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THE ECONOMICS OF
WAR AND CONQUEST
THE ECONOMICS OF
WAR AND CONQUEST
AN EXAMINATION OF
MR. NORMAN ANGELL'S
ECONOMIC DOCTRINES
BT
J. H. JONES, M.A.
LECTURER ON SOCIAL ECONOMICS IN THE UNIVERSITY
or GLASGOW ; HONORARY DIRECTOR OP THE GLASGOW
SCHOOL OF SOCIAL STUDY AND TRAINING
LONDON
P. S. KING & SON, LTD.
ORCHARD HOUSE, WESTMINSTER
1915
vi PREFACE
it rests upon economic grounds, would have
met with universal approval. But he has
travelled far beyond this simple truth, and
by creating controversy about assertions
which are either false or incapable of proof
has obscured what is beyond controversy
and yet sufficient in itself. In the following
pages it will be shown that some economic
gain may be achieved by means of a war of
conquest. But the money value of the
expectation of such gain is considerably less
than the money cost of such a war.
My best thanks are due to Messrs. Hector
J. W. Hetherington and Donald Stalker for
reading the manuscript and making several
suggestions, and to the editors of The Welsh
Outlook for permission to use an article on
German war finance, published in the April
number of that journal.
The references in the text are to the 1914
edition of " The Great Illusion."
J. H. JONES.
Glasgow.
May, 1915.
CONTENTS.
CHAP. PAGE
Introduction ix
I. Mr. Norman Angell's Theory . . i
II. Armaments and Economic Strength . i6
III. War and the Credit System . . 37
IV. The Immediate Financial Effects of
THE War 55
A. Great Britain (pp. 55 — 76).
B. Germany (pp. 76 — 91).
V. Territory and Economic Welfare . 92
A. Annexation (pp. 92 — 103).
B. Colonies (pp. 103 — 117). -
C. Destruction of Markets (pp. 118 —
121).
VI. The Indemnity Problem . . . 122
VII. The Material Cost of War . . 139
INTRODUCTION.
If the value of a book is measured by
the attention it commands and the dis-
cussion it provokes, '* The Great Illusion/'
by Mr. Norman Angell, probably ranks
first among recent contributions to the
study of international relations. Mr. Angell
and his followers have declared war upon
war itself. They do not fight alone, but
they fight with new weapons, and follow a
different plan of campaign. It is the
writer's object to examine the value of one
of the instruments of attack — the heavy
artillery — and to indicate the ways in which
it has been and might be employed. And
it may be stated here that, whereas the
noise of the heavy guns is deafening, the
writer believes the damage wrought among
the enemy's defences to be far less than is
generally supposed to be the case. He
believes, moreover, that the campaign is
one for which the heavy artillery employed
by Mr. Angell is not required.
The artillery or '' economic " attack
upon the enemy forces — mihtary power,
war and conquest — which is made in the
X INTRODUCTION.
first part of " The Great Illusion " may
be briefly described as follows : — ^(jUnie^
wealth and prosperity of _a _iialicui«,aca
Independent of military power. That small,
almost defenceless, countries like Holland are
regarded by investors as more secure than
miUtary powers like Russia or Germany
is clearly indicated by the relative prices
of their national stocks. (2) War.^^r.r,oni3
paniedj>v looting, would result in finanria4^
ChaosTcapital would bejdisturbBd. and the
"crf^Hit ysyqtfi^ wnnlH rnllapc^f^, If Germany
invaded Great Britain and looted the
Bank of England, the damage to Germany
herself would far exceed the gain from
such looting. Nor could compensation be
sought by means of tribute, which, under
present industrial conditions, is an economic
impossibility. (3) If an indemnity is not
inevitably futile, its value to the conquering
nation must be largely discounted by the
difficulties of transferring a large sum of
money from one country to another outside
the channels of ordinary commerce. The
payment of an indeiimity of .^.200^0jqq3OTI.
by Prance to Germany after the war qL
1870 proved to be disadvantageous to the
Recipient. Germany would hav6 been better
withotrt'it. (4) Annexation and colonial
expansion bring no economic advantage.
Germany, for example, has gained nothing
by annexing Alsace-Lorraine, while the
INTRODUCTION. xi
British colonies are not a source of special
profit to the mother country. Finally, an^
invading army could not r|fst^^3^ ^^^ fraH^^
"^mifiV^'^tim witbr^l^t/^/^^^'^y^T'C tliP market
of its own people. The prosperity of
Lrermany is bound up with the prosperity
of this country, consequently a victorious
German army would be compelled, from
purely selfish motives, to leave Britain
exactly as it was before invasion. The
corollary is that defence, as well as aggres-
sion, is economically futile. Since no loss
is suffered through invasion, no economic
object is achieved by resistance. These
propositions are examined separately in
the chapters which follow.
Mr. Angell limits the application of his
theory of the economic futility of war and
conquest to nations which have come
completely under the sway of the industrial
revolution. He deals with those com-
munities which are '' firmly set," and in
which the modern features of economic
organisation find full expression. The
main features relevant to the present
discussion arena) a considerable degree
of dependence upon foreign countries for
the necessaries of life and the raw materials
of manufacture ; (b) the existence of joint-
stock companies controlling large invest-
ments of capital ; (c) a highly-developed
system of credit. These are inter-related,
xii INTRODUCTION.
for not only is foreign trade largely carried
on by joint-stock companies employing
credit instruments in the course of trade,
but the shares of such companies, together
with the corporate debts of communities,
are bought and sold on the Stock Exchange,
whose operations play an important part
in the credit system.
The function of the modern bank is to focus
the savings of the community and disperse
them to be employed as capital by those
who, presumably, are best able to make use
of it. The performance of this double func-
tion has resulted in the creation of a com-
plex mechanism which will need examina-
tion as the argument proceeds. A delicate
web of finance, woven through the centuries,
has spread during the last fifty years or so
to the ends of the earth. Again, the
development of the banking system, com-
bined with the introduction of the principle
of limited liability, has facilitated the
formation of joint-stock companies to con-
trol immense undertakings which, as a
result partly of inventions and partly of
other economies of large organisations,
it would have been impossible for an
individual to control. The ownership
of such undertakings can be transferred
by the sale and purchase of '' shares."
And the Stock Exchange is the market-
place of such shares, together with the
INTRODUCTION. xiii
bonds of Governments. The market for
the stocks and shares of some undertakings,
such as railways, as well as for most Govern-
ment bonds, is world-wide. The result is
that the ** owners '* of Argentine railways
may to-day be Englishmen and to-morrow
Canadians or Germans. The creditors of a
Government may be Egyptians, Poles, or
Americans.
It is necessary to distinguish clearly
between the cost of constructing, say, a
railway, its market value as indicated by
the price of the stock representing it, and
the tangible assets of the undertaking as
they appear on the annual balance-sheet.
The first two may differ materially. For
the value of stock in the market depends,
other things being equal, upon the antici-
pated net earnings of which it is the
capitalised value, and over a long period
it varies roughly with the actual dividends
paid ; but since at any moment it depends
upon tlie^profit expected jn.tte -future,
and since such expectation is affected by
the political situation, it will be evident
that war or the prospect ~oFwar Ts bound
"to react upon the Stock Exchange. TKe
world-wide ramifications of credit and trade,
combined with the interdependence of the
banking systems of all nations, and tlie
jdep^ndence of each upon continuity ojL
jproduction and sale, have made it practi-
xiv INTRODUCTION.
cally jmpossible _ for -war_ to be waged
between two nations without dislocating,
more or less severely, the trade and affecting^
J:he credit relations of all other countries.
This internatignalisation of cre.cWf has be(
the mam factor which, in Mr. Angell's
view, has rendered war and conquest
futile. Wealth has become " intangible,'
and cannot, therefore, be carried away in
sacks by the looting conqueror. The credit
system provides the " sensory nerves " of
the body economic, and if credit is destroyed
the result will be similar to that produced
by the destruction of these nerves. It is
always dangerous to argue by analogy ;
and in this case particularly it seems as if
Mr. Angell has not escaped the pitfalls.
Our own experience during the first two
months of the present war suggests that
the financial system should rather be
regarded as the driving machinery of the
world factory. It broke down, but it was
not beyond repair. And the reduction in
output of the world factory is due not to
defective work on the part of this
machinery, but to other and obvious
reasons connected with actual warfare.
Mr. Angell asserts that the economic
motive to war is strongly operative among
modern nations. Usually the policy of
aggression is chiefly dictated by the prospect
of material gain. But Mr. Angell does not,
INTRODUCTION. xv
as some of his critics seem to believe, argue
that the economic motive to war is the only
one in operation. He does not ignore other
factors. In the second part of " The Great
Illusion " he seeks to prove that conquest
is as futile in the moral and political sense
as in the economic, and that war is by no
means a " biological necessity." Neverthe-
less, some of Mr. Angell's statements con-
vey the impression that he believes the
economic motive to dominate all others,
and that, if the economic futility of war
were clearly recognised, universal and ever-
lasting peace would not be long delayed.
In the course of a discussion of the influ-
ence of financiers on war he writes : ''It
cannot be too often repeated that the neces-
sary profitlessness of war between civilised
nations, /the necessary interdependence of
nations, will not stop war. It is the general
recognition of profitlessness and interdepen-
dence that will stop war.^^ Impersonal forces,
the Stock Exchange and the rest of it, will
certainly push these truths more and more
into our notice'' (''Foundations of Inter-
national Polity,'' pp. 138-9). To interpret
" profitlessness " and " interdependence "
in the material sense may be wrong, but, in
their context, it is the natural inference.
Again, on the first page of the synopsis of the
book which brought him fame (" The Great
1 The italics are mine. — J. H. J.
xvi INTRODUCTION.
Illusion*'), we find the following: ''What
are the fundamental motives that explain
the present rivalry of armaments in Europe,
notably the Anglo-German ? Each nation
pleads the need for defence ; but this
implies that someone is likely to attack,
and has therefore a presumed interest in
so doing. What are the motives which
each State thus fears its neighbours may
obey ? They are based on the universal
assumption that a nation, in order to find
outlets for expanding population and in-
creasing industry, or simply to ensure the
best conditions possible for its people, is
necessarily pushed to territorial expansion
and the exercise of political force against
others ; ... it is assumed, therefore, that
a nation's relative prosperity is broadly
determined by its political power ; that
nations being competing units, advantage,
in the last resort, goes to the possessor of
preponderant military force, the weaker
going to the wall, as in the other forms of
the struggle for life. The author challenges
this whole doctrine.'' The immediately
relevant sentences may be paraphrased as
follows : It is universally believed that
territorial expansion may become an
economic necessity for some nations ; others
fear that such expansion may be at their
expense, ergo they prepare to meet that
contingency by creating armies and navies.
INTRODUCTION. xvii
Is it not natural, in view of these state-
ments, that critics should have accused
Mr. Angell of losing sight of the other and
deeper forces at work ?
But in other parts of his books he
recognises the influence of other forces.
These, however, are not relevant to the
subject of this book, which is concerned
only with his economic doctrines. Refer-
ence was made to them merely to avoid
the possible charge of neglect or misrepre-
sentation.
The first chapter of this book is devoted to
an examination of Mr. AngelFs main thesis.
The meaning of the phrase '' the economic
futility of war and conquest '* is indicated,
and some of the supposed analogies are
discussed. In the second, third, fifth, and
sixth chapters the particular propositions
which together constitute his case are
analysed, while the fourth chapter deals
with the immediate effects of the present
war upon the credit systems of Great Britain
and Germany. The reader will thus be able
to estimate, in the light of recent experi-
ence, the valjie of Mr. Angell's treatment
of finance, (ihe final chapter deals with
the material cost of war, and indicates,
in a very general way, the effects of war
upon the production and distribution of
the national income)
E.w. h
THE ECONOMICS OF
WAR AND CONQ.UEST..
CHAPTER a. r^ ^
MR. NORMAN ANGELL'S THEORY.
This book is not a defence of war. On the first
page of " The Foundations of International
Polity " Mr. Norman Angell rightly contends that
" the correction of any widespread misconception
touching large human issues, or the correction of
any misinterpretation of facts or false reasoning
concerning them, is desirable in itself, and is its
own justification, even when the immediate
practical import is not apparent." These words
express, with sufficient accuracy, my reason for
attempting to write, in language free from the
technical terms of economic science, a book
devoted largely to an examination of those
theories of Mr. Angell which have led him to
affirm that war is economically futile, and that
the economic strength of a nation is in no way.,
dependent upon military power. This doctrine
is a challenge, not only to militarists, but also to
E.W. B
2 THE ECONOMICS OF WAR.
those pacificists who, admitting the economic value
of miUtary power and the possibility of material
gain from conquest, plead their cause otherwise.
Much of what is written in " The Great Illusion "
upon the economics of war is admirable, and will
meet with universal approval, but a great part of
the book is highly controversial, and, it will be
argiied, untrr-e.
' 'My purpose iu writing is not to attempt to
daniage- thje cau,se of peace. Rather is it to
strengthen ihat cause by ridding it, if possible, of
those fallacious arguments which appear to be
among the props upon which it rests. The success
of a movement depends, in the long run, not
upon the unconsciously exaggerated statements of
enthusiastic supporters, but upon the truth which
it represents. Mr. Angell seems to have burdened
his advocacy with so many arguments that some
almost inevitably prove unsound. The real
economic case against war is simple and clear,
but unimportant : it is that the certain material
cost of war and preparation for war is not counter-
balanced by the cMnce' oi~^^kl~hconoim
This statement wUl riot readily be disputed] ~ and
if its truth is admitted the pacificist who condemns
war on economic grounds has proved his case, and
probably influenced but few people. For the
peace movement will not, in the long run, be
strengthened by any appeal to the pocket, much
less by an appeal mainly to the pocket. Nor
would war cease if all nations realised that it could
MR. NORMAN ANGELL'S THEORY. 3
never bring material gain. But it happens that,
as things are to-day, military power may, under
certain circumstances, be employed to strengthen
the economic position of a nation both absolutely
and relatively to other nations. And the penulti-
mate cause of the present war is probably econo-
mic. The war partly represents the attempt of a
nation whose economic development has been
subordinated to political power to defeat a rival
nation whose recent political history has been
largely shaped by economic ideas, and to increase
its political strength by imposing its will upon
that rival, largely to the latter's disadvantage.
In other words, although German statesmen
avow that the political policy of the nation is
dictated by economic necessity, the truth probably
is that that policy is rendered necessary, not by
economic conditions as such, but by the will to
advance, under present economic conditions, that
prestige or power in international politics which is
the dominating idea of Prussianism. The welt-
macht of the Prussian statesman by no means finds
approval among the German people ; but the
economic situation, or rather the people's inter-
pretation of that situation, is such that the method
necessary to secure world power is one that appeals
to different groups in the community for different
reasons. A vigorous colonial policy appeals to
the industrialist because it offers the prospect of
a secure market for manufactures, and ensures an
adequate supply of raw materials. A strong
B 2
4 THE ECONOMICS OF WAR.
navy appeals to socialists (such as Rohrbach)
because it guarantees a plentiful and continuous
supply of the necessaries of life, which are im-
ported in increasing quantities as the population
grows and the nation becomes more industrialised.
But to prove such a material gain (with the
higher standard of life thus secured for the com-
munity) to be possible by war and conquest is not
to justify war. It should not be inferred from
such a proof that a nation is justified in imposing
its will, through force or threat of force, upon
another people. Economic issues should be
entirely subordinated to moral issues ; and
although the advance of economic civilisation
and the growing complexity of industrial organisa-
tion have forced economic questions to a promi-
nent place in international diplomacy, it is
probably true that even yet those problems
which endanger the peaceful relations of European
nations are only in a minor degree economic. No
nation is justified in sacrificing the lives of some
of its members in order that the remainder may
enjoy material comforts which would otherwise
be unattainable.
Industry, too, has its losses ; trade exacts its
toll of lives. Experiments are conducted and
enterprises started which almost inevitably result
in human suffering. It may appear at first sight
that the two cases are analogous, and that to
oppose war for economic advantage is also, in
effect, to oppose all industrial effort involving
MR. NORMAN ANGELL'S THEORY. 5
considerable human risk. But there are funda-
mental differences between the two cases. The
one involves compulsion ; the soldiers of the
State are given no option. Nor are taxpayers
allowed a reduction by that proportion of their
annual contributions to the State which would be
employed to defray the cost of such a war of
aggression. The other is a voluntary contract.
There is no compulsion to risk one's life in a
dangerous industrial occupation. If anyone takes
the risk he does so voluntarily. Moreover, the
one involves deliberate destruction of human life,
the other implies co-operation on the part of all
human beings to destroy the obstacles presented
by ungenerous Nature — to use Mr. Angell's
phraseology, the one connotes the employment of
physical force, the other the abandonment of
such force. Nor is it an adequate reply to say
that the mere threat of force is sufficient when the
stronger nation opposes the weaker, for the threat
derives its efficacy simply from the certainty of
action if the threat is not itself sufficient. The
attitude of the stronger nation is essentially that
of an enemy ; it is the opposite of mutual agree-
ment. Consequently no inconsistency is involved
in holding the belief that, on the one hand, it may
be desirable to undertake risky enterprises in
order to increase the nation's command over
Nature, and that, on the other, all war is immoral.
Nor is the contrast any less sharp if for co-
operative attack upon Nature is substituted
6 THE ECONOMICS OF WAR.
industrial competition. Mr. Angell defines war
as " the use of physical coercion for the purpose
of imposing the will of one group upon another,
and, to the extent to which force is operative,
dispensing with the need for understanding com-
mon interest, and for free agreement. It is the
rule of coercion, eliminating consent, reason and
co-operation, in the relationship of the two parties
involved '* (" Foundations of International
Polity," pp. 62-3). Yet he believes that " the
' common ' sense of humanity " sees no difference
between war and industrial competition when the
latter enables the " big man " to take advantage
" of all the weaknesses of the small man — his
narrow means, his ill-health even — to undermine
and to undersell " ('' The Great Illusion," p. 10).
Everyone will admit many of the evils attri-
buted to unregulated industrial competition.
But surely (since the abolition of slavery) none of
the attributes of war indicated by Mr. Angell are
present. Bad though the conditions may be
under which a large proportion of industrial
workers are compelled to live and work, they do
enjoy immunity from precisely those evils which
the weaker nations suffer in war. Industrial com-
petition stops short of the very things which Mr.
Angell regards as constituting war. And it is
likely that the " common sense of humanity " does
recognise the differences between the two cases.
Mr. Norman Angell's main contention is that
war and conquest are economically futile, i.e..
MR. NORMAN ANGELL'S THEORY. 7
they do not result in material gain to the victorious
nation. The statement as it stands is somewhat
ambiguous. In the first place, it may mean that
the fruits of victory are purchased at too high a
price ; that the cost entailed by war and prepara-
tion for war is not counterbalanced by the ultimate
material advantage secured by victory. In the
second place, it may mean that no material
advantage can ever be gained by conquest ; that
nothing appears on the credit side of the balance-
sheet. It is in the latter sense that Mr. Angell
argues that an aggressive war must fail.
When the cost of armaments is included in the
expenses of war, and all is debited against the
gains that may accrue from victory, whether in
the form of territory and all that it brings, or in
the form of added security of peace for many years,
as was said to be the case after 1870, probably
it is true that there is a net loss,^ taking, at any
rate, a comparatively short view. (It is of course
conceivable that, taking a much longer view, say
a century, there might be a net gain, even allowing
the cost of war and the annual expenses of arma-
ments to accumulate at compound interest for
the period. For the trade need only show a net
gain greater than the interest on that capital sum
for this result to be achieved. But, apart from
other considerations, no country is justified in
1 The cost of defending newly acquired territory against
possible enemies should also be included and set against the
material gain resulting from colonies or added territory.
8 THE ECONOMICS OF WAR.
legislating in so definite a manner for a century in
advance, for the other elements which may enter
and produce a fundamental change in the character
of the problem, are so uncertain that such legisla-
tion would be a gamble and the gain from it highly
problematic. Assuming war for material ends to
be defensible, no country would be justified in
going to war for a possible enormous gain a
century hence.) On the other hand, it seems that
there should be placed on the credit side of the
balance-sheet against the cost of armaments not
only the gains from war, but, under existing con-
ditions, the gains from peace until war broke out.
For, if there had been no means of defence, the
country, now stronger, and prepared to wage a
war of conquest at the selected moment, would
have been the weaker and subject to attack by
some other stronger nation, who might have
waged war for precisely the same reason. Never-
theless, taking all things into consideration, few
would deny that the net result would be serious
loss.
But this is not Mr. Angell's case. Nor does he
argue merely that conquest brings no material gain
to the world as a whole. It is possible that the
conquest of Great Britain or Canada by Germany,
in consequence of the economic policy subse-
quently enforced by the conqueror, would result
in a net loss to the world as a whole while securing
real gain to Germany itself. And it is further
possible that Germany would be content to see
MR. NORMAN ANGELL'S THEORY. 9
the world as a whole lose twenty shillings, if, by
such means, she could secure ten shillings of that
sum. But Mr. Angell goes far beyond this state-
ment of probability. He denies that Germany
can, under any circumstances, capture the ten
shillings. He argues that she cannot secure any
gain by conquest. She cannot effect any change
in economic organisation which will produce a
profit to her.
" We might conquer Germany to-morrow " (he
writes) " and we should find that we could not make
a single Briton a shilling's worth the richer in con-
sequence, the war indemnity notwithstanding " ^
{"The Great Illusion," p. 47).
Elsewhere he writes :
" As the only possible policy in our day for a con-
queror to pursue is to leave the wealth of a territory
in the complete possession of the individuals inhabit-
ing that territory, it is a logical fallacy and an optical
illusion in Europe to regard a nation as increasing its
wealth when it increases its territory, because when a
province or State is annexed, the population, who are
the real and only owners of the wealth therein, are
also annexed, and the conqueror gets nothing "
(P- 31)-
Now it will be obvious that upon the assump-
tion of universal free trade, and the retention,
after conquest, of the status quo ante, Mr. Angell's
contention is true. The loss or gain of territory
would not then involve the loss nor secure the gain
1 This statement was made to illustrate a general proposi-
tion, so that I have done Mr. Angell no injustice by assuming,
for my purpose, that German v was the victor rather than the
vanquished.
10 THE ECONOMICS OF WAR.
of material wealth. This is the natural corollary
of the free trade theory, if not, indeed, the essence
of it. If Germany were a free trade country, and
continued to be a free trade country after her
defeat, we would gain nothing by conquering her.
Again, if free trade or protectionist Germany
conquered us, and then allowed us to retain our
present fiscal policy, she would gain nothing from
such conquest.^
But the general assumption of free trade, or
that the status quo ante would be maintained, is
false. Germany has long pursued a policy of
moderate protection. And if, after defeating her,
we compelled her to reduce her import duties on
British goods, while retaining the existing duties
on goods imported from other countries, Britain
would gain by the particular preference, and the
world would gain through the enlargement of the
free trade area. If, on the other hand, Germany
conquered Great Britain, and compelled her to
impose moderate tariffs upon all goods imported
from countries other than Germany, and to admit
German goods free of duty, Germany would gain
the ten shillings, while the world as a whole
might lose the twenty. Since, therefore, it is
possible that conquest would be followed by a
readjustment of economic relations between the
nations concerned, it is not true to say that
material advantage cannot be secured.
1 Neglecting for the moment such questions as taxation,
tributes, and indemnities.
MR. NORMAN ANGELL'S THEORY. ii
Again, it is true that, in consequence of division
of labour and national interdependence in econo-
mic matters, we thrive, not on the poverty, but on
the vrealth of other nations. They are better able
to purchase our goods and to send us v^hat we
want in return. It will be generally admitted
that the greater the wealth of the rest of the world
the better for our nation. But whether this
identity of interests holds between two particular
nations is a question which presents great diffi-
culty. Mr. Angell's argument has not taken into
account the two-fold character of the problem ;
he seems to have taken for granted that what is
true of the world as a whole (outside Britain) is
true of each country in turn.
" At the beginning we have a Great Britain which
could have seen all its political rivals annihilated
without damage ; at the end we have a Great Britain
in which such a thing would spell starvation to its
population " ("The Great Illusion," p. 157).
It is quite true that if the rest of the world were
completely destroyed the people of this country
would almost starve ; but this result would not
follow if Russia alone, or Canada alone, or any
other country by itself, were destroyed. Whether
the destruction of a single political rival could
possibly react favourably upon the economic
development of a nation remains to be discussed
in the chapter on colonial expansion.
Finally, Mr. Angell asserts not only the economic
futility of conquest, but also that the " all but
12 THE ECONOMICS OF WAR.
universal idea " that " a nation's financial and
industrial stability, its security in commercial
activity — in short, its prosperity and well-being
— depend upon its being able to defend itself a.gsimst
the aggression of other nations," is " a gross and
desperately dangerous misconception, partaking
at times of the nature of an optical illusion ; at
times of the nature of a superstition." ^ Thus
a successful defensive war as well as a successful
war of aggression is economically futile ; in other
words, the defeated country suffers no material
loss from its defeat and loss of independence.
And Mr. Angell states it to be the object of his
book to expose the error of the view which the
quotation partly expresses. But, especially if one
is to interpret the word " well-being " broadly, it is
difficult to reconcile this view with his defence of
our naval and military programme before the war.
It may be well at this point to refer to a con-
fusion of ideas involved in some of the arguments
which Mr. Angell employs in support of his main
thesis. He seems to have lost sight of the obvious
distinction between the impossibility of conquest,
on the one hand, and, on the other, the futility of
a secured victory. In an article reprinted in
" Foundations of International Polity " the author
explains why " we submit to affronts from
1 " The Great Illusion," pp. 25 and 26. The italics are
mine. In bringing these quotations together, which are sepa-
rated by almost a page, I do not think I am doing Mr. Angell
an injustice. The same idea runs through the chapter called
" The Great Illusion " in the book possessing the same title.
