which is New Caledonia. French colonies may be classified for tariff discussion into assimilated, open-door, and special-regime colonies. Although there are some exceptions, those of the first group have the same tariff as the mother country, and with France they not only have free trade, but are assimilated into a common customs union. These colonies are Algeria, Indo-China, Tunis (in part), Mada- gascar, Reunion, Martinique, Guadeloupe, New Cale- donia, French Guiana, and Gaboon. In the second group, the open-door colonies, there are very low, or no, tariff duties. Generally, their goods pay the minimum rates when imported into France, but there are a few special preferences. These colonies are Morocco, French Somaliland, Dahomey, the Ivory Coast, French India, and Equatorial Africa outside of Gaboon; to these French tariff policy adds also the New Hebrides.^^ Those of the third group, the special-regime colonies, have special tariffs containing some preferences. They are West Africa (excluding Dahomey and the Ivory Coast), Oceania, and St. Pierre and Miquelon. The assimilated colonies are France's most important colonies. As they are in customs union with France and levy, therefore, the high duties of the French tariff on foreign goods, the discrimination in favor of French and French colonial products is 100 per cent. In the sipecial-reghne colonies the relative discrimination is equally great but the rates are lower. 13 The New Hebrides are under the condominium of France and Great Britain and are not technically a French colony. 290 1 OPEN DOOR AND COLONIAL TARIFFS In French markets the products of the assimilated colonies (except pepper and sugar) are given a prefer- ence of 100 per cent. On imports of certain articles from some of the open-door and special-re^me colonies pref- erences are allowed. Article IV of the Treaty of Paris, which in 1898 brought to a close the Spanish- American War, provides : The United States will, for the term of ten years from the date of the exchange of the ratifications of the present treaty, admit Spanish ships and merchandise to the ports of the Philippine Islands on the same terms as ships and merchandise of the United States. Connected with this Article occurs probably the first mention in American diplomatic correspondence of the words ' ' the open door. ' ' The protocol shows that the Spanish commissioners asked: Is the offer made by the United States to Spain to establish for a certain number of years similar conditions in the ports of the Archipelago for vessels and merchandise of both nations, an offer which is preceded by the assertion that the policy of the United States is to maintain an open door to the world's commerce, to be taken in the sense that the vessels and goods of other nations are to enjoy or can enjoy the same privilege which for a certain time is granted those of Spain while the United States do not change such policy? The American commissioners replied : The declaration that the policy of the United States in the Philippines will be that of an open door to the world's com- merce necessarily implies that the offer to place Spanish vessels and merchandise on the same footing as American is not in- tended to be exclusive. But, the offer to give Spain that privi- lege for a term of years, is intended to secure it to her for a certain period by special treaty stipulation whatever might be at any time the general policy of the United States. 291 I I COMMERCIAL POLICY Article IV of the Treaty of Paris was not included in the original proposal of the American commissioners, but was granted as a concession after a prolonged debate over the disposal of the islands. A revision of the Philippine tariff was undertaken almost immediately, and as soon as a draft was prepared, it was sent to the War Department and from there distributed among American exporters with requests that suggestions be made. These suggestions indicated means of classifying goods so as to provide a concealed discrimination for American goods.^* Many of these suggestions were accepted. Colonel Edwards, Chief of the Bureau of Insular Affairs, said of it:^'' ^* While no different duty in favor of American products is openly mentioned, the articles were so described in the tariff as to allow an advantage to American goods.'' The Ways and Means Committee in presenting a re- vision bill to Congress on February 13, 1905, said :^* The general purpose of the bill, as of the former Act, is to give the United States what benefits there are arising from classification of goods. There is no preference in rates given to goods coming from the United States for the reason that by the terms of the treaty of Paris Spain would have the right to a similar preference on goods imported from Spain to the Philippine Islands until January, 1909. Certain open preferences were also allowed on raw materials exported from the Philippines in which cer- tain manufacturing concerns of the United States were interested. Upon the production of evidence of con- sumption in the United States, the Philippine export tax on hemp was refunded, and on copra, sugar, and i*Sen. Doc. 171, 57th Cong., 1st Sess. 15 Washington Post, December 11, 1901. i« House Report 4600, 59th Cong., 3d Sess. 292 OPEN DOOR AND COLONIAL TARIFFS tobacco the import tax was decreased by the amount of the export tax. The United States Tariff Act of 1909 established free trade between the Philippines and the United States with a few exceptions (which were practically all omitted from the Tariff Act of 1913) ; that is, no import duties were to be assessed on domestic products of either the United States or the Philippines when entering the ports of the other. Thus Congress definitely abandoned the open-door policy. For some years prior to 1909 there had been a few preferences to such Philippine products as sugar. The Philippine Tariff Act of August 5, 1909, enacted by the United States Congress, contains the rates of duty that are to be levied on imports in the Philippines from countries other than the United States. The tendency of this Tariff Act, it is said, was to exclude foreign competition with American products in the Philippines, and the Act was, therefore, opposed bitterly by some classes in the Islands. The preceding brief review of colonial systems indi- cates a variety of attitudes toward the open door in tariff making. In the colonies of Great Britain, The Netherlands, and Germany, from various motives, no preferences were established in favor of the mother country, and colonial goods were accorded the same treat- ment as foreign goods in the markets of the mother country. Spain, Italy, France, and the United States have, on the other hand, pursued a policy of preferences, and have endeavored to direct trade to their own advan- tage by means of discriminatory rates. This should not be taken as a classification of * * saints and sinners. ' ' The adoption of the open door in tariff legislation is not necessarily evidence of a liberal position. Germany 293 COMMERCIAL POLICY adopted it at the same time that her Colonial Secretary, Dernburg, was saying that colonies are **an instrument of commercial policy. ' ' The open door has been a policy favorable to the world-wide trading interests of Great Britain, and in order to be in a position to urge it else- where, she necessarily had to adopt it in her dependent colonies. The Netherlands in spite of their open-door policy have managed by other means — for example, shipping — to retain the greatest share of the trade of their colonies. Nevertheless, the principle of the open door is the correct one, and the international conferences and the agreements that have proclaimed it are precedents for future action. The open-door principle is the antithesis of the policy that colonies exist for the exclusive bene- fit of the mother country. It recognizes the interests of outside nations and of the colony itself. Colonies should not be ''an instrument of commercial policy.'' Too frequently they are so regarded. The open door in im- port tariffs is desirable, but no more desirable than the open door in export tariffs, navigation, and investment. Nations that congratulate themselves on equality in tariff matters may, nevertheless, so bar and bolt the door in other fields that it makes little difference whether the door is opened or closed in the tariff schedules. Colonial monopoly can be maintained by navigation laws, by Government ownership and control of lands and com- panies, by exclusive trading concessions, and by restric- tions on investment. If there is one" thing that the war should end forever, it is colonial monopoly and the exploitation of outlying parts of the world by nations that control them politi- cally. The defeat of Germany and the breaking up of the Russian and Turkish Empires have greatly increased 294 OPEN DOOR AND COLONIAL TARIFFS the areas for which the Allied Powers will have to pro- vide administration. Central Africa, Asia Minor, Syria and Mesopotamia, and parts of the Russian Empire must not be permitted to become the exclusive trade and in- vestment preserves of any power. Colonies should be regarded, and are regarded by the most advanced nations, as trusts which they are called upon to adminis- ter. Preferences enjoyed by the trustee are inconsistent with the trusteeship. CHAPTER XVI PREFERENCES — AN INTERNATIONAL PROBLEM Economic effect of tariff preferences — Spirit in which the problem should be approached — Undesirableness of dis- criminatory treaties between nations — Of tariffs favoring the mother country in dependent colonies — Of British pref- erential tariffs — Necessity for international agreement — Concealed discriminations — Possible grounds for exception to the rule of equality of treatment — An International Tariff Commission proposed — Its powers and duties. *' Equality of trade conditions"^ can be achieved only by the removal of discriminatory economic barriers such as special reciprocity treaties, preferential arrangements, and tariffs that establish lower rates for the goods of colonies and the mother country than are paid by for- eign goods. Such discriminations obviously involve world interests; they are, therefore, subjects for inter- national discussion, and perhaps decision. No doubt their economic value to the favored nation and their material injury to the excluded nations have been ex- aggerated. Nevertheless, the nations discriminated against are aggrieved. Whether rightly or wrongly, they think they are injured. Suspicion arises. Re- taliation is planned and put into effect. Trade wars follow, and bitterness and hostility are engendered be- tween peoples. It can no longer be said that a special discriminatory treaty between two peoples is their con- cern alone. Nor can it be said that preferences between 1 President Wilson in his address to Congress on January 8, 1918, advocated, as the third of his 14 points, *'the removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all nations consenting to the peace and associating themselves for its maintenance.'' 296 « PREFERENCES a nation and its colonies are purely domestic problems. To take such a position is simply to refuse to face squarely one of the most fruitful sources of international friction. The disposal of the matter depends funda- mentally upon the spirit in which nations come together for the consideration of preferences. If the spirit is that of selfishly seeking to hold to every material ad- vantage that political power for the moment makes possible, no substantial progress will be made, and the world will settle back into the old fatal circle of dis- criminations, trade rivalries, hostility, and war. If, however, nations recognize that they are faced with the need for revolutionary action, if the spirit which guides is that of a willingness to give up something in the in- terests of world harmony and goodwill, we may hope for a gemiine solution of the perplexing problem of dis- criminatory barriers. Something should be said at the outset on the economic effect of preferential arrangements and special reciproc- ity treaties. Preferences may be, but are not neces- sarily, beneficial to the consumer ; they may be subsidies to the producer in the exporting country. The well known economic principle that prices are determined by the cost of the last portion of the supply of a commodity obtained is governing. Quantity and quality of the goods receiving the preferential treatment are also im- portant factors. Three possible cases may be distin- guished where the discrimination takes the form of the application of additional duties on the products of non- favored countries. When the commodities of a nation enjoying a prefer- ence in another country or in its colony would, because of their superiority in quality and price, dominate the 297 COMMERCIAL POLICY market even without the preference, the result of a higher, discriminatory tariff on goods of a third nation would be negligible; tariff rates on goods not enjoying the preference would be merely nominal, and the articles would sell to the consumer on the basis of the lower duties. Thus, American products that dominated the Philippine market without the preference sell there under the preference on the basis of free imports. It should be added that this would not happen unless there were free competition. If a combination controlled all of the products enjoying the preferences, it would be enabled to raise the price substantially by the amount of the preference, and the benefits of free competition would not accrue. In the case of those commodities enjoying preferential treatment that under equal treatment could not enter the market, but under a preference enter in amounts which are substantial but not sufficiently great entirely to displace non-favored imports, the higher discrimina- tory rates on the same commodity from other sources would operate as a full subsidy to the producers receiv- ing the preference at the expense of the consumer ; that is to say, prices would be determined by the imports of that portion of the commodity that paid the higher discriminatory rates. Thus in the case of goods im- ported into New Zealand, a portion of which come from the United States and a portion at lower rates of duty from Great Britain, the New Zealand consumer pays a higher price in consequence of the higher duties on the American imports, and the tariff preference measures the subsidy to the British producer on each of his products imported. Commodities enjoying a tariff preference that are dearer than similar products paying the higher discrim- 298 PREFERENCES inatory rates, and yet are able, by virtue of the tariff preference, entirely to displace them in the market, command a higher price in the favoring market than they would if imports from all countries paid the same tariff rates. In such a case, as, for example, British products imported into Canada under the preference which could not be imported profitably otherwise, the consumer loses without there being any corresponding increase in the public revenues. Here again, as in the second case, the increase in price to the consumer measures the subsidy to the favored producer. But in this case the amount of the subsidy would probably be somewhat less than the amount of the preference unless the favored producers were in close enough agreement to extort from the con- sumer the full benefit of the higher rates on the products of their non-favored competitors. In all of these cases it is true that whatever benefit accrues to the favored producer is at the expense of the consumer in the country granting the preference. "Where the preference takes the form of a reduction of duties on imports from a favored country instead of the application of additional duties to imports from non- favored countries, the method of operation and the effects of the preference are different in detail but similar in general results. Whereas under preference by addi- tional duties on non-favored imports, the subsidy to the favored producer is borne by the consumer, under pref- erence by reduced duties on favored imports the burden of the subsidy to the favored producer is borne by the treasury of the country granting the preference, in the form of reduced customs revenue. Not the least among the important problems with which the peoples of the nations are confronted are the 299 COMMERCIAL POLICY scope of the most-favored-nation clause in commercial treaties, the limitations upon the use of special reciproc- ity treaties and preferential tariffs within empires, and the use of customs unions. Probably the first question which will have to be faced in considering these policies will be whether or not they may be dealt with internation- ally at all. In spite of the fact that experience has in- sistently demonstrated the need for international treat- ment, some may take the position that special reciprocity treaties between nations and preferences within empires are no concern of third parties. Instead of applying further the principle of equality of treatment to the relations of nations, the adoption of an opposite policy has been suggested. In the resolutions of the Paris Economic Conference^ it was agreed to deny the Central European Powers most-favored-nation treatment for an indefinite period of years. Russia, France, and Italy have denounced their commercial treaties containing the unconditional form of the most-favored-nation clause. Before the war nations had come to recognize gener- ally the undesirability of special reciprocity treaties. Even the United States after its varied experience with them abandoned in 1909 the policy of bargaining for ex- clusive favors. The Brazil agreement survived more from inertia than from deliberate policy, and Cuba was a special case which will be considered later. In Europe special reciprocity treaties between nations were all but unknown. By means of a network of commercial treaties containing the unconditional form of the most- favored-nation clause, concessions made by one country to another were immediately and without negotiation extended to all other nations entitled to favored treat- ment. Nations learned from experience that the most 2 Appendix II. 300 PREFERENCES any one of them could expect in the long run was equal- ity of treatment. Special favors always led to retalia- tions which more than destroyed the advantages of the special concessions. European nations found it in line with the interests of each to adopt a general principle that would automatically maintain equality in their tariffs. Recognizing then the possibilities of the viola- tion of the spirit of the unconditional form and interpre- tation of the most-favored-nation clause,^ its general adoption by all nations is unquestionably the first step in the construction of a policy of equality of treatment among nations. Because a good rule is evaded is an argu- ment, not for its abandonment, but for its more rigid enforcement. Now that the United States is to take a more active part in the affairs of the world, and that too as a champion of the principle of equality, it cannot consistently retain the conditional form and interpreta- tion of the most-favored-nation clause. Nations before the war found it expedient to go still further in establishing equality of treatment. Great Britain, The Netherlands, and Germany extended it to their dependent colonies. At international conferences and in treaties the open door was agreed upon for large portions of the earth's surface, but usually for countries where no single nation had more than a shadowy claim to exclusive political control, or where the local govern- ment, although theoretically independent, was ineffective. As a post-war policy, would it not be feasible to extend the principle ? Great areas of Asia, Africa, the Pacific Islands, and America will have to continue indefinitely in a position of dependence upon the strong powers. The breaking up of the Russian and Turkish Empires 8 See Chapter X. 301 COMMERCIAL POLICY has added to this area. Asia Minor, Syria, and Meso- potamia must have some tutelage before they are ready to assume self-government. These dependent parts of the world should not be the exclusive preserves of any nation. Narrow colonial policies were too much a con- tributing cause of the war for the nations to permit them to continue. The development of the backward parts of the world economically and in self-government is a mat- ter of international concern. If international control of them does not prove feasible now, it should be made clear that the nation vested with political control of a dependent country is in the position of a trustee and is answerable to the League of Nations for the performance of its trust. From this it would follow that the mother country should have no preferential treatment in the tariffs of the colony or protectorate. As they are inter- national wards, the trade of the dependent parts of the world should be open equally to all. In any consideration of equality in tariff matters the preferential tariffs of the self-governing British do- minions cannot be passed over. These political divisions of the world — Canada, Australia, New Zealand, and the South African Union — are sui generis. Nothing like them exists anywhere else. They are not * * colonies ' ' in the old sense of that word. Except for a theoretical veto retained by Great Britain but now never exercised, they have complete domestic autonomy. They may enact any legislation they desire, including tariff laws that exclude British goods for the purpose of developing their home manufactures. On the other hand, they have not fully the status of ''nations.'' Their foreign affairs are in large part conducted from London, where their voices are having an increasing influence. They must adhere 302 ( PREFERENCES to the treaty obligations of Great Britain even if the terms of those treaties conflict with their domestic legis- lation. In spite of these limitations, however, the self- governing dominions of the British Empire have many of the characteristics of ''nations.'' Canada was al- ^ lowed practically a free hand in negotiating the reci- procity agreement with the UniteH States in 1911. The relation between Great Britain and the self-governing Dominions has been referred to* as the "Britannic alliance" and as "an alliance of free nations." In the Covenant of the League of Nations these Dominions are admitted as units with all the rights of independent nations. They cannot, it would seem, claim this position of equality with independent nations and still retain the right to discriminate against their copartners in the in- ternational organization. Argument from analogy can- not, it is true, alone decide the wisdom of the preferential tariffs of the British Empire. But comparisons sug- gest themselves. In their economic effect there is no difference between preferences granted by Canada and Australia to Great Britain and preferences granted by Brazil to the United States, and politically one may be as much a source of international ill-feeling as the other. Penalty duties levied by the United States against certain countries for the purpose of getting special favors are not wholly unlike the surtax which New Zealand levies on all foreign goods while granting to British goods the lower duties in the general tariff. From an international standpoint there is not a funda- mental difference between preferences established by self-governing parts of the British Empire and special reciprocity arrangements between nations. This argument, however, is not pressed as conclusive. 