Studies in Economic Nationalism

CHAPTER III

ECONOMIC NATIONALISM THROUGH THE AGES

I

The present chapter serves a modest yet important purpose: that of placing the phenomenon of economic nationalism in its historical setting; for thus only, I believe, it is possible fully to measure its significance in our own day.

As the bird’s eye view that follows will clearly, albeit very sket- chily, show, economic nationalism — or policies similar to it — extends back in time as far as the recorded history of mankind. And its defence is as ancient as political theory. Nor is this very surprising. There would be no barriers to international trade in one of two conceivable cases. One is that of a world organised into one single state, when there would only exist inter-regional and inter-individual, but not international, trade. The other is that of a world divided into many separate and sovereign states — as ours has always been — but in which governments would deliberately abstain, all of them, from interfering with business transactions carried out across national boundary lines by inhabitants of the various countries. In the latter case, free trade would develop as a matter of course, political boundaries in no way affecting the economic relations between people living on either side. Of these hypothetical alternatives, the former has never actually existed, although it has caused rivers of ink to flow, and also rivers of blood. The other was approached, over a short period of time —and only over a part of the world’s surface — in the nineteenth century, but so far has only been a mere historical interlude, highly advantageous in material and moral terms to all parties concerned, not sufficiently resilient, however, to survive the manifold storms of the twentieth century.

“Sovereign” constituted governments, whatever their form of organization, their underlying philosophy, their political aims, and the size of the territory and population over which they exercise control, have nearly always been known to interfere with international trade and finance. It is well that this should be realized from the outset, for the goals of economic internationalism, of free trade, of a “well-knit” world economy represent, in historical perspective, a novel and highly revolutionary principle, comparable only to (and intimately connected with) the defence and promotion of individual freedom. It is no accident that the reaction against the highly controlled economic systems of the mercantilist period (sixteenth to eighteenth centuries) coincided with the rise of libertarian philosophies and movements. Nor is it an accident, as will presently be shown, that the reaction against economic internationalism has coincided, in our day, with movements aiming anew at the subordination of the individual to the state.

II

In the pages that follow there is, of course, no claim to provide a history of economic nationalism — a history which, may it incidentally be stressed, sorely needs writing. The development of economic nationalism will merely be illustrated here by some of its highlights. Though we could go further back into the past, let us begin with ancient Greece, where we find not only institutional arrangements but also political doctrines favouring economic nationalism.1

Self-sufficiency (which, as shown in Chapter I, is the prime objective of economic nationalism) enjoyed in theory and in practice considerable favour in ancient Greece. Aristotle regarded “political and economic self-sufficiency as a basic prerequisite of the ideal state”. Thus, in Book I of his Politics, we read:

When several villages are united in a single complete community, large enough to be nearly or quite self-sufficing, the state comes into existence, originating in the bare needs of life, and continuing in existence for the sake of a good life. And therefore, if the earlier forms of society are natural so is the state, for it is the end of them, and the nature of a thing is its end. For what each thing is when fully developed, we call its nature, whether we are speaking of a man, a horse, or a family. Besides, the final cause and end of a thing is the best, and to be self-sufficing is the end and the best.2

This concern with self-sufficiency runs all through Aristotle’s work, and what he has in mind becomes more apparent in Book VII. Having reached the conclusion that the ideal size of the State is for it to be large enough to be self-sufficient but otherwise as small as possible (“the best limit of the population of a state is the largest number which suffices for the purpose of life, and can be taken in at a single view” 3), he continues:

Much the same principle will apply to the territory of the state, every one would agree in praising the state which is most entirely self-sufficing; and that must be the state which is all-producing, for to have all things and to want nothing is sufficiency. In size and extent it should be such as may enable the inhabitants to live at once temperately and liberally in the enjoyment of leisure.4

Self-sufficiency, then, for Aristotle, represents a complete lack of dependency on the outside world, combined with the ability to live a “good life” within the confines of the state.5 Over twenty-one centuries later this notion was to be taken up, albeit with a very different philosophy behind it, by the German philosopher Fichte, of whom more will be said in Chapter V. Fichte, it should be noted, coupled self-sufficiency with territorial expansion, whereas Aristotle linked it with his recommendation that the size of the community should be the smallest practically possible. (This is why Fichte, rather than Aristotle, was to inspire, in our own times, Hitler’s “geopoliticians”.

