Potential Conflicts
Between Capital-Importing and Capital-Exporting Countries

IN THIS and the subsequent chapter the aim will be to uncover some of the basic elements in investment friction(1) by devoting attention to the potential investment conflicts that exist (a) between countries which stand in the relation of capital-importer and capital-exporter and (b) between countries which are competing exporters of capital.

It is a fact of general experience that the debtor does not love his creditor, and a debtor region is likely to develop a hostility toward a creditor region. This is true within the confines of a single nation: witness the undercurrent of latent hostility toward "Wall Street" and the East which has periodically come to the surface in the middle-western United States. When the creditor region is of one nationality and the debtor region another, the mingled pride, fear, and suspicion of sharp dealings which enter into the psychological relation of debtor toward creditor join with the popular reaction against foreigners in general to produce an important general source of investment conflict. This creditor-debtor conflict arises partly out of the other specific forms of conflict between debtor and creditor areas to be described in this chapter. It may not be violent enough in ordinary times to generate serious political friction in itself, but it forms an unfavorable background against which any acute conflict takes on a more sinister appearance.

The history of the United States, until a few decades ago a great debtor to the world, provides ample illustration of the phenomenon under discussion. Popular antipathy against foreign capital ran high in the early days of the republic and helped to put an end to the first United States Bank, since the Bank was believed to be under the domination of British financial interests. Later, foreign capital went into American banking to such an extent that fear arose lest the banking function be concentrated in the hands of a few wealthy foreigners, and Pennsylvania in 1824 prohibited the transfer of bank stock to non-citizens of the United States. The same state, when rechartering the Bank of North America in 1825, prohibited any foreigner, save a citizen of Holland, from holding stock unless he had declared his intention of becoming naturalized.(2) "British gold" was long regarded as a sinister influence. During the free silver campaign of 1896 multitudes of Americans held that British creditors, who naturally favored the maintenance of the gold standard in the United States, were using their money to interfere in the domestic affairs of the country. The result was intense anti-British feeling. In the twentieth century the situation changed. The United States became one of the most conspicuous creditor regions, and now it was "American gold" which was denounced in Europe, in Latin America, and elsewhere. The Wall Street bogie was even used occasionally in election campaigns to frighten patriotic Canadians, who were pictured by at least one political orator as destined to become hewers of wood and drawers of water for American capital.

Domestic disputes between employers and workers over wages, hours, recognition of unions, and conditions of labor may be very bitter, but they do not ordinarily set two states or provinces---that is, two regional or local governments, or two subordinate divisions of a national government---against each other. This is true even though the capital may be owned by citizens of one political division (e.g., New York) and the workers may be citizens of another (e.g., Alabama). When capital-labor relations cut across national boundaries, however, disputes involving capital investors of one country and workers of another may easily bring two governments into conflict, since one rules the territory in which the difficulty arises and the other claims the right, under the existing system of international law, to see that the interests of its nationals in that territory are adequately protected. Thus one state may be pitted against another, each representing the interests of a group of its nationals. Furthermore, lurking national antagonisms and prejudices render capital-labor conflicts that cut across boundaries infinitely more complicated than their domestic counterparts. A concrete example vividly illustrates the truth of this observation.

On January 18, 1933, a group of rioting workmen, nearly 200 strong, battered their way into. the offices of the Singer Sewing Machine Company's branch in Yokohama, Japan, smashed typewriters and furniture, damaged safes, broke doors and windows, poured ink on ledgers, and destroyed installment sale contracts and other valuable documents. This riot climaxed a series of labor troubles reaching back into the previous summer. The ambassador of the United States immediately requested the Japanese government to make an investigation and to provide adequate police protection for American life and property. Since it turned out that the building used by the Singer Sewing Machine Company was the property of a Swiss citizen, the Swiss legation took a similar step. The Japanese Foreign Office appears to have handled the matter satisfactorily; at least, newspaper dispatches revealed no subsequent diplomatic developments. The incident did not lead to serious international political friction, therefore; but the point is that this rather ordinary capital-labor conflict, of a type not uncommon in domestic disputes of the same sort, immediately involved the political departments of two major powers. Furthermore, it brought into play the emotional antagonisms of two peoples, powerfully stimulated, as is usual in such cases, by sensational and nationally biased reporting in their respective newspapers.

The conflict was, in fact, purely as a capital-labor dispute, not especially noteworthy. Newspaper dispatches spoke of a strike against pay reduction in the previous summer, of a request by the general-secretary of the Japanese Federation of Labor for an interview with the Singer general manager, which was refused, and of the fact that the general-secretary was an upholder of legal methods, while the mob was led by younger hot-heads who took matters into their own hands when the company refused to deal with any labor organization. Each side accused the other of hiring thugs. So far this is the old story, familiar in many a domestic labor dispute. A novel element enters in a reported difference over the question of retirement pay to workmen leaving the company's service; here a diversity in American and Japanese customs appears to have played a part. But most important from our point of view, and directly associated with the migration of capital across national boundaries, was the facility with which international animosities attached themselves to the original capital-labor controversy and gave it potentially grave political implications.

Certain newspapers in the United States reported the affair sensationally as an outburst of anti-Americanism. The more sober correspondent of the New York Times wrote that "this interpretation appears far fetched, in view of the fact that salesmen had been on strike for many weeks," but he went on to point out that there is a tendency in such situations for national feeling to develop: "The fall in yen exchange has, in the eyes of unthinking Japanese, made all Americans here rich, and some are foolish enough to suppose this advantage accrues at Japan's expense. Many American companies, including Singer, have a long record of friendship with their Japanese employes, who value the higher pay the foreigners give. When disputes arise and are embittered by long duration, racial animus is often injected by agitators, but the disturbance at the Singer Company was primarily a strike riot, not a manifestation of Anti-Americanism."(3) Nevertheless, what starts as a simple labor disturbance may easily take on nationalistic complications where foreign investments are involved.

It may be said of private international investments in "advanced" countries, however, that capital-labor conflicts connected with them have not ordinarily created difficulties strikingly different from those connected with domestic enterprise, nor have their labor troubles been responsible for serious international complications or even noticeable ill-will.

For the most part such organizations as the European affiliates of the General Electric Company, the International Harvester Company, and General Motors, like the Bosch Magneto Company, the Agfa film sales organization, and other foreign-owned enterprises in the United States, have adapted themselves to the countries where they operate and have merged into the general economic background of those lands. Their managers on the ground include many native citizens of the capital-receiving country. Their policy is usually to pay the prevailing rate of wages (or higher, as in the case of certain American companies in Europe), to follow the practices of native employers in such matters as dealing with unions, and often to join the recognized associations of employers in their industries.(4)

The situation is different when the investor enters an industrially undeveloped country. In such areas the labor problems raised by the introduction of foreign capital and capitalistic methods have taken various forms, ranging from the revolting cruelties practiced on certain African tribes by collectors of rubber, through virtual enslavement or peonage of other peoples (forced labor), to the creation of a factory proletariat with strikes, lock-outs, and boycotts on a quite modern line in Chinese cities. The capital-labor problem in industrially less advanced regions also merges with the land problem, the destruction of native social organization by the absorption of small plots or communal lands into large estates, and the owner-tenant conflict. All these problems involve strong elements of conflict, which become potential sources of political friction between capital-providing and capital-receiving regions. Of course, the very conditions which make the capital-labor problem take these forms in "backward" countries also render the inhabitants of these countries impotent to express their antagonisms forcefully against foreign exploiters. These conflicts cannot, for the present, rise to the dignity of international war, simply because one party is no match for the other. In the immediate future such conflicts will doubtless continue to manifest themselves in scattered disorders and riots, anti-foreign movements, boycotts, and in colonial insurrections within the dependencies of great powers, rather than in wars or threats of wars. A longer view into the future, however, can easily picture a situation in which the peoples of Asia, Africa, tropical America, and the islands of the sea have taken over enough of the industrial culture to be no longer negligible in military combat against their tutors in industrialism. It is not beyond the bounds of the possible that Soviet Russia might provide powerful technical support in some future alignment of the "exploited" nations of the earth against the "exploiting" nations. These possibilities suggest that the capital-labor conflict, in its many phases, may some day be the source of the most intensely serious political problems connected with international capital movements.

Some concrete instances will illustrate the various forms which capital-labor conflicts may take in non-industrialized areas under the impact of foreign investment. When King Leopold II of Belgium secured the coöperation of explorers and financiers to launch the International Association of the Congo in 1879 one of the most ruthless chapters in the history of native mistreatment by foreign exploiters was begun. The object of the Association was to make a profit from the rubber and other products of central Africa, and also to increase the glory and power of the King by establishing an African empire. The methods employed to force the defenseless inhabitants of the dense tropical forests north of the Congo River, later known as the Congo Free State and now as the Belgian Congo, to gather rubber for the white newcomers were unspeakably cruel. They included frequent shootings, the holding of women and children as hostages against the delivery of certain amounts of rubber and ivory ("taxes") by the men, and such punishments as the chopping off of hands. Perhaps even more devastating than these atrocities were the indirect effects of the concessionaire system and the destruction of native social organization upon native life. Whole areas were swept by famine and decay. Exposures eventually led to action by the Belgian parliament, which made the Free State a Belgian colony in 1908 and endeavored to substitute a better regime.(5)

The same problem which led to the atrocities of the Congo Free State confronts the foreign investor in many countries, namely, how to secure an adequate labor supply where the native population is not subject to pecuniary inducements. Not often are such extreme methods used in its solution, but the resort to "forced labor" or to various forms of pressure which have a more legitimate sound but amount to much the same thing, are a not uncommon result. A recent writer on Mexico(6) relates two instances which illustrate the problem. A foreigner with strong humanitarian sympathies acquired a plantation in Mexico. Finding that the prevailing rate of wages for hacienda work in his vicinity was twenty-five centavos a day, he determined to double that amount; fifty centavos seemed little enough. The peons were duly hired and began work. At the end of the first week they were paid the higher wage, and everybody seemed pleased. But Monday morning when the gates were thrown open not a worker appeared; operations came to a standstill. A few interviews shortly established the fact that the peons, accustomed to making ends meet on twenty-five centavos a day, had earned enough in a week to keep them two weeks. Why, then, they reasoned, work any more? Hard as this behavior may be for a person reared in a pecuniary culture to understand, it seemed perfectly logical to them. The philanthropic employer swallowed his principles and reduced wages to twenty-five centavos in order to insure a steady labor supply! The second instance had a more tragic outcome. Labor was hard to get for a sugar plantation in Tehuantepec. The neighboring Zapotec Indians could not be interested. Thereupon the company bribed a local political boss to arrest the Indians on trumped-up charges and deliver them at so much a head to the hacienda. The victims made a few polite motions of an agricultural nature, but soon escaped to their village. Here were fine mango trees, food like manna from heaven. Why work for aliens in hot fields? In desperation, the company finally sent its men by night and cut down the mango trees, starving the village into dependence upon employment.

The land question is intimately bound up with the exploitation of labor, and, indeed, with many of the disastrous effects on native social life which modern anthropologists point to as the results of the imposition of an alien industrial culture on non-industrial peoples.(7) A quite common device in Africa has been for private companies to acquire large tracts of the best land by lease or concession, so that the natives become trespassers on the soil that formerly yielded them food and must either starve or abandon their accustomed way of life and go to work for the companies. Will the new point of view which the findings of the anthropologists, the efforts of humanitarians, and the machinery of League of Nations mandates supervision have introduced into colonial policy during recent decades suffice to prevent innumerable conflicts between native populations and foreign employers or landowners from developing into serious political friction, perhaps international war, as the "backward" peoples grow stronger? Progressive colonial administrators are here and there taking steps to defend primitive peoples against the organized rapacity of industrialism. The British soap firm of Lever Brothers, for example, which has large concessions in the Belgian Congo, was unable to secure similar privileges in Sierra Leone and the French Ivory Coast, because the governments believed them incompatible with native interests.(8) The rubber concessions of Firestone in Liberia have lately come under the scrutiny of the League of Nations, whose experts have studied the problem of harmonizing the interests of small native cultivators with the labor needs of the Firestone plantation.

Thus far we have seen that the migration of capital imparts a new twist to the traditional creditor-debtor, capital-labor, landowner-tenant conflicts by installing them athwart international boundaries, thereby making them potential sources of international friction. Still another form of conflict which may be brought into play by foreign investment results from the cultural diversities between capital-exporting and capital-importing countries. The export of capital frequently means nothing less than the export of the industrial revolution, with its attendant strains upon the social fabric of the country suddenly exposed to its drastic influence. We are familiar in the West with the turmoil and struggles that have accompanied the industrialization of England, the Continent of Europe, and America; indeed, these countries still grapple with the multifarious problems pressed upon them by the rapid economic changes of the last two centuries. How much more acute, in many respects, may be the difficulties of social readjustment experienced by a country which has the industrial system thrust upon it all at once, without the necessity of a gradual accumulation of capital and techniques to slow down the pace of the transition !(9) That is what the migration of capital from highly industrialized to non-industrial countries brings about. The conflicts expressed by the wrath of Lancashire hand-workers against the machines over a century ago in England also exist in all their fury where the industrial revolution arrives full-blown with imports of foreign capital. But there is the additional complication that the disturbing changes are initiated in such cases, not by natives, fellow-citizens, but by outsiders, aliens, foreigners. Into the familiar conflict between the old, non-industrial culture and the new, ever-conquering machine technology of industrial capitalism an anti-foreign element is thus injected when capital crosses boundaries.

The clash of cultures associated with foreign investment is at its maximum, of course, in countries like China, where the native culture is not only non-industrial, but rests upon a stable, firmly rooted social system of its own, whose every fiber points a contrast to the industrial West. From the first fateful wedge driven by the early traders, through the Opium War by which foreigners forced their way into treaty ports, past the Boxer uprising, down to the revolutionary movement of Sun Yat Sen and the external and internal conflicts which beset China today, contacts with the West have been disintegrating the old Chinese civilization. Investments from abroad have had their share in this process.

