International Order and Economic Integration

I ATTEMPTS, TENDENCIES AND PROBLEMS

Whereas in the German edition of this book (1945), in view of the world situation at that time, a most gloomy picture had to be drawn of the breakdown of world economy, the task of its reintegration being represented with extreme emphasis to all responsible persons as something the implications of which had not yet been universally grasped, still less undertaken seriously, today (at the end of 1953) we have reached a stage of development at which a somewhat different language may be used. This is certainly not the language of satisfaction at what has been achieved, nor of confident hope as regards further progress. For sentiments of this kind, we are confronted far too grimly by the unsolved problems of international order. Nevertheless it is not the language of unbounded criticism concerning the headway made since 1945, nor yet of catastrophic visions for the future. For it can not be denied that since the end of the War, and above all during the last few years, since fatal errors of the preceding period have been progressively set right, a greater measure of order, freedom and prosperity has come into the international economy of the free West than would have been considered possible – even by people who were by no means incurable pessimists. If, therefore, we attempt today to present an interim balance with regard to international reconstruction, it will, on the one hand, be impossible to deny that – particularly in Europe, the most important yet at the same time the weakest and most vulnerable point of the entire Western front – we have put behind us the melancholy period during which the countries shut themselves off from each other, through the most senseless autarchic policy, living, at the same time, on aid from the United States. On the other hand, however, various things have occurred to give cause for reflection, and which cannot fail to make us feel both humble and uneasy.

In the first place, there is not the slightest reason why the progress, so far as it has been realized, should be considered as an achievement where in those who are principally responsible for international constructive planning, could be particularly proud, when they compare it with the tempo and success of the international work for reconstruction after the first World War. Such pride seems, indeed, not too well founded, since it would require a most faulty vision to attribute this progress, so far as it has been realized, to the great international plans and organizations for reconstruction. To do this would mean to repeat, in retrospect, one of the fundamental mistakes which may be held responsible for the disappointments and failures experienced in international reconstruction since 1945, i.e. the belief that international economic recovery is to be expected from international organizations, conferences and charters instead of from the soundness and balance of the individual national economies themselves, from, in a word, that ‘false internationalism’, which was discussed earlier in this book.

Neither the International Monetary Fund – which, as an international credit institution, has up to the present been of very little use, and, as an international monetary authority, has done harm rather than good1) – nor the International Bank for Reconstruction and Development (World Bank), the second creation of the Bretton Woods Conference of 1944, nor the Marshall Plan, however salutary it was as a political move, and bountiful as international poor relief, nor the efforts of the International Trade Organization with its one surviving live child, the General Agreement on Tariffs and Trade (GATT), nor the other institutions of one kind or another, almost too numerous to be counted, nor the Schuman Plan are the real instruments of the relative progress of the last few years, and even OEEC with its European Payments Union, which may, before most others, claim a not inconsiderable credit, can, at the best, be considered merely as an impermanent emergency structure. Rather is such progress as is actually on record to be placed predominantly to the credit of two factors: to that of the colossal vitality of modern economy, whose sturdy stomach seems capable, of eventually digesting even the big lumps of modern autarchic policies, and to the extent to which it has proved possible, within a number of the national economies, to abandon the false road which, like no other, had led to the disappointments and delays in international reconstruction since the War, and even robbed the so generously designed Marshall Plan of its full effect. It is, as we know only too well, the false road of an inflationist and collectivist economic policy, in which socialism, Keynesianism and the ideology of the Welfare State had joined together to constitute a power of fateful strength and efficacy2). Where the international economy today shows real and noticeable signs of a healthy growth, it is in those countries which have resolutely abandoned this false road, or have never trodden it. The more important of these are easily enumerated: the United States, Switzerland, Canada, Western Germany, Belgium, Austria and – with reservations in a greater or lesser degree-countries such as the Netherlands, Italy, Denmark and perhaps Mexico.

If we weigh up the two sides of our interim balance, there can be no doubt whatever, that in the task of creating a genuine international economic order, we have, in spite of everything, not passed beyond the stage of partial successes, starts and preliminary measures, and the real decisive problems still lie unsolved before us. Among these the problem of a genuine international monetary system is of such overwhelming importance that the treatment of it is being reserved for a special last chapter. In the meantime it will be worth our while, in this chapter, to consider some of the other unsolved problems which hem in the way to a new world economy.

EUROPEAN ECONOMIC INTEGRATION

Out of the administration of the Marshall Plan and of the parallel organization of European countries (OEEC) a policy has been evolved which, impelled by the major, uncontested task of the political consolidation of Europe, is striving, under the name of ‘European economic integration’, to find a solution to the problem of international economic order. All that can be objected to the ‘Regional Principle in World Economy’ had already been set forth in the first German edition of this book, in anticipation of today’s campaign for ‘European economic integration’, and is at present finding concrete confirmation. If, in addition to this, the reader also considers what has already been said in an earlier part of the present work (pp. 103 et seq.) concerning the muddles and the false roads of ‘European economic integration’, he will understand why any sober judgment, of this part of the international pattern, cannot be otherwise than highly sceptical3). If it is true that the term ‘European economic integration’, to be reasonable, can only mean a state of affairs which will permit trading relations among different national economies to be as free and mutually advantageous as those which exist within a national economy, the essential condition for such state of affairs – we repeat this, because it is so important – is that close community of markets and prices which makes an economic area a whole. This means, primarily, that within such an area every person, at any time, is at liberty to buy on the cheapest and sell on the dearest market, i.e. that he profits by a state of affairs which, in international economic relations, is known as multilateralism. This, however, is only possible if a second condition is fulfilled – the free use of money, without regional limitation, i.e. the condition which, in international economic relations, is known as currency convertibility. Only then will real economic integration be realized, as also, thanks to this community of markets, prices and payments, the possibility of an unhampered division of labour among the various areas with its extraordinary increase in productivity. An integrated international economy presupposes free multilateralism, which, in its turn, presupposes a free convertibility of currencies.

