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International Finance - Chapter 7

1. Preface

2. Charter 1

3. Chapter 2

4. Chapter 3

5. Chapter 4

6. Chapter 5

7. Chapter 6

8. Chapter 7

9. Chapter 8



So far we have considered the working of International Finance chiefly
from the point of view of its effects upon the prosperity and comfort of
mankind as a whole and on this country, as the greatest trader, carrier,
and financier of the world. We have seen that the benefit that it works
is wrought chiefly through specialization, that is, through the
production of the good things of the earth in the lands best fitted, by
climate or otherwise, to grow and make them. By lending money to other
lands, and the goods and service that they have bought with it, we have
helped them to produce things for us to consume, or to work up into
other things for our consumption or that of other peoples. Thereby we
have enriched ourselves and the rest of mankind. But the question still
arises whether this process is one that should be left altogether
unchecked, or whether it involves evils which go far to modify its
benefits. In other words is it a good thing for us, socially and
politically, to enrich ourselves beyond a certain point by a process
which involves our dependence on other countries for food and raw

Analogy between a State and a man is often useful, if not pushed too
far. The original man in a primitive state is always assumed to have
been bound to find or make everything that he wanted by his own
exertions. He was hut builder, hunter, cultivator, bow-maker,
arrow-maker, trapper, fisherman, boat-builder, leather-dresser, tailor,
fighter--a wonderfully versatile and self-sufficient person. As the
process grew up of specialization, and the exchange of goods and
services, all the things that were needed by man were made much better
and more cheaply, but this was only brought about at the expense of each
man's versatility. Nowadays we can all of us do something very much
better than the primitive savage, but we cannot do everything nearly as
well. We have become little insignificant wheels in a mighty great
machine that feeds us and clothes us and provides us with comforts and
luxuries of which he could never have dreamt. He was the whole of his
machine, and was thereby a far more completely developed man. The modern
millionaire, in spite of his enormous indirect power over the forces of
nature, is a puny and ineffective being by the side of his savage
ancestor, in the matter of power to take care of himself with his own
hands and feet and eyes, and with weapons made by his own ingenuity and
cunning. Moreover, though in the case of the millionaire and of all the
comparatively well-to-do classes we can point to great intellectual and
artistic advantages, and many pleasant amenities of life now enjoyed by
them, thanks to the process of specialization, these advantages can only
be enjoyed to the full by comparatively few. To the majority
specialization has brought a life of mechanical and monotonous toil,
with little or none of the pride in a job well done, such as was enjoyed
by the savage when he had made his bow or caught his fish; those who
work all day on some minute process necessary, among many others, to
the turning out of a pin, can never feel the full joy of achievement
such as is gained by a man who has made the whole of anything. Pins are
made much faster, but some of the men who make them remain machines, and
never become men at all in the real sense of the word. And when at the
same time the circumstances of their lives, apart from their work, are
all that they should not be--bad food, bad clothes, bad education, bad
houses, foul atmosphere and dingy and sordid surroundings, it is very
obvious that to a large part of working mankind, the benefits of the
much vaunted division of labour have been accompanied by very serious
drawbacks. The best that can be said is that if it had not been for the
division of labour a large number of them could never have come into
existence at all; and the question remains whether any sort of existence
is better than none.

In the case of a nation the process of specialization has not, for
obvious reasons, gone nearly so far. Every country does a certain amount
of farming and of seafaring (if it has a seaboard), and of
manufacturing. But the tendency has been towards increasing
specialization, and the last results of specialization, if carried to
its logical end, are not nice to forecast. "It is not pleasant," wrote a
distinguished statistician, "to contemplate England as one vast factory,
an enlarged Manchester, manufacturing in semi-darkness, continual uproar
and at an intense pressure for the rest of the world. Nor would the
continent of America, divided into square, numbered fields, and
cultivated from a central station by electricity, be an ennobling

It need not be said that the horrible consequences of specialization
depicted by Dr. Bowley need not necessarily have happened, even if its
effects has been given free play. But the interesting point about his
picture, at the present moment, is the fact that it was drawn from the
purely economic and social point of view. He questioned whether it was
really to the advantage of a nation, regarding only its own comfort and
well-being, to allow specialization to go beyond a certain point. It
had already arrived at a point at which land was going out of
cultivation in England, and was being more and more regarded as a park,
pleasure ground and sporting place for people who made, or whose
forbears had made, fortunes out of commerce and finance, and less and
less as a means for supplying food for our workers, and raw material for
our industries. The country workers were going to the new countries that
our capital was opening up, or into the towns to learn industrial
crafts, or taking services as gamekeepers, grooms or chauffeurs, with
the well-to-do classes who earned their profits from industry or
business. Even before the war there was a growing scarcity of labour to
grow, and harvest, even the lessened volume of our agricultural output.
Dr. Bowley's picture was far from being realized and even if the process
of specialization had gone on, it may be hoped that we should have had
sense enough to avoid the blackest of its horrors.