MR. NORMAN ANGELL'S THEORY. 13
America, which, if committed by Germany, would
make war inevitable." The explanation, he
argues, is not to be found in the blood-relationship
of the two countries, which is now more attenuated
than in those days when they were actually at
war ; it is to be sought rather in the fact that
America, for geographic and economic reasons, is
obviously impregnable. We cannot secure such
a victory as would enable us to impose our will
upon her in the matters in dispute.
" When a Great Power " (he writes) " takes an
attitude calculated to hamper our movements and
commerce with half the universe, we submit, because
war ... is utterly ineffective for enforcing our
rights" (p. 191).
Incidentally, it may be observed that Mr. Angell
gives his case away here — i.e., he admits it is
possible for one nation to inflict economic loss
upon another, which the latter would be able to
prevent by the employment of sufficient military
force. But in this connection the important point
is that Mr. Angell argues, from this fact, the
recognition of the futility of war between the two
great English-speaking nations. Surely this is
irrelevant to that argument for peace elsewhere
urged by him. Assuming the accuracy of his
article on matters of fact,^ it is evident that what
Great Britain recognised was not the futility of
conquest, but the impossibility of victory in arms.
If, for example, she would have suffered economic
1 I am not competent to discuss it.
14 THE ECONOMICS OF WAR.
loss through the proposed action of the United
States in relation to the Panama Canal, she would
have secured economic gain (by preventing the
loss) had she been able to effect, by military action,
that change which President Wilson introduced by
constitutional means. If Britain had admitted
that America's action in the Panama had not
reacted unfavourably upon her economic life, or
if the United States had admitted the economic
futility of her action, it would have provided a
particular apphcation of Mr. Angell's main thesis,
and he would have been able to claim it as evidence
in support of his theory. But, of course, neither
Britain nor the United States did any such thing.
The same confusion of ideas appears in that chapter
of " The Great Illusion " which deals with colonies.
In one place he argues that Canada could not be
conquered ; in another that, if conquered, she
could not be compelled to adopt the poHcy
dictated by Germany, the conqueror ; and, in yet
another, that, if she did adopt that policy,
Germany would gain nothing. And all the time
he gives the impression of employing them in
support of his contention that conquest cannot
possibly bring economic gain. If a discussion of
the possible economic effects of conquest is to be
fruitful, the assumption must be made that it is
effective ; that it is complete conquest, i.e., that
the conqueror is able to impose her will upon the
vanquished nation. For if the full economic gain
cannot be achieved by the victor through failure
MR. NORMAN ANGELL'S THEORY. 15
to impose her will, it is due not to the futility
of conquest, but to the incompleteness of the
victory. The possibility of complete conquest is
a totally different matter, quite irrelevant to the
discussion of the possibility of gain by means of
conquest.
CHAPTER II.
ARMAMENTS AND ECONOMIC STRENGTH.
The exact degree of dependence of the economic
development of a nation upon its military
strength cannot be determined. Mr. Norman
Angell asserts that " the factors which really con-
stitute prosperity have not the remotest connec-
tion with military or naval power, all our political
jargon notwithstanding." While this is probably
an exaggeration, it contains a truth of great
importance. Recent events have shown that such
power does not secure peace. For some years,
indeed, the competition in armaments created
and then intensified a feeling of timidity, and to
that extent probably retarded economic develop-
ment.i Moreover, the enormous cost of arma-
ments in recent years has produced an unfavour-
able effect upon the social condition of the
people. If, for example, the £80,000,000 per
annum spent on the army and navy in this
country had not been required for that purpose,
1 The cost of " defence " has been called an insurance
premium, but this is not a true comparison, for the risk itself
IS affected by the payment of the so-called premium. One
is reminded of the effect produced upon the frequency of fires
when fire insurance was first introduced, especially in the
United States.
ARMAMENTS AND ECONOMIC STRENGTH. 17
either it might have been employed to ameliorate
the condition of large masses of the people, or
some of our indirect taxes could have been re-
mitted and direct taxes reduced, thus rendering
possible a higher standard of life in the com-
munity. The total amount of trade would
probably not be appreciably altered, but the
character of much of it would be different.^
Although, however, the general poHcy of
arming did not produce a feeling of security, it is
nevertheless true that, taking things as they are,
Britain's security depended upon following the
pace set in the armament race. And so with other
countries. Nor is it any reply to say that we were
already the strongest naval power and conse-
quently set the pace ; for adequate defence
required unchallengeable naval supremacy. Thus,
although German efforts were increased as we
grew stronger, our strength was determined by
that of Germany ; we but replied to her efforts to
destroy our supremacy. Each of the military
nations had her own idea of what her strength
relatively to that of her neighbours should be,
1 The serious dislocation of trade which would follow
disarmament is not taken into account here. But the ease
with which factories established in this country for quite
other purposes have been adapted to the requirements of
war suggests that industries directly dependent upon war, or
preparation for war, could also be accommodated to the
requirements of peaceful industry with less difficulty than
anticipated, and that in consequence the dislocation of trade
produced by rapid disarmament would not be so serious an
evil as we once supposed. Nevertheless, suffering would
undoubtedly accompany the process of adjustment.
E.W. C
i8 THE ECONOMICS OF WAR.
and shaped her poHcy accordingly. Since these
ideas conflicted, constant readjustment of miHtary
and naval power was inevitable, and, if the
destruction by a rival in war was to be avoided,
satisfactory readjustment impHed an increase in
strength. This involved a change for the worse
to the rival or rivals, who in turn pursued the
obvious poHcy. And so the thing went on,
making war inevitable. And if we have under-
stood Mr. Angell aright, this statement is con-
sistent with his views. The further conclusion is
that, although the military and naval pohcies of
nations were interdependent, it is nevertheless
true that under existing conditions the security
of each was dependent on its adapting itself to
the policy pursued by all the others. No one
could afford to disarm without taking grave risk ;
and to take grave risk was to be insecure, for risk
is the negation of security. In this sense it seems
evident that peace, if not independence, was
bound up with a strong military or naval policy.
Although this conclusion seems to follow
naturally from the previous one — if, indeed, it is
not a restatement of it — it is not at all clear
whether Mr. Angell would assent to it. Some of his
statements seem to imply the contrary, although
his defence of the naval policy of this country is
tantamount to an admission of its truth.
Mr. Angell supports his contention that no
causal relation exists between the prosperity of a
country and its political strength somewhat as
ARMAMENTS AND ECONOMIC STRENGTH. 19
follows :— (a) The standard of life in smaller
States, such as Holland and Switzerland, is not
lower than that enjoyed by miHtary States :
" All the weight of Russia or Germany " (he writes)
" cannot secure for the individual citizen better
general economic conditions than those prevalent in
the little States" ("The Great Illusion," p. 36).
(b) Closely related to the first is the fact that
armaments are powerless to affect the course of
trade.
" Mihtary power can in reaUty do nothing for trade ;
the individual merchants and the manufacturers of
small nations, exercising no such power, compete
successfully with those of the great. Swiss and
Belgian merchants drive English from the British
Colonial market " (p. ix).
Again :
" Large navies are impotent to create trade for the
nations owning them, and can do nothing to ' confine
the commercial rivalry ' of other nations." " Nor-
way has relatively to population a greater carrying
trade than Great Britain,^ and Dutch, Swiss, and
Belgian merchants compete in all the markets of the
world successfully with those of Germany and
France" (p. 35).
(c) It is evident from the relative prices of Govern-
1 Surely geographic conditions fully explain this. The
configuration of the country — a long, dented coastline and
high mountains in a narrow strip of land — makes railway
transport difficult, and calls for a relatively big coastal trade.
Moreover, the natural wealth of the country — mineral ores —
is suited to a large export trade, but not to a relatively
important internal trade.
C2
20 THE ECONOMICS OF WAR.
ment stocks that the weaker States enjoy greater
security than stronger ones :
" The pubHc credit (as a rough-and-ready indication,
among others, of security and wealth) of small States
possessing no political power often stands as high as
or higher than that of the Great Powers of Europe,
Dutch Three per Cents, standing at 77J and German
at 75 ; Norwegian Three-and-a-Half per Cents, at 88,
and Russian Three-and-a-Half per Cents, at 78 "
(p. ix).
And he argues that
" the only consideration of the financier is profit and
security, and he has decided that the funds of the
undefended nation are more secure than the funds
of one defended by colossal armaments. How does
he arrive at this decision, unless it be through his
knowledge as a financier, which, of course, he exercises
without reference to the political implication of his
decision, that modern wealth requires no defence,
because it cannot be confiscated ? " ^ (p. 34).
The unfavourable effect of armaments upon secu-
rity is still more clearly shown in Mr. Angell's
statement that
" industrial undertakings in a country like Switzer-
land, defended by an army of a few thousand men,
are preferable in point of security to enterprises
backed by three milHons of the most perfectly trained
soldiers in the world." These facts carry with them
1 The retort obvious is that if this is the implication, or if
such implication is true, the wealth of the armed nations is
also secure, so that armaments should not have an unfavour-
able influence on the price of funds, as Mr, Angell asserts,
except to the extent that armaments necessitate an increase
in taxation (which is not the point immediately under dis-
cussion) and so reduce that part of the taxable capacity of
the nation which may be regarded as security for the funds.
ARMAMENTS AND ECONOMIC STRENGTH. 21
" the paradox that the more a nation's wealth is
militarily protected, the less secure does it become."
In the light of the very definite views expressed
in these quotations, as well as others of the same
kind that might have been taken from the same
chapter, it is curious to find Mr. Angell emphasis-
ing the lirnits of his argument and stating that
reference was made to economic rather than
political security. The argument, he states,
" is not that the facts just cited show armaments or
the absence of them to be the sole or even the deter-
mining factor in national wealth. It does show that
the security of wealth is due to other things than
armaments ; that absence of political and military
power is on the one hand no obstacle to, and on the
other hand no guarantee of, prosperity ; that the
mere size of the administrative area has no relation to
the wealth of those inhabiting it " (pp. 36 — 7).
And again :
" the political security of the small States is not
assured ; no man would take heavy odds on Holland
being able to maintain complete independence if
Germany cared seriously to threaten it. But Hol-
land's economic security is assured. Every financier
in Europe knows that if Germany conquered Holland
or Belgium to-morrow, she would have to leave their
wealth untouched ; there could be no confiscation.^
And that is why the stocks of the lesser States, not in
reality threatened by confiscation, yet relieved in part
at least of the charge of armaments, stand fifteen to
twenty points higher than those of the military States.
1 The destruction of Belgian property by the German in-
vaders does not invalidate Mr. Angell's particular argument.
Economic considerations naturally give way to real or sup-
posed military necessity.
22 THE ECONOMICS OF WAR.
Belgium, politically, might disappear to-morrow ;
her wealth would remain practically unchanged " ^
(pp. 38, 39)-
The inconsistency of Mr. Angell's statements
adds to the difficulty of dealing with a subject
which, from its very nature, is by no means easy ;
but it is clear that three distinct, though related,
questions are raised : — (i) What are the factors
upon which the wealth and standard of life of a
nation depend ? (2) Is it possible for military or
political power to be employed in the interests of
trade ? (3) How are the prices of Consols and the
funds of other nations determined, and what
part is played by security in producing the final
result ?
(i) An adequate reply to the first question
would necessitate a treatise on economic organisa-
tion. But it will be evident that, in the last
resort, the economic possibilities of a nation
depend upon its natural resources, the quality of
its people, and the opportunity it enjoys for
employing these to the best advantage. The last
consideration calls up such questions as the
reaction of the distribution of wealth upon
efficiency, the effects of monopolistic combinations
of capital, associations of labour, land policy,
insurance, banking, Government restrictions on
1 Her funds would be merged in those of the State which
annexed her, and consequently would be fixed at the same
price as the others of that State, other things being equal.
The prospect or danger of annexation would therefore affect
the price of Belgian funds at all times. Mr. Angell seems to
have missed this important point.
ARMAMENTS AND ECONOMIC STRENGTH. 23
trade, taxation, etc., although none of these is
quite relevant to the question at issue. But the
problem of making full use of the natural re-
sources and human powers within a country gives
rise to two questions — security and the cost of
armaments — which are strictly relevant and inter-
related ; while a third — the stage of development
reached — bears indirectly upon the subject under
consideration.
Great Britain, Holland, and France are much
older, in the economic sense, than Germany and
Russia, and now enjoy the results of vast accumu-
lations of capital. Most of our capital has been
invested within the country, in the form of
factories, railways, buildings, etc., and these
naturally react upon the national income and the
standard of life made possible by it. But a con-
siderable proportion has been invested abroad,
and now brings its reward in the form of interest
payments (which are made in those goods upon
which our comfort largely depends), and therefore
makes possible a higher standard of life.^ What
is true of this country is also true of France and
Holland.
1 When speaking of capital in this connection, I mean not
a sum of money, but the forms, such as factories, in which
the money has been invested. I am aware that these capital
goods wear out and have to be replaced, so that only a small
proportion of our existing capital in this country was not
actually made in recent years. But there is a real difference
between the replacement of worn-out capital and net addi-
tions to it. All countries have to replace their capital, and
provision for this is, or should be, made out of current income.
In spite, however, of necessary replacement of capital and
great additions to it, we have been able to export, in the form
24 THE ECONOMICS OF WAR.
Germany and Russia, on the other hand, are
comparatively new countries. The former only
started on her career rather more than half a
century ago, while the latter is, even yet, but pre-
paring for hers. It is true that new countries
like these (and Canada) are able to avail themselves
of the resources of older countries, and, other
things being equal, may be expected to advance
more rapidly than we have done. Germany,
indeed, has done so, and may soon overtake us.
But they do so by borrowing the capital which
the older countries are prepared to lend. And
the payment of interest lessens the amount of the
total wealth (produced with the assistance of such
capital) which can be enjoyed in those young
countries. The value of Mr. Angell's comparison
of Holland with Russia is largely discounted, as
will be shown, by his failure to distinguish between
the two types of nations, the old and the young —
roughly speaking, the lending and the borrowing
countries. It is a comparison of the mature
journeyman with the young apprentice. It is
to be regretted — although it is significant — that
he did not bring France and Britain, both econo-
mically mature nations possessing great military
and naval power, into comparison with Holland,
an old and non-military State. The test he em-
ployed is unscientific.
of machinery, rails, etc., a considerable proportion of our
annual savings. New countries, on the other hand, are
compelled to add to their total supply of capital, mainly or
partly by importing from older countries.
ARMAMENTS AND ECONOMIC STRENGTH. 25
The cost of armaments, other things being equal,
must obviously affect adversely the standard of
living, for it impHes the employment of a propor-
tion (sometimes a considerable proportion) of the
capital and labour of a country in the production
of things which do not directly affect the standard
of living. This is of great importance to-day,
when, in this country alone, before war broke out,
we spent a sum on our defences amounting to
practically one-half the interest on our foreign
investments. And those nations, such as Holland,
who can afford to dispense with adequate means
of defence, enjoy a tremendous advantage, since
the capital and labour thus set free becomes
available for the production of goods and the
supply of services tending to raise the standard of
living.
But other things may not be equal. It has to be
proved that the absence of means of defence in a
particular country will not create such insecurity
as will reduce the national income by more than
is represented by the cost of armaments. It is
quite obvious that, if universal disarmament were
possible, without loss of security, a great gain
would be effected and the world would be a better
place to live in. Taking things as they are,
however, the effect of disarmament by a single
country cannot be estimated. It is believed in
Germany that the long peace which that country
enjoyed, and which made rapid economic develop-
ment possible, was directly attributable to the
26 THE ECONOMICS OF WAR.
maintenance of a large army, and that the over-
seas trade which they have recently developed
was conditioned by a navy that would command
respect. Their two-fold belief that peace was due
to military power and that rapid economic
development was made possible by peace may be
erroneous. But who can tell ? If it was well
founded, their armament policy was worth the
cost — i.e., the Germans enjoyed a higher standard
of life than would have been possible without
such expenditure on armaments. For, as a result
of the development of international banking,
political insecurity, as Mr. Angell himself has
pointed out, would have kept the financial world
in a state of agitation and in this way reacted
upon trade.
PoHtical security increases readiness to lend
capital both to a Government and in aid of
industrial enterprises controlled by its people.
The Balkan States have evidently suffered for
many years through lack of such security ; and
the complete domination of these States by one of
themselves or by another nation might be a real
gain. In this special case it is obvious that
economic development would be closely related to
political power.
(2) To the second question, which is closely
related to the first, Mr. Norman Angell replies in
the negative. People buy in the cheapest market,
without reference to the flag which flies above it.
The smaller States thrive in spite of the absence
ARMAMENTS AND ECONOMIC STRENGTH. 27
of military power, and their impotence in the
" councils of the nations/' Swiss manufacturers,
for example, are ousting their British rivals from
the Canadian market, for the simple reason that
they are able to provide the goods more cheaply.
But the answer is not quite so simple.
It is necessary to draw a distinction between the
mere existence of political power and effective
employment of military force to conquer and
exercise control over the policy of its rival. The
enjoyment of political power brings with it one
real advantage. Britain was able to enforce the
policy of " the open door " in China, and in this
way to secure considerable economic gain. But
the open door policy also benefited the smaller
States, who were thus able to enjoy the results of
the exercise of political pressure by other nations ;
but it was necessary that some should enjoy that
strength which the possession of military force
provided. In some cases, however, this political
strength is provided by the importance of the
nation as a market. If, for example, Germany
imposed a prohibitive duty upon imports from
Holland, the latter could retaliate and so deprive
Germany of an important market. The threat
of reprisals would be sufficient in such a case to
limit the power of Germany to hurt Holland
without, at any rate, injuring herself seriously in
the process. Political power here is a result of
economic strength.
When we turn to conquest, or the effective
28 THE ECONOMICS OF WAR.
employment of military power, we are met by
different considerations from those created by its
mere existence ; and these are examined more
fully in the chapter on colonial expansion. But
in this connection it may be stated that while
it is perhaps true that in the colonial market
we are suffering from the competition of the
smaller States, such competition is not inevitable,
but is rather the result of a deliberately chosen
colonial policy. We might have adopted the
alternative policy of colonial preference, which
would have limited, if not prevented, such competi-
tion ; but we believe the loss of the kind indicated
by Mr. Angell to be counterbalanced by gains in
other directions. The average customer buys in
the cheapest market ; but we have the power so to
modify the conditions that Belgium and Switzer-
land would become dearer markets. This is
neither a plea for nor a defence of such a change
in policy : it only shows that such is possible, and
that, in consequence, Belgian and Swiss manu-
facturers, to the extent that they depend upon
the colonial market, are at the mercy of the
Empire. And, as everyone knows, one of the
objects of colonial federation is to effect such a
change in the direction of trade as is implied
above.
Mr. Angell states that
" the foreign trade of most great States is mainly with
countries over which they exercise no political control.
Great Britain does twice as much trade with foreign
ARMAMENTS AND ECONOMIC STRENGTH. 29
countries as with her colonies (which she does not
control). The enormous expansion of German trade,
mainly in countries like Russia, the United States,
South America, owes nothing to her military power." ^
This argument, which is employed in support of
the contentions already examined, is beside the
point. Our trade with the United States, a
relatively populous country, is naturally greater
than our trade with her neighbour, Canada,
which is sparsely populated ; our trade with almost
seventy million Germans across the narrow North
Sea must (in the absence of prohibitive tariffs)
obviously be greater than that with the young and
distant Australian nation. Population and geo-
graphic conditions are two of the three important
factors. The third is tariff policy. And the point
is that if we could induce Germany and the
United States to admit our goods as freely as we
admit theirs, our trade with them would be much
greater than it is at present. If conquest could
effect this, it would be a considerable gain to be
placed on the credit side of the balance-sheet.
The answer to the second question thus seems
to be that military power can be and is employed
in the interests of trade, though not to any great
extent. Whether a particular colonial policy,
enforceable through political power, is to the
interest of the ruling nation is a question which
free traders and protectionists will answer
differently ; but that it produces immediate
^ " Foundations of International Polity," pp. 21-2.
30 THE ECONOMICS OF WAR.
effects upon the economic activities of the foreign
countries (including the small States) cannot be
denied.
(3) The third question is one which presents
considerable difficulty on account of the elusive-
ness of the word " security." It is obvious that
security is not the only factor in the determination
of the price of funds ; it is but one of an assem-
blage of conditions. Others suggest themselves
at once. The rate of interest is obviously the
most important.^ The wealth, population, and
amount of national debt all play their part.
If the wealth of the nation is increased while
population remains stationary, or if the popula-
tion is increased proportionately to the growth of
wealth — in other words, if the wealth per head
increases while the population remains un-
changed, or the wealth per head remains constant
while population increases — the price of the public
funds will tend to rise. The same result follows
if the funds are reduced by repayment. These
facts may be brought together by stating that
the price will depend partly upon the proportion
the national debt bears to the wealth per head of
the people. The prospect of an increase in the
debt produces a depressing effect upon Govern-
ment stock.
1 It should be observed that the prices of stocks do not
vary proportionately to the rates of interest paid on them. If
a stock issued at 4 per cent, can be sold for ;^ioo, probably it
would command less than ;^20o if issued at 8 per cent., even
though all other conditions remained the same.
ARMAMENTS AND ECONOMIC STRENGTH. 31
The price of funds will also be influenced by
the state of trade. It is well known that guaran-
teed stocks bearing a fixed rate of interest fall in
value during a boom in trade, when most people
are bent on investing in a form which will bring a
return commensurate with the real or supposed
profits of business, and rise in value during a
period of depression, when secure investments are
in great demand. Further, such factors as the
intervals at which interest is paid and the general
attitude of Governments towards their obligations
are reflected in the price. Interest at 5 per cent,
per annum paid quarterly represents a slightly
higher rate than if paid in two instalments a year.
If a nation repudiated her debt, say, during a war,
she would afterwards find much greater difficulty
in obtaining fresh loans.
In the next place, the price depends upon the
extent to which the funds possess what Giffen
called a " free market.'* The condition of a " free
market " is the presence of a considerable body
of speculators who deal in the particular stock.
Where such a market exists the speculative holders
respond much more readily to the other influences,
which thus operate more strongly than would
otherwise be the case. Again, special factors may
call for consideration ; for example, until recently,
the powers of trustees in this country were
severely limited, and when the number of trustee
investments was increased the price of British
Consols suffered. The new War Loan must be
32 THE ECONOMICS OF WAR.
repaid in 1928, consequently the price of the stock
representing it is higher than it would otherwise be.
Finally, a country which normally invests
capital abroad is able to borrow for Government
purposes more cheaply than a country which
normally imports capital for industrial enterprise.
A Frenchman will not purchase Russian stock
in preference to French stock unless the terms
are distinctly more favourable. This last factor
seems to play a more important part than has been
generally realised, and, along with others which
have been ignored by Mr. Angell, should be taken
into consideration in estimating the extent to
which political insecurity reacts upon the prices
of funds. The factors above enumerated deter-
mine the mean level of prices from which the wave-
like movements created by political events can be
measured. If peace could have been guaranteed
to Germany for a considerable period of years,
while the general conditions (such as interest, the
period for repayment, etc.) relating to the loans
were identical, the price of her funds would be
brought much nearer to that of Dutch stocks.
There would still be some margin between the
prices, due to the difference in the degrees of
" economic maturity " of the countries.^ Indeed,
it is probable that the difference of 2 J in the
prices of the Three per Cents, quoted by Mr. Angell
1 Germany now invests capital abroad. Nevertheless, she
is still a " borrowing country," and will be until her foreign
investments exceed her indebtedness to other nations.
ARMAMENTS AND ECONOMIC STRENGTH. 33
is accounted for in this way. Mr. Angell should
have compared lending countries with lending
countries when examining the extent to which
military power reacted on the price of funds, or a
lending with a borrowing nation when both were
strong in armaments.
Since the effect of military power upon security
is really one of the main props upon which Mr.
Angell's case rests, it may be well, at the cost of
reiteration, to examine his views on this particular
point in greater detail. He develops his case as
follows :
(i) n it is argued that the security of small
States " is due to the various treaties guaranteeing
their neutrality, it cannot be argued that those
treaties give them the political power and * con-
trol ' and ' weight in the councils of the nations '
which Admiral Mahan and the other exponents
of the orthodox statecraft assure us are such
necessary factors in national prosperity.'* We
have already replied to this by showing that the
insistence upon the open door policy by the Great
Powers reacts favourably upon the smaller States,
so that the latter gain through the existence of
military force which is not their own ; and that
in other cases the possibiUty of inflicting injury
upon others by reprisals gives those small States,
of importance economically, political power as
effective for the purposes as that created by
military strength.
(2) " Those who argue that the insecurity of
E.W. D
34 THE ECONOMICS OF WAR.
the small States is due to the international treaties
protecting their neutrality are precisely those who
argue that treaty rights are things that can never
give security ! " This is no reply. The state-
ment may be true of some, but it is not true of all.
(3) In Mr. Angell's view the real truth, as
already indicated, is that " the political security
of the small States is not assured ; no man would
take heavy odds on Holland being able to maintain
complete independence if Germany cared seriously
to threaten it. But Holland's economic security
is assured." It is true that no one would feel
confident of the ability of Holland to defend
herself against a German invasion ; but investors
did feel confident that international treaties would
be honoured, and do feel confident that a German
invasion would be opposed by others who signed
the treaty, and who conceive their own safety to
be bound up with the independence of the small
States. And that investors do " take heavy
odds " on the maintenance of Holland's indepen-
dence is clearly indicated, in spite of Mr. Angell's
statement, in the price of Dutch funds. If, a
year ago, it had been made clear that the indepen-
dence of the small States had lost its importance
to the stronger nations, the price of Dutch funds
would have fallen considerably. Thus the political
security of Holland, Belgium and Switzerland,
and probably Norway, was largely dependent
upon the miUtary strength of other Powers. If
we had disarmed before the war, the national
ARMAMENTS AND ECONOMIC STRENGTH. 35
credit of Holland would have suffered. Again
security is given to some small States {e.g.,
Norway) partly by geographic conditions, but the
geographic factor is becoming less important.