This highly desirable state of affairs, as regards the economic integration of Europe, already existed; indeed, scarcely twenty years have elapsed since it was destroyed. To a degree, which nowadays we are hardly able to imagine, or to dare to wish for, European economic integration was realized, at a time when Europe was not yet cut in pieces through systematic national exchange control and cognate measures of a collectivist trade policy, and had not yet been robbed, by the inconvertibility of currencies, of the multilateral character of economic relations. It was an integration which required no plans, no planners, no bureaucracy, no conferences, no customs’ unions and no High Authorities. Certainly, this integration was impaired by protective tariffs, though these had perhaps scarcely greater significance than have the easily overlooked distances within the territory of the United States (so eagerly held up as a pattern to Europe!), with their high cost of inland transport, which has the same effect as would inter-States customs’ tariffs. In contrast with this, our continent is compressed into a narrow space, most parts of which can, moreover, be easily reached by cheap sea-transport. Besides, those protective tariffs which, until a couple of decades ago, constituted the sole means of a European trade policy, differ fundamentally from the modern collectivist (quantitative) methods of trade policy, especially exchange control, in that they did not touch the convertibility of currencies and thus did not affect the multilateral character of trade relations. They were able, it is true, to impair integration (in the manner of natural obstacles to trade such as distances or mountain ranges) but they could not abolish it. Finally, let us not forget, that that genuine integration which Europe possessed until about 1932, excelled everything offered today under that high-sounding name, in that it was not confined to Europe, but was world-wide. It was an open, not a closed system. It was part of a world-wide, not the ideal of a regional order, and therefore quite free, with no subtleties attached.

This integration was destroyed by the new trade policy which began twenty years ago in the midst of the international payments crisis of that time, and developed subsequently into a gigantic world-encompassing system which was only the logical and visible conclusion of a national development along collectivist and inflationary lines. In those days, at that pre-collectivist time, when, in regard to international dealings, we had only to reckon with protective tariffs – as a rule by no means prohibitive – and, generally speaking, the conditions of freedom prevailed, the separation of peoples through distance, monetary systems, frontiers, language or customs proved no obstacle capable of preventing the formation, by the entire globe, of a cohesive economic system, a real world-wide economy. Thus, European economic integration, as it existed a short time ago, was a liberal, open, and at the same time universal institution. It has been destroyed by trade and monetary policies which had, if not their origin, certainly their main props in a specific economic, credit and fiscal policy pursued by governments, at home, in that policy, indeed, which I have defined as collectivist and inflationary. As however, for reasons which have been discussed earlier, there can be no thought of seeking a way out of this cul-de-sac – now universally recognized as such – in an international system of inflationary economic planning, there only remains one possibility i.e. to cure the sickness where it originated. Since the disintegration of European economy has been brought about by the leftist course of national economic policy, which is bound to lead to planning and controls in foreign trade, and to culminate in exchange control, which is irreconcilable with an integrated international economy, it results – by strict logic and not as the expression of a vague inclination towards a liberal solution – that the more or less collectivist and inflationary system of national economic policies must now be abrogated to clear the way for the abolition of exchange control and the other measures inherent in a collectivist trade policy. Here lies the Archimedian point at which the lever for European economic integration has to be placed. The problem of European economic integration, as it presents itself today, would be practically solved if some means could be found of removing this upper stratum, composed of collectivist, absolute, trade restrictions, which twenty years ago was superimposed on the old layer, composed of the relative trade restrictions of protective tariffs. This, however, is a matter for each separate European Government. Everyone who is honest with himself must acknowledge that we would thank God on our knees if we in Europe today had nothing further to worry about than the obstacle to trade caused through protective tariffs which was all we were concerned with twenty years ago.

European disintegration, like charity in the English proverb, began at home, and the reintegration of Europe’s economy must likewise begin at home, i.e. within each individual nation, with a decision by the Governments and Central Banks to abandon at last, after twenty years of error, the collectivist and inflationary path of leftist economic and monetary policies. The way out is possible everywhere, provided the necessary insight and strength are to hand. Not merely is it the only way open to us, in view of the impossibility of solutions based on economic planning, but is also the only one worth striving for, since it leads, as it did formerly, to an open, and not a closed, form of European integration. Only so may we hope to integrate Europe in such a manner as not to lead to a corresponding seclusion from the rest of the world. People will become increasingly convinced of this in the United States, where, until a short time ago, under the influence of confused ideas, so much was done to cause Europe to go wrong i.e. to drive it into a collectivist and closed form of integration.

As the actual problem of European integration is traceable to the harm occasioned by the ‘upper stratum’ of trade restrictions, it follows that all those plans, which are continually being put forward, for a regional or continental customs union, rest on faulty reasoning. For either we succeed truly in getting rid of the top layer – in which case we do not need customs unions, which are in any case bound to give rise to exceedingly difficult problems of a political or administrative nature or, if we do not succeed in getting rid of that layer, the customs unions will present one more instance of what seems to have become the general rule in our time – a mere façade, an optical illusion, a ‘roof without a house’. If a customs union be accepted as a solution, it means that, on the one hand we are demanding too much, and, on the other hand, too little: too much, because such a union always constitutes a task which rarely succeeds, too little, because a mere customs union leaves unsolved the actual problem i.e. the demolition of the absolute obstacles to trade, and merely amounts to a waste of time and energy, – to say nothing of the fundamental problems of a regional solution of this kind 4).

Such is the compelling and inevitable logic as regards European economic integration. Only from this firm footing is it possible to judge the two schemes, which have been acclaimed as the first great steps towards European integration: the European Coal and Steel Community of the Schuman Plan, and the European Payments Union (EPU). In neither of these cases, however, have we to do with schemes for a genuine European economic integration, since they do not solve the actual problem – the demolition of the upper layer of obstacles to trade. In any case, however, they can only fulfil the functions properly assigned to them if they are supported by a genuine economic union of the kind described ad nauseam, and – by a species of Hegelian ‘logic’, perhaps prepare the way for this. Both the said actions are doomed to failure unless they are supplemented by decisive action on a national basis. Both imply the danger that, owing to them, this national action may well be delayed, whilst they foster the illusion that they are able to offer a substitute for a genuine, though uncomfortable, integration.

As regards the European Coal and Steel Community, any definitive judgment must, in fairness, take into consideration both the political aim, i.e. to provide a catalyst for political integration, as also the specifically economic aim of securing a system for regulating competition in the sphere of heavy industry, which inclines so strongly towards monopolies. With regard, however, to the intention of effecting, by means of such union in a single industry, a direct contribution to a genuine European economic integration, such supposition of a piecemeal (‘functional’) integration rests on a misunderstanding of the problem which is hard to conceive. What use would there be in solemnly proclaiming a ‘common’ European market for iron, steel and coal, while the production branches affected remain integral parts of separate national economies, cut off from each other by the entire system of organizing, planning and isolating economic and financial policies of a strictly national character, and primarily by monetary autonomy and change control? Such reckoning leads nowhere. In some way or another the impatient attempt is doomed to failure to achieve an international economic integration without first removing the causes – as explained – of the present disintegration, above all non-convertibility of currencies with the balance of payments trouble and false rates of exchange that go with it; once these causes are removed, the desired economic integration will automatically ensue. Once more a ‘roof without a house’ is obviously being built. If we try to ‘integrate’ any single branch of the economy, whilst, the forces, which tend again and again to disturb the balance of payments from inside continue to operate, the appearance of a ‘common’ market for the group of goods concerned must inevitably be bought at the price of serious disturbances and stresses, in certain cases difficult to foresee, which we finally try in vain – being impeded by the limits set to any international economic planning – to master by means of a highly complicated system of control measures.

Nothing good can be expected so long as European trade, in regard to a single type of goods, is handled as if there existed no disturbance in the balance of payments, no exchange control and no false rates of exchange. The results of such a policy of fictions are patent for all to see. So long as European countries adhere to an internal credit and budget policy, and to exchange control at the wrong rates of exchange which push first one country then another to the limits of its credit margin in EPU, and thus keep the ‘see-saw of liberalization’ merrily swinging, in other words, so long as they are not heading for genuine economic integration, but are retaining the quantitative regulation of imports and exports as the chief means of achieving a balance of payments equilibrium, any permanent and complete ‘liberalization’ of a single branch of the economy (and this is what the ‘common’ market of the European Coal and Steel Community amounts to) must inevitably be bought at the price of a corresponding decrease in liberalization for the rest. Somewhere the fox must come out of his hole. This effect will only be obviated in proportion as a genuine integration is effected, i.e. one which is associated with free convertibility of currencies and the abolition of quantitative trade restrictions. Once this is realized however, we shall need none of these unions, ‘pools’ or ‘High Authorities’. In this connexion we will refrain from going once more into the question whether the international dirigisme, which is common to all these organizations, is politically feasible or not.

The idea of a so-called ‘functional’ integration after the pattern of the Schuman Plan – which at any rate can be defended on political grounds – is based, therefore on an inadequate appreciation of the interdependence of economic phenomena. The only solution is an ‘integral’ integration, which will consist in the free convertibility of currencies and the removal of other collectivist restrictions, but which, on its part, presupposes a healthy economic and monetary policy within each country.

When, in 1950, the other relevant creation by the policy of ‘European integration’, the European Payments Union was founded, common sense suggested the question what use there could be in setting up such a payments system among countries which continue to resort to exchange controls in view of the lack of equilibrium in their national economies. The Payments Union appeared like a kind of gigantic cheese plate cover placed over unchanged national economic and monetary policies and the balance of payments discrepancies that went with them. Once it was foreseen that under these circumstances the EPU would not be able to function properly and furnish a further example of the policy of fictions, the further question arose whether it might not be superfluous, once the balance of payments difficulties were removed, since it would then in any case be possible to adopt free convertibility of currencies. Was not the European Payments Union therefore, either incapable of functioning or unnecessary? To this one could reply with a certain amount of right, that the EPU could justify its existence by developing into a supra-national body which, by its well-designed mechanism and direct influence on the economic policies of the various countries would guide the Governments and Central Banks towards a sound policy of equilibrium as a re-emergence of the gold standard in the shape of a political institution. Once this work of education was completed, a system of freely convertible currencies could take the place of EPU.

The actual development of EPU undoubtedly did justice to the common sense way of thinking. In a report to the German Federal Government in Summer 19505), I made the following statements, quoting Germany as an example: that a country in Germany’s position, which is a member of a regional payments union would experience all the disadvantages of a country in a natural creditor position in relation to the other members, and a corresponding natural debtor position in relation to the rest of the world; that the functioning of EPU would presuppose a perpetual readiness on the part of countries with a balanced economy to ‘finance that policy of other countries which leads to the balance of payments difficulties’, and that everything would depend on ‘whether the mechanism of the Union would give member countries the time and incentive to undertake the necessary revision of their national economic policies, and thus to make the Payments Union itself superfluous’. Events have shown that this appraisal of the situation was correct and even too favourable, since the creditor countries of EPU have found out in the meantime that the extreme debtors not only resorted to them for compulsory finance, but also passed the commercial burden of their balance of payments problems on to them by way of ‘deliberalization’ (the see-saw of liberalization) with all the disadvantages this implied. Moreover, I was, unfortunately, also right in viewing without optimism the chances that the EPU might have a disciplining effect and thereby render itself superfluous. If I finally added that it was doubtful whether one could count upon the unlimited patience of the creditor countries – and it is obvious that this limit has now been reached.

There is no need to belittle unduly the achievements of EPU, or its historic role, in order to become resigned to the view that this way leads no further and that the task of a genuine international integration by free convertibility of currencies still lies unconquered before us. Today the EPU lives merely on the patience of the creditor countries, and this patience cannot be prolonged indefinitely, from one ‘rallonge’ to another. Even if this institution had fulfilled better its purpose of educating the undisciplined countries in monetary policy, or would do so better in future, it still has an irreparable constitutional defect in that it is merely a regional payments union, which continues to produce surpluses in the balance of payments of creditor countries (notably Germany) that cannot be used to offset deficits incurred elsewhere. Liberalization, even as a total and unchangeable measure (to which end efforts are being made in vain), is no true way to convertibility; only the full settlement of EPU net balances in gold or in hard currency would accomplish this, and then there would be no further need of EPU and convertibility would, without further ado, become possible in all countries, in the simplest manner. Convertibility – the actual and decisive end – cannot therefore be achieved through a mere reform of EPU, but through its ultimate obviation, the necessity for which was clear to all at the time of its foundation.

