THE world is now at one of the great cross-roads of history. The system, usually termed capitalist but I think better termed competitive, under which the western world has made its astonishing progress of the last century and a half, has developed deep-seated defects which will threaten its existence unless they can be cured. We need to reform, and in larger measure to transform, this system. We need so to improve the framework of law, of institutions, of custom and of public direction and control, that the otherwise free activities and competitive enterprises of man, instead of destroying each other, will inure to the general good. In the organization of industry, of credit, and of money, we need to supplement the automatic processes of adjustment by deliberate planning. This is the specific task of our age. If we fail, the only alternatives are chaos or the substitution of a different system inconsistent with political and personal liberty, perhaps after an intervening period of collapse and anarchy.

Now in every aspect of this great task one fundamental issue constantly occurs. Upon what basis are we to plan, at what goal should we aim? Are we to move more and more towards a system of closed units, with political and economic boundaries coterminous, each aiming at a self-sufficiency with no more than a minimum of external relations? Or are we to aim again at building up world trade within the framework of a world order? It is an issue which presents itself urgently to the world as a whole and to each nation. No complete realization of either ideal is of course practicable. But it is now that we must decide towards which we shall move.

We must understand the real alternatives clearly. The choice is not, of course, between a complete suppression of international trade on the one hand and its complete freedom on the other. In any event some foreign trade will and must take place. No country, or even continent, is completely self-sufficient or will be content to forego everything which it cannot itself produce. Nor, even so far as self-sufficiency is aimed at and achieved, will it always be coterminous with that of political sovereignty. Many smaller countries would find the restriction on their economic development, if it were dependent upon their own resources alone, so intolerable that they would be forced into economic unions with their neighbors. The conclusion to which the world will move, if the "closed unit" alternative is chosen, will be that of an economic system in which either single great countries, like the United States or Russia, or Empires such as the British, or economic unions of a number of separate politically sovereign states, for example in Central Europe, will form economic units, each producing from its own resources for its own market, with no more than an indispensable fringe of external trade as a supplement. Raw materials will be exported and imported; a few highly specialized manufactures will pass from one unit to another. The position will become more like that of the days before the industrial revolution, when with small unit manufacture and primitive transport facilities the vast bulk of the world's activities were national, or even regional and local, and external trade was mainly concerned with the precious metals, the precious spices, a few luxuries, a few staple commodities such as wool and its products.

Nor must we conceive the opposite alternative as that of a complete freedom of trade and a total suppression of tariffs. Tariffs will in any event remain as a convenient form of revenue; they will not be confined to those few articles which are not and cannot be produced at home, and will therefore in varying degree have a protective aspect. Moreover, even if the freetraders' economic argument were fully admitted, some countries would doubtless wish to avoid complete specialization upon a few types of production and secure a greater variety of national life, although at an admitted economic cost. It is a not unreasonable social ideal to desire to be a member of a community which comprises many varieties of occupation -- agricultural, industrial, financial -- rather than to be slightly better off in a community exclusively engaged, for example, in sheep-farming. In addition, various forms of protection are likely to be found as a counterpart to a deliberate planning of the economic and social life of a community.

But between these two impossible extremes, of completely closed economic units and complete freedom of trade, there is an immense field within which there are real alternatives. The world may be predominantly a world of closed units or a world of free intercourse.

The issue is now, in some respects, clearer than it has ever been; for the collapse of the credit system has revealed the anatomy of the world's economic structure. So long as credit flows freely, economic developments and policies that are ultimately inconsistent and impracticable can long continue without apparent disaster. The arrest of credit brings us face to face with realities. The education of public opinion proceeds rapidly. The ordinary man learns quickly, perhaps has already learnt, that some ambitions, each attractive in itself, are incompatible. He begins to realize that a country cannot be at once a successful creditor from the past and a successful exporter, and at the same time a reluctant importer and a reluctant new lender. But when this lesson has been learnt, the conclusion remains uncertain. It is certainly not to be assumed, as is done by many who desire a world order and the restoration of world trade, that the result will be the adoption of a more international policy, the revival of exports by the admission of imports, the reëstablishment of the conditions of successful foreign investment by an active policy of coöperating to secure the necessary political basis of assured peace. It may be just the opposite. The disillusioned American citizen may say in effect: "I admit that the world's main political problem must be solved if foreign investments are to be more than a gamble and that this is improbable without America's active participation. But I don't wish to become involved in Europe's quarrels. I admit that if we don't allow Europe to pay her debts by sending in her goods, she won't be able to pay. Very well, if that is the choice, let us cut our losses. I admit that we can't maintain a large unilateral export trade, and that if our foreign trade is substantially destroyed our general level of prosperity will be lower than it would be if we could keep it and expand it within the framework of a secure world order. But the world situation is in any case too uncertain. If we establish our economic life to any substantial extent on such a basis, we shall always be liable to disastrous reactions from foreign events which we cannot control. Let us utilize our own resources, built on a foundation that we can ourselves assure; let us deliberately forego certain possible but precarious benefits for a more safe and stable economic life."

