Chapter I: Historical Orientation

CHAPTER I HISTORICAL ORIENTATION

THAT, for whatever reasons, something very serious is happening to international economic relations, which amounts to a quantitative shrinkage and to a pathological qualitative change, is the undisputed fact which has given rise to the present investigation. To define more exactly what this “something” really is presents a major problem and one which makes us pause. The best thing is to take a long-range view and try to understand the present situation more thoroughly by incorporating it in the chain of history. Our first endeavour must be to study the preceding phase of expanding world economy from which the present one seems to be a reaction, and our second to make the most of the fact that this sequence of economic integration and disintegration has been preceded by earlier examples the analysis of which may contribute to a better understanding and a more satisfactory interpretation of the present development.

Along with the general development of our modern economic system, the nineteenth century saw a gradual and almost uninterrupted process of growing international economic expansion and integration, whose essential features are so well known that it seems unnecessary to dwell on them. Its most impressive side is the enormous quantitative increase in the volume and value of world trade resulting (a) from the intensification of economic relations between the old-established trading nations and (b) from the extension of “capitalism” to new areas of the globe, which has made the growth of world economy both an intensive and an extensive process.1

That the development of world economy has been, first of all, a process of intensification is as important as it is evident. It can be deduced from the fact that the most highly developed countries showed the greatest percentage of world trade, which, in view of the reciprocal nature of trade, proves that the bulk of world trade must have belonged to economic interchange within the high-capitalistic sphere itself. This deduction is corroborated by a number of calculations of the relative intensity of this “intraindustrial” economic interchange. One of these calculations, made by the Kiel Institut für Weltwirtschaft und Seeverkehr,2 shows that the commodity trade between the industrial countries of Europe (Belgium, Germany, France, Great Britain and Ireland, Italy, Austria and Switzerland) amounted in 1913 to 30.2 milliard RM (=$7.2 milliard), which was equal to about one-third of the total reciprocal trade between all industrial and agricultural countries of the world. The same story is told by the calculation that out of average total exports of industrial Europe (comprising the same countries) during the years 1909–1913 slightly more than one half (51%) constituted an exchange of goods among these countries themselves.3 It is also a well-known fact that such leading countries as England and Germany were practically each other’s best customers. In 1913, for example, exports from the United Kingdom to Germany formed 7.74% of the total export trade of the former (higher than the percentage of any other country except British India), while imports from Germany into the United Kingdom as a percentage of the total import trade (11.56%) were surpassed only by those from the United States.4 Another very interesting illustration of the same tendency is to be found in the development of reciprocal trade between the two leading industrial countries outside of Europe, i.e. the United States and Japan.5

At the same time, the development of world economy has been a process of continuous extensification in the sense of a spatial extension of the universal economic system over the non-capitalistic areas of the world. On this point there is even less need of a statistical or historical description. If, however, we try to interpret this side of international economic integration, we are faced with very momentous problems which cannot be solved in passing, i.e., those connected with “economic imperialism.”

There is no denying the fact that world economy and capitalism have been to a large extent forced upon the “new” countries by political pressure and in some cases—as in the opening-up of China—by undisguised war. The problems thus presented are, at the present moment, far from a universally accepted solution;6 but it seems clear that no satisfactory study of international economic integration and disintegration could evade them.7 This holds especially true for one of the many aspects of the problem of economic imperialism—the difficult question of whether and how far extensification and intensification of world economy were, and perhaps still are, correlated to each other. In other words, was it not just the spatial expansion of capitalism which kept the whole mechanism of dynamic development going, by providing more and more new markets for the surplus production which constantly increased as productive technique improved, by giving the necessary stimulus to entrepreneurial initiative and speculative optimism and by allowing the “play” essential for any working mechanism? Allowance must also be made for the possibility that the existence of an economic “frontier” in world economy may have been instrumental in providing that psychological atmosphere essential for the breadth of outlook, which is the basis of a liberal commercial policy. This refers not only to the exploitation of new markets, but also to the opening of overseas territories to human settlement. Thus the vast problem of international migrations would also have to be studied in this context.

Full treatment of this set of problems must wait till a later occasion. At this juncture let it suffice to emphasize that this is not only important for a full appraisal of the past development, but even more so for a diagnosis of the present situation of world economy and for a prognosis of its future. It is obvious that it would make a tremendous difference if it were really true that spatial expansion (for both goods and men) has been one of the indispensable and irreplaceable springs behind the development of a highly integrated world economy up to 1914. Here, then, is another of those strategic factors we are looking for, though it seems probable, even at the present stage of enquiry, that the result would be a refutation rather than a corroboration of popular views. But, since here as elsewhere popular views are a very important element in shaping actual policies, a convincing refutation amounts in itself to a constructive action. It may be added that, if there is a grain of truth in this theory, the “saving-investment” approach made familiar by recent developments in business cycle theory will probably indicate the most promising direction of analysis.8 The problem, therefore, will be encountered again in that part of this investigation reserved for the relationship between economic stabilization and economic nationalism.

There is another, though more unusual, sense in which the development of world economy can be conceived as a process of extensification. Spatial extension of capitalism means, in the last resort, not the incorporation of additional square miles, but of additional men living and working on them. The same effect, however, can be achieved by population increase within the orbit of the old trading area; and this is, of course, what happened during the nineteenth and early twentieth century on an unprecedented scale. Spatial (horizontal) extension, then, finds its counterpart in demographic (vertical) extension; and the analysis of both can be largely, though not entirely, conducted on similar lines.9 Considering the present slackening in the rate of increase of the population of the Western World and the probability that the time is soon coming when this will remain constant, no proof is needed of the importance of an elucidation of this problem for a diagnosis and prognosis of present developments in international capitalism.