THE FOREIGN BODY OF COLLECTIVISM IN THE WORLD ECONOMY

The free world in its search for economic integration is confronted by the colossal block of the Communist Imperium. How is any modus vivendi between the two, in regard to economic relations, possible, which would not work out to the serious disadvantage of the West, economically as well as politically? A few principles may be cited in this connexion.

Firstly, we shall have to reckon with the imperium of Soviet Russia and its economic block as with a powerful area of totalitarianism and economic collectivism, bent on world conquest. Secondly, so long as this imperium exists, the economic collectivism, inseparable from it, will necessarily imply a collectivist system of foreign trade, which will preclude any kind of automatic regulation through the powers of the market, these being substituted by arbitrary direction. Thirdly and lastly, this collectivist system of foreign trade is irreconcilable with the liberal system of world economy and represents a foreign body in the same, which, if not encapsulated by the rest of the world, would lead to a chronic sickness in the new world economy.

From these facts, which we have to face without any uncertainty or illusion, it follows that the essentially liberal world will, even now, after the removal of National Socialism, have to contend for a long time to come with the same difficulty which it experienced during the years 1933-1939, when it had to accustom itself to the methods of the Third Reich in regard to foreign policy. This difficulty consists in the coexistence of a sector pursuing a free market economy with one dominated by a collectivist system of international trade, a question which we discussed earlier (see pp. 163 et seq., also note 3, pp. 175 et seq.), and found disquieting. Nevertheless the world today could lighten its task to a not inconsiderable degree by a willingness to learn from the experiences which it underwent in the past, with the National Socialist economic block, and apply these lessons to the new conditions. From these experiences it should, above all, have come to realize that a world economy based on a free market, and a collectivist economic block, are two entirely different systems of foreign trade. The collectivist State is no partner in a game for the liberal world, as it is incapable even of observing the rules of the game, and any attempt to treat it as such can only lead to severe disappointments and losses. Besides this, the collectivist State which would be bound by no considerations of prices and costs, would, in such unilateral trading, reserve to itself the right to upset, where and when it liked, any liberal economy governed by the laws of the free market.

In order to counter this danger to the free world, represented by the foreign body of Collectivism, it will be necessary to maintain the same distrustful watchfulness as is also rendered necessary in the political interplay of the world forces, by the existence of a collectivist State which is bound by no unbreakable rules. If the liberal world does not wish to be duped, it will have to make up its mind to meet the collectivist ‘economic block’ with similar weapons, applying to it the methods of an enforced bilateralism, so that the sector of the free market economy may remain free from disturbances, yet without itself succumbing to collectivist infection. The liberal world will have to get used to the idea that its relations with the collectivist ‘economic block’ take the form of short-time makeshifts, thus bearing the stamp characteristic of collectivist foreign trade. In face of the powerful economic weight which the collectivist sector is able to throw into the scale, the task of effectually encapsulating this foreign body, for the protection of liberal world economy, can only succeed if the liberal countries, faced by the monopoly position of the collectivist State show a minimum of solidarity in matters of foreign trade, instead of letting the other side play up one bidder against the other. This appears to be one of the most important tasks of the free world, a task which presupposes, as a primary condition, a clear grasp of the significance of collectivism in world politics and the world economy. We have to confess that before this is achieved we have a terribly long way to go!

UNDERDEVELOPED COUNTRIES

We had occasion earlier on (p. 190) to draw attention to the fact that one of the most serious problems in the reintroduction of an international order is that process of economic and social fermentation which is taking place in the so-called ‘underdeveloped countries’6). What is going on here is something far beyond what is usually understood by the expression ‘industrialization of agrarian States’. The slogan ‘Development of the underdeveloped countries’ means ultimately that we witness what has never taken place before in the whole course of history: the apparently irresistible spread of a now world-dominant culture, that of the West, at the cost of an inexorable disintegration and dissolution of all others. Whether this will result finally in a 100-percent Westernization of the earth, is doubtful. One thing however is certain – the negative result i.e., the shattering, wilting, disintegration and final destruction of the non-Western forms of culture, life and society, and at least the tension and fermentation arising among the most distant peoples and races as a result of the continued contact, becoming ever closer and more tightly gripping, with the Western, ‘modern’ world. This refers above all to western technology, to the allurements and grip of which these nations, although showing varying grades of inner resistance, succumb in the end with the same inevitability as ourselves.

Now this process is, as far as the West is concerned, further complicated, in that it has become identical with the end of Western colonial rule. This end, which is inevitable, in view both of the character of such rule and of the entire world-political constellation, and which can only be delayed at isolated points, occurs with all the crises incidental to such transition, unfortunately just at the moment when – in view of world Communism and its Socio-psychological strategy, the free world is least able to afford the emancipation of the colonial peoples and even the most impatient critics of the colonial system, if they are intelligent, must be found on the side of the forces seeking to delay, rather than to hasten, such end. The West is therefore faced with the task of effecting, with the utmost tact and human understanding, two things simultaneously, which are not easy to combine i.e. extending an active sympathy in regard to the economic and political condition of these countries and meeting the errors of their leaders with a vigorous resistance and undisguised criticism.

The most essential condition for this is that the West should become clearer in its own views as to the conditions and limits of the ‘development’ of these countries. Every development programme must inevitably end in disappointment if it is not guided by the understanding that most of the essential pre-conditions, intellectual, political and sociological, on which a western industrial economy ultimately rests, are not, as a rule, fulfilled in the ‘underdeveloped countries’, even though the programme may be based on the illusion that such conditions can be imported or speedily created. This leads us to the second point to be realized i.e. that such ‘development’ is a process which demands an unending patience, a deep human understanding, a flexible adaptibility to existing conditions the ability to allow for slow growth – which demands, in short precisely the opposite of what has become almost second nature to the ambitious planner, the well-intentioned rather than clear-sighted social reformer the economist working with theoretical formulae and doctrines, the western engineer with his visions.