4 Reconstruction Programme of the British Labour Party. 303 COMMERCIAL POLICY It is intended merely to be suggestive. The real ques- tion is one of desirability. Is it wise for the British Empire to attempt to monopolize trade by means of preferential tariffs ? It is doubtful whether even from Great Britain's standpoint such a course is desirable. Arguments based on political and sentimental ties are not likely to be convincing with excluded peoples, and the resentment against the British Dominions because of their discriminatory tariffs will increase. From an international standpoint preferences between widely separated and different political divisions of an empire are as undesirable as reciprocity between nations, and if the British Empire should insist on preferential ar- rangements, it is hardly in a position to ask other nations to give up their discriminatory measures. The crucial question in considering tariff discrimina- tions is this: Shall unconditional most-favored-nation treatment be accepted as the principle to guide nations in their dealings with each other ? If the answer to this question is in the negative, it will be a recognition of the right of every nation to make such special or exclu- sive tariff arrangements as it can. If the answer is in the affirmative, as it should be, it would seem to be de- sirable that the self-governing dominions of the British Empire, which are ''nations" so far as fiscal policy is concerned and under the Covenant of the League of Nations should accept the responsibility of ''nations'' within the meaning of the unconditional form of the most-favored-nation clause. Out of the war should come a recognition of the prin- ciple that tariff discriminations are contrary to inter- national wellbeing. There should be an end to national narrowness. An attitude of justifying one nation's shortcomings by pointing to those of another should be 304 n s PREFERENCES ended. The subject of tariff discriminations should be approached from the standpoint of the world's welfare. The most that any one nation can expect to have is equal- ity of treatment. Preferences may profit for a time, but in the long rmi they are injurious to the parties im- mediately affected, and they are clearly objectionable from the standpoint of world commercial policy. Preferential tariff treatment should be a subject for general international agreement. No one nation is at fault, and none should be asked to act alone in the aban- donment of a discriminatory policy. The principle of the open door should be recognized as applicable to all dependent parts of the world, and the unconditional form and interpretation of the most-favored-nation clause should be accepted as binding on the British dominions as well as on nations. If then there are to be any exceptions to the general rule of equality of treat- ment, either by preferential tariffs or customs unions, these should be passed upon by an international con- ference. But we must not stop here. Machinery must be devised for making these principles effective. The principle of equality of treatment may be nullified, as it often has been, by open exceptions insisted upon by individual nations and by concealed discriminations. Concealed discriminations constitute one of the meth- ods by which the principle of equality of treatment may be made ineffective. Their existence has led some public men to despair of the general application of the princi- ples of the open door and unconditional most-favored- nation treatment. Critics have said with considerable justification that nations that carry out their inter- national obligations in good faith are at a disadvantage in competition with nations that do not hesitate to evade 305 mam COMMERCIAL POLICY the spirit while accepting the form of equality of treat- ment. Concealed discriminations, as has already to some extent been pointed out, may be found in tariff classifi- cations by means of which commodities that are pe- culiarly the product of one country are favored under an appearance of equality; by the undervaluation of home products sent to colonies; by discriminatory cus- toms and sanitary regulations; bj' unequal port and navigation rules; by the Government ownership of land and trading companies in colonies; by exclusive conces- sions to private corporations; and by the even more, subtle method of financial and political control. Faced with these conditions, some public men have proposed to abandon the equality-of-treatment principle and to attempt the use of retaliatory measures for the purpose of obtaining the removal of concealed discriminations. In clear cases such a step would no doubt be justified, but a general acceptance of such a principle would drive the world backward into the old vicious circle of trade rivalries, discriminations, and war. Much more desir- able is it for nations, recognizing the desirability of the equality-of-treatment principle, to devise means for mak- ing it effective by supplementing it with machinery that will ferret out and bring into the open objectionable and concealed discriminations. Publicity itself will remove many of them. To others may be applied penalty duties in case negotiations fail. The most controversial phase of the subject of equality of treatment relates to the exceptions that it is claimed are justified under it. Cases undoubtedly exist where geographical or political ties, or the two together, justify, even from an international standpoint, preferential ar- rangements or a customs union. Among these may be 306 PREFERENCES mentioned the United States, where the states are con- tiguous geographically and bound together by an indis- soluble political union ; the Zollverein established among the German States in 1834;^ and the customs union of the states of Australia. A customs union or preferential tariffs would also be justified among the states of Cen- tral America. If eastern and southeastern Europe is in the future broken up into small nations in order to satisfy the many national aspirations of those peoples, their vital interests may require the adoption of a com- mon commercial policy among them. Cuba and Hawaii are economically a part of the United States and are bound to this country by peculiar political ties. To refuse in their case a close economic union with the United States would be unjust to them. Even Algeria may perhaps reasonably claim inclusion in a customs union with France. Just where the limit to the estab- lishment of customs unions and preferential arrange- ments shall be placed depends upon what is desirable' from the standpoint of international goodwill. The interests of weak political units dependent upon others and the fundamental political and geographic relation- ships should be carefully weighed. It is reasonable to suggest, however, that mere political ties between politi- cal units widely separated is not alone sufficient to justify preferences. From the standpoint of world harmony, then, no justification can be found for pre^rences, for example, between the United States and the Philippines, between Great Britain and Australia, Italy and Eritrea, or France and Indo-China. It is one thing, however, to admit that exceptions are 5 It was gradually extended to include more German states and ■was completed in 1871. Hamburg and Bremen were added in October, 1888. 307 «! - '» |1 COMMERCIAL POLICY necessary and quite another to determine what the ex- ceptions are to be. If each nation is left to deter- mine independently what exceptions to the general rule should exist, the general treaty will put us little further ahead than we are today. Plausible grounds, geographic or political, can always be alleged for prefer- ence, and the exceptions will destroy the rule. Here, as in the case of concealed discriminations, we have a problem for international investigation and possible decision. The need for investigation and control with reference to concealed discriminations and possible exceptions to the equality-of-treatment principle makes highly de- sirable the establishment of an International Tariff Com- mission under the League of Nations. In the past, when bargaining between nations failed to remove discrimina- tions, or when negotiations resulted in no agreement as to the scope and interpretation of the most-favored- nation clause and as to exceptions to the rule of equality of treatment, there w^as a deadlock. The only recourse available was trade war, and this course, if pursued, usually failed. No organization existed that could act as an arbiter and that was interested in the international aspect of the problem. We have come to see that not only the nations directly involved, but every other nation, is interested in the amicable adjustment of trade difficulties. An International Tariff Commission, if it were merely a clearing house of information, would justify its existence. Certainly the world needs an organization that will take up differences when ordinary negotiations fail and that will be in a position to pro- pose a solution before these differences lead to hatred and hostility. 308 PREFERENCES An International Tariff Commission to do effective service need not at first have more than investigatory and advisory powers. It should publish authoritative texts of all the tariffs of the world in the important lan- guages of commerce, as is already done by the Inter- national Union for the Publication of Customs Tariffs at Brussels.* It should investigate concealed discriminat- ing tariffs and regulations, and in case its mediation failed to remove any discriminations found, it should be authorized to give them full publicity in order that they might be corrected either by penalty duties imposed by the countries discriminated against, or by joint inter- national action. It should investigate the operation of the most-favored-nation clause and assist in its interpre- tation and in carrying out its spirit as well as its letter. 6 The International Union for the Publication of Customs Tariffs was formed by a general international convention signed at Brussels on July 5, 1890. This convention, to which the United States and practically all other countries are partners, is binding for successive periods of seven years, but is subject to revision at any time. Any nation may withdraw by notice given 12 months before expiration of any seven-year period. The object of the Union is to publish at the common expense and as promptly and accurately as possible all customs tariffs of the various countries of the world, and any modifications thereto from time to time. To this end an International Bureau has been organized at Brussels, which is charged with the pulDlication of the International Customs Bulletin in the following five lan- guages: English, French, German, Italian, and Spanish. In order to facilitate prompt and accurate publication of the tariffs at the various countries, each contracting state agrees to send to the Bureau at Brussels two copies of its customs laws, tariffs, and any regulations, orders, or instructions concerning application of its tariff schedules, classification of goods, or other matters affecting the interpretation or execution of its tariff laws ; also copies of commercial treaties, international conventions or agreements, and domestic laws having a direct bearing on existing tariffs The annual budget of expenditures by the International Bureau is fixed by the convention at the maximum of 125,000 francs (about $25,000), actual expenses being shared by the various countries in stated proportions according to the amount of their commerce. 309 .4 COMMERCIAL POLICY It should study the economic effect of proposed excep- tions to the principle of equality of treatment and re- port whether or not they are warranted from an inter- national standpoint. These and similar questions open an ample field for the activities of an International Tariff Commission. Without such machinery the open- door principle and the unconditional most-favored- nation clause, even if written into the final treaties of peace, are in danger of being evaded and their spirit destroyed. An International Tariff Commission may be given another field of investigation which would contribute to fair tariff making throughout the world. It would not have, as has been said, any power over the minimum level of tariffs adopted by individual nations. But it may be given power to collect data on competitive con- ditions in each country and to publish comparative re- ports. A nation today seeking to levy a fair tariff^ finds it difficult to obtain foreign information. If com- parable data on prices, costs, and other conditions were collected by an International Commission, they might be used by individual nations in formulating such tariffs and such anti-dumping legislation as their domestic needs may require. In order to make such investiga- tion effective, each nation w^uld have to agree to permit the Commission to use the national authority to collect information from which figures for purposes of publica- tion might be deduced. 7 See Chapter VII. CHAPTER XVII FOREIGN INVESTMENT AND CONCESSIONS Foreign investments — Of Great Britain — Of France — Of Ger- many — Of the United States — Use of foreign investments in highly developed countries — Alien Property Custodian in the United States — German world-wide control of non- ferrous metals — German finance in Italy — Policy to be pur- sued — The alliance between export trade and foreign invest- ments — Methods making it effective — Need for inter- national regulation — Political significance of the exploita- tion of undeveloped regions — Exclusive concessions and the open door — The Congo — The British in the Caribbean — Conflicts between financial interests and weak Governments — British in Egypt — French in Morocco — Haiti and Domin- ican Eepublic — Italy in Tripoli — The Boer War — Political aims and finance — Kussia in Persia — The Bagdad Railway — Concessions in China — Manchuria — The Twenty-One De- mands — China in the world politics of the future — Neces- sity for international supervision — Failure of imperialism — Of the laissez-faire policy — Nature of international control. In all communities that have attained a fair degree of civilization some of the people are able to save something from' their income for permanent investment. If the community in which they live is growing and developing, if it is diversifying its industries, it is likely that oppor- tunity for profitable investment can easily be found at home. If, on the contrary, the community is already highly industrialized and public improvements well de- veloped, investments there will yield a relatively lower rate of interest than in less advanced parts of the world. Many investors, therefore, in Great Britain, France, Germany, Belgium, Switzerland, and The Netherlands, frequently, through large financial houses, have placed their savings in enterprises in foreign countries. The great majority of these investments are merely commer- 311 '* COMMERCIAL POLICY cial ventures with no political significance ; nevertheless, the world-wide interlocking of financial control and its use, particularly in countries with weak Governments, to further political ambitions are facts of first im- portance in world affairs. For very obvious reasons it is difdcult even to estimate the amount of capital invested in countries foreign to the investor. Estimates have been made by capitaliza- tion of incomes reported on income-tax returns as com- ing from abroad, by tabulating security issues, and by a study of exports, imports, interest, freight, and other factors in trade.^ Each of these methods has its defects, but estimates thus arrived at are at least suggestive of the significance of investments in world commercial policy. The Federal Trade Commission, following the investi- gations made by Sir George Paish, concluded that British investments outside the British Isles, that is, m the Dominions, the colonies, including India, and foreign countries, amounted at the outbreak of the war to not less than $17,500,000,000, and very probably to $20,- 000,000,000.2 A large percentage of these investments is in conservative ventures, such as railroads, municipal improvements, telegraphs, canals, port works, and banks. This conservatism is shown by a classification of the $100,000,000 worth of American stocks and bonds offered in 1916 as partial pledge for the war loan floated in this country. There were 360 different railway securities, 88 public-utility, 47 industrial and miscellaneous, and eight municipal. The railroads of the United States, 1 Federal Trade Commission, Cooperation in American Export Trade (1916), vol. i, p. 67. 2 Ibid., p. 71. 312 FOREIGN INVESTMENT in fact, were formerly dependent in a large degree upon British capital for their development To a much greater exLt this is still the case with the railway systems of Argentina. But the investors of Grea Britain by no means confine themselves to one form ot investment. British capital enters a variety of enter- prises all over the world. It is invested m mines, nitrate beds, oil wells, plantations, mortgages, and manuf actur- ing concerns. British investments in rubber p anta ions amount probably to $350,000,000, and in tea plantations to $150,000,000. Britain's influence as an investing country is further enhanced by the fact that her capital controls many enterprises in which a portion of the capi- tal is furnished by citizens of other nations. Next to Great Britain, France has long been the largest foreign investor. French holdings of foreign securities in 1910 have been placed at a minimum ot $8 000 000 000.^ This excludes French investments not represented by stocks and bonds. It is conservative to sav therefore, that the foreign investments of the French at the o^^^^^^^^ of the war were roughly $9,000,000,000. The French are very conservative investors, confining themselves primarily to Government and municipal issues which bear a fixed rate of interest. Their invest- ments are well distributed over the world, although the most important field by far has been Russia At the becrinning of the war they held approximately $1,75U,- 000,000 in Russian securities. Their capital, however was invested also in Egypt, Austria-Hungary, South America, Spain, Turkey and Italy. German foreign investments at the time of the out- break of the war were rapidly approaching the French in amount. They were estimated roughly at from 8 Ibid., p. 71. 313 COMMERCIAL POLICY $7,500,000,000 to $8,500,000,000.^ Germany 's influence in foreign investments was due, not so much to the volume of investments, as to the way in which they were used to advance German commercial and political interests. Her investments were widely distributed and in enter- prises more speculative than those sought by the British and the French. They were not infrequently made in remote places where, although the risks were greater, the opportunities of reward were larger. They were made deliberately with the object of building up trade and frequently had an industrial and political as well as a financial significance. A leading German authority says :^ In this connection it must be remen^bered what important political results have been brought about by the granting or refusing of loans to foreign States and to what extent the Home Government may use for political purposes its power of permitting or prohibiting the issue, official listing and pledging of foreign securities, especially at times when the foreign State, either because of the closing or overstocking of foreign markets, is confined to our exclusive assistance and when it is in our power to inflict great damage on it by our refusal or prohibition. The skirmishes of the political ad- vance posts are fought on financial ground, though the selection of the time and the enemy, as well as the manner in which these skirmishes are to be fought, depends upon those respon- sible for the direction of our foreign policy. Much more than ever before, we Germans will have to bear in mind that in- dustrial contracts, commercial enterprises, and capital invest- ments are conveying from one country to another not only capital and labor but also political influence. The Bagdad Railway w^as Germany *s most important single venture. A large amount of capital, however, 4 IMd., p. 72. 5 J. Riesser, Die Deutsche GrossbanTcen und ihre Konzentration (Jena, 1910), p. 401. 314 FOREIGN INVESTMENT was invested in electrical and chemical industries in foreign countries, in shipbuilding in Russia, in engineer- ing and electrical enterprises in Russia and South America, in iron mining in Scandinavia and Spain, and in gold in Siberia. The United States was a debtor nation before the war — was indeed the world's greatest borrower. It was estimated by Sir George Paish in 1910 that about $6,500,000,000 of foreign capital was invested in the United States, somewhat over half of it being British and most of the rest German, Dutch and French. Even at that time, however, Americans had invested about $2,000,000,000 abroad — $700,000,000 in Mexico, $500,- 000,000 in Canada, $350,000,000 in Europe, and smaller amounts in Cuba and Porto Rico, South America, China and Japan, the Philippines, and Central America.* Foreign loans were increasing rapidly. John Barrett estimated in 1913 that Americans had invested over $1,000,000,000 in Mexico, and the Canadian Manufac- facturers' Record estimates that American interests in Canada amounted to about that much at the beginning of 1917.^ In Mexico two-thirds of the investment is in mines. In Canada, before the war, it was in a variety of industrial enterprises, but since that time it has gone largely into Canadian securities. The Singer Sewing Machine Company and the International Harvester Com- pany are large exporters of capital to Europe. Other cases of American investments abroad have already been cited.® During the war large cash advances were made and credits established for the Allies which made the United « Charles F. Speare, North American Beview, July, 1909. T Manufacturers' Record, December 28, 1916. 8 See Chapter XI. 315 COMMERCIAL POLICY States a creditor nation. These advances and credits between April 24, 1917, and November 15, 1918, were:^ Country Belgium Cuba France Great Britain Greece Italy Liberia Bumania Eussia Serbia Total Credits Established (000 omitted) $192,520 15,000 2,445,000 3,945,000 15,790 1,210,000 5,000 6,667 325,000 12,000 $8,171,977 Cash Advances (000 omitted) $173,380 10,000 1,970,000 3,696,000 i,0ol,o66 187,730 10,605 $7,098,715 Other Charges against Credits (000 omitted) $200,000 15,790 5,666 $220,790 Balances under Established Credits (000 omitted) $19,140 5,000 275,000 249,000 159,666 5,000 1,667 137,270 1,395 $852,472 Foreign investments when made in a country with a strong government such as the United States are not ordinarily accompanied by any political or other ex- traneous complications. They are usually in stocks and bonds of public utilities or industrial corporations and are nothing more than financial ventures. In so far as this is the case, they are desirable. Many of our largest enterprises have been made possible largely through foreign capital. Foreign investments in the United States have not, as a general thing, been made with ulterior purposes. Individuals have simply sought to profit by the larger financial returns yielded by enter- prises in this country. Foreign capital, however, has been invested in vital commercial enterprises of even the most highly developed countries with the ulterior purpose of moulding busi- * » Annual Eeport of the Secretary of the Treasury, 1918, p. 36. 316 FOREIGN INVESTMENT ness or even political conditions or of gaining unfair trade advantages over competitors. In such cases, which, it is true, are not many, the investments become matters of national concern. The possibilities and" significance of building up influence with a foreign country through investments were scarcely thought of until the war dis- closed the extent to which German interests had insinu- ated themselves into the industrial life of the" United States and other Allied countries. After the United States declared war on Germany, Congress provided for the appointment of an Alien Property Custodian with power to take over and hold as trustee the property in the United States of *' enemies'* as defined by law.^« He took over ''enemy" property valued at over $800,000,000.^^ More significant than the amount, however, is the use to which some of these investments were put. The Alien Property Custodian states, for example, that German influence insinuated itself into certain American non-ferrous metal industries by the control of the principal metal and smelting com- panies in the United States, either by complete owner- ship of stock or such partial ownership as to give Ger- man interests substantial representation on the boards of directors. In fact, the German control of^ non- ferrous metals was world-wide. Speaking of it the British Board of Trade Journal says :^^ 10 The duties and powers of the Alien Property Custodian are prescribed in the Trading-with-the-Enemy Act, and Paragraphs XXIX to XXXIV, both inclusive, of the Executive Order under date of October 12, 1917, and in the Executive Order under date of October 29, 1917. For an account of the operations ot the AHen Property Custodian see, in this series, Louis E. Van Norman, War Time Control of Commerce. .^ ,, m, 11 A. Mitchell Palmer, * ' German Business our Indenmity, i he Nation's Business, February, 1919, p. 26. ^.^ -n ^2 Board of Trade Journal, October 31, 1918, p. 545. For an 317 COMMERCIAL POLICY FOREIGN INVESTMENT Before the War the world's market for non-ferrous metals was largely controlled by a group of German metal companies, engaged primarily in buying metals or in acting as selling agents for producers. These companies were closely connected by stock control, the inter-ownership of stock, interlocking directorates or joint syndicates, their relations being of such a nature as to lead to a common policy in respect to the pur- chase and sale of metals. The most important of these concerns was the Metallgesell- schaft, of Frankfort-on-Main, which combined with certain German metallurgical and financial interests to found in 1910 the Metallbank and Metallurgische Gesellschaft, of Frankfort- on-Main, with a capital of £2,000,000. This last-named organisation, either directly or through its constituent con- cerns, had by the outbreak of war established, or acquired, controlling financial interests in metal dealing, mining or working companies or chemical-metallurgical companies in Germany, Austria, the United Kingdom, France, Belgium, Switzerland, Holland, Spain, Australia, Africa, Mexico, and Italy. Distinct from the Metallgesellschaft group of companies, but closely associated with the same interests and with each other in various syndicates and combinations, were Beer Sond- heimer and Company, of Frankfort, with interests in com- panies in Germany, Austria, Italy, Belgium, France, and the United States ; and Aron Hirsch and Company, of Halberstadt, which also had subsidiary companies in various countries. As illustrations of the activities of the German group of associated undertakings there may be mentioned the Inter- national Lead Convention and the International Spelter Con- vention, both of which were formed by the Metallgesellschaft. The position of the German interests was so strong that they were able to force the smelters of these metals in other coun- tries into those conventions, which regulated the world's prices; and by controlling the market the German interests were able in some cases to restrict the development of the smelting of the metals elsewhere than in Germany. The position which the German companies occupied before account of this conirol as it affected the United States see, in this series, George Otis Smith, The Strategy of Minerals. 318 the War in respect of various metals had been attained in a variety of ways. In some cases there was actual ownership of, or participation in, mining companies ; in others there were long-period contracts for the purchase of the output of mines ; there were interests, frequently of a controlling nature, in re- fining and smelting companies; sole selling agencies of refined metals had been secured in some instances; and there were international price agreements, of the kind already referred to, into which producers and traders had been forced by the great competitive strength of the German groups. The infiuenee of the German metal organisations was very extensive in the case of zinc and lead (e. g., they controlled by long-period contracts the output of Australian zinc con- centrates, the raw material of spelter) ; and there are indica- tions that endeavors were being made at the time of the out- break of war to acquire a controlling influence over other metals, particularly copper and nickel. In her attempt to use financial control to further her own interest Germany invested not only her own capital, but that of other countries — often of the very countries which it was Germany's aim to dominate and exploit. The classic example of this is the case of the Banca Com- merciale Italiana, founded at Milan in 1894, by means of which Germany gained control of the electrical, ship- ping and many other important industries of Northern Italy, although the actual amount of German capital involved was, after the system had become perfected, very small.^^ The German policy of expansion resulted in the estab- lishment of industrial colonies in the heart of foreign countries, especially in such partially developed regions as South America, Australia, and the Far East. These colonies maintained a connection with the home country, and gave assistance to German aims. A subsidized merchant marine, a network of foreign branch banks, 13 See Ezio M. Gray, Guerra senza sangue, Florence, 1916. 319 I COMMERCIAL POLICY foreign branch factories, cartels which control the market, specialized tariffs and bargaining commercial treaties, lower prices and transportation rates for ex- ported articles — all these devices have been used effectively by the Germans. They have also been used by other nations, but they formed a larger part of the national policy of Germany than of any other country with the single exception of Japan. The dangers to the Allies incident to Germany's con- trol of economic activities in their respective countries were recognized early in the war, and drastic measures were determined upon by the Paris Economic Conference of June, 1916. It was there agreed that the Allies should prevent subjects of the Central Powers from exercising within their borders ** industries or professions which concern national defense or economic independence.^* As a war-time measure such a policy is justified, but it should have no place in a peace programme. Financial boycott is as inconsistent with permanent peace as trade boycott. In Great Britain the Secretary of State for the Colonies excluded foreign capital from investment in the rubber lands of the Federated Malay States. Speak- ing of this case, the British Committee on Commercial and Industrial Policy after the War stated that obstacles should not be placed in the way of foreign capital's as- sisting in developing the resources of the Empire.^^ Free investment of capital is desirable in all countries from a national and particularly from an international point of view. Publicity will serve as a check to unfair use of investments. A few exceptional cases of essential materials or products exist in which a nation may be justified in retaining complete financial control 1* Appendix II. 15 British Blue Book, Cd. 9035 (1918), p. 30. 320 FOREIGN INVESTMENT in its own hands. Such a ruling, however, should apply to all foreign capital, not to that of a particular country. The conclusion of the British Committee was as follows :^* As regards Alien interests in the sources of supply within the Empire we think that some Government control, which may take various forms according to the circumstances of each case, will be necessary in future in respect of a limited number of commodities of vital military importance. Apart from this limited class of cases we think that it would be unwise to aim at the exclusion of foreign (other than present enemy) capital from sharing in the development of the material resources of the Empire. More important than the national problem that may arise from the investment of alien capital in a **key'^ industry for ulterior purposes is the international prob- lem arising out of the close alliance existing between export trade and foreign investment. The export of capital, as is well known, has frequently been followed by the export of goods from the investing country. The interlocking of financial and industrial interests, not un- common in all the leading commercial nations, character- ized in particular the economic life of Germany. The German banks, such as the Deutsche Bank and the Dresdner Bank, were represented directly in the manage- ment of hundreds of industrial concerns. *' Shortly be- fore the present war the directors of the Dresdner Bank were on the boards of nearly 200 industrial companies. In 1910 the Deutsche Bank was represented on the boards of 116 German and foreign concerns, some of which are dominating factors in leading German and international cartels and combinations.''^^ This close relationship between finance and production resulted i« Ihid., p. 61. IT Federal Trade Commission, op. eit, vol. i, p. 62. 321 COMMERCIAL POLICY naturally in the use of investments in the promotion of German foreign trade. Nor was this practice confined to Germany. Large financial houses in other countries made their loans for the development of foreign enter- prises dependent upon the purchase of supplies and con- struction materials from industries in their own country. Mr. Hurley cites the case of the French banking house of Perrier and Company, which had ''made a loan of $10,000,000 to the State of Minas Geraes (Brazil), the fund to be loaned out in turn by the State to various municipalities for the perfection of municipal improve- ments, such as tramways and electric lighting plants. The contracts executed between the State as lender and the municipality as borrower stipulated that when other considerations were equal preference should be accorded by the municipality to French materials, and that in such purchases the municipalities should avail themselves of the mediation of the house of Perrier & Co. ' ''^ The rivalry of the financial interests of nations for in- vestments, loans, and concessions in foreign countries, particularly in undeveloped regions, has been keener because of the opportunities thus afforded to sell goods. Many factors contribute to make it probable that the country that finances a railroad, mines, oil fields, manu- facturing, tramways, electric power plants, and other municipal improvements in another country will also provide the constmction materials and supplies. Steel rails, machinery, electrical apparatus, and many other products are more often than not influenced in their sale by the investment of capital. The influence may be merely personal. A citizen of the investing country 18 Edward N. Hurley, '* Banking and Credit in Argentina, Brazil, Chile, and Peru,'' Bureau of Foreign and Domestic Com- merce, Special Agents Series, No. 90 (1914), p. 47. 322 i FOREIGN INVESTMENT usually becomes manager of private enterprises which are developed abroad, or if the capital is loaned to a Government in an undeveloped region, the engineer is frequently a man from the lending country. It is natural that he should favor with orders those firms that he has known in his home land. This personal factor, however, is not as important as others. In some cases contracts, similar to the one of Perrier and Company already mentioned, are insisted upon at the time the loan is granted, provided that all construction materials, machinery, and supplies be purchased from firms in the investing country. An even more decisive factor which results in trade following investments is the interlocking of financial, industrial, and transportation interests. A British director in an Argentina railway, for example, may be also a director or stockholder in a concern in Great Britain manufacturing steel rails. He is in a position to insist that the railway purchase from his com- pany. When the complex interrelationships which exist in world trading are recalled, it is not surprising that foreign investments have many times had determining in- fluences on trade. One or two statements by witnesses before the Federal Trade Commission may serve to make this concrete. In the Argentine, in particular, we have encountered serious difficulty in selling to the railroads, as these are largely con- trolled by British financial interests. Every possible prefer- ence is given to British materials — even though substantial economies may be possible by employing American construc- tion methods and materials. The consulting engineers in London receive a percentage on aU materials purchased on designs which they prepare or which may be prepared by the engineers of the railroad and are approved by them. Their antagonism toward everything American even led them in one case to adopt a very expensive and antiquated construction, 323 COMMERCIAL POLICY using local materials, rather than approve a design which we submitted and which would have effected a saving of upward of $100,000. Our design was approved and urgently recom- mended by the chief and assistant engineers in Buenos Aires, but their recommendations were promptly overruled by the consulting engineers and the directors in London.^' In several South American countries and in Mexico, English, German, and American investments in industrial plants, rail- roads, and public utilities, insure in a large measure orders for machinery and plant equipment being placed with the mer- chants or manufacturers of the country having the investment. For instance, the investment of Chicago capital in packing houses in Buenos Aires insures the installation of American machinery in these plants, while houses controlled by English capital are equipped with English machinery. In Chile, American mining interests buy American machinery, often at a higher price than similar machinery could be bought for in Europe. Our investments in Mexico, as much as our proxim- ity to that market, is the reason for our having the lion's share of the foreign trade of that country.