Against the Tide

I

On the Transfer Problem in International Capital Movements*

Some years ago one of the distinguished scholars to whom Dutch economics owes its excellent reputation published an article called “Das Geld als Quelle von Missverständnissen im internationalen Güteraustausch” [“Money as a Source of Misunderstandings on the International Exchange of Goods”].1 It contains the following sentence, which I would like to take as a starting point: “One feels it would be nice to be a Communist, to live in a world that has no need of money, so as to be able to look in the simplest terms at so many economic problems that now are a source of numerous misunderstandings.” How true this is! And never is this desire felt more urgently than when it is a question of gaining for oneself and conveying to others a clear understanding of the intricate processes of foreign trade. But although our, somewhat frivolous, wish has to remain unfulfilled, there is nothing to stop us taking a leap from reality into the realm of imagination and trying to clear our minds by working out how this or that process, encumbered by all the complications of our modern economic system, would take place in the idyllic simplicity of Utopia’s moneyless and marketless economy. An attempt to apply this method to the process of international capital movements, which is under discussion today and need not be described in detail to this audience, would give the following result.

Imagine two socialist economies, comparable to two giant corporations, and suppose that in consequence of some commercial or political debt a certain capital sum is to be transferred from one economy to the other. The first question would clearly be whether the debtor economy is able to raise the required sum domestically without prejudice to the present and future livelihood of the inhabitants. Even this question would take a simplified form in comparison with the actual state of affairs today, insofar as the state and economy are identical, whereas in our system on one side the state is an authority imposing taxation and on the other side the economy is the sum of individual economic units where the stream of national income collects and forms a pool on which the state draws by more or less imperfect methods. But more important in our context are the next questions, namely, in what form is the capital sum to be transferred and in what manner is it handed over to the recipient economy. Money is excluded by assumption. The capital sum can, therefore, only take the form of actual goods, to be selected by a commission of delegates from both countries on two criteria: first, according to whether the debtor country has a sufficient supply of this or that good and can spare it without detriment to a minimum standard of living for its own inhabitants, and second, according to what goods are most urgently in demand in the creditor country. There is not a shadow of doubt that the debt can be paid only in the form of goods (or services). The meaning of the transaction by which a certain volume of goods is to be withdrawn from one country and handed over unrequited to the creditor country is brutally and nakedly plain. But several other features of the process are likewise seen in a clearer light. It is, for instance, quite conceivable that the debtor country for its part can raise the required resources domestically, in the sense that it can set aside from its social product a certain amount of goods, say, wine and cigarettes, and make these goods available for transfer to the other country without detriment to its own future, except that the creditor country unfortunately happens to be the United States—which, as we may imagine without great flights of fancy, has banned not only drinks but smoking as well. What happens now? The commission reaches no agreement; it would have been possible to raise the resources, but their transfer was not feasible. The transfer problem, to use the expression of the Dawes Plan which quickly gained currency, has emerged as a separate problem alongside the problem of domestic procurement.

Consider yet another case. It would seem to go without saying that the free receipt of resources, like the receipt of a gift, can give rise to nothing but joy. Or are there not also gifts to be looked at suspiciously, like a Trojan horse? Here again our imagined economy without money and market helps us to greater clarity, insofar as it mercilessly demolishes the notion that a creditor country can gleefully pocket the resources to be transferred as it could a sum of money. If the creditor country wants to be paid, it has to accept payment in the only form in which it can be made, that is, in the form of goods. But once more we may imagine a constellation of circumstances that prevents the transfers working out smoothly. Suppose that the goods that the debtor country can supply are produced also by the creditor country in quantities sufficient to meet demand in comparison with the coverage of other categories of demand. Unless the debtor country can be induced to adjust its production accordingly in consequence of the creditor country’s raising difficulties about accepting these competing goods—difficulties which have their parallel in the protective tariffs of creditor countries in today’s conditions—such an adjustment will have to be made by the creditor country. Here is a new problem that should give us food for thought and that points to the actual difficulties we must be prepared to encounter.

A final set of complications arises if we drop the assumption that only two countries are involved and insert third countries into our imagined process. We may suppose, for example, that some especially rich third country advances the required resources to the debtor country and thereby postpones the moment when the latter inexorably has to begin transferring resources in the form of goods or services, at the price, of course, that the debtor country, in addition to the original sum, must now also repay its debt to the third country. But these complications had better not be followed through in all their implications here, so as not to spin out the overture to the point of tediousness. Instead, we turn at once to the question of how the whole process we have just considered on the simplifying assumption of a moneyless economy takes place in the real world, in which the complications introduced by money and the market have caused that special science to emerge that is called economics.

I

Given that in our economic order money is merely an indispensable medium of exchange, a transactions entry that disappears in the final accounts and in no way alters the fact that ultimately goods and services are exchanged against goods and services, we must expect today’s international capital movements not to differ essentially from those discussed in the initial, Utopian and socialist, setting. And this is indeed so with respect to the most important point, for it turns out at once that an international capital movement today, in the end effect, amounts to an equivalent volume of goods and services being transferred from the debtor to the creditor country.

In other words, every international capital movement resolves itself in a transfer of goods and services and only thereby fulfils its real meaning of increasing one country’s economic assets at the cost of those of another, provided, of course, that no capital flow moves simultaneously in the opposite direction. An international capital movement must, therefore, cause a deficit on the goods and services account in the originating country’s balance of payments and a surplus in the goods and services account of the recipient country. If the goods and services account is taken to cover all visible and invisible goods that cross the frontier, the strict and inescapable conclusion is that the structure of the goods and services account is the mirror image of the structure of the capital account. The goods and services account is in surplus always, and only, when the capital account is in deficit, and it is in deficit always, and only, when the capital account is in surplus. If, on balance, more capital flows out of the country than into it, then the outflow of goods and services exceeds their inflow, and vice versa. The surplus or deficit on goods and services account, therefore, is always merely the expression and consequence of a corresponding deficit or surplus on capital account. The whole world’s goods and services accounts would balance, and the theorem that ultimately goods and services are exchanged against goods and services would be fully substantiated, were it not that international capital movements canceled the equality of the two terms in the quid pro quo.

Anyone who has grasped these simple relationships will henceforth cease to be one of those who regard a trade surplus as auspicious and a trade deficit as ominous, nor will he be one of the countless number of people whose faces beam when the latest trade returns show the trade balance to be in surplus, only to assume a worried look when the press reports yet another trade deficit. There is no more room for the notion that a trade surplus as such is a good thing, and a trade deficit as such a bad thing, once it has been grasped that the structure of the goods and services account is a mere reflex of the capital account, that the goods and services account must be in surplus when capital exports exceed capital imports, and that it must be in deficit when capital imports exceed capital exports. A trade balance is in deficit not because the economy works at a loss and is “unviable” but because, on balance, it receives more capital from abroad than it disburses abroad. Similarly, a trade balance is in surplus not because the economy works at a profit and is bursting with health but because, on balance, it exports more capital abroad than it receives from abroad.

However, it does make a great deal of difference to an economy under what heading capital flows in and out. Four cases may be distinguished in this connection.

1. The case of a nation that does not use some portion of the regular export proceeds for imports, but leaves it abroad as capital investment and thereby becomes a so-called creditor country (the case of the emerging creditor country). Capital flows out of the country for the creation of a creditor position. The capital account is in deficit and to the same extent turns the goods and services account into surplus.

2. The case of a nation that, thanks to a steady increase in its capital investments abroad, eventually reaches the point where the sum of interest, dividends, and repayments exceeds the amount of new investments abroad (the case of the pure creditor country). Capital exports for the creation of a creditor position now bear fruit in the shape of a net inflow of capital, the capital account swings into surplus, and the goods and services account into deficit.

3. The case of a nation that incurs debts abroad and to the extent of its indebtedness can import goods and services from abroad without paying for them currently (the case of an emerging debtor country). The capital account is in surplus and correspondingly the goods and services account in deficit.

4. The case of a nation that, while possibly incurring further debts abroad, eventually reaches the point where the sum of its outgoings for interest, dividends, and repayments exceeds the sum of new debts, so that a portion of export proceeds corresponding to that excess can no longer be used for imports but serves as a unilateral transfer to abroad (the case of the pure debtor country). The capital account is in deficit and correspondingly the goods and services account in surplus. This category includes the case euphemistically described as “political indebtedness,” to characterize the case best illustrated by German reparations, namely, one where the creditor’s claim arises not from prior credits for commercial and hence constructive purposes but from a mere political stipulation. The special feature of political indebtedness, therefore, is that it has not been preceded by a capital import that raised the economic potential of the debtor country, but, as in the case of reparations, that it is linked with a process that enormously weakened that potential.

No one who wants to avoid the pitfalls of crude amateurishness should ever lose sight of the above model in discussing questions of foreign trade. There are, then, four possible cases of surplus or deficit on goods and services account, and these in turn can be grouped in pairs from the point of view of an excess of capital imports or capital exports. But capital imports or capital exports are of very different character in the various cases. They are either provisional or definitive. Capital export is provisional in the case of the emerging creditor country and definitive in that of the pure debtor country; capital import is provisional in the case of the emerging debtor country and definitive in that of the pure creditor country. Accordingly, the surplus on capital account is either provisional or definitive. In the first case capital import carries the condition of subsequent repayment; in the second case it does not. The same applies to the deficit on capital account. From this point of view the various possible cases of surplus and deficit in the trade balance may be grouped as follows:

1. The trade balance is in surplus because the capital account is in deficit. This deficit may be: (a) definitive (pure debtor country); (b) provisional (emerging creditor country).

2. The trade balance is in deficit because the capital account is in surplus. This surplus may be: (a) definitive (pure creditor country); (b) provisional (emerging debtor country).

To illustrate these four possible cases of surplus and deficit in the trade balance by concrete example of individual countries is extremely difficult, because the only reasonably reliable figures are those referring to the actual merchandise account, while those referring to the services and the capital account are mere estimates, which are all the more vague the further we go back into the past. Subject to this reservation, the following may be said about the development of the German trade balance, as the example closest at hand.

Germany’s trade balance was in surplus until the middle eighties of the nineteenth century (case of the emerging creditor country). It then swung into deficit, which by 1899 had reached almost 1.5 billion and subsequently, until 1914, fluctuated around approximately 1 billion. How is this prewar trade deficit to be explained? Partly by the fact that Germany was by then running an appreciable surplus on services account (net receipts on account of international freights, banking, insurance, etc.), though this surplus was certainly not large enough to explain the whole of the trade deficit. It will have to be assumed, therefore, that Germany had a deficit on goods and services account before the war, for which there is only one explanation, namely, that Germany had in the meantime reached a stage in its development where gains from capital investments abroad—which by the outbreak of the war had grown to about 28 billion—exceeded each year’s new investments (case of the pure creditor country). The war dispossessed Germany of these investments and turned it from a creditor into a debtor country. Just as before the war, the German trade balance was in deficit until quite recently, but it was the deficit, not of a creditor country, but of an emerging debtor country. The German trade deficit (which was partly offset by a surplus on services account) amounted to about RM 2.3 billion in 1925, to RM 2.8 billion in 1927, and to RM 1.2 billion in 1928; only in 1926 did the trade balance register a surplus of RM 859 million, in connection with that year’s economic crisis and the resulting turnabout in the capital account. In effect, Germany took up foreign credits of all kinds in an approximate amount of RM 12 billion between 1924 and 1928, and thus developed into the world’s foremost debtor country.

Having thus successively gone through the stages of an emerging creditor country, pure creditor country, and emerging debtor country, the moment must inexorably arrive when the sum of payments due to abroad for interest, dividends, repayments, and reparations exceeds the sum of new credits contracted. In a gradually rising curve and subject to many fluctuations, such as we are already experiencing, the German balance of trade will move from equilibrium to surplus, and it will be a surplus that, to the extent that Germany is at all able to honor its commitments arising from commercial debts and above all the political debt of reparations, may reach an extent that perhaps we cannot quite imagine at present. But the great question, which constitutes the true content of the transfer problem, is whether that inversion in the balance of trade will happen with or without major disturbances, indeed possibly with disturbances so great as to frustrate the whole transfer of capital. This is the question that must now occupy us.

II

I hope I have made it clear beyond doubt that there are absolutely no grounds for believing, in connection with the above-mentioned trade-balance syndrome, that the transfer problem in international capital movements is a question of the trade balance in the sense that a prior surplus in the debtor country’s balance of trade is a conditio sine qua non of any capital transfer. According to this extraordinarily popular transfer theory, the size of the trade surplus that can be achieved is to determine the extent to which a transfer is possible. Whatever efforts a country may make domestically to raise the capital sum, if the gods send unfavorable winds to the flow of goods across frontiers, this sum must rest and wait, like the Achaeans’ army at Aulis, while the high priests of economics get busy with their hocus-pocus and implore the gods for the miracle of a trade surplus.

Is this theory really to be taken seriously and is it worth the trouble of taking issue with it in detail? I should think that before this audience it will be enough merely to state that the trade-balance theory simply stands the relationship on its head and forgets that an export surplus can appear only in the presence of a transfer no longer accompanied by net capital imports, and not one moment earlier. It is not the trade balance that determines the transfer, but the transfer that determines the trade balance. And with this we have demolished also another equally widespread view, to wit, that all the medieval weapons in the armory of foreign trade policy must be applied in an attempt to get the trade balance into surplus, and thereby to create the conditions for the capital transfer. The same goes for any attempt by the transferee country to mobilize its trade policy against the trade deficit that comes in the wake of net capital imports.

This latter case shows up especially clearly how untenable is the whole argument. For what can be achieved if a capitalimportant country applies its trade policy to an attempt at correcting its trade deficit? Since the trade deficit is an inescapable consequence of the import surplus on capital account, it can be diminished in no other way than by cutting down capital imports. To obstruct merchandise imports by customs duties therefore can only have the result of diminishing imports and exports in equal measure, while the surplus of imports over exports remains as big as it was before. The total volume of foreign trade decreases, but not the difference between the volume of imports and the volume of exports. The only thing that is achieved is that the inexorable import surplus will be due more to a decrease of exports than to an increase in imports. In all cases the question is not whether there will be a surplus or a deficit in the balance of trade, but only how either comes about—more by changes on the export side or more by changes on the import side. And on the occasion of future reparations payments by Germany the question, therefore, will be not “trade surplus or not?” but “more exports or less imports?”—the road of declining imports being undesirable precisely in the measure in which it is artificially induced by import duties or import restrictions.

Now that we have disposed of the trade-balance theory, the field is cleared for an investigation of the true transfer problem. The problem is this: What is the nature of the mechanism that brings about that altered relationship between exports and imports that is the necessary expression of an international capital transfer? Or, we may ask the equivalent question: What guarantees are there in the transfer mechanism to prevent the transfer from jeopardizing the stability of the currency by causing a disproportion between supply and demand on the foreign exchange market?

This mechanism has been described so often that the barest outline should be enough here.2 Schematically simplified, the process may be imagined as follows.

1. The debtor country year after year accumulates a fund to cover its debt payments and does so by the ordinary means of fiscal policy, that is, without recourse to inflation.