All of these – and with them the intellectuals of the countries concerned who are fascinated by these western materialist concepts and alienated from their own cultural and social traditions – will have to learn that the ultimate secret of ‘rich’ lands is to be sought, not in ‘capital’, machine models, technical or organizational recipes or natural wealth, but in a spirit of order, foresight, combination, calculation, enterprise, human leadership and the freedom to shape life and things, also in citizenship, a sense of responsibility, loyalty to work, reliability, thrift and the urge to create, and in a civil middle-class, providing the humus for all this, – things, in short, which can neither be conjured up from the soil, nor imported. The idea that it merely needs the artificial manure of ‘capital’ and ‘technical assistance’ from the West, in order to induce the dormant economic powers of these countries to spring up into growth, must be given up as a fundamental error. In this connexion we need not revert to a problem, without the solution of which all efforts are doomed to frustration which seek to help those countries of Asia and Africa, now cruelly cursed with a genuine over-population, towards an existence more worthy of human beings for the masses of their people, i.e. the problem of birth control, which is rendered all the more serious by the triumph of western medicine and hygiene over the thousand forms of death and disablement, which lie in wait for the millions in those latitudes.

Any development programme will prove to be more surely on right and sensible lines the less it does violence to natural conditions and to the circumstances already existing. This means, on the other hand, that it becomes the more questionable in proportion as it requires, for its carrying out, a protective isolation and the compulsion of a planned economy, those expedients that are rated highly – fatal though this may be – by all concerned, i.e. by the leaders of the underdeveloped countries as also by their Western helpers and advisers. The sensible course would be to continue with that which has already been done in those countries, but to do it better, more sensibly and more profitably, not, however, to indulge in a pretentious imitation of the West, nor emulate that national and socialist fashion in the West, to which so many economists succumb. Wherever, hitherto, this fundamental rule has been disregarded under the spell of socialist and industrial obsession, catastrophic consequences have always followed, agriculture becoming the obvious sacrifice to such economic power-policy. In how short a time flourishing agrarian lands can in this manner – contrary to all probability – be transformed into regular famine areas, is shown by Yugoslavia and Argentina, to say nothing of the countries on the other side of the iron curtain.

Thus, if it seems indicated that the development of the countries under consideration be sought in the improvement of primary production rather than in industrialization, this certainly does not mean that they are thereby condemned to play a Cinderella role. The popular idea that the world’s primary production provides less possibilities for a profitable expansion and with it a steady rise in the national income, than industrial production, is shown to be a dogma which needs revision. This is becoming apparent in view of the increasing population of the world, rising mass incomes in industrial countries, higher and more diversified requirements, the expansion of industry and the disquieting signs of an incipient exhaustion of natural reserves (in particular – owing to erosion – of the fertility of the soil), there is a danger that the industrial superstructure of the world might in the not too distant future grow out of proportion to a too narrow foundation in the production of foodstuffs and raw materials.

Another more far-reaching and highly important consideration must be mentioned here. The development of those countries could indeed become a veritable curse, if an attempt were made to erect on that social, economic and political morass with which we usually have to do in countries with a feudal agricultural society, an urban, industrial superstructure, or to extend one which is there already and which is questionable enough. That would amount to nothing less than transforming the present rural semi-proletariat, whose livelihood has not yet been torn adrift from all its anchors, into a complete industrial proletariat, of a most wretched type, and without roots. By this very means a soil is being prepared for Communism, more fruitful than can be imagined, more especially if at the same time an intellectual mass-proletariat is bred. It is a cause for the most serious apprehension that this sort of thing has been going on for a long time and is still making headway. This is, moreover, an example of the prevalent blindness towards those highly delicate problems of an intellectual and sociological order, with which we have to do here. Even now people lack a sufficiently clear understanding of the catastrophe which they are calling down, if, in the name of a ‘higher standard of living’ and everything appertaining thereto, they interfere with living and social conditions, some of which seem to belong to the Stone Age, and if, through misguided zeal, people are isolated from the social organism in which they were hitherto embedded, even if in poverty and illiteracy. Dissolution, proletarianization of the worst kind, demoralization, tensions of a highly dangerous nature and the mass-fabrication of an unhappy and discontented population – such are the inevitable results; and only Moscow stands to gain from a programme which was actually meant to steal the Communist’s thunder.

Now all inflated and abortive development programmes are sooner or later forced back to the sphere of reality in so far as their implementation presupposes the help of foreign capital. Here we are faced with a situation which is tragically paradoxical that very emancipation of the colonial peoples of yesterday, which expressed itself, economically in the urge towards ‘development’, is now assuming forms calculated to shatter the legal, political and monetary conditions which could alone attract Western capital and yet it is on this capital that the desired development depends. In place of these conditions there is too often something else: dependence on obscure and unstable internal political conditions, submission to a legal system alien to the West, and which is not by any means always reputed for impartiality and incorruptibility, distrust and even hatred towards everything Western, the continuous threat of expropriation, open or concealed, obstinate resistance to any demand, however understandable, on the part of the investor for special security, possibilities for control, influence commensurate with the capital risk undertaken, and for the appointment of reliable, trained Western personnel. The most paralysing effects, however, result from the arbitrariness of a collectivist and inflationary economic policy, which is not rendered more attractive by the fact that it was inspired by Western models, an extravagant labour policy, which often does not even permit the maintainance of the wage advantage these countries originally enjoyed, a system of taxation which threatens capital yields with unpredictable levies, and finally an exchange control which deprives the Western investor and entrepreneur of that which remains.

An ‘Underdeveloped Country’ that is not – as the Belgian Congo – one of the few remaining colonial territories, whose credit standing is raised to a Western level by the backing of the motherland, does not offer the conditions necessary for the inflow of private foreign capital. If, however, the source of free and commercial capital cannot be induced to flow, a well of political finance is sunk. What will not flow freely must now be pumped to the surface by the pressure of conferences, propaganda and more or less veiled threats, even at the risk of diminishing or evaporating it in the same heat of passions which has already caused the source to dry up. If it is no longer possible to turn to a private investor of capital, attempts are made to mobilize the Governments of the West, and through them their taxpayers. Not even the World Bank is able to do much about this state of affairs, since it cannot afford to extend its loans too far beyong the limits set to purely commercial transactions, nor can it risk, in regard either to amounts involved or to the choice of projects to display considerably less caution than would a private investor. It is thus clear that the margin between capital assistance on a purely commercial basis – i.e. for a consideration –and purely political capital assistance which does not necessarily involve costs – is extremely narrow.