^^ Governments, even, have used their control over finance to further trade of their citizens. Not long ago the French Government threatened to withdraw the listing privilege from Turkish State bonds unless certain con- tracts were awarded French industry.^^ The export of capital is a necessary and legitimate phase of the foreign activities of a modern commercial nation. The promoters of enterprises abroad will natur- ally be influenced for one reason or another to place many of their orders at home. Foreign investments, however, particularly those in undeveloped countries, may be used unfairly against competitors. The unfair practices and methods of competition already discussed" may be made 19 Federal Trade Commission, op. cit., vol. i, p. 74. 20 Ibid., p. 75. 21 J. Riesser, op. cit. 22 See Chapter XII. 324 FOREIGN INVESTMENT more effective because of financial strength. Com- petitors in a foreign market may be eliminated by 'Hying contracts" or ^^ full-line forcing." Financial power may enable a concern to bribe, entice away employees, and indulge in espionage. It may enable a concern to destroy a weak competitor by means of price cutting. In these and similar cases investments may be used un- fairly, and they should, therefore, come under the same system of international regulation already found de- sirable in other economic matters. Investments, loans, and concessions have a political as well as a commercial significance. They have played a large part in the diplomatic contests, international rival- ries, and wars which perplexed the world for almost half a century before the Great War and were unquestionably one of the leading causes of the epochal struggle. H. N. Brailsford estimates that the motives that led to the increase of British and German armaments may be ap- portioned thus:^^ 50 per cent, or less for the settlement of the question, Who shall exploit Morocco?; 25 per cent, or more for the privilege of building a railway to Bagdad and beyond it; 25 per cent, or more for the future eventualities which remain unsettled — the fate of the Portuguese Colonies in Africa, and the destinies of China. Speaking of this same problem G. Lowes-Dickinson, a responsible British scholar, says:^* So long as the exploitation of undeveloped countries is directed by companies having no object in view except divi- dends, so long as financiers prompt the policy of Governments, so long as military expeditions, leading up to annexations, are 23 H. N. Brailsford, The War of Steel and Gold, p. 247 2*G. Lowes Dickinson, The European Anarchy (1916), p. 132. .325 COMMERCIAL POLICY undertaken behind the back of the public for reasons that cannot be avowed, so long will the nations end by war where they have begun by theft. . . . To these statements may be added that of an American naval officer. He said:^'^ It is the great amount of unexploited raw material in terri- tories politically backward, and now imperfectly possessed by the nominal owners, which at the present moment constitutes the temptation and the impulse to war of the European states. The export of capital or the control of land through exclusive trading companies is one of the most ingenious ways of nullifying the open-door principle. Equality of treatment may be granted in import and export tariffs and still the right to exclusive trading may be established in favor of one country by the granting of concessions, by land control, or other restrictions. In the General Act of the Berlin Congress of 1885 it vs^as agreed that in the Basin of the Congo the trade of all nations should ''enjoy complete freedom." Discriminatory dues on vessels navigating the Congo and its affluents were also forbidden. The Congress, in fact, established the open door to all nations. But the Congo Free State decreed in 1885 that all * ' vacant lands ' ' 'were its property. As a result of the interpretation of this decree and the pro- mulgation of others, the Government assumed absolutely proprietary rights over almost the whole of the country. Rights to trade and concessions were granted to private trading companies, and the State itself entered into part- nerships with others for the purpose of exploiting the resources. The State exercised an absolute and exclu- sive ownership over virtually the whole of the land. It 25 Rear-Admiral A. T. Mahan, Armaments and Arbitration, p. 110. 326 FOREIGN INVESTMENT assumed the authority to dispose of all the products and prosecute any one who took any products from the land.^® With the exception of the villages, the whole country came to belong to the financial companies or to the Congo Free State.^^ The natives were forbidden to sell rubber and ivory to private factories and were compelled to bring specific amounts to the agents of the conces- sionaires on penalty of death.^® The charges against the Congo Free State were, first, those of inhuman conduct toward the natives, and second, that the methods employed to exploit the State lands and the exclusive grants to concessionaires nullified the open- door principle. It may be added here that the French in the part of the Congo which they controlled went to the length of excluding foreign houses, and a similar attempt was made on the Ivory Coast.^^ A more recent case of the proposed exclusion of for- eign capital from a colony comes from the Caribbean.^® The correspondent of the London Times, writing from Kingston, Jamaica, in 1917, spoke of the possibilities of the colonies of the Crown in the Caribbean Archipelago. He pointed out that they are rich in mineral deposits, the most of which have not been exploited. He then added that it should not be left to American capitalists and others to develop the gold, diamond, bauxite, and other resources of the magnificent colony of British 26 M. Vandervelde in Belgian House of Eepresentatives, Feb- ruary 20, 191C. The five-days Congo debate in the Belgian House is printed as Sen. Doc. 139, 59th Cong., 2d Sess. 27 From Eeport of Commission of Inquiry, quoted by M. Vander- velde. 28 E. D. Morel, King Leopold's Rule in Africa, pp. 36-44. A number of letters substantiating his charges are quoted by Mr. Morel. 29 J. W. Root, Colonial Tariffs, p. 286. 30 The London Times *' Trade Supplement,'* December, 1917. 327 COMMERCIAL POLICY Guiana. In speaking of this position he quoted an ad- dress by Sir Wilfrid Collet, the Governor of the Colony, in which he said: American capital is not wanted to develop the resources of Demerara; it is a British Colony; British capital should, there- fore, be used for the purpose. If it is a success, then British capitalists should get the benefit; if their efforts fail, then it will be British capital that is lost. At that time Americans were seeking to invest in baux- ite deposits. The correspondent states that the Secretary of State for the Colonies gave instructions that this in- dustry should be preserved' for the Crown and nothing should be done whereby foreign capitalists would be able to continue to exploit the deposits until after the war. Serious complications have arisen from the unregu- lated lending of capital to weak Governments or from the conflict between financial interests and weak local governments over the development of resources. The British Government was led to intervene in Egypt chiefly to protect its citizens who held Egyptian bonds.^^ French intervention in Morocco followed as a result of the unregulated lending by private French houses to that Government. The United States has intervened in Haiti and the Dominican Republic in order to adjust difficulties which have resulted from the unregulated ad- vancing of capital by European investors to irresponsible Governments. A further illustration of the connection between financial investment and political conquest is supplied by Italy's Tripolitan war. One of the leading factors causing this war was that a relatively unim- 31 H. N. Brailsford, op. cit., Chapter III. 328 FOREIGN INVESTMENT portant bank, the Banco de Roma, having begun invest- ing in Tripoli and then practically attempted to ''secure a mortgage on the province, ' ' found itself obstructed by Turkey in its attempt to get certain important conces- sions. It thereupon informed the Italian Government that if military aid was not granted, it would be forced to sell out to British and German financiers. The presi- dent of the Bank's Board of Directors was the brother of the Minister of Foreign Affairs. War followed and the Bank was granted the right of disposing of important war contracts. Since the war this fortunate institution has remained associated with the Government in the de- velopment of Italian interests in Tripoli.^^ Another war which might be cited as having grown out of the interests of foreign investors and concession- aires is the Boer War. David Lloyd-George, at that time far from being Premier, opposed the war as one that was waged in the interests of those owning gold and diamond mines in the Transvaal. The absence of any authority to distribute loans and concessions among the investing powers has led nations to employ diplomatic influence backed by their armies and navies to assist their financial interests in obtaining what they consider a fair share of opportunity in ex- ploiting the resources of the world. From this position it was not an unnatural step for aggressive nations to use^ the financial wedge as a device for advancing their political ends. Russia and Japan, for example, at the time of the Five-Power Loan to China in 1913 had no capital to invest in a purely commercial enterprise. They insist ed, however, for political reasons in sharing 32R^n6 Pinon, "L'Europe et la guerre Italo-Turque," Revue aes Deux Mondes, June 1, 1912. 329 m A ■ i COMMERCIAL POLICY in this Loan.^^ Political motives were also inseparably linked with Russia's activities in Persia and with Ger- many's plan to build the Bagdad Railway. Russia pressed southward in Persia in the hope of establishing a seaport on the Persian Gulf. Great Britain, in order to protect her communications to India, opposed this move- ment, and spheres of influence were agreed upon with a neutral zone between. In 1911 Russia and Germany entered into an agreement in which Germany recognized that Northern Persia was a Russian sphere of influence and that Russia could claim all the railway concessions granted by the Persian Government in that region. In support of Russian policy it was agreed that German capital would be provided to assist in the construction of a railway from Teheran to Kohanikin on the Turko-Per- sian frontier. It was to remain under the control of the Russian concessionaires. In return Russia recognized Germany's commercial interests in northern Persia and also recognized Germany's rights granted by concession in the Bagdad Railway and undertook to give diplomatic support to the completion of that enterprise.^* The German plan to build the Bagdad Railway, and the numerous concessions which accompanied it, was the key- stone of Germany's Near Eastern policy. It was the basis of her diplomacy at Constantinople for many years. Important as this enterprise was from a financial and trading standpoint, it was more conspicuously a case of the use of financial control to further the political ends of a nation. In China the so-called *' scramble for concessions" oc- curred during the years following the China-Japanese 33 Stanley K. Hornbeck, Contemporary Politics in the Far East, p. 395. 34 W. Morgan Shuster, The Strangling of Persia, pp. 254-57. 330 FOREIGN INVESTMENT war.3^ China's weakness had led to the impression that her partition was at hand. Concessions or non-alienation pledges were exacted from her by France, Great Britain, Russia, Germany, and Japan. France and Great Britain obtained concessions and privileges in the south of China. Russia after forcing Japan to give up the Liaotung Peninsula took it herself and obtained among other things the privilege to build railroads in Manchuria. A German fleet took possession of Kiao-Chau Bay in Shantung and established her sphere of influence there. Non-alienation pledges were secured by France for the Island of Hainan and the provinces bordering on the Tonking, by Great Britain for the Yangtse Valley, and by Japan for the Fukien Province. Among the Great Powers these were considered as establishing their prior claims in case China was partitioned, but China had no intention of alienating its land to any nation. Great Britain also exacted a lease to Wei-hai-Wei. The sordid story of finance and diplomacy in China cannot be told in detail here. Manchuria will serve as an illustration of the political consequences which have resulted. Russia had claimed the exclusive right to build railroads in Manchuria. When the Boxer uprising in 1899 ended the scramble for concessions, Russia occupied the prov- ince outright. In 1905 she was ejected by Japan, who succeeded to all the Russian concessionary privileges. Japanese influence has gradually extended itself through- out Manchuria and into Eastern Inner Mongolia. China was forced to agree not to build a line competing with the South Manchuria Railway Company, nor were for- eigners other than Japanese to enter into competition. British capitalists w ere prevented from building a Chapt'e^X^/''"^'* ^^^<^"s«^on see Stanley K. Hornbeck, op. ciL, 331 COMMERCIAL POLICY Hsinmintun-Fakumen extension of the North China line, and British, American, and Chinese capitalists from building a Chinese Government line from Chin Chou to Aigun. It is not likely that any line could be projected in South Manchuria that would not be deemed to com- pete with the South Manchuria Railway or its branches ; hence, the position of Japan is monopolistic. The con- trol of this railway has been placed in the hands of the Japanese Ministry of Communications, making it a Gov- ernment venture, and making its privileges the privileges of the Japanese Government. Among these privileges is the right to work the mines of the regions. In all South- eastern Manchuria the Japanese Government is the su- preme authority. The Chinese administration is re- tained, but a veto power is exercised by Japanese officials. When Secretary of State Knox suggested, in 1910, that the railways of Manchuria be neutralized, the Russian and Japanese Governments refused consent, the Foreign Minister of Japan declaring that numerous Japanese enterprises had been promoted in Manchuria in the be- lief that the railway would remain in Japanese hands and that it could not be given up. Probably the boldest attempt which has been made to impose the rule of one country on another is found in the 21 demands^^ made by Japan on China in 1915. If these demands had been acceded to as originally made, the result would have been the establishment of a Japanese protectorate over China." China was finally forced to accept some of them, which turned over to Japan German rights and privileges in the Shantung, extended Japanese rights in Manchuria and Eastern Inner Mongolia, secured for Japanese control of the iron 36 Quoted in Appendix III. 37 Stanley K. Hornbeck, op. cit, Chapter X. 332 ( FOREIGN INVESTMENT and steel mills at Hankow and mines in the surrounding region, and compelled China to agree not to cede or lease to any Power, bays, harbors, or islands along her coast. Since the outbreak of the war, Japan has loaned to China over $100,000,000,^^ * thereby, in the view of the Chinese, increasing its hold on the country. ' '^^ No region requires international supervision more than China. In that country even more than in Africa or the Near East the unregulated contest of financial in- terests backed by narrow national diplomacy threatens the future peace of the world. The statement of John Hay, true when he made it some twenty years ago, is more true today than ever: **The storm-centre of the world has gradually shifted to China. . . . Whoever understands that mighty Empire . . . economically . . . has a key to world-politics for the next five cen- turies. . . . The danger is great that China will be- come, through the jealousy and the indifference of the Western Powers, the most dangerous storm center in the world after the European peace is concluded. ''*° A con- sideration of the Chinese problem is imperative in the interests of world peace, for, as has been stated by a well-informed British champion of China :*^ **The politico-economic relationship between the Republic and the world must be remodelled at the earliest possible opportunity, every agreement which has been made since the treaties of 1860 being carefully and completely revised. ' * In considering the policy to be pursued toward invest- i» Millard's Eeview, August 10, 1918. 89 W. Reginald Wheeler (Hangchow College), China and the World War (1919), p. 161. *o F. W. Williams, The Nation (New York), November 22, 1917. *iB. L. Putnam-Weale, The Fight for the Bepuhlic of China (1917), p. 375. 333 COMMERCIAL POLICY FOREIGN INVESTMENT ments, loans and concessions, the distinction should be clearly drawn between those made in countries that are both politically and economically independent and those made in other countries. The former are amply able to protect themselves from the form of economic penetra- tion practiced by Germany before the war. The danger here, in fact, is that unnecessary restrictions will be placed in the way of the freedom of investment. On the other hand, a very different policy is desirable in unde- veloped regions where political control is weak. Here, if investments, loans, and concessions are regulated at all, it must be from without. The regime of anarchy and license which prevailed before the war must be replaced by strict international supervision. No one power should be permitted to close the door to the capital of all others, nor should nations permit an unregulated scramble to go on among their financial interests for privileges. But until some form of international regu- lation is adopted, it is almost inevitable that nations will use diplomacy and the threats of armaments to obtain for their citizens exclusive spheres of influence and that complications w^ill arise between investing countries and between them and weak peoples. Says a British writer of standing :*^ The problem is two-fold :— first, how to secure the reason- able rights of the inhabitants of such undeveloped countries against a policy of plunder, extinction of life, or servitude im- posed by the people of a powerful aggressive state; secondly, how to secure equal opportunities to the members of various advanced nations to participate in the work of developing the natural resources and the trade of the backward countries. The peace of the world is dependent upon both. *2 C. K. Hobson, chapter on ' ' The Open Door, * * in Towards a Lasting Settlement (1916), p. 105. 334 Pi Imperialism has failed to solve the problem. It has secured the rights of the investors but frequently at the expense of the borrowing peoples and the world. It looked upon economically backward countries as fields for exploitation. If it be permitted to continue to de- termine the relations of nations, we may expect frequent disputes in all parts of the world, fomenting of revolu- tions, interventions of Governments favoring the inter- ests of their citizens, the establishment of protectorates, and continued hostility among nations. The alternative to economic imperialism which has often been advocated is the policy of Icdssez faire. It is argued with some plausibility that if investors wish to invest their funds in foreign enterprises, they should take all the risks and submit themselves to the local regime. This policy, advocated by many anti-imperial- ists, is frequently insisted upon by the Governments of the undeveloped countries. The Mexican Constitution adopted in 1917, for example, provided that Mexico would grant the right to acquire ownership in lands, water, and other appurtenances, or concessions to de- velop mines, waters, and mineral fuel in the Republic of Mexico provided the foreigners *' agree before the De- partment of Foreign Affairs to be considered Mexicans in respect to such property, and accordingly not to in- voke the protection of their Governments in respect to the same, under penalty, in case of breach, of forfeiture to the Nation of property so acquired." The laissez-faire proposal leaves out of account the positive value of foreign investments to undeveloped regions and to the world as a whole. If a single nation, such as the United States, were to refuse support to financial interests abroad, it would only result in the elimination of its influence from the developing regions. 335 COMMERCIAL POLICY Our capitalists, if they still cared to invest, would merely transfer their capital to another country. Where there is no regulation, the rate of interest is high and the ex- ploitation which exists is normally prompted by the rists involved, which would be greater rather than less if protection were refused. If all industrial naticns adopted the policy of non-intervention, the struggle of financial interests would result in unfair exploitation of helpless races and in time would become an issue in world politics in spite of the home Governments. Foreign investments and concessions in undeveloped countries constitute a problem which can be adequately solved only by joint action among nations. No alterna*- tive exists that does justice to the interests affected and assures a lessening of causes of war. Supervision and regulation of international finance is essentially the task of an international commission functioning under the League of Nations. Such a commission would no doubt find it necessary to establish local commissions in the different regions of the world where the conditions re- quired it. Details must be worked out in practice. The recognition of the principle of international control is the important thing. In general, the work of such a commission would fall into two classes. In the first place, it would assist in the distribution of loans and con- cessions among nations that have surplus capital. Public- ity on loans and loan contracts would in itself have value. Perhaps provision should be made that weaker nations seeking loans should apply to it and then it would under- take the underwriting of the loans to all countries on equal terms. By establishing methods for equally dis- tributing loans and concessions, the temptation to bribe weak Governments and the necessity for diplomatic pres- sure would lessen, and the enterprises would become less 336 < FOREIGN INVESTMENT and less political and more and more, what they should be, merely commercial. In the second place, the commis- sion would have the duty of protecting the borrowing nation from exploitation and undue political pressure and of adjusting disputes between it and the lender. It should have power to fix the terms of loans and conces- sions. Its supervision, by creating security, would enable undeveloped nations to get capital on reasonable terms and at the same time make foreign investments safe for the investor. In case disputes arose between local gov- ernments and the foreign commercial interests, as, for example, when revolutionary changes in government are resorted to as a means of avoiding the payment of debts, appeal for support to the foreign office of the home Gov- ernment of the investors should not be permitted, but should be required to be made to the commission. Such a practice would tend to eliminate the use of investments as an excuse for intervention and political dominion. Some form of international control, whether that proposed or some other, is unquestionably the only avenue of escape from the political complications, rivalries, and struggles which have vexed and disturbed the world in the past and which, if met by no constructive solution, will lead to future wars. CHAPTER XVIII TOWARD WORLD DEMOCRACY Place of national governments in progress in the immediate future — National security, both military and economic — Political deniocracy often associated with commercial and financial im- perialism — Imperialistic nations cannot be formed into a successful democratic league — Eesponsibilities of democracies to undeveloped regions — Undesirable sort of ''league of nations'' — Holy Alliance — Triple Alliance — Triple En- tente — Mittel Europa — Paris Economic Conference — Shall the ''next war" be? — Arguments for a democratic league of nations — Causes of war — What the Great War has taught in cooperation — Failure of unrestricted competi- tion — Proposals for a league of nations — Sovereignty — Covenant of the League of Nations — International commis- sions — Their functions and relation to the League — The need of vision. New worlds do not just happen. The reconstruction of our national and international life requires construc- tive planning and positive action. In no field is this more true than in the complex economic relationships of nations. Any peace settlement that does not deal adequately with the economic questions that have played so large a part in the discussions of international politics during the last half century will not be worth its cost. The path toward world democracy lies through nationality. International organization cannot at the present stage of the world 's development take the place of national governments. It can simply supplement them. Upon the solid foundation of democratic nations we should rebuild social life as it has emerged from the war. A successful league of nations depends upon the 338 TOWARD WORLD DEMOCRACY recognition of the right of each nation to adopt such protective measures, whether military or economic, as will give it security and develop its resources. Nations exist as protectors of peoples and their civilization. Armaments are not to be cast aside merely by agree- ment; they are a vital part of national life, for they guarantee security. The Covenant of the League of Nations' provides only for the reduction of national armaments to the lowest point consistent with national safety and the enforcement by common action of inter- national obligations, having special regard to the geo- graphical situation and circumstances of each State. We do not think of the British fleet as separate from the British Empire. Nations cannot be asked to give up their means of defense until a league of democratic nations has developed to a point at which it can guar- antee security. And this cannot be accomplished in the twinkling of an eye. Decades were necessary to work out the idea of federation among the homogeneous states of the American Union. Gradually, very gradu- ally, were the states persuaded that their interests justi- fied the limitations of their activities. Not until after the Civil War could we feel reasonably sure that the Federal Government would not perish, and it took the Spanish- American War to bring out the full measure of national consciousness. In America we were first a union of states, then a union of peoples. In the Con- stitution the Federal Government was given power to declare war, to raise and support armies, and to pro- vide and maintain a navy. But the states reserved the right to arm. *'A well regulated militia,'' so the Sec- ond Amendment to the Constitution reads, ''being neces- sary to the security of a free state, the right of the people 1 Quoted in Appendix IX. 339 / COMMERCIAL POLICY to keep and bear arms shall not be infringed." This right to military defense reserved to each state in the Union ceased to seem important to American citizens only when the Federal military power became strong enough to insure ''the security of a free State." This reasoning applies with equal force to the economic problems of nations. Nations are entitled to that degree of industrial and commercial security that can be ob- tained without discrimination and imperialistic aggres- sion. What has been said in earlier chapters concerning American commercial policies applies with equal force to other nations. Protective measures may be used to establish or preserve essential industries. Nations with natural resources may develop them with tariffs; they may adopt measures to diversify their life and develop their productive powers. Anti-dumping legislation may be enacted; no nation need submit to price cutting by foreign industries that undermines the industrial fabric essential to its economic wellbeing. Nations may also use their economic power in such a way as to enforce equality of treatment for their citizens doing business abroad. These and similar measures that aim at the establishment of economic security and equality of treat- ment are not inconsistent with a league of free nations, but are, in many particulars, essential in preserving that body of democratic tradition from which a world organ- ization must draw its ideals. Protective tariffs have at times been used to advance the interests of a special class, but so also has free trade. Neither protection nor free trade is applicable to all conditions. A complete establishment of democracy in economic as well as politi- cal affairs may still depend for its security upon pro- tective tariffs, anti-dumping legislation, and bargaining tariffs. These measures may be necessary in molding 340 TOWARD WORLD DEMOCRACY social institutions and in preserving the social progress which a people has made. In preparing for a democratic world league, reform for each nation constituting it should begin at home. Even in political democracy nations are far from perfect. Some nations seeking admittance to the world league have no conception of democratic ideals ; others, and the most powerful (including the United States, Great Britain and her self-governing dominions, France and Italy), have, some more, some less, shaped their political institutions along democratic lines. But in industry, trade, and finance democratic ideas have made slow progress. Small groups with autocratic power still con- trol the economic and social activities of large numbers of human beings through the ownership or control of capital. The share of labor in the control of industry has been slight, but in that field democracy is making progress.^ In foreign trade and finance the power of small autocratic groups has been almost supreme, and Governments, democratic as well as autocratic, have lent their power to further this growing commercial and financial imperialism. Nationalism has been brought into disrepute because peoples, content with political control which never reached the evil, allowed the national power to be used to further the selfish interests of dynastic or commercial classes. Peoples should not be satisfied with having overthrown the autocracy of Ger- many. The same thing that made Germany dangerous is raising its head among the victorious allies and it is the great enemy of a world league. Imperialistic zCf. Reconstruction Programme of the British Labour Party. See also A. E. Zimmern, Nationality and Government (1918), p. 172 et seq. 341 COMMERCIAL POLICY nations, even if they hypocritically call themselves democracies, cannot be welded into a democratic league. The first task before nations then is to perfect within their own. borders the alliance between democracy and national economic aspirations. Democracies should see to it that neither their citizens nor their Governments pursue a policy toward other peoples that is contrary to democratic principles and that may embroil them in international difficulties. This requires that Governments be truly representative, and particularly that foreign relations be under the guidance of those who appreciate their responsibility for the ob- servance of democratic principles and the maintenance of democratic ideals. Publicity is essential. Secret agreements have been one of the chief devices employed by those who used the machinery of modern States in the interests of special groups. At the outset it should be agreed that ** there shall be no private international understandings of any kind, but diplomacy shall pro- ceed always frankly and in the public view.*'^ Agree- ments made in contravention of this democratic principle should be held not to be binding. The success of any league of nations will depend primarily upon the spirit in which individual nations carry out the covenants of the final peace. Discrimina- tions in trade, transportation, and tariffs and colonial monopolies are clearly undemocratic. But the accept- ance of the principle of equality of treatment, the open door, and international supervision will not be sufficient if commercial classes and Governments are permitted to devise ingenious ways for evading international obliga- tions. A democratic principle cannot be applied by 3 Cf. Article XVIII of the Covenant of the League of Nations, Appendix IX. 342 TOWARD WORLD DEMOCRACY an imperialistically-minded Government. Democracies must exercise constant control over the commercial activities of their citizens abroad and see to it that the spirit as well as the letter of their international cove- nants is adhered to. Such a policy should never be merely negative, de- structive, or restrictive ; it should be constructive. It should seek to further the interests of each nation m every way consistent with harmonious world relations. Each nation's goods and capital are entitled to share in the development of the backward countries. Trade and investment are reciprocally beneficial. In checking the abuses to which they incline, we should not make the greatest mistake of all — the mistake of seriously impair- ing these great affirmative forces making for material progress. Strong nations with democratic traditions that have built up through centuries their civilization have also an obligation to those parts of the world less advanced. The substitute for imperialism is not a laissez-faire policy. Letting backward peoples alone to work out their salvation with the not disinterested aid of private trading and financial interests results often in the grossest exploitation and social chaos. By such unheroic practice a nation may for a time escape international entanglements, but sooner or later the evil effects of the laissez-faire policy will draw it into conflict. Even if democratic nations did not have this selfish interest in checking tendencies outside their borders that ultimately may embroil them, they have a duty to prevent exploita- tion (forced labor, the traffic in liquor, the arming of natives,* for example) and to educat e backward peoples 4C/. Article XXIII, Covenant of the League of Nations, Appendix IX. 343 COMMEKCIAL POLICY in the principles of self-government. Democracies should not shirk this responsibility. The chief burden of this work cannot be carried at present by any inter- national organization. It must be borne by individual nations, holding their colonies and protectorates in trust and answerable to an international assemblage for the proper performance of their obligations.^ ^ Not every form of association among nations is de- sirable. Imperialism, which has appeared so objection- able m individual nations, has its own particular form of a 'league of nations'^ and the unsuspecting are likely to be led astray by its specious arguments. At the close of the war we heard it suggested: -We already have a league of nations. What more do we need? The nations who fought together in war now constitute a league for peace. ' ' An alliance, however, is not a league of nations. It is a group of nations which for the time being have a common interest, often an imperialistic interest, which they wish to maintain against outsiders. It implies the exclusion of some nations whose interests are antago- nistic. An imperialistic *' league of nations'' is worse than the imperialism of single nations. The famous Quadruple Alliance of 1815 and the so- called Holy Alliance which supplemented it were to the autocrats of that day a sort of league of nations for the purpose of maintaining the status quo. Great Britain was not a party to the Holy Alliance, although a party with Austria, Prussia, and Kussia to the Quadruple Alliance. Tsar Alexander I of Russia persuaded the autocrats of Prussia and Austria to join him in the Holy xkll! ^'"^^^^ application of this principle see iUd., A^e 344 TOWARD WORLD DEMOCRACY Alliance with the purpose both in domestic and foreign affairs * ' to take for their sole guide the precepts of that Holy Religion, namely, the precepts of Justice, Christian Charity, and Peace, which, far from being applicable only to private concerns, must have an immediate in- fluence on the councils of Princes, and guide all their steps, as being the only means of consolidating human institutions and remedying their imperfections." This ** piece of sublime mysticism and nonsense," as Lord Castlereagh called it, illustrates clearly the operation of alliances. When Canning became British Foreign Secre- tary in 1822, he took the first step toward withdrawing from the Quadruple Alliance and the ending of the Con- cert of Europe. He supported the revolting Spanish colonies in Latin America against the illiberal policy of Metternich, proudly declaring that he had ** called the New World into existence to redress the balance of the Old." At the same time the President of the United States set forth the famous Monroe Doctrine. The alliances that immediately preceded the Great War furnish further examples of this form of inter- national association. Particularly from the '90 's on to the outbreak of the war there were diplomatic struggles of greatest moment. Alliance was balanced against alliance with many efforts to tip the scale in favor of the hegemony of one group. Bismarck's Triple Alliance may be considered as the stai^ting point. As it spread its influence toward the east and as German influence supplanted that of other powers at Constantinople, France and Russia were drawn together and formed the Dual Alliance. In 1904 the Entente Cordiale was estab- lished between France and Great Britain and three years later Russia was added, making the Triple Entente. In 1911 the alliance between Great Britain and Japan, 345 ^ COMMERCIAL POLICY TOWARD WORLD DEMOCRACY originally entered into in 1902, was renewed. Such was the grouping of the powers in 1914 when Germany threw aside diplomacy and attempted to establish her world dominion by force of arms. As the war dragged on, there was a further extension of the alliance idea. The Triple Alliance after the with- drawal of Italy became the Quadruple Alliance by the addition of Bulgaria and Turkey, and this combination became the basis of the Prussian dream of Mittel Europa. This grouping of powers, if it had been permitted to remain and hold its captured territory and to weld itself into an economic unit by preferential customs duties, loans, control of trade routes, and all the other subtle means of economic penetration, would have been an alliance embodying all the worst features of combative nationalism. Its significance for the purposes of this discussion is that it shows the conditions to which alliances give rise. A similar development took place among the Allied Governments. In June, 1916, they adopted *'on grounds of necessary and legitimate defense" the famous resolutions of the Paris Economic Conference.* These resolutions proposed an economic war during an in- definite period, called the *' reconstruction '^ period, fol- lowing the Peace Conference. Most-favored-nation treatment was to be refused to the Central Powers, that is, they were to be discriminated against ; and since ex- perience has shown that discrimination is a sword that cuts both ways, compensatory outlets were to be given to any Ally whose commerce was injured. Added to this plan to restrict the markets of the Central Powers, the Allies proposed to deprive German industries of raw materials by conserving for themselves ** their natural ) y « Appendix II. fi 346 resources" and establishing ** special arrangements to facilitate the interchange of these resources. ' ' I'he com- merce of the *' enemy Powers" was to be submitted to *' special treatment," and their goods — let us not forget that this was to be after peace had been signed — were to be subjected ** either to prohibitions or to a special regime of an effective character. " * * Special conditions ' * were also to be imposed on Teuton ships — more *' navi- gation laws," it may be supposed. As if these restric- tions were not enough to remind us of the fiercest days of trade conflict in former centuries, it was proposed to revive the practice of excluding foreigners from all re- tail trade in the mediaeval town; the subjects of the Central Powers were to be prevented from exercising in the countries of the Allies ** industries or professions which concern national defense or economic . inde- pendence." This economic alliance was not, according to the reso- lutions, to be temporary. In the spirit of exclusive nationalism the Allies decided **to take the necessary steps without delay to render themselves independent of the enemy countries in so far as regards the raw ma- terials and manufactured articles essential to the normal development of their economic activities." This self- sufficiency was to be achieved by subsidies, enterprises controlled by Government, scientific and technical re- search, customs duties, and '* prohibitions of a tempo- rary or permanent character. ' ' The Paris resolutions proclaimed Germany a people with whom the Allies would have no dealings. Although the signing of some sort of peace was assumed, the resolutions proposed that after it there should remain an impassable economic gulf between the Allies and the ** enemy countries." But what kind of peace can that 347 Si COMMERCIAL POLICY be in which the ''allies'' are grouped in one economic camp and their ** enemies'' in another? In so far as the Paris resolutions proposed to use the economic power of the Allies as a supplement to military operations, they were highly commendable. They may also be justified as a card in the game of strategy — an effort to frighten the Central Powers with the use of the economic weapon. The pact came at a time when the hope for military success on the side of the Allies was all but gone. The economic weapon appeared to be the only one left in the Allied arsenal. The economic boycott will, it is true, be one of the devices used by the League of Nations against recalcitrant nations. Under the Covenant of the League of Nations the mem- bers undertake' to subject a nation committing an ''act of war ... to the severance of all trade or financial relations, the prohibition of all intercourse be- tween their nationals and the nationals of the covenant- breaking State, and the prevention of all financial, com- mercial, or personal intercourse between the nationals of the covenant-breaking State and the nationals of any other States, whether a member of the League or not." But such a policy of the League is fundamentally differ- ent from the exclusive combative proposals of the Paris resolutions. They, like the plan for Mittel Europa, are the last organized effort of the old system of alliances to save itself. They are militarism translated into com- mercial warfare. From this hasty sketch of alliances it should at least be clear that the sort of "league of nations" with which we ended the war — an alliance of the Allies — is not the kind the world wants. The same is true of the much advertised Anglo-Saxon Alliance. The nations that 7 Article XVI. 348 TOWARD WORLD DEMOCRACY won the war, or even the English-speaking peoples of the earth, have the power today to maintain the peace of the world for a hundred years. But at the end of the hun- dred years the world would be no nearer to inter- national cooperation than it is today. Such alliances would probably maintain the peace in their own in- terests, and even if they were considerate to others, they would always be under suspicion. Excluded peoples would have at least one thing in common — their opposi- tion to the alliance. Their common policy would be the battering down of its monopoly. Some power would perhaps find it to its interest to fall away from the alliance as Great Britain left the Quadruple Alliance. The difficulty is inherent in the nature of an alliance, and if nothing but an alliance results from the Great War, the old game of diplomacy, balancing of powers, and conflict will begin anew to prepare the world for the "next war.'' The arguments in behalf of the association of demo- cratic nations for the purpose of dealing with those problems that no one of them can solve alone are mani- fold. The woeful failure of alliances and the idea of the balance of power is one of them. An attempt to estab- lish a league of nations can hardly at worst end in any- thing more catastrophic than the war that began in 1914. Only a few of the other arguments can here be touched upon. Modern war has come to absorb all the energies of the warring nations. Inventions which are the pride of modem material progress have been turned into instru- ments of destruction. "There has been a change, an intensification, of the destructive processes of war which opens up a black alternative" to the possibilities of "human unification and world-unanimity" which the 349 a COMMERCIAL POLICY development of transportation, communication, produc- tion, and education make possible.® . . . The case as it is commonly stated in the propaganda literature for a League of Nations is a choice between, on the one hand, a general agreement on the part of mankind to organize a permanent peace, and on the other, a progressive development of the preparation for war and the means of con- ducting war which must ultimately eat up human freedom and all human effort, and, as the phrase goes, destroy civiliza- tion. ... What has happened is essentially this, that the natural limitations upon warfare which have existed hitherto appear to have broken down. Hitherto there has been a certain proportion between the utmost exertion of a nation at war and the rest of its activities. The art and methods of war have had a measurable relation to the resources of the com- munity as a whole, so that it has been possible for nations to be well armed by the standards of the time and yet to remain vigorous and healthy communities, and to wage successful wars without exhaustion. . . . . . . But the outbreak of that struggle [the war of 1914- 1918] forced upon the belligerents, in spite of the natural con- servatism of all professional soldiers, a rapid and logical utili- zation of the still largely neglected resources of mechanical and chemical science; they were compelled to take up every device that offered, however costly it might be; they could not resist the drive toward scientific war which they had themselves released. In warfare the law of the utmost immediate exertion rules; the combatant who does not put in all his possible energy is lost. In four brief years, therefore, Europe was compelled to develop a warfare monstrously out of proportion to any conceivable good which the completest victory could possibly achieve for either side. Here is stated by Mr. Wells and his associates the fundamental argument for the abolition of war. If there were no other argument, it alone should suffice to s H. G. Wells and others, ' ' The Idea of a League of Nations, ' ' Atlantic Monthly, January, 1919, p. 106. 350 TOWARD WORLD DEMOCRACY enlist the support of everyone. If man cannot devise social controls to keep up with the progress of invention and material civilization, he fails. In the present anarchy of international affairs mankind is to a large degree the victim of material forces which should be his most useful servants. To hold that many of the differences arising between nations can be settled only by wars is to admit the political and moral bankruptcy of western civilization. The problem of war must be attacked at its source. Causes of wars must be removed before disarmament can advance far. In Part III of this book some of the causes of international friction have been discussed. ihey present problems which nations acting alone or bargain- ing two by two, cannot solve. Such problems would exist even in a world where all the nations were de- mocratized. In domestic affairs we have long recog- nized that the judgment of an individual, a class or a locality is not always to be accepted when the nation s interest is at stake. In international affairs a similar situation confronts us. The individual nation is not always in a position to judge what will work for inter- national harmony and goodwill. Some form of inter- national control coextensive with international problems is necessary. It will require time to perfect a League of Nations, but this should be no excuse for not making a be.'inning in international government. We would never have had the American Union if in 1787 powers that no one state could adequately handle had not been delegated to the Federal Government. _ Out of the present chaos of national selfishness m in- ternational affairs must come a conscious international direction of the great forces of international trade and finance in the interests of a better and more peaceful 351 I COMMERCIAL POLICY world. Trade between nations must be made fairer by the elimination of unfair trade practices and transporta- tion discriminations. Such practices as export bounties, the imitation of trade-marks and designs, preferential shipping rates, and predatory price-cutting must go. The economic resources of the world must be developed not, however, in the selfish interests of classes in particu- lar nations that happen to control them, but in the inter- ests of social welfare throughout the world. It is of international concern that the resources of the world are made available on equal terms to all. The principle of the open door and of unconditional most-favored-nation treatment are an essential basis in solving the problems of tariff discriminations and colonial development. The wider problems of financial control, investments, and concessions are also international problems which need and must have the regulating influences of international machinery. The war has demonstrated that coooperation among nations is practicable. The unified control of the Allied armies was in itself a signal achievement. Co- operation in shipping and in commercial and financial matter^ was successful in the Allied Maritime Transport Council, the Allied Food Control, the Allied Credit Control, and in the various committees for handling raw materials.* The war in fact demonstrated not only that the world needs, but that it is practicable to have, regu- lating forces more effective than those of unrestricted competition. It has proved that the operation of so- called natural laws can be and should be controlled and directed by man-made organizations. Production can be energized and made to serve a social purpose. Raw materials and food can be distributed where they are » Cf. Chapter XIII. 352 TOWARD WORLD DEMOCRACY most needed. Finances can be controlled and shipping directed. Out of the ruins of the war must come a practical, definite step toward international control, which, as our experience extends and the democracies become better informed, should gradually develop into a comprehensive League of Nations directing the eco- nomic forces of the world in the interests of peace and order. In the United States the League to Enforce Peace has done excellent work in assisting the American public to think internationally. So also has the League of Free Nations Association. This association declares that the purpose of a League of Nations should be **to achieve for all peoples, great and small: (1) Security, the due protection of national existence; (2) equality of eco- nomic opportunity. ''^'^ The Association considers the following principles indispensable : A universal association of nations based upon the principle that the security of each shall rest upon the strength of the whole, pledged to uphold international arrangements giving equality of political right and economic opportunity, the association to be based upon a constitution democratic in character, possessing a central council or parliament as truly representative as possible of all the political parties in the constituent nations, open to any nation, and only such nation, whose Government is responsible to the people. The forma- tion of such an association should be an integral part of the settlement itself and its problems, and not distinct therefrom. It should prohibit the formation of minor leagues or special covenants, or special economic combinations, boycotts, or ex- clusions. Differences between members should be submitted to its judicial bodies. Its administrative machinery should be built up from the inter-Allied bodies already in existence, expanded into international bodies differentiated in function 10 The Nation (New York), November 30, 1918, p. 650. 353 COMMERCIAL POLICY TOWARD WORLD DEMOCRACY and democratized in constitution. The effective sanction of the association should not be alone the combined military power of the whole used as an instrument of repression, but such use of the world-wide control of economic resources as would make it more advantageous for a state to become and remain a member of the association and to cooperate with it, than to challenge it. Sir Frederick Pollock, the eminent authority on legal matters, does not think a league of nations an undue infringement upon the independence of nations. He .11 says: It seems that when we are discussing the derogation from the rights of an independent State which must or may be inci- dent to joining a League of Nations, it will be better to avoid sovereignty as an ambiguous and disputed term, and speak only of independence; better still if we can bear in mind that the question is not of words, but to what extent the parties to a League of Nations must undertake to fetter their dis- cretion in exercising the rights allowed to independent States by accepted usage, and whether in these necessary restraints there is anything unreasonable or excessive, having regard to the importance of the end to be attained. • • • Thus there seems to be nothing amounting to denial of inde- pendence in the obligations that members of a League of Nations would have to undertake (a) Not to make war without the sanction of the League; (b) To take measures, by breaking off diplomatic rela- tions, economic pressure, or active warfare, against any State violating the foregoing rule, or any State external to the League attacking a member of it; (c) To reduce its armaments as part of a general scheme, or to submit the future production of warlike material to the control of some common authority. No international league will spring into existence full- 11* 'Sovereignty and the League of Nations,'' Fortnightly Ee- view, December, 1918, p. 813. 354 fledged. A plan too ambitious for the present time will destroy itself. Nations may not immediately yield up that degree of sovereignty that the more pretentious plans for a League of Nations call for. Years of educa- tion and experimentation are probably ahead of the world before the tradition, the sanction, and the inter- national will come into being that are necessary to make a comprehensive world state a success. The immediate problem is to determine the steps that now should be taken toward international government, for real progress depends on knowing how much the world will accept at the present stage of its development. President Wilson, as Chairman of the Commission on the League of Nations, submitted on February 14, 1919, at the plenary session of the Peace Conference a pro- posed Covenant of the League of Nations. Subsequently changes were made and the revised Covenant^^ was re- submitted on April 28, 1919. The action of the League is to be effected through the instrumentality of an As- sembly, and of a Council with a permanent Secretariat. Except where otherwise expressly provided in the Cove- nant, decisions at any meeting of the Assembly or of the Council require the agreement of all the members of the League represented at the meeting. The principle of disarmament is recognized. The members of the League undertake to respect and preserve, as against external aggression, the territorial integrity and politi- cal independence of all members of the League. Any war or threat of war is declared a matter of concern to the whole League. Provision is made for the hearing of justiciable disputes before a court of arbitration and 12 See Appendix IX for full text of the revised Covenant of the League of Nations. 355 COMMERCIAL POLICY non- justiciable disputes before the Council or the As- sembly. The covenants of the League are to be pro- tected by joint economic or military action by the mem- bers, which may be put in force not only against mem- bers of the League but against outside nations that re- fuse to accept the obligations of League membership for the purpose of any dispute to which they may be a party. The effective performance of the League's functions will require under its permanent Secretariat a series of bureaus or commissions.^^ Under the control of the League are to be placed *'all international bureaus al- ready established by general treaties if the parties to such treaties consent'' and **all commissions for the regulation of matters of international interest hereafter constituted" (Article XXIV). Not the least of the tasks of the League of Nations will be the adjustment of disputes between nations in matters of commerce, trade, raw materials, tariffs, and finance. Many of these will not be of sufficient importance at the time to warrant a formal hearing before the Council or a court of arbitration, and yet, if left unadjusted, they may become serious controversies. In such matters ad- visory international commissions may do effective ser- vice by investigation, conference, and publicity. The work of Federal commissions in the United States in adjusting disputes arising between American citizens in interstate commerce and even between states furnishes ample precedents to justify similar commissions in inter- national affairs. The United States Tariff Commission illustrates the purely advisory body.^* The Interstate 13 Such as those discussed in Chapters XII, XIIT, XVI, and XVII. 14 Appendix IV. 356 TOWARD WORLD DEMOCRACY Commerce Commission, the Federal Trade Commission," the United States Shipping Board, and the Federal Re- serve Board (banking) have in addition certain admin- istrative or quasi-judicial powers. Experience of these interstate commissions has shown that many disputes can be adjusted and discriminations and other unfair prac- tices removed merely by publicity or by bringmg the in- terested parties together before an impartial tribunal. Long, expensive court proceedings have frequently been rendered unnecessary, whereas they would have been inevitable if the parties had insisted strictly on their legal rights. In like manner international commissions may be constituted to assist in adjusting economic differences which often arise between citizens of different nations. At the time of the establishment of commissions to deal with the economic problems that arise between nations, principles, in the form of substantive law, should be laid down for their guidance. Discrimina- tions in trade and commerce and unfair practices in con- trolling raw materials, marketing and transporting goods should be declared contrary to international law. Nations should accept the principles of unconditional most-favored-nation treatment and of the open door, and before any exceptions to equality of treatment are sanc- tioned, the nations immediately concerned should sub- mit to an international investigation to determine whether or not the proposed exceptions are economically justifiable. Equality of treatment should be applied not only to markets, transportation, and access to raw materials, but to the distribution of investments, loans, and concessions in economically backward countries. Under the Covenant of the League it is provided (Article XXIII) that through the Leagu e provision IS Appendix X. ' 357 COMMERCIAL POLICY shall be made *'to secure and maintain freedom of communication and of transit and equitable treatment for the commerce of all members of the League.'