Security against aggression from Europe is given
to South American States by the force behind
the Monroe Doctrine of the United States.
It is true that a comprehensive treaty between
the States of Europe might, and probably would,
enable each to reduce its armaments to but a
small fraction of the existing strength, without
endangering its security ; and in this way
economic progress would be accelerated. But
the security of each would then depend, in the
last resort, upon the coercive force of the federated
States, i.e., upon the military force which could
be brought by the group against a recalcitrant.
And so we are brought back to the dependence of
security upon military power. ^ Nevertheless, the
new State would obviously be preferable to the
old, for the security itself would be greater, and
the cost of providing it less.
There are two kinds of security — that of peace
and that of independence. Although closely
related they are quite distinct. We have not
been in danger of losing our independence to Ger-
many or France, but duiing recent years there
1 It is not part of my work to deal with Mr. Angell's view
that force is a diminishing factor, destined to disappear.
But I may express the behef that this argument rests on a
confusion of a reduction of force with a change in its manner
of operation.
D2
36 THE ECONOMICS OF WAR.
was danger of war on a number of occasions.
Without the assistance of other countries Den-
mark would be quite powerless to resist Germany,
who might possibly have annexed it without war
as we commonly understand the term. A threat
might be sufficient. So long as the independence
of the smaller States (except Belgium) was beyond
doubt, they were practically secure against war.
The danger of annexation to which they were
exposed was also a danger to European peace.
But the peace of Europe was also exposed to other
dangers : the independence of small States was
not the only possible cause of war. Hence the
stronger nations — the big brothers who would fight
for the small ones, but also for other reasons —
were necessarily less assured of peace than the
small ones were of their own independence. The
armament policy of the stronger nations brought
greater security to the smaller, non-military
States than it did to themselves. Nevertheless,
as things were, the degree of pohtical security
actually enjoyed by the strong -ones was largely
due to their military or naval power.
CHAPTER III.
WAR AND THE CREDIT SYSTEM.
In those parts of his books which deal with
modern finance Mr. Norman Angell shows, in an
interesting and convincing manner, the suscep-
tibihty of modern credit transactions to the
influence of political factors, and the difficulties
which confronted the German Government during
the crisis of 191 1, through the dependence of
German industry upon French capital. But his
deductions are not clear. It is sometimes con-
cluded that he believed war to be impossible.
This is quite untrue. Nothing in his writings
seems to warrant such a conclusion. Again, some
people are under the impression that a part of his
case was that our credit structure would collapse
in time of war. And this is the impression that
one might easily gather from a first perusal of
" The Great Illusion." ^ For, after showing that
continuity of production in one country was an
absolute necessity to another, Mr. AngeU goes on
1 In his latest book, " War and Lombard Street," published
after this chapter was written, Mr, Hartley Withers writes to
the effect that the war demonstrated the truth of Mr. Norman
Angell's major premises, which " is to the effect that modern
nations are so closely knit together by the bonds of inter-
national finance that they cannot go to war without inflicting
enormous damage on themselves as well as on one another."
38 THE ECONOMICS OF WAR.
to say that this " vital interdependence is largely
the work of the last forty years ; and it has,
during that time, so developed as to have set up
a financial interdependence of the capitals of the
world so complex that disturbance in New York
involves financial and commercial disturbance in
London, and, if sufficiently grave, compels finan-
ciers of London to co-operate with those of New
York to put an end to the crisis, not as a matter of
altruism, but as a matter of self -protection." ^
He further quotes, apparently with approval,
a French writer who argues that this financial
interdependence not only has created an inter-
national solidarity, but was one of the principal
causes which prevented the outbreak of war
between France and Germany over the first
Moroccan difficulty. This quotation, in the
absence of other evidence, might have been
taken to suggest the probable consequences of
war.
On more careful reading, however, it becomes
evident that he does not refer to the effects of a
state of war upon the financial relations of the
nations. That war would result in a collapse of
credit seemed obvious to most people. But Mr.
Angell's treatment of the financial consequences of
conquest and confiscation implies the belief that,
at any rate in the early stages of war, there would
be little, if any, interference with international
finance. All his arguments relating to the effects
1 " The Great Illusion," p. 49.
WAR AND THE CREDIT SYSTEM. 39
of war are based upon the assumption of conquest
and confiscation.
(i) In the first place he assumes that, if the
German army reached London and looted the
Bank of England, the consequence would be a
run on every other bank and universal suspension
of payment. Since bills held by foreigners could
not then be met they would lose all their value.
" The loanable value of money in foreign centres
would be enormously raised, and instruments of credit
enormously depreciated ; prices of all kinds of stocks
would fall, and holders would be threatened by ruin
and insolvency. German finance would represent a
condition as chaotic as that of Great Britain. What-
ever advantage German credit might gain by holding
Britain's gold, it would certainly be more than off-set
by the fact that it was the ruthless action of the
German Government that had produced the general
catastrophe . A country that could sack bank reserves
would be a good one for foreign investors to avoid :
the essential of credit is confidence, and those who
repudiate it pay dearly for their action " (p. 51).
What the result of such action by the German
army would be is a matter for speculation ; the
important point is that the whole argument
quoted is based upon the assumption that
finance would continue practically on a peace
footing during the early part of the war. Con-
fiscation, not war, it is argued, produces the mone-
tary crisis, destroys values, and shatters the credit
system. But we know now that war makes trading
with the enemy illegal ; that the outbreak of war
results in serious dislocation and loss, breaks down
40 THE ECONOMICS OF WAR.
the old system, and necessitates a complete re-
organisation of our financial methods. How this
was actually done in Great Britain and Germany
will be shown in the next chapter.
Mr. Angell provides a second illustration. He
assumes the conquest and annexation of Hamburg
by Britain and the confiscation of all property
in the city. The Hamburg Government stock
would lose almost all its value, while the value of
stocks and shares in industrial enterprises would
be completely destroyed. Since the latter are
held by banks and insurance companies as col-
lateral security the solvency of these institutions
would be shattered, and, since German banks owe
money to London, this country would also be
involved. Moreover, confiscation would produce
a monetary crisis in Germany which in turn
would cause the withdrawal of balances in
London by German banks. Thus confiscation
would prove a failure as the result of what
Mr. Angell calls the intangibility of wealth. The
argument here again is based upon the same
assumptions, namely, that property is confiscated
by the conquering nation, and that during the
previous stages of the war the belligerent coun-
tries traded with each other.
The conditions which are stated to have made
confiscation too costly are of recent growth. In
olden times, when tribes and nations were eco-
nomically self-sufficing and property consisted
mainly of movable goods, conquest was accom-
WAR AND THE CREDIT SYSTEM. 41
panied by looting ; and such looting was a real
gain : there was no reaction. In later times, too,
the conquest of savage tribes by civilised nations
was an advantage to the latter, since it enabled
the surplus population to migrate and to live in
the conquered territories, when order had replaced
disorder, under conditions preferable to those
obtaining in foreign countries. But these factors
are no longer operative in modern countries,
which are fully occupied, whose civilisations are
so firmly set that their character could not be
sensibly modified, and where modern industrial
and financial conditions obtain. Confiscation of
the kind already indicated would produce such
violent and serious reactions that it would quickly
defeat its own end.
(2) To those critics who urge that confiscation
need not take the form indicated Mr. Angell
rephes that modern wealth is intangible in
another sense, and that such intangibility makes
other kinds of confiscation, such as a tribute, an
economic impossibility. While few would deny
the futility of confiscation in the first sense,
there seems to be no economic reason for its
futility in the second. Economically there is
httle difference between it and a voluntary con-
tribution by, say, Australia of a battleship to our
navy. Mr. Angell's argument on this point is
somewhat unusual.
He assumes, with his critics, that Britons are
reduced almost to a state oi slavery by their
42 THE ECONOMICS OF WAR.
German conquerors ; that the workers are allowed
little beyond the necessaries of life, and that the
Germans seek to confiscate the remainder of the
nation's wealth, or dividends. But how can they
do it ? he asks. The nation's wealth, thanks to
modern finance, is largely intangible ; it consists
of services such as transport, travel, amusement
and recreation, medical attendance and the like.
Moreover, the dividends are themselves created
by generous consumption. Reduce the consump-
tion of the workers and the dividends disappear.
" If the German taskmasters are to take these
dividends they must allow them to be earned. If they
allow them to be earned they must let the population
live as it lived before — spending their income on
themselves ; but if they spend their income on them-
selves, what is there, therefore, for the taskmasters ?
In other words, consumption is a necessary factor of
the whole thing. Cut out consumption, and you cut
out the profits. This glittering wealth, which so
tempted the invader, has disappeared. If this is not
intangibility, the word has no meaning" (p. 58).
We shall examine this doctrine in a moment ;
its corollary calls for comment first. If Germany
could take nothing from us, then, since there is
no necessary difference between confiscation and
a gift — the former is but a " forced gift " — the
United States cannot send food to Belgians in
their own country ; Australia cannot make a gift
of warships to Britain ; we cannot send clothing
to Serbians.
The theory is based upon an obvious fallacy.
WAR AND THE CREDIT SYSTEM. 43
It assumes either that the wealth of a nation
consists wholly of such services as those indi-
cated above, or that all the wealth produced by
a nation must be consumed within its own
borders. Mr. Angell, we know, does not believe
this ; nevertheless, the argument we have quoted
impHes it. What he seems to have in mind is
the necessity for continuity of production ; any-
thing which interferes with such continuity
naturally stops the flow of wealth which consti-
tutes the national income of goods and services.
Consequently the method of confiscation must
obviously be adapted to the conditions of modern
industry. But a proof of the necessity for a
change in the method of confiscation is not a
proof of the impossibility of confiscation. Ger-
many obviously cannot convey the service of
transport to her own people ; she cannot carry
home the medical service without taking the
doctors who provide it. But it is not economi-
cally impossible for her to confiscate a part of the
supply of engines, rails, etc., which would provide
similar transport services to the Germans, or to
tax the profits of medical men so that better
service should be given to her own people. It is
not economically impossible — nor would it be
" futile " — to impose a tribute of, say, two
battleships a year. Germany could become part
of our nation for purposes of consumption, as far
as portable commodities are concerned. And
this is precisely what she would be doing if she
44 THE ECONOMICS OF WAR.
exacted a tribute. She would negotiate with our
own Government, and the Government would
collect the money to pay for the ships by means of
taxation. Thus there is no real difference in the
nature of the transaction between the payment
of a tribute and an indemnity or (for the time
being) the export of capital. Tributes and
indemnities, in their economic significance, are
but exports of capital where the exporter loses
his right to such capital upon exportation and,
consequently, loses his claim for interest upon it.
Mr. Angell illustrates his argument as follows : —
" Here is a German manufacturer selling cine-
matograph machines to a Glasgow suburb (which
incidentally lives by selling tools to Argentine
ranchers, who live by selling wheat to Newcastle
boiler-makers). Assuming even that Germany could
transfer the surplus spent in cinematograph shows to
Germany, what assurance has the German manu-
facturer in question that the enriched Germans will
want cinematograph films ? They may insist upon
champagne and cigars, coffee and cognac, and the
French, Cubans, and Brazilians, to whom this ' loot '
eventually goes, may not buy their machinery from
Germany at all, much less from the particular German
manufacturer, but in the United States or Switzer-
land. The redistribution of industrial rdles might
leave German industry in the lurch, because at
best the military power would only be controlling
one section of a complex operation, one party to it
out of many." ^
The essential parts of this quotation may be
paraphrased as follows : If the residents of the
1 " The Great Illusion," p. 59.
WAR AND THE CREDIT SYSTEM. 45
Glasgow suburb handed over to Germany all their
money now spent in attending cinemas, instead
of (indirectly) that part which now goes in pay-
ment for the appliances, the German machine
and film makers might lose their occupation, and,
consequently, Germany as a whole would be
worse off than before. Mr. Angell implies there
would not then be enough work to "go round"
the German nation. It is an ancient fallacy,
which one imagined to have been long buried, and
beyond hope of resurrection. One might, with
equal truth, say that the receipt of interest on our
foreign investments results in loss of work to our
workpeople, since they might have been making
those goods which now come to this country in the
form of interest payment.
Mr. Angell elsewhere ^ states that
" it is evident we have here, on the very first analysis,
two fundamentally important features in which the
early pre-economic statecraft would quickly prove
unworkable in our day, in which the motives dictating
the relationship of States are subject to great modifi-
cation. It is merely silly to argue (and yet I have
heard it argued by a great University professor) that
there is no change. AH that remains in doubt is the
degree of change and its direction ; whether it has
moved sufficiently far as yet to reach a condition
which makes military power economically futile, as
I have declared."
That there have been changes no one would deny :
that these changes necessarily make confiscation
1 " Foundations of International Polity," p. 98.
46 THE ECONOMICS OF WAR.
futile and tributes an economic impossibility, as
Mr. Angell argues, is not true. Industrial changes
have merely necessitated a new method of
exaction.
(3) In the chapter entitled " Credit and Inter-
national Relations " of " Foundations of Inter-
national Polity," 1 Mr. Angell indicates two
important results which follow upon the develop-
ment of international finance, and the vital inter-
dependence of industrial nations. The first of
these is the impotence of a conquering nation in
changing the established order to its own advan-
tage. To prove his point he assumes that a
modern nation adopts the colonial policy pursued
for three centuries by Spain. The Spanish
colonies of South America were bled of their gold
and other valuable possessions for the benefit of
privileged groups in the Mother Country.
" All goods had to be taken to certain centres and
there shipped in a certain way, this sometimes in-
volving mule transportation thousands of miles out
of the direct route ; and this was merely a detail."
Naturally this was not a profitable policy ; in
spite of its wealth of gold Spain remained one of
the poorest countries in Europe. But the effect
of such a policy became evident only after a long
period had elapsed. The plentiful supply of gold
was the evident fact; and this, to the crude
mercantilists of the time, was evidence of wealth.
1 Most of it appears also in " The Great Illusion " under the
title of " The Bearing of Recent History."
WAR AND THE CREDIT SYSTEM. 47
The more this policy was enforced, the poorer
Spain became.
Mr. Angell then describes the effects of a similar
poUcy introduced under modern industrial con-
ditions.
" Now, imagine a modern Spain " (he writes),
" responsible for the poHcy of a modern South
America, developed industrially and financially to a
high degree. We should best understand the relation-
ship, perhaps, if we could imagine the American
Revolution not having taken place, and Great Britain
still ' owning,' in the meaningless phrase of our
pohtics, North America, and then imagine Great
Britain to-day trying to introduce the sort of policy
which Spain enforced during three hundred years in
South America : enacting in Parliament, for instance,
that every mine and oil-well in the United States
should pay a tribute of 80 per cent, to certain mono-
polists in London ; ordaining that all cotton coming
from Louisiana and destined for Lancashire should
first be taken to Winnipeg and there pay a special
octroi tax, and then be handled by certain privileged
firms, shipped in certain privileged ships at certain
fixed rates, and arriving, shall we say, at Deal,
because that happened to be the seat of another
monopolist, be brought inland, shall we say, to the
town of Derby, because that happened to be the seat
of a business having influence with the Government,
and from Derby shipped to Manchester. You know,
of course, that an Act of Parhament of that kind,
merely a paraphrase of the sort of legislation enforced
by Spain on South America during three hundred
years, if passed to-day, would precipitate a financial
crisis, first in America, but immediately after in Great
Britain, which would involve tens of thousands of
business men in London, having, at first sight, but
the remotest connection with the interests involved.
48 THE ECONOMICS OF WAR.
and would practically annihilate a great national
business in Lancashire — on which thousands of our
countrymen depend for food. No man would know
whether he would find his bank closed in the morning
or not." ^
Mr. Angell's argument seems to be open to two
serious criticisms. In the first place the cases
cited by him are not analogous. Spain's colonial
policy produced its harmful effects through
continuous operation ; it was the constancy of
its application which wrought such evil. In the
other example the evil is produced by the sudden
departure from a policy so long estabhshed that
vested interests have grown up around it. If,
before war broke out, all European nations had
suddenly abandoned their armament poHcies, no
less serious a crisis would have ensued than that
which Mr. Angell describes above. But it does not
follow that disarmament is bad poHcy ; it merely
follows that a sudden change of policy is bad. To
make Mr. Angell's illustrations parallel one would
need to assume that Britain's policy had been
pursued from the earliest days of the colonies.
But no financial crisis would now take place ; the
Lancashire industry would not be annihilated,
because it would have developed in quite another
way, and, undoubtedly, to but a much smaller
extent — in other words, there would exist no
national cotton industry to be annihilated. The
tens of thousands of London business men would
1 " Foundations of International Polity," pp. io6 — 8.
The italics are mine. — J. H, J.
WAR AND THE CREDIT SYSTEM. 49
not be in financial straits. Mr. Angell compares
the permanent effect of a long-continued policy
in the one case with the momentary effects of a
sudden and violent change in a long-established
policy in the other. Consequently the analogy
is false and the comparison useless. If it be
urged that Spanish policy was modified from
time to time, the reply is that either such
modification was unimportant relatively to the
policy itself, or the change, if relatively im-
portant, did produce the serious and immediately
perceptible results, which are lost to us because
they were not recorded, not because they were
produced slowly.
In the second place, no conquering nation would
be so foolish as to adopt, and quite without warn-
ing, the policy outlined by Mr. Angell. Conse-
quently his example of modern statecraft possesses
no practical value. If Germany conquered
Canada, she might and probably would modify
the economic policy of the colony, with the object
of securing a gain for herself. Whether or no such
gain be possible, such a change of tariff policy
would be introduced gradually, if we are to credit
Britain or Germany with any wisdom in economic
matters. No violent changes affecting every
industry would be enforced suddenly and without
warning, except, possibly, for political purposes,
in which case the economic loss suffered would
presumably be cheerfully borne for the greater
political gain to be achieved. And changes intro-
E.W. E
50 THE ECONOMICS OF WAR.
duced gradually and after due warning would be
discounted, and would thus produce their effects
slowly. Consequently, there would be little
danger of financial panic and a monetary crisis.
The United States has changed its tariff policy
four times during the last quarter-century,^ but
none of these changes can be said to have created
a panic, although the McKinley Act of 1890 did
probably contribute to the serious financial unrest
of the time.
The second result of the growth of modern
finance is shown by means of an illustration. Mr.
Angell points out that when, in 1911, war almost
broke out between Germany and France, the prices
of stocks on the Berlin Exchange fell, and German
banks were seriously embarrassed. French
capitalists, who had invested largely in German
securities, sold rapidly. In the end the German
Government yielded to the pressure of German
financiers and business men, who were threatened
with ruin, and war was averted. The history of
this political crisis and its effects on German
business is highly instructive, and shows three
things, one of which is the particular point which
Mr. Angell appears to be dealing with, namely, the
sensitiveness of the world of finance to changes in
the political relations of nations. The others,
which Mr. Angell does not refer to, are — {a) the
financial loss incurred through prolonging diplo-
1 Acts amending the tariffs were passed in 1890, 1893, 1896,
and 1913.
WAR AND THE CREDIT SYSTEM. 51
matic negotiations, i.e., through delaying the
actual declaration of war ; {b) the disadvantage
suffered by a debtor nation, contemplating war,
during this period of delay. Germany learnt her
lesson : the political crisis of last year developed
so rapidly in the summer that French capitalists
were unable to realise many of their investments.
The German Government recognised the necessity
for rapid mobilisation in the financial as well as
the military sense. Once war was declared foreign
capitalists were practically helpless. The laws
enforced in time of peace were no longer
operative.
We have been compelled to follow a zigzag
course through this chapter ; it was necessary to
do so in order to examine Mr. Angell's views upon
the relations of war and credi^ It may be well
to bring the particular propositions together.
The chief difficulty is to discover Mr. Angell's
main thesis. He shows quite clearly that if a
war cloud appears on the horizon financiers grow
nervous, and the money market and stock
exchange are affected. The capital values of
industrial undertakings and the prices of Govern-
ment funds fall ; credit institutions may suffer
through the actions of their creditors or the
financial position of their debtors. And the dis-
location of finance is world-wide. So far Mr.
Angell is undoubtedly right. But these are
truths which have been fully appreciated for
many years.
E2
52 THE ECONOMICS OF WAR.
He also attempts to prove that the financial
interdependence of modern States does not permit
a nation to modify the economic conditions of a
vanquished rival. His illustration was fantastic
and his comparison of the past with the present
(Spain with Great Britain) misleading. Nations
do modify their own economic policies from time to
time, without the financial consequences indicated
by Mr. Angell ; and it is urged by the Conserva-
tive party that the economic policies of Great
Britain and her colonies should be modified in the
immediate future. Whether this would be a gain
or loss to those concerned is irrelevant at this
point.
Mr. Angell further holds that confiscation would
create a loss for which the confiscated property
would not be adequate compensation, and that a
tribute is an economic impossibility. These are
consequences of the changes which have made
wealth *' intangible.*' He uses the word " in-
tangibility *' in two senses. In one place '* in-
tangible wealth " means exchange value or price
(mainly capital value) ; in another it means
services, such as those rendered by an actor or
lawyer. Wealth has become intangible, he argues,
through changes in economic organisation of which
banking is the final expression ; but he does not
seem to realise that capital values and services are
quite independent of banking in the sense that
they may exist without it. Banking has facili-
tated economic development. We found that the
WAR AND THE CREDIT SYSTEM. 53
changes in economic organisation call for new
methods of exacting tributes, and probably limit
the goods capable of direct confiscation to a smaller
proportion of total wealth than before. For the
nation's wealth consists of capital goods, such as
factories and houses, which cannot be carted
away, and of a flow of wealth and services made
possible by the utilisation of such capital goods
and the people of the country. But it was shown
that confiscation or tribute is still possible, and
need not be followed by the undesirable results
indicated by Mr. Angell. The method alone is
changed : it is now necessary to redirect the flow
of wealth. The German army appears already
to have confiscated property and gold in
Belgium ; and, if the Germans were victorious,
it is unlikely that such confiscation would
react unfavourably, in the economic sense, upon
them.
Finally, the strange conclusion was arrived at
that, contrary to popular belief, Mr. Angell does
not argue that warfare would destroy the credit
system. On the contrary, his contention that
conquest, if accompanied by confiscation, would
do so is based upon the implicit assumption that
it had not already been destroyed. It implies
that financial operations were conducted, during
the early stages of war, by German bankers in
London and British bankers in Germany. It
will be shown in the next chapter that as soon as
war broke out financial business between the
54 THE ECONOMICS OF WAR.
belligerent nations ceased, except in so far as it
could be carried on surreptitiously, through the
agency of neutrals. On the whole, the chapters
on Finance are among the least convincing in the
two books. Mr. Angell seems to have missed
the obvious, and, for this reason, much of his
argument falls to the ground.
CHAPTER IV.
THE IMMEDIATE FINANCIAL EFFECTS OF
THE WAR.
A. Great Britain.
Since Mr. Angell wrote on the effects of war
and conquest upon the credit system the money
market has witnessed an upheaval far beyond the
dreams of speculators. And it goes without
saying that what really happened in the world of
finance was precisely what few expected, although
the predictions of a writer in the Round Table,
about two years ago, were partly fulfilled. It
may be well to complete the examination of Mr.
Angell's views on finance by describing briefly
the effects of the outbreak of war upon the banks
and finance houses of this country, and, as far as
they can be ascertained, upon credit in Germany.
It is obviously impossible to discuss adequately
the many financial problems created by the war.
Such a discussion would call for a lengthy volume
of a highly technical character.^ Since this book
1 The reader who desires to know more about the history
of the crisis than can be described here will find much valuable
material in the Economist and Statist. Mr. J. M. Keynes' articles
in the Economic Journal (September and December) are in-
valuable as a critical survey of the position of the banks.
56 THE ECONOMICS OF WAR.
is written for the general reader, it seems necessary
first to describe those features of banking, in
normal times, which are relevant to the examina-
tion of the chief financial effects of war.
Credit is a term which eludes definition. For
our purpose it may be regarded as the privilege
of using the money or purchasing power of
another person for a stated or indeterminate
period. The most essential feature is confidence
on the part of the person who supplies the pur-
chasing power, i.e., of the lender, in the ability
and intention of the user to repay. The ability
of the user to do so depends upon the manner in
which he employs his loan, or on the value of the
security which he offers. A bank is a medium for
focussing and facilitating transactions in credit ;
it collects and redistributes purchasing power.
When A. deposits cash with his banker he buys a
claim upon the bank for that amount of money
or purchasing power. He is a " depositor " by
virtue, not of the money which he surrenders, but
of the claim which he buys with it. He pays for
the claim in advance. When B. borrows money
from the same banker he, like A,, purchases a
while an unsigned article in the September number of the
Round Table gives an interesting account of the crisis and the
way in which it was met. Since the lectures of which this
chapter is a summary were delivered, Mr. Hartley Withers
has published a characteristic book, " War and Lombard
Street," which gives the most satisfactory account I have
seen of the breakdown of the foreign exchanges. The January
number of the Journal of the Royal Statistical Society also
contains a brief account of the foreign exchanges during the
last few months.