A description of the quantitative development of world economy—both in its extensive and intensive sense—is to be followed by the much more difficult task of analysing the qualitative structure of pre-war world economy. The most general remark this calls forth is that this structure of pre-war world economy, now that it is disintegrating, appears as something much more complex and conditioned than was formerly supposed. This leads us to a vast field of research which even now has scarcely been touched, and which forms part of the great task of correcting earlier simplified views about the structure and conditions of the competitive market system in general. From this standpoint, of which more will be said on a later occasion, the main points may be summarized as follows:

World economy was an interdependent and intercommunicating system, which means that there was a very close (horizontal and vertical) correlation of national markets, which made the world market virtually a unit. Making allowance for all obviously necessary qualifications, it is possible to say that the essential condition of economic integration, viz., unhampered “arbitrage” (buying in the cheapest and selling in the dearest market), was practically fulfilled, at least to such an extent that the difference between regional and international interchange was only gradual. Customs duties, like transportation costs, were merely data in the otherwise free transactions which connected the national markets to “world markets” and reduced national price disparities to a minimum. This achievement was due to a number of conditions which were also essential features of the pre-war structure of world economy, including especially that mentioned below.

World economy as an intercommunicating system was also a multilateral system, and this in a double sense which is not always duly recognized: (1) in the sense that a large part of the world’s commodity trade was actually carried on in a multilateral way; and (2) in the sense that almost the total world trade was virtually multilateral. The latter was at least just as important as the former, since the ever-present latent possibility to change from bilateral to multilateral interchange completed the intercommunicating character of world trade; but, whereas the actual multilateralism can be calculated statistically,10 the virtual, of course, can not. For this reason the multilateral character of world trade in the combined sense of actual and virtual multilateralism escapes quantitative measurement. All we can say is that it was multilateralism which made world trade possible as an intercommunicating system. It was multilateralism that enabled the industrial countries to procure by roundabout exports via third, fourth and more countries their raw materials and foodstuffs without any difficulties giving rise to a “problem of raw materials,” and at uniform world prices. And it was again multilateralism which enabled the countries producing raw materials to sell their products on a uniform world market, to pay interest and amortization on their foreign debts, and to keep up the value of their currencies without chronic difficulties.11 It is against this background that a picture of the actual scheme of international division of labour and of the complicated network of international trade relations of that period should be traced, with due emphasis on the basic differentiation between industrial and agricultural countries. At the same time, it should not be forgotten that this multilateral system found support in a number of essential conditions, of which the existence of an international monetary system (gold standard), the prevalence of equalizing clauses in commercial treaties (most-favoured-nation treatment, open-door policy, and in some cases national treatment), bearable duties, smoothness of the international credit machinery and a reasonable co-ordination of the movements of goods and capital were the outstanding ones.

World economy was, by dint of the prevailing gold standard, virtually a payment community. On the basis of parities fixed within the narrow margin of the gold points and because of the well-known arrangements preserving those parities, the coexistence of different currency systems was neutralized in its effect on trading operations, so that changes in the exchange value of money did not enter as a new element into trade transactions; nor, since there was confidence that those changes would not occur under normal circumstances and that every responsible country would play the game of the gold standard, did even the expectation of possible changes in the exchange value of money, at least not in those countries which formed the bulk of world economy. In monetary security world economy was, for all practical purposes, equal to the national economy; the gold standard was a working fiction of a real “world money.” Now that this system has completely gone to pieces, we have again become aware that what is gone depended on more conditions than it was thought to do when it was functioning smoothly. The working of the gold standard was, indeed, both condition and effect of the whole economic system of that time and embedded, together with it, in the same set of political, legal and moral conditions—a point which will be dealt with separately later on. It has become evident that the so-called automatic character of the gold standard had to be kept up by a constant will to preserve the conditions on which it depended and by a good deal of conscious management and control. It needed, moreover, the lubricant of short-term capital movements and the guiding hand of London as the leading financial centre of the world.

World economy, with the free trade area of Great Britain as its nucleus, was untrammelled by prohibitive import duties. Protectionism had been on the increase ever since the ‘seventies and was becoming a more and more serious problem, and this increase was sowing the seed of disintegration. It cannot be denied, however, that up to 1914 state interference with foreign trade was kept within limits, which made it compatible with the working of the world economy as a highly integrated and intercommunicating system. Assimilable duties, most-favoured-nation treatment and the relative stabilization of commercial policy by long-term commercial treaties combined to bring this about. In this respect one must not be misled by the bitterness with which the struggle about protectionism was fought before the Great War. The issue was serious enough to justify some of this fierceness, but in the light of present experiences it must be admitted that prewar protectionism usually remained within the sphere of “conformable” interventions,12 so that the impression is justified that both liberals and protectionists had overrated the importance of the height of duties as such.13 It is a notable fact that world trade expanded by leaps and bounds just during the last period of pre-war capitalism, when protectionism was practically everywhere in the ascendancy. This proves that, up to 1914, in the race between the restrictive influence of protectionism and the expansive forces of world trade, the latter had kept the upper hand, and that if it was the aim of protectionism to hinder the growth of international economic integration it failed more flagrantly than liberalism in its opposite aim. Here is a problem which, in any case, deserves close and special study.

World economy was not only a process of relatively free interchange of commodities, but also of large international movements of the mobile productive agents, capital and labour. The fact that the monetary risk of long-term investments was reduced to a minimum by the gold standard, the small degree of governmental control of the capital markets, and above all by the political and moral integration of the world which gave it peace, contractual loyalty and security, made large-scale international investments a common and important feature of the pre-war world economy. The international mobility of capital was equalled by that of labour, whose movement was practically unhampered by migration restrictions and which made use of this opportunity on an unprecedented scale. This intensive international flow of capital and labour was an essential part of the integrated world system which, also in this respect, became more and more equal to the integrated system of national economies by reducing comparative cost disadvantages and by going a long way toward levelling average unit returns on capital and labour. At the same time, it was one of the main driving forces behind the development of world economy, especially with regard to its growing extensification. The co-ordination between the flow of goods and of capital, the working of the gold standard with its prerequisites and the smooth functioning of the international credit machinery enabled the problem of the transfer of capital to be solved “without tears.” International movements of capital generally did not degenerate into spasmodic jerks of vagabond short-term holdings. On the other hand, it was an essential corollary of the large international movements of capital that the great capital markets were in close communication with each other.