* This is the acceptance of the principle of equality, but it re- quires amplification in further treaties. In fact, some- thing in the nature of an international code for the regulation of the economic relationships of nations is highly desirable. It will not be sufficient, however, to lay down certain general principles to regulate the relations of nations without establishing machinery for interpreting the principles and applying them to particular cases. This should be the work of the proposed international com- missions. If nations are left to dispute over the in- terpretation of general principles, progress will be slow. Commissions should exist that will view the problems from the standpoint of the world's interest. They will be constantly called upon to determine, among other things, whether a given trade practice is unfair, whether discriminations are being made in transportation, whether raw materials are being unfairly controlled, whether the most-favored-nation clause is being properly interpreted, whether a given tariff practice is a dis- crimination, whether a nation is being improperly ex- cluded from financial opportunities in backward coun- tries, or whether the people in undeveloped regions are being unfairly exploited. In a general way these commissions, discussed in some detail in earlier chapters, would have two functions. They would administer such rules, perhaps in the nature of a code, governing the economic relationships of nations as were adopted in treaties. Such rules will require constant construction and application to par- ticular cases. In this respect these commissions would 358 TOWARD WORLD DEMOCRACY have semi-judicial powers as have certain of the inter- state commissions of the United States. Unhampered by the strict rules of legal procedure, they would be able to act more quickly and effectively than a court, and in the majority of cases, as the experience of the American Federal commissions has demonstrated, the mere bring- ing of the parties together and an open consideration of the facts will solve most difficulties without formal pro- cedure. Provisions should be made for appeal when desired to the international court established by the League. Again the Federal commissions of the United States provide a precedent. Appeals may be taken from the orders of the Federal Trade Commission to the United States Circuit Court of Appeals^^ or the Com- mission, in case its orders are not obeyed, may enforce them by filing a petition in that court. Appeals from the international commissions to the international court would provide added protection and assure the consecu- tive development of international law as it affects eco- nomic relationships. The second function of these commissions, although more general, is nevertheless important. They should have wide powers of investigation and publicity relating not only to such matters as are covered by rules laid down in treaties but also to all economic questions arising between nations. Secrecy and misinformation have con- tributed largely to illwill among peoples. The publish- ing of the facts by an international commission would tend to correct many tendencies which lead to serious controversies. Nations should find a sense of security in the fact that there are international commissions con- sidering the larger economic problems of the world in the light of harmony and peace. i« Federal Trade Commission Act, Section 5. See Appendix X. 359 i COMMERCIAL POLICY In the world out of which the Great War sprang as inevitably as sparks fly upward, a nation aggrieved by . shipping, trade, or financial discriminations had only the alternative before it of submitting or retaliating. If it submitted, it nursed its grievance into suspicion and hatred; if it retaliated, the world witnessed a commer- cial war which increased ill-feeling. The need was great, and now after the war is even greater, for inter- national commissions under the League of Nations that will investigate and offer a solution of these commercial rivalries before they result in conflict. One of the dangers that may beset the League of Nations is that it may become a device for maintaining a status quo — for preventing the economic and national development of a growing people. If the necessity for change is not recognized, a League may maintain the peace for a few decades, but it will ultimately fail. Change is inevitable, and there are ample opportunities for economic development in the world to satisfy the needs of any democratic people. Not the least of the provisions of the constitution of the League, then, is the provision (Article XIX) for the reconsideration by the members of the League of treaties that have be- come inapplicable and of international conditions the continuance of which may endanger the peace of the world. This provision qualifies the rigor of Article X, which, if read alone, might be construed as an effort to maintain existing conditions for all time. The Covenant of the League of Nations is a decided step toward world democracy. Sceptics may doubt its practicability but they must admit the future dark if we are to return to the unregulated haphazard international order of the pre-war period. And it may succeed. The security of nations requires that it shall. It provides 360 TOWARD WORLD DEMOCRACY the means of solving problems with which no nation can adequately deal alone and which, if left unsolved, may destroy nations and the civilization they seek to defend. '* Where there is no vision, the people perish.'' I APPENDICES AMERICAN MANUFACTURING INDUSTRIES M o ^ M S t— 1 t; Q :z; w Pk p PL, ^ -^ <5 Jz; < o 1-^ « » S -< o OS p a 5z; o o O O (4 o P • « tD»H»OCO l^iOiOi-t 1,557 4,683 0,879 3,760 ^0(MC5 Value added by- manu- facture C0-N01 W (X)r}< W'-' (Nr-lOC«3 tOOO'-' OOiOMOO 05l>«0' '(ttCOOOO OOOO'^ 1-11-4 rHi-(i-t lONMt^ 05 00CD«* i0 05,-i0 T)<(NCOO0 CCOOC^ o ^ »o o T-l05TtlO ■^t>.l>-t>- **H CD Tt<005 05 l>diOC3t^ (Tit- (MOO t>- t-- i-i o "a m m 't-(Ni-tO I^CJSr-l-a' .oo»o XiOt>'(^> M< o ccco 05 O IC rH "oS 05ooco QCrfi-HO 05 CO • ■-« OQOiO lO •«j<005 0» O00t}' r-Oicoo T-(O0T}1Ttt oot>-»c# d t^TttCOCl i-Htf; f-iO CO-^b-CO (NiOC0»O o (NOONOO C*i-5t^n'CO Ot)<0(N iCiOCO-CO COOCCt^ WiOO(X) «O^C0i-t OOCOC^ o'ir5 00(N OT-<-. l^<©lOTt< fiH ,-«,_«,-) 1-IIH M i: l-^l-fOTj* r^-^t^t- lOC0 cc on OJO5(30i-< r-(CO IC''** 0(N ■<*<'** i-li35CO« Numb of establi ment t-Tjii-iiO COCOOOIN 05t-00 1>.(Nt}<0 »O00(OI> 03iOiC<-t MrHhTbT t>.b.^^ r* M<05-r» •**05 c ^ « thOOO i-iOOcr5 i-HOCOi r-<0 0(35 ,« S « 05(35 05 00 C5> »-(l— 1 1— ll-i ?— t T— 1 r-t 1— t 1-t 1— 1 t-ItH l-H T-l i-H i—c b 6 (1 s. u (U ■** a 03 fii M f-^ aa •f4 •t S U c -ij o "2 e Z^ 00 a . "73 t) j3 tf (D S o ceo C««o2(N lO (N •«♦• ■-« CCCON-i W5CCOC0 OOt'.i.'iCO icoO'-'Oi (N 00:0 00 1-I05«f -^ t*iO*C0 l-H t>.Tf CO »Ot>.MO •^OOthO OiNOOOi Tf 35 rW C0 3i'-'0-- •C lO M O OCTXNCO (N-*^(N t^ 1^000 r-Oicec rH l-ti-H Mr-"-! Jftcooeo CCOOvCOS eor^Mco 1-1 00 (NO »0 0J««0 t^- woo-"** 753 669, 480 396 00»00'-< •^oocoOi Clf-ii-l OS'-'CO'^ QC-OCOiO OCQ>0(© 00. lO'-'coQ ©«oe5 •^o^t>. ©■^loeo oioo—^ cDiN'no •^C^COiO «OiOMO CS^OOtl* ^. ■^lOOPO coiNt>-r' .1-HtDO »-io?oo W^MOO eooosao (Nt>-Q0 ■^r>»oo CO eo«oo CO O"^ "O <-< COC<»-n-i 03CO«0?0 IN 0> CO OS 10 iC •-• ?D oooso «0-00 »0.-o COCOCJiO<-- Tt< O "-O oc f. O C^l c» CO 000 c- t»t>.0»0 iNOJOSCK ■^fOS^CS ^O'^OS ^CS-*03 M'O-^CS ■^S^^ •-lOOCS '--OOOJ 1-iOOOS i-iOOOl r-tOOC oscsooc OSC3CSCO 000300 osc-csx osososc/: I 3 a es s V s . ^ 3 c ^ 6 « 3"- -s •g a ca M fl 5 ••«* .a j: & V. 9 1 Leathe prod 1 a; s J55 AMERICAN MANUFACTURING INDUSTRIES Oi 00 >|6« i u •o|i onoJ{) >o o 00 3C6 •S5 o « 3 > ft OO'fi'-'CO N-*00'-< ^OS ©•'i iCh-00>O r^'ii'cooo eocooar-t 00 "O CO OS to CO 00'^ CO 00 IN 00 0»rf.coeo»^ MC> m ta i-i ft Nt^OOO COC0-*»O i-tt-i-icO ^H CO OS t^ 0 OS CO IN 00 ^t,COTj< COcOCll>» OoeoiN OOCOiNiO CD'OM'^ c«t^cor- lococ^e* W^eON 00 CO coo t-( -H co>r^ ■»*<■«*• COM b- CO OS CO CO OS CO CO t~r>-0'-i 00 CO CO 15 CO 00 (N 00 Wi-ii-i »*-(Na> t<-eO'4-trt C« OS coo O*-* COrfi-^OO OiCOSiO 10 O CO t- 00 CO CO OS t^OSINb. t-OcO-«*« OOt'.OSIN h-rt<»rtCO OOOIN b-.»-(NC2 >C>Jb-cO OS! 000^ lO COO 1-1 i-IOOi-tij* CO 1.0 OS o lOOS-^O C4i-4i^i-l cor-coi-- 00 O ifl C0C4Ni-t 00r-4»C»H C^iOiNCO OOC0t-» (NOOOiO COOOO rJtcDQOi-J COt-b-CO 0". lOCO Tjt(Nl-l^ NOS © 03 i 0 OaOOlN •«ii •* 000 ■xJtOSiO'N OS 10 —< CO »OTl«TjtCO I iz; s t--00COrl< COCOO'H i-lC^b-OS OS C^ 00 30 Vnot^c^ <^>=os2! SJ3S3i2 2'-Si5S2 ^l,f-it>-iO ot~-ooo osooooos osooco 1-1 O O Q CO O^ en OJ 1-I30INO OSX)>00 O O (N ■'I* 1-1 '-0 tN ■<*< JifOO'-* 000«0«0 CO»OOil< OSOOb* «i- rJ •^Ci-^a* ^^-tc^ rtOOO* 1-iOOOS '-'OOOS OSOSOSOO OSOSOSOO OSOS3saO J •a c eS o 3 « o o a OQ ^2 ft.tS tt)2 « n >-i 3 3 08 a « u d •§ « ft o ja ID .SJ ft u -2 o hi Pi OB 9 •T3 fl o a d 0) u •o^ dnojO OS e made to this method on the ground that it is unscientific, but for the purpose of this discussion it is likely to be more accurate than the computation of the total English cost from the prices of raw wool. The English top-making conversion costs are computed from the statistics of the Tariff Board, and by subtracting them from the total English cost the cost of the wool in 1 pound of top is determined. The compensa- tory duty in cents under each of the bills is computed by multiplying the figures in column 4 by the ad valorem rat€ imposed by the respective bills upon raw wool. The English price is then multiplied by the ad valorem rate fixed by each bill on tops, and from the result is subtracted the correspond- 398 r 1 , TARIFF BOARD AND WOOL LEGISLATION ing compensatory duties. This gives the net amount of pro- tectioi under each bill and is to be compared ^v^th the d ffer- ence ia conversion costs between this country and England, as determined by the Tariff Board (column 11). If tie prices used in Table 5 had been for a low-pnce year, the net protection given by each of the bills would havQ been less thm sho^^m. This is, from the point of view of protection, one of the unavoidable disadvantages of ad valorem duties. A given ad valorem rate may be protective when prices are at one leTcl and not protective when they are at another In tie La Follette, Underwood, and Compromise bills, where the duLy on tops was a flat ad valorem, rate, it was possible to compute the net protection separately from the compensatory duty In studying the Penrose and Hill bills, where the duty on the tops was a specific and a compound duty, respectively, a different method must be followed. Table 6 is a comparison of the total protection and compensation given on tops by the Penrose and Hill bills with the total protection and compensa- tion required according to the Tariff Board. Table 6 — The Duties on Tops in the Penrose and Hill Bills * Compared with the Tariff Board Costs Quality of tops 32s. 36s, 403 50s 648 803 Price in England (1911) Per pound $0,261 .269 .274 .360 .533 .593 Duty under Penrose bill Duty under Hill bill Protec- tion and compen- sation needed per Tariff Board ^ Duty under Penrose bill Duty under Hill bill Per pound $0.28 .28 .28 .28 .28 .28 Per pound $0.2131 .2135 .2137 .2180 .2267 .2298 Per pound $0.2449 .2524 .2557 .2563 .2603 .2656 Per cent 107.28 104.09 102.19 77.78 52.53 47.22 Per cent 81.65 79.37 77.99 60.56 42.53 38.75 Protec- tion and compen- sation needed Per cent 93.83 93.83 93.32 71.19 48.83 44.79 1 $0,215 plus difference in conversion cost. The Penrose bill levies a flat specific rate of 28 cents on tops, and the rate under the Hill bill is 20 cents per pound and 5 per cent ad valorem. From these rates the duty m cents per pound is arrived at. In computing the total protection and compensation required according to the Tariff Board, 1» cents is adopted as the duty on the clean content of wool, and, 399 Iri \ COMMERCIAL POLICY TARIFF BOARD AND WOOL LEGISLATION making allowance for waste, 21^,4 cents was taken as a fair compensatory duty; that is, the duty which must be assessed in order simply to compensate the domestic top maler for the rise in the price of his raw material due to the 18-cent duty on raw wool. To this compensatory duty was adied the diHerence in conversion cost between here and abroad as set forth in column 11 of Table 5. The last three colimns in Table 6 are the preceding three expressed in percentages. One of the noticeable features of the percentages in Table 6 is the fact that the tops of low quality receive or require a larger duty than the tops of a higher quality. Such a difficulty arises inevitably from a flat specific compensatory duty. In theory, if the rate of duty on raw wool is the same on all grades of wool, the compensatory duty on the manufactured product should be the same on all qualities. In practice, how- ever, a flat specific compensatory duty bears more heavily on the lower than on the higher qualities of product, and it re- sults in a higher ad valorem equivalent on the lower qualities. Apparently, the practical thing to do is to grade the com- pensatory duties in order to retain, from the point of view of protection, the advantages of specific duties and still eliminate the excessive duties on the lower qualities. On the basis of the premises of this article, then, what is a fair rate on tops ? Table 5 shows that 40 per cent ad valorem is adequate, in most cases, if the duty on raw wool is 35 per cent ad valorem, but a somewhat higher rate is defensible, as will be observed from Table 6. A decline in price would, of course, make the calculations of this table useless. From the standpoint of protection, if the duty on raw wool is specific, the duty on tops should also be specific. The conversion cost of tops is, as compared with the material cost, relatively small and their price is affected directly by the price of raw wool. For the protectionist the most desirable method for levying the duty on tops would seem to be a carefully graded specific duty. If this be conceded and if the duty on raw wool be 18 cents on the clean pound, a duty of 26 or 27 cents per pound of tops of 60s quality, graded both up and down, would undoubtedly be a fair duty — granted, of course, the premises on which the calculations have been made. 400 \ Worsted Yakns Tie conversion costs of converting tops into worsted yarns in tie United States, as found in the report of the Tariff Boaid, are summarized in Table 7. Table 7. — Conversion Cost Per Pound op Producing Worsted Yarns from Tops in the United States 21 Ply and Count of Yam 2/28 2/32 2/36 2/38 2/40 2/42 2/44 2/46 2/48 2/60 Conversion Cost per Pound $0.1262 0.1448 0.1648 0.1749 0.1798 0.1847 0.2055 0.2267 0.2335 0.3181 After discussing the American costs and comparing them with English costs, the Tariff Board sums up the relative com- petitive positions of the two countries in the following words : In view of the fact that the figures as given for the United States have been put at what may be considered a low figure when compared with the large number of. mills from which figures were received, it may be said that, making due allowance for variations on account of quality, etc., the actual manufacturing cost in the United States for turning tops into yarn is about twice what it is in England.22 The conversion cost of converting tops into yarns in Eng- land, then, may be taken as substantially one-half the costs presented in Table 7. The costs here discussed include those of drawing, spinning, twisting, and spooling, and do not include those of sorting, carding, and combing, which were considered under the cost of making tops. It is necessary, therefore, in order to de- termine the cost of converting raw wool into worsted yarns, to add to the costs of converting tops into yarn the costs of combing. This has been done in making the subsequent tables on yarns. To one who analyzes carefully the figures of these tables it will be evident that the cost of combing alone, not zilhid.y p. 649. 22jbid., p. 650. / 401 '! P COMMERCIAL POLICY the cost of top making, has been added to the cost of convert- ing tops into yarn ; that is, the 50 per cent added to the cost of combing in computing the cost of top making is not here added in computing the total conversion cost of yam. The reason for this is the fact that some of the costs incidental to a combing establishment are absent where combing is msrely one department of a spinning mill. In Table 8 the net protection on worsted yams given hj the La Follette, Underwood, and Compromise bills is computed and compared with the findings of the Tariff Board. TABLt 8. — The Net Protection Given to Worsted Yarns by THE La Follette, Underwood, and Compromise Bills AND Compared with the Findings of the Tariff Board Count of yarn 2/32S 2/363 2/403 2/483 2/609 2/808 Price of yarn in England (July 27, 1911) Total cost of yarn $0.4157 .4714 .5120 .7097 .8111 1.1761 $0.3695 .4191 .4511 .6308 .7210 1.0454 4 5 Conver- sion cost Cost of in Eng- wool in land from 1 pound wool of yarn to yarn $0.0973 $0.2722 .1136 .30.55 .1238 .3313 .1512 .4796 .1968 .5242 .2724 .7730 6 La Follette bill: Com- pensatory duty (35 per cent)i $0.0953 .1069 .1160 .1679 .1835 .2706 1 7 8 9 10 11 12 Under- Com- Protection Protection Protection wood bill: promise given by given by given by Protection Count of Com- bilhConi- La Under- Com- needed pensatory jicnsatory Follette wood promise according yam duty duty bill bill bill to Tariff (20 per (29 per (45 per (30 per cenlj* (35 per Board cent)i cent)i cent)* cent)* 2/32s.... $0.0544 $0.0789 $0.0918 $0.0703 $0.0666 $0.0923 2/36a.... .0611 .0886 .1052 .0803 .0764 .1074 2/40S.... .0663 .0961 .1144 .0873 .0831 .1170 2/48S. . . . .0959 .1391 .1515 .1170 .1093 .1443 2/60S. . . . .1048 .1520 .1815 . 1385 .1319 .1893 2/808. . . . . l.">46 .2242 .2586 .1982 .1874 .2620 * Total duty on raw wool. * To tal duty ou yarn. In Table 8 the total cost of the yarn is computed in sub- stantially the same way as it was computed in the case of 402 / TARIFF BOARD AND WOOL LEGISLATION tops (Table 5); that is, an allowance of 121/2 per cent to co«r distribut on expenses and profit was taken from the pil ' From the total cost was subtracted the English con- vem;n cost in order to determine the cost of wool m 1 pound of yarn (column 5) . Column 5 is then multiplied by the rates on^aw wool in the respective bills in order to determine the amount of yarn duty needed for compensation. Colmnns 9, ITZl 11 are the rates on yarn in the respective bills times th; price and less the compensatory duty. The result gives the let protection furnished by each bill and should be compar d with the protection needed according to the findings of the Tariff Board (column 12). .. „ *„ ti,„ Tariff The protection on yarns needed accordmg to the Taritt Board in Table 8 is a minimum. The net proteet.on given by even the La Follette bill falls in most cases slightly under the protection required. It may be fairly said tb^* 45 per cent on the basis of 35 per cent on raw wool is not, accordmjT to he Tariff Board. Lfflcient protection. The f act f °ula ^ noted, also, that a decline in the price of yarns would, under ad valorem duties, reduce the net protection given. Table 9 presents the total protection and compensation given T^.„.„ o Tnr Total Duties on -Woksted Taens ckder the ^''pENe7sE AND HILL BILLS COMPAEEI, WITH THE FlNMNGS OP the Tariff Board Count of yarn Price of yarn in England July 27, 1911 Duty under Penrose bill 2/323. 2/36S. 2/40S. 2/4SS. 2/603. 2/803. $0.4157 .4714 .5120 .7097 .8111 1.1761 Duty under Hill bill Per pound $0,390 .400 .410 .442 .490 .570 $0.2774 .2857 .3174 .3569 .4178 .5090 Protec- tion and com- pensation needed according to Tariff Board on basis of 18-cent wooH Duty under Penrose bUl Duty under Hill bill Per pound Per pound $0.3223 .3374 .3470 .3743 .4193 .4920 93.82 84.85 80.08 62.28 60.41 48.47 Per cent Per cent Per cent^ 66.73 60.61 61.99 50.29 51.51 43.28 Protec- tion and compen- sation needed accord- ing to Tariff Board 77.53 71.57 67.77 52.74 51.70 41.83 » $0.23 plus difference conversion cost. 403 ■I fii COMMERCIAL POLICY by the Penrose and Hill bills on yarns and the amount re- quired according to the findings of the Tariff Board. ^ The yarn duty in the Penrose bill, as shown in colunn 2, IS a graded specific duty — graded according to the couat of the yam. The duty in the HiU bill is a compound duty, and the computations for the yarns in the table are sho\Tn in column 3. Column 4 shows the protection and compensa- tion, m cents, required according to the Tariff Board and is made up of a compensatory duty of 23 cents per pound, and the difference m conversion costs for yarns as found in column 12 of Table 8. It will be noticed that this compensatory duty is higher than the one recommended by the board when the duty on raw wool is 18 cents.23 This is a concession to the critics of the board who said that the compensatory duty should be based, not on the scoured content of grease wool, but on the duty on scoured wool which in a bill with a duty of 18 cents on the scoured content of grease wool would be at least 19 cents. ^ In this article, therefore, the benefit of the doubt on this point has been resolved in favor of the manufacturer, and the compensatory duty has been based on the recommendations of the board for a raw wool duty of 19 cents.^s Columns 5, 6, and 7 are columns 2, 3, and 4 expressed in percentages. Here It IS found, as in considering the top duties of these bills, that the duties are much heavier on the low-gi-ade yarns than on the higher. This defect can be corrected by properly grading the specific part of the duties. Considering all the bills studied, the method of levying the duties on yarns in the Penrose bill is the most desirable from the point of view of protection. Yams — The Tariff Board says — are comparatively well standardized and their cost varies in a certain regular relation to the fineness or count of the yarn It IS a simple matter, then, to adopt the specific system in* this particular case. A duty can be assessed on No. 1 yarn and be made to increase by a certain proportion with each additional count of yam.24 23 Ihid., p. 626. 2^ Ibid., p. 710. 404 TARIFF BOARD AND WOOL LEGISLATION These suggestions were followed by the f ramers of the Pen* rose bill. By referring to Table 9 it will be observed that a rate of 41 or 42 cents per pound on 2/60s is approximately in accord with the findings of the Tariff Board. This rate should be graded up and down, according to the count of the yam. An ad valorem rate on yarns is, from a protective point of view, inadvisable, but if it is adopted the rate should be at least 50 per cent on the basis of 35 per cent wool. It was evident from Table 8 that the 45 per cent given by the La FoUette bill was scarcely ample to cover the minimum differ- ence in conversion cost. Woolen and Worsted Fabrics When the question of the duty on woolen and worsted fabrics is taken up, a field is entered upon vastly more com- plicated than that of tops and yarns. In investigating the cost of weaving the Tariff Board chose 55 samples of woolen and worsted fabrics, which included samples of all the standard varieties used for men's and women's wear. ^ The board, in the first place, obtained the actual weaving cost of each fabric from the mill originally making it; in the next place, it submitted the various samples to foreign and domestic manu- facturers making similar goods, and obtained from them, after their books had been studied by the board's agents, the cost at which they could make the fabrics. The figures were checked and compared and the record of each sample written up.^^ The board contented itself with giving the costs of converting yam into cloth, and it made no effort to report specifically on the conversion costs of the tops and yarns used in the mak- ing of the fabrics. Nor did it attempt to connect its investi- gation of weaving costs with its costs of combing and spinning. An effort will here be made to do this. In Table 10 the differ- ence in conversion costs between this country and abroad for the samples reported on by the Tariff Board is calculated from the raw wool through combing and spinning to the fin- ished fabrics. Those samples on which no English costs were obtained are not included. In this table the classification of the Hill bill has been adopted, not necessarily because it is the last word on classification, but because it was the one most dis- cussed in the sixty-fifth Congress. 28 2ftid., pp. 651-690. 405 COMMERCIAL POLICY TARIFF BOARD AND WOOL LEGISLATION o fH w 02 O O ^ Q H o M u CJOQ ^ ^ ^ o o O ^ o o a: w & O O Eh O < o 00 =^ O »o $2; OS o w O Eh ft- I ^ I S >»»,•« go -® © 5 5^ <".2-i- " > « 3 ' (N to 00 —I « CO 00 S S2?!:Sgg5322 uu :; CO IN CO (N N CO ■* ^ W CO 1.H LO f^ o CO eo i-Hco o rHrH 05 rjco-Ht>.oooMo» ooc:^j:-j:-cono5R§ . t» Oi>. o t» o "= a M o 00 "t? "♦»4_ CO CI 00 COCO T«t «0^?OcOOfOt*t<.0 coeo»oot^N.oo.H(N esi-i(N(N.-te^(No«(N 0) Mfl « C O t, ^ £ rt is ="5 o to k ^ 93 o o o t^oo o SS4 2 »OOt>.COOcO«0'^i-4 OD 73 S 2i o c * c o « w o »*» a'3 tQ ^"^ L. CO s s SCO lO o o Q0b"COcOOJir5«Ot^CO Ci'MOTCSCli-HOCOTti oc0Tfo-^t^f^r>.O OOOOOOOOO g o c ° o o Is ^ MO 00 O CO »oo o ooco CO .0438 .0077 .0290 .0438 .0431 :5S • __ c«t<-t*p«c«oocoo '^C0C000C4OO^'^ o a a] OS • 3 - OQ '■ a V 1:8 — © e« 13 (- o5 a © ■5«o u 3 2 M _C -«j 04 O © © > o a © 3 (O a © § >> © at O, --oSfl SW ©, ©4^3Eb, S s o o •s3 c O a a! ^ IS OS s 03 a T3 © oo i4 O © 3 a ot .a '-' "S o •• ® ■IJ 3S O O*^ fl a © ©•r ^1 CO u © © oo la o o © © OQ © 3 o -^ JD •♦» m ja >,aJ«©©ajtfao ".-, o o o o S © ;j3 •o^ ©IduiBg j CO •*^oo »He^eoooo5C^»ococ^ 406 I OQ O o p ftJQQ O o ^ 9. ^ CO « Q S" O o w'^ o -fj CO CQ W O O P &^ o w I ^ O -sj tHQQ W W o CO c» 'ft ^2'^K? .2 a o £ b. 2 ftfl O S ^ a § §.«s © © DO "d c a « S ^5 © O fl ? o_o S3 © § >> ft-S 4> S "s " • Q ftS-Ja o t, P.© fci««-i _ o © 3 © » o> :3 "^ .4 O o o a u 05Meo»-»o t^QOlMOO'O t^OOOOCJCOCO CONCO-^-^M •»!< eo cr 'f' r-i (N CO C) 00 -i? O lO CO-*COQ0f^l^ t^ CD CO t> r- 1>» COfNfOiOOOcO OOiOCOO-^C^ b- CO O C^l lO 00 N r-t C^ CO CO r-t lO 1-1 (35 CO O O t^ CO 1> lO Tl< ■* rH ».H 1-1 M N r-l CO CO (N "0 00 CO COtJ*OCOC^CD CO 'O •^ I^ t» CO oooooo o o o oooo»oo NOC0(Ni-lt>. NO MOOfMOO^N-* OCO 11 1» CO i-< ■* o o» ooco T-< CO o o r>- ^ 1-1 COIN N eo CO CO (N (N !N t»0 CO t>- -f CO lO t* -^ CO UO OJ 00 1-1 1^ 05 O -1" T*ieo T*iO'^>^QOc^ioo oboo 05 00 C5 05 a> 00 oj lOCO 00 t>- ■■*< O "0 CO o Ose^ Q CO "0 !>• »H 00 o coco 05 001^1^05'-' coco CO (N CO CO CO »-i CO coo OOCSt^COOOCl O O 00 O O t>. 'O 1-t >o Wr-I 1-t CO 1-1 '-' i1 »-' --H t^CO 05 eo rt* O 'H CO O h-CO OCOcOQt^O-* t^cO lOOCOOCOOOO OO ooo>- Oj'd 3t? 3 C O bfift i^ OQ I IS u C © O © 5 a te aa O 2 •* i'S •T3 • © :2 • "* c . 03 03 . " O 2§1> ° >S o •3 cj ft 2 r c o«t: goJ°a •oj5^ atduiBg CO "0 t- CO I* i-t COMCOCOCO'* o b--* cooeot>-^co rH i-tN COCOeOCO'^'* 407 COMMERCIAL POLICY TARIFF BOARD AND WOOL LEGISLATION 09 . ^ I CO El] O J w Sz; o ^ . o I: o w £2 W « Eh < ig ^ ^ fe -^ o o = ^ c >< Oi 03 «> w o O '-'. ft <5 O ►J Sz; o OS o » a CC Eh U :^ o < 5^ W lO CO s o o .^ > ^ . — » c o > t« ?5 ^ "* •J ® <= « a 1^ 73 •5 s^** a .2 o^ a 3 •cc^au?* — 9 _ ^* _ ®.2— "S-a"* "S o 3 o a -w 4. o ?» ? M o'w'^ o bog o C O •-■_j3 « ^ £ ae o •« > > 00 o ^^ S > a o a«« Q a S ° ® O CO "O g a " b aS 2 o a $00 ft, o o •*> 0.13 Q ©**" a "^ o a £ to g c oo o ^&a5 o ^ ais Oi-HU-i « a ip ^1" s. <©O0i a (1. OJi/5 ?0 CO M CO C^ (NCO CO oOfOior^ c^ CO to CO SOJOO ^050 CO OO'HOOO OOCO 0OV5tJ< o» Tj.05>0 r»t»-icO O—KN CI eOi-tO^ w» OC170 O "?0 OS 00 C5 CO tJ" X !N t^ O O t^ O 10 0> .-I iO-^T)< CO MOO Tjt >Oi»Q 00300-H CO CO CO Tl* STtQ hi ■ a ':§ bC (U t- bi D O OQ C DO B •2« CQ . ta a 3 a IB .S=' 3 w a 1-1 OS coco Ol'N CO-* •.*( O 00 coo CJCO ■i<-^Tf« i-OTf 00 o 0000 00 Clio <0 o £-? o-a ' a 3ao2 > •o^ aidurag 1 C4 COCO'* "^ •^•^•^ NCO »oo 408 The unit of measure in Table 10 is 1 pound of cloth. Before the difference in conversion costs of the tops and yarn entering into a pound of cloth could be computed it was necessary to determine how much waste there is in combing and spuming. It should be clear that, because of the wastes in these processes, it requires more than a pound of yarn to make a pound ot cloth and more than a pound of top to make a pound ot worsted yarn. The conversion cost of the material wasted, however, must be considered in calculating the total conversion cost of a fabric. At best the method by which the figures in Table 10 were computed is complex. The best way to make it clear is to take one sample and follow it through all the computations. Sample No. 22 is a men's blue serge weighing 14 ounces to the yard. In making the yarn required to make 1 pound of this fabric approximately 1.24 pounds of top were consumed. The difference in the conversion costs between this country and England of the top in this fabric is 3.5 cents per pound, and the corresponding cost for 1.24 pounds is 4.34 cents. By this means all the figures in column 2 were computed. In making 1 pound of sample No. 22 approximately 1.13 pounds of worsted yarns were used — 0.60 of a pound ^re used in the warp and 0.53 of a pound were used in filling; 2/24s were used in the warp. According to the Tariff Board the difference in conversion cost between this country and England of 2/24s is 6.31 cents per pound, and the correspond- ing figure for 0.60 of a pound would be 3.79 cents; l/12s were used hi the filling. While no cost was given for l/12s by the Tariff Board, a fair estimate on the basis of the costs given would make the difference in conversion costs between this country and abroad for 1 pound of this yarn 5.04 cents, and the corresponding cost for 0.53 of a pound would be 2.67 cents. Adding 3.79 cents and 2.67 cents the result is 6.46 cents — the difference in conversion costs between this country and abroad of making the yarn in 1 pound of sample No. 22 This method of calculating the yarn costs was followed m the case of each sample, and the results are to be found in column 3. The American weaving cost for sample No. 22 was 22.2 cents per yard and the English weaving c ost was 11.93 cents^^^ 26 lUd., p. 665. 409 COMMERCIAL POLICY ii per yard. The latter cost was subtracted from the former in order to obtain the difference in the weaving conversion costs per yard between this country and abroad. This difference per yard was then reduced to the corresponding difference per pound, or 11.7 cents. In this manner each of the costs in column 4 of Table 10 was computed. Column 5 is the sum of columns 2, 3, and 4 and shows the total difference in cents per pound between this country and England of converting wool through all the processes into finished cloth. For sample No. 22 this cost is 22.5 cents. It next became necessary to determine the price on which the duty would be assessed if the fabric in question were im- ported. Under the present administration of the customs this price would, of course, be the foreign price. The Tariff Board did not give prices for the samples under discussion but it did give the total costs. Upon the basis of the total cost the price is computed. Recurring to sample No. 22, the total English cost, i. e., both material and conversion costs, for this sample was 49.11 cents per yard.-^ This total cost per yard was reduced to the total cost per pound, and to it was added llYz per cent of itself in order to determine a figure on which the duty should be assessed. This method is employed by the customs officials ^hen goods are billed to this country at cost, and 17^^ per cent is a fair allowance for distribution expenses and profit. For sample No. 22 the figure on which the duty would be assessed is 65.94 cents per pound. This is the way column 6 was made up. Column 7 is the real object of all the computations in Table 10. It is the per cent which column 5 is of column 6; in other words, it is the total difference in conversion costs be- tween this country and England expressed in percentage. If, then, a duty were being levied just adequate to offset the dis- advantages of the American manufacturer arising from the difference in conversion costs alone between here and England of sample No. 22, the ad valorem rate would be 34.12 per cent. This duty, of course, does not provide for compensation on account of a duty on raw wool. There are certain other observations to be made concerning the method by which Table 10 was constructed. No effort was made to work out the top costs in column 2 according to the 2« Ihid, p. 665. 410 TARIFF BOARD AND WOOL LEGISLATION These costs corres^^^^^^^^ ^ChTaSon: Ifoc^^rt column frr irtr-in S: amount of top used in makin. Z are aue lu v Whenever the spaces are blank in f = 4?^ rs*s™ -rrt? sss. Tht was t^e in proportiouing the material in a pound of mating the amount ot loss oi m ^^^^ Schedule K and in those cases where costs were not given for SrtSar counts the costs of these were estimated on the Twfhp costs given. The costs of cotton yams (when a ihese ^®^^^^;\^ . . ith the reader. Differences of ment of him w ho reads. . ^ — ■■ 2T H. Doc. No. 643, 62d Cong., 2d Bess. . 411 C3 «o C3 C^l C3 « w v-^ iJ iJ »-t « .4 1.] < H o K « ti h 03 l-H H OJ O < 55H H CO JB o £n HH 03 &4 pa O > O 3 HT3 ;iO»OOSOOOOt»C>HOiOOt>-t>.?Cb-t*?Ot*t>.t>->0 gCJ«0NiOOi000'*O0SCC»-iO(Na>MC0»-it»O hOiMC^c<>-oo>-.i-(i>.io oil 04 N « >o ^ CO N CO ^ CO 00 ec CO CO Tf 00 ro e<3 CO «8 >> 4)'S 00 S5erftOCeOr^Tf.COOOrt<^OOTt-f^oooxcO'j"co-*t»»-it>.N KcOcOOOir5i3St»t-COCOO«Or>.0005"50t>'COCOC^ i;^>O>OO>00t»t«^CDt»Xt«t«t«t»b>Xt«t»t>t^ 03^— ^-032 Tj«O»M00i0Ci-«(NOt>.T}'00W00OOi0(»O»-' eoOTfOcO'^cor-«"+oc-f < o a •3T3 > t-00>^«OOt^^OONOO'vOC5>0 000»-t Oih-Tt0 >o 3ffi Seoeocoeoeo'^'^'^'^'^'^ijtTj^'^Ti''^'^^'^'^ a. ' C 00 Sb>i^S'2c'3 og-oS5g8§.« O pCggoooO eoooc gob-ooooc 00000000 O'fSOOOOOOOOOOOOC '-''-•0)C>JNNO'-'C^04WOJNCMN01C1C^Cfl'*000i0>'-<'Tf*Tti0000^'--(N r^O'-"«oot^oo--i>.-t^ot>»cor^ot>-tOi£>t-.t^t^ •S o e ® i; >00»000«r>»t^C>JC100eOOOOOOiOO oo«ooocoeorttocoooiMOsO'-i'*Ncdco > • > •^coT)».-ioei-'0 compen d accorc Board Total duty lH '^ 1> "5 00 1*. 06 CO »o 06 i>i 00 <©* 10 W5 CO »c t>. CO ■** cr ^0»000'*iOiO»0>0"*tO»0»OiCTt<»0>0'*>0>00»0"5 ^^ and quire ari£f Pro- tective duty SciOiOOC«00'»l.o>ci g£H jJ'eocicioococociNCicocococicicoooNcoeococO'* Com- pensa- tory duty g-HCiciocicoooos^OcOTjirt(cociioost*Tj*<.-t«OOi»C<£>'<*^»-ii©OiOOO hO'F^-<*-<*N>OOCO.-HOQOC»0>>OClr-l,-iO»CICOeO»00 P^ (^0OCOi-l»HC«ClCIC0Clr-IC|i- ^ 00 Tj4 T}< CO CI »o <35 1* rj< eo CI ic 00 St>..-(00'1*«COC»Tj(rl4,-(COOiOO'«tfH.-i«OC|.-l»-t05C100COO — ^ t>- 1- 10 10 1* t* t>. r^ t^ <© i> 1© t» t- 1- 1>. <© t- 1>. t» i» t* opeoo«oo»eo«oo-Hioo5^i.oot»->!j> OJ^ -^-li'O »* ■^C0«0^tX3t>.OC0Ot^C0'-"Oe0«0l>C0f0O'--rtH «OCC>iOiOcOcOtN.COt^O500O5t^0000MO5000000»HT-4 3 5:=5 s * -"-" a^ OOCOO>OOiCOOO^i«OJ'-<»OOt-^«OOSiOOOO ,-icor^oeociO'-#T-4C5Tj.T}Hr>.cooiCj»'50 ^?>>* 'O u ^ CO 00t>.C105Cli-f«*t^'*'-it*»0Ot^O'-lt^t«.Tj COCO''3»0 1 «0 Compen- satory duty based on rate of 18 cents on scoured content of wool OOOrHOOOOOOOOOOOOOOQOOO «* SSwoaSsoSSoSSSSSSSsSSSS C4Cli-lrH(M04ClClCIC4CtCiC4C4CIC4CICIC4CIC4^ g Per cent of wool in cloth CO OOC01-4OOO 000 00000000 0000 ii^*§ii§§§i§§§iii§ii§2 t»C0C0b.-<*.05>-OTi.os":i'<*io '3;coT}05ooo>'^<-tooO'-tcie«eoi-iO'-i«o» £4 ^^^^^^^^^^^^^ Weight in ounces per yard 1-4 iOiOOC»Oco»H-^rn?o-«j d »-• rf» 1 d at more ts and not m per pound. d at more tha more than $ nd. d at more thi 1 1 ©d_ ©+>3 V u 3 v^ 300 3 S -S^** -^dft -^E > > >. ~ 1 -o^j aiduiBg °'^:2;?2£2t:'*''°'^®**0'C>oociicb-ooc»cif«? •1 1 i-4.-4CJCicoeocO'*'* cicooO'T«o "* CO M H3 -Oftg^ ■— '.tJ C «- OQ ea a) o o-h o -^ m c c 3 .s« cj ? u >T3 « !r, "3 a o 3 S05 ^ ■ •-< 00 rH wio «co3Oit^'*00'-'roecoitoioo>b- 0000 t>-C\Ji.'3CH>.t^cOt>.t*(©t^b.t>.iO COtNCO ifjOCO ooooo i-CO(^fOCX'-|■^c<^lO^>• ^-lrt4 <£>COOC^OOCCO'^X'-oo;oot^r-t>. ot^c< CSCDiC CO CO 00 o «9 lOifl CDCOt*Tj-< Tj< (N lO t^ eo.co •^^oo»-i50'*oo(Ncoc^-«*oooo N.;^ CO CO CO CO CO 00 CO CO CO CO CO CO CO CO CO CO tl* lOiO oooooooooooooo 00-* CMCMM 00 00 C^PQ(NC^Cq(N(NC-Lteo-*ooclot^t>- ICUO CO CO t^ CO t* CO t* CO t>» CO CO t* t* t^ IOO"5 00 CO 00 OO C«N.C<10JOOCOOOOOO>00 coco T}< CO 00 Ol OS O r-i ■>*' (N CO CO CJ '-' I^ OS CQ c c C G . a a . o o OO "OO 'OO COrt< i'^'O ;ioco o o ■ C • es OS o a ■ o o Co . o Q eS'cSE'seS's as o a ■>3^ 03 -s 3 a & > o u opq H » 05 i-t ^ O § !^ ^^ O H > B O OQ t-i ft 00 «o »o CO c» fl:i 'r^* S V cs"* © c S C >^§ ft ■^ fe a r * a ■- fto ft Ah MS >. V o b C ft •*OiOO»«iOt»00«OQO«M'»»CCOOSO»0«00<00 oaiOO)OC30C>OQO(Xiaoo)Xcx)aoaot»t« OOXOO»»aOClC5(N(N t^i©ecQOGor»cr^'-<»^C5C5oocoo «Ci0C^lt»^O'1*'C^«CC«3Ot^Tj0»0»0»0«0»0»0>0»0»0»0'0»0»00«00«0»0 coweceoeoeccoeccoeocoeocococococoecco •^COTO-«}<.-HCC'N3Ci-lTj<-H(NiC^JCO. TT . " ^^'^^ ^^ P^"" '^^°' ""-terial cost. The rate on raw wool m the Underwood bill is 20 oer portion of t?n r °*f. "'' ''''' '^ '' P- cent, the p^:: portion of the Underwood duty on cloth required to eompen- due tor*9n"'*'""'"/r *'^ "^* « P"- "' his raw maTrial due to the 20 per cent duty on raw wool. The 11 per cent ia then subtracted from 40 per cent (the Underwood duty on 417 •' II!' COMMERCIAL POLICY TARIFF BOARD AND WOOL LEGISLATION w to 2 " H Q •J ?^ OS o r/j W t-* H 1^ O (4 (!< O O O o S S'. o < u !2; H •< s o ^ Ol O ?o Ph r-l lO *oooeo5j05'H eococcecNCMeocoeococooicoNcocoNco iC:^np Aio^ssuadraoQ os ^^ a 0^ o Ih o 0) PCH a et t-i ^so3 noTSjaAuoa jaAoa o^ UI8JOIVA pB papaa^ X .t:^np aApaa^ojj X^np Xjo:jB8ua00 co^ccecNMcococc^NNcceococcNco eocoeceocoeoeococococoeocccceocorooo 0500?OCOt^0500CO^Xt*OC^'^Q005QC W*MCOMC»C0eOC0'^M(NCOCOC0eONCO CJO0000OC0000St^0it^C0t^«00»00c000 *-l•MNC^^•* s e8 : 08 . g (u e « CD 09 es 00 'g rt rt o « u CO .O CO g-s 3 a 00 o o o o o o 0-1.JI.J. c a c3 a 01 a> 4) 0) S-oSS o o o o e o ^ 00 fl u * c o o p cdJS o ^^ 1 I ID OQ |s?ss S o a O o © -t-> • 4^ C-, to « O « !r^ ° <" > O © © Kl O g^^ S.OO >>oo 00 >,« c c c « e c aj Q, c o i^i0Ot»000SOe.O(M»Hrs.rt eococo(N«N(N(NwrowSc5ww«row iC^np ^o^BguaduiOQ Oi ^^ 5 a © © Cl o © PC4 0. »— ' c3 hA « P-. rH (N _ d cocot*tiKcoioSoIo pJBiC jad paesaBSB si i£:^np qaiqM uo aouj 92S2^®"5OSO5'^CMC>'»*oow5N-HSoa§^IS O «H ,HfHf-lfHi-4 ' '»-Ir^ f s c8 55 a 9 a C J© "o o "^ © a © o o i-S o.S 0) >> © £ " © © © o 3 a 3 OQ ••-g _^ . OQ •22 : o 2 P fl fe. o_2 "3 ort; « >j >>& >> 00 o >j w WI'S — •©§« Jj © ?» -s' o -a ^ i| r^ ^o' ^x* «v cj - ©5g>eggc >^ci a b 3 « « S-S^ ^^ '•0*0 3) © *3 c © „ -. a'^ E 3 3 00.2 3 G o a*^ V a a ,^ a © o o! 3 as (D a)Jd 5 •O^ 9[duiBg 419 2SS£?£23I^*^°o^(NTj»iocot*ooffl)MMl * H^ W H « Q 'A o & ^ O Ph ^ w Ah < Eh M w W o t^ o •v ^ !2: o ■< H-l , -1 t/J M « w > eo 'O t> o6 r '^ ^ ^9 ft O W o Ah M M ft w ►J ;^ CQ S °g O ^ ^^ h-l ft ^ (§QQ fa H <; ►J ft o ■< ^►^ s ^ w « w a ij O a, m c C 3 aJ H S g o o o-^. 3 t. a; 3 h- lO t^ 00 Oi O (N O 00 O C-J (N l^ Tt ooqooodoooooSoo SSoSSSS o _ S3 O O O O O 73 ■•X3 • a ■ 09 . 03 • T3 XI u OS 3 o o 73 T3 (NO tt5(N CO o O t^OO(N M »0 1 X] u 0) S o T3 'O a a a o ■*^ u a 00 a o u s (O a •1-4 3 u s) 3 C 03 s 1^ m to n ■•J C 10 IS •OMaiduiBgJ ^O, cor, u, ^ ^ oOO^O ^ 0 lO "5 »C >0 >0 S hi Q a 3 O S <5 •*COt>.t^ 00 ■'J* OJ 00 (N !N O •<*< «0 -io5»or^t>-ooOTj o I. ' 4< *o b- lO »0 M lO »0 L-S »0 «0 "5 »aJ bS'O SJ2 " CC o d OCICJN t^N01^Q0M» OOO OOOOOOOO-^O O'-tOO ^-9 M * ©^ 51.2 a'^'z'^ •^ ft o 1-4 t>. 1-1 00 NC^iCO t^t^oo ooo^ eoioocOf-iooO'O'OO Ot^OOi<-lOW^•C^^1-^ r>.^ot^oo«Ci-ieocO'* ^ I— ( I-^ O »-H l-H l-H f^ 1—* v^ •^COOOO 00 d 1-H l-l l-( o 00OO>O 0-. ©(NO'-t 1-1 OS o o 5 ♦e C-n > o 0* 00 fl „ f-i a o 5 o cr C 3 3] OOOTj<(NiN03C5iM(NOt^O'**50''50t^'-iCO'^030> OC-lCOO'^'-'C^irOOC^'-iCjOif^'— '■^'^^'-"f'^l'"' i-'C^coco^TfiO'T}-'«*'r>- OOOOOOOOOOOOOOOOOOOOOO d ' * ' C5 o o ■i •T3 ■ a ■ c3 o OOOOOOOOOO OOOO • • ■ 4> «_, d o o 2 jj S TSTI'O v^ id • • -^ PQ ^ k. a> 3 02 " ft 00i-iTticO'^»-t00iO«Oi-i oeoweo t^ «0 I-Hl-H lO ^ W5 t»C0«O X 0> COt>» CO >o >oooo^ i*«-*ooeoooo>oo«o iHt-o«o oo I o •0 a ^i* ^ *« a o •-H u bO a o 6(1 ^ "^ J— 03 S Oo ri_S b oB-g 3 O- . t, ? O* O ^ 7i in ri KT (h >> J<1 -5^ © >,^ S « © ■ • ■ u 01 • • O 03 • . OS'S oo H OQ .2:2 ^-^.l „ *3 i^ « 5 " > ^ o ft S c C- 3 3 d «- - 03 424 O'-lC«C0-«l<»C<0t^000> C4C4C4C4Cv|INC>4C4CtC4 COCOCOCQ CO COTTON COSTS AND TARIFF RATES pq p ^ Ih 0) '^ O -M ft-^fc*^ >>£« i§ 3 ■5 >»l-l » 3 3 O s U Q ID Ih 03 ft-dg Q a 3 o a V 3 ft£^ u i-S >.S !3'd 5.*^ » ^ oc ==ai<; -H-9 w s Q? ^o MS g 3 S H,'^ ®-c Oi Ih OJ « d I— I ^'tJ Ih tt) ® *? C*» > *7« I- O > »o WiOCO CO ^ ■^ CO o 000 o op N o ea ooTjt «oto Tf» o O t^ »-i <3>t» »CO» 05 CO S3 2 2J 22 rJ'^ "-I c^ 000 00 00 o o in iCiOO o t« O 00 CMN i-H r-iwt OiCi M C^ CS| (N 10 CO o C0 1-1 TJHCO 00 C4 i>o (N(N t<- C^ CO 00 h-1-l toco 00 «c •^ O 1-H CO Tt<^ »0^ l-H 10 I-H 1-H I— I 1-H 1-H1-H i-HM M CI OOOO 00 00 O o 1(5 lO lO 10 IC>0 CI 10 kO >o 1-t 1-1 »-t 1H »-HtH dd CI C4 CI CO o §000 000 00 11^ 0-"0 10 CI CO o 10 c< CO o to c« o U5 CO o 10 lO coco 00 00 8 8 «0 CD o o CO CI o C0U5i-t OOOCl CO CO CI 00 Oi o CO o CO o 1-H 00t>. CI t-CO 1-H 0>l^ rt 00 xfHO CO 00 00 CJ 00 o o o 1* Ot^ a> 1-Hoo -;< -^fo o 00 o QOi-H^dcOWNOOrlfeOOOOSiOb-OOTftTj^cO OcooO'-HTjto5t<-o>cot^i-HoscoN»r>-iocio C0C0dC000C0dCIC0CIC0C0rt- t^ CO U3 >OiO 010 Oi O I o >• • •H CD K « ol M a o o O a & 08 C • -H Ih ki ft o o "3 O o O Ih « ft a • fH Ih >> •"O 3 08 ^ bO ^ O ■*^ *i c a • ^ .-H U Ih hJ .2 3 1 - (5: £ 'OM oidraBg I >o cot* 00 o> I CO coeoeo CO O 1-t CI co^ ^ ^ ^ ^ ^ 10 CO t* 00 425 1 COMMERCIAL POLICY 0> OOt- N^JtiOOb-tO 55 OOCO rt< (M O Tf O t^ 1-t cj0 1-1 TH 1-( N 1-1 l-lT-l.-11-l 1-iM 0) CO g-" »- 35 Ih M a 3 O a »o M CO OJ t^ c^ (M CO o o o • • o f0> 00(N t^lNi-ir^ i-iiO COCOtJ*'** CO <-! C^ rH r-l rH OO OOOO OOt^ yf O ^ »OiO »-• CO O i-ii-l i-i M (N OO O O O (N (N r-ti-l C^r-1>-<'H r-lf-t (N C>< CM O o d 0© O o o«o o O Ot^ «> 00 o-^ O O '-"O ooeoMCi oooo COCO OO > o f-l o o C3.i2 C O-b"^ 0M3 g 3 S '^M oQ t . cot^eot>. 10-* 1-1 ~ ^QOoiiH od (^1 o «o OO o 1-1 i-i o C^ r-i O « m Q C 3 ffl H S o o o a'>> 0'*'050"^ooi-<'-"Oi'^-H050c i-tocMi>»»oC'i »OOOcOOOfOC'0^-*OOiXi?OV5i-'?CO ?-4C0«D00h-O IO»iCt^»Ot>.>-iiOiO»QCOCOC^COfO'*< C^CO'tii.'JCO'ti OOOOOOi-iOOOOOOOOO OOOOOO d OQ a o I o 73 O 73 o T3 T3 V hi a a S3 CO 13 N >> bl gj gd -^ o cs oj 4> ^ ^ a t- a c :o ;25 o : £« T3 g.«a§ oj '^ a «o CM CO coo OOCMOCO OW^O 00-* tH 00 OO lO t>. ® CO ■* t^-* ■^■^ittCO T( 13 M §1 pu, tfM -O -O So a c a 3 o bO a s" .s a ■^ -^ *fl •o^ 3[dniBS lo CO t^ oooj o<-«cMco Tjtio CO r^ oo CO «o . t* v _o "C a a "CB OB O 426 427 COMMERCIAL POLICY COTTON COSTS AND TARIFF RATES < H o p WO ^ < ^ o HI t* P4 03 » w a 02 02 o o ,, O o < o W ^ 1-5 O O m '^ W « oQ a <*i V e I M 93 ^-§^3 5 Q a 3 O a 0) a o S -3.2 ^aja-^ aj.ji o a, i a> oj O » 0>C>CO«0 »oo oooo C^ 00 ^ ^ ^ ^ or^'«*<>-oo5oooooi5 «oo WOOOOCO^COCOO lOrJt <-! c^ M — c^ c0 O CO 00 •* ^ CO 00 OOOOOOOOO 8«|J4 0«0 -t- O (N'M -O cor>. OO -co ^O COC^ -CM O "*0»0 lO coco <-• O) ,-1 ^^ .H ,-4 CO C4 'H t>. OiCi Ci lO '^ CO OJ CO CO o> t^ oi ^» « coo 5^0 •-• rH 1-1 1-1 ^ ^ O ^ "-"-• (N""" ■^ffO^'^ • •••••••• •• •■ • O CO 00 CO 00 1-tl-HM l?J C5 CO cO CO r-lOCO (M !-• CO 30 CO CO ^ oooooc 2S •c^oo .0703 .0968 .3013 .2454 . CO -^ -1 CO 35 ■* •OiCOO-N '->'i> • 73 • a • O • -O -2 -a c 1 C ^ ,^ 00 • ocioot^Ocori^Tft.ri »oco oO'ON'^ t^ '^.^. CO CO d ^ lO t>^ t>^ «o 00 r*M ih(N'-i.-» qo «cot>. a : -a "^-'Sid a-a -J3 mS >,d o = 2 S 2"^ 2 >» ^a §£ • > *^ o ? ^ r) 2 aJ fl fc< St* o • « CO ^ 9> O O U J^ 4^ ■!-> O V O O o>oo ,2 .^^ o > a o o O a oi • -^ CO 'ON ^idca^S OO-^i'^CO'tOCON. QOOJ oo^eo 3J ISSJi t«.MO0O0O0XO0MQO 0000 OJOJasO* OJ C5a>0> Ih a 00 » a (E4 a C3 o ■)^ o ^ 125 » o H 09 WO HO 5 o 04 ;z; H EH ^ ^ • f« W _