I do not mean that such a creed will be explicitly formulated and definitely adopted as a basis of official policy. That is not the way official policies are formed under the conditions of modern representative government. I mean that the customary resistance of particular interests to any substantial reduction of tariffs is likely to find support in sentiments of the kind just expressed.

If, indeed, this should be the conclusion to which the disillusionments of the present depression leads America, the reaction upon the rest of the world will be very important, and may be decisive. Other countries have a less plausible case for self-sufficiency because their internal resources are more limited. But in all cases a real alternative is presented between policies directed towards greater freedom of world trade or more restricted markets, and in every instance the issue is now in doubt. If the second alternative is taken, the inadequacy of the national resources of smaller countries is likely, as suggested above, to lead to economic unions of one kind or another, each of them having either internal freedom of trade or substantially lower tariffs than they impose against the goods of countries outside.

Nothing could illustrate better than the case of Great Britain the inevitable interaction of the world's economic policies and the unlikelihood, under modern conditions, that some countries will continue policies calculated to facilitate free intercourse, while the rest of the world pursues an exactly contrary course. For about half a century Great Britain clung to free trade in an increasingly protectionist world, with diminishing hopes that other countries would turn in the same direction. Until a few months ago this remained her fundamental policy; but the forces making for its reversal had obviously been growing in strength for some years. The financial crisis was the occasion of the radical change that has recently been made, but the underlying cause is undoubtedly the country's growing feeling that it could not remain as an open market in a protected world.

The issue recently decided as regards domestic policy now presents itself in the sphere of imperial policy. The dominions are of course in the position of self-governing States, united in their relations to each other and to Great Britain by common traditions and sentiments, but completely masters of their own policies. The Ottawa Conference has shown how far, at this moment, the tendencies that make for closer union against the rest of the world are potent. But the position of the so-called British Colonial Empire is in some respects more significant. It would indeed be very misleading to think of the policy of this Empire as being simply dictated from London. The Empire includes every variety of lands, not only in natural resources, but in stages of civilization and culture. And the Constitutions reflect these differences, ranging from autocratic paternal government at one end to a very large measure of self-government at the other. Nevertheless, it is true that, in varying degree and by gradual stages, Great Britain could if she so desired make a large part of her dependent Empire a more or less closed system.

No country which has been faced with the same issue, except Holland, could well complain if she did. French territories are divided between those which are "assimilated" (that is, included within the French Customs area) and others which have high preferential duties. Japan has proceeded on the "assimilated principle;" Italy, Spain and Portugal on the "preferential principle." The United States has applied the first system to Hawaii and the second to the Philippines. Nevertheless, such a change would be a breach with all the traditions of British Imperial policy, and might prove a disastrous landmark in world history. The main directing principle of British policy, though it is now subject to exception, has been that of the "open door." The raw materials of her colonies have not been reserved, or supplied on preferential terms, to the home country; and the colonial market has been open to the world. The United States Tariff Commission published in 1922 a report on Colonial Tariff policy which includes the following passage:

Between 1860 and 1919, Great Britain maintained the open door in India and in the Crown Colonies generally, with either free trade or low tariffs for revenue only. In this period no British dependent colony had a general system of preferential rates. . . . During 1919-1920 there has been a considerable extension of differential tariffs . . . but since only about 5 percent of the total trade of the British Crown Colonies is affected by these differential duties, the open door is still the policy prevailing in the dependencies of Great Britain. . . . While the differential duties at present are so few, in so vast an empire, and one that controls the major part of the world's supplies of so many articles, the reintroduction, on however limited a scale, of the old mercantilist principle of the reservation of colonial products to the mother country must cause serious concern to the rest of the world.

This is a notable eulogy of a great venture in liberalism; may it not prove to be also its epitaph!

Great Britain is only one instance, though it is the most striking one, of the inevitable interaction of the commercial policies of different countries and their tendency to move in the same direction.

II

This, then, is the great issue which presents itself to the world, and to each country in it, in the period immediately ahead of us. Shall we continue and intensify our present economic nationalism or shall we retrace our steps?