Though this enumeration of the most important characteristics is perhaps not complete, such a sketch of the qualitative structure of pre-war world economy seems sufficient for the present purpose. At several points this has already become more a description of the main driving forces behind the development of the last century, but to describe this fully is a task which, in the present stage of the enquiry, it would be better to leave for special treatment later on, when contemporary sociological researches will have given us a profounder insight into the historical significance of the expanding period of capitalism—roughly speaking, from 1815 to 1914.

A comparison of the present critical stage of world economy with the preceding period of expanding capitalism is not the only task necessary for the historical orientation of the present. The next step would be to study earlier periods of contraction and disintegration and to find out to what extent they resemble the present period.

In this respect it is of considerable interest to note, first, that even the period of expanding world economy has by no means been a continuous and uninterrupted development toward greater and greater integration and expansion. On the contrary, there have been periods of hesitation and even recession in the development of world trade which, for all their relative insignificance compared with major crises like the present, should not be overlooked. Of greatest interest in this respect is the long wave of depression reaching roughly from 1875 until 1895 during which the value of world trade remained practically stagnant with a slight increase in physical volume, in spite of the fact that some of the most important dynamic factors—especially the increase of population and technological progress—retained all their force. At the same time, it was the period of the steep retrogression in commercial policy from the preceding era of liberalism in Western Europe toward increasing protectionism, and it is no accident that it was also the period to which modern historians date the beginning of the “Age of Imperialism” (Friedjung). Nor is it insignificant that it was marked by a more than average degree of internal and external political tension, which perhaps reached its climax toward the end of the ’eighties. Moreover, it also resembled the present period of disintegration in that it followed upon a cyclical crisis of an unusually severe character, that of 1873. World economy had to undergo a painful process of adaptation to meet deep structural changes in world production, of which the development of low-cost production of cereals on the virgin soils of America was the most notable. In view of these striking resemblances, it is not difficult to understand that at the beginning of the present period of world economic disintegration it was widely held that these two periods, as long-run recessions of world trade, were of the same order of magnitude and belonged to the same class. This opinion found support in the fact that during the years 1930 and 1931 the decline in the quantum of world trade was less than that in the quantum of the world’s industrial production and in 1931 less than both the decline in the quantum of industrial and of raw material production.14

However, the more the Great Depression proceeded, the less possible it became to defend this relatively optimistic opinion against the suspicion that this decline of world economy had gone further than its rather harmless predecessor of the end of the last century, both in dimensions and in essential nature. Like its forerunner it was more than a mere cyclical set-back, but, unlike it, it appears to have been more than one of those “long waves of depression” which, according to the recent findings of business cycle research, seem to characterize the growth of capitalism. It is in fact the first case of an absolute and striking decrease in the value and quantum of world trade to occur in one hundred years of capitalistic expansion. For the first time world trade has declined over a number of years more than average national production, and afterwards recovered less than it did. Unlike any earlier period during the last hundred years, this is the first real disintegration of the structure of world economy in the qualitative sense which has already been indicated and which will become still clearer in a later chapter. For the present, it will be sufficient to mention that the long period of world depression between 1875–95 in no way affected the financial mechanism of world economy, its multilateral character or the relative continuity of the channels of world trade resting on a network of long-term commercial treaties. All this agrees with the structural changes working behind the present set-back being much more fundamental and far reaching than anything which has occurred previously, notwithstanding the resemblance between the agricultural depressions of the ’eighties and of the present period and the rather similar effect they both have had on the development of the total world depression. So the plot thickens, and the evidence becomes stronger and stronger that something unique has occurred, which can no longer be measured by the experiences of the economic history of capitalism.

If that is the case, it will give a new significance to the study of earlier periods in economic history. If it should be true that the rifts go down to the very foundation of the economic and social system itself, we would do well to look for earlier parallels of simultaneous major periods of economic disintegration and of disintegration of the entire social system. It will be found that there are three outstanding examples of this, a fact which is somewhat alarming, but nevertheless highly instructive for true assessment of the criteria to be applied to the present tendencies of disintegration. The first case was that of the crumbling of the economic system of the Roman Empire, a system which, in terms of that time, deserves the name of “world economy” in more than one sense. The second instance, one less familiar and much less studied, was that of the Arabic Empire and its economic and political disintegration, while the third appeared at the end of the medieval “world economy.” Very unfortunately, the literature dealing with this special aspect of those periods is meagre and lacks the right perspective, while on many points scholarly research has scarcely begun. Under these circumstances, such research would be a conspicuous case of fruitful co-operation between economics and history.

As far as the disintegration of the economic and social system of the ancient world is concerned, much material for preliminary orientation will be found in M. Rostovtzeff’s monumental Social and Economic History of the Roman Empire,15 while new aspects may be expected from research work which is in progress at the present moment. It seems, however, that it is in the history of the rise and decline of the world-wide economic system of the Arabic Empire that our present knowledge most requires to be carried beyond certain generalities.16 In the case of the “world economy” of the medieval time, we are much more fortunate, since the problem has recently been successfully attacked by a number of modern historians, though here, too, the last word has still to be said. These historians (Pirenne, Rörig, Espinas, Kuske, Strieder and others) have made it progressively clearer that the older views about the more or less idyllic backwardness of medieval economy, and the continuous economic integration from the “regional economy” of the Middle Ages through the “national economy” of the mercantilist period to the “world economy” of capitalism, are very badly in need of thorough revision.

