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How is this condition of affairs to be remedied? How is the poverty of Europe to be cured? Obviously a socialistic organization is no sort of cure. Socialism is only another method of distributing wealth. But what is wrong with Europe is not the system of distribution, but of production. Professor Bowley's researches prove that even in a wealthy country like Great Britain there is not enough wealth being produced to give everybody a satisfactory participation in the comforts of life. Such wealth as is produced throughout Europe is much better distributed than in earlier days. Never before in the history of mankind have the means for securing to the poorer classes a share in any increase of the wealth of the community been so widespread and so efficient. In most European States, either by way of collective wageagreements, of profit-sharing, or of State-subsidies in one form or another (Health Insurance, Housing-schemes, Old Age Pensions, Unemployment Benefit) the wage-earners are assured of, at any rate, some share of any increase in national wealth. But national wealth is not being increased. Why is this so?
Many answers to this question can be suggested. What is called "Labour policy" has certainly reduced productivity in some important industries, but that fact only covers part of the field. If production is being artificially restricted in the coalmines, it is nevertheless true that more coal is being produced than can be disposed of. And yet many industries, and most households, could do with more coal, and would gladly have more, if they had more wealth to buy it with. Indeed, restriction of output, whether by trade unions or by employers' federations, is often a result rather than a cause of poverty.
Briefly, the most general causes of European poverty are: lack of capital; the payments on account of the American debts; and trade barriers between State and State. Of these three causes, the last is the most important.
Europe undoubtedly lacks capital. Before the War the fact that most men produced more than they consumed, and had a persistent habit of saving, resulted in the existence and constant replenishment of a large capital fund, which was available, on easy terms, for the needs of industry. The War destroyed a vast amount of capital; post-war inflation of the currency and the catastrophic fall in the values of fixed-interest bonds, took away much of the inducement for saving. Thus the supply of capital
fell and the price of it rose. An industrious and solvent people like the Germans, can now obtain British or American capital by paying 6 or 7 per cent. in interest. But this is a high rate for industry to bear, and prevents the rapid increase of wealth, because comparatively few businesses can afford to pay such a price for capital. And what is hard for Germany is almost impossible for Poland, where the cost of capital may be anything from 15 to 35 per cent. Nevertheless the lack or scarcity of capital is not so much a cause of European poverty as an effect of it. If European industries were more productive they would soon create a sufficient capital fund for their own use.
The payments of the American debts are, doubtless, a contributory cause of European poverty. In the courageous and public-spirited memorandum issued by the Faculties of Economics, Political Science and History of Columbia University, the professors pointed out that Europe has recently made an unexampled and successful step towards the establishing of a continuing state of peace. This step is comprised in the Locarno pacts for the neutralisation of the Rhineland and for the peaceful settlement of territorial disputes on the Polo-German and FrancoGerman frontiers. But while, in the security of peace, Europe may be expected to recover much of its ancient capacity for producing and accumulating wealth, the accumulation will be retarded so long as a large part of this wealth has to be exported to the United States, without anything being received in exchange.
This, of course, is not an ethical question. European countries received a military benefit in exchange for the money they borrowed between 1917 and 1920, and therefore morally they, as debtors, are bound to pay. But, from the point of view of economics, all that can be said is that European countries are paying over vast amounts of wealth (that is, vast amounts of things which are useful and pleasant for life) to the United States year by year without receiving anything in return, and without having received any economic benefit from the use of the American loans. These payments, therefore, only decrease the amount of wealth left in Europe and available for the peoples there; they both depress the standard of living and they diminish the fund of capital which could be used for the creation of fresh wealth. In order to replenish their capital fund the peoples of Europe have to re-borrow from United States bankers, at a high
Oct. rate of interest and subject to a heavy discount, the very wealth or credit which they are exporting to the United States in payment of the debts. Nevertheless, the debts are not the cause of European poverty; for, if Europe was using its resources to the utmost of their productivity, it could pay these debts out of the surplus of its wealth.
We now come to the fundamental cause of European povertytrade barriers. Europe is a great region of the earth's surface which is particularly suited for the production and exchange of wealth. Some parts of Europe are pre-eminently suited for the production of certain commodities; other parts are better adapted for producing other commodities. It is obvious common sense that each country should concentrate its energies on making or growing the things which nature has especially equipped it for producing, and that it should exchange its surplus of these things for the commodities which other countries are better fitted to produce. For effecting such exchange, Europe has unrivalled advantages. There are no insuperable natural barriers, no wildernesses, no impenetrable mountains, no jungles. On the contrary, the natural routes of communication are numerous and easylong navigable rivers which traverse many different countries, low passes through the mountain-ranges, large stretches of level plain. There is, on the whole, a temperate climate. Finally, nature has been reinforced by art; road, canal and railway provide a system of communication which is absolutely unrivalled in any other region of the world. Yet on this continent and its adjacent islands, the States, so suited by nature and art for trading with each other, have actually directed a great part of their energy to the building up of barriers for the purpose of preventing trade.