2. This implies a contraction of the total money supply in the debtor country, and, for reasons that need not be discussed here, the same applies if the fund is accumulated by open market sales.3

3. This contraction implies a relative downward pressure on prices in the debtor country.

4. In consequence, the debtor country becomes a good market to buy in but a bad one to sell in, so that imports will tend to diminish and exports to expand.

5. As a further consequence, demand for foreign exchange diminishes while its supply rises.

6. The foreign exchange market is thereby adequately prepared for a conversion of the capital sums due to be transferred abroad into the currency of the creditor country. The pressure this conversion exercises on the national currency automatically leads to a further considerable improvement in the already transfer-favorable situation of the foreign exchange market since other demand for foreign exchange will diminish and supply will rise.

7. The pressure to which the exchange rate of the debtor country’s currency is thus subject, and which may push the rate of the creditor countries’ currencies to the upper gold point, at the same time forces the central bank of the debtor country to protect its gold reserves by raising its bank rate, thereby to restrict the volume of credit and thus to reinforce the existing tendency for exports to expand and imports to contract.

8. The last stage is that the creditor country’s currency units bought up by the debtor country’s government are handed over to the recipients in the former country. This means a corresponding increase in the money supply of the creditor country, with a consequent tendency for prices to rise, imports to expand, and exports to fall, so that the market is automatically prepared for additional exports from the debtor country. Any possible imports of gold enhance this tendency just as does the state of the foreign exchange market, as described above, and the correspondingly liberal credit policy of the creditor country.

If the transfer mechanism so outlined works without friction, we would expect, therefore, that the sum raised domestically in the debtor country is reflected in an equally large decrease of the same country’s total money supply, which decrease, in its turn, equals the shift in the proportion of Germany’s visible and invisible exports and imports, equals the opposite shift in the exports and imports of the creditor countries, equals the sum which the creditor country receives, and finally equals the increase in the creditor country’s total money supply.

The existence of relationships of the kind thus briefly outlined is seldom denied anymore in authoritative circles, especially since the theory is confirmed by experience, witness the most recent capital imports into Germany, which worked perfectly smoothly in spite of their gigantic proportions. There may be some doubt about the effectiveness of one or the other little wheel in the machanism as described, or one cog may be replaced by another, but the principle of the transfer mechanism in international capital transfers can surely be taken as agreed by now, at least among scholars.

This agreement on principles extends, in particular, also to the conviction that the monetary transfer problem, in the sense that the successful internal accumulation of the required sum might endanger the currency of the debtor country or—as has indeed been seriously suggested—that of the creditor country, is in fact a pseudo-problem that need not cause any headaches. But this does not dispose of the whole content of the transfer problem, nor is that problem itself exposed as a pseudo-problem that can be treated lightly. One major question that still has to be regarded as open and requiring an answer is whether the transfer mechanism is perhaps subject to friction and adjustment difficulties such as might put an additional burden on the debtor country beyond the nominal value of the capital sum to be transferred, or indeed might conceivably cripple the whole transfer mechanism. This is the question on which the discussion of the transfer problem really turns today, and we will take it up next.

III

The eminently important question in this context is to what extent is a special price pressure on the debtor country’s goods necessary for the establishment of a new equilibrium in international economic relations in the case of international capital transfers?4 Is it necessary for the debtor country, which needs to export more because of the capital transfer, to find an outlet on the world market by exporting at lower prices than the competitors, and thus to accept a relative deflation of its price level? Or, to use the language of foreign trade theory, is it necessary for the international terms of trade to shift against the debtor country in order that a new equilibrium may come about on the international product market? If this question has to be answered in the affirmative, far-reaching consequences must be expected, in two directions.