Then came the war, which went far to undermine the great underlying
assumption on which the free interchange of capital among nations and
the consequent specialization that proceeded from it, was taken to be a
safe and sound policy. This assumption was in effect, that the world was
civilized to a point at which there was no need to fear that its whole
economic arrangements would be upset by war. We now know that the world
was not civilized to this point, and is a very long way from being so,
that the ultimate appeal is still to "arms and the man," and that we
have still to be careful to see that our trade and industry are carried
on in such a way as to be least likely to be hurt if ploughshares have
suddenly to be beaten into swords. At first sight, this is a somewhat
tragical discovery, but it carries with it certain consolations. If the
apparent civilization evolved by the nineteenth century had been good
and wholesome, it might have been really sad to find that it was only a
thin veneer laid over a structure that man's primitive passions might at
any moment overturn. In fact, the apparently achieved civilization was
so grossly material in its successes, so forcibly feeble in its
failures, so beset with vulgarity at its summit and undermined by
destitution at its base, that even the horrors of the present war, with
its appalling loss of the best lives of the chief nations of the earth,
may be a blessing to mankind in the long run if they purge its notions
about the things that are worth trying for.

At least the war is teaching us that the wealth of a nation is not a
pile of commodities to be frittered away in vulgar ostentation and
stupid self-indulgence, but the number of its citizens who are able and
ready to play the man as workers or fighters when a time of trial comes.
"National prosperity," says Cobbett, "shows itself ... in the plentiful
meal, the comfortable dwelling, the decent furniture and dress, the
healthy and happy countenances, and the good morals of the labouring
classes of the people." So he wrote, in Newgate gaol, in 1810.[8] Since
then many reformers have preached the same sound doctrine, but its
application has made poor progress, in relation to the growth of our
riches in the same period. If we now decide to put it into practice, we
shall not long tolerate the existence in our midst of disease and
destitution, and a system of distribution of the world's goods which
gives millions of our population no chance of full development.

We need not, then, stay to shed tears over the civilization, such as it
was, which we thought we had and had not. Its good points will endure,
for evil has a comfortable habit of killing itself and those who work
it. All that we are concerned with at this moment is the fact that its
downfall has shaken an article in our economic faith which taught us
that specialization was a cause of so much more good than evil, that its
development by the free spreading of our capital all over the world,
wherever the demand for it gave most profit to the owner, was a tendency
to be encouraged, or at least to be left free to work out its will. This
was true enough to be a platitude as long as we could rely on peace. Our
capital went forth and fertilized the world, and out of its growing
produce the world enriched us. As the world developed its productive
power, its goods poured into us, as the great free mart where all men
were welcome to sell their wares. These goods came in exchange for our
goods and services, and the more we bought the more we sold. When other
nations took to dealing direct with one another, they wanted our capital
to finance the business, and our ships to carry the goods. The world as
a whole could not grow in wealth without enriching the people that was
the greatest buyer and seller, the greatest moneylender and the greatest
carrier. It was all quite sound, apart from the danger depicted by Dr.
Bowley, as long as we had peace, or as long as the wars that happened
were sufficiently restricted in their area and effect. But now we have
seen that war may happen on such a scale as to make the interchange of
products between nations a source of grave weakness to those who
practise it, if it means that they are thereby in danger of finding
themselves at war with the providers of things that they need for
subsistence or for defence.

Another lesson that the war has taught us is that modern warfare
enormously increases the cost of carriage by sea, because it shuts up in
neutral harbours the merchant ships of the powers that are weaker on
the sea, and makes huge calls, for transport purposes, on those of the
powers which are in the ascendant on the water. This increase in the
cost of sea carriage adds to the cost of all goods that come by sea, and
is a particularly important item in the bill that we, as an island
people, have to pay for the luxury of war. It is true that much of the
high price of freight goes into the pockets of our shipowners, but they,
being busy with transport work for the Government, cannot take nearly so
much advantage of it as the shipmasters of neutral countries.

