THREE HUNDRED YEARS AGO, economic conditions in the world were more uniform than at present. There were some savage tribes, of course, but except for them the greater part of the world by and large had reached the same level of technological development and civilization. Then there came a radical change in some countries. Capitalism developed in the West; there was an accumulation and investment of capital; tools were perfected; Western civilization developed. Today there is an immense difference between Western civilization in the “advanced” countries of the world and conditions in the “backward” countries.
This distinction was even somewhat sharper in the early and middle part of the nineteenth century. A man who visited England and Romania in 1700 would not have seen any remarkable differences in the methods of production. By the year 1850, these differences were enormous. These differences were then so considerable that one could say, and some people believed, that the disparities would never disappear, that they would remain forever.
These differences consisted in the fact that there was greater capital investment, very much greater capital investment, in the West. But this capital investment, these capital goods are nothing but intermediate products. The head start these countries had attained over the “backward” countries consisted only in the matter of time. The Western nations had started earlier on the road toward improving economic conditions. The “backward” countries had still to begin. But there was time. It would have been a slow process. However, these backward nations would have found enterprise much easier, for there was no need for them to make experiments with unsuccessful methods of production. They didn’t have to make the inventions anew; they could simply take them over from the Western countries. In time, this would have reduced the discrepancy in economic levels, but some difference would have remained.
There was no secrecy about the technological inventions of Western civilization. The most intelligent young men in the “backward” countries went to schools in the West to learn all they could about methods of production. Then they could bring Western technology to their own countries. But technology was not the only thing. What was lacking in the “backward” countries was the mentality that had produced capitalism in the West and the institutions brought about by that mentality.
Capitalism couldn’t develop in the “backward” nations because the people didn’t like capitalism, and because businessmen there were exposed to dangers which didn’t exist in the West where there was the Rule of Law. The important thing for these “backward” nations, which were mostly in the East, was to change radically their mentality, their idea of economics. They had to recognize that the greater the number of rich there are, the better it is for the poor, that the presence of rich people is necessary for the abolition of the poverty of the masses. But this idea didn’t enter into the minds of these people. The farther they were from Europe, the less they realized that the essence of capitalistic development was not the technological knowledge and capital goods but the mentality which had made it possible to accumulate large-scale capital and capital goods.
The people in the “backward” nations, especially those in Asia, saw only their technological backwardness. If these countries had powerful governments, powerful in dominating their own country, what they wanted first of all, what they envied most of all, was the better weaponry produced by the West. These kings of the East were interested first of all in getting better guns; they were little interested in other things. But the patriots who did not consider war as the most important manifestation of the human mind were interested in technology. So they sent their sons to technological universities in the West and invited professors and industrialists from the West to come to their countries. But they didn’t grasp the real difference between the East and the West, the difference in ideas.
If the people in the “backward” nations had been left alone, they would probably never have improved conditions in their own countries; they probably wouldn’t have adopted the ideologies necessary to transform their countries into “modern” countries. Even if they had done this, it would have been a very slow process. It would have been necessary for them to start from the grass roots. First, they would have had to accumulate capital to construct, let us say, equipment for the mines, in order to produce ore and from this ore to produce metals, and then the railroads. It would have been a very long, slow process.
But what really happened was a phenomenon that nobody in the eighteenth century had considered. What developed was foreign investment. Considered from the point of view of world history, foreign investment was a most important phenomenon. Foreign investment meant that the capitalists in the West provided the capital required for the transformation of a part of the economic system of the “backward” countries into a modern society. This was something entirely new, something unknown in earlier ages. In 1817, when Ricardo wrote his book On the Principles of Political Economy and Taxation, he simply assumed as a fact that there was no capital investment abroad.
The capital investment that developed in the nineteenth century was very different from what had taken place under the old colonial system as it developed from the fifteenth century on. Then it had been a search for agricultural materials, natural resources, and products that could not be obtained in Europe. A silly explanation of their desire to trade was that the colonial powers were interested in getting foreign markets for their production. Actually the colonial powers exploited the colonies in order to get materials; they were very happy when they didn’t have to give anything for the resources they wanted, when they could get the foreign products for nothing. These early colonists were more often pirates and robbers than tradesmen. They considered selling abroad only as a sort of emergency measure if they couldn’t get what they wanted without paying for it. They really had very little interest in investing—they only wanted the raw materials.
Of course, they couldn’t prevent some citizens from their own countries from settling in these colonies and starting agricultural production. As a by-product of these colonial ventures of the fifteenth–eighteenth centuries, some important colonies developed overseas. The most important, of course, was the United States, and secondly the Latin American countries. But from the point of view of the European merchants and tradesmen, there was little interest in the fact that some members of the lower classes migrated and settled in the United States. For a long time they probably considered the islands in the Caribbean more important because there they could produce something they wanted— sugar. The settlements in America were not a part of the old colonial policy; they developed in spite of the ideas of the government, at least not because of them.
In the eighteenth century there was already some investment in the North American colonies, but it was not yet a phenomenon of great historical importance. The real foreign investment started in the nineteenth century. This foreign investment was different from the earlier colonial investment insofar as it took place in territories owned and ruled by foreign governments.
This foreign investment was developed in two different ways. One development was the investment in colonies owned by the several colonial powers, i.e., in countries dependent on European nations, for instance, the British investments in India. But still more important were the investments in countries that were politically independent and some of which were highly developed, such as the United States. The American railroads, for instance, were built to a great extent with the aid of European capital. Investments in the United States, Canada, and Australia were different from investments in other foreign countries because those three countries were not “backward” in the sense that they lacked the business mentality. These investments had a very different history because they were really used in the best possible way, and also because they were later completely paid back. In the 1860s and 1870s one of the most important investment opportunities for Europeans was to invest in the United States.
Capital investment in a country means, of course, what is called an “unfavorable balance of trade.” The United States imported capital in the nineteenth century. Therefore, in the nineteenth century there was an excess, by and large, of imports to the United States over exports from the United States. But then from the last decade of the nineteenth century on, the United States began to pay back the investments the Europeans had made. Then there was an excess of exports over imports; the balance of trade became, therefore, “active.” The difference was paid for by the purchases by U.S. citizens of American shares and bonds that before had been sold to Europeans. This went on until after World War I. The United States then became the greatest money lender and investor in the world.
The capital from Europe, and later from North America, that came to these countries made it possible for European and North American countries to expand their economic systems. One result of these foreign investments was that certain branches of production were developed in countries where they wouldn’t have been developed at all, or where they would have been developed only much later and certainly not in the way in which they were actually developed. The consequences undoubtedly benefited both the countries that invested and the countries in which the investments had been made.
Very soon an attitude hostile to foreign investors and foreign creditors developed in many of the countries which had benefited from this foreign investment. Such things even happened to some extent in the United States. One reason why the Confederate States didn’t get more than one small loan from Europe during the Civil War was that in their files Jefferson Davis [1808–1889] had a black mark against him. Before he became president of the Confederacy, Davis had worked to repudiate a state loan in Mississippi, and the European bankers at that time had a good memory. However, such things happened more often in other countries than they did in the United States.
On the one hand some countries had a specific idea about how foreign investors and foreign creditors should be treated. On the other hand there were European governments waiting to intervene when such conflicts became acute, to protect the “rights” as they said, of their citizens. As a matter of fact, these European governments were not very much interested in the “rights” of their citizens. What they wanted was a pretext for colonial conquest. After the Congress of Vienna [1814–1815], it was a very disagreeable situation to be an army officer in Europe which was, by and large, at peace. The governments, and especially their armies and navies, were anxious to gain success abroad. They wanted victories, and some governments believed that public opinion expected such victories. If they went to war, they might be defeated and their prestige would suffer. This led some of them to seek colonial exploitation. For instance, the government of Napoleon III, which suffered from really bad treatment of French investors in the Republic of Mexico, embarked in the 1860s on a great adventure in Mexico. In the beginning, it brought some success to the French army, but it did not end as the French had hoped.
The countries which had been benefited from foreign investment misunderstood the meaning and advantages of foreign investment. There was a popular movement against foreign investors. Throughout the world, the principle of national sovereignty became accepted; it was maintained that an outside nation does not have the right to interfere if the rights of its citizens in another country are being violated. This was called the sovereignty doctrine. We are not interested in the legal excuses for placing obstacles in the path of foreign investors. But the result of the whole movement was that foreign investments and foreign loans granted to a country were completely at the mercy of every sovereign nation. These countries declared the foreigners to be exploiters and they tried to demonstrate the presence of exploitation by various theories which are not worth mentioning.
The Marxians provided several doctrines which related foreign investment to imperialism. They maintained imperialism is bad and must be abolished at any cost. These Marxian doctrines, especially those of Rosa Luxemburg [1871–1919], cannot be explained without entering into the whole value theory of Karl Marx. These Marxian doctrines of imperialism declared that foreign investment is both detrimental to the country from which capital is exported and detrimental to the country to which it is imported. Foreign investment is imperialism—imperialism means war—and therefore foreign countries are conquerors. The naïve reader of a newspaper is very astonished to learn that the United States, which is today practically the only country that can make foreign investments, is an imperialistic power and that a loan granted by the United States to another country means aggression against that country. This is a consequence of these ideas. But are they true? Did the capitalists of one country go into foreign countries, as this doctrine declares, in order to withhold capital and the advantages of additional capital investment from their own citizens?
Let us look at the motives of an individual capitalist entrepreneur. Why did he not invest at home? Because he believed that investing abroad was more profitable than investing at home. Why was this the case? Because the consumers on the domestic market were asking more urgently for products which could be produced only with the aid of foreign resources than they were asking for products which could have been produced by an expansion of domestic industries. For example, until a short time ago Europe had practically no oil production. Except for a very small quantity of inferior quality oil in Romania and in a part of the Austro-Hungarian Empire that later became a part of Poland one could produce practically no oil in Europe. Therefore, instead of expanding European industries when consumers began to ask for more oil products, it became profitable to go to foreign countries and invest there in order to produce oil. The same was true of many other articles. For instance, the greater part of the cooking fats and soaps produced in Europe were made from plants that couldn’t be grown in Europe. A great part of European consumption was consumption of things produced from raw materials that couldn’t be produced in Europe at all, or that could be produced there only at a much higher cost.
At the beginning of the nineteenth century, when the question was protectionism against free trade, the slogan of the free traders in Britain was the simple Englishman’s breakfast table for which all the products were either directly or indirectly imported from abroad. Even if some of them were produced at home, it was with the aid of fertilizer or fodder from abroad. In order to develop the products for the Englishman’s breakfast, European investors went abroad and in the process they developed a demand for the products of English manufacturers. They also had to establish transport systems, harbors, and so on. Therefore, it is simply not true that European consumers and then later American consumers were hurt by capital exports; the capital was exported to invest in the production of things that European and American consumers wanted. The domestic resources of the European nations were lamentably insufficient; it would have been impossible for them to feed and clothe their populations out of domestic resources. In spite of the fact that there are now seven times more people in England than at the start of the Industrial Revolution,1 the standard of living is incomparably higher. This was possible only because capital had been invested and large-scale production had been started in England and abroad—railroads, mines, and so on.
On the eve of the Second World War, the economic structure of British life was characterized by the fact that Great Britain imported about £400,000,000 more than it exported. 50 percent of this surplus was paid for by the dividends and profits of British-owned enterprises abroad and by the interest on bonds of foreign countries owned by the British. The standard of living of Great Britain was determined by this fact. During World War II, a part of these British investments abroad were sold, mostly to the United States, in order to pay for the war and for the surplus of imports the British needed before Lend-Lease started.2 Then after the war, when Lend-Lease came to an end, the British government declared that it was no longer possible to feed their people without the aid of an American loan which was, in fact, an American gift. But even this was not enough. The Argentine government expropriated the shares of the British-owned railroad and paid for these expropriations in British currency. The British government then taxed the money away from the people who got this indemnity from Argentina, and used this money to pay for wheat, meat, and other foodstuffs bought from Argentina. This is a typical case of capital consumption. Savings of the past which had been accumulated in the form of railroads were sold in order to get food (current consumption). This is very characteristic; it shows how these foreign investments were consumed.
But the greater part of European foreign investments, including British investments abroad, were simply expropriated. For the United States these expropriations and repudiations didn’t mean so much, because the United States is comparatively very rich and these investments didn’t play such a great role in the economy. Also, in my opinion, the United States is still accumulating additional capital. But for Great Britain, Germany, Switzerland, France, and other countries, this meant a considerable reduction in their wealth; they had invested abroad, not because they wanted to give away their wealth, but because they wanted income from the investments.
There are many different methods of expropriation.
1. The communistic method: If the country goes communistic, the government simply declares that there is no longer any private property; it takes and it doesn’t pay for what it takes. Sometimes they say they will pay, but in fact they find some excuse not to make this indemnification.
2. Confiscatory taxation: Of course, there are in some trade agreements provisions prohibiting any discrimination against foreigners and this includes discrimination by taxation. But laws can be written so as not to appear to be against foreigners.
3. Foreign-exchange control: This is the most popular method. The foreign corporation makes a profit in its dealings in a country but the foreign-exchange control laws prevent it from transferring these profits into another country. As an example, let us consider Hungary. There were foreigners who owned small or greater amounts of bonds and common stocks in Hungary. The Hungarian government said, “Of course, you are perfectly free. You have the right to receive your interest and dividends. But we have a law, not only for foreigners, also for Hungarians. The law says that the transfer of funds out of the country is forbidden. Come to Hungary and live here, and you can get your money.” Often a country with foreign-exchange controls does not even let a man spend all his money earned in a short period of time—it is portioned out in monthly payments. In effect, this means expropriation. What they really want is for the producer, if he should actually come to the country, to spend not only the money earned in the country but also his own money which he brings to the country. This practically means an end to foreign investment. In the past if people were willing to invest capital in foreign countries they expected an improvement in conditions. But now this is no longer the case.
In the Middle Ages, the wealthy kings and rulers traveled around their empires. They said they were judges and had to keep an eye on the country. But the real economic reason for their travels was that the prince, the German Kaiser, for instance, owned big estates in various parts of the country. They traveled with their retinue to consume what was produced there. It was easier to move the men to the commodities than to move the commodities to the prince’s palace. This is the same right that exchange controls give—to consume goods in the region of their origin.
The Chinese governments were very clever. They did not expropriate the British. First, they prohibited them from exporting profits. Then they forced them to operate in such a way that there was no profit. Then they asked for taxes also, so that the British had to send additional money to China. Finally they made the British realize that you cannot do business with the communists, you especially cannot invest with them.
The expropriation of the Mexican oil fields was accomplished by repudiation, by the nonpayment of bonds.
The story of foreign investment can be told in a few words. Investments went out but only the glory, or the fame of this glory, remains. The result is that today there is very little readiness of people to invest abroad.
It was amazing that during the interval between the first and second World Wars there were still investments in countries that had repudiated foreign investors openly or indirectly. American investors lost a lot of money when the German mark collapsed because the German bonds were Mark bonds, not gold bonds. Nevertheless, during this period there were many German municipalities that succeeded in getting loans from American investors. Sometimes these America investors were simply “babes in the woods”; they didn’t know what they were doing.
The Swedish government issued a gold dollar bond. They were paid for these bonds in gold dollars and promised to repay the loan in American gold dollars, defined as the American McKinley gold dollar. Then in 1933, the United States went off the gold standard. The provision in the Swedish loan had been formulated precisely for the unlikely event of a change in the American currency. But then the Swedish government declared, “We will repay the loan in new American dollars, Roosevelt dollars, not in McKinley dollars as specified in the bond.” Given such a situation it is very difficult to get foreign investment.
In some Latin American countries there is no market for government bonds. These countries got private loans in the United States. But they will no longer get such loans. What has been substituted for this system of private investment was, first, Lend-Lease and, now, foreign aid. That means the American taxpayer is making gifts, not loans, to these countries.
Institutions have been established, especially the International World Bank, for the purpose of giving loans, but under a guarantee. In the long run such a system is self-defeating. If the United States issues bonds at a definite rate, let us say 3 percent, then the United States is standing behind the bond. If a foreign government issues such a bond under the guarantee of the United States, then again the United States is behind this bond. If the United States will not pay, then this foreign government will certainly not pay either. Now if this foreign loan is at a higher rate, let us say 4 percent, then the American government competes with its own bonds. The American government will not be in a position to sell its own bonds at 3 percent if the foreign bond has an advantage over the American bonds—not only a higher interest rate but the guarantee of the American government besides. Therefore, such a system cannot prevail in the long run. The result of the whole thing is that there is no longer any private investment.
Public investment abroad means something quite different from private investment. When the Argentine railroads were owned by private individuals of Great Britain, there was no infringement on the sovereignty of the government of Argentina. But if the railroads or harbors, for instance, are owned by a foreign government, this means something entirely different. And it means political problems become more important than economic problems.
Point Four is a very lame attempt to do away with the disastrous consequences of the absence of foreign investment.3 Behind it is the idea of teaching these backward nations “know-how.” But in the United States, there are many gifted engineers with “know-how” who could be offered positions abroad where they could use the knowledge and experience they have acquired in this country. Therefore, Point Four is not necessary for that reason. Also, there are hundreds and even thousands of foreign citizens in the United States and in Western universities who learn all these things. The art of printing was invented 500 years ago, and there are now printed textbooks. For those who cannot read English there are translations of these books. There are many clever Chinese. If a factory in China is backward, it is not due to the inability to acquire “know-how,” but because it doesn’t have the capital required.
In 1948, there was a meeting of the World Council of Churches in Amsterdam. They issued a statement saying that it was unfair and unjust that only the countries of the West enjoyed the advantages of machines, while in Asia and Africa the methods of production were backward. If, on the eighth day of Creation, the Lord had made a limited amount of machines and hospitals to be distributed equally and the West had appropriated more than its share, then one could have said that the situation was unfair. But the capitalist countries actually gave very valuable equipment and machines as gifts to these “backward” countries and the “backward” countries simply expropriated them. These countries didn’t understand what capitalism means. They thought the machines and the hospitals were capitalism. But capitalism is the mentality from which the institutions could emerge making it possible for capital to develop in the West and then to construct all these things. It could be said that the West developed its method of production from capital it made at home. Capitalism is not things; it is a mentality.
Nehru [Jawaharlal Nehru, 1889–1964] has been quoted as saying: “We want to give every encouragement to private industry. We won’t expropriate private businesses for at least ten years—perhaps not even that soon.” You cannot expect people to invest if you tell them that you will expropriate them at some time in the future. Therefore, conditions in India are much worse now than when the British were there. Then you could still hope that the British would remain and that they would not expropriate your business. The conditions are again similar to those that prevailed before the British came to India. If an Indian has some savings, he invests in the precious metals or still better in jewels. First of all these cannot be confiscated so easily and you can try to hide them. If necessary, you can even swallow a diamond to keep it safe for some time. You can’t hide a railroad or a mine. And this is the catastrophe of the “backward” nations; people invest their savings in such things rather than in capital goods.
This situation has been made much worse because the Europeans brought to these countries modern medicines and modern methods of treating contagious diseases. In spite of the conditions that still prevail in China, and India especially, infant mortality figures have dropped considerably. As a result, these countries have an increasing population and a decreasing capital investment. The per capita capital is dropping instead of increasing. The Russian system also does not produce capital accumulation, i.e., it has insufficient capital accumulation. Thus, we have a situation in which the greater part of mankind in the world is living under conditions which mean a lowering of the standard of living. It is terrible to say this, but it is true; it would have been better for these people if the methods of fighting contagious diseases had not been imported for them.
I want to stress again that capitalism, modern machine production, and so on, is not something material! The tools and machines are the material results attained by a certain spiritual mentality, by a certain ideology. Capitalism or modern conditions, modern standards of living, are not simply the outcome of technology. They are the outcomes of certain ideas about social organization and about the cooperation of men under the division of labor and private ownership of the means of production. These ideas must be adopted in these “backward” countries if they want to change conditions.
I do not want to deal with happiness and other connected problems. I don’t want to say that the Africans are happy without machines, without clothes, and with very different methods of feeding. But certainly they are not enthusiastic about the various diseases that plague them and which they can fight only with the methods of modern capitalism. It is wonderful that Dr. Albert Schweitzer [1875–1965] went to the center of Africa to work for the improvement of conditions. But Dr. Schweitzer has had only a very limited effect compared to the effects of capitalism which made possible the modern means of production that provided all the things necessary to maintain a hospital in the middle of Africa. If you want to help the millions in Asia and Africa, then what is needed is capitalistic methods of production and capitalistic ideas. And they cannot be developed by the means which are today being applied in those countries.
It was the introduction of foreign investment in the nineteenth century that helped to make war and conquest superfluous. The situation which people had to face at that time, and are facing again today, was that there are countries in the world which nature has endowed with natural resources that are not available in other countries. From the point of view of natural resources, Europe is very poorly endowed by nature; Asia is much better endowed. If, on the one hand, the countries which have rich natural resources are so backward and so poor in capital that they cannot produce from these resources, and if, on the other hand, they do not permit foreigners to invest capital there and take advantage of the existence of these resources, both for their own and for the natives’ advantage, can anyone expect that the people of the civilized countries will forever tolerate this state of affairs? Do the inhabitants of a country, just because their ancestors, conquered the country 500 or 600 years ago, have a right to prevent the improvement of conditions and peace in the world?
We are going back to the situation when you couldn’t get these products without conquest, the situation which made the colonial system necessary. The nineteenth century developed a method which made it unnecessary. But now we have a state of affairs again in which these countries are preventing access by trade to raw materials. We can’t know but some day a new technological method may be discovered that depends on raw materials which are available only in very backward countries. The people will say, “We could improve our standard of living and that of all other countries if we had access to these raw materials; they are completely useless to the Dalai Lama of Tibet.” It was precisely foreign investment— the possibility of making use of all natural resources without political interference—that made war unnecessary. That doesn’t hurt the countries involved. The foreign investments really cooperated in the country’s development without hurting the country in any way. The peace of the world depends on this.
The disappearance of foreign investment is a very serious problem. What is most visible today is only the bad consequences, the bad standards of living, in India and China and some other countries. But this is not all; the whole system of world policies and international policies will be affected. And then if such real conflicts really arise, even the Boy Scouts of the United Nations will not prove any better than did the statutes of the League of Nations, the UN’s predecessor.