Though what seems to have been the real situation is certainly too complicated to be described by a simple formula, there is overwhelming evidence to show that toward the end of the Middle Ages, i.e. roughly from 1300 to 1500, there was a highly developed economic system of an international character, in which the urban centres of commercial activity in Europe intercommunicated with each other on a quantitative scale and with a commercial technique which, relative to the general stage of the economic and technological development of that time, were altogether remarkable.17 From the material available there is every reason to assume that, in contrast to previous views, this economic system of the “High Middle Ages” was certainly not based on the idea of autarky, at least not in that category of goods where technical reasons made long-distance trade at all possible. Nor is there any lack of proof that the people of that time seem to have been conscious of what they called “communis omnium nationum mercancia,”18 the true equivalent of the “world economy” of modern terminology, and of its interdependent character.

As in other periods, this international economic system was only made possible by a corresponding political, legal and moral system which gave it the necessary security and continuity, despite the fact that respect for unwritten laws and moral codes had largely to take the place of written laws and treaties.19 Now, the most significant fact is that this international economic system broke down (between 1500 and 1600) contemporaneously with the disintegration of the international political system brought about by the formation of centrally organized national states and the growth of isolationist economic policy (mercantilism). In spite of the discovery of overseas territories, there set in a process of contraction of the economically integrated space down to the area of the new “national economies” in which the forces were slowly accumulating for the rapid development of the later world economy of the capitalist age. The inscription over the Antwerp Stock Exchange, In usum negotiatorum cujusque nationis ac linguae, which had been put there in 1531, was not effaced, but it reflected the spirit of an age gone by.

This is, grosso mode, the picture which has been made fairly clear in general outline by the recent studies of economic history. All the details and modifications have been left out, since no more than a mere comprehension of the general significance of this period is needed. It is only in collaboration with the specialists in this field that we can penetrate deeper into this phenomenon, by determining more fully not only the parallel features, but also the great number of differences between it and the present age.

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20 There exist many statistics illustrating the growth of world economy, but it seems rather pointless to reproduce them here since, far into the nineteenth century, they are very unreliable and the undisputed fact of growth is sufficient for all our purposes. The order of magnitude may best be indicated by the fact that the value of world trade has roughly trebled during the thirty-two years from 1881 to 1913. Cf. as the most reliable source: Soltau, “Statistische Untersuchungen über die Entwicklung und die Konjunkturschwankungen des Aussenhandels,” Vierteljahrshefte zur Konjunkturforschung, Supplement 2, 1926.

21 Der deutsche Aussenhandel unter der Einwirkung weltwirtschaftlicher Strukturwandlungen (Enquete-Ausschuss), Berlin, 1932, vol. 2, pp. 358-361.

22 H. Liepmann, Tariff Levels and the Economic Unity of Europe, London, 1938, p. 112.

23 Survey of Overseas Markets (Balfour-Committee), London, 1925, pp. 658-661.

24 See Der deutsche Aussenhandel unter der Einwirkung weltwirtschaftlicher Strukturwandlungen, l.c., pp. 362-363.

25 The vast literature on this subject has recently been enriched by M. J. Bonn, The Crumbling of Empire, The Disintegration of World Economy, London, 1938; and by Lionel Robbins, The Economic Causes of War, London, 1939.

26 See my own approaches to these problems given in the article: “Kapitalismus und Imperialismus,” Zeitschrift für schweizerische Statistik und Volkswirtschaft, 1934, pp. 370-386; and in my book Crises and Cycles, pp. 4-6.

27 Cf. Röpke, Crises and Cycles, London, 1936, p. 88n.

28 In anticipation of a probable objection, it may be noted that if the development caused by population increase is put under the heading “extensification,” the “intensification” referred to previously (pp. 11-12) appears inexact. In order to get “net intensification” that part would have to be deducted which is due to “vertical extensification,” an operation which is impossible.

29 F. Hilgerdt (The Approach to Bilateralism—A Change in the Structure of World Trade, Index, August, 1935) gives about 20% as normal.

30 A somewhat fuller description may be found in the Review of World Trade, 1934, League of Nations, Geneva, 1935, pp. 69-70.

31 On the distinction between “conformable” and “non-conformable” interventions, see W. Röpke, Crises and Cycles, l.c., p. 195. The distinction has been used expressly with regard to protectionism by L. Einaudi, “Delle origini economiche della grande guerra, della crisi e delle diverse specie di piani,” Rivista de Storia Economica, 1937, No. 3.

32 The ominous significance of pre-war protectionism is much more to be sought in its distorting influence on the economic and socio-political structure in general, especially on the growth of monopolies. For the very instructive example of Germany, see W. Röpke, German Commercial Policy, London, 1934.

33 World Economic Survey, 1933-34, League of Nations, Geneva, 1934, p. 45.

34 It is difficult to escape the temptation to quote, even at this early stage of the enquiry, this disquieting sentence with which Rostovtzeff closes his book: “The ultimate problem remains like a ghost, ever present and unlaid; is it possible to extend a higher civilization to the lower classes without debasing its standard and diluting its quality to the vanishing point? Is not every civilization bound to decay as soon as it begins to penetrate the masses?” See also the suggestive passages in Chr. Dawson’s Progress and Religion, chap. ix.

35 To the best of the author’s knowledge, the first comprehensive treatment of the problem is to be found in a doctoral thesis by A. Lieber accepted by the University of Amsterdam.

36 A succinct and well-reasoned account is to be found in F. Rörig’s Mittelalterliche Weltwirtschaft, Blüte und Ende einer Weltwirtschaftsperiode, Jena, 1933, while for a fuller treatment H. Pirenne’s book on Economic and Social History of Medieval Europe, New York, 1937, should be consulted.

37 So in a letter from the Florentine merchants in Bruge to the Hansa in 1457 (quoted from Rörig).

38 Cf. R. F. Wright, Medieval Internationalism: the Contribution of the Medieval Church to International Law and Peace, 1930; R. Wallach, Das abendländische Gemeinschaftsbewusstsein im Mittelalter, 1930; I. Hashagen, “Internationalismus und Nationalismus im Mittelalter,” Friedenswarte, 1938, No. 1.