Look at investments in China as they must appear to the Chinese masses. People practicing their accustomed modes of production, their ancient family and community life, and the forms of art and religion sanctioned by long usage, suddenly find all this disturbed and their lives unsettled by foreigners who introduce articles from abroad more cheaply than native craftsmen can make them, who ruin the livelihood of native transport workers by the competition of their iron horses, who put whole villages to work in factories or mines, and who desecrate the sacred places with tunnels and steel rails. Each new-fangled contraption from the West has upset some phase of the delicate balance that characterized the old Chinese economy.(10) The first railway, for example, was laid between Shanghai and Woosung (twelve miles) in 1875. The permit issued by Chinese authorities made plain that only animals were to be used as motive power, but Messrs. Jardine and Company, ignoring the protests of the natives, soon installed a steam locomotive. All the prejudices of the conservative Chinese culture were aroused. The populace feared for the graves of ancestors, and the more superstitious trembled lest the "luck" of the land should be disturbed. Most men disliked the probable extension of foreign influence. No sooner was the road in operation than the porters, carters, wheel-barrow men, and others dependent upon the old carrying service between Shanghai and Woosung found their occupation gone. With starvation staring them in the face they rose in desperation and, decided to keep the Western innovation permanently inoperative. Some walked deliberately in front of the engine. Petitions poured in upon the provincial authorities. It was not until a laborer had been run over and killed that the central government directed the provincial to have the concession cancelled. After troublesome diplomatic negotiations, the railway was repurchased in 1877, torn up, and shipped to Formosa.(11)

It is only within the last few years that street cars could be operated on the streets of Peking, because of the opposition of the 28,000 rickshaw pullers who earn their bread by transporting people from place to place.(12) A similar conflict lies behind the frequent attacks on steamers in the upper reaches of the Yangtze. For centuries trackers have made their living towing junks against the swift current. It is estimated that three million people were dependent upon these trackers for a livelihood.(13) When machinery appeared, it brought doubt and despair to the displaced workers, and, unaccustomed to the rules of competition as practiced in the West, they attempted to save their livelihood by driving out the steamers. Particularly frequent attacks developed in 1923-24 when the Dollar lines and the German Stinnes Company opened service through the gorges to Ch'ungking, competing with the British, Japanese, French, and Chinese lines already established. The Chinese boatmen on this part of the river are noted for their skill and bravery, and when thousands of them saw their jobs disappearing they sometimes took violent measures. Brigands and provincial chieftains championed their cause against the foreigners. When a steamer was fired upon swift retribution usually followed from the gunboats of the powers, stationed along the river to maintain law and order in the Western sense.(14)

The transportation services have felt the impact of western technological culture most severely in China, for there as elsewhere an early step in the invasion of foreign capital has been the construction of modern facilities for transport and communication. The estimate that twenty per cent of China's manpower is employed in transportation, while five per cent is sufficient to provide a much superior service in western countries,(15) indicates the startling magnitude of the social changes which may be effected by the modernization of this aspect of China's economic life alone. And experience has shown that a revolution in transportation is merely the beginning; it initiates vast reorganizations in the life of a people through transformation of a local handicraft economy into an economy of extended markets, specialized production, and wide interdependence. The impact of such changes is already beginning to be felt in China with the disappearance of certain trades, the starvation of displaced craftsmen, the disorganization of village communities, the uprooting of family traditions, the rise of proletarian masses in the cities, and a general breakdown of the morale based on a disappearing culture.

The number of laborers now working under the factory system in China is said to be a few hundred thousand at most. Nevertheless, a definitive breaking away from the family system is perceptible. A regular working class is slowly forming in the cities, a class made up of whole families who have definitely left the soil. Here is a class peculiarly susceptible to anti-foreign feeling. The foreigners own and operate many of the mills, and, as we have already seen, labor disputes under such conditions are likely to develop antagonism against the employer which easily passes into hostility against the foreigner. The Seamen's strike of 1921 led into general anti-British feeling. A labor dispute at a Japanese cotton mill in 1925 resulted in the death of a Chinese rioter at the hands of a Japanese guard. Students arranged a demonstration, "and their diatribes were aimed, not at employers as such, but at the foreigners as murderers. What under normal circumstances would have been a labor outbreak became, under the conditions prevailing in China, an anti-foreign demonstration," and led directly to the nation-wide outburst against foreigners in June, 1925.(16)

Many more illustrations could be given to show the multitudinous ways in which conflicts may arise when foreign investors carry their revolutionary operations into a cultural environment different from their own. Mining enterprises In China, for example, have aroused the hostility and encountered the obstruction of local and provincial authorities, the local gentry, and the people. At times they have had to suspend operations even when armed with permits from the central government, and at other times the central government has had to repurchase mining concessions to appease an outraged populace. This hostility has been due partly to local economic interests, partly to violations of sacred places such as the graves of ancestors, and partly to the superstitious dread of believers in feng-shui (a "wind-water" magic whose practitioners search out auspicious land formations) that mines and railroads will alter the lucky influences of a countryside.(17) Nor need such illustrations be drawn only from China, though China has been chosen as the best example for our purposes. In Morocco a serious anti-foreign outbreak was precipitated when a railway company at Casablanca carried its construction work across a graveyard, and similar tactless interferences with local usage are not uncommon in the introduction of capital equipment abroad. In countries whose customs are little understood or are held in contempt by the advance guard of industrial civilization incidents which arouse antagonism are bound to occur.