There is at least sufficient experience in this last post-war decade to show what the first alternative means. And it is perhaps worth while to recall some of the outstanding features of this experience. It is not necessary to insist on the familiar theme of the inevitable economic loss involved in putting impediments in the way of international commercial transactions which would never take place unless they brought benefit to both parties. It is sufficient on this aspect of the question to recall the unanimous verdict of the two hundred representative experts nominated by fifty governments who constituted the World Economic Conference of 1927. More important at this moment is the relation of economic nationalism to the present depression and to the political difficulties, both domestic and international, which confront the world.

Economic nationalism helped to cause the depression of 1929, and still more the financial crisis of 1930, chiefly by increasing the disturbing effect of the intergovernmental obligations left by the war and by its dislocation of the world's gold-standard currency system.

The sequence is clear in its main outline. Debtor countries can only meet their obligations by exporting more than they import; or by paying out of new loans; or, as the only remaining alternative to default, sending their gold. The larger debts left by the war were bound in time to become impossible unless imports were welcomed by the countries to which they were due. In fact, they were impeded by high tariffs, and the balance of payments was for a time maintained by loans and credit operations. The effect of these was necessarily to pile up indebtedness to ever-increasing heights, since the new money borrowed was not -- and could not be -- employed in such a way as to create corresponding additional exports. As soon, and just so far, as a recognition of the increasing danger of the situation restricted new lending, gold necessarily flowed to bridge any gap in the payments. This was bound in any case to be a very temporary expedient, since gold stocks are limited. Under ordinary conditions, however, the outflow of gold from debtor countries would have set corrective forces in operation. When the gold standard worked normally, as before the war, several results followed from such a movement of gold. Prices would go down in the country losing the gold, and up in the country receiving it. This would increase the exports of the first and the imports of the second. But in the post-war period, these results did not in fact follow. The gold was partly "sterilized" in the countries receiving it, so that prices did not increase proportionately; and so far as the gold standard did still retain sufficient potency to direct extra imports to the gold-importing countries they were kept out, not only by the existing high tariffs but by their increase.

It is such an increase of tariffs, made in order to counteract a flow of imports caused by the normal corrective operation of the gold standard, that made and must always make that standard -- or any international money -- impossible. This is the reason why the Hawley-Smoot tariff of 1930, and its ratification by the President, was such a decisive event in world history. For other consequences inevitably followed. The partial sterilization of gold exercised a deflationary effect on world prices, not indeed originally causing their fall, but continuing and increasing it. And the outflow of gold from debtor countries, deprived of its normal corrective effects, necessarily drained their currency reserves, and soon -- through a chain of interacting events -- made it impossible for debtors to meet their foreign obligations (which constituted the financial crisis of last summer), and then drove more than half the world off the gold standard. In the meantime, the fall in prices aggravated by the maldistribution of gold increased the real burden of all debts. Thus a debtor country, producing say food and raw materials, would find the prices of these commodities halved, so that it would have to export twice the quantity to meet a given gold obligation; and at the same time it might find that, through the general conditions of the crisis, its exports also were halved; so that its burden was quadrupled. And thus the crisis has been prolonged and intensified.

These results were the unintended but inevitable consequents of economic nationalism combined with large international debts. Without the first, both reparations and war debts could have been paid on a large scale by methods which would not (like the actual new borrowing that took place) have merely postponed and aggravated the ultimate difficulty. Without the second, economic nationalism would indeed, as it always does, have brought both economic loss and international friction; but it need not have been a principal factor in an unprecedented financial crisis.

Not less striking is the light which recent experience throws upon the relation between economic nationalism and political impotence at home and political friction abroad.

In a large proportion of countries at the present day the fundamental evil, deeper and more enduring than the economic depression itself, is political impotence, the inability of government to govern. There are other causes of this impotence, but one of the strongest and most widespread is certainly the corrupting influence of a policy of changing tariffs. In the nature of the case this must be so. Whatever the loss involved to the community as a whole by a new tariff, it usually carries a substantial financial advantage for the particular industry protected. The industry organizes pressure because it finds that pays. Collectively, members of a representative assembly are judge; individually they become advocates. Log-rolling is the consequence, and the national tariff that emerges is not an expression of national policy, wise or foolish, but the sum of competitive -- or corruptly concerted -- pressures. The whole machine of government has its attention diverted from its proper tasks, and is made unfit for them. At the best the available resources of intelligence and honesty, in even the most fortunate of countries, are barely sufficient to enable it to deal with its essential problems on the basis of a representative system. With the added duty of framing discretionary and variable tariffs, the task of making representative government compatible with honesty and efficiency becomes impossible. After many years of international negotiations on commercial policies, I came to the deliberate conclusion that the greatest and most fundamental difficulty was not an international one at all, it was the impotence of the national governments. Just so far as one could penetrate the real minds and thoughts of the delegates, one saw that what was determining their attitude was not a conception of national policy but a calculation of political pressures. If the national representatives had been masters in their own houses, a settlement might have been possible; but on the prevailing basis nothing could be done.

International agreements, and any kind of practicable world order, must be built up on national units. If these foundations crumble the larger structure crumbles. Illustrations of the impotence of government abound on every hand; and there are of course other causes; but no judgment of the present and no constructive plan for the future is possible without recognition of the extent to which this variable tariff-making power under the control, directly or indirectly, of representative assemblies is sapping the foundations upon which government is built.

In spite, however, of the economic loss and the corruption of domestic government that result from economic nationalism, it is its effect upon international relations that is most obvious and direct. Of the four great historic causes of war -- dynastic, religious, economic, and political -- the first two now belong to the past, at least so far as nations of the western races are concerned. The two dangers for the present and the future are political nationalism and economic nationalism. The first of these is more obvious in relation to actual disputes and imminent dangers; we think of the national sentiments that gather round such a question as the Polish Corridor, or countries denied freedom or equality in armaments, when we are trying to assess the immediate prospects of peace or war. In the period succeeding a great war all such sentiments are abnormally inflamed. But deeper and even more enduring as a permanent threat to peace are the economic causes of friction. Without them political animosities themselves would lose half their venom and national loyalties would more easily find an innocent expression.

Throughout history economic disputes have been among the principal causes of war. But the form which the economic danger takes has changed from age to age. In earlier history occurred the great migrations under the spur of hunger; in later eras we see the forcible seizure of a neighbor's territory, or the partitioning of uncivilized areas to form the empires of more advanced countries. It obviously is not possible to say that such causes of war belong definitely to the past. The Japanese action in Manchuria is a warning against any unqualified generalization. Nevertheless, as far as western countries are concerned, a very definite stage was marked by the partitioning of Africa in the last century. The danger which is characteristic of the present period, and the only one which needs very serious consideration, is of a different kind. It arises from the use of the national instrument of government to influence the competitive struggle -- that is, from the use of the tariff-making power, from the clash between the natural development of trade and industry and the political frontiers which have been converted into economic barriers. Of course this is not a new phenomenon in history. But it is now of altogether unprecedented importance, and dominates every other form of economic danger in international relations.

The danger is in some respects greater because of the uncertainty and ambiguities of the present position. The action which almost every government is taking to exclude the goods of other countries, and to subsidize its own exports in world markets, assumes many forms and is with few exceptions not guided by any recognized code of behavior, much less restrained by binding laws or treaties. Each new action is resented by those whose interests are adversely affected, and is followed by a retort which is equally resented by the first party. Recriminations follow, with no recognized criterion by which to judge between them, and a general international temper is created which envenoms current political disputes and greatly adds to the strain on any preventive machinery devised as a safeguard against war.

Space does not suffice to illustrate adequately the multitudinous forms which this form of economic nationalism assumes. Governments devise new forms of tariffs, prohibitions, quotas, exchange restrictions, for the benefit of some immediate interest in their own countries, with little regard for their effect upon others. Official representatives accredited to foreign capitals, who derive their influence from the knowledge that those who employ them have in their control the national armed forces, support their respective nationals in their competition for foreign business. They all of them employ methods which the others resent as unjust. One, for example, will hint that a settlement of a governmental debt will be facilitated if a new contract is given to a particular firm. Another will hint at support in a political dispute. Those whose interests are prejudiced will resent the use of such influence, and will ask their own government representatives to give them equally effective help, which will in turn be equally resented; and here again there is no recognized criterion of behavior. The consequence is that in a large proportion of the capitals of smaller countries the representatives of Great Powers are occupied more in work that causes trouble between those Powers than in establishing healthier relations with the country to which they are accredited. Often, too, if we look below the surface of a dispute which is apparently political, we find the same economic forces obscurely working. The political animosities between Germany and Poland, for example, have been kept alive largely by the rivalries of coal interests or agriculturists who desire to avoid any agreement which would result in the import of coal or pigs from across the border into their own market.

It might be said that if economic nationalism were carried even further, some of these dangers would be lessened. If tariffs were everywhere completely prohibitive, so that world trade was really limited to the exchange of these commodities which could in no case be produced at home, the situation would be known and recognized; the multiplicity of separate occasions of friction that arise under present conditions would cease.