1Cf. my paper “A Value Judgment on Value Judgments” in which I am explaining my attitude in this very important methodological question. It will probably be published in the “American Economic Review.”
2The following pages are largely based on a memorandum which the author wrote together with Professor Alexander Rüstow (University of Istanbul) in the summer of 1938.
3See also: W. Röpke, Die entscheidenden Probleme des weltwirtschaftlichen Verfalls, Zeitschrift für schweizerische Statistik und Volkswirtschaft, 1938, No. 4.
4In current literature there is already some evidence that the understanding of the scientific situation outlined above is growing. See E. F. M. Durbin, “Methods of Research—A Plea for Co-operation in the Social Sciences,” Economic Journal, June, 1938; A. Löwe, Economics and Sociology: a Plea for Co-operation in the Social Sciences, London, 1935: F. Akerman, Das Problem der sozialökonomischen Synthese, Lund, 1938. The essential things have been said on a wider scientific scale by A. N. Whitehead, Science and the Modern World, New York, 1926; and by Ortega y Gasset, El Tema de Nuestro, Tiempo, Madrid, 1923.
5See Der deutsche Aussenhandel unter der Einwirkung weltwirtschaftlicher Strukturwandlungen, l.c., pp. 362-363.
6The vast literature on this subject has recently been enriched by M. J. Bonn, The Crumbling of Empire, The Disintegration of World Economy, London, 1938; and by Lionel Robbins, The Economic Causes of War, London, 1939.
7See my own approaches to these problems given in the article: “Kapitalismus und Imperialismus,” Zeitschrift für schweizerische Statistik und Volkswirtschaft, 1934, pp. 370-386; and in my book Crises and Cycles, pp. 4-6.
8Cf. Röpke, Crises and Cycles, London, 1936, p. 88n.
9In anticipation of a probable objection, it may be noted that if the development caused by population increase is put under the heading “extensification,” the “intensification” referred to previously (pp. 11-12) appears inexact. In order to get “net intensification” that part would have to be deducted which is due to “vertical extensification,” an operation which is impossible.
10F. Hilgerdt (The Approach to Bilateralism—A Change in the Structure of World Trade, Index, August, 1935) gives about 20% as normal.
11A somewhat fuller description may be found in the Review of World Trade, 1934, League of Nations, Geneva, 1935, pp. 69-70.
12On the distinction between “conformable” and “non-conformable” interventions, see W. Röpke, Crises and Cycles, l.c., p. 195. The distinction has been used expressly with regard to protectionism by L. Einaudi, “Delle origini economiche della grande guerra, della crisi e delle diverse specie di piani,” Rivista de Storia Economica, 1937, No. 3.
13The ominous significance of pre-war protectionism is much more to be sought in its distorting influence on the economic and socio-political structure in general, especially on the growth of monopolies. For the very instructive example of Germany, see W. Röpke, German Commercial Policy, London, 1934.
14World Economic Survey, 1933-34, League of Nations, Geneva, 1934, p. 45.
15It is difficult to escape the temptation to quote, even at this early stage of the enquiry, this disquieting sentence with which Rostovtzeff closes his book: “The ultimate problem remains like a ghost, ever present and unlaid; is it possible to extend a higher civilization to the lower classes without debasing its standard and diluting its quality to the vanishing point? Is not every civilization bound to decay as soon as it begins to penetrate the masses?” See also the suggestive passages in Chr. Dawson’s Progress and Religion, chap. ix.
16To the best of the author’s knowledge, the first comprehensive treatment of the problem is to be found in a doctoral thesis by A. Lieber accepted by the University of Amsterdam.
17A succinct and well-reasoned account is to be found in F. Rörig’s Mittelalterliche Weltwirtschaft, Blüte und Ende einer Weltwirtschaftsperiode, Jena, 1933, while for a fuller treatment H. Pirenne’s book on Economic and Social History of Medieval Europe, New York, 1937, should be consulted.
18So in a letter from the Florentine merchants in Bruge to the Hansa in 1457 (quoted from Rörig).
19Cf. R. F. Wright, Medieval Internationalism: the Contribution of the Medieval Church to International Law and Peace, 1930; R. Wallach, Das abendländische Gemeinschaftsbewusstsein im Mittelalter, 1930; I. Hashagen, “Internationalismus und Nationalismus im Mittelalter,” Friedenswarte, 1938, No. 1.
20The purpose of this book is to make a new and more promising approach to the diagnostics of that long-run crisis in international economic relations which is one of the most striking symptoms of the general economic, social, and political crisis of occidental society. I believe that the urgent necessity of such an approach has been enhanced rather than diminished by the outbreak of the war. However, I would betray my own philosophy if I regarded this book as anything more than a mere beginning, an invitation to constructive criticism, and a way of opening or furthering a discussion for which the world seems to be ripe. In submitting this book to criticism, I am not afraid to expose myself as one who believes not only in the scientific legitimacy but even in the utmost scientific necessity of employing a measure of judgments, which is ultimately based on a definite conception of what is wrong with the world, and of what should be done in order to put it right again. Those who are shocked by such an attitude may be reassured that I gave more thought to this methodological problem than I am able to explain on this occasion.
21(b) This crisis puts social science in a new situation, which is itself highly critical and which no partial investigation in any field of this science whatever can ignore without running the risk of missing its aim. Nobody conversant with the current development of the social sciences can overlook the fact that the feeling of being on insecure ground is becoming more and more widespread, until even the most tenacious followers of the traditional lines of approach sense the need for reorientation. The growing literature on methodological questions even in countries like England, where it was formerly distinctly unpopular, is a sure token of this scientific situation, as is also the fact that it has been felt necessary to open the present report in such a roundabout way as would have appeared rather strange even five years ago.
22As the present historical crisis finds its first, its most painful and its most conspicuous manifestation in the economic sphere, and since the nineteenth century has accustomed us to treat the economic problems as the main ones, it is easy to understand why the crisis is conceived primarily as an economic one and why, therefore, the traditional approaches of economics have been relied upon thus far. Whether or not this traditional conception corresponds to the inner convictions of our scholars and statesmen, it is at least exemplified in the character of by far the greater part of scientific activity in our field. Accordingly, men and means have been mobilized, during the last ten years, on an unprecedented scale. Facts have been piled up sky-high; conferences have been held in endless succession; economic analysis has been brought to an ever greater degree of refinement (and, incidentally, to an ever greater degree of unreality); vast and detailed programmes of research have been elaborated; a complicated machinery of institutionalized science has been set up; and questionnaires have been sent to almost every country and to every section of the population. It would surely be no pessimistic over-statement to say that nobody feels that this hectic activity has brought us any nearer the fundamental diagnosis which alone could serve as the basis for effective therapy.