That is how matters stand. So long as there is no radical change in the whole policy and mentality of the ‘underdeveloped countries’, it is not to be expected that development will be fructified to any appreciable extent by capital assistance on a commercial, i.e., free and non-gratuitous basis, and no hybrid arrangements, though they may conceal this state of affairs, can abolish it. Moreover, as the possibilities of capital assistance on a political basis (‘compulsory formation of international capital’) are very limited, this means, practically, that the development programmes will have to adapt themselves, in regard to their volume, direction and implementation, to the amount of capital available, and to the conditions under which it may be expected to be increased by private capital assistance from the West. There should be no doubt in the mind of any well-informed or thoughtful person, but that, even in the case of underdeveloped countries, an economic order based on the functions of a free market, competition and a free price mechanism, is superior to one based on a socialist system, and this notwithstanding any concessions which may be made to the prevailing lower grade of development and the different psychological and sociological conditions regarding governmental planning and controls.

INTERNATIONAL CAPITAL MOVEMENTS

The problem of the ‘underdeveloped countries’ has led us to the further, more general problem of international capital transactions, the importance of which calls for a few special remarks. The problem arises from the fact that international capital transactions have, since the last two decades, practically come to a standstill, in so far as they concern normal and voluntary investments abroad, which are guided, like those in the interior of any country, by considerations of private advantage. The knowledge has become general that here in the paralysis of international capital transactions, lies the crucial point at which the forces of economic progress get stuck more than anywhere else. Here is the bottleneck which has resisted all efforts to push through. Moreover, it is more and more generally agreed that the stoppage at this decisive point is fraught with consequences of so serious a nature, that to overcome the bottleneck is one of the principal conditions for decisive progress in the reconstruction of Western economy. Without it a new world economy can scarcely be contemplated. But why this chronic stoppage in the international capital transactions of our time? The answer is given by the following argumentation which will bring us once more, by way of conclusion, to the basic problems of the international order.

In times when economy and society are profoundly shaken, as we have experienced in so unprecedented a manner during the last quarter of a century, it becomes apparent, for fairly obvious reasons, that international economy is the most sensitive part of the entire economic system. If money begins to fail, if standards of right, property and confidence break down, and the arbitrariness of Governments gains the upperhand, in a word, if the water level of civilization sinks by a hand’s breadth it is the international economic relations which are the first to be left dry. Further, – they constitute that part of the entire world-wide economic process of our time, which will be the first to suffer from a revolutionary economic policy on the domestic scene i.e. inflationism and collectivism. International disintegration, as we know full well, is the inevitable consequence of the rigid organization, by national Governments, of the economic life in the interior of a country. Nevertheless, there is, in the domestic organism also a particularly sensitive part of the economy, a highly delicate nerve plexus which reacts before all else, and most strongly, to anything which unsettles the circumstances that determine peoples’ confidence in law, government, money, the honesty of others, and in the future. This highly sensitive nerve plexus is the supply and investment of capital, because here decisions are taken for an always uncertain future. Such decisions are always entered into at some risk, which people only take when it bears some reasonable relationship to a possible gain. Let this relationship be disturbed by all sorts of measures which render gain so much more doubtful than loss, and capital investment will be discouraged and shrink.

Now we understand what has taken place in the sphere of international capital transactions of our time. The paralysis thereof will be seen to be the most natural thing in the world when we reflect on the fact that here we have the meeting-point of the two most sensitive, delicate and defenceless sectors of our modern economic system. If everything which has to do with investments is, in itself, already the most sensitive part of the whole system, this sensitivity will be augmented to an extreme degree if it is a question of investments effected in the tension-ridden field of international economy. International investments constitute the most sensitive spot in an already highly sensitive field. This spot is where the complex business of investment and that of international economic relations converge. Even if international traffic in goods and services is, in general, sufficiently robust – as we see it today – to assert itself more or less readily in an epoch of shocks and crises, the delicate plant of capital transactions cannot survive in this deadly climate. Even if national investment activity is, in general, sufficiently resilient to acclimatize itself, in a certain measure, within the borders of States, such international activity cannot survive. Either of these two risks, the one of international business and the other of capital investment, is already terrifying enough. Both combined exceed the measure of what people can be expected to face7).

Those are the stark facts which we have already met with peculiar clarity in our contemplation of the ‘underdeveloped countries’. We saw how these countries have to choose between foreign capital and a policy which frightens away such capital. This is no less true, however, of the countries in Europe which are in dire need of capital. Whilst here conditions are, in other respects, far more favourable than in the case of the ‘underdeveloped countries’, the factor actually hindering international capital movements sticks out all the more plainly: exchange control.

 

NOTES

8. (p. 224) The International Monetary Fund:

General review: F. A. LUTZ, International Monetary Mechanisms, Princeton 1943; R. F. MIKESELL, The International Monetary Fund 1944-1949, International Conciliation (Carnegie Endowment) November 1949.

9. (p. 224) The wrong way, as represented by a collectivist and inflationary economic policy.

Detailed treatment: W. RÖPKE, Alte und neue Ökonomie, Sammelband ‘Wirtschaft ohne Wunder’ ed. by A. Hunold, Erlenbach-Zürich 1953.

10. (p. 225) European Economic Integration:

Detailed treatment: W. RÖPKE, Europäische Wirtschaftsgemeinschaft, Der Monat (Berlin), June, 1952 (also in an enlarged and revised French version: La communauté économique européenne, Bulletin d’Information et de Documentation de la Banque Nationale de Belgique, November 1952).