To some extent this is true. But other dangers, ultimately more formidable, would come into existence. If the world is organized in the form of closed units, in each one of which all the national resources are gathered and concentrated, the general situation must be one of grave and constant danger. Among all the fundamental conditions that make for peace the greatest is the existence of counteracting forces that will come into operation when any momentary folly of those who control policy threatens war. So long as a large proportion of the people of each country feel that their interests are involved with the fortunes of other countries, and depend upon peaceful relations with them, there will be an automatic resistance to any dangerously nationalistic policy. For this reason it is better that men should think of themselves more in terms of their occupations, professions and businesses, and meet the nationals of other countries on that basis; and be less conscious in all their activities of their differences as Englishmen, Germans or Frenchmen. The identification of all the interests and activities of a country with its political sovereignty, and the political authority which controls its armed forces, is the greatest of all the ultimate dangers. On the other hand, when the citizens of different countries meet on a basis of common interest that transcends or cuts across national frontiers -- whether they are scientists, or schoolmasters, or financiers, or industrialists, or trade unionists -- and when organizations develop on lines determined by their special purpose in science, education, finance, industry or labor conditions, and draw their members indifferently from every country, the basis of international relations is broadened and international amity no longer rests on purely political foundations. If, then, economic nationalism were developed to its ultimate extreme, and firmly kept there, some of the casual frictions that result from the present intermediate and ambiguous position might cease, but even graver dangers would replace them.

This is, however, an unreal assumption, for it is incredible that such complete economic nationalism could be securely entrenched. It would in each country be constantly menaced by the resistance of the economic interests it was repressing. It is too directly opposed to natural economic development to be permanently possible. An intensification of the present economic nationalism would thus bring new dangers, without even the advantage of establishing a known and recognized policy which would end the friction that now arises from uncertainty.

III

What, then, of the prospects for the future? Will economic nationalism increase or decline? Those who take the former view will find their strongest argument in the fact that, in the absence of deliberate decision and action, the mere drift of policy is bound to be in that direction. The pressure which separate interests exercise on the government is almost always in order to secure action which means a more nationalistic policy. The interests which lose by such a policy are more dispersed and less organized. A policy composed, as most policies have been, of the sum of sectional demands, means a nationalistic policy. A wiser policy needs to be collective and deliberate. It depends upon the wisdom and power of governments, and the good sense of those upon whom their authority depends. The case of those who expect an intensification of the present nationalism is therefore obviously a strong one. Nevertheless, the reasons for expecting policy to move in the opposite direction are also strong.

Lessons taught by the past are rarely learned; but immediate suffering is a more effective schooling. World trade is now demonstrating its real value by its disappearance. The destruction of world currency by nationalism is showing us unmistakably what we have lost. Under the pressure of necessity, leadership is reappearing in some countries. The monetary policy of the Federal Reserve Board, for example, is courageous and determined, and needs probably only a less pessimistic national psychology to become effective. In other cases, the same necessity as produced a national temper which gives leadership a chance; the success of the conversion loan in Great Britain may be cited as an illustration. These instances may seem irrelevant to a discussion of nationalism. But they are in fact closely related to it; for nationalism will be restrained if government can govern. If collective control can really make the res publica effective over sectional interests, collective wisdom will have its chance.

Indeed, if we take not a near but a distant view, the answer to our question can hardly be in doubt. The whole tendency of modern industrial development is towards a large scale organization which is only compatible with secure access to markets which are larger than those comprised within national frontiers. The economic life of the world, as it grows and finds expression through all the multitudinous activities of man, implies more and more world trade and a world order. It is incredible that government policies should permanently obstruct this natural and inevitable development. Ultimately policies must be adapted to the requirements of the actual life of the world. A world order must be established; the conditions of secure intercourse must be assured. Economic nationalism must be a passing phase in the world's history.

Yes, the ultimate answer is certain. But the immediate answer is doubtful. In this, as in other spheres, we may drift on till natural forces at last compel a solution after decades of intervening anarchy and disaster. Or we may, by deliberate policy, anticipate the conclusion and avoid the intermediate period of suffering and distruction. The issue depends upon a few great countries; upon their recognition that they cannot abdicate their responsibilities for the fate of a world which must be determined mainly from their decisions, or isolate their own fortunes from a world of which they are, and cannot but be, integral units. Nationality has been for many years the form in which the aspirations of man for liberty and free development have found their expression; nationalism is the abuse of nationality which now threatens all that it has given or promised with destruction. The present situation is the greatest challenge ever given to the constructive and collective intelligence of man.

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  • SIR ARTHUR SALTER, Secretary of the Allied Maritime Transport Council during the World War; recently Director of the Economic and Finance Section of the League of Nations; author of "Recovery" and other works
  • More By Arthur Salter