23The real cause of this deficiency in the social sciences seems to lie just in the narrowness of our economic conception and the lack of courage and ability in really synthetic interpretation to connect the economic phenomena with the wider aspects of society. There is, in fact, increasing evidence that the real epicentre of the earthquake does not lie by any means in the strictly economic sphere, but rather that the economic disturbances are only the external manifestations of a deeper organic disease, of which overemphasis on economic matters—a legacy of the nineteenth century—is only one of the many symptoms. If that is true, then it becomes clear that the traditional approach is doomed to failure and that a new point of departure has to be found.
24That the development of world economy has been, first of all, a process of intensification is as important as it is evident. It can be deduced from the fact that the most highly developed countries showed the greatest percentage of world trade, which, in view of the reciprocal nature of trade, proves that the bulk of world trade must have belonged to economic interchange within the high-capitalistic sphere itself. This deduction is corroborated by a number of calculations of the relative intensity of this “intraindustrial” economic interchange. One of these calculations, made by the Kiel Institut für Weltwirtschaft und Seeverkehr, shows that the commodity trade between the industrial countries of Europe (Belgium, Germany, France, Great Britain and Ireland, Italy, Austria and Switzerland) amounted in 1913 to 30.2 milliard RM (=$7.2 milliard), which was equal to about one-third of the total reciprocal trade between all industrial and agricultural countries of the world. The same story is told by the calculation that out of average total exports of industrial Europe (comprising the same countries) during the years 1909–1913 slightly more than one half (51%) constituted an exchange of goods among these countries themselves. It is also a well-known fact that such leading countries as England and Germany were practically each other’s best customers. In 1913, for example, exports from the United Kingdom to Germany formed 7.74% of the total export trade of the former (higher than the percentage of any other country except British India), while imports from Germany into the United Kingdom as a percentage of the total import trade (11.56%) were surpassed only by those from the United States. Another very interesting illustration of the same tendency is to be found in the development of reciprocal trade between the two leading industrial countries outside of Europe, i.e. the United States and Japan.
25There is no denying the fact that world economy and capitalism have been to a large extent forced upon the “new” countries by political pressure and in some cases—as in the opening-up of China—by undisguised war. The problems thus presented are, at the present moment, far from a universally accepted solution; but it seems clear that no satisfactory study of international economic integration and disintegration could evade them. This holds especially true for one of the many aspects of the problem of economic imperialism—the difficult question of whether and how far extensification and intensification of world economy were, and perhaps still are, correlated to each other. In other words, was it not just the spatial expansion of capitalism which kept the whole mechanism of dynamic development going, by providing more and more new markets for the surplus production which constantly increased as productive technique improved, by giving the necessary stimulus to entrepreneurial initiative and speculative optimism and by allowing the “play” essential for any working mechanism? Allowance must also be made for the possibility that the existence of an economic “frontier” in world economy may have been instrumental in providing that psychological atmosphere essential for the breadth of outlook, which is the basis of a liberal commercial policy. This refers not only to the exploitation of new markets, but also to the opening of overseas territories to human settlement. Thus the vast problem of international migrations would also have to be studied in this context.
26There is no denying the fact that world economy and capitalism have been to a large extent forced upon the “new” countries by political pressure and in some cases—as in the opening-up of China—by undisguised war. The problems thus presented are, at the present moment, far from a universally accepted solution; but it seems clear that no satisfactory study of international economic integration and disintegration could evade them. This holds especially true for one of the many aspects of the problem of economic imperialism—the difficult question of whether and how far extensification and intensification of world economy were, and perhaps still are, correlated to each other. In other words, was it not just the spatial expansion of capitalism which kept the whole mechanism of dynamic development going, by providing more and more new markets for the surplus production which constantly increased as productive technique improved, by giving the necessary stimulus to entrepreneurial initiative and speculative optimism and by allowing the “play” essential for any working mechanism? Allowance must also be made for the possibility that the existence of an economic “frontier” in world economy may have been instrumental in providing that psychological atmosphere essential for the breadth of outlook, which is the basis of a liberal commercial policy. This refers not only to the exploitation of new markets, but also to the opening of overseas territories to human settlement. Thus the vast problem of international migrations would also have to be studied in this context.
27Full treatment of this set of problems must wait till a later occasion. At this juncture let it suffice to emphasize that this is not only important for a full appraisal of the past development, but even more so for a diagnosis of the present situation of world economy and for a prognosis of its future. It is obvious that it would make a tremendous difference if it were really true that spatial expansion (for both goods and men) has been one of the indispensable and irreplaceable springs behind the development of a highly integrated world economy up to 1914. Here, then, is another of those strategic factors we are looking for, though it seems probable, even at the present stage of enquiry, that the result would be a refutation rather than a corroboration of popular views. But, since here as elsewhere popular views are a very important element in shaping actual policies, a convincing refutation amounts in itself to a constructive action. It may be added that, if there is a grain of truth in this theory, the “saving-investment” approach made familiar by recent developments in business cycle theory will probably indicate the most promising direction of analysis. The problem, therefore, will be encountered again in that part of this investigation reserved for the relationship between economic stabilization and economic nationalism.
28There is another, though more unusual, sense in which the development of world economy can be conceived as a process of extensification. Spatial extension of capitalism means, in the last resort, not the incorporation of additional square miles, but of additional men living and working on them. The same effect, however, can be achieved by population increase within the orbit of the old trading area; and this is, of course, what happened during the nineteenth and early twentieth century on an unprecedented scale. Spatial (horizontal) extension, then, finds its counterpart in demographic (vertical) extension; and the analysis of both can be largely, though not entirely, conducted on similar lines. Considering the present slackening in the rate of increase of the population of the Western World and the probability that the time is soon coming when this will remain constant, no proof is needed of the importance of an elucidation of this problem for a diagnosis and prognosis of present developments in international capitalism.