The cultural impact of foreign capital has aroused opposition in countries less oriental than China and Morocco. The feudal-agrarian nobility of Tsarist Russia, possessors of great landed estates, bitterly fought Witte's policy of encouraging the inflow of capital from abroad to build up industries. They saw their dominance threatened by the rise of a new industrial bourgeoisie, and their antagonism took the form of violent denunciations directed in the name of outraged patriotism against the entrance of foreign capital. A group known as the Narodniki (Populists), including certain Russian sociologists, likewise opposed the introduction of foreign enterprise on the ground that industrial capitalism, "strange child" from Western Europe, had nothing to justify its artificial planting on Russian soil. They held that city life was demoralizing; they wished to preserve the agrarian, semi-communistic organization of the Russian village. To them the industrial development fostered by capital imports, like the technical importations of Peter the Great, was a "poisonous product of foreign culture."(18)

The connection of the foreigner with cultural overturns in capital-importing countries is in a sense fortuitous. China, to return to that example, has been overtaken by the industrial revolution. It so happens that foreigners have been the instruments of that revolution, diffusing with their capital and their enterprise the transformations which their own countries underwent not so long since. The industrial revolution produced evils and antagonisms in Europe and America, where it developed without the conspicuous presence of alien initiative. But in China, "It is the foreigner who builds the railroads, who runs the ships, who sells the machine-made products, and who pays higher prices for the raw materials and the foodstuffs. Everywhere the foreigner is the active and visible agent of the industrial revolution. What more natural than that the Chinese villager in his ignorance should ascribe his desperate condition to the enterprises of these foreigners? . . . What an excellent opportunity for the political agitator, who sees his own advantage in rousing the anger of his people against the foreigner, to denounce the Powers, their treaties, their concessions, and all their works as things of evil, as the bane of China, and to urge the purging of the land from the malign influence."(19) When the industrial revolution is carried across international boundaries by foreign investment into non-industrial societies, the clash of divergent cultures may easily become an international conflict.

A further source of conflict between the inhabitants of a capital-importing country and foreigners who make investments there lies in the opposite attitudes which they are likely to take toward measures of social reform, or, in extreme cases, social revolution. When the inhabitants of a capital-importing country are predominantly of the non-propertied, wage-earning, or tenant farmer class, their first concern as they wake to political consciousness is to use the power of the state for bettering their own position. They are likely to adopt labor codes drawn in the interest of workers, tax systems bearing heavily on property holders, drastic restrictions on the private ownership of natural resources like oil, minerals, or timber, and measures designed to achieve, by taxation or outright expropriation, the break-up of large landed estates and their distribution among the people who actually till the soil. Such a program clashes directly with the vested interests of large property owners. Now, just as in the case of the labor-capital conflict examined above, this conflict of vested interests with social reform---of the privileged with the unprivileged, the haves with the have-nots, of private rights with the general welfare---exists as an internal problem in every country. The only unique element which the fact of foreign investment introduces into the problem is its tendency to create situations in which the desire for social reform or revolution is on one side of a political boundary and the vested interest on the other. Thus the conflict becomes a potential source of friction between national states.

Vivid examples of this type of conflict have already been described in Chapters 5 and 6: the controversy between the United States and Mexico over oil and land laws, similar difficulties over agrarian reform and nationalistic oil laws in Rumania, and antagonism in the capitalistic world against Soviet Russia on account of expropriation of property. As the Russian case illustrates, private foreign investments under some conditions may tend to convert class conflict into conflict between nations, for foreign investments bring it about that the "exploiters"---to use the terminology of the revolutionist---dwell in one country and the "exploited" in another.