First of all, the deflationary pressure or what really amounts to the same thing, the deterioration in the debtor country’s international terms of trade, means that in addition to the primary burden of raising the nominal amount of its debt payment, the debtor country is saddled with a secondary burden, which finds expression in the lower value attached to factors of production in the debtor country or, in other words, lower money incomes and especially lower wages. To put it briefly: For Germany to pay reparations, German workers must not only part with some of their income in the form of taxes, but the very income from which taxes are deducted is lower than it would be without the obligation to pay reparations. But this increase in the real value of the reparations would by no means accrue to the creditor countries; it would merely be the price for the disturbance of international economic equilibrium due to the reparations payment. It would be yet another example of the case, not infrequent in economic matters, that one party’s loss need not be the other’s gain, or at any rate may be altogether out of proportion to it, rather like the case of a man who sets fire to his neighbor’s house in order to cook his broth for dinner. If things are indeed as they are here assumed to be, the capital transfer, by the severe disturbances it implies for international economic equilibrium, does considerable harm also to the creditor countries as well as to third countries affected via the nexus of world trade. All the more important it is, therefore, to be quite clear on this question.

The best approach to a correct answer to the question of the necessity of price pressure constituting a secondary burden on the debtor country as well as a disturbance to international economic equilibrium is to distinguish two groups of views: on the one hand, a quantitative and a qualitative group of views; on the other, a static and dynamic one. A purely quantitative view of the problem leads to the conclusion that the decrease in the German money supply entailed by the reparations payment is matched by an equal increase in the money supply of the reparations creditors. It follows that, in terms of the total volume of demand, regardless of its qualitative composition, the question of where additional German exports are to find a market without causing havoc to the economies of the creditor countries is irrelevant. If we use the term reception problem for the problem of the effects of the capital export on the economy of the receiving country, there admittedly is no reception problem in this quantitative sense. This explains the barely concealed sarcasm often encountered in the receiving countries in response to any attempt to win acceptance for the view that these countries ill serve their own interests by insisting on reparations payments. Why, people ask, should it be such bad business to get something for nothing? They forget that apart from the quantitative reception problem, which has been shown to be an apparent one only, there may exist a qualitative reception problem in the sense that the additional demand of the creditor countries (or of third countries affected by triangular trade relations) may not coincide with Germany’s shortfall of demand in qualitative terms, that is, that it may be directed to goods other than those that have become exportable in Germany as a result of the contraction of demand.

There is obviously no guarantee whatever for such coincidence, and this brings us to the heart of the whole, so often misunderstood, transfer problem in international capital movements. The true problem in international capital transfer lies in the possibility of serious qualitative divergence in terms of composition between the minus of demand in the transferor country and the plus of demand in the transferee country. And it is this possibility that provides a foundation for taking a pessimistic view of reparations developments, without any sacrificium intellectus and without denying the uncontested or at any rate uncontestable principles of the theory of foreign trade. Whether such pessimism proves justified or not depends on whether or not a serious qualitative divergence in the relevant demand quantities can or cannot be shown to be probable.

It is not possible here to go into this question in detail.5 We are concerned with principles here, and from this point of view it must be stressed that what actually happens is likely to lie somewhere between two extreme limiting cases. The most favorable limiting case is that of a full qualitative match between the demand quantities. In that ideal case, capital transfer would cease to be a problem, and there would be no need either for a price war or a price fall. In Germany there would be less demand for, say, shoes, while the enrichment of the British or the French economy would show up precisely in an increased demand for shoes. There clearly is no occasion for any difficulties in this. At the opposite extreme there is the other limiting case, which has already been touched upon in the introductory description of conditions in the socialist state, the case, that is, where the goods made available for export by the debtor country meet with no additional demand in the receiving countries such as would enable these goods to be sold without a price fall (or at any rate, without a price fall so large that the total proceeds do not rise in spite of higher sales).6 In that case the capital transfer would clearly be altogether impossible. But while the first, most favorable, limiting case is quite conceivable, the second, most unfavorable one, is unimaginable. The second would require conditions that are most unlikely ever to obtain. It would have to be assumed, for example, that there are no other goods at all in the debtor country that could take the place of those not wanted in the creditor countries; it would have to be assumed, furthermore, that there are no services that could take the place of these goods; and it would, finally, have to be concluded that the goods offered by the debtor country could be transformed into others more acceptable to the creditor country via triangular trade, that is, by the intermediary of third countries.