29World economy as an intercommunicating system was also a multilateral system, and this in a double sense which is not always duly recognized: (1) in the sense that a large part of the world’s commodity trade was actually carried on in a multilateral way; and (2) in the sense that almost the total world trade was virtually multilateral. The latter was at least just as important as the former, since the ever-present latent possibility to change from bilateral to multilateral interchange completed the intercommunicating character of world trade; but, whereas the actual multilateralism can be calculated statistically, the virtual, of course, can not. For this reason the multilateral character of world trade in the combined sense of actual and virtual multilateralism escapes quantitative measurement. All we can say is that it was multilateralism which made world trade possible as an intercommunicating system. It was multilateralism that enabled the industrial countries to procure by roundabout exports via third, fourth and more countries their raw materials and foodstuffs without any difficulties giving rise to a “problem of raw materials,” and at uniform world prices. And it was again multilateralism which enabled the countries producing raw materials to sell their products on a uniform world market, to pay interest and amortization on their foreign debts, and to keep up the value of their currencies without chronic difficulties. It is against this background that a picture of the actual scheme of international division of labour and of the complicated network of international trade relations of that period should be traced, with due emphasis on the basic differentiation between industrial and agricultural countries. At the same time, it should not be forgotten that this multilateral system found support in a number of essential conditions, of which the existence of an international monetary system (gold standard), the prevalence of equalizing clauses in commercial treaties (most-favoured-nation treatment, open-door policy, and in some cases national treatment), bearable duties, smoothness of the international credit machinery and a reasonable co-ordination of the movements of goods and capital were the outstanding ones.
30World economy as an intercommunicating system was also a multilateral system, and this in a double sense which is not always duly recognized: (1) in the sense that a large part of the world’s commodity trade was actually carried on in a multilateral way; and (2) in the sense that almost the total world trade was virtually multilateral. The latter was at least just as important as the former, since the ever-present latent possibility to change from bilateral to multilateral interchange completed the intercommunicating character of world trade; but, whereas the actual multilateralism can be calculated statistically, the virtual, of course, can not. For this reason the multilateral character of world trade in the combined sense of actual and virtual multilateralism escapes quantitative measurement. All we can say is that it was multilateralism which made world trade possible as an intercommunicating system. It was multilateralism that enabled the industrial countries to procure by roundabout exports via third, fourth and more countries their raw materials and foodstuffs without any difficulties giving rise to a “problem of raw materials,” and at uniform world prices. And it was again multilateralism which enabled the countries producing raw materials to sell their products on a uniform world market, to pay interest and amortization on their foreign debts, and to keep up the value of their currencies without chronic difficulties. It is against this background that a picture of the actual scheme of international division of labour and of the complicated network of international trade relations of that period should be traced, with due emphasis on the basic differentiation between industrial and agricultural countries. At the same time, it should not be forgotten that this multilateral system found support in a number of essential conditions, of which the existence of an international monetary system (gold standard), the prevalence of equalizing clauses in commercial treaties (most-favoured-nation treatment, open-door policy, and in some cases national treatment), bearable duties, smoothness of the international credit machinery and a reasonable co-ordination of the movements of goods and capital were the outstanding ones.
31World economy, with the free trade area of Great Britain as its nucleus, was untrammelled by prohibitive import duties. Protectionism had been on the increase ever since the ‘seventies and was becoming a more and more serious problem, and this increase was sowing the seed of disintegration. It cannot be denied, however, that up to 1914 state interference with foreign trade was kept within limits, which made it compatible with the working of the world economy as a highly integrated and intercommunicating system. Assimilable duties, most-favoured-nation treatment and the relative stabilization of commercial policy by long-term commercial treaties combined to bring this about. In this respect one must not be misled by the bitterness with which the struggle about protectionism was fought before the Great War. The issue was serious enough to justify some of this fierceness, but in the light of present experiences it must be admitted that prewar protectionism usually remained within the sphere of “conformable” interventions, so that the impression is justified that both liberals and protectionists had overrated the importance of the height of duties as such. It is a notable fact that world trade expanded by leaps and bounds just during the last period of pre-war capitalism, when protectionism was practically everywhere in the ascendancy. This proves that, up to 1914, in the race between the restrictive influence of protectionism and the expansive forces of world trade, the latter had kept the upper hand, and that if it was the aim of protectionism to hinder the growth of international economic integration it failed more flagrantly than liberalism in its opposite aim. Here is a problem which, in any case, deserves close and special study.
32World economy, with the free trade area of Great Britain as its nucleus, was untrammelled by prohibitive import duties. Protectionism had been on the increase ever since the ‘seventies and was becoming a more and more serious problem, and this increase was sowing the seed of disintegration. It cannot be denied, however, that up to 1914 state interference with foreign trade was kept within limits, which made it compatible with the working of the world economy as a highly integrated and intercommunicating system. Assimilable duties, most-favoured-nation treatment and the relative stabilization of commercial policy by long-term commercial treaties combined to bring this about. In this respect one must not be misled by the bitterness with which the struggle about protectionism was fought before the Great War. The issue was serious enough to justify some of this fierceness, but in the light of present experiences it must be admitted that prewar protectionism usually remained within the sphere of “conformable” interventions, so that the impression is justified that both liberals and protectionists had overrated the importance of the height of duties as such. It is a notable fact that world trade expanded by leaps and bounds just during the last period of pre-war capitalism, when protectionism was practically everywhere in the ascendancy. This proves that, up to 1914, in the race between the restrictive influence of protectionism and the expansive forces of world trade, the latter had kept the upper hand, and that if it was the aim of protectionism to hinder the growth of international economic integration it failed more flagrantly than liberalism in its opposite aim. Here is a problem which, in any case, deserves close and special study.