11. (p. 229) Problems concerning Customs Unions:

Principal works for reference: J. VINER, The Customs Union Issue, New York 1950, (a slightly different opinion: J. E. MEADE, The Removal of Trade Barriers: The Regional versus the Universal Approach, Economica, May 1951). The experiences of the Benelux Countries: J. VAN DER MEUSBRUQGGHE, Les unions économiques, Brussels 1950; M. WEISGLAS, Benelux, Amsterdam 1949.

12. (p. 231):

Reference is made here to the report published originally under the title ‘Ist die deutsche Wirtschaftspolitik richtig?’ (Stuttgart 1950) together with an appreciative foreword by the Federal Chancellor, Dr. Adenauer.

13. (p. 234) Underdeveloped Countries:

Detailed treatment, including further indication of works on the subject: W. RÖPKE, Underdeveloped Countries, Ordo, Yearbook for economic and social order, Düsseldorf and Munich, 1953. Cf. also J. VINER, International Trade and Economic Development, Oxford 1953; HERBERT GROSS, Neue Märkte, Chancen in Übersee, Düsseldorf, 1953.

14. (p. 241) Paralysis and revival of international capital transactions:

The question has long been asked, whether, by means of binding agreements under international law – through an ‘International Investment Code’ – the hindrances referred to, in the way of a free flow of capital to countries in urgent need of funds, could be eliminated. Such a code would certainly not be without its uses, since it would set up standards against which it would be inconvenient and dangerous to transgress. This places us, however, in a known dilemma. Such agreements will, indeed only promise a genuine solution of the problem, if we may presuppose, not only a modicum of good will, but also a reasonable prospect that the Government of tomorrow will stand by the promises of the Government of today, being supported therein by public opinion in the country. Should this condition be fulfilled however, the Investment Code would not be needed, any more than it was needed in the by-gone days of a free world economy. And how are we going to enforce these standards? By submitting the dispute to the United Nations, or to the Hague Court? Already it is scarcely possible to ask such questions without sarcasm! The extreme maximum which might perhaps be gained thereby seems to me to have been anticipated by a proposal made recently by F. A. HAYEK in the New York periodical ‘The Freeman’.