It is a literal fact that the governments of Europe are almost daily devising and putting into effect regulations for preventing that exchange of goods and international co-operation in production, without which the resources of the land and of the peoples cannot be employed to the fullest advantage. Instead of encouraging the production and accumulation of wealth, the governments are actually restricting production on every side by preventing the import of advantageously made foreign goods, and forcing their people to depend on disadvantageously made home goods. As Professor Cassel well puts it: division of labour," the great fundamental principle" of Adam Smith, means "the dividing
up the process of production, and concentrating the work of everybody upon the occupation for which he is peculiarly fitted."
Nobody would seriously recommend giving up this division of labour and going back to more primitive forms of production by means of which it would be absolutely impossible to feed the world's present population. In spite of this, the whole world to-day is engaged in finding out all sorts of devices to restrict the free division of labour and render its application less profitable. In fact, the serious sufferings of the world which the Geneva Conference has been called to cure, can ultimately, to a great extent, be traced back to forces and measures counteracting more or less consciously the great principle of the division of labour.*
On every side, as Professor Cassel has shown in this luminous memorandum (prepared for the consideration of the Geneva Conference), there is restriction; and restriction makes poverty. Great Britain restricts the import of motor-cars, lace and gloves; therefore the population of this island has to be content with a smaller number of those articles, or else to pay for the same number by a greater expenditure of labour and capital than would be the case if imports were free. Great Britain is eminently suited for producing and shipping excellent coal; but France and Spain will only have an artificially limited amount of it; therefore the French and Spaniards have to use a restricted supply of inferior home-produced coal, and at a price which is said to be about 10 per cent. above the price of British coal. A similar tale can be told of every country in Europe. The greatest area of restriction is Russia, where no goods are free to enter or leave at all, where no exchange can take place with the outside world, except through the narrow and obstructed bottle-neck of the Soviet Commission of Foreign Trade.
What is the reason of all this international restriction of trade? In theory, practically all systems of protection are imposed to adjust the difference between the rates of home and foreign wages, or to countervail some advantage which foreign nations possess and which are supposed to be unfair to home industries. The programme of the party, which made the great McKinley tariff of 1890 in the United States, said :
If the proposed rate of duty of any article on the dutiable list is in excess of what is required to give fair and adequate protection to the
*" Recent Monopolistic Tendencies in Industry and Trade."
competing domestic industry, none will be more ready than the majority of your committee to reduce the rate to the level of such requirement.
Similarly the so-called Safeguarding of Industries Act is supposed to operate to protect industries from " unfair" foreign competition. This simply means, in effect, that the British people are denied the use of certain useful goods which can be produced in large quantities economically abroad, and have to be content with a smaller supply of similar goods which can only be produced with a higher expenditure of effort and capital at home. Meanwhile other goods, which Great Britain is specially adapted to make in large quantities and of high quality, lose their markets because the foreigner, whose motor-cars, lace and gloves, we are hindered by law from buying, must consequently buy less from us. The result, as it affects all Europe, is that the amount of wealth which is daily created is far less than it would be if the international restrictions did not exist; and as the amount of wealth is thus kept artificially small, the peoples of Europe (including the British Isles) are kept artificially poor. In place of helping to maintain the standard of living of their labourers, as the countries which impose tariffs think they are doing, they are taking one of the most effective means of lowering that standard. To quote Professor Cassel again :
The fundamental reason for an exchange of goods between nations is an inequality of the costs of production of the various goods. The advantage of the exchange depends solely on the fact that there is an inequality of cost and is independent of the causes of this inequality. These causes may be connected with different natural resources, climate, etc., with different conditions of labour and different standards of living; all the same, a free exchange of goods is always profitable. Although fairly generally acknowledged, as far as essential natural differences are concerned, this principle meets with strong opposition as soon as the difference in the cost of production is due to social causes. . . People seem to imagine that . . . a country with a higher social standard must be hopelessly handicapped in free competition with countries having lower standards. . . . In reality, relative advantages will always be divided up between countries with high and low social standards in such a manner as will bring the exchange of goods between them into equilibrium and make this exchange profitable to both parties.†
*Paxson," Recent American History " (1921); p. 147.
+" Recent Monopolistic Tendencies in Industry and Trade."