33In this respect it is of considerable interest to note, first, that even the period of expanding world economy has by no means been a continuous and uninterrupted development toward greater and greater integration and expansion. On the contrary, there have been periods of hesitation and even recession in the development of world trade which, for all their relative insignificance compared with major crises like the present, should not be overlooked. Of greatest interest in this respect is the long wave of depression reaching roughly from 1875 until 1895 during which the value of world trade remained practically stagnant with a slight increase in physical volume, in spite of the fact that some of the most important dynamic factors—especially the increase of population and technological progress—retained all their force. At the same time, it was the period of the steep retrogression in commercial policy from the preceding era of liberalism in Western Europe toward increasing protectionism, and it is no accident that it was also the period to which modern historians date the beginning of the “Age of Imperialism” (Friedjung). Nor is it insignificant that it was marked by a more than average degree of internal and external political tension, which perhaps reached its climax toward the end of the ’eighties. Moreover, it also resembled the present period of disintegration in that it followed upon a cyclical crisis of an unusually severe character, that of 1873. World economy had to undergo a painful process of adaptation to meet deep structural changes in world production, of which the development of low-cost production of cereals on the virgin soils of America was the most notable. In view of these striking resemblances, it is not difficult to understand that at the beginning of the present period of world economic disintegration it was widely held that these two periods, as long-run recessions of world trade, were of the same order of magnitude and belonged to the same class. This opinion found support in the fact that during the years 1930 and 1931 the decline in the quantum of world trade was less than that in the quantum of the world’s industrial production and in 1931 less than both the decline in the quantum of industrial and of raw material production.
34As far as the disintegration of the economic and social system of the ancient world is concerned, much material for preliminary orientation will be found in M. Rostovtzeff’s monumental Social and Economic History of the Roman Empire, while new aspects may be expected from research work which is in progress at the present moment. It seems, however, that it is in the history of the rise and decline of the world-wide economic system of the Arabic Empire that our present knowledge most requires to be carried beyond certain generalities. In the case of the “world economy” of the medieval time, we are much more fortunate, since the problem has recently been successfully attacked by a number of modern historians, though here, too, the last word has still to be said. These historians (Pirenne, Rörig, Espinas, Kuske, Strieder and others) have made it progressively clearer that the older views about the more or less idyllic backwardness of medieval economy, and the continuous economic integration from the “regional economy” of the Middle Ages through the “national economy” of the mercantilist period to the “world economy” of capitalism, are very badly in need of thorough revision.
35As far as the disintegration of the economic and social system of the ancient world is concerned, much material for preliminary orientation will be found in M. Rostovtzeff’s monumental Social and Economic History of the Roman Empire, while new aspects may be expected from research work which is in progress at the present moment. It seems, however, that it is in the history of the rise and decline of the world-wide economic system of the Arabic Empire that our present knowledge most requires to be carried beyond certain generalities. In the case of the “world economy” of the medieval time, we are much more fortunate, since the problem has recently been successfully attacked by a number of modern historians, though here, too, the last word has still to be said. These historians (Pirenne, Rörig, Espinas, Kuske, Strieder and others) have made it progressively clearer that the older views about the more or less idyllic backwardness of medieval economy, and the continuous economic integration from the “regional economy” of the Middle Ages through the “national economy” of the mercantilist period to the “world economy” of capitalism, are very badly in need of thorough revision.
36Though what seems to have been the real situation is certainly too complicated to be described by a simple formula, there is overwhelming evidence to show that toward the end of the Middle Ages, i.e. roughly from 1300 to 1500, there was a highly developed economic system of an international character, in which the urban centres of commercial activity in Europe intercommunicated with each other on a quantitative scale and with a commercial technique which, relative to the general stage of the economic and technological development of that time, were altogether remarkable. From the material available there is every reason to assume that, in contrast to previous views, this economic system of the “High Middle Ages” was certainly not based on the idea of autarky, at least not in that category of goods where technical reasons made long-distance trade at all possible. Nor is there any lack of proof that the people of that time seem to have been conscious of what they called “communis omnium nationum mercancia,” the true equivalent of the “world economy” of modern terminology, and of its interdependent character.
37Though what seems to have been the real situation is certainly too complicated to be described by a simple formula, there is overwhelming evidence to show that toward the end of the Middle Ages, i.e. roughly from 1300 to 1500, there was a highly developed economic system of an international character, in which the urban centres of commercial activity in Europe intercommunicated with each other on a quantitative scale and with a commercial technique which, relative to the general stage of the economic and technological development of that time, were altogether remarkable. From the material available there is every reason to assume that, in contrast to previous views, this economic system of the “High Middle Ages” was certainly not based on the idea of autarky, at least not in that category of goods where technical reasons made long-distance trade at all possible. Nor is there any lack of proof that the people of that time seem to have been conscious of what they called “communis omnium nationum mercancia,” the true equivalent of the “world economy” of modern terminology, and of its interdependent character.
38As in other periods, this international economic system was only made possible by a corresponding political, legal and moral system which gave it the necessary security and continuity, despite the fact that respect for unwritten laws and moral codes had largely to take the place of written laws and treaties. Now, the most significant fact is that this international economic system broke down (between 1500 and 1600) contemporaneously with the disintegration of the international political system brought about by the formation of centrally organized national states and the growth of isolationist economic policy (mercantilism). In spite of the discovery of overseas territories, there set in a process of contraction of the economically integrated space down to the area of the new “national economies” in which the forces were slowly accumulating for the rapid development of the later world economy of the capitalist age. The inscription over the Antwerp Stock Exchange, In usum negotiatorum cujusque nationis ac linguae, which had been put there in 1531, was not effaced, but it reflected the spirit of an age gone by.

International Economic Disintegration