By comparison the ideal limiting case is at least conceivable, but it is bound to remain a limiting case in the sense that it is likely to be the exception rather than the rule. The rule—at least in the case of such gigantic capital transfers as reparations and inter-Allied debt settlements—will be some qualitative divergence, greater or lesser, between the relevant demand on the two sides. But if this is what must be expected, it follows that the transferor debtor country will not be spared some degree of downward pressure on prices, nor the creditor country and any third countries involved some degree of competitive pressure. And the meaning of all this is that the transfer will be associated with painful readjustments and with disturbances of the economic equilibrium. This, I repeat, is the true aspect of the transfer problem: transfer is not impossible, but it leads to frictions and disturbances that add much to the burden of the debtor country and may well spoil the creditor countries’ joy.

However, there is another point to consider, and this brings us to the second group of views. In the nature of things, any imbalances caused by the demand divergences will eventually even out by themselves, and at the end of the adjustment process there will be a new equilibrium, in which the additional exports of the debtor country can find a market without the sort of price pressure that is a burden on the debtor country and disturbs the world economy. Being a solely qualitative problem, the reception problem is also solely dynamic, whereas in quantitative-static terms, that is, with reference to the total volume of demand and in the long run, there is no problem at all.7 In normal cases of international capital transfers this definition of the transfer problem may indeed be taken as belittling it, but not so in a case such as the German reparations, where the sums involved are so gigantic that the imbalance may be so great and last so long that there is plenty of room for pessimism. Equilibrium may indeed be so greatly disturbed that the creditor countries’ fear of enforced competition by Germany need not be imaginary and might possibly in the not too distant future lead to another revision of the Young Plan.

No discussion of the transfer problem can be complete unless it takes due account of one more important factor. To this end I would recall my earlier distinction between two kinds of capital export, a provisional and a definitive one. The case of provisional capital export obtains when there is, in some country, capital that by a natural process looks for investment opportunities abroad and thus creates a creditor position for the country concerned. The case of definitive capital export obtains when a debtor country has to service commercial or political debts by transferring capital abroad for interest and principal and, contrary to the former case, has to do so definitively and without any claim for an eventual return of the sums concerned. It readily follows that provisional capital export is in all circumstances also voluntary capital export resulting automatically from a shift in the supply and demand schedule of capital, and that definitive capital export is in all cases imperative. For the sake of completeness let it be noted at once that, conversely, provisional capital import (on the part of the debtor country) is voluntary, and definitive capital import (on the part of the creditor country) imperative. Is there not a presumption that the transfer problem will differ according to whether the capital movements are of the provisional/voluntary or of the definitive/imperative kind? The difference is obvious enough, and can be deduced from the fact that in the case of provisional/voluntary capital transfers the transfer process itself is as natural and automatic as the whole process of capital seeking investment opportunities abroad. This is not so in the case of definitive/imperative capital transfers, where the capital movement simply has to be effected regardless of all transfer difficulties. But—and this brings us to the transfer factor still to be discussed—there is one circumstance that helps in overcoming these transfer difficulties and does much to mitigate the transfer problem even in the most desperate cases, and this is a new capital inflow into the debtor country. The definitive/imperative capital outflow from the debtor country is met by an opposite, provisional/voluntary flow of capital, the function of which is to replace an abrupt adjustment with all its losses and disturbances with a gradual process of adjustment. This happened recently on the occasion of the settlement of reparations payments, in the most patent manner and to an enormous extent. In the case of reparations it looks as though this counteraction of capital outflow and capital inflow is destined to continue for some time in the future, possibly with the assistance of the Bank for International Settlement, but it also looks as though Germany is approaching the moment where the amount of capital imports definitely no longer offsets the imperative capital export, so that gradually the present, spurious, credit transfer will be transformed into a genuine transfer of goods, with the result that, subject to inevitable fluctuations, the German balance of trade will run up a growing surplus.