In turning from political theory to the political and economic practices of ancient Greece, I can do no better than to quote a highly illuminating passage from Sir Alfred Zimmern’s authoritative and brilliant work, The Greek Commonwealth:

It was a tradition and a boast of Greek cities to be sovereign States wholly independent of foreign claims. Their fierce love of independence had been nourished by centuries of isolation, and was, as we have seen, one of the strongest forces in the national life. But we shall be merely following the bad example of so many nineteenth century traders and pioneers if we interpret this sentiment in a strictly political sense. If was in origin and essence, in Greece as elsewhere, every whit as much economic as political: for politics and economics, State government and State housekeeping, are to simple people (as they should be to us) merely two aspects of the same thing. So it provided what was for centuries the bedrock of Greek economic policy. If a State was to be independent it must not only govern itself in its own way, but also feed and clothe itself in its own way. It must not only manage its own affairs but supply its own needs. Home rule and self-sufficiency are, in the traditional Greek view, almost convertible terms. How strong was the tradition may be seen by the way it lingered on, years after Greek traders had begun pouring in goods from east and west, in the political economy of the philosophers.6

The self-sufficiency idea spread through the Hellenistic world of the Near and Middle East during the third and second centuries B.C. The Hellenistic monarchies in Egypt and Asia Minor, the results of Alexander’s conquests and of the disintegration of his short-lived empire, represented a superimposition of Greek political ideas upon a number of very ancient states, each with an old and varied history. One of the Greek influences lay in envisaging self-sufficiensy as the basis of political strength. In fact, the evolution was from “self-sufficiency” to state-controlled trade, and, finally, to commercial hegemony. The impact of these ideas upon the history of the Hellenistic monarchies is a fascinating story, told with a great deal of illuminating detail by Professor M. Rostovtzeff in his Social and Economic History of the Hellenistic World, to which the present writer is indebted for all that follows on this subject. To obtain the greatest possible measure of economic self-sufficiency Hellinistic monarchies

strove to develop to the utmost the resources of their kingdoms, mobilizing and organizing all the creative forces of their people and adding thereto new forces, those of Greek or Hellenized immigrants. For the produce of their countries they sought to secure the largest possible market by establishing commercial connections as widely as they could, which meant opening their countries to the rest of the world and putting an end to their economic isolation. The easiest way of achieving this was to control important commercial routes by sea or land and so secure for themselves some measure of economic hegemony as a complement of political hegemony.7

It is noteworthy that the principle of self-sufficiency as applied in practice by large states brought, as a corollary, policies aimed at the development of power, not only economic and political, but also military. Among the Hellenistic monarchies it was Egypt which went furthest in the direction of economic nationalism and — this being of particular interest to the modern student — of internal economic planning. As a result, it was the Egypt of the Ptolemies that adopted measures of monetary policy to which the name of “monetary nationalism” can well be applied and which Rostovtzeff describes as the pursuance by the Ptolemies of “their own monetary policy regardless of what happened in this respect in the rest of the world”.

He also observes — and this, too, cannot fail to impress the modern student of international economic relations — that “it is very probable that a concomitant of this monopoly of currency was the exclusion of foreign capital from the Egyptian money market”. Rostovtzeff further describes how the monetary nationalism of the Ptolemies divided the Hellenistic world into two monetary areas, Egypt and the rest of the said world, and how the isolation of Egypt, so damaging to that country’s future prosperity, followed from its policies of monetary and economic nationalism. 8 Internally Egypt adopted, in that period, comprehensive measures of economic planning. The system that emerged bears some striking resemblance to modern totalitarianism. To quote Professor Rostovtzeff once more:

The Ptolemaic reform almost entirely ignored the essence of the Greek economic system: private property, recognized and protected by the State as the basis of society, and the free play of economic forces and economic initiative, with which the State very seldom interfered. These could not be suppressed altogether, for they were among the factors that helped the Ptolemies to achieve their second object, the improvement of technical devices and the development of the natural resources of the country, but they were limited and curtailed in order to bring them into harmony with the general Ptolemaic scheme of centralized State control. Restricted and curtailed as they were, these features never disappeared from the economic system of Egypt, and by the mere fact of their existence they created within it a kind of antinomy of which the Ptolemies were never able to get rid, but which, on the contrary, became more and more apparent as time went on.9

This opposition between strict regimentation, on the one hand, and economic progress, on the other, has not been resolved by any country in the two thousand years and more which have elapsed since the downfall of the Ptolemaic regime in Egypt. But in our own day more than one country is becoming involved in the same conflict of objectives that is diagnosed by Rostovtzeff in the above passage. Commenting on Rostovtzeff’s findings from the vantage point of 1950, Professor Luigi Einaudi, the great Italian scholar — and the first economist ever to become President of his country — makes the following very pertinent and profound comments:

There is, in the Ptolemaic system of planned economy an essential characteristic, to which great importance should be attached… In the Greek town, the fear of war, of piracy, of revolutions, of confiscations, of liturgies, of forced public services and reduction to slavery weighed like an incubus on the members of the middle class during the last three centuries B.C. … The system of controlled economy was peculiar to Egypt, or at least was applied there in its complete form; and there it supplemented the other factors of insecurity which were plentiful in the Hellenistic world. At first sight this statement sounds paradoxical. Regulation, programme, plan of cultivation, are they not beyond the scope of doubt, are they not the opposite of insecurity? … The insecurity derived from the system of planned economy, in Ptolemaic Egypt, was synonymous with arbitrary power.10

And this, says Einaudi “is the worst form of insecurity, worse than the fear of war, revolution and famine and piracy, because instead of the inscrutable will of the gods, it must be attributed to the evil will of Man”.

Thus, from the theoretical speculations about self-sufficiency of the Greek philosophers to the exercise of power for the sake of self-sufficiency by Hollenistic rulers, and thence to the establishment of internal conditions of ruthless and arbitrary power, such was the development in the ancient world of the causal relationship between economic nationalism and individual insecurity. This development is not without profound significance for our own day.

III

The economic nationalism of the ancient world did not, of course, destroy international trade; what it did was to substitute state-controlled trade for private trade, with all the consequences such a substitution entails in terms of economic advantage and individual choice. Under certain circumstances, economic nationalism, by enhancing autarky, reduces the absolute volume of international trade; but under other circumstances it merely interferes with its structure and influences its growth along lines which would not be considered sound on purely economic principles. (The case of Nazi Germany shows that totalitarian trade may even be expanding trade — though there the expansion was due to political and military motives; but it obviously was not the kind of trade which would have been developed by the market economy acting freely and concerned with the welfare of the individual rather than with the power of the state.)

It would exceed the scope of this chapter — of necessarily limited length — to discuss the experience of the Roman Empire in terms of economic nationalism.11 Nor is it possible to do full justice to the long, intricate and fascinating developments that took place during the thousand-year span of the Middle Ages.12 I can hardly do better than quote several passages from the Economic and Social History of Medieval Europe by Henri Pirenne, the great Belgian historian who was in his lifetime and remains today the leading authority on this subject:

Hampered as was all traffic by the multiplication of internal tolls, some compensation at least was to be found in the absence of all obstacles on the political frontiers. It was not until the fifteenth century that the first symptoms of protection began to reveal themselves. Before that, there is no evidence of the slightest desire to favour national trade by protecting it from foreign competition. In this respect, the internationalism which characterised medieval civilisation right into the thirteenth century was manifested with particular clarity in the conduct of the states. …

The princes of the Middle Ages were still without the slightest tinge of mercantilism, with the exception, perhaps, of Frederic II and his Angevin successors in the Kingdom of Naples. Here, indeed, under the influence of Byzantium and the Moslems in Sicily and Africa, we may detect at least the beginnings of State intervention in the economic system. (p. 91.)

It is the rise of the towns which resulted, according to Pirenne, in the development of “urban protectionism”. This took place in the course of the fourteenth century. “Henceforth”, Pirenne notes, “the consumer was completely sacrified to the producer” (page 206). The following further comments are of great interest:

Urban particularism led the towns to hamper large-scale commerce in exactly the same way that they hampered large-scale industry. The decline of fairs in the course of the fourteenth century is not unconnected with the dislike of the artisans for an institution so incompatible with their violent protectionism. …

But is was in vain that the towns pursued their policy of taxing and exploiting large-scale commerce; they could not escape it, nor indeed did they desire to do so, for the richer, the more active and the more populous a city was, the more was commerce indispensable to it. After all, it provided the townspeople with a great part of their food supply and the crafts with almost all their raw materials. (pp. 209-11.)

But history was not to stand still. “The same fourteenth century which saw urban particularism at its height, also saw the advent of the royal power in the sphere of economic history. Hitherto [royal power] … had left the economic activity of its subjects to themselves. Only the towns made laws and regulations for them. But their particularism caused them to be continually in opposition to each other … The princes alone were capable of conceiving a territorial economy, which would comprise and control the urban economies.” And so, at the end of the Middle Ages, “whenever it had the power, the State was moving in the direction of mercantilism” (pp. 216-17). Our last quotation from this source shows how the final transition to mercantilism was made:

Obviously the word [mercantilism] can only be used within strict limitations, but, alien as the conception of a national economy still was to the governments of the late fourteenth and early fifteenth centuries, it is plain from their conduct that they desired to protect the industry and commerce of their subjects against foreign competition, and even, here and there, to introduce new forms of activity into their countries. … It was the beginning of a process which in the long run was destined to throw aside medieval internationalism, and to imbue the relations of states with each other with a particularism every whit as exclusive as that of the towns had been for centuries. (p. 217.)

IV

We now move to a period which, from the point of view of the present inquiry, is of particularly great importance. It extends over roughly three hundred years, the sixteenth, seventeenth and eighteenth centuries, and involves the birth and consolidation of the modern concept of the national state. The economics of that period, in particular the regulation by the state of external trade an behalf of national power, are known as “the mercantile system” or “mercantilism”.

Countries which adopted the economic policies of mercantilism had, at least to begin with, authoritarian and powerful governments, absolute monarchies having developed upon the disintegration of the decentralized feudal systems. The rulers of that period had far- reaching powers over the activities of their subjets, while individual liberties were largely submerged. The eventual revolt against mercantilism was associated with the promotion of democratic principles. In England the democratic revolution started in the last quarter of the seventeenth century; in France a hundred years later. The internal policies of mercantilism varied greatly, therefore, as between France (and other continental countries), on the one hand, and England, on the other. There was more similarity in respect of foreign economic policies, i.e. the impact of the state upon the Conduct of foreign trade and finance. A separate chapter is devoted below to a more detailed examination of those mercantilist doctrines which have a particular bearing on the national economic policies of modern states.

For the present, suffice it to say that mercantilism evolved for the first time in history a more or less consistent body of doctrines13 explaining and justifying state action to regulate, control, and restrict various elements of international economic relations. These doctrines, as will be shown later, are inspired by a primary concern for national power and a secondary concern for national well-being. In the nineteenth century, the world having moved very far in the direction of free trade and of economic internationalism, the mercantilist tradition seemed to be relegated to the historians’ domain, while the economic doctrines of mercantilism were looked upon as discredited and discarded curiosities from the past. Since then, instead of moving further ahead in the direction of world order, we have made, through a maze of detours, a turn around ourselves and we seem to be right back where we were two hundred and fifty years ago! Thus Professor Philip W. Buck, a careful student of mercantilism, could write in November 1941 in the preface to his Politics of Mercantilism14 that “modern totalitarianism — an awkward word used in this book to include the Soviet, Facist, and Nazi states and their policies — is in many ways a revival of the ideas and practices of the mercantile system”.

Actually, as will presently be shown, the new economic nationalism of the mid-twentieth century stems from two different sources, not from one source alone: one of these is, obviously, mercantilism, the other is the doctrine of “national insulation” which, leaving aside the ancient claims of Aristotle, goes back to Fichte (1800). Of these two sources, the latter, though the less acknowledged and the less known, is certainly the more important.15

The mercantilist tradition included certain elements which are not found again in the contemporary world, such as colonialism; and other elements which are very prominent in present-day society, such as concern for balances of payments and for full employment. What is, therefore, particularly important to us today is not so much the entire mercantilist tradition as some special parts of it. These can be described as our mercantilist heritage, and they are discussed in Chapter IV below.

V

The end of mercantilism was due to many causes. Because mercantilism was so intimately related with the state, with state structure and powers, its practical manifestations varied from country to country — as did its eventual contradictions and difficulties. French mercantilism disintegrated with the disintegration of the absolute monarchy. British mercantilism, closely linked with Britain’s “old colonial system” (as distinct from the nineteenth century “new” colonial empire, that which was to evolve eventually into the British Commonwealth of Nations), was brought to an end largely by the American Revolution. The Industrial Revolution of the end of the eighteenth century and early nineteenth was another factor instrumental in the liquidation of controls and restrictions characteristic of the mercantilist system. Free trade, heralded by Adam Smith in the year of American Independence, became a reality of British politics about seventy years later, in the age of Cobden and Peel.

When Great Britain decided to give up its agriculture in favour of its industry, it also decided to accept international economic interdependence as a basic fact of life. Such an acceptance could only be made on the assumption of durable peace, an assumption which seemed reasonable during the century when “Britannia ruled the waves” (instead, as a recent wit remarked, of “waiving the rules”). International insecurity produces, of course, economic nationalism. This was undoubtedly a factor in the mercantilist period, as it is again a factor in our own day. Cobden — whose overriding passion was the establishment of durable peace in the world — believed that free trade could make peace secure; we may be somewhat sceptical about this today, but even our own experience tells us that the fear of war or the preparation for war tends to stimulate economic nationalism, while political security is a prerequisite (or at least a concomitant) of economic internationalism. It may also be said (and this anticipates later chapters of the present book) that economic nationalism tends to make peace more precarious and conflict more likely.

Upon the ruins of mercantilism, and notwithstanding the increasing prestige of Adam Smith, new forms of economic nationalism soon began to grow. These took, however, all through the nineteenth century, the form of “liberal protectionism” and not of what we defined in Chapter I as “economic nationalism” in the restricted sense of the term. Although, in one of its aspects at least, the American Revolution was a reaction against mercantilism, as early a builder of the republic as Alexander Hamilton laid the intellectual and practical foundations for a new cause of economic nationalism in his Report on the Subject of Manufactures,16 published in 1791. This report represents one of the most important early reactions against the free trade doctrines of Adam Smith’s Wealth of Nations. Also — and therein lies its importance — it is the cornerstone of American protectionism. Alexander Hamilton was as fascinated in his day as statesmen from the so-called underdeveloped countries are today by the sight of a wealthy industrial nation. In Hamilton’s time that nation was England and its industrial advance was an attractive and stimulating model for the young republic to follow.

In 1791, it will be recalled, mercantilism was breaking down but free trade existed only on paper. State interference in foreign trade was still the rule even in England. Hamilton advocated the adoption of governmental measures for the encouragement of domestic industries, not because of any concern for foreign trade and balances of payments (he does not seem to have been influenced by mercantilist considerations) but because of his interest in the development of the domestic economy of the United States. This is made quite clear in the following observations in his report:

It is now proper… to enumerate the principal circumstances from which it may be inferred that manufacturing establishments not only occasion a positive augmentation of the produce and revenue of the society, but that they contribute essentially to rendering them greater than they could possibly be without such establishments. These circumstances are :

1. The division of labour.

2. An extension of the use of machinery.

3. Additional employment to classes of the community not ordinarily engaged in the business.

4. The promoting of emigration from foreign countries.

5. The furnishing greater scope for the diversity of talents and dispositions, which discriminate men from each other.

6. The affording a more ample and various field for enterprise.

7. The creating, in some instances, a new, and securing, in all, a more certain and steady demand for the surplus produce of the soil.17

It might be noted, by the way, that Hamilton proposed to use government subsidies or bounties to stimulate the development of domestic manufacturers quite as much as — and even in preference to —tariffs to reduce the competition of foreign-made goods. Concerning the latter, he had the following comments to make:

It shall be taken for granted … that manufacturing pursuits are susceptible, in a greater degree, of the application of machinery, than those of agriculture. If so, all the difference is lost to a community which, instead of manufacturing for itself, procures the fabrics requisite to its supply from other countries. The substitution of foreign for domestic manufactures is a transfer to foreign nations of the advantages accruing from the employment of machinery, in the modes in which it is capable of being employed with most utility and to the greatest extent.18

Although Hamilton had textile industries in mind, his proposition is susceptible of broader application.

There comes a time when the question must be asked whether a fully developed new domestic industry can produce goods as cheaply as they can be imported from abroad, and in as good a quality; and the issue between protection and free trade was ultimately argued on that basis. Hamilton’s concern was, however, most of all for the creation of new industries on the assumption that they would be entirely viable when they reached their full bloom. His argument, further developed by later economists, especially by Friedrich List, has come to be known as the “infant industries” argument for protection. To apply it to fully developed industries is actually an abuse of the argument. Although Alexander Hamilton can be considered the father of American protectionism during the first half or two-thirds of the nineteenth century, he surely must not be burdened with that responsibility for the protectionism of the late nineteenth and the twentieh centuries. His arguments (but not his name) are today widely used by spokesmen of the so-called underdeveloped countries, in combination with other much less defensible arguments and policies.19

The artificial stimulation of new industries can be defended on economic grounds only if these industries are to receive no further slate support once they are fully grown. The argument for increasing the diversity of occupations and skills within the nation can, of course, be defended with the greatest of ease on grounds other than economic. On economic grounds, one must inquire into the consequences of such diversification in terms of the higher prices the man in the street has to pay for what he buys; this is the sole basis on which an economically valid decision can be made.20

Although his primary interest was directed towards the development of new industries, Alexander Hamilton regarded his proposals as very advantageous to agriculture as well. He drew attention to the consequences for American agricultural producers of the uncertainties resulting from fluctuations in foreign demand, and he noted that a growth of industry combined with immigration would increase the domestic market for agricultural products. It was Hamilton’s opinion that “a domestic market is greatly to be preferred to a foreign one, because it is, in the nature of things, far more to be relied upon Reverting to that subject on a later page of his report, “there appear”, he says, “strong reasons to regard the foreign demand for that surplus [products of the soil] as too uncertain a reliance, and to desire a substitute for it in an extensive domestic market. To secure such a market there is no other expedient than to promote manufacturing establishments” 21 (my italics).

The “infant industries” argument was further developed, indeed brought to its most perfect formulation by the German economist, Friedrich List, whose major work, The National System of Political Economy, appeared in 1840. Note the title of that work and compare it with Adam Smith’s An Inquiry Into the Nature and Causes of the Wealth of Nations: the contrast is most illuminating! Actually, it would be very misleading to place Hamilton and List into one and the same doctrinal “compartment”: the differences between them exceed the similarities. There was nothing aggressive towards the outside world in Alexander Hamilton’s protectionism; List, however, is very much concerned with considerations of power. Economic policy in his eyes is for the state a means of achieving its full bloom. He envisages the acquisition of a “well-rounded” territory22, a large population, and a well-balanced economic structure. He also emphasizes that a nation must possess adequate military power to protect its political independence and its trade routes. Unlike Hamilton, List is interested in outlets for surplus population and emphasizes the need for colonies.

The next observation which shows the contrast between the philosophy of List and that of Alexander Hamilton has been brought out by William E. Rappard in his essay on The Common Menace of Economic and Military Armaments.23 Rappard notes that according to List industrial protection “is not the artificial product of political speculation, as the school erroneously teaches. History shows that trade restrictions are born either of the natural efforts of the nation to attain well-being, independence, and power, or of wars and hostile commercial measures on the part of the dominating manufacturing nations.” Wars, then, are regarded by List as a frequent source of protectionist policies, and Rappard draws attention to List’s conclusions that “a war which promotes the transition from the purely agricultural to the mixed agricultural-manufacturing State is therefore a blessing for a nation … whereas a peace which throws back into a purely agricultural condition a State destined to become industrialised, is a course incomparably more harmful than a war. ”24 Here economic nationalism rears its very ugly (and often hidden) head: far from being a mere adjunct of political nationalism, it appears as a policy which even welcomes war as a means of attaining certain economic ends.

VII

Once American industry came of age and once German industry became powerful, the arguments of Hamilton and List ought no longer to have been invoked in their countries (although they still were available for the new underdeveloped areas and indeed were to be frequently used by their statesmen). But the protected industrial “infants” continued to cling to the state’s apron-strings — or purse- strings — and would insist that protection of infant industries should become the protection of — increasingly powerful — vested interests. It is these interests which are largely responsible for the upsurge of protectionism in western Europe in the last quarter of the nineteenth century and the early part of the twentieth, and for the persistence of protectionism in the United States.

However motivated, nineteenth century protectionism was a considerably milder instrument of state interference with economic life than were the quantitative trade restrictions (coupled with tariffs) practiced in the preceding centuries. Tariffs did not stultify the price mechanism, nor did they disrupt the intricate interrelationships of world markets. They affected the distribution of resources and of industries throughout the world; the “liberal” mechanism of markets and prices continued to function undisturbed. The protectionism of the nineteenth century operated in the environment of a liberal society and at a time when the economic powers of the state were, throughout the western world, at a low ebb. There was in those days a good deal of interest everywhere in an expanding world economy. The growth of trade, the smooth functioning of the gold standard, the sustained flow of capital from country to country, not to forget the easy migrations, all were expressions of the same favourable attitude towards the world economy. Political nationalism, to be sure, was unabated, but liberal democracy was making increasing inroads on authoritarianism, such as the liberalization of the Czarist regime in Russia after 1905. The world economy was in a state of continuous growth and expansion. The clash of powerful nationalisms culminating in World War I took place in what was, for all the growth of protectionism, a reasonably close approximation to a well-integrated world economy.

To say this is not in the least to deny that the widely spread protectionist miasma had very dangerous implications for the future of international relations. World War I disrupted world economic processes and, in conformity with List’s prevision, considerably stepped up economic nationalism. It is interesting to speculate on the possible course of events if there had been no war. Would American, German and Russian protectionism have continued to grow and would Great Britain have succumbed to the blandishments of the followere of Joseph Chamberlain and given up free trade? No one can tell, of course, but there is no doubt that even in the absence of World War I free trade would have needed new enthusiastic, forceful, and persuasive champions in the twentieth century in order to continue its course towards complete world economic integration, rather than be eroded by a rising tide of protectionism.

VIII

Trade and war do not mix well. A war on a world scale, a war taxing all the resources of the belligerents, could not but disrupt international economic relations. The international gold standard broke down under the strain, trade and payment controls were widely adopted, trade routes were disrupted, war needs acquired a veto power over the decisions of the price mechanism. Economic nationalism was the real victor of World War I, just as collectivism was to be the real victor of World War II.

We now come to events which are familiar to the older readers of this book, although they are already remote to the younger. The reconstruction that took place after 1918, largely under League of Nations auspices, proved very precarious, owing to the contradictory tendencies prevailing in the world of the twenties. Monetary reconstruction was carried out as the first item on the post-war international agenda; there was a large expansion of international capital movements, especially out of the United States; trade routes were re-established fairly rapidly. Nevertheless, the foundation of that re-construction was very tenuous. The monetary reconstruction was superficial and proved to be largely spurious.25 The revived capital movements were more the product of the bond salesmen’s zeal than of the banks’ shrewd appraisal of the economic outlook in borrowing countries. Many of these investments carried with them the seeds of default. The combination of erratic foreign investments with the technical faults of the “new gold standard” promoted an inflationary wave, worldwide in scope, with the most devastating depression of modern times following in its wake.