Differential rates of social and economic change, or the development of divergent social orders, would produce no conflicts between countries differently affected if there were no contact between them. But foreign investment is a form of contact peculiarly sensitive to such changes. Where foreign investments exist, social reform or social revolution easily sets up conflicts between countries whose norms with respect to property rights have not undergone simultaneous modification or transformation. Since foreign investments do exist and are likely to continue to exist, and since the state of flux in which the social institutions of the world appear to find themselves at the present time makes it likely that reforms and revolutions will continue to occur, but not simultaneously in all countries, the future will doubtless present grave problems of the type we have been discussing. Some of the most serious political issues confronting the world in the next few decades will center about the question, What fundamental rights are to be upheld by the international community and enforced in all countries, even against the wishes of the inhabitants? If these are to include property rights of foreign investors, to what degree are such rights to be held inflexible as over against the welfare of non-propertied classes in a borrowing country? Critics of American diplomatic policy in Mexico have accused the United States government of attempting, in the oil and land law controversy, to "export the 14th amendment"---that is, to insist upon observance in Mexico of those doctrines favorable to propertied interests which the United States Supreme Court has built up on the "due process of law" clause of the Constitution. Whose view of the correct balance between vested private interests and general governmental powers, presumably exerted in the public interest, shall prevail? The problem is not simple within the bounds of a united national group under one government. It becomes infinitely more complex when foreign investment propounds it on an international scale.

One further source of conflict between capital-importing and capital-exporting countries deserves examination here. It arises out of the fear shared by most borrowing lands that capital imports may lead to foreign domination, either economic or political or both. This fear, as previous chapters have made plain, is not entirely unjustified. The love of independence and the fear of foreign domination have often given rise to measures designed to prevent politico-economic "penetration" by foreign capital. Not infrequently these measures have themselves become centers of dispute with other nations and have thereby provoked the very interference from abroad which they were designed to forestall.

Although a review of past experience shows rather conclusively that "advanced" countries have had little reason to anticipate political subjugation as a consequence of foreign capital imports, measures based on the fear of such consequences have by no means been confined to the weak, non-industrial nations. The conspicuous participation of outside capital in domestic economic life is bound to arouse the emotions of nationalists where nationalism is strong, giving rise to vague suspicions and dire forebodings of evil results whose exact nature is never specified. Thus, a book published in France in 1931 under the title "America at the Conquest of Europe,"(20) argues that if Europe cannot raise funds to free industry from the penetration of American interests, then Europe will be permanently "enslaved" to the United States. The use of such words as enslavement in this connection must probably be regarded as an emotional expression of the injury to pride which seems to accompany the import of capital; it apparently depends upon the association of inferiority-superiority with debtor-creditor relationships. Objectively, one can think of respects in which American policy becomes subject to influences from Europe as a result of capital investments in Europe, as well as of ways in which European policy becomes subject to influences from America; the "enslavement" notion is a way of looking at one side only of the relationships of political and economic interdependence set up by capital migration. In fact, in the realm of foreign policy and as between advanced countries there is strong reason for believing that the borrowing nation has more leverage on the policies of the creditor nation than vice versa.

Given the existing state of national consciousness, however, it is inevitable that the acquisition of a considerable measure of control over well known enterprises by foreigners should arouse comment and concern. This has been the situation in Germany, particularly, in the last decade. When Opel and A.E.G. (German General Electric) and hundreds of other firms, some of whose names are as familiar to Germans as are the names Ford and General Electric to Americans, came partially or wholly under the influence of American capital, the alarm in certain quarters was acute. There followed widespread discussions of "Ueberfremdung," or "alienation of control." It appears that it is not foreign capital itself which is feared, but the control bound up with it.

Germany is not the only advanced country where "Ueberfremdung" has been viewed with alarm in recent years,(21) and modern nations have adopted a surprising variety of measures designed to guard against politico-economic penetration by foreign capital, to forestall possible international friction over foreign investment interests, or to prevent alienation of control of certain industries. The means used for the prevention of foreign influence in national enterprises have included (1) general laws or administrative regulations, (2) state intervention in the organization of particular enterprises, (3) outright state participation in particular enterprises, and (4) measures taken by private companies themselves to prevent control from passing to non-nationals. Examples follow.(22)

Regulations of the first type are exemplified by the Russian decree of 1887 which prohibited ownership of land by foreigners along almost all of the Russian frontiers in Asia and in Poland. The exploitation of mines was forbidden to foreigners in some regions, and aliens were not allowed to hold land in certain cities. Norwegian laws of 1909 and 1913 contained similar provisions. A Prussian law of 1909, designed to prevent French penetration in the coal regions of western Germany, made the acquisition of mining properties by legal persons subject to the approval of the state.

Legislative measures to insure national control of the merchant marine have been widespread. France, for example, has granted subsidies on condition that a majority of the board of directors and the president of the steamship company must be French, and a former Russian law provided that companies established for the purpose of shipping on the Caspian Sea could have only Russian shareholders. A Swedish law of 1910 required that the founders, members of the board of directors, president, and in case of liquidation the receivers, of certain corporations must be citizens of Sweden. These regulations, and certain restrictions on foreign capital imports adopted in Czechoslovakia and other countries, are said to have been inspired by fears of complications with larger countries over protection of their citizens' investments. The French corporation law of 1913 provided that a stockholders' meeting might at no time change the nationality of the corporation. Indirect means of guarding against transfer of nationality are established in some countries by the requirement that all companies must be registered and that the nationality of founders and directors must be given.