IV

Those who have attentively followed my exposition will no doubt have sensed already how extremely awkward it is to treat the transfer problem as one and the same for all kinds of capital transfers. Their feeling is quite correct, and I have tried to allow for it by the distinctions I introduced between provisional and definitive, voluntary and imperative capital transfers. So far as the transfer problem as such is concerned, these distinctions are probably good enough. But when it comes to taking an overall view of international capital movements, we have to go further and give priority to the distinction between commercial and political capital transfers. A deep gulf divides the two categories. The one unites nations, the other divides them; the one is constructive, the other destructive. This fact cannot be altered by any attempt to bridge the gulf by artificially commercializing the political debts.

There is one aspect, though, that commercial indebtedness has in common with political indebtedness, namely, that they create the closest interrelations of nations in the sphere of money. In turn, these interrelations in the monetary sphere must, as we know, logically lead to equally close interrelations in the sphere of goods. Since international indebtedness in the world, both of commercial and of political origin, has grown tremendously in comparison with the past and shows every sign of growing still more, we cannot escape the conclusion that international economic relations in the world will not diminish, as some false prophets predict, but will, in defiance of all autarkic tendencies, continue to intensify. There is no greater or more exasperating contradiction than that between this irresistible development and the highly protectionist tariff policies throughout the world, which seems to be further removed than ever from any sort of economic reason. The sooner the nations become aware of this contradiction and the sooner their commercial policies draw the consequences from this immanent development, the better. Fortified by this inner logic of things we may hope that Friedrich Albert Lange, the nineteenth-century Marburg philosopher, may be proved right in the field of foreign trade policy as in others, when he said: “In politics the realist has the hour on his side, but great ideas command the support of centuries.”

* Lecture delivered on May 21, 1930, at the Nederlandsche Handelshoogeschool at Rotterdam, subsequently published in Jahrbücher für Nationalökonomie und Statistik, Vol. cxxxiii (1930).

1 A. van Gijn, “Das Geld als Quelle von Missverständnissen im internationalen Güteraustausch,” Weltwirtschaftliches Archiv, Vol. xix (January, 1923), pp. 81 et seq.

2 See W. Röpke, in “Das Reparationsproblem” (Protocol of the Pyrmont Conference), 1929, pp. 329 et seq.

3 See W. Röpke, “Neuere Literatur zum Reparationsproblem,” Zeitschrift für Nationalökonomie (1930), p. 1.

4 See the following among recent literature: F. W. Taussig, International Trade, New York, 1927; J. M. Keynes, “The German Transfer Problem,” Economic Journal, March, 1929; B. Ohlin, “The Reparations Problem,” Index (Svenska Handelsbanken, Stockholm), No. 27 (March, 1928), and No. 28 (April, 1928); B. Ohlin, “Transfer Difficulties, Real and Imagined,” and Keynes’s reply, Economic Journal, June, 1929; G. Haberler, “Transfer und Preisbewegung,” Zeitschrift für Nationalökonomie, I, 4 (1930), pp. 547 et seq.; F. Machlup, “Transfer und Preisbewegung,” ibid., pp. 555 et seq.; W. Röpke, loc. cit.; B. Ohlin, “Transfer und Preisbewegung,” Zeitschrift für Nationalökonomie, I, 5 (1930), pp. 762 et seq.

5 See W. Röpke, Protocol of the Prymont Conference, loc. cit.

6 The limiting case referred to in the text is one where the elasticity of demand, for the goods in question is unity or less than unity.

7 This is overlooked by A. Cabiati, among others, in his otherwise so valuable book 1919-1929 Da Versailles alla’Aja (Turin, 1930), which has recently appeared in German under the title Der Widersinn der Reparationen und die Internationale Bank (Berlin, 1930).