FINANCIAL EFFECTS OF THE WAR. 57
claim upon the bank, but undertakes to pay for
that claim at some future date ; and in the mean-
time deposits something of value with the banker
to secure the latter against possible loss. By
virtue of the claim he possesses, B., like A., is
a *' depositor." Thus a depositor is one who
possesses a claim upon the bank, and deposits,
which, of course, are greater in amount than the
cash deposited, represent liabilities or claims
which the bank may be called upon to meet. The
main assets are the cash, together with the
securities deposited by those who, like B., pay for
their claims at a later date.^ The banker is able
to sell claims upon the bank to " borrowers "
because {a) the group of which A. is the repre-
sentative— i.e., the cash depositors — will not, in
normal times, utilise more than a fairly definite
proportion of their claims ; their cash deposits
represent savings, and the proportion of unin-
vested savings left on deposit with bankers is
fairly constant ; {h) the claims of the group of
which B. is the representative — i.e., the " bor-
rowers," using the term in a very wide sense — do
not represent more than a fairly definite demand
for cash. All depositors might make their claims
effective at the same time ; and, even if the cash
depositors alone did so, the bank would not be
* I purposely neglect the various kinds of dealings with
customers and their differences from the legal standpoint ;
for in this connection I am merely concerned to show their
essential economic features, and to give the minimum that is
needed to comprehend the nature of the panic of August.
58 THE ECONOMICS OF WAR.
able to meet them. But experience — upon which
banking, Hke insurance, is based — shows that they
do not all demand their money together. And
this makes it possible for the banker to redistribute,
in the way of loans, the surplus cash of A. and his
fortunate brethren. Nevertheless, the bank must
be prepared to meet A.'s claim when it does
appear, and, meanwhile, to fulfil his agreement
with B. For A. only refrains from claiming his
share so long as he is confident that he can obtain
it on demand. He acts on the principle " H you
can pay me, I don't want my money ; but if you
can't, I do." The necessity for retaining sufficient
reserve to keep A.'s mind at ease limits the power
of the bank to lend to B., and determines largely
the character of the loan which is made. The
credit system rests on confidence ; and anything
which shakes confidence tends to bring A. and his
group to the bank clamouring for a settlement of
their claims — i.e., for cash. If too many come
together, the bank may be unable to meet its
obligations. The bank, therefore, needs to keep
an adequate supply of cash at hand to meet the
possible demands of the cash depositors during a
period of stress, as well as " till money " to meet
the daily needs of all classes of depositors.^ The
greater the amount of transactions settled by
1 A manufacturer cashes a cheque for a big amount on
Friday or Saturday to provide money of small denomination
for the payment of wages. This money finds its way back
to the bank on Monday or Tuesday via the grocer, butcher,
publican, etc.
FINANCIAL EFFECTS OF THE WAR. 59
cheque, the less, other things being equal, the
need for cash.
Cash lying idle in the vaults of the bank repre-
sents dead loss ; it might have been earning
interest as a loan to a borrower. The banker is
thus controlled by two motives which conflict.
The one is to retain the complete confidence of
his customers by holding more than an ample
reserve in cash ; the other is to earn as much
profit as possible by reducing reserves to the mini-
mum consistent with safety. The result is a com-
promise, which is seen by examining the credit
side of the balance-sheet — i.e., by observing the
ways in which A.'s money is utilised. In the first
place, a reserve in actual cash must be kept.
Part of this is deposited with the Bank of England,
for reasons which we need not discuss here. In
the second place, the bank invests some of its
money in gilt-edged securities. Since these can
easily be sold on the Stock Exchange, they are,
normally, almost as good as cash. Investments
are thus ** liquid assets," which, at the same time,
are a source of profit. In the next place, the
bank lends money " at call " or " short notice "
to brokers on the Stock Exchange, and to dis-
count houses or bill brokers — i.e., it lends money
at low rates of interest to these firms on the under-
standing that it may call in the loan immediately
or in a few days. Such loans, therefore, provided
the firms remain solvent, are almost equivalent
to cash in hand. Thus, in addition to cash
6o THE ECONOMICS OF WAR.
reserves, the bank has other reserves which can
be converted into cash in a few days. Advances
to industrial enterprises, Stock Exchange dealers,
private customers, etc., form the largest item
among the loans ; and these are not regarded as
" liquid." They represent assets which cannot
always be quickly realised.
The remaining loan transactions are directly or
indirectly connected with bills of exchange, and
these need some explanation. Economically, and
under normal conditions, there is no essential
difference between a bill of exchange and a
promissory note ; and perhaps the best method
of approaching the former is by way of the
latter. Macdonald, a Scottish boot manufacturer,
sells boots and shoes to Williams, a London dealer,
who, working with a scanty supply of capital,
cannot make payment until he has in turn dis-
posed of part of his stock. But Macdonald is
equally short of cash, and desires payment at
once. Williams therefore sends him an I.O.U.
(dated two months later), which is taken to the
local branch of a Scottish bank. The banker
has confidence in Macdonald, his customer, but
none in the nonentity from London, and so refuses
to buy the note at its present value unless some
well-known London firm, such as Hindenburg,
becomes guarantor. Williams approaches Hinden-
burg, who, confident of the ability of the boot
dealer to pay, consents (for a commission) to
guarantee the payment of the note on maturity.
FINANCIAL EFFECTS OF THE WAR. 6i
And when the day arrives Hindenburg advances
the payment and collects the money himself from
Williams. His name is so valuable for this
purpose, and he receives so many applications
for its use, that he finds the commissions provide
him with a comfortable income ; consequently he
makes this his calling, and devotes his time to
examining the stability of the applicants. In this
way those worthy of assistance are given the
credit they need, and are allowed to trade upon
his name and reputation. The important point
is that the promissory note acquires its value to
the bank through the guarantee of a firm of
repute.^
Now the mechanism of the bill of exchange is
not that of the imaginary note described above,
but the complete transaction possesses precisely
the same economic significance. Hindenburg,
by arrangement with Williams, writes a letter to
the Scottish manufacturer empowering the latter
to draw a bill upon himself (Hindenburg). Mac-
donald is the drawer and Hindenburg the drawee.
The Scottish bank, having seen Hindenburg's
letter, now bu^^s the paper, and Macdonald thus
gets his money. The bill is sent to the London
agent, who presents it to Hindenburg, and the
1 Readers of Mr. Hartley Withers' books will have noticed
that my account of this imaginary note is a poor copy of the
author's description of the bill of exchange. The modern
Bagehot must pay the penalty of fame. Who, having read
his works on finance, can write or lecture except in imitation
of his method ?
62 THE ECONOMICS OF WAR.
latter, by signing his name, signifies his acceptance
and becomes the acceptor. The bill is nov>^
complete, and is sold at a price determined by the
current rate of discount to a discount house.
Again, be it observed, the bill is negotiable by
virtue of the reputation of the accepting firm.
Macdonald and Williams have disappeared for
the time being.
Discount houses are merchant firms whose
merchandise consists of bills of exchange.
Usually they borrow money from the banks to
enable them to carry on a larger business than
their own capital would permit. Thus the liquid
assets of banks consist partly of loans to discount
houses. Some of the bills are held by the brokers
till they reach maturity, when they are naturally
presented to the accepting houses, who meet
them and, in turn, recoup themselves by obtaining
payment from Williams. The latter may be a
New York or Berlin dealer, not a Londoner ; and
Macdonald may be a Canadian farmer, not a
Scottish manufacturer. An exporter of goods
from Sweden to Holland may draw a bill on a
London accepting house, because such bills are
negotiable anjrwhere, and will certainly be dis-
counted in London, the world's financial capital
being a *' free market for gold." Thus London
finances a considerable part of the foreign trade
of the world, even when such trade is not with
this country.
Some of the bills— the best — are purchased by
FINANCIAL EFFECTS OF THE WAR. 63
the banks, and form an asset somewhat less Hquid
than those already mentioned. Banks select
their bills in such a way that they mature regu-
larly— i.e., so that a steady flow of money returns
through the maturing of the bills. This constant
circular motion of money and bills makes it easy
for the bank to strengthen its reserves by refusing
to rediscount some of or all the bills which they
usually take up. In this way it throws a dam
across the stream and creates a fairly deep pool.
Finally, the modern bank has taken to " accept-
ing " on its own account. As an acceptor of bills
it incurs an obligation to the holder, so that
acceptances are liabilities. On the other hand, by
accepting on behalf of Williams and others, it
makes these firms its debtors, so that their debts
on account of acceptances represent an asset of
the same amount as the corresponding liabilities.
It will thus be seen that the position of the bank
depends partly upon the financial stability of the
discount houses ; that the stability of the discount
house depends mainly upon the financial strength
of the accepting houses, and that the strength of
the accepting houses depends upon the solvency
of the ultimate debtors, the purchasers of goods.
And if these are in foreign countries, it depends
upon the ability to send payment to London.
Anything which seriously interferes with this
payment to the acceptors of bills reacts upon the
banks as lenders to discount houses, as holders of
bills, and as acceptors. The existence of means
64 THE ECONOMICS OF WAR.
of payment depends upon continuity of produc-
tion and sale, while that of external facilities
depends upon the maintenance of peace, or,
during war, the control of the seas.
We are now in a position to examine the
financial panic created by the war and prospect
of war, and to understand the measures taken by
the Government to deal with it.
The dramatic history of the money market
during the fortnight following the Austrian ulti-
matum to Serbia and the necessity for Govern-
ment action become intelligible to those of us
who are laymen when attention is fixed upon the
position of the joint-stock banks. One of their
needs, as already indicated, is to maintain a
considerable proportion of their assets in a
" liquid " form, so that the claims of the depositors,
even in time of stress, may be readily met. The
net effect of the political situation — first the crisis,
and afterwards the outbreak of war — ^was, on the
one hand, to solidify or make unreaUsable those
assets which the banks had looked upon as quickly
convertible into cash, and, on the other (and
partly as a result of the first), to create alarm
among the bankers lest A. and his group should
become panic-stricken and clamour for their
cash.
In the first place, the feeling of unrest, intensi-
fied by the ultimatum, reacted upon the stock
exchanges, and also caused the foreign exchanges
to break down, so that within a week remittances
FINANCIAL EFFECTS OF THE WAR. 65
could not be sent from one country to another. ^
Holders of securities sold rapidly and prices fell
heavily. Apparently Berlin and other Con-
tinental banks endeavoured to realise those
securities which they held — partly for strategic
purposes — as reserves. Moreover, other holders,
speculators and investors, sold because they
feared worse might follow, and so developed an
affection for cash. The consequence was that in a
few days all the Continental bourses were closed,
and London and New York alone remained open.
Naturally — and especially as the political crisis
was rapidly growing more acute — masses of
securities were unloaded on these exchanges,
which were compelled to close (on the Saturday
before Bank Holiday) as a measure of protection
to their own members.
The banks were affected in two ways — through
their loans to the Stock Exchange and as inves-
tors in securities. Brokers holding purchases on
behalf of foreign clients could not receive payment,
and were therefore unable to repay their loans to
the banks. Again, the securities held by the
banks for loans to brokers shrank in value. The
loan normally obtainable on securities depends
upon their market prices ; a margin of about 10 per
cent, is insisted upon to secure the bank against
a fall in price. Thus £100 Government stock
quoted at 80 will be regarded as sufficient security
for a loan of about £70. If the price falls to 70,
1 See p. 66.
E.W. F
66 THE ECONOMICS OF WAR.
the borrower must find other cover, or redeem
part of the loan. This is often done by seUing
some of the stock.
The serious fall in values on the Stock Exchange ^
placed many borrowers in Queer Street, and
these were saved by the closing of the exchange.
The banks — some of whom had not inspired con-
fidence by their attitude towards Stock Exchange
clients — could not insist on more cover, since there
were no official quotations for the securities. Nor
could they sell the securities themselves, since
there was no market.
Finally, they could not sell their own invest-
ments. Thus two liquid assets — short loans and
investments — lost that very characteristic which
made them so desirable from the banker's point
of view. And to that extent the position of the
bank, in the face of possible panic demands from
the depositors, was weakened.
In the second place, the position of joint-stock
banks was made precarious by the effect of the
collapse of the foreign exchanges upon the bill
market and the reaction of the political situation
upon the prospects of trade. The acceptor of a
bill expects to be placed in funds by the client for
whom he has acted. Many of these debtors or
clients, as already stated, are foreigners, who
cancel their debts, under ordinary circumstances,
1 The average fall for a mass of securities was a little over
5 per cent, during the week following the ultimatum ; the
fall in Consols was slightly above the average.
FINANCIAL EFFECTS OF THE WAR. 67
by means of bills on London purchased from those
who have sent goods to this country and are
therefore our creditors, but occasionally, under
special circumstances, by sending gold. But
before the end of the last week in July it became
practically impossible to send remittances to this
country, so that much of the circulating capital
of the accepting firms was lost for the time being.
Moreover, the outbreak of war between Russia and
Germany, and the subsequent entry of the other
nations, made doubtful the solvency of home
debtors — Williams & Co. — who had been accus-
tomed to rely upon the acceptors, so that the
latter were also in danger of losing considerably
on home bills. The effect was two-fold. Accept-
ing houses could not undertake fresh business in
bills, so that our trade, which is so largely financed
in this manner, was in danger of serious dislo-
cation. Moreover, discount houses would be
seriously injured if the accepting houses failed to
make payment on maturity, and would thus find
it extremely difficult, if not impossible, to repay
their loans to the banks. The banks were thus
affected in three ways — (i) as acceptors they would
be called upon to meet bills on maturity, but could
not expect to be repaid by all their debtors, for
whom they acted ; (2) as holders of bills accepted
by the chief accepting firms, they wotild be injured
where the latter proved unable to meet those bills
on maturity ; (3) as lenders to discount houses,
they would be injured where the latter had been
F2
68 THE ECONOMICS OF WAR.
made insolvent through similar failure on the part
of the accepting houses. All three classes of
assets were frozen, and so could not be relied upon
in the emergency.
Consequently those joint-stock banks which
pursued a short-sighted policy, while endeavouring
to realise as much as possible of the above assets
(thus adding to the embarrassment of the other
sections of the financial community), did three
things. First, they drew upon their reserves in
the Bank of England, and so increased their
individual holdings of gold and Bank of England
notes (which are legal tender). Secondly, they
refused to discount any more bills and called in
their loans to discount houses. Consequently the
latter were compelled to have recourse to the Bank
of England, which never refuses to discount a good
bill, although it may increase its charge for doing
so — i.e., raise the rate of discount.^ One would
expect to find that these joint-stock banks, so
solicitous of the welfare of their cash depositors,
would have treated the latter handsomely. But
such was not the case, for (thirdly) they curtailed
payment of gold over the counter. Their custo-
mers, whenever possible, were handed bank-notes
on the Friday before Bank HoHday. Now a bank-
note (which is always convertible into gold at the
Bank of England) is an extremely inconvenient
1 It appears that the Bank of England discounted bills
to the value of ;^ 14,000,000 in two days, mainly in conse-
quence of the action of such banks.
FINANCIAL EFFECTS OF THE WAR. 69
form of money for holiday purposes, and quite
unsuitable for payments of wages and small
debts. So great was the need for coins of small
denomination that on Friday afternoon and
Saturday morning large crowds of those who had
received paper the day before appeared at the
Bank of England to change the notes into gold
and silver. Thus some of the joint-stock banks
helped in three ways to drain the gold reserve of the
Bank of England. This reserve, which on Wednes-
day, July 29th, amounted to £27,000,000, was
reduced by Friday, August 7th, to ;£io,ooo,ooo.
It is doubtful if there was a serious run upon the
joint-stock banks ; ^ but some of the joint-stock
banks certainly acted towards the central institu-
tion as they expected their depositors would act
towards themselves. ^ The result was a violent
upward movement of the Bank of England rate
of discount, first from 3 to 4 per cent. (Thursday),
then to 8 per cent. (Friday),. and ultimately, on
the Saturday, to 10 per cent. The declaration of
the 10 per cent. Bank rate was the signal for
Government interference. Such, then, was the
position over the holiday week-end. In a week
the storm had wrought greater havoc upon
1 In view of the holidays there was naturally a greater
demand than usual for cash.
2 The writer witnessed " runs " on three banks in Rotter-
dam on Bank Holiday. Barriers were erected outside the
buildings, and the police guarded the premises. But these
" runs " were said to be due to the scarcity of silver which,
apparently, the Dutch working-class families suddenly began
to hoard.
70 THE ECONOMICS OF WAR.
finance and commerce than anyone had dreamt
possible. So great is the interdependence of
nations that mere suspense destroyed completely
the dehcate fabric of world credit. A new and
tougher one had to be substituted without delay.
The problem which faced the Government was
two-fold. The banks required assistance to meet
a possible panic among depositors after the Bank
Holiday. Moreover, it was necessary to secure
continuity of trade by preventing the complete
destruction of the financial machinery by which
it is carried on. The primary need of a bank
during a crisis is a plentiful supply of currency in
which the depositors have complete confidence,
and which, therefore, they will accept without
hesitation. Gold is, of course, the perfect cur-
rency in this respect. Hardly less acceptable is
the Bank of England note, which is regarded as
being practically State-guaranteed paper. But
the issue of such notes (except as a substitute for
cash deposited) is limited, by the Act of 1844, to
an amount which now reaches approximately
£18,500,000. The Government could provide the
banks with all they needed in one of two ways —
by suspending the Bank Act and permitting an
unlimited issue of the notes with which we were
familiar, or by issuing notes from its own Treasury
Department. The latter method was adopted.
The Bank Holiday was extended three days, at
great inconvenience to the public, to enable the
Government to prepare the new issue, and to
FINANCIAL EFFECTS OF THE WAR. 71
allow time for the fears of nervous depositors to
diminish. Postal orders were made legal tender
until an adequate supply of notes could be manu-
factured. The Bank Act was also suspended, so
that, presumably, an unexpected shortage could
be met immediately by an additional sypply of
bank-notes ; but the new powers of the Bank of
England were not employed in this manner.
Joint-stock banks were allowed to borrow Trea-
sury notes to the amount of 20 per cent, of
their Habilities. Since these total more than
£1,000,000,000 for all the banks, the Govern-
ment made provision for a possible addition of
over £200,000,000 to the currency of the nation.
When the banks were reopened on the Friday it
was found that depositors were not the victims of
the infectious disease which had been so much
dreaded. They had been successfully inoculated.
The other aspect of the problem presented
greater difficulty. One writer has stated that the
Government's action produced the effect of a
dose of morphia ; it deadened the sensibility of
the credit organism. Another affirms that it
quickened its activities, which had been almost
paralysed. Morphia can scarcely be regarded as
a stimulant ! What the Government did was to
give a mixture of morphia and strychnine.
In the first place the difficulties of the accepting
houses were met for the moment by the declara-
tion of a moratorium covering bills of exchange —
i.e., accepting houses were relieved, for a month,
72 THE ECONOMICS OF WAR.
of their liabilities on maturing bills. But this left
the banks and discount houses in an awkward
position, so that a few days later (August 8th)
the moratorium was extended to almost all
transactions of £5 and upwards. Thus a holiday
was granted to debtors at the expense of creditors ;
and banks frequently employed the shelter of the
moratorium against the claims of their own
creditors, the depositors. So much for the
morphia.
The strychnine was equally effective. The
problem of the banks and discount houses was
solved with comparative ease. The assets of the
banks in the form of bills of exchange and loans
to discount houses threatened to be unreahsable,
consequently the Bank of England was em-
powered (August 13th) by the Government, and
at the latter's risk, to rediscount, at 2 per cent,
above Bank rate, all bills normally regarded as
good bills drawn before the moratorium of
August 4th. Thus all such bills could be turned
into liquid assets, and the discount houses were
able to repay their loans to the banks. Both
institutions were in a position to undertake fresh
work of the same kind, since they availed them-
selves largely of the powers conferred by the
Government. It is surprising they did so to
such a great extent, for, as Mr. Keynes points out,
they were practically borrowing at 7 per cent,
(the Bank rate having been reduced to 5 per cent.)
to lend again at a much lower rate. The fact
FINANCIAL EFFECTS OF THE WAR. 73
that they could rediscount their bills at any time
secured them against possible loss, so that it would
have been more profitable to hold them longer
than they did. But the net effect of the policy
pursued by the Government was that the capital
of the holders of bills — banks and discount houses
— which had been locked up was once more
realisable. The accepting houses were for the
moment protected by the moratorium, which gave
them time to recover from the stunning blow
delivered by the outbreak of war. But they could
not be expected to entertain fresh business. Nor
could the other institutions be expected to dis-
count, so readily as before, the bills of acceptors
whose solvency was now seriously threatened.
Trade was in imminent danger of being curtailed
beyond the point to which war itself would reduce
it. Consequently the Government authorised the
Bank of England to allow acceptors to reaccept
pre-moratorium bills as they fell due. Since
there was no basis for confidence that the political
and industrial conditions would be improved
before the reaccepted bills again matured, this
measure proved inadequate. Ultimately (Sep-
tember 5th) the Bank was authorised to lend
money to acceptors (also at Government risk and
at 2 per cent, above Bank rate) to enable the latter
to meet their bills (most of them now held by
the Bank itself) at maturity. The bills thus
disappeared and the acceptors became simply
borrowers. The loans need not be repaid until
74 THE ECONOMICS OF WAR.
twelve months after the conclusion of peace except
in those cases in which the ultimate debtors —
Williams & Co. — placed the acceptors in funds in
the usual way. Thus the acceptors are relieved,
for the time being, of the dead weight which
hampered their movements and are able to pro-
ceed with their accustomed work. Moreover,
since the Bank's claims will rank second to those
of holders of bills at the time of settlement, the
banks and discount houses (who have realised
their assets, and so possess, or can obtain, money
to discount fresh bills) are ready to accept the
guarantee of the acceptors.
The history of the crisis and the measures of the
Government raise many questions which have
been fully discussed in newspapers and journals,
and which would need careful examination in a
treatise on banking. But, since the purpose
of this chapter is to indicate what really did
happen to the financial machinery on the outbreak
of war (for purposes of comparison with Mr.
Angell's supposed predictions), such an examina-
tion would be irrelevant. Reference may be
made, however, to three criticisms.
(i) It is sometimes contended that since the
bill market has been dull since August, and banks
cannot find outlets for the capital set free by the
measures of the Bank of England, the machinery
has not been fully repaired. This is not quite
true. The machinery may not be so powerful as
of old ; but the chief reason for the lack of bills
FINANCIAL EFFECTS OF THE WAR. 75
is to be found in the state of trade. Bills do not
make trade, but trade creates bills. It is obvious
that trade must be dislocated and materially
reduced when five great nations are at war ; the
belligerents cannot exchange goods, and at least
fifteen million men are withdrawn from their
ordinary occupations to take their places on the
battlefield or behind it.
(2) Complaints have been uttered by traders
that finance houses have received preferential
treatment, while they themselves, equally in need
of assistance, have been left to fight their battles
unaided. Such is not the case. Traders were
protected when assistance was granted to finance
houses. The latter were not assisted in their own
interests, but in the interests of the community.
The bank has been termed the power-house. If
power fails, all the machinery in the factory is
brought to a standstill. The measures of the
Government can scarcely be called " paternal
legislation," such as assistance to traders, in their
own interests, would be termed.
(3) It is sometimes argued that the Government
was not justified in incurring such enormous
liabilities as were involved in the guarantees it
offered to the Bank of England. That there will
be losses cannot be denied. It is impossible to
say how serious they will be. But even if they
amount to forty or fifty milHon pounds, the gains
already achieved are probably more. Not only
was credit restored, but (to a great extent as a
76 THE ECONOMICS OF WAR.
result of this) the war loan was issued with com-
plete success. The terms were much more favour-
able to the Government than would have been
likely if credit had not been fully restored. It is
not improbable that the Government will gain
as much by issuing war loans under favourable
conditions as it is likely to be called upon to pay
as the price of its policy in protecting the financial
market. The damage caused by the temporary
collapse of credit was far less than anticipated ;
and the courageous action of the Government
was undoubtedly the dominating factor in its
restoration.
B. Germany.
It is never easy to disentangle the strings of
assets and liabilities published at regular intervals
by those who take care of the nation's money,
but the task of estimating the significance of the
periodic statistical statements of the Imperial
Bank of Germany presents almost insuperable
difficulties. Beyond these statements — ^which may
or may not be reliable — the financial news which
percolates through the national boundaries is
somewhat meagre. Nevertheless, it is important
that such facts as are obtainable should be exa-
mined ; for not only may the duration of the war
be partly determined by the manner in which the
financial machinery performs its work, but the
state of credit is itself a manifestation of the
economic and moral condition of the people.
FINANCIAL EFFECTS OF THE WAR. ^^
It is generally admitted that for many years past
the economic policy of the German nation has
been subordinated to presumed political necessity.
What is equally evident to those who are interested
in the German credit system is the care which was
devoted to financial preparations for war. Pro-
fessor Riesser, of Berlin, in an elaborate treatise
on the concentration movement among German
banks, dwells upon the need for facilitating, by
carefully considered methods, "the marshalling of
financial forces " corresponding to that of military
forces — " it is impossible without severe losses to
evolve a battle formation in the face of the
enemy." Scraps of information have appeared
from time to time in the Economist which, together
with the canons laid down by Professor Riesser
and the balance-sheets of the Reichsbank, make
it possible to visualise, somewhat dimly, the pre-
sent state of credit in Germany.
The modern banking system of Germany pos-
sesses one feature which is characteristic of our
own. It rests upon or radiates from a central
institution, the Reichsbank, which corresponds to
our Bank of England. But it differs from the
latter in being under Government control and
management. Joint-stock banks keep their
bullion reserve on " giro " account with the
Reichsbank, so that, as with us, their mutual
indebtedness can be cancelled and clearances
effected by means of cheques (or their equivalent)
upon the latter. But banking in the German
78 THE ECONOMICS OF WAR.
States is not so highly developed as in this
country ; the method of payment by cheque is not
so extensively employed, so that bank-notes play
a much more important part as currency. Nor-
mally the issue of Imperial bank-notes is limited
to £27,500,000 plus the value of the reserve,
which consists of bullion (gold and silver),
Treasury notes, and the notes of the four other
banks of issue — Wiirtemburg, Bavaria, Baden,
and Saxony. For any issue beyond this limit
a tax of 5 per cent, is payable. The Reichsbank
notes are legal tender, normally convertible into
gold at headquarters.
The economic disturbances during the " black
week " of July and immediately after the out-
break of war were of almost the same character
in Germany as in Britain, although the remedial
measures adopted by the two Governments were
quite different. When the political crisis reached
an acute stage the Germans became panic-
stricken. Excessive demands for cash were made
upon the private banks, which, immediately before
the declaration of " Kriegzustand " on the Wed-
nesday, refused to meet more than 20 per cent,
of their liabilities in gold. It has been stated
that they entirely suspended cash payments at
this stage. Such was not the case ; the writer
(like many others present at the time) was paid
gold on the Friday evening (July 31st). The news-
papers called attention to the efforts of the people
to hoard gold and silver during that week, and
FINANCIAL EFFECTS OF THE WAR. 79
urged them to act exactly as they were accus-
tomed to do under normal conditions. Bank-
notes were regarded with suspicion, and appa-
rently depreciated in terms of gold. Sometimes
they were refused, and the military governor was
compelled to intervene, and to threaten punish-
ment for non-acceptance of paper which had
always been legal tender. Food prices rose
rapidly, and many householders played into the
hands of the shopkeepers by laying in large stores
of non-perishable household goods. Immediately
after the declaration of war against Russia maxi-
mum food prices were established by many local
authorities in Prussia and elsewhere ; the Reichs-
bank was relieved of its obligation to pay gold for
its notes, and, apparently, the Act limiting note
issue was suspended. Thus the first two steps
taken — one, at least, after careful thought — in
the economic mobilisation of the nation were
precisely those which, according to orthodox
British theory, should have been regarded as
among the last resources. But before the notes
were made inconvertible the gold reserve of the
Reichsbank had been depleted to the extent of
about ;f5, 000,000.
The great need during a crisis (when hoarding
is general and gold therefore scarce) is a plentiful
supply of currency which will be accepted without
hesitation by the community. Such a currency
was provided partly by coining and issuing silver
to the value of about ^f 15, 000, 000, which had
8o THE ECONOMICS OF WAR.
previously formed part of the Reichsbank reserve ;
partly by the issue of Treasury and bank notes ;
and partly by the issue of war notes {Darlehn-
skassenscheine) by special war banks, to which
reference will be made later. The initial expenses
of military mobilisation were met from the con-
tents of the ** war-chest." After the Franco-
Prussian war the sum of £6,000,000 in gold was
deposited in the fortress of Spandau, near Berlin,
and remained there until the outbreak of the pre-
sent war, when it was apparently transferred to
the Reichsbank. Moreover, a few years ago
provision was made for a second war reserve of the
same amount. Two-thirds had been collected
and deposited at the bank before war was declared,
so that the effective reserve of that institution was
strengthened, to the extent of £10,000,000, soon
after the withdrawal of gold and silver made
necessary by the panic and scarcity of currency.
The remaining two millions of the new war-chest
apparently existed in the form of Treasury notes.
It seems fairly evident that the trading com-
munity was directly and immediately assisted by
the Imperial Bank. For not only had this part
of the plan been advocated long before, but the
" discounts and advances " in the weekly state-
ments of that institution increased from about
£40,000,000 on July 23rd to about £230,000,000
on August 15th. It is extremely probable that
such increase was at first mainly due to the dis-
counting of bills of exchange. The item roughly
FINANCIAL EFFECTS OF THE WAR. 8i
corresponds to " other deposits *' in the weekly
returns of the Bank of England.
The Germans are proud of the fact that, alone
among the belligerent nations, they found it
unnecessary to declare a moratorium, and that
the official rate of discount never exceeded 6 per
cent. These facts are undoubtedly evidence of
financial strength. But they are also evidence of
financial immaturity. Comparison of Germany
and Britain on the basis of the emergency measures
which proved necessary is impossible. For, first,
even in time of peace the Reichsbank frequently
refused to part with gold (while retaining a
moderate rate of discount) when the state of the
foreign exchanges made such action profitable,
so that the 6 per cent, rate of discount would not
be operative in the case of transactions calling for
the export of that metal. Secondly, the fact that
the Reichsbank had suspended gold payments —
when the notes were made inconvertible — renders
comparison with our own country futile. When the
Bank of England rate was 8 per cent, every bill
discounted might have meant the withdrawal of
gold, for the bank-note was (and is) convertible.
But a bill discounted at the Reichsbank could not
mean more than a withdrawal of notes, which
could be replaced without difficulty so long as the
printing machine remained in working order. In
other words, the rate of discount possesses little or
no significance where the currency can be inflated
without limit. Finally, bills of exchange pre-
E.W. G
82
THE ECONOMICS OF WAR.
sented to the Reichsbank were held in Germany,
and were mainly of a domestic character. And
such bills play a much less important part in the
economy of the nation than is the case here. What
made a moratorium necessary in Britain was the
great extent to which London accepting houses
were then financing the trade of the world, and
to which they were creditors of foreign merchants
who could not pay their debts. The argument
that because Germany was able to dispense with
a moratorium she was stronger, financially, than
Britain is as valid as the argument that because
Timbuctoo has been less seriously affected by the
war it is in a better economic condition than the
United States.
The following tables, selected from the weekly
returns of the Reichsbank, provide some of the
data upon which the remainder of the chapter is
based : —
Bank of Germany (ooo's omitted).
-
July 33.
Aug. 15.
Sept. 23.
Nov. 7.
Dec. 23.
Feb. 27.
Assets :—
£
£
£
£
£
£
Gold .,
■ 84,570
79,511-
83,791
94,371
103,774
113,532
Silver..
1,435
1,808
2,064
2,181
Treasury notes
7,465
42,961
37,707
10,801
Discounts and
advances ..
40,055
230,348
241,881
133,804
185,123
206,899
Liabilities:—
Notes in circu-
lation
94,545
194,096
199,640
204,34a
221,599
343,135
Current ac-
counts (or
deposits) . .
47,198
137,588
135,449
64,103
102,727
79,076
FINANCIAL EFFECTS OF THE WAR. 83
The addition of about £190,000,000 to " dis-
counts and advances " between July 23rd and
August 15th was probably due, in the main, to
the rediscounting of bills of exchange. This was
done partly by payments of gold, silver, and
Treasury notes, but mainly, as the tables show,
by means of bank-notes and " current accounts "
(i.e., entries in the bank books against which the
depositors could draw cheques).
Nearly ;f 100,000,000 of additional notes were
issued, while deposits (or current accounts) were
augmented by about £80,000,000. These together
represented an enormous increase in the currency
available for circulation. On the other hand,
when war became inevitable private individuals
hoarded as much gold as possible, and to the extent
of the affection displayed for the golden nest-egg
the amount in circulation diminished. Conse-
quently, it is likely that the active currency was
not so seriously inflated as the above figures
suggest — certainly not to the extent of over
£200,000,000 suggested in the Economist.
The " life " of a bill of exchange is usually two
or three months ; it is rarely longer than six
months. Some of those rediscounted at the
Reichsbank were probably already advancing
towards old age, while others had passed their
early youth. As these bills reached maturity
and were cancelled one would expect to find a
gradual but steady reduction in " discounts and
advances." Such was not the case. Their place
G 2
84 THE ECONOMICS OF WAR.
was taken either by Treasury bills or, what comes
to the same thing, by advances to firms engaged
on Government work, who would ultimately be
paid from the proceeds of the war loan. For
several weeks, indeed, the advances of the bank
increased, until on September 23rd (when they
were approximately £242,000,000) the upward
trend came to an end.^ Afterwards they fell
steadily to about £134,000,000 on November 7th.
The first war loan of £250,000,000, authorised on
August 4th, was floated on September 19th.
The natural inference is that there was a con-
siderable reduction in assets which was closely
related to the issue of the Imperial loan. Advances
made to the Government or its contractors were
repaid out of the funds provided by subscribers
to that loan. In this connection it is significant
that, corresponding to the shrinkage of assets,
the reductions of liabilities were entirely in
" current accounts." The issue of bank-notes
steadily increased during this period. Obviously
many subscribers to the loan obtained funds in
the form of such notes, so that notes first issued
as emergency (temporary) currency to finance
trade during the critical period were employed
by subscribers in payment of their shares, and
afterwards replaced in circulation by the Govern-
1 Under normal conditions " advances " increase towards
the end of the quarter ; but in the quarter under considera-
tion one would expect to find such increase counterbalanced
by a reduction on account of the maturing of rediscounted
bills.
FINANCIAL EFFECTS OF THE WAR. 85
ment as part payment of its debts to contractors
and others.
The war banks — of which more than two
hundred were estabhshed in various parts of the
country — call for comment here. These are, in
effect, special mortgage banks with a two-fold
object. It was obvious that the outbreak of
war would dislocate trade and embarrass many
tradesmen and others, who, while solvent, might
be unable for a time to realise their assets. The
war banks were established mainly to provide
temporary assistance to such people by lending
" money " (for three months at 6J per cent.)
upon such security as produce, stocks, bonds, etc.
The " money *' lent consisted of special credit
instruments or war notes, which, although not
legal tender, were accepted by the Government
and honoured by the Reichsbank, which was
authorised to exchange them for bank-notes on
demand and empowered to classify them as
Treasury notes. Although the bulk of such notes
as were actually borrowed found their way to the
Reichsbank and were replaced by bank-notes, a
considerable proportion circulated freely. They
were mainly of small denomination (10, 15, 20 and
50 marks) and corrected the lack of coin. Between
July 23rd and September 30th the amount of
" Treasury notes " in the Reichsbank reserve
increased by about £13,500,000, while on the
latter date there were almost £10,000,000 of war
notes in circulation. The second object of the
86 THE ECONOMICS OF WAR.
war banks was to enable the general public to
raise funds for subscription to the war loan ; and
to this end the total amount which the special
credit institutes could advance was increased in
September from £75,000,000 to £150,000,000.
Further discussion of this point would necessitate
an examination of the methods employed in
financing the war, which is beyond the scope of
this chapter. It is sufficient to say here that the
activities of the war banks have resulted in an
appreciable increase in the currency of the nation.
Moreover, since the beginning of November " dis-
counts and advances " have steadily increased
until, in the latest returns (February 27th), they
amounted to approximately £207,000,000, while
during the same period bank-notes in circulation
increased to £243,135,000. The bank-notes now
in circulation amount to more than the total gold
supply of the empire ; and when the second war
loan is issued the supply must be still further
increased.
From what has already been stated it is evident
that, although the gold reserve has been enor-
mously strengthened, the currency of Germany
has been considerably inflated at a time when the
need for currency (as distinct from the demand for
gold) has been considerably reduced ; for the
isolation of the empire and the withdrawal of
several millions of soldiers from their ordinary
avocations must have seriously curtailed trade.
Economic theory tells us that under such circum-
FINANCIAL EFFECTS OF THE WAR. 87
stances the value of money must fall — i.e., prices
must rise. In this way alone can the inflated
currency be completely absorbed. But imme-
diately war was declared maximum food prices
were established by many local authorities, and
subsequently the Imperial Government fixed
maximum prices for foodstuffs and metals. It
seems as though the German economists called
into consultation believed it possible to neutralise
the effects of economic forces by legal enactment.
The material available is too scanty to justify
dogmatic utterance upon the efficacy of the
measures adopted. The price policy is said to
have proved a failure. It is true that the earlier
methods of enforcing it proved inadequate, and
that the resulting friction has led many to believe
that economic exhaustion is at hand. But it is
by no means clear, from experience already
gained, that a stricter application of the same
policy must fail completely. During the first five
months of war the price of copper advanced 44 per
cent., tin 58 per cent., lead 22 per cent., and zinc
68 per cent. The prices prevailing at the end
of the year were declared maxima. That they
proved to be too low is evident from the fact that
no private dealing afterwards took place. Sellers
would not part with their stocks except to the
Government, which was above the law. But the
rise in the prices of the minor metals is fully
explained by their scarcity. The maximum prices
of foodstuffs were advanced from time to time.
88 THE ECONOMICS OF WAR.
During the last quarter of the year the price of
butter, for example, rose 27 per cent., and that
of lard 42 per cent. There is a fundamental
difference in the immediate significance of the
necessaries of life and the metals. A continuous
supply of the former is absolutely essential. And
since sellers held up their stocks for higher
maxima in the future, the Government was com-
pelled practically to commandeer bread to secure
supplies for the poor, as well as economic con-
sumption with a view to the future. At this
point the assumption of economists — free play of
economic forces — completely breaks down. It
will be interesting to see what has happened to
the prices of commodities other than metals and
necessaries of life.
It is practically certain that if gold circulated
freely in Germany two prices would already have
emerged — gold and paper prices. The former
would be lower than the latter. German paper
(in terms of German gold) has already depreciated
in other countries. Such depreciation is quite
distinct from, though closely related to, the
foreign exchanges, which are not within the scope
of this chapter. Early in January the writer con-
verted, into British money, gold and paper which
he brought from Germany on the outbreak of war.
For two Reichsbank notes of 100 marks he was
given £S 6s. Sd. ; and for a German sovereign
19s. 2d., so that for ten German sovereigns he
would have been given £9 iis. Sd., or 25s. more
FINANCIAL EFFECTS OF THE WAR. 89
than he obtained for the same sum in paper ; in
other words, German paper had depreciated about
13 per cent, as compared with German gold.
It is highly probable that in the near future,
when a great part of the new loan has been spent
and the issue of bank-notes again considerably
increased, the latter will be further depreciated.
And it is still more probable that the restoration
of the credit system after the war will necessitate
a considerable loan to cover the damage already
wrought ; while further depreciation of paper will
but add to such cost of restoration. The only
alternative will be to allow the holders of notes
to bear the loss entailed by the emergence of two
prices when gold again enters into circulation.
The final point for consideration is closely
related to the above. Since war was declared
about £50,000,000 of gold has been added to the
reserve of the Reichsbank, so that, in spite of the
enormous issue of bank-notes, the proportion of
reserve is still high, and the legal limit of total
indebtedness far distant. But it should be
observed in passing that a reserve of (say) 50
per cent, on a normal paper issue of (say)
£100,000,000 is not the same as a 50 per cent,
reserve on an abnormal issue of £200,000,000 ; for
a reduction of the issue once more to the normal
amount would sweep away the whole gold reserve.
Where has the gold been obtained ? The sum of
£10,000,000 in gold was already to hand in the
form of a war chest. The rest, according to the
90 THE ECONOMICS OF WAR.
German authorities, has been withdrawn from
circulation. Probably most of it is accounted for
in this way, although the steadiness of the increase
(which cannot continue indefinitely) remains a
mystery. A writer in the Economist suggests that
since the Bank of Austria ceased to publish
returns after the declaration of war, the gold
reserves of the two Imperial banks may have been
pooled. It is not a convincing theory. Probably
the explanation is to be found in the suspension
of cash payments. In a speech in the autumn
Herr Havenstein, the President of the Reichs-
bank, complimented the joint-stock banks upon
having strengthened their reserves in the central
institution while continuing to advance freely
to their own customers. The inference is that the
Reichsbank, which could seriously damage the
credit of reluctant private banks, calls upon the
latter for their gold in such a way as to show a
steady increase in its own reserve. The other
banks no longer require their domestic supplies
of gold, for they may advance freely to their own
customers either by paying (inconvertible) notes
or by granting deposits upon a reserve of notes.
The impression conveyed by such facts as we
know is that the currency measures constituting
the " financial mobilisation," upon which Pro-
fessor Riesser and others lay such stress, were
well adapted to a short war which would not
isolate Germany from the rest of the world, but
are no more e:ff ective than those employed by the
FINANCIAL EFFECTS OF THE WAR. 91
United States Government, during the Civil War,
for a long struggle against a combination which
seriously interferes with the external trade of the
German Empire. And there is ample reason for
the view that before economic exhaustion is
reached the financial situation may become intoler-
able to the Liberal party, representing the indus-
trial and commercial interests. The longer the
war lasts the greater will be the difficulty of re-
storing credit, and, therefore, of resuming trade
with foreign countries.
CHAPTER V.
TERRITORY AND ECONOMIC WELFARE.
A. Annexation.
Mr. Angell's views on territorial expansion
by means of complete annexation are expressed
in language which gives no room for misinter-
pretation. Annexation cannot bring economic
gain.
" The wealth of conquered territory remains in the
hands of the population of such territory. When
Germany annexed Alsatia, no individual German
secured a single mark's worth of Alsatian property as
the spoils of war. Conquest in the modern world is a
process of multiplying by x, and then obtaining the
original figure by dividing by x. For a modern nation
to add to its territory no more adds to the wealth of
the people of such nation than it would add to the
wealth of Londoners if the City of London were to
annex the county of Hertford " (" The Great
Illusion," p. viii, preface).
" When Germany annexed Schleswig-Holstein and
Alsatia not a single ordinary German citizen was one
pfennig the richer " (p. 31).
In regard to the annexation of Holland, " we may,
indeed, say that the Hollander would be certainly the
worse, in that he would have exchanged the relatively
light taxation and light military service of Holland
for the much heavier taxation and the much longer
TERRITORY AND ECONOMIC WELFARE. 93
military service of the ' great ' German Empire "
(p. 40). 1
The view expressed in these quotations seems
to be erroneous. If no gain was effected by the
annexation of Alsace-Lorraine, no loss would be
suffered if it were now returned to France. Nor
would any loss be felt if Schleswig-Holstein were
handed back to Denmark, East Prussia were
presented to Russia, Westphalia ceded to Belgium
and Holland, Saxony to Austria, Silesia to the
new Poland, and so on, until " Germany " was
left with only the plains and pleasant lakes of
Brandenburg. Her remaining people, according
to Mr. Angell, would be no worse off, economically,
than before. He has obviously neglected impor-
tant factors contributing to the wealth of nations.
In the first place, his argument denies the
validity of the contention, both of free traders
and of many modern protectionists, that an
extension of the free trade area is followed by an
increase in the total wealth of that area. If the
free trade argument is sound, Germany gained
appreciably by bringing the annexed provinces
within the customs union. The gain to Alsace-
Lorraine is not so obvious, since it but exchanged
one free market (France) for another. But,
even to that province, the exchange probably
1 From his statement, on p. 28, to the effect that if Germany-
annexed Holland Dutch merchants would be competing
more keenly than ever with their German rivals, we infer,
perhaps wrongly, that Mr. Angell believes Germany would
suffer through such annexation.
94 THE ECONOMICS OF WAR.
proved advantageous in the economic sense, for,
while the population of France has remained
practically stationary, that of Germany has in-
creased steadily, so that the new free market is
considerably larger than the other would have
been. Moreover, the direction of industrial
development in Germany has proved advan-
tageous to the new province, which contains
valuable deposits of iron ore and coal.^ It is
probably true to say that if Alsace-Lorraine had
been kept on the remote side of the German
customs barrier it would not have enjoyed so
much economic prosperity during the thirty-five
years or so that have passed since the discovery
of a method of utilising the special quality of ore
found in that region. But whatever doubt may
exist about the economic gain to Alsace-Lorraine,
there is certainly none as to the advantage which
annexation brought to Germany, with its pre-
vailing tarrS policy. Similarly the annexation
of the Low Countries would benefit, in this sense,
not only those countries themselves, but also
Germany, which is now hampered by the barrier
separating the Rhine provinces from the sea. It
is, of course, obvious that if one free trade country
annexed a portion of another free trade country
the free trade area would not be extended. But
1 And the fact that much of the trade of the annexed
provinces with foreign countries was made to pass through
Germany rather than France must have brought considerable
gain to the transport industries and commercial interests of
the empire,
TERRITORY AND ECONOMIC WELFARE. 95
even in this case, provided the two employed
different systems of weights and measures, and
different coinage, the former would gain slightly
from an extension of its area. For the adoption
by the annexed territory of the systems of the
conqueror would undoubtedly react favourably
upon the trade of the latter. Differences in the
systems employed by the different German
States before 1870 seriously hampered inter-
State trade ; and the adoption of a uniform
standard after the French war assisted materially
the development of trade within the new Empire.^
In reply to a critic Mr. Angell writes :
" We realise that when Germany has conquered
Alsace-Lorraine she has * captured ' a province worth,
* cash value,' in my critic's phrase, sixty-six millions
sterling. What we overlook is that Germany has also
* Mr. Angell lays great stress in his writings upon the fact
that trade does not respect political boundaries. But trade
even yet is not entirely indifferent to them. Differences in
coinage, in weights and measures, and in laws relating to
trade and finance still compel a certain amount of such
respect. The truth of this may become very evident after
the declaration of peace, when Germany will be faced with
the serious problem of reducing her inflated currency (which
even now is not accepted abroad at its face value) to normal
proportions. The fact that currency is under the control of
Governments, that the fiat of Governments is practically
ignored in other countries, and that an international currency
is more restricted in its forms than internal media of circula-
tion will, for a long time to come, make political boundaries
an effective barrier, within well-defined and narrow limits, to
international trade. The absence of that knowledge of indus-
trial and financial conditions of foreign countries which is
possessed of one's own country is also a retarding influence
of no small importance. These differences in laws and degrees
of acquaintance with markets act in the same manner as
protective tariffs.
96 THE ECONOMICS OF WAR.
captured the people who own the property and who
continue to own it. We have multiplied by x, it is
true, but we have overlooked the fact that we have
had to divide by x, and that the result is consequently,
so far as the individual is concerned, exactly what it
was before. My critic remembered the multiphcation
all right, but he forgot the division " (pp. 42, 43).
The paragraph has been quoted because Mr.
Angell seems to lay great stress upon this process
of multiplication and division. Three comments
may be made upon it : — {a) If what we have
already stated is true, the wealth per head is
increased. The enlargement of the free trade
area has added to the wealth more than pro-
portionately to the addition, through annexation,
to the population. (6) It is difficult to give a
meaning to Mr. Angell's algebra. The mul-
tiplier is X. Now what is xl Apparently the
population of Alsace-Lorraine. If anything is
multiplied by x it must be the average wealth
per head in that province. So the net result is
that we multiply the average wealth per head
in Alsatia by the number of people, and then
divide by that number, and so obtain — the average
wealth per head in Alsatia ! But that gives us
no information about Germany, and is, of course,
an absurd process. What Mr. Angell probably
means is that if the property of the new province
is added to the wealth of Germany, then, in order
to ascertain the wealth per head, the population
of the province must also be added to the popula-
tion of the conquering nation. And the resulting
TERRITORY AND ECONOMIC WELFARE. 97
wealth per head is the same as before. It is per-
fectly true that, since the annexation of French
territory did not interfere with the property
rights of its inhabitants, the individual Germans
did not gain much immediately, but the present
chapter shows that they probably gained consider-
ably in the long run. (c) The inference from the
quotation seems to be that if Germany could have
annexed the land and property and expelled the
people she would have been better off. This
assumes that the country was already over-
populated.^ Surely it was better to have the
people along with the property, since the well-
being of the Germans would only be increased
by the employment of such property. Merely to
have factories which must remain idle and houses
which must be empty was of little use. To have
the people also, to produce a flow of wealth, was
an advantage, provided not all that flow was
appropriated by the Alsatians.
Thus we are brought to the second important
effect of annexation. The annexed territory may
be a real gain, in that it adds to the taxable capacity
of the nation. Mr. Angell denies that this can be
so. Replying to a critic who stated that the cash
value of Alsace-Lorraine was £66,000,000, and
that consequently, at its present rate of taxation,
^ I refrain (because it is not important in this connection)
from a discussion of the theoretical question of the possibility
of gain to the members of a nation by the emigration of those
who are engaged in " marginal employments " to another
country — uninhabited or thinly populated — ^where they
would be engaged in " intra-marginal employments."
E.W. H
98 THE ECONOMICS OF WAR.
the French Government was losing an income of
;f8,ooo,ooo a year, he writes :
*' If we take the interest of the ' cash value ' at the
present price of money in Germany, Alsace-Lorraine
should be worth to the Germans about three millions
a year. If we take the other figure, eight. Suppose
we split the difference, and take, say, five " ^ (p. 41).
But is it not obvious that
" this whole notion of national possessions benefiting
the individual is founded on mystification, upon an
illusion ? . . . Alsace-Lorraine is owned by its in-
habitants, and nobody else ; and Germany, with all
her ruthlessness, has not been able to dispossess them,
as is proved by the fact that the matricular contri-
bution {matrikularbeitrag) of the newly acquired State
to the Imperial Treasury (which incidentally is neither
three millions nor eight, but just about one) is fixed
on exactly the same scale as that of the other States
of the Empire " (p. 41).
Elsewhere (p. 43) he states that
" in every civihsed State, revenues which are drawn
from a territory are expended on that territory, and
there is no process known to modern government by
which wealth may first be drawn from a territory into
the treasury and then be redistributed with a profit
to the individuals who have contributed it or to
others."
These statements are not wholly true. In the
first, Mr. Angell implies that the contribution of
Alsace-Lorraine to the Imperial Exchequer is only
* There can be no question of splitting the difference ;
they are two essentially different things. The one is taxation
of total income, the other interest on capital value. One
might just as well speak of splitting the difference between
eight apples and three oranges.
\
TERRITORY AND ECONOMIC WELFARE. 99
the matrikularheitrag. Such is not the case. It
is true that each of the States in the federation
manages most of its own affairs, but in addition
to the matrikularheitrag, Alsace-Lorraine, and
all the others, contribute towards the Imperial
revenue by means of customs, excise, stamp and
inheritance duties, so that the new province pays
roughly in proportion to its wealth and trade.
And if these are above the average for the rest
of the Empire, Germany undoubtedly gains in
this particular sense. Moreover, the reproductive
undertakings of the empire, such as the post office,
are more profitable than they would have been
if they had not included Alsace-Lorraine. Finally,
this province makes a special contribution to
Imperial funds in that its railways — unlike those
of other German States — are owned by the empire
(having been purchased from France out of the war
indemnity), so that the profit from them, instead
of being spent in that State, is used to meet the
needs of the empire as a whole. ^
Again, it is not true that in modern States the
revenue obtained from one part of the com-
munity must be spent on that part. The main
accepted principle of taxation — payment accord-
ing to ability — is the negation of this view. The
modern State taxes its citizens according to their
^ It is, of course, true that the indemnity might have been
otherwise invested. But the net profit of the undertaking
(after allowing normal interest on capital), which now goes
to the empire (but in each of the other States to the State
itself) is a clear loss to the province and a gain to the
Imperial Government.
H 2
100 THE ECONOMICS OF WAR.
wealth, and renders assistance according to need.
Ireland, for example, pays proportionately less
than England to the Exchequer of Great Britain,
yet it enjoys not only the same protection, and the
same " general " advantages conferred by Govern-
ment, but also special advantages where these are
desirable. And the same principle holds in local
government. It may be true that London would
gain nothing by incorporating the county of
Hertford ; but the county might gain con-
siderably by being incorporated. The recent
development of the British policy of making
" grants in aid " of poor localities provides further
evidence of the error of Mr. Angell's view ; and
if still more were needed it could be found
by examining the advantages offered to small
villages on the fringe of large cities like Birming-
ham and Glasgow, when the latter wish to extend
the city boundaries. Now if Alsace-Lorraine has
proved to be richer, as a province, than the average
for Germany, and an appropriate share of the
Imperial taxes is paid by its people, the amount
of taxation falling upon the rest of the empire is
reduced, and consequently the citizens are indivi-
dually richer by the amount of additional taxation
they would have had to pay if Alsatia had
not been annexed. If the new province enjoys
but average wealth and prosperity, there is
neither gain nor loss in this special sense ;
while if it is poorer than the average, a
loss is experienced, since it draws more from
TERRITORY AND ECONOMIC \VELFAiElE.. xoi;
the Imperial Exchequer than it contributes
to it.
Finally, the cost of government does not increase
proportionately to the value of territory added.
Reference has already been made to the repro-
ductive undertakings of Government, such as the
post office, railways, etc. But the same is true
of other administrative departments, such as the
Board of Trade and insurance, and of the adminis-
tration of justice and the provision of means of
defence.^ The cost of defending the empire was
not materially changed by the annexation of
the Danish and French provinces. If the cost of
governing the people increases more slowly than
the population, obviously it was a real gain in
this particular sense to add to the territory and
population of the empire, for in this way the cost
per head was diminished, and the individual
Germans were richer by the annual amount saved
to them. The national debt provides the extreme
example of what is meant here. It is evident that
if the wealth and population of a country are
doubled while the national debt remains un-
changed, the annual charge per head and the
amount per individual to be paid on redemption
are reduced by one half. It was clearly a gain in
this respect to the Germans to annex Alsatia.
1 Mr. Angell holds the view that the military policy of
Germany was largely forced upon the empire by its annexa-
tion of the French province. It may be true ; we do not
know. Many believe that it was not appreciably influenced
by the tgrms imposed upon France in 1871.
; ip? . ' « - < TH£: .^ECONOMICS OF WAR.
The interest charges were spread over a larger
population, and so the cost per head was reduced
and the individual Germans made richer than they
would otherwise have been. France lost heavily
in this way, for the enormous additions to the
national burden had to be borne by a smaller
population, so that each had to shoulder a
greater part than would otherwise have been the
case.i
If the annexed territory was previously an
independent nation with a debt of its own, like
Holland, rather than a section of a country, like
Alsace-Lorraine, which had incurred no debt of
its own, it follows that the gain to the conquering
nation will be proportionately less ; for if Ger-
many, for example, retained Belgium in her grip,
and annexed Holland, she would need to accept
their debts as her own. And if these were greater
per head of population (in the smaller countries
before annexation) than the German debt, the
result in this respect would be unfavourable.
The conclusion, then, is that, whether wealth
be measured collectively or per head of population,
the annexation of a territory of average prosperity
is a gain to the conquering nation. Mr. Angell
1 The loss to France was relatively greater than the gain to
Germany. Assume the population of each of two countries
to be 100,000,000, that the annual debt charge of each is
^100,000,000, and that part of one country, containing, say,
20,000,000 inhabitants, is annexed by the other. The
interest per head on the debt of the latter is reduced from £1
to 1 6s. 8^., but on that of the former it is increased from £^
to 25s,
TERRITORY AND ECONOMIC WELFARE. 103
emphatically denies this conclusion. If it were
true it would be found, he argues, that small
countries, like Holland and Denmark, would be
immeasurably poorer than the vast territories of
Russia, or a large country like Germany : wealth
does not vary with the size of the administrative
area. So much has already been written upon
the factors upon which the wealth of a nation
depends that it is unnecessary to labour the point
here. The comparison is unjust. Climatic con-
ditions, topographical features, geological factors,
and the stage of economic development reached,
differ so much in the countries of Europe that few
are really comparable. What Mr. Angell regards
as the real test is no test at all. The point at
issue is not whether Germany is richer than
Holland, but whether she is richer than she would
have been without the annexed provinces —
whether the individual German has gained by
compelling the Alsatian to work under the
Imperial flag. And, unless one subscribes to the
views of the narrowest school of protectionists, the
reply is in the affirmative.
B. Colonies.
The changes in economic organisation indicated
in previous chapters have profoundly altered the
character of the colonial problem. In earlier
centuries the policy of the merchant adventurer
towards the newly-discovered lands, containing
104 THE ECONOMICS OF WAR.
precious metals and inhabited by savage and
semi-savage peoples, aimed at two things —
" first, such effective political occupation of the
country that he (the merchant adventurer) could keep
the savage or semi-savage population in check, and
could exploit the territory for its wealth ; and,
secondly, such arrangements as would prevent other
nations from searching for this wealth in precious
metals, spices, etc., since, if they obtained it, he could
not " (p. 97).
But changes have occurred since then : the
savage tribes have been civilised, the colonies have
been organised in much the same way as the
conquerors, and the character of international
trade has undergone material change. Colonies,
like other foreign countries, have become ** firmly
set,*' and are useful as markets for our products
and as sources of supplies of foodstuffs and raw
materials.
" And if their value in those respects is to be
developed to the full, they inevitably become self-
governing communities in greater or less degree, and
the mother country exploits them exactly as she
exploits any other community with which she may be
trading " (p. 98).
Germany would have to " own " Canada exactly
as we do ; she would buy from her merchants and
sell to her importers just as we do now.
Mr. Angell argues that two important results
follow from the changes outlined above. In the
first place, a modern colony or State cannot be
fully conquered. It might be defeated in a war,
TERRITORY AND ECONOMIC WELFARE. 105
but not so completely that the enemy would be
able to enforce his will upon it in economic or
political affairs. Great Britain does not impose
her will upon the colonies. Australia and Canada
are, for all practical purposes, politically inde-
pendent. The British Empire is really an alliance
of free independent nations. Britain is impotent
even where the foreign policy of Canada is con-
cerned. And if she now wished to enforce her
own ideas upon a colony, contrary to the will of
its inhabitants, she would lack the power to do so.
Canada and Australia are not colonies in the
old sense of the term ; they are rather States
upon equal footing with the mother country,
bound to the latter by sentimental ties.
If Germany, or some other Power, were
" to use force to conquer colonies, she would find out
that they were not amenable to force, and that the
only working policy was to let them do exactly as
they did before she conquered them, and to allow
them if they chose — and many of the British Colonies
do so choose — to treat the mother country absolutely
as a foreign country " (pp. loo-i).
Nor is the control of the economic policy of the
colonies in the hands of the British Government.
" If fiscal preference is extended to Great Britain,
that preference is not the result of British ' owner-
ship ' of the colonies, but is the free act of the colonial
legislators, and could as well be made by any foreign
nation desiring to court closer fiscal relations with
Great Britain " (p. 107).
Thus the colonies do not represent any special
io6 THE ECONOMICS OF WAR.
economic gain to this country. The profit they
bring is simply the profit that all foreign countries
bring — by means of their trade. Great Britain
would actually gain economically by formal
separation, since she would be relieved of the cost
of defending them.^
In the second place, assuming the possibility of
conquest so complete that the will of the con-
queror in political and economic matters could
be fully enforced upon the new colony, no eco-
nomic pohcy could be devised which would not
inevitably react unfavourably upon the former,
except that of allowing the colony to exercise its
own judgment and pursue its own pohcy. Britain
did not act in a philanthropic spirit towards her
colonies when she granted them complete control
of their economic destinies. In the early days
of colonisation she pursued the mercantilist
* It is extremely doubtful whether Britain would be re-
lieved of the " cost of defence " if the colonies were formally
separated from her. The experience of the present war
clearly shows that complete naval supremacy is necessary
to secure adequate supplies of food for the inhabitants of this
country. But when this is assured all the warships may
be withdrawn from the ocean highways and employed to
blockade the enemy's coast. If the colonies were cut off we
would require, other things being equal, practically the same
relative strength as we do now. The two objects — securing
food supplies and defending the colonies — ^are achieved with
practically the same naval force as would be necessary for
the attainment of one alone. To the extent, therefore, that
the colonies provide ships towards the Imperial navy they
are not a burden, but a real material gain. It is conceivable,
indeed, that if our colonies were separated from us a still
greater navy might be necessary, since one or more of them,
possessing a navy of its own, might throw in its lot with the
enemy.
TERRITORY AND ECONOMIC WELFARE. 107
policy ; but this system of " exploitation by
monopoly " broke down. It was a complete
commercial and political failure long before it
was abolished. Freedom to develop along their
own lines was ultimately granted to the colonies,
and such freedom has proved successful from the
point of view of both the mother country and
themselves. The earlier poHcy prevented the
development of these colonies ; they remained
poor, and were therefore unable to purchase the
goods we were eager to export. Mr. Angell goes
on to say that the recent experience of France is
not unlike our own. The French Colonial Law of
1892 compelled those colonies not already bound
by international treaty to admit French goods free
of duty, while France still taxed goods imported
from the colonies. And those alone prospered
which were already bound by treaty with other
nations. Where the Colonial Law was fully
operative trade was strangled, the colony re-
mained poor, and, consequently, France derived
no benefit. A change of policy was inevitable in
the interests of France herself.
What proved impossible to Great Britain and
France must be impossible to Germany or any
other modern nation.
" As Great Britain is not able to exact tribute or
economic advantage, it is inconceivable that any
other country, necessarily less experienced in colonial
management, would be able to succeed where Great
Britain had failed, especially in view of the past
io8 THE ECONOMICS OF WAR.
history of the Spanish, Portuguese, French, and
British colonial empires " (p. 99).
Is it conceivable, then,
" that Germany, if the real relations between Great
Britain and her colonies were understood, would
undertake the costliest war of conquest in history in
order to acquire an absurd and profitless position,
from which she could not exact even the shadow of a
material advantage ? " (pp. 107-8).
The two propositions elaborated above are
quite distinct. The first denies the possibility of
complete conquest ; the second denies the utiUty
of complete conquest. In the first Mr. Angell states
that a war of conquest must fail — the aggressor
cannot win ; in the second he states that conquest
cannot achieve its object. Failure to distinguish
between the two cases leads inevitably to con-
fusion. Mr. Angell is probably right when he
states (in effect) that Germany could not conquer,
with one effort, a large colony like Canada
or Australia. But, with Britain out of the way,
it is not unlikely that she would be able to conquer
and establish a strong colony in, say. Western
Australia. And having obtained a footing in
that continent, the gradual extension of control
would not present insuperable difficulties. It is
not improbable that, if British South Africa were
formally separated from Britain, Germany would
soon be able to secure complete control over that
colony. It is not long since France and Italy
acquired territory in North Africa, and Britain
TERRITORY AND ECONOMIC WELFARE. 109
annexed the Boer Republics. It is true that the
South African colony was afterwards granted
virtual independence. But this was not so much
dictated by necessity as the application of the
British idea of colonial government. German
standards differ from our own. Complete self-
government may be desirable ; it is not inevitable.
It is not impossible to conquer a nation so com-
pletely as to be able to exercise more or less
permanent control over its government, until at
any rate the population of the latter reaches a
point which would represent ultimate military
power corresponding to that of the conqueror.
The statement that Germany cannot win in a
war of conquest is of the nature of a challenge ;
it is a denial of the existence of that military power
upon which she has long prided herself. It is
practically an assertion that her preparations for
such a war are, and must inevitably be, inade-
quate ; that she is attempting the impossible.
" You are not so mighty as you imagine yourself
to be, nor will you ever attain such might, so why
not give it up as a bad job ? " — this accurately
represents Mr. Angell's argument on the first
point. " Even if you win outright you will get
nothing out of it ; any and every colonial policy
you can devise will be without profit to you "
sums up the second contention, which is obviously
distinct from the first.
In examining Mr. Angell's second contention
it will be assumed that the economic policy which
no THE ECONOMICS OF WAR.
now finds favour in Britain — free trade — is the
best that human agency has yet devised. It is
beUeved by the majority of our people that this
system makes possible the fullest utilisation of our
national resources. Moreover, since we believe
our wealth to depend upon the wealth rather than
the poverty of the rest of the world, we would
regard with favour the adoption of our policy
by other nations. Taking this extreme view of
the benefits of free trade between nations,^ even
the preference now given by our colonies to
British imports is not so desirable as a universal
system of free imports would be. Nevertheless,
if the two alternatives at present are (a) equal
duties upon British and foreign goods imported
into, e.g., Canada, and (6) differential duties (i.e.,
lower duties or no duties at all upon imports
of British goods), the latter is decidedly better for
us, as well as for the Canadians, because the in-
dustrial development of Canada is facilitated to
the extent of such preference. Whether the exist-
ing colonial preference is a real gain therefore
depends upon the extent to which the policy of
1 Which I believe to be the right view for practical purposes,
taking the distant future into consideration as well as the
immediate effects. If it be assumed that colonial federation,
as advocated by the late Mr. Chamberlain, would bring
economic gain to this country the conclusions indicated later
will still hold good, and even be strengthened. The assump-
tion in the text was made partly because Mr. Angell seems to
believe in free trade (although part of his argument denies its
value), and partly because the conclusions which follow are
weaker upon such assumption and therefore place Mr. Angell's
case in the best possible light.
TERRITORY AND ECONOMIC WELFARE. iH
the colony is one of differentiating against other
countries, or, on the other hand, differentiating
in our favour. To illustrate this point, we may
suppose (a) that Canadians believe a general duty
of, say, 20 per cent, upon imports to be the best
general policy for their country, but that, for
political reasons, they allow British goods to enter
on payment of a duty of lo per cent. ; {b) that
Australians believe a lo per cent, duty to repre-
sent the degree of protection most consistent
with the prosperity of their nation, but that,
for political reasons, the duty against foreign
countries {i.e., other than the British Empire) is
raised to 20 per cent. In the former case we gain
directly and the world gains indirectly ; for the
alternative is a greater degree of protection,
which, by assumption, arrests the development
of Canada and reacts upon the industrial progress
of the world. In the latter example we gain
directly by the preference, but the world, and
therefore ourselves, loses indirectly ; for the
alternative is greater freedom of trade, more rapid
development of Australia, and a favourable re-
action upon the industrial progress of the world.
But our direct gain is much greater than our
indirect loss. Probably neither of these is a
true description of the existing policies of the
colonies, but, where preference is given, the former
seems to be nearer the truth ; ^ for the preference
1 Although the figures employed are merely illustrative,
such seems almost to be Canada's policy. Recently she
112 THE ECONOMICS OF WAR.
to our imports is regarded as a concession to a
greater extent than the discrimination against
foreign imports is regarded as a quasi-punishment.
Consequently one may justly regard colonial
preference, where it exists, as a real gain to the
mother country and, indirectly, to the world as a
whole.
The case of Germany is quite different. The
German Government has for many years pursued
a moderately protective policy, and it may be
presumed that this policy finds favour among the
people. If Germany '* acquired " Canada she
would enforce a policy beneficial to herself, if
not also to the new colony. Presumably she would
extend the customs union. Canadian goods would
enjoy preferential treatment in the German
market, and to that extent the exports of the
colony might be expected to grow. Wheat now
purchased by Germany from Russia and Argen-
tina would be obtained from Canada. Moreover,
Canada would be compelled to discriminate in
favour of manufactured goods imported from
Germany and against similar goods sent from
this country. We would suffer in the Canadian
market in the same way as Russia would suffer
in the German market. Such a policy might make
little difference to Canadian importers and con-
appeared to be contemplating the abolition of preference to
this country ; but, according to latest newspaper reports,
she is about to increase the duties upon foreign imports,
while retaining the old duties upon British goods. The war
is responsible for the change in the proposed policy.
TERRITORY AND ECONOMIC WELFARE. 113
sumers, since Germany would probably be able to
supply them almost (il~ not fully) as cheaply as
we did. The net result of the change of " owner-
ship " would therefore be a rearrangement of the
parts played by the various nations involved,
without much, if any, loss to the world as a whole.
It is possible, indeed, that the world as a whole
would gain ; for, while Canada would not neces-
sarily be more highly protective than she is at
present, Germany would have made some pro-
gress towards a free trade policy. ^ Russia
and Britain would lose, and Germany, if not
also Canada, would gain. Whether the world
as a whole would gain would depend upon the
manner in which the protective system had been
affected. If the total amount of protection
proved to be not greater than formerly — if the
barriers to trade, in the form of duties, had merely
been shifted, without being increased — the world
would probably not lose. The argument is some-
what intricate. The essence of it is that it is
possible to alter the industrial arrangements of
nations in such a way that some will lose and
others gain materially, without seriously affecting
the rate of world progress. But Germany would
1 The result would depend upon the kind of preference
given to Canadian goods. If Germany retained, as a mini-
mum, her existing tariffs on agricultural products to protect
home farmers — which is not unlikely — and discriminated
against foreign wheat-growers by imposing higher duties
upon their produce than upon Canadian produce, her policy,
in this respect, would be more highly protective than at
present, and, upon our main assumption, she would be the
loser to this extent.
E.W. I
114 THE ECONOMICS OF WAR.
not trouble herself about world progress ; she
would be concerned merely with her own advance-
ment and the welfare of her new colonies.
A slight preference may produce, in some cases,
far-reaching effects. The sites of some industries,
such as mining, are exactly determined by nature ;
but the homes of others may be fixed by more or
less ' ' artificial ' ' conditions. A fall in freight rates,
a bounty in the form of a cheap site, a new inven-
tion, the growth of shipping facilities — a host of
such causes might be mentioned which influence
the progress and may even change the location of
a large part of an important industry. It is some-
times argued that a secure market such as a colony
might provide would enable a group of industries
to flourish in Germany, which growth would bring
many economies into being ; and the latter, in
time, would enable the Germans to produce for
the colonial market more cheaply than they or
their competitors do now, so that the colonies
would ultimately benefit. In other words, trans-
port facilities have lessened the importance of
purely geographic factors in the determination of
national industries, and increased the importance
of moral factors and others directly under the
control of man. The aniline dye industry pro-
vides an excellent illustration of the importance
of the " human factor " in economic development.
But the general argument, though theoretically
sound, has not yet been sufficiently tested by
experience.
TERRITORY AND ECONOMIC WELFARE. 115
The weakness of Mr. Angell's case is that it is
based upon the assumption that the only alterna-
tives are the policy now pursued by Britain, and
that enforced recently by France in Africa and, in
earlier days, by ourselves. There is a third option
— a zollverein between the mother country and her
colonies ; and if these previously employed the
system of protection, such a zollverein would
probably mean development towards free trade
and, consequently, a gain to the world as a whole,
as well as a special gain to the nations affected,
through the preference granted to each by the
others. The extension of a customs union is the
next best thing to universal free trade ; it brings
advantages of the same character as those
enjoyed through the absence of trade restrictions.
It is quite true, as Mr. Angell points out, that
German trade with Canada and our colonies is
growing under the conditions now obtaining ; but
such trade has grown in spite of these conditions,
and is less than it would be if Germany were
granted the same facilities as we enjoy. We
could not, if we would, supply the whole world
with all it needs of those goods — steel, cotton
manufactures, etc. — which we are accustomed
to export. There must obviously be room for
the manufactures of other nations in the world
market. And Germany is well equipped for the
task of producing for export. But she has made
progress against the stream ; she now wishes
to row with the stream. Since the object is to
I 2
Ii6 THE ECONOMICS OF WAR.
make headway rather than to develop muscles,
the direction of the stream is an important
factor.
This does not exhaust the colonial problem. A
section of the German people look beyond the
possible material gain to the next generation or
so. They believe it to be the duty of the nation
to legislate for the time — not very distant — when
the population of the world will have increased
to such an extent that a real scarcity of materials
will prevail. For the present it is to the interest
of all nations that new countries should be
exploited and peopled. But later, when no virgin
territories remain, and new countries like Canada
and Argentina have populations of their own so
large as to require all the agricultural products
grown there, the older industrial nations will
experience difficulty in feeding their people. But
before that stage is reached the metals, it is argued,
will probably give out, and before the supplies are
exhausted their prices will rise to a much higher
level than that now prevaihng. This modern
Malthusianism leads to the advocacy of a colonial
policy which will enable Germany to secure a
permanent supply, at relatively low prices, of the
necessaries of modern industry and life. It is the
duty of Germany, it is said, to acquire colonies
containing metals and minerals, such as copper,
coal and iron ore. Such colonies would not be
allowed to develop freely. Presumably they
would be compelled to impose duties on exports
TERRITORY AND ECONOMIC WELFARE. 117
to countries other than Germany ; and their
population would be kept within safe limits, in
the interests of the mother country. Although
such a view may not be defensible, it is certainly
inteUigible. The world as a whole (if that day
ever arrives) will be in the same position, in regard
to metals, as Germany is during the present war in
regard to the minor metals and oil. It will be
competing for a supply of necessaries which cannot
be increased by mutual co-operation and further
exploitation. Nature will be almost at the end
of her resources. If Germany or Austria had
annexed Roumania and her oil-fields both might
now be better able to withstand the siege of the
Allies. Similarly, if Germany now acquires
suitable colonies, she will be better able in the
distant future to maintain her place in the world
and provide for her inhabitants. Mr. Angell, as
already indicated, states that the merchant
adventurer of old, acting on behalf of his country,
aimed at " such arrangements as would prevent
other nations from searching for this wealth in
precious metals, spices, etc., since, if they obtained
it, he could not." Some Germans believe that
the policy they advocate will become necessary
in the future for precisely the same reason. The
economic philosophy which is at the root of such a
pohcy is highly speculative ; but such a charge
can be brought against all the colonial theories of
a nation which has only recently looked beyond
its own boundaries.
ii8 THE ECONOMICS OF WAR.
C. Destruction of Markets.
There are people who beUeve that the present
war is certain to prove beneficial to the trade of
this country, in that it will enable us to cap-
ture Germany's foreign markets. They seem
to imagine that the industrial development of
Germany was a menace to us. Such is not
necessarily the case. If Germany were removed
from the map we should probably suffer con-
siderable material loss.
It is conceivable that the destruction of one
country would prove a distinct advantage to
another. Such a result would follow if both
depended mainly upon the same industry, and
traded but httle with each other. If the South
African goldfields were destroyed, California
would undoubtedly benefit through the consequent
rise in the value of gold ; if Argentina were laid
waste, wheat would become dearer and Canada
would grow richer. The world as a whole would
be poorer, but the resulting loss to the surviving
nation would not counterbalance the direct gain
from the destruction of its rival. Where two
countries are mainly competitive their interests
naturally conflict.
On the other hand, if two nations are comple-
mentary— i.e., if each is a valuable customer of
the other without being also a serious competitor
— the destruction of one would involve con-
siderable loss to the other. Russia and Britain,
TERRITORY AND ECONOMIC WELFARE. 119
Canada and Britain, China and Germany are
examples of such profitable interdependence.
The destruction of China would materially affect
German exporters of manufactured goods as
well as consumers of China tea ; and such
exporters could not recoup themselves by grow-
ing the tea of which the consumers had been
deprived.
It is probably true to say that Germany and
Britain are complementary nations to a greater
degree than they are rival. Both are exporters
of iron and steel, cotton manufactures, etc., and
so compete, within limits, in neutral markets.
Moreover, each sends goods to the other which
compete directly with the products of the home
manufacturers, so that they are also competitors
within their own borders. To this extent they
are competitive rather than complementary. But,
apart from the gain to each from imports which are
cheaper than the corresponding home products,
the one profits by the existence and prosperity of
the other in that a great part — perhaps the bulk —
of their foreign trade makes them complementary
to a greater extent than they are rival. All
modern nations which foster a great variety of
industries are probably complementary rather
than competitive. For competition itself results
ultimately in such a readjustment that the loser
becomes a producer of goods in which there is
less keen competition. It would be dangerous to
dogmatise in this matter. A quantitative proof
120 THE ECONOMICS OF WAR.
is lacking. The nature of the changes in indus-
trial arrangements which would occur if, say,
Germany were sunk beneath the ocean, can easily
be indicated, but it is impossible to state the net
effect of such changes. On the one hand, German
exports would cease. The deficiency would be
made good by the other nations : the Americans,
as well as ourselves, are now seeking means of
supplying aniline dyes, for which, before the
war, we looked to Germany. It is here that we
are expected to gain. We would export steel,
machinery, rails, etc., to foreign nations who pre-
viously dealt with our German rivals. But, on the
other hand, German imports would also vanish,
so that certain of the trades of all countries
exporting to Germany would suffer. And to those
who argue that we would profit it is replied that
this loss would be greater than any gain we could
achieve by capturing Germany's foreign markets.
Instead of sending more machinery and rails to
South America we would need to make for our-
selves the semi-manufactured steel which was
previously imported from Germany, while Ameri-
can manufacturers would look after the needs of
that continent. Or, again, we might supply the
American market (which we could not do so
cheaply as Germany did) while American manu-
facturers would supply us with semi-manufac-
tured steel (which they could not do so cheaply
as Germany did). Whether the ultimate result
would be gain or loss depends upon the character
TERRITORY AND ECONOMIC WELFARE. 121
of the nation destroyed and that of the nations
affected thereby.
Considerations of space prevent a complete
examination of this problem. It is sufficient to
say here that Mr. Angell is probably right when
he states, in effect, that the prosperity of Germany
is largely dependent upon the prosperity of this
country, so that she would lose, rather than gain,
if Britain were " wiped off the map." But he
is probably wrong when he implies that what
holds for Germany and ourselves holds also for
every pair of nations. Every case has to be
taken on its merits, for the ultimate effect will
depend upon the economic characteristics of the
two nations compared. No general conclusion is
possible.
CHAPTER VI.
THE INDEMNITY PROBLEM.
In a discussion of the value of economic motives
to war the question of an indemnity would demand
little or no attention, for it is almost inconceivable
that a modern civilised nation, carrying on trade
with most of the countries of the world, would
undertake a war against another merely for the
sake of a sum of money euphemistically called an
indemnity. Not only would it excite the indig-
nation of other nations, but a " victim " suffi-
ciently wealthy for the purpose would probably
possess great mihtary power, and the resulting
war would prove so long and costly that the
indemnity would bring little, if any, net gain.
Such a war defeats its own end.
But the question of an indemnity assumes real
importance in a detailed examination of the
economic effects of a war produced by other causes.
If Britain and her allies prove to be victorious in
the present struggle, an indemnity to Belgium, if
not also to France, will undoubtedly be provided
for in the final settlement. It is important, there-
fore, that the economic effects of the payment of a
large sum by one nation to another be carefully
estimated. It is not our present purpose to do
THE INDEMNITY PROBLEM. 123
this ; we are merely concerned with the manner
in which the subject is dealt with in " The Great
Illusion."
In a chapter entitled " The Indemnity Futi-
lity" Mr. Angell asserts that the payment of
£200,000,000 by France to Germany, after the last
war between those nations, proved worse than
useless to the latter : "All the evidence plainly
and conclusively shows that it was of no advan-
tage ; that the conqueror would probably have
been better without it " (p. 93) ; the " flood of
gold turned indeed to dust and ashes so far as the
German nation is concerned " (p. 84). Elsewhere
he states that " the exaction of a large indemnity
[has become] so costly directly and indirectly as
to be an extremely disadvantageous financial
operation " (p. 28). It is not clear, however,
whether Mr. Angell believes it possible for a nation
to gain at all from an indemnity, for on another
page (83) he merely tells us that
" the history of the German experience with the
French indemnity suggests the question whether in
every case ah enormous discount on the nominal
value of a large money indemnity must not be allowed
owing to the practical financial difiiculties of its pay-
ment and receipt, difiiculties unavoidable in any cir-
cumstances which we need consider."
The evidence adduced by Mr. Angell in proof of
the futility of the French indemnity does not call
for lengthy comment. It is so inadequate, and in
every way so unsatisfactory, that it can scarcely
124 THE ECONOMICS OF WAR.
be called ' strong circumstantial evidence/
Germany, he tells us, suffered from a crisis soon
after the final instalment of the indemnity was
paid, and experienced a period of severe depression
lasting six or seven years. France, on the other
hand, escaped both the crisis and the depression,
and soon after the war was able to capture
German markets. The depression in Germany,
he asserts, was caused by the receipt of the
indemnity, which led immediately to abnormal
speculation, which, in turn, culminated in a crisis.
During the eighties trade recovered rapidly, and
ever since industrial Germany has advanced by
leaps and bounds. But such recovery was not
in any way related to the indemnity ; it was rather
due to a combination of circumstances, among the
chief being the customs union formed before the
war.i A well-known economist once wrote :
" A panic follows the creation of a debt, a panic
follows the payment of a debt ; in either case some
^ Mr. Angell does not attempt to show why this factor only
began to operate about ten years after the war. One would
imagine that the indemnity provided the capital necessary to
give effect to the extension of the unrestricted trade area.
Moreover, the evidence which he adduces to show the existence
of depression is of little or no value. For example, he states
(as evidence of depression) that within twenty months of the
payment of the last instalment of the indemnity the bank rate
was higher in Berlin than in Paris. Such a statement conveys
nothing. Apart from the fact that one usually associates a
low bank rate with comparative depression, the average
official rate of discount for every single year between 1876
and 1908 (and probably since the latter year) was higher
in Berlin than in Paris. The Paris rate fluctuated less during
this period than the Berlin and London rates, a fact partly
due to the banking laws of France.
THE INDEMNITY PROBLEM. 125
wise man will surely appear to charge the commercial
disaster upon the financial policy of the Government.
It is a safe rule ... to deny a causal relation which
cannot be traced with some degree of clearness." ^
It is a rule which Mr. Angell has ignored.
It is quite true that the payment of the indem-
nity was followed by a period of depression. It
is probably true, moreover, that the indemnity
intensified the depression at first. But to attri-
. bute the depression to the indemnity is a serious
error. Mr. Angell has omitted other factors,
which were undoubtedly of much greater import-
ance.
In the first place the depression, as Sir Robert
Giffen long ago pointed out, was almost universal,
and followed upon financial panics in Vienna and
New York. For some years previously the trade
of this country had increased very rapidly ; new
countries had been exploited, railways constructed
and other speculative enterprises undertaken.
In Germany the expansion of trade, whether
judged by the number of joint-stock companies
established or by their total capital, was greater
during the three years 1871 — 1873 than in any
similar period before or since. It was the cul-
minating point of the industrial revolution in that
country ; it was the inevitable consequence of the
developments of the previous quarter-century.
Speculation was undoubtedly encouraged by the
» Adams, " Public Debts."
126 THE ECONOMICS OF WAR.
ease with which the indemnity provided capital
for the purpose and the readiness of the Govern-
ment to finance trade through the banks. But
it should not be forgotten that only a part of the
indemnity could have been used in this way ; the
remainder was employed as loans to Austria and
Russia, and in other ways which could not
influence speculation.
The German industries mainly affected by the
speculative fever were railway transport, building,
banking, mining and iron production. A well-
known economist has clearly shown that the
severity and duration of a depression are largely
determined by the degree of maladjustment
between the different stages in the complete
process of manufacture.^ Over-speculation in
railways, iron manufacture and building generally
results in a fairly long period of bad trade. As
was the case in Germany during the period under
consideration, these speculative enterprises outrun
the immediate needs of a nation, and are com-
pelled to wait until the remaining industries and
the consuming ,"powers of the community have
' caught up ' with them. The almost inevitable
result is a number of failures. But when firms go
into liquidation their assets are by no means
destroyed ; they become available for use later,
so that such financial failures do not necessarily
indicate an equivalent loss to a nation as a whole.
Many of the German companies floated during the
1 Taussig, " Principles of Economics."
THE INDEMNITY PROBLEM. 127
boom of 1871 — 1873 were forced into liquidation ;
but their properties — factories and mines — were
afterwards employed and added to the wealth of
the nation.
This leads to the consideration of the second
feature of the depression following the indemnity
payment, viz., the fall in prices. There can be no
doubt that some part of the fall was due to the
over-capitahsation caused by the artificially high
prices previously prevailing. The removal of the
stimulus immediately caused over-production and
a collapse of prices. But to ascribe the whole
effect to this particular cause — a method fre-
quently adopted by Mr. Angell — is obviously
illogical. As we have pointed out above, some
part of the over-speculation would have taken
place in the natural order of things — how large a
part it is impossible to say. But, apart altogether
from that, two main causes of the low prices, quite
neglected by Mr. Angell, have to be noticed. The
first was the establishment of a gold coinage in
Germany and the resumption of specie payment,
in the United States, for the paper currency issued
during and subsequent to the Civil War. The
resulting scarcity of gold was severely felt in both
countries, as well as in Britain. France, however,
suffered less from this cause, for the inconvertible
notes issued there during the war with Germany
remained in circulation, and so lessened the strain
upon gold. The second cause was the failure of the
harvests of 1875, 1876, and 1877, which delayed
128 THE ECONOMICS OF WAR.
the recovery of trade, and even accentuated the
depression. Germany, which was at this time
almost entirely independent of foreign supplies of
wheat, naturally suffered more than most coun-
tries. The prosperity of her industrial enterprises
was bound up with the prosperity of agriculture ;
and the suffering of the agricultural interests was
intensified by their obligation to pay interest upon
comparatively heavy mortgages upon farms
which had been purchased during a period of great
agricultural prosperity, at prices determined by
the profits realised at that time.
It is, of course, impossible to form a precise
quantitative judgment as to the effects of these
particular causes, but it is evident that the
indemnity was no more than a comparatively
unimportant factor contributing to the depression
of the seventies in Germany. Taken cumula-
tively, the main causes were the industrial
changes preceding the war, culminating in a
fever of speculation which infected most coun-
tries ; the scarcity of gold during a period
when the demand for that metal increased by
leaps and bounds ; and, finally, a series of bad
harvests.
It is highly probable, however, that the fall
in prices exaggerates the suffering of the time.
Prices suffered more than the volume of trade ;
in other words, the depression reacted more
strongly upon the employers than upon the
working classes. Employment, both in Germany
THE INDEMNITY PROBLEM. 129
and in this country,^ was steadier, apparently,
after the immediate effects of the crisis had dis-
appeared than the study of prices would suggest,
and although money wages may have been re-
duced, the still greater fall in prices made the
period far less unfavourable to employed workmen
than Mr. Angell seems to believe.
France, we are told, escaped the depression. ^
This is only partly true. Naturally her trade
during the payment of the indemnity was brisk,
and the country presented an appearance of
prosperity ; but the goods she made for export
constituted, to some extent, the indemnity itself.
Her exports, which, normally, would have pur-
chased a great wealth of imports, brought nothing
in return. She was heaping up vast wealth with
feverish haste, for no return. Brisk trade and
1 We received no indemnity : on the contrary, we assisted
France by advancing part of the payment she had to make.
Nevertheless, our experience was similar to that of Germany,
and the depression in this country probably as severe as that
suffered by the recipient of the indemnity.
2 The three important countries which almost escaped the
depression were France, Spain, and Italy — i.e., those countries
in which industrialism, as we now understand the term, had
not yet appeared. France even yet seems to suffer less from the
rhythmical movement of trade. The " big factory " does not
predominate. It is rather a country of small organisations,
which are not influenced so largely by speculative movements
as our own intensely localised manufacturing industries,
which are mainly in the hands of large joint-stock companies.
This fact partly explains the early success and determined
the character of the French syndicalist movement. It also
partly accounts for the comparative steadiness of industry in
that country. The traditional frugality of the French people,
and their love for safe rather than highly remunerative but
more speculative investments, must also be taken into con-
sideration.
E.W. K
130 THE ECONOMICS OF WAR.
prosperity are, accordingly, not always inter-
changeable terms. Moreover, France paid a
great part of the indemnity by transferring some
of her foreign investments to Germany. The
former thus lost imports in the form of interest
payments on her investments abroad. The
alternatives open to her were — (a) to do without
such imports altogether, and be content with a
lower standard of living ; (b) to pay for them by
means of additional exports, which amounted to
harder work for the same remuneration ; and
(c) to manufacture at home goods which were
previously imported. Mr. Angell has confounded
prosperity with harder work for the same pay.
To state the argument otherwise : the payment
of the indemnity by France was equivalent to
abnormal speculation, after which all the enter-
prises created by it — factories, railways, etc.
— completely disappeared. When reaction
followed speculation in Germany, values suffered
seriously, but the factories, etc., which grew
out of such speculation, remained and contri-
buted to the ultimate prosperity of the nation.
' In France nothing remained : the results of
the toil of the people were almost as if
the products had been thrown into a bottomless
pit.
During recent months most of the factories in
this country have been working at highest speed,
using up the war loan, and many industries are
suffering from a shortage of labour. But it can
THE INDEMNITY PROBLEM. 131
scarcely be maintained that the war has made the
nation prosperous. We are merely using capital
as income, i.e., living beyond our income. Again,
when the war is over the shipyards will probably
continue to be busy until the merchant vessels
lost during war are replaced. But it would be
foolish to argue from this that the nation is
prosperous. The so-called prosperity enjoyed by
France subsequent to the last war with Germany
was precisely of this character. Mr. Angell's
whole argument on this point implies the old-
fashioned belief in the economic service rendered
by the window-breaker, who stimulates trade in
glass.
But assuming all he asserts to be true ; admit-
ting Germany to have lost rather than gained by
the receipt of the indemnity, Mr. Angell has shown
no more than that this particular indemnity was
futile. It is dangerous to generalise from a
single example. The loss might have been due to
the size of the indemnity or to the manner of
payment. The reply to Mr. Angell might then be
that Germany was suffering from " economic
indigestion " ; the body economic had taken a
greater quantity of food (capital) at one meal than
it could assimilate. But it would by no means
follow that food in itself was not desirable or
necessary. In another part of his book (pp. 153,
154) Mr. Angell states that the recent development
of German trade would have been impossible
without the aid of French capital. Assuming the
K2
132 THE ECONOMICS OF WAR.
statement to be true,i why should the same
capital, because it enters the country through
the instrumentality of the Government, be
economically futile ?
Mr. Angell, in dealing with the general question,
seems to admit that an indemnity is not entirely
without economic value. He suggests that its
value must be largely discounted for two reasons.
(i) He quotes, with approval, Giffen's assertion
that Governments cannot control capital so
efficiently as private individuals. Giffen made
the statement over forty years ago, when the
Manchester school of political philosophers
reigned supreme. Since then Governments have
acquired considerable experience in the manage-
ment of capital funds. But assuming such a
view to be true, the Government could transfer
the indemnity almost immediately to individuals
by employing it in repayment of the national
debt.
(2) " The transfer of an immense sum of money
outside the ordinary operations of commerce "
is attended with great practical difficulties. Mr.
Angell quotes the following paragraph from
Giffen : —
" The financial operations incidental to these great
losses and expenses seriously affect the money market.
1 It is only a partial truth. France supplied the capital at
a lower rate than it could be obtained at elsewhere, so that if
Germany had been unable to borrow from France she would
have been compelled to attract capital from other countries
by ofiering slightly higher rates. Thus her de-^-elopment would
probably have been only slightly retarded.
THE INDEMNITY PROBLEM. 133
They have been a fruitful cause, in the first place, of
spasmodic disturbance. The outbreak of war caused
a monetary panic in July, 1870, by the anxiety of
people who had money engagements to meet to pro-
vide against the chances of war, and there was another
monetary crash in September, 1871, owing to the
sudden ^ withdrawal by the German Government of
the money it had to receive. The war thus illustrates
the tendency of wars in general to cause spasmodic
disturbance in a market so dehcately organised as
that of London now is."
Mr. Angell adds that the difficulties experienced
forty-five years ago were " trifling " in com-
parison with those which would attend a similar
operation to-day, when the credit system has
become highly organised and the financial relations
of nations are extremely delicate.
The truth of the quotation cannot be denied.
The sudden withdrawal of a large sum of money
by one nation from another must obviously upset
the money market. Moreover, if the whole
indemnity were suddenly handed over, in the
forrn of goods and cash, serious dislocation of
industry in the receiving nation would follow.
But it is by no means necessary that a large
indemnity should be paid at once ; nor is it
necessary that, if paid at once, it should take the
form of money or concrete goods. Giffen was
careful to point out that the monetary disturb-
ance was caused by the sudden withdrawal of
money by Germany. In view of the present
situation this point demands further examination.
* The italics are mine. — J. H. J.
134 THE ECONOMICS OF WAR.
It is conceivable that Germany will be com-
pelled to compensate Britain for the material
loss involved in the present war ; and it is further
likely that the need for capital in Germany will
be greater than in this country. Under such
circumstances Germany might become the
debtor of Britain ; our own Government would
become holders of German " script " or bonds
and be entitled to interest payments ; in
other words, we could lend money to Germany
for the purpose of paying us the indemnity.
The Government need not hold such bonds
indefinitely — they could be sold on the market and
a part of our national debt cancelled with the
proceeds. The net result would be that some
investors, previously holding British Consols,
would become investors in German Imperial
funds. If Germany, for the first few years, found
it unprofitable to meet the interest payments from
the proceeds of industry, such interest would be
reinvested as capital in that country ; or, again,
if it paid Germany to remit the interest, while
we preferred to postpone its acceptance, it would
be reinvested abroad.
On the other hand, if the need for capital
proved to be greater in other countries than in
Germany and Britain, the indemnity to us might
take the form of exports from Germany to those
countries, who would become our debtors ; in
other words, the goods ultimately comprising the
indemnity could be sent to the country in greatest
THE INDEMNITY PROBLEM. 135
need of them, while the claims, or bonds, repre-
senting such goods would be sent to our Govern-
ment, who would be entitled to interest. When
one nation " pays an indemnity " to another it
presents the latter with a claim upon itself ; but
it does not necessarily follow that the creditor
nation presses for immediate payment. Such
payment will be made not " outside the ordinary
operations of commerce," but in response to the
relative needs of the creditor. And the develop-
ment of international credit, so far from making
the payment of an indemnity more difhcult, has
probably facilitated such payment.
The foreign exchanges present an abnormal
appearance when one nation imports, on balance,
large supplies from another, but their appear-
ance becomes normal when a loan is issued in
the creditor country, and the proceeds are
employed in payment of such goods. During the
past few months we have imported vast supplies
from the United States, which are not paid for
directly by exports to that country or indirectly
by exports to some other country, which, in turn,
sends goods to the States. The result is that
the *' exchange " on New York has gone steadily
against us. But it will be righted partly by the
sale of American securities held by British in-
vestors, just as the Russian exchange on London is
now being assisted by the issue of a Russian loan
in this country. If Germany agreed to pay us an
indemnity of, say, £100,000,000, the position
136 THE ECONOMICS OF WAR.
would be precisely the same as though we had
exported goods of that value to Germany and were
awaiting " payment." The exchange on Ger-
many would be strongly in our favour, and would
present an unusual appearance. But it could be
righted by the issue of a loan and the exportation
of bonds by Germany to London, just as in the
case of Russia now. If we realised such a security
with great speed, it is likely that its value would
fall, and we should lose in the process. Probably
such a loss is being experienced at the present
time both by France and Britain, for they are
calling in their foreign investments with con-
siderable rapidity. These are being paid in
goods — ^wheat, boots and shoes, copper, airships,
etc. — ^which are sold by America at abnormally
high prices — i.e., the Allies are reaUsing their
investments at a heavy discount ; they are re-
ceiving in return fewer goods than thej^ would
be receiving under normal conditions.
The conclusion, then, is that the payment, in
bulk, of a large indemnity may mean no more than
the issue of a loan. Whether the value of such
indemnity has to be discounted depends upon
the manner in which the new bonds are utilised.
If they are carefully manipulated trade will not
be seriously disturbed by the indemnity itself. If
the new loan or investment is called in suddenly
the money market, and trade itself, will be dis-
located in precisely the same manner as they
would be if other foreign investments were quickly
THE INDEMNITY PROBLEM. 137
realised. In the circumstances we have assumed
the only danger of dislocation would be that
caused by the payment of interest. An indemnity
loan of ;f200,ooo,ooo to Germany, if issued at
5 per cent., would mean a payment of £10,000,000
a year in the form of interest. But the sum is so
small that the danger is quite negligible. More-
over, as already observed, if it were more profitable
to reinvest it in Germany or elsewhere the exports
from Germany on its account would not enter this
country.
The political question remains whether it would
be possible to permit the payment of an indemnity
by the issue of a loan. There seems to be no valid
reason why it should not be done, for the German
Government, by subsequently repudiating its
obligation, would be injuring, not our own
Government, but the holders of the bonds, who
might soon be private individuals in this and
other countries. And it is hardly possible that it
would so injure private bondholders. But if the
danger were too great it would be possible to
compel the German Government to surrender the
foreign bonds held by its own people, to whom it
would issue its own bonds in exchange. Such a
method of payment is essentially the same as
the other.
So far we have assumed that Germany pays an
indemnity to a nation which is not in need of
capital. The case of Belgium differs slightly from
the above. The need for capital to carry on the
138 THE ECONOMICS OF WAR.
work of restoration would be considerable, so that
the indemnity would be paid up almost im-
mediately. The transaction would take the same
form as the first, and the Belgian Government or
the holders of bonds would sell these either in
Germany itself or in other countries. In return
Belgium would receive the necessary commodities
in such manner and to such extent as she desired,
while those who sent goods to her would be
exporting capital and would become creditors of
the German Government.
The implicit assumption in Mr. Angell's state-
ments seems to be that the nation receiving the
indemnity must accept, within the stipulated
period of payment, either goods or cash. Even
Germany, as we have seen, reinvested part of her
indemnity in Austria and Russia, while part was
employed in cancelling State debts, thus releasing
capital for investment elsewhere — even in France,
if the interest offered there had proved sufficiently
attractive. Only a portion of the indemnity was
paid in goods and cash ; and only such portion
can be said to have materially assisted speculation
in Germany itself . The payment of the indemnity,
as Adams and Leroy Beaulieu pointed out long
ago, was but a " transaction in credits '' ; and
the wonder is, not that Germany and France were
affected so much, but that they were affected so
little.
CHAPTER VII.
THE MATERIAL COST OF WAR.
One of the striking features of the twentieth
century, in the world of thought, is the readiness
of people to abandon orthodox views, simply
because they are orthodox. In philosophy, art,
religion, and economics new ideas are often ac-
cepted, and become popular, simply because they
are new or are supposed to be new. Bergson-
ism in philosophy, futurism in art, and the " new
theology " in the world of religion have captured
the popular imagination. Who has not heard
Bergson expounded by one who had never made
the acquaintance of Kant, Hegel, or Green,
" cubism " extolled by a man wearing brown boots
and a grey tie, Campbell discussed by the stranger
to Harnack and Fairbairn ? Heterodox views
may be right, nevertheless they often become
popular, not because they are right, but because
they are heterodox.
Mr. Norman Angell has gathered around him
a large, influential, and responsive audience. It
is highly probable that many of this audience
have never heard of Marshall, Wagner,^ and
^ Nor is any indication giveii in Mr. Angell's books of the
views of economists of repute upon any of the subjects dealt
140 THE ECONOMICS OF WAR.
other outstanding writers on economic subjects.
And yet a knowledge of current economic
doctrines, and the foundations upon which they
have been built, seems essential to an adequate
discussion of Mr. Angell's theories. The previous
chapters of this book have been devoted to an
examination of the particular propositions laid
down in " The Great Illusion." Taken together
they may convey the impression that the writer
is not among Mr. Angell's admirers. Such is not
the case. It is not necessary to agree with an
author's views to appreciate his ability and
earnestness. " The Great Illusion " must leave
a deep impression upon the mind of every
reader. Argument has followed argument, asser-
tion been added to assertion, until the accumu-
lated effect is almost overwhelming. It is diffi-
cult to recall a book in which facts have been so
cleverly marshalled to a given end. Neverthe-
less, when the personality of the barrister is
removed and the argument stripped of rhetoric
and restated in simple and unambiguous terms,
the doctrines are not satisfying. The reader and
listener are carried away by the pleading eloquence
and earnestness of the barrister rather than con-
vinced by the evidence.
Mr. Angell has given expression to two truths
which need to be emphasised at a time when most
with in the various chapters. Mr. Hartley Withers has been
quoted ; but none of the quotations is strictly relevant to the
main subject of the book — the economic effects of war and
conquest.
THE MATERIAL COST OF WAR. 141
of the European nations are engaged in a war
which must help to shape the development of all
concerned. The first, to which reference has
already been made, is that it is folly to imagine
that Germany can completely destroy Britain
or Britain Germany. The people of the con-
quered nation will continue to exist ; most of
the factories, workshops, railways, etc., will
remain, ready to be employed in competition with,
or as a complement to those of the conqueror.
And even if the country could be laid waste and
its people killed off, the actions of the conqueror
would recoil on his own head.
The second truth is that defeated nations
recover quickly after war. Mr. Angell points out
that the history of France after 1871, Russia
after the war with Japan, and Spain after her
defeat by the United States provides ample
proof of this. The explanation seems to be that
the energies of the nation, which were previously
expended in the interests of militarism and
political aggression, are employed in economic
and social reorganisation. This is a message
of hope. If Germany is completely defeated,
and her genius is afterwards concentrated upon
political and economic advance rather than
expended upon military and naval affairs, the
material loss to Europe caused by the present
war will the sooner be made good.
The other doctrines expounded by Mr. Angell
are, as already shown, largely false. They are
142 THE ECONOMICS OF WAR.
plausible, and when joined together seem to prove
the main thesis. Yet at best they are but half-
truths. The argument is mainly inductive ;
Mr. Angell's conclusions appear to be based upon
evidence provided by the experience of nations.
But he seems to have misinterpreted such experi-
ence. Two important errors of reasoning are
evident in most of the chapters. The first is
what logicians call the post hoc ergo propter hoc
fallacy — i.e., that if A. follows B. in point of
time, A. is caused by B. Depression followed
the receipt of the indemnity by Germany ; the
indemnity was therefore the cause of such
depression. Again, he writes :
" It is since Great Britain added the goldfields of
the world to her ' possessions ' that British Consols
have dropped twenty points. Such is the outcome, in
terms of social well-being, of military success and
political prestige ! " (" The Great Illusion," p. 78).
No reference is made to Lord Goschen's conversion
scheme, to the widening of the field of trustee
investment, and to the general downward trend,
in recent years, of guaranteed stocks bearing a
fixed rate of interest (or, in other words, of an
upward trend in the net rate of interest) through
the opening up of new countries and the con-
sequent " pull " of capital away from this
country.
The second recurring error in Mr. Angell's
reasoning is that of contrasting present economic
conditions in military and non-military States
THE MATERIAL COST OF WAR. 143
without reference to the non-military factors in
their development. To take one example :
" All the might of Russia and Germany cannot
secure for the individual citizen better general
economic conditions than those prevalent in the little
States " (p. 36).
This is beside the point, which is whether the
military State is in a better economic position
than it would have been in the absence of adequate
means of defence.
Military power may be used for defence or for
aggression. Safety of life and security of property
depend upon power. In civil life the safety of
the individual depends upon his power ; and his
power lies in his ability to call in the policeman.
The citizens of all modern States have pooled
their power, and so increased their individual
strength and reduced the cost of maintaining it.^
This is but the method of insurance. And it is
no more the negation of " force " than insurance
is the negation of saving. The greatest sinner
against society recognises the futility of attacking
an individual able to draw upon the superior
collective power ; but if such power is not
available (as in a lonely road after dark) the
criminal accepts his chance and the victim of
attack suffers.
Nations have not yet employed the method of
mutual insurance, consequently most of them are
1 In doing this they abandoned all idea of employing it in
attack.
144 THE ECONOMICS OF WAR.
compelled to rely upon individual effort. Some,
like Holland and Belgium, depended upon a power
similar to though weaker than that enjoyed by
the individual within a State ; they looked to the
military power of those States which had signed
treaties guaranteeing their independence. For
the security of the weaker States ultimately
depended upon the power of the signatories to
enforce the treaty, just as the security of the
citizen depends upon the power of the State to
enforce its laws. Probably these States also
expected much from the sense of moral indigna-
tion of other nations. But their faith was mis-
placed. The spirit of help and sacrifice is still
weak among nations acting in their corporate
capacity.
It may be that one result of the present war
will be the substitution of strict international law
and order for the chaos of the past. If so, the
separate States will then be adopting the method
of mutual insurance, or pooling their wealth of
power. But this means the centralisation of
" force," not its abandonment. Each of the
States will still be powerful in defence, but its
power will consist in being able to call upon the
collective military and naval strength of the
States controlled by such law. Such an arrange-
ment involves the abandonment of all idea of
aggression, for aggression now implies criminality.
Moreover, it will mean the definition and
enforcement of the " civil rights " of the units
THE MATERIAL COST OF WAR. 145
(nations) in the world State ; and " civil rights "
here practically means the power of each nation
in its dealings with other nations. The arrange-
ment seems to assume that nations are or will be
psychological entities ; and at present they are
too loosely bound to be so regarded. Such a
world Government would be as unstable and
impotent as a coalition Government in a demo-
cratic State containing a large number of dis-
tinct parties with interests which conflict more
often than they are identical. And just as
Prussia became the dominating State in the
German confederation, so, too, one (or a combina-
tion) of the nations of the European or world
confederation might grow to be a dominating
and dangerous power within it.
For this reason the success of such an inter-
national arrangement, under present conditions,
is doubtful. It would almost inevitably mean the
retention of the status quo. Britain would retain
her colonies, while Germany would need to be
content with her present possessions. For it is
scarcely conceivable that Britain, in her present
temper, would readily present Germany with
some of her own colonies, or that such colonies
would consent to be transferred. It is somewhat
doubtful, however, whether international law and
order similar to that prevailing within a State is
consistent with the colonial system as we now
understand it.
When a State pursues an aggressive policy for
E.W. L
146 THE ECONOMICS OF WAR.
material gain the end in view is likely to be
annexation or colonial expansion. ^ It is of the
nature of an industrial enterprise. The State
sinks capital because the return seems adequate
to the expenditure. Mr. Angell denies the
possibility of a return in any shape or form. But
this seems an exaggeration : all that can be
asserted is that the *' income " is remote, un-
certain, and often inadequate. What the cost
of such a war would be it is impossible to indicate ;
nor is it part of our object to provide an estimate.
The experience of the world during the present
conflict shows that it is not fully borne by the
belligerent nations. All the countries of the
world which trade outside their own borders are
affected by the disturbance of credit, interference
with transport, and the contraction of markets.
But the injury inflicted upon neutral nations
would not be taken into consideration by the
nation seeking economic gain by means of con-
quest, except in so far as such injury might react
upon its own welfare.
The cost to the aggressor is partly direct and
partly indirect. The indirect cost we know to
be heavy, from recent experience. Many indus-
tries have suffered materially during the war.
First, industries catering to the luxurious habits
of the people, both rich and relatively poor.
1 In the first chapter it was pointed out that States are not
often influenced by economic motives to the exclusion of all
others.
THE MATERIAL COST OF WAR. 147
Secondly, industries such as cotton manufacture,
depending upon European markets. The enemy
countries buy nothing, while the Allies and
neutral countries import far less (excluding war
material) than in time of peace. Thirdly, indus-
tries depending upon foreign supplies of raw
material. Such material is either unobtainable,
as in the case of synthetic dyes, or obtainable
only at considerably higher prices, as in the case
of pit-props. Finally, many of the professions
have been seriously injured. The loss caused
by the dislocation of industry should be included
in any estimate of the cost of war.
A second indirect cost of war (closely related
to the first) shows itself in the rise in prices. The
cost of living has increased materially since July.
Briefly stated, the cause of the rise in prices is a
shortage of supply. The reduction in supply is
due, in some cases, such as (in Scotland) coal,^
to scarcity of labour. The proportion of work-
men who have joined the army is greater than the
industry could spare upon the assumption that
prices were to remain practically undisturbed.
If, in consequence of the war, demand is reduced
by 5 per cent, and 10 per cent, of the workmen
are withdrawn, a rise in price is inevitable if the
remainder do not consent to increase their output.
In other cases the shortage of supply is due to a
reduction of transport facilities of all kinds —
^ The rise in the price of coal is due partly, if not mainly, to
other causes.
L2
148 THE ECONOMICS OF WAR.
shipping, railway, and motor. Again, the prices
of some articles (such as aspirin) have materially
increased because such articles were partly or
wholly obtained from the Continent. In some
cases the total supply of a commodity has been
increased rather than reduced, but the require-
ments of the Government are so great that the
proportion available for private consumption
has been largely reduced. Hence the rise in the
prices of woollen material, leather goods, etc.
Finally, where combinations among sellers exist,
consumers are probably made to suffer more than
market conditions seem to justify. Probably the
high prices prevailing for house coal in some
districts are partly accounted for in this way.
The direct cost of war is not so easily explained.
We are told, on the one hand, that the war now
costs the nation well over a million pounds a day,
so that the wealth of the people is being rapidly
exhausted. On the other, it is urged that the
nation is well able to bear the strain, which is
much less than appears at first sight. The
amount of unemployment is practically negligible ;
prices are high and wages are rising, so that neither
employers nor workmen suffer much as producers
and consumers. Those alone suffer much who
pay heavy taxes. There is an element of truth
in both statements ; the latter is less plausible
than true provided certain conditions are fulfilled.
Unemployment figures published by the Board of
Trade convey little information, for those indus-
THE MATERIAL COST OF WAR. 149
tries which are injured by the war are not ade-
quately represented in the Government returns.
Moreover, the extent of dislocation of industry is
hidden by the fact that large numbers of workmen
who would otherwise have been unemployed have
become soldiers.
The first approximation to the real cost ^ of the
war may be obtained in the following manner.
Assume, for purposes of illustration, the contribu-
tion of Britain {i.e., excluding that of the colonies)
to the army and navy to reach an average of
2,000,000 men 2 during the war. Assume, further,
that for every soldier and sailor one civilian is
engaged in the production of strictly war materials
and services, that is, materials and services which
would not be required for the soldiers and sailors in
times of peace. Thus 4,000,000 men are engaged,
during the war, in " occupations " not all of which
would exist under ordinary conditions. If it be
assumed that 1,000,000 men were engaged as
soldiers and sailors, or at industrial and other
occupations connected directly or indirectly with
national defence, in time of peace, it follows that
3,000,000 men have been withdrawn from their
ordinary employments to assist on the field of battle
or behind it in the present struggle. And the direct
material cost of the struggle to the nation is
1 Material factors alone are dealt with, and no attempt is
made to " capitalise " the wealth lost through loss of life in
war.
2 All the following figures are merely illustrative, and are
taken almost at random.
150 THE ECONOMICS OF WAR.
equivalent to the cost of maintaining 3,000,000
men (with their families) in idleness, together
with that of replacing property destroyed by the
enemy. The loss to the nation seems at first to be
the sum total of goods and services which these
3,000,000 men (and women) would be adding to
the national wealth if there were no war. But
this is not quite true ; it is necessary to deduct
the extra work performed by those who remain
at home : for example, married women, once
teachers, resume work at school, while continuing
to perform their domestic duties, in place of men
who have joined the army ; clerks, accountants,
lawyers, shop assistants, etc., work harder than
ever before ; Belgians in some places are given
opportunities to work at their callings.^ Moreover,
a small percentage of the new army were probably
" men of leisure " or young apprentices before
war broke out. Finally, industry has been to
some extent reorganised to meet the new con-
ditions. Assuming the above factors to account
for 200,000 men, and that 50,000 aliens are
interned and so unable to work, the loss to the
nation is the normal contribution of 2,850,000
men to its annual income.
The ability of the nation to continue the war
for a long period depends upon three factors,
which are distinct, though related. These are —
(i) the goods and services which are sacrificed ;
1 Canadians have been brought to work in engineering
factories on the Clyde.
THE MATERIAL COST OF WAR. 151
(2) the manner in which the burden is distributed
between the different classes in the community ;
and (3) the extent to which it is spread over a
long period.
The goods and services which are least useful
socially are not the ones in least demand. The
amount of human energy annually devoted to the
supply of harmful or useless luxuries, together
with the amount spent on the manufacture of
capital goods for export (to which reference will
be made in a moment), is probably greater than
that withdrawn from ordinary occupations for
employment in carrying on the present struggle ;
so that if industrial capital could be immediately
adjusted to the new conditions, and we gave up all
luxuries and ceased to export capital, the war could
be continued almost indefinitely without addi-
tional burden.^ But such an adjustment cannot
be made without loss and in a day or a week.
The production of luxuries, like all other goods,
is a long process. The appliances (factories,
machinery, warehouses, etc.) which contribute to
it — ^which are really the past labour employed in
it — are already in existence ; and, unless such
appliances can be employed for other purposes,
the only human energy engaged in the production
of luxuries at the moment is the direct labour
engaged by the employers, and that which is
represented in the price of raw material. A
1 It is obvious that the annual interest lost to this country
is a steadily accumulating sum.
152 THE ECONOMICS OF WAR.
sudden break with luxuries (assuming that the
fixed capital employed in the industries concerned
are not adaptable to other uses) would therefore
produce considerable dislocation and loss, which
would need to be added to the cost of war. But
it is unlikely that the consumption of luxuries will
be reduced to the extent which seems desirable.
Among some sections of the community it will be
largely diminished, because these suffer more than
others from the effects of the war. This leads to
the examination of the second factor — the dis-
tribution of the cost of war between different
groups in the community.
War not only reduces the wealth of the nation,^
but also affects its distribution. In the first
place, as already indicated, the cost of living is
raised ; and the loss entailed by a rise in the cost
of living varies inversely with the income — the
smaller the income the greater is the suffering.
Secondly, money incomes are affected in different
ways. Workpeople employed in trades which
are depressed during war probably face the higher
cost of living with wages smaller in amount and
more irregular. Those employed in industries
affected directly or indirectly by war contracts
may be able to secure an increase in wages com-
mensurate with or even greater than the rise in
their cost of living. They share the " windfall ''
with their immediate employers. What is true
1 Using the term " wealth " in the sense in which it is
generally employed, i.e., with no ethical significance.
THE MATERIAL COST OF WAR. 153
of workmen is true also of employers and owners of
capital. People in receipt of nominally fixed
incomes, and those engaged in professions, are
called upon to bear a disproportionate share of
the burden, in reduced salaries, harder work in
many cases, higher cost of living, and increased
taxation. Consequently the burden of war is
unequally distributed as between different groups
in the same class.
Probably no economic question raised by the
war has led to so much confusion of thought as
that of controlling and altering such distribution.
Nor is this surprising, for it raises a number of
difficult problems, which cannot be discussed
here. At this point it need only be stated that
where employers enjoy great increases in total
net profits in consequence of the war, or workmen
secure relatively higher wages rates through the
same cause, such additions should be deducted
from the total cost of the conflict ; for they
merely represent a transference of money from
one group to another, in virtue of the fact that
the latter, for the moment, enjoys a quasi-
monopoly. They do not represent expenditure
of labour and capital.^
The cost of war is spread over a long period. It
is commonly supposed that such a distribution is
1 The same will be true of the salaries of Government
officials if the proposal to increase them is adopted. The
defence of the proposal (the rise in the cost of living) is
irrelevant. But the " war-bonus " given for additional work
performed during a period of stress is fully justified. The
154 THE ECONOMICS OF WAR.
effected by means of loans and taxes. It is held
that the burden is placed on the present to the
extent that funds are obtained by means of
taxes and postponed to the extent that funds are
obtained by borrowing. This is not wholly true.
Suppose A. pays £20 additional income tax in
consequence of the war. If it is paid out of income
which would otherwise be devoted to the purchase
of consumption goods — clothes, luxuries, etc. —
it represents a present burden. But if it is paid
out of income which would otherwise be saved,
it represents a future burden — it diminishes the
supply of capital. If A. lends £20 to the Govern-
ment which he would normally spend as income, it
represents a present burden. If that sum would
have been saved in any case, it represents a future
burden. It is not so much the method of obtain-
ing the money as the way in which such money
would have been employed, if there had been no
war, that indicates the extent to which the burden
is distributed between the present and the future.
If the labour energy withdrawn from industry
would otherwise have been employed in the pro-
duction of goods for current consumption, the
burden rests upon the present ; but to the extent
that such labour force would have been employed
in the production of capital goods (to be used
case of the engineers in the Clyde valley is quite different.
The present dispute is largely connected with events which
occurred before war broke out. The labour problem as it is
affected by war is examined by the writer in an article which
appears in the May number of The Political Quarterly.
THE MATERIAL COST OF WAR. 155
ultimately in the manufacture of consump-
tion goods) the burden is transferred to the
future. Nevertheless, it is probably true to say
that loans are made largely out of current savings,
while taxes generally restrict consumption, so
that the method employed by the Chancellor in
financing the war is important. Taxation tends
to restrict consumption at a time when such
consumption should be restricted among the
relatively rich.
If the loans are obtained within the borrowing
country the war is carried on out of current
savings, voluntary or forced ; the nation is not
increasing its indebtedness to other nations, or
reducing its claims upon them. Probably nearly
all the first British loan was obtained out of current
savings. It is true that we imported large
quantities of war material from the United States,
but such imports took the place, to some extent,
of other goods (such as raw cotton), which are
normally sent over in payment of interest upon
our investments in that country and elsewhere.
Moreover, we exported considerable supplies of
war materials to our AlUes, so that the net effect
seems to have been as stated above. We did
not seriously injure our position as a creditor of
foreign nations. But it is equally likely that we
did not strengthen it. Current savings, which
would normally have been employed partly in
the export of capital and partly in extension of
home trade, w^re employed in carrying on the war.
156 THE ECONOMICS OF WAR.
The rate of expenditure has since increased,
and it is hkely that we are now utihsing the
resources of other countries — i.e., we are reducing
our claims upon our debtors. The new loan may
possibly be fully subscribed by the people of this
country ; but they will only be able to supply all
the " money " if they realise their foreign invest-
ments. Such a process is equivalent to borrow-
ing capital abroad. The capital is repaid or
advanced in the form of goods — war materials or
other commodities. Such commodities are either
{a) those which were normally imported, for which
other goods were previously exported as payment,
but now are not so exported, so that those who
manufactured such exports are set free to assist
in carrying on the war ; or [h] those which were
not previously imported, but made in this country,
so that the makers of such goods in the past are
also set free for the purposes of war. In other
words, the excess of imports (which have
materially increased) over exports (which have
diminished) indicates the extent to which we are
reducing our exports of capital and calling in
capital already invested abroad. The *' willing-
ness " to do this depends upon the relative rates
of interest at home and abroad, together with the
rate of discount at which we call in our capital.^
1 We are importing at exceedingly high prices — in other
words, we receive relatively little for each ;^ioo of capital
which we recall. We gave much more for that sum when we
invested it, so that we are realising our investments at a heavy
discount.
THE MATERIAL COST OF WAR. 157
The extent to which the normal extension of home
trade and the exportation of capital are reduced,
and our foreign investments are realised, is also
the extent to which the burden of the war is
transferred to the future.
These facts are of considerable importance in a
discussion of the effect of the war upon distributioni
Stated briefly, war destroys capital ; during the
present war we are using capital as income. It
is inevitable, therefore, that scarcity will prevail
in the future, and that the rate of interest will
rise. And since the present war practically
involves the whole world, in the economic sense,
and the world as a whole is using most of its free
capital as income, the scarcity is likely to be so
serious as to affect the world rate of interest very
materially. In previous wars the world supply
of free capital was not appreciably affected, so
that the scarcity prevailing in one country could
be made good by foreign loans. But on this
occasion other countries will suffer from lack
of capital even more seriously than ourselves,
so that we shall probably continue to export
capital which we can ill afford. Unless, there-
fore, a heavy tax is placed upon foreign invest-
ments,^ in order that the net return obtainable
from them may be reduced, a considerable rise
in the rate of interest in this country is in-
evitable. And a rise in the rate of interest
1 This is not a plea for such a tax. There are other factors
to be taken into consideration.
158 THE ECONOMICS OF WAR.
is likely to press heavily upon the working
classes.
The indirect cost of war to recipients of small
" earned incomes " provides a strong argument
against placing much, if any, of the direct cost to
their account, in the form of indirect taxes, or
direct taxes upon relatively low incomes. For it
should be observed that the proceeds of the taxes
are not lost, but repaid as interest to people within
the country. It is merely a transference of
wealth — and a transference largely from those
who will have suffered much indirectly — to those
who have benefited by being able to invest at a
higher rate than would have been obtainable if
the war had not taken place. The destruction of
capital on a large scale is a loss to society as a
whole, but a gain to investors of fresh capital ; in
other words, scarcity of capital in general is
advantageous to owners of new capital, while a
plentiful supply of capital is beneficial to society
as a whole.
There remains a final point for consideration.
Those who held secure investments, at a fixed rate
of interest, before war broke out will naturally
suffer through depreciation in the value of such
investments. The price of Consols, for example,
will be considerably lower in the future than
they would be if there were no war. And the
difference will be mainly due to the possibility of
obtaining a greater net return in other invest-
ments. The foregoing remarks (which are based
THE MATERIAL COST OF WAR. 159
upon the assumption that trade will go on as
usual) ^ seem to be beyond the subject of this book.
It is true that some of the points have been dealt
with in greater detail than strict relevance
permits ; but the main factors indicated bear
directly upon the problem.
Reference has already been made to the fact
that the economic return from a war of conquest
(in so far as it is permanent) need only be greater
than the interest upon the capital cost of such war.
But to arrive at the cost of war it is necessary to
take into consideration all the factors indicated
— the present cost or burden ^ and the future
direct and indirect costs. In the latter must be
included the effects of the war upon the distri-
bution of wealth.
It is evident that, since a war of conquest is
likely, in future, to draw other countries into the
struggle, the cost of such war will be enormous ;
and, since the use of capital as income will involve
the employment of world capital on a large scale,
the resulting scarcity of capital will react un-
favourably upon the conqueror. But it is clear
also that such loss is not so much due to the
internationalisation of credit (although this move-
1 In other words, we are dealing with the trend of interest
over a period of years, rather than the fluctuations
immediately after the war. The actual rates will oscillate
about a mean level higher than that which would prevail if
war had not occurred.
2 The perpetual annuity which could be purchased with
this sum should be set against the annual gain from the con-
quest.
i6o THE ECONOMICS OF WAR.
ment has greatly facilitated world progress) as to
the economic interdependence of nations and the
great importance of capital in modern economic
organisation. It is less the financial machinery
than the material upon which the machinery is
employed that is, in the long run, important.
The proposition with which we started seems
therefore to be true. = That proposition may be
stated as follows :^^Although a war of conquest
is likely to bring some return of wealth, and may,
over a long period, bring a return commensurate
with the outlay, the chance of a gain equal to or
greater than the cost is never adequate compensa-
tion for the outlay itself. Even if he proved the
chance of gain to be of greater material value than
the certain loss, the conqueror, as already stated,
would not have justified his action. Economic
considerations should be entirely subordinated to
other considerations. And in almost all inter-
national questions which endanger peace in the
West it is probable that economic questions do
occupy a subordinate position. Japan is perhaps
the only important nation whose foreign policy is
determined mainly by material considerations.
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spectator. — " Dr. Higgins believes that a more widely diffused
knowledge of the recognised laws of war would sober public
opinion in times of strained international relations. He is a
lawyer, but writes for laymen, and draws an impressive picture of
war as it affects civilians and non-combatants."
P. S. KING & SON, Ltd., Orchard House. Westminster.
M
KING'S BOOKS ON WAR QUESTIONS.
Crown 8vo. 5s. net. Inlatid Postage, 4d.
CAPTURE IN WAR ON LAND AND
SEA.
By Hans Wehberg, Dr. Jur. With a Preface by
John M. Robertson, M.P.
Publishers' Circular. — "Deserves to be studied by all who are
interested in the subject."
Southampton Times. — " Deals in a masterly style with the law
of prize."
Crown 8vo. Is. net. Inland Postage, Id.
BRITISH RIGHTS AT SEA UNDER
THE DECLARATION OF LONDON.
By F. E. Bray.
Times. — "A very timely and careful statement. His arguments
. . . deserve and should receive attentive and dispassionate
consideration."
Western Daily Press. — " Sir Edward Grey has . . . advised
people who wish to hear both sides before passing judgment to
get this book. It is excellent advice."
P. S. KING & SON, Ltd., Orchard House, Westminster.
KING'S BOOKS ON WAR QUESTIONS.
Demy 8vo. 6d. net. Inland Postage^ 2d.
MILITANCY r£i?5t/5 CIVILIZATION.
An Introduction to, and Epitome of, the teaching of
Herbert Spencer concerning Permanent Peace as
the first condition of Progress. By Alfred W.
TiLLETT, Author of "Spencer's Synthetic Philo-
sophy— What it is all about," etc.
Demy 8vo. Cloth, 7s 6d. net. Inland Postage, 4d.
IMPERIAL DEFENCE AND CLOSER
UNION.
By Howard D'Egville. With a Preface by
Colonel the Right Hon. J. E. B. Seely,
D.S.O., M.P., and an Introduction by Rear-
Admiral Sir Charles L. Ottley, K.C.M.G.
Daily Telegraph. — " The word of warning is timely. May it
fall upon receptive ears,"
Aberdeen Free Press. — "Deals with a subject of engrossing
interest, and is specially welcome at the present moment."
P, S. KING & SON, Ltd., Orchard House, Westminster.
KING'S BOOKS ON WAR QUESTIONS.
NATIONAL LIFE AND NATIONAL TRAINING.
By General Sir Ian Hamilton, G.C.B., D.S.O.
Crown 8vo. 6d. Inland postage^ Id.
A stirring plea for the universal military training of Britain's
youth.
NATIONAL SERVICE AND NATIONAL
EDUCATION.
By Eric George. With an Introduction by Lord
Henry Cavendish Bentinck, M.P. Crown 8vo.
Is. net. Inland postage, Id.
The Academy. — "The essay is a thoughtful one, well worthy
of consideration. , . , We recommend the pamphlet to all
Social Reformers."
NAVAL AND MILITARY CADET TRAINING.
By Douglas Halliday Macartney, Author of
" National Cadet Training." Crown 8vo. 6d. net.
Inland postage, Id.
EUROPE'S MAD DOG.
By Major-General Charles H. Owen, Author of
''Modern Artillery," "The Royal Ordnance
Factories," " Employment of Artillery in South
Africa," etc. Crown 8vo. 6d.net. Inland Postage, id,
THE CAUSES AND CURE OF ARMAMENTS
AND AVAR.
By A. W. Alderson. Demy Svo. Is. net. Inland
postage, Id.
Includes also : A Refutation of Mr, Norman Angell's Thesis
as set forth in "The Great Illusion "—Wars that Pay and Wars
that do not — The True Colonising Principle— Racialism, etc., etc.
Times. — " The author believes in language as the great
unifying and pacifying factor in international relations."
WHY THE AVAR CANNOT BE FINAL.
Its true and only Cause — The only way to obtain
Finality in Armaments and War — The Deciding
Factor for Peace or War — The Eternal Enemy
— Empires and Expansion. By A. W. Alderson.
Demy Svo. Is. net. Inland postage, Id.
P. S. KING & SON, Ltd., Orchard House, Westminster.
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