States have frequently made special provisions for maintaining the national character of particular enterprises. Thus, most countries make some requirement regarding the nationality of directors and stockholders of note-issuing banks, and it is often required that directors and officials of national railway companies be citizens. Sometimes contracts and concessions are granted on condition that the national character of an enterprise be preserved; examples may be found among the chartered companies discussed in an earlier chapter. Particularly in such strategic enterprises as telegraphic cable operations have governments insisted upon national control as a condition of financial and other support.(23) Examples of outright state participation in private enterprises, thereby insuring the absence of foreign influence, are relatively rare, but some, such as the Anglo-Persian Oil Company, have been previously cited.(24)

Since the war the progressive increase of foreign control or strong minority influence in European corporations, especially by American industries joining in the widespread movement to acquire branches and affiliates in Europe, has led a surprising number of French, German, English, and other European corporations to adopt safeguards of their own against non-national control. The Frankfurter Zeitung(25) estimated in 1929 that fifty per cent of all German corporations had taken such action, largely by the issue of plural voting shares vested in the boards of directors. The French Thomson-Houston Company, in justifying the issuance of multiple voting shares, explained that it was merely following the example of five hundred other French corporations.(26) In England a large number of companies have adopted protective devices, among them Marconi-International Marine, Ltd., Marconi Wireless Telegraph Company, Ltd., Rolls Royce, Ltd., Imperial Airways, Rubber Plantations Investment Trust, Burma Corporation, Gaumont British Pictures Corporation, and three of the British-owned South American railways.(27) In other countries such well-known enterprises as Fiat and Snia Viscosa in Italy, Swiss Motor Columbus and Aluminium Industrie, A. G. Neuhausen in Switzerland, Dutch Enka, and the Swedish Match Trust have taken similar action.

The three corporate devices which a recent investigator found in most common use among European companies to prevent alienation of control are: (1) the issue of plural voting shares, to be held by the board of directors or (less commonly) by stockholders of a given nationality; (2) the limitation of foreign stockholding to a minority percentage of the total outstanding stock; (3) the disfranchisement of foreign stockholders. The same investigator declares, however, that "so far as can be ascertained, these devices have not in the slightest hindered American (or other) corporations in their effort to purchase foreign interests."(28) All of them can be circumvented, and some of them, such as plural voting shares, have on occasion actually made it easier for foreign interests to gain control.(29)

In the industrially less advanced and politically weaker countries there are usually no native enterprises which foreigners care to take over. They prefer to set up their own modern organization and equipment. Therefore, the issue of alienation of control does not arise. Lands of this type in their protective measures against foreign capital are concerned with preventing the political consequences which they have seen come to other countries in the wake of alien enterprise: diplomatic pressure from powerful foreign states, interference with internal political affairs, armed intervention, loss of territory and sovereignty.

Some countries have tried to hold off all foreign enterprise, or to resist the establishment of economic interests by the nationals of particular states whose political dominance is feared. Policies of this sort have been uniformly unsuccessful against the drive of modern business and modern governments for expansion. China and Japan were forced to abandon their anti-foreign policies. The Bey of Tunis could not resist the pressure of the French for concessions, nor could the Shah of Persia resist the Russians and the English. The obstructionist tactics of the Turks against Italian penetration in Tripoli merely provided the desired pretext for military conquest.

Other countries, recognizing the futility of attempting to resist the world-wide sweep of capitalist development, have tried to safeguard themselves against untoward political consequences by caution in granting concessions, by limitations on certain types of foreign ownership, by regulations and restrictions. An American financier relates in his memoirs that a project for the consolidation of Chilean nitrate interests under the leadership of financial houses in the United States was under discussion, with the government of Chile showing every evidence of its willingness to coöperate, when like a thunderbolt came the ultimatum on the Alsop claims issued to the Chilean Republic by Secretary Knox. In the face of this assertion of American political might, Chile was afraid to have her principal industry and source of income controlled by a corporation organized by the financial and industrial magnates of the United States. And that was the end of the proposed consolidation.(30) Many states restrict alien land ownership, especially along their frontiers. Others limit the percentage of foreign stock ownership in corporations exploiting certain natural resources. Japan has prohibited ownership of land and mining properties by foreign individuals or companies, though the law permitted foreign participation in companies formed under Japanese law, and long leases might be taken on surface property.(31) China has attempted to set up the requirement that foreigners may not hold more than half the total number of shares in mining concerns, and Mexico in 1879 provided that citizens of neighboring states might not acquire public lands in the Mexican border states adjacent to them. Numerous instances of the same character could easily be collected. In a secret appendix to the Bagdad Railway concession of 1902-3, the company agreed not to establish or encourage foreign settlements in the vicinity of the railroad.(32) The nationalist government of Turkey since the war has surrounded the concessions of foreign firms with innumerable safeguards, arising out of a fear of the political consequences of capital importation which, according to some observers, has become an obsession.(33)

A third type of procedure adopted by the governments of weaker and less developed nations in their struggles to avoid political domination by stronger powers has been the encouragement of "non-imperialist" or "neutral" capital. That is, endeavors are made to attract capital from countries which are thought to have no political ambitions in the capital-importing region.

