IT is not the job of the scientific researcher, as such, to tell people what they ought to do. His task is to discover principles, to understand and elucidate relationships. The pure scientist in the field of biology busies himself with studying the laws that govern the functioning of living cells and organs and tissues, not with curing disease---though the understanding of principles to which he contributes certainly increases the power of physicians to cure disease. Likewise the pure scientist in the field of international economic and political relations investigates the laws that characterize these social relationships, and in his rôle as scientific investigator he offers no remedies for the ills of the world, only increased understanding of cause and effect. Yet a special obligation rests upon anyone who attempts to apply scientific methods of investigation to such problems as the causes of disease or of war. He must expound his results in a way that will make them practically available, as effectively and accurately as possible, in the struggle of humanity against these things which men are nearly unanimous in regarding as evils. That is the obligation which these last two chapters attempt to fulfill. Parts I and II have pursued the inquiries of the pure scientist---"What?" and "Why?" Now we drop the rôle of pure, objective inquiry into cause and effect, definitely accept as desirable the accomplishment of certain ends---namely, the lessening of international investment friction---and ask "How?" What advice can be given those statesmen and public-spirited citizens who genuinely desire to work intelligently toward the elimination of the causes of war associated with international investment of private capital? First of all, what general direction should their efforts take?
The search for the underlying causes of international investment friction has revealed that capital investment is a form of contact peculiarly apt to occasion conflict, while the existing institutions for the adjustment of these conflicts are not only inadequate but are fundamentally ill-adapted to the task. The defectiveness of the institutions of adjustment arises largely from the fact that the areas of political loyalty and political organization on which they are based, are smaller than the area of conflict-producing contact, which today includes practically the whole world. Now, if the considerations advanced thus far are essentially sound, it follows that there are just two directions in which a reduction in the amount and intensity of international investment friction may be sought: 1) through contraction of the area of investment contact (and hence of investment conflict) to the areas of well-established institutions of adjustment, which means the confinement of investment relationships within national boundaries by the elimination of international investment; 2) through enlargement of the area on which institutions of adjustment applicable to investment conflict are based, which means development of world-wide political loyalties which will support a world governmental authority with jurisdiction over international investment contacts. Any workable and intelligent policy for the statesmanlike handling of the international investment problem must move in one of these two directions.
With these general considerations in mind we now turn our attention to the appraisal of various policies which have been practised or which may be suggested in connection with the problem of reducing the political friction connected with international private investment. These policies may be grouped according to their basic characteristics under three general headings, and will be so discussed: 1) mere anti-imperialism, 2) national supervision of investments abroad, 3) denationalization and mondial(1) supervision of international investments.
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The type of policy which is here labelled "mere anti-imperialism," takes one of two main forms: either a demand for the prohibition of capital exports, on the ground that they are sure to get into difficulties abroad, whereupon the nation will be called upon to sacrifice lives and money to pull the investors' chestnuts out of the fire, or a demand that investors should assume their own risks when they invest abroad, with the distinct understanding that their home government will follow a hands-off policy when difficulties arise. Now the trouble with both of these proposed policies is that they tremendously over-simplify the complex problems raised by investment contacts and in the long run could not possibly work. They nevertheless provide the basis for persuasive oratory, largely because their very over-simplification offers an easy channel for emotional reactions against the serious evils connected with political and economic imperialism. justified as such emotional reactions may be, they are more likely to yield desirable results when harnessed to careful thought.
The apparently simple solution by prohibition of capital exports is neither possible nor desirable. In the first place, it would do nothing to solve the problems connected with the enormous existing international investments, the result of past capital exports. In the second place, it is utterly futile to expect that a permanent and effective ban against the form of international relationship represented by capital investment can be maintained in a world of close contact, shrinking distances, and well-established traditions of international intercourse.(2) There is no indication that the trend toward improved technology in transportation and communication will be reversed, and so long as this trend continues it will provide a persistent and overwhelming pressure toward heightened international contacts. Whether these ever more intense and more abundant contacts will lead to an insoluble tangle of conflicts and a long period of chaos cannot be foretold. That depends upon man's success in refitting his institutions of adjustment to the wider scale of contact. The wider contacts themselves cannot be prevented. To be sure, the measures of economic nationalism so widespread in the world today may for some time restrict international economic intercourse, but the more successful such measures are for the time being the more surely do they lay up troubles and painful readjustments for the future. The economic life of the modern world simply cannot be kept in separate compartments, unless we assume a "breakdown" of modern civilization which will destroy modern technology, because the fundamental forces pushing steadily toward closer contacts are too powerful. Capital, if what we know as "civilization " continues, will flow from place to place on the earth, and this statement will be true whether capital is privately or collectively owned in the future. Thus, the first alternative suggested earlier---that of eliminating international investment contacts as a means of eliminating international investment friction---turns out upon examination to be no alternative at all. The problem of international capital investment cannot be avoided; it must be faced.
Furthermore, it must be remembered that even if it were possible to prohibit international capital exports many economic advantages would be lost in the process. The flow of capital from industrialized to non-industrialized regions, the opening up and exploitation of new natural resources, the consequent increase in the efficiency and variety of world production, are intimately related to the relatively high living standards of modern times. If mankind wants to maintain and improve these standards it would be poor policy to prevent the shifting of capital from place to place.
Perhaps the more common form of mere anti-imperialism is not a demand for the prohibition of capital exports, but for a hands-off policy on the part of national governments toward the vicissitudes of their citizens who launch enterprises abroad. The argument is not that investments should be supervised or protected by some other agency than national governments, but that the investor should be left to take his chances in the locality to which he goes. There are two questions to be raised about such a policy of laissez-faire. First, can the investor be left alone to assume his own risks and to accept whatever treatment is meted out to him abroad, including gross violