McKenna Shows How Nations Foster German Competition
BUSINESS & INVESTMENTS
A REMARKABLE address, dealing with such subjects as the cancellation of war debts; the effect of
“splendid isolation” on foreign trade; the relations existing between foreign commerce and prosperity; the value of exports as only payment for imports; and the folly of super-taxing industry, was delivered recently by the Right Honorable Reginald McKenna, leading British financier, formerly Chancellor of the Exchequer, before the Commercial Club of Chicago. This address is so thoughtful, so pregnant with authoritative information, so logically developed, that readers of MacLean's will be interested in reading substantial extracts. Very little publicity has hitherto been given to this address— and none at all in Canada. Mr. McKenna says, in part.:
What is the position of the United States in foreign trade at the present moment? There are some people who think that foreign trade for the United States is a very pleasant luxury, but something which after all is not necessary for the life of this great people, and, if needs must, something with which you may dispense.
It has been said that your foreign trade —I have seen the figures quoted—amounts only to seven per cent, of your total trade. Well, I think those figures are not correct. Such study as I have been able to give the subject has led me to the conclusion that while your foreign trade before the war was seven per cent, of your total trade, it rose during the war to twenty per cent, and is at this moment fo.urteen per cent, a proportion of the volume of your trade which is by no means negligible.
Some Striking Comparisons
I WOULD like to recall the salient figures of American export trade now and in the past, and I would like also to call attention to the nature of that trade. In 1920 your total exports amounted to $8,000,000,000 in value. Of those exports upwards of fifty-one per cent, consisted of manufactured and partly manufactured goods and under forty-nine per cent, of food of all kinds and crude or raw mater-
If you compare those figures with the corresponding figures forty years ago, in 1880, you will find that in the earlier year your exports amounted to $824,000,000, or only a little more than one-tenth of your export trade of last year, but in 1880, eighty-five per cent, of your exports consisted of food and raw materials and only fifteen per cent, of manufactured and partly manufactured goods.
During this period the nature of your export trade has been changing. The volume of both your export of food and raw materials and your export of manufactured goods enormously increased, for though in 1880, eighty-five per cent, consisted of food and raw materials, it was only eightyfive per cent, of $824,000,000, a total export of about $700,000,000, of that class of commodities, but in 1920 your food and raw materials were exported to the value of nearly $4,000,000,000, or dose upon six times the amount that you exported in 1880.
But mark what the development had been in manufactures. In the earlier year your export of manufactures amounted to less than $150,000,000. In 1920 they considerably exceeded $4,000,000,000. That
is a trade which cannot be lightly neglected-
Where Britain was Last Century
VT'OUR position today is the position 1 which was occupied by Great Britain during the Nineteenth Century. Throughout that century we were rapidly developing our export of manufactured goods, and we found ourselves more and more involved in the great commercial development of the world.
During a great part of that time many of our most eminent, most prudent and wisest statesmen used to advocate the policy in our country of what they called “splendid isolation.” They thought that England should stand out of all the revolutionary troubles, of all the wars and intrigues of Europe, and that we should go on developing our foreign trade while detaching ourselves from the snares which Europe set about our feet.
But trade, and what we may call the force of circumstances, were too strong for those eminent statesmen. We found that this immense trade brought us into relationship with all the nations of the world, and that we were utterly unable, desirable as it would have been, to hold ourselves aloof from the anxieties and troubles which vexed Europe.
It is not for me to draw any inference from these facts. I tell you only what has happened, and I say to you who have developed this enormous international trade, at this moment the greatest in the world, that you may find—I don’t prophesy;
I merely state it as a possibility—that you may find it as difficult as we have found it to hold yourselves aloof from the troubles and responsibilities of the rest of the
If you were to sacrifice your foreign trade, if you had no external relationships, you might in some respects be much happier—I do not dispute it—but I think y ou would be poorer. I n the development of modern industry your plant has been laid down for mass production. If you do not get a wide market for your produce, if your sales are reduced by five or ten or shall we say fourteen per cent., you may find that the drop makes all the difference between working at a profit and working at a loss.
Exports and Prosperity
THAT has been our experience. We have found that when the foreign market is closed to us, when the foreign demand is lessened in amount, we live under conditions of bad trade, and our domestic trade rises and falls with the prosperity of our foreign trade. I am very much afraid that you will find your experience to be precisely the same as ours; and also, that you will find that with this trade you will incur responsibilities which will press themselves upon you, however right may he your desire to avoid all connection with them.
I admit that the problem of foreign trade is not nearly as vital for you as it is for England. After all, you can support yourselves, and you can supply yourselves with all the food you require and nearly all the raw materials necessary for your industries without going outside your own borders. We can not. Foreign trade is, therefore, a vital necessity for us. But though that is true, I greatly doubt wheth-
er you will be able to maintain and develop the degree of prosperity which you have a right to expect, unless your foreign trade is in fact maintained.
Now, what are the causes in operation at this moment which are affecting the foreign trade of both the United States and of the United Kingdom? I hear it said very often that the depression in foreign trade is due largely to the existence of the inter-allied war debts. As not one penny, either by way of capital or interest of the war debts between the Allied Governments haB yet been paid, I very much doubt whether they could have had this adverse influence to them.
You know, the United States has a very large war debt due to it, but I think you will be surprised to hear that the net war debt due to the United Kingdom is quite as great as the war debt due to you. I took out some figures the other day which were not without interest. The advances ! the United Kingdom has made to the Allies I and Dominions amount to eight billion j dollars. The debt due from Germany under the treaty of Versailles and the treaty of London, amounts to six billion dollars— or a total of fourteen billion dollars due the United Kingdom. Against that, on the other side of the account, we have a debt due to the United States Government of four billion dollars, leaving a net credit to the United Kingdom of ten billion dollars j which is exactly the amount all the Allies : owe to the United States. So the United I States and ourselves between us are entitled to receive from Germany and the j Allies a total debt of twenty billion dollars, i one-half to the United States and onehalf to the United Kingdom.
Should England Cancel Debts?
AS TO the part due to the United Kingdom from the Allies, 1 confess, I not only am not sanguine of receiving it, but if it were in my power at this moment, I would cancel it. And I am going to tell you why, if you will allow me, in a few moments.
I do not say the same of the United States debt. I am only speaking now of the debt due to. the United Kingdom.
My argument is founded upon the experience of the payment of German reparations. Germany is called upon to pay annually a minimum amount, reckoned in dollars about $650,000,000,—rather over than less. Germany can only pay this $650,000,000 by exporting goods in excess of the imports she receives to that value. She cannot pay in gold; she does not possess it. Therefore the only thing she can do is to sell her goods in all the markets of the world, and in such large quantities that after paying for all her necessary imports, she will have a surplus over of $650,000,000.
Now, Germany is under an obligation to pay this money, an obligation of not quite the same kind as the debtor states are under to pay their debts to the United Kingdom or to the United States. The obligation which Germany is under is this: she is told that if she does not pay, her country will be invaded, and she has been threatened with a renewed blockade, what is the consequence? The German workman, having a very vivid memory of what the blockade meant to him during the war, when he was deprived of all fats, of the use of all cotton and wool, of most of the necessities of life—and I have worn, although not for long, because it was so uncomfortable, I have had on my back, at any rate, a German coat made of paper, and I can assure you it is a most disagreeable garment to wear—the German workman, I say, having a vivid recollection of the horrors of a blockade, is willing to work for almost any wages, in order that he may export his goods in competition with your goods, and with our goods.
As fast as we endeavor to reduce our prices in order tu meet the foreign demand, down comes the pressure of the government on the German workman. More marks are issued, paper marks. They are sold abroad, and down goes the
external value of the mark. There is consequently a renewed depression in the real wages of the German workman. While he is getting apparently the same number of paper marks as he got before the commodities he can buy with those marks are always diminishing in quantity.
German wages under this process can be indefinitely forced down, until at length the German workman will be reduced to somewhat the condition he was in during the war; when no doubt he will give up the struggle. But until that moment arrives the German workman will go on working and producing in competition with your workmen and our workmen, on a scale and on a standard of living which we would never permit our people to suffer under.
Why the German Undersells
THE consequence is quite obvious.
The German successfully undersells us and undersells you throughout the .markets of the world. He pays the reparations, it is true; he finds the necessary dollars, pounds, francs and lire. But at what a cost! We have in England two millions of unemployed. I believe you have some considerable number of unemployed here in this country. We, at any rate, cannot get our people employed again until we can get out our goods once more into the markets of the world.
Now, I do not say that German competition and the pressure uf the reparations are the sole cause of unemployment in England at the present time. There are other causes in operation, one of which I shall refer to later. But I would remind you of this, that we in our country lose more by the existence of two millions of unemployed for one year than ever we shall get in value from the German reparations paid over a period of thirty years. It looks to me, then, like a very bad bargain. I would rather see our people employed, and well employed; I would rather see them producing wealth in great quantities than receiving a dribble of wealth from Germany at the cost of our people being unemployed.
When I see these things happen, I begin to doubt whether it is really for the benefit of the United Kingdom that these reparations should be paid; at any rate, to this amount or in this form; and whether the other debts, the other war debts due to us from the Allies, might not perhaps, if they were paid, prove rather a curse than a blessing.
I would remind you that there are two kinds of international debts. England at the present time, quite apart from the debts arising out of the war, of which I have given you the figures, is a creditor nation, on which we might term trade account, to an amount of about $15,000,000,000. Before the war we were owed by the rest of the world something like $20,000,000,000. Of that amount we used up $5,000,000,000 during the war, chiefly in selling back to the United States the dollar securities in which we had invested our money over a period of fifty years or more. I was the means myself of transmitting many, many hundreds of millions of dollar securities to this country. It was a resource reserved to us. We were enabled with the accumulations we had made during our good years to pay for our immediate necessities during the war. But all that money, that twenty billion dollars, had been lent in different foreign countries for the promotion of industry. The money represented so many steel rails, locomotives, machinery, and plant of all kinds which had been sent out for over a century from the United Kingdom in order to develop those countries.
The United Kingdom Surplus
THE MONEY lent was capital employed in the foreign country and gave that country the means of furnishing the wealth with which to repay interest and capital alike. That is very different from what happened in the war. All the money
lent during the war has been spent, with nothing to show for it—that is, in a material sense. There is an immense amount to show in a moral sense; there is victory to show for it; but in the way of finding the means of repayment, there is nothing to show, and consequently the nations which have borrowed the money can only repay if their normal trade gives them a sufficient surplus of exports, and then can only repay if the creditor is willing to take that surplus.
The United Kingdom has a very considerable surplus of exports. We paid off last year 117 millions sterling—at the present rate of exchange about $450,000,000—of the foreign debt. We paid that off without re-borrowlng; we paid that off out of our surplus. That was debt, not due to any government, but debt which had been borrowed from private lenders, and we shall be paying off a considerable amount of similar debt during the current year; and year by year, we shall go on paying off that debt until the whole of it, as it falls due to the private lenders, is discharged. Great Britain can do that, because, as I said, she has great external resources and a considerable export balance.
But has Germany any export balance to enable her to pay the reparations; or has France a sufficient export balance to enable her to pay the debt due from her; or Italy, or Belgium, Roumania, or the other borrowing countries? I do not believe that they have. I have seen no figures which would justify any such belief; and even if they had this surplus,
I have not seen any great willingness on the part of the United States to accept their goods. Under the circumstances,
I do not think that the effort to repay, however desirous the nations might be to undertake it, will be a successful effort, either because they have not the ability to pay or because the United States has not the willingness to receive. For after all, if you are to receive these debts, you must accept them in the form of commodities. It is the only way in which foreign debts can be paid.
In England we discovered that long ago. As we became a great manufacturing nation, and lent our money abroad, we found that unless we admitted the goods of other countries into ours, we could not be paid. We learned—and it is a difficult lesson, but a true one—that the only value of an export is to pay for an import. And while I have nothing whatever to say upon the policy of the United States, while I am sure that you know your business a thousand times better than anybody else does, and while I would not presume for a moment to suggest to you any line of polioy for you to adopt, I do merely remind you, as an economic truth, that if you wish to be paid by a foreign debtor, you must accept his goods.
Taxation and Unemployment
THE United States and the United Kingdom are the two richest countries in the world. They enjoy much the greatest foreign trade. We are very nearly equal in that respect at this moment, though I think in the latest figures I have seen you are just ahead of us. They are far and away the greatest foreign creditors. I think in the matter of being foreign creditors we are ahead of you; we are owed more than you are, taking both trade debts and war debts together. While we enjoy this wealth and this trade and this foreign debt, we have the most unemployment and we are the heaviest
Now does it occur to any of you that there is any connection between the heavy taxation and unemployment? It does to me because we suffer even more from taxation than you do; and because, therefore, the lesson has been brought home to us more directly and with greater weight.
There are people who hold that if the State takes from the individual everything above what is necessary t;o support himself and his family in reasonable comfort,
and spends all the surplus on government I work, the nation is living an ideal life.
I have no doubt you have people who preach that doctrine in this country, as we have in ours. It is a gigantic fallacy. They forget that the profit made in one year so far as it is not spent on unprofitable consumption, becomes an increase of capital in the year ensuing, and by its use, trade year by year is increased in volume and national prosperity extends. But, if you take from industry all the surplus above what is necessary to maintain a man and his family in reasonable conditions of life, the whole of your reserves vanish. What you need for the development of your business, for the repair and extension of your plant and machinery—all that is gone. It is spent by the state within the year and instead of being a nation with a growing industry and growing wealth, you become poorer and poorer as the years go by.
It is a question of economic fact. Excessive taxation does not really take from thejich in a so great degree what they are accustomed to spend, as what they are accustomed to save. It takes from them what they would otherwise use in extending their business; and it is the greatest mistake to believe that a nation is benefited by a high rate of tax and a rapidly rising scale of surtax imposed in order to absorb what is regarded as the surplus income of the great industrialist, or banker.
Supertaxes Don’t Pay
WE NEED their resources. We know that those resources are going to be saved. We know that they are resources in powerful hands which can use them to the best advantage; and we know that in the long run every man is no more than a trustee for the wealth he manages, for he cannot enjoy more than a limited amount himself. He cannot take it away with him. He builds up a great business and a great industry, and he thereby contributes to the wealth and prosperity, not merely of himself and his family, but of his whole neighborhood, of his city and of his country.
We must therefore see to it in my country, and I think you may have to see to it in yours, that expenditure be so managed as to permit of a material reduction in taxation. It is necessary for the development of business and it is the surest means by which industrial prosperity can be restored.