CHAPTER XI

THE WORLD THEATER

The analysis of this volume as a whole has been concerned with factors and forces that are as germane to other countries as to the United States. Indeed, the discussion of the first two chapters was definitely cast in terms of world conditions and developments and that of the third in terms of international economic relationships. In subsequent chapters, however, the analysis was focused largely on American conditions, potentialities, and requirements. In this final chapter some comments appear necessary with respect to economic conditions and problems in the world at large and to the bearing of such conditions upon American economic life.

As we write, the threat of future war still enshrouds the world scene. In the nature of the case if war, or concentrated preparation for war, should continue to dominate the economic life of nations, there is little prospect of economic stability or progress. We can only hope that in due course mankind will find his way to enduring peace. The analysis which follows is based on this assumption.

I. THE EVOLUTION OF A WORLD ECONOMIC SYSTEM

As a preliminary to the discussion of the international situation today and the problems involved in re-establishing stability, it will be helpful to summarize very briefly the main factors responsible for the evolution of a world economic system during the nineteenth and early twentieth centuries. To give concreteness to the

discussion, reference will be made to the developments which have occurred in one after another of the leading nations of the world.

Great Britain took the lead in becoming a nation with wide international economic relations. Its economic pre-eminence throughout the nineteenth century was due chiefly to two factors. The first was the momentum of an early start in the field of manufacturing enterprise, especially in the heavy industries. The second was the early development of a sound currency system which established universal confidence in credits payable in British sterling. From the Napoleonic era on, London banking houses financed much of the trade of the world, and well before the middle of the century the British people were extending long-term credits to and making direct investments in the United States, British possessions, the Orient, and South America. By the end of the century the economic and financial life of the island kingdom was closely linked with that of the entire world. As a part of the process of becoming internationally interdependent, Great Britain abandoned the protective tariff in the 1840's in order that cheap raw materials and foodstuffs, and hence low-producing costs, might give particular advantages to the export trade in manufactured commodities.

France began to make substantial investments abroad toward the middle of the century. By 1870 it had accumulated some 2 billion dollars of foreign investments, chiefly in England, the United States, and nearby European countries, a substantial part of which was liquidated in paying the German indemnity of 1870. Between 1875 and World War I, France gradually extended her foreign investments, particularly in Russia,

and in her colonies in Africa and the Far East-the latter chiefly by the process of direct investment. Unlike Britain, France continued to maintain her agriculture as an important part of her economic structure.

Germany did not emerge as a great industrial and financial power until after 1875. The extraordinary expansion that occurred during the next twenty-five years was, however, the most striking European development of the nineteenth century. While the industrial revolution came somewhat tardily in Germany, once under way it flowered with astonishing speed. Despite restricted natural resources, except for coal and iron ore, German organizing genius and scientific aptitude quickly made the Reich a great manufacturing nation, purchasing foodstuffs and raw materials in other parts of the world and converting them into finished products for sale over wide geographic areas. She also became a great financial center, especially in connection with short-term trade and industrial credits extended to central and eastern Europe. Germany, like France, continued to foster agriculture. This great development was accompanied by a very rapid increase in population and also by a steadily rising plane of living which made Germany a large importer of certain types of manufactured products, especially from the countries of western Europe.

Other western and central European countries of course contributed to and shared in the general expansion. This was especially the case with Holland and Belgium, which possessed colonial empires, but it was also true of the Scandinavian countries, Austria, Hungary, and Italy. Russia, the Balkans, and Spain, however, remained largely agricultural.

The development of industrialism in central and western Europe, accompanied by a vast increase in urban population, contributed greatly to the prosperity of agricultural countries in far parts of the world. For example, the opening of the great interior of the United States to profitable agriculture was a direct result. In turn, these cheap foodstuffs and raw materials made it possible for European countries, with restricted agricultural resources, to sustain huge populations.

In the last quarter of the nineteenth century there began in the Far East another great economic development. As a matter of national policy, Japan isolated itself from the rest of the world from 1600 until the political revolution of 1868. Immigration and emigration were forbidden and virtually all trade relations with the outside world were proscribed. The population of the Japanese islands, with a productive area about equal to that of the state of West Virginia, had increased between 1600 and 1720 from roughly 10 to 30 millions; but for nearly a hundred years thereafter it remained practically stationary, being limited, not by birth control but by famine, disease, and systematic infanticide.

The revolution quickly transformed the hermit kingdom to a nation seeking universal knowledge of and trade with all the world. The rapid acquisition of scientific and technical knowledge, the establishment of a modernized internal economic and financial organization, and the opening up of extensive trade relations with the outside world, resulted in a doubling of the population and of the plane of living in a period of sixty years. The application of science and technology, both in agriculture and industry, rapidly increased man-hour output, and at the same time Japan was now able to specialize

her productive efforts in the lines where she possessed the greatest relative advantage. She furnished raw silk to the industrial nations of the West, and she drew in turn upon the outside world for other raw materials. She imported raw cotton from the United States, Egypt, and India, converting it into finished products, not only for her own population but for export, especially to the Asiatic mainland. In due course the range of her industrial proficiency was extended to include metallurgical products and chemicals. Japan also furnished capital, largely in the form of direct investments, for the development of the resources of eastern Asia.

This complex, integrated, world system was in a state of balanced equilibrium.

The developments to which we have been referring proved cumulative in their effects-expansion in each particular nation or area contributing to expansion elsewhere. The process was furthered by the flow of investment capital from the wealthier states to the less developed areas, enabling the latter to increase productivity and thus to raise their standards of living. The system may perhaps best be characterized as one of financial and trade interdependence. This world-wide economic structure, it should be noted, was built up through the ordinary processes of trade and finance. With few exceptions governments played a minor role.

This world system was held in a state of equilibrium by a more or less balanced interchange of goods and services, supplemented by credit operations and international movements of gold. As indicated in Chapter III, the internal economies of each nation were adjusted to international economic requirements. That is, creditor