• 1. (p. 25) The Sociology of War:
• 2. (p. 27) War of Conflict and War of Aggression:
• 3. (p. 31) The inadmissable over-simplification of the peace problem:
• 4. (p. 57) Communist Imperialism:
• 5. (p. 74)
• 6. (p. 75)
• 7. (p. 76)
• 8That the various factors are interwoven with extraordinary intricacy becomes particularly evident in the dramatic catastrophe of international interrelations which we call war). One of the moral perversities with which our age is afflicted was to deny at times the supremely catastrophic character of war, until two world wars brought disillusionment – let us hope for ever. For centuries the time-honoured belief existed that war was, as a rule, one of the incomprehensible evils of the world system, which – like the other Horsemen of the Apocalypse – Pestilence, Hunger and Death – had to be borne with resignation. Pacifism, in the sense of a mass movement directed towards the abolition of war, only became possible after the beginning of the modern age, when war, like all other things alleged to be the Will of God, came to be regarded in the light of critical and ameliorative reason, and, together with other social institutions, as a work of man which it would be quite possible to alter. Thus instead of being a subject of theology, war became a subject of sociology. Has it in this way become entirely comprehensible? To be honest we must admit that we are still very far from understanding it. Although men have at all times pondered over the phenomenon of war, and although recent generations especially have amassed a gigantic literature on the sociology of war, all that progress adds up to is that we possess a fairly complete list of the possible causes of war and that we realize the extraordinary intricacy which links these causes and which excludes any monistic theory of war sociology. Only a separate and comprehensive volume could do justice to the epistemology which results.
• 9In order to understand in detail what an international peace based on justice must accomplish, the various categories of war must be distinguished. Above all a difference must be made between two types of war, the importance of which is not lessened by the fact that they have often been combined with each other in the course of history and that there are borderline cases in which it is not easy to say whether the one or the other type predominates. A war may arise either through a conflict over concrete claims, which may be compared with a case under civil law (war of conflict), or through an act of violence which corresponds to a breach of the peace under criminal law (war of aggression) ). Whereas individual legal disputes arising from contentions of personal honour or material claims are finally settled by judicial decision, international conflicts of this kind may easily lead to war, as long as a decision by force of arms, which corresponds to the ordeal of the Middle Ages, is not abolished through obligatory international legal procedure, and before this is the case we shall continue to regard war rather as a tragic chain of events than as a vicious action. From their very nature such wars of conflict make it difficult to clarify the question of guilt, provided one of the warring parties – as is however often enough the case – does not misuse the conflict as an excuse for a war of aggression, or does not oppose the readiness of the antagonist to come to an understanding with inexcusable intransigence. This last applies on the whole to the case of the first world war, whereas we should not hesitate to characterize the second in its origin and in all its phases purely as a war of aggression, after it had already been preceded by the wars of aggression in China and Abyssinia.
• 10Is not then the solution of the war problem in reality very simple and only dependent upon the firm determination of the governments and the peoples? If this were our opinion we should be contradicting ourselves, since earlier on we termed just such thinking ‘internationalism’ and warned our readers against it. In actual fact this contradiction is only an apparent one. To explain it we should consider that the problem can be regarded from various angles. In formulating the solution of the war problem so sharply and smoothly above, we were regarding it from the juridical angle. Here in fact everything appears much simpler than it actually is. To be content with such considerations is to lapse into that monistic way of thinking which may be termed legalism and which is no better than economism or any other one-sided outlook. In indicating the legal solution the question has still not been answered as to the conditions under which the peoples and governments would be prepared to accept it firmly and undeviatingly. This question however brings us back to the higher level of the sociological, ethical and political considerations with which we started).
• 11Already in the first German edition of this book, which appeared at the end of the war, attention was diverted, with an outspokenness which at that time was understood by only a few, from the recently overthrown totalitarianism of the Axis powers to the new threat to peace and international order presented by the last remaining totalitarianism of Russian Communism). This danger has meanwhile grown so enormous that all questions of international order today must be considered in its perspective. This fact emerged very clearly in the foregoing section. Everything is of a temporary nature, everything is in a state of constant tension, everything is doubtful, as long as the world is overshadowed by this danger. What is the nature of this danger, and how can it be abolished? A book which deals with the fundamental problems of international order must at least give some indication of the lines along which these questions which weigh so heavily upon us are to be answered, if it is not to lack the foundation of hard and fast reality which the middle of this century demands.
• 12(1) Instead of the world state, which is an indispensable setting for a world economy, but which did not exist, a practicable and robust substitute was found, and that in a way with which, on a limited scale, the Res Publica Christiana of the Middle Ages may be compared). This substitute was the international ‘open society’ (Henri Bergson)) of that liberal age, a sort of unwritten ordre public international, a secularized Res Publica Christiana, which for that reason spread all over the globe. It is the ‘communitas seu res publica hominum sub Deo’ of St. Thomas Aquinas, to which natural law gave the double roots of universalism, which postulates the brotherhood of man, and of personalism, which postulates the inviolability of the individual, but replanted out of the spiritual earth of Christian Theism into the loose soil prepared by the Renaissance, by Humanism, Enlightment and Liberalism, while the addition ‘sub Deo’ was gradually suppressed and finally dropped). No description can be given here either of the complicated structure of this international ‘open society’ of the 19th century and its manifold workings, nor of the theological, philosophical, moral and sociological forces which underlay this effective substitute for a world state and which penetrated among even the lowest intellectual classes). It must suffice to say that these forces which created the universalist system of the ‘open society’ of the 19th century are for the greater part rooted – as indeed is only to be expected – in the same soil which produced the predominantly ‘liberal’ social, political and economic systems of the same age. What first strikes us in considering this order is the respect it enjoyed, which is only accentuated by the bad conscience or apologetics accompanying cases of infringement, which made it possible for international law to be regarded as a genuine law, on a par or even superior to that of the national state; for the world to be united through a network of long-term agreements which therefore made for the stabilization of international relationships; for tensions between large and small states to be continually adjusted – the unjustly suspected ‘balance of power’ – and for a high degree of agreement to exist regarding legal conceptions and national standards of justice. This external order was, however, fostered by the moral and political atmosphere of the ‘open society’, of the secularized Res Publica Christiana; to which a considerable and by no means unwholesome measure of Pax Britannica was added.
• 13(2) If the international ‘open society’ of the 19th century was the creation of a ‘liberal spirit’ in the widest sense, which need not be explained in detail here), this origin appears very clearly in another respect, and in the narrower and more usual sense attached to the expression ‘liberal’, – not as associated with Thomas Aquinas, Suarez, Victoria, Erasmus or Grotius, but with David Hume and Adam Smith. This point is of the greatest importance as explaining the secret of the international order of the recent past. It is the liberal principle that economic affairs should be free from political direction, the principle of a thorough separation between the spheres of the government and of economy, between sovereignty and the apparatus which provides material goods, between the Imperium and the Dominium, between the political power and the economic power (Maclver). This reduced the economic importance of the existence of sovereign states, with their different legal provisions, their frontiers, their independent administrative systems and civil rights, to a minimum. The economic process was thereby removed from the sphere of officialdom, of public and penal law, in short from the sphere of the ‘state’ to that of the ‘market’, of private law, of property, in short to the sphere of ‘society’, and this did away with the greater part of the causes of conflict and problems of order of an economic nature which arise from the side-by-side existence of sovereign states. This principle also solved an extremely important special problem of international integration, which as we said above was of decisive importance in addition to the problem of international law, i.e. the problem of an international monetary system. Just as the universalist liberal ‘open society’ of the nations was able to create something like a world state, an acting substitute for a non-existent world government, with a common code of law for all nations, so did the application of the principle of separation to money give rise to a working substitute for world money and to establish a really international monetary order in the form of gold standard. The lack of a uniform world monetary system which would guarantee free exchange of currencies at stable rates was compensated for by the fact that all the leading countries accepted the gold standard and supported it more or less scrupulously in a manner which merged the whole globe into a payments union and lent the same qualities of homogeneity, stability and convertibility to international payment transactions as characterize national payments. By this means, by the free and universal convertibility of money at fixed rates and the resulting multilateralism of trade – it became possible for the first time to speak of international economic integration in the exact sense in which we speak of economic integration inside a national economy).
• 14(2) If the international ‘open society’ of the 19th century was the creation of a ‘liberal spirit’ in the widest sense, which need not be explained in detail here), this origin appears very clearly in another respect, and in the narrower and more usual sense attached to the expression ‘liberal’, – not as associated with Thomas Aquinas, Suarez, Victoria, Erasmus or Grotius, but with David Hume and Adam Smith. This point is of the greatest importance as explaining the secret of the international order of the recent past. It is the liberal principle that economic affairs should be free from political direction, the principle of a thorough separation between the spheres of the government and of economy, between sovereignty and the apparatus which provides material goods, between the Imperium and the Dominium, between the political power and the economic power (Maclver). This reduced the economic importance of the existence of sovereign states, with their different legal provisions, their frontiers, their independent administrative systems and civil rights, to a minimum. The economic process was thereby removed from the sphere of officialdom, of public and penal law, in short from the sphere of the ‘state’ to that of the ‘market’, of private law, of property, in short to the sphere of ‘society’, and this did away with the greater part of the causes of conflict and problems of order of an economic nature which arise from the side-by-side existence of sovereign states. This principle also solved an extremely important special problem of international integration, which as we said above was of decisive importance in addition to the problem of international law, i.e. the problem of an international monetary system. Just as the universalist liberal ‘open society’ of the nations was able to create something like a world state, an acting substitute for a non-existent world government, with a common code of law for all nations, so did the application of the principle of separation to money give rise to a working substitute for world money and to establish a really international monetary order in the form of gold standard. The lack of a uniform world monetary system which would guarantee free exchange of currencies at stable rates was compensated for by the fact that all the leading countries accepted the gold standard and supported it more or less scrupulously in a manner which merged the whole globe into a payments union and lent the same qualities of homogeneity, stability and convertibility to international payment transactions as characterize national payments. By this means, by the free and universal convertibility of money at fixed rates and the resulting multilateralism of trade – it became possible for the first time to speak of international economic integration in the exact sense in which we speak of economic integration inside a national economy).