When Walter von Siemens visited Persia in 1867 in the hope of obtaining contracts for electrical equipment, he found the Persian government hesitating for political reasons to grant the permission desired by the British government for an Indo-European telegraph line across the country. The Persians even inquired through the Russian legation whether it might not be possible for the German firm to undertake the project. "The Persians are much less difficult to deal with when it is a question of concessions to private persons," wrote von Siemens, "and as Prussians we are doubly free from suspicion."(34) As the financial and political grip of Russia and England tightened on Persia, the government made a desperate attempt to escape from the clutches of these powers by bringing in a financial adviser to help put its house in order. Mr. Morgan W. Shuster, from far-away, neutral America, was the adviser selected. His efforts were successfully thwarted by the two interested powers, but again after the World War Persia turned to America in the hope of attracting disinterested assistance. Since the United States had no political interests in that particular region "the Persians no doubt felt that the presence of Americans and American capital in Persia would contribute to the creation of conditions under which the open door would become an actuality and the danger of spheres of influence or partition of the country would be definitely past. The 'American policy' of the Persian government appeared to be based, therefore, on a strong desire to insure in a practical way the independence and integrity of Persia through economic and financial coöperation with a nation whose interests in the country would be likely to coincide with those of the Persian people."(35) The government of Abyssinia recently endeavored to interest American capital and enterprise in important construction work in that country (the Tana Lake dam) as part of its campaign to escape from the sphere of influence policy pursued by France, Italy, and Great Britain.(36) Officials of the Ottoman Government have almost without exception looked upon the prospect of American capital investment in Turkey with greater favor than upon investments by citizens of other powers, because American enterprise was held to be free from political ambition and desire for territorial aggrandizement.(37)

Another phase of the efforts of weak, capital-importing countries to forestall the unwanted political effects of foreign investments is represented by their efforts to establish certain doctrines of international law. Few such countries have not attempted to guard themselves against diplomatic intervention by some form of the Calvo clause, either in contracts and concessions or in constitutional or statutory provisions regarding the ownership of property by foreigners. The Calvo clause, designed to bind the foreign investor not to appeal to his government for diplomatic protection, has been vigorously championed by the small, capital-importing states and as vigorously rejected and held to be of no effect by the major capital-exporting powers. This particular device for avoiding the political consequences of capital importation has itself provoked diplomatic disputes of some sharpness---for example, between the United States and Mexico.

Finally, far-sighted statesmen in some of the less developed countries have decided that the inflow of Industrialism, represented by foreign capital and technical methods, cannot be resisted, and that their best hope for retaining political independence lies in accepting the inevitable and adjusting to it. They have therefore endeavored to guide and control the movement themselves, directing it into channels deemed most beneficial, or least menacing, to the welfare of' the capital-receiving land, and training their own people to take charge. The Persian government, for example, as a modest provision against the permanent exploitation of Persia by foreign interests, has sent young men to study in European engineering schools, while foreign technical advisers have been employed to establish various industrial enterprises destined eventually to become thoroughly Persian. Provincial normal schools have been established, with special facilities for the study of physics and chemistry.(38) The Japanese, of course, used this method very successfully in achieving the phenomenal transformation of Japan from a "backward" country to a modern industrial and political power of the first rank. Soviet Russia is following a somewhat similar course, in that foreign capital and foreign technical advice are hired freely, but foreign entrepreneurship is excluded or admitted only in special cases under strict supervision. Latin-American countries have been urged by some to imitate this example in order to emancipate themselves from foreign economic domination.(39) The nationalist governments of Turkey and of China have put among their cardinal objectives the education of their people to a point where they can exploit their own resources as capably as can foreigners.



We have explored in this chapter the underlying conflicts which may, in certain circumstances, take the form of political friction between capital-importing and capital-exporting nations. These are, to recapitulate, the debtor-creditor conflict, the labor-capital conflict, the conflicts centering about the expropriation of native lands and the tenant-landlord relationship, the conflict of divergent cultures-particularly, the clash of industrial civilization with older forms of social organization-and the conflict between social reform and vested property interests. Finally, there exists a conflict between the desires of capital-receiving nations for economic and political independence and the tendency of capital to bring in its wake consequences which, even if they do not lead to political conquest, may be felt as foreign domination. This inspires certain defensive measures on the part of capital-importing nations, and these defensive measures in themselves sometimes provoke international difficulties.

Chapter Fifteen

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