The financial internationalism of the twenties, such as it was, stood in contrast to the increasingly protectionist commercial policies of the period and to the spread of monetary nationalism (of mild expression). True, exchange controls and quantitative import restrictions which sprang up during World War I disappeared again a few years later, but economic nationalism was very strong and growing, both in the old-established countries and in those which either regained their independence or were newly formed at the Paris Peace Conference of 1919. The “new” countries were largely inspired by the “infant industries” argument; the older countries by the protection of vested interests. In Great Britain the increase of protectonist tendencies was a symptom of economic decline; in the United States it was consequence of the failure of Congress, government, and the public to understand the effects of the country’s drastically changed position in world affairs. From a fast-growing adolescent, the United States became the new leader of the world economy. It inherited from its elders responsibilities which they, crippled by war, were no longer able to discharge. These were, however, responsibilities which the United States was not yet mature enough to carry out wisely. Hence the twenties with their orgy of indiscriminate foreign lending and simultaneously rising tariffs. Hence, also, the failure to realize that a creditor country must move towards free trade, and not away from it, if it is not to suffer great losses itself while upsetting the international economic balance.

The decade of unreason (as it might well be called) culminated in the most spectacular economic crisis of modern times and socially the most upsetting. It ushered in the destructive depression of the thirties — a complex economic process with internationally interlocking causal connections which still awaits careful, complete, and penetrating study. It has led to a great expansion of collectivist creeds and collectivist practices throughout the world, including the West, and to at least a temporary decline of economic liberalism and internationalism. Economic nationalism reappeared after over a century of decline, first in the form of neo-mercantilism, later in the more extreme forms advocated in 1800 by Johann Gottlieb Fichte. The views of Fichte on national self-sufficiency were rediscovered, or, rather, re-invented, by John Maynard Keynes in 1933. Easily the most influential economic thinker of this century, Keynes at this crucial time placed his immense gifts, intellectual as well as literary, and his great powers of persuasion at the service of economic nationalism (see Chapter VI below).

It was, however, not a thinker but a man of action who was to apply the Fichtean blueprint in practice: Dr. Hjalmar Schacht of Germany, the architect of the Nazi economic policies. In the mid-thirties “Schachtian” policies were instrumental in promoting Germany’s self-sufficiency, or autarky, through totalitarian trade methods which included “peaceful conquests” of several neighbours of Germany in the Danubian basin, a necessary prelude to her military march into Austria (in 1938) and Prague (Spring 1939) and to the wars of aggression started on September 1, 1939. Thus Fichte’s blueprint was put into effect one hundred and thirty-odd years after its publication! The “Schachtian” concept of economic nationalism was also instrumental, at least implicitly so, in shaping the foreign economic policies of the Soviet Union, today the greatest outpost in the world of ruthless economic nationalism.

After the end of World War II economic nationalism remained the prevalent tendency of most countries of the world. Although its most extreme forms, those which hark back to Fichte, were limited to the Soviet bloc, many other countries continued to practice strict trade and payments controls in order to insulate from outside influences their national plans for economic development or full employment or, in the mercantilist tradition, to “protect” their balances of payments and monetary reserves. The reader will find in the final chapter of this book a discussion of the principal doctrines propounded since the end of World War II, which influence the nationalistic economic policies still widely practised at the present time.

What must be noted in conclusion of the present account of “Economic Nationalism through the Ages” is that there has developed, especially from the end of the forties onward, a growing revulsion against economic nationalism. Limited at present to the Western world, this revulsion, if it lasts, may start a new era in the economic history of the world. 26 It may well be that future historians will find that the mounting tide of economic nationalism, having reached its peak in the latter thirties, has been decisively reversed in the nineteen-fifties.

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“It is worthy of particular remark that, in general, women and children are rendered more useful, and the latter more early useful, by manufacturing establishments, than they would otherwise be. Of the number of persons employed in the cotton manufactories of Great Britain, it is computed that four-sevenths nearly are women and children, of whom the greatest proportion are children, and many of them of a tender age.”