The economic argument, then, that it pays best to make and grow things
where they can best be made and grown remains just as true as ever it
was, but it has been complicated by a political objection that if one
happens to go to war with a nation that has supplied raw material, or
half-raw material, for industries that are essential to our commercial
if not to our actual existence, the good profits made in time of peace
are likely to be wiped out, or worse, by the extent of the inconvenience
and paralysis that this dependence brings with it in time of war. And
even if we are not at war with our providers, the greater danger and
cost of carriage by sea, when war is afoot, makes us question the
advantage of the process, for example, by which we have developed a
foreign dairying industry with our capital, and learnt to depend on it
for a large part of our supply of eggs and butter, while at home we have
seen a great magnate lay waste farms in order to make fruitful land into
a wilderness for himself and his deer. It may have paid us to let this
be done if we were sure of peace, but now that we have seen what modern
warfare means, when it breaks out on a big scale, we may surely begin to
think that people who make bracken grow in place of wheat, in order to
improve what auctioneers call the amenities of their rural residences,
are putting their personal gratification first in a question which is of
national importance.

We may seem to have strayed far from the problems of International
Finance and the free interchange of capital between countries, but in
fact we are in the very middle of them, because they are so complicated
and diverse that they affect nearly every aspect of our national lives.
By sending capital abroad we make other countries produce for us and so
we help a tendency by which we grow less at home, and export coupons, or
demands for interest, instead of the present produce of our brains and
muscles; and we do much more than that, for we thereby encourage the
best of our workers to leave our shores and seek their fortunes in the
new lands which our capital opens up. When we export capital it goes in
the shape of goods and services, and it is followed by an export of men,
who go to lands where land is plentiful and cheap, and men are scarce
and well paid. This process again was sound enough from the purely
economic point of view. It quickened the growth of the world's wealth by
putting men of enterprise in places where their work was most handsomely
rewarded, and their lives were unhampered by the many bars to success
that remnants of feudalism and social restrictions put in their way in
old countries; and it cleared the home labour market and so helped the
workers in their uphill struggle for better conditions and a chance of
a real life. But when the guns begin to shoot, the question must arise
whether we were wise in leaving the export of capital, which has such
great and complicated effects, entirely to the influence of the higgling
of the market, and the price offered by the highest bidder.

Much will evidently depend on the way in which the present war ends. If
it should prove to be, as so many hoped at its beginning, a "war to end
war," and should be followed by a peace so well and truly founded that
we need have no fear for its destruction, then there will be much to be
said for leaving economic forces to work themselves out by economic
means, subject to any checks that their social effects may make
necessary. But if, as seems to be probable, the war ends in a way that
makes other such wars quite possible, when we have all recovered from
the exhaustion and disgust produced by the present one, then political
expediency may overrule economic advantage, and we may find it necessary
to consider the policy of restricting the export of British capital to
countries with which there is no chance of our ever being at war, and
especially to our own Dominions oversea, not necessarily by prohibitions
and hard and fast rules, but rather by seeing that the countries to
which it is desirable for our capital to go may have some advantage when
they appeal for it.

This advantage our own colonial Dominions already possess, both from the
sentiment of investors, which is a strong influence in their favour, and
will be stronger than ever after the war, and from legal enactment which
allows trustees to invest trust funds in their payday loans. Probably the
safest course would be to leave sentiment to settle the matter, and pray
to Providence to give us sensible sentiments. Actual restraints on the
export of capital would be very difficult to enforce, for capital is an
elusive commodity that cannot be stopped at the Customs houses. If we
lent money to a friendly nation, and our friend was thereby enabled to
lend to a likely foe, we should not have mended matters. The time is not
yet ripe for a full discussion of this difficult and complicated
question, and it is above all important that we should not jump to
hasty conclusions about it while under the influence of the feverish
state of mind produced by war. The war has shown us that our wealth was
a sure and trusty weapon, and much of the strength of this weapon we owe
to our activity in International Finance.


[Footnote 7: "England's Foreign Trade in the Nineteenth Century," p, 16,
by Dr. A.L. Bowley.]

[Footnote 8: "Paper against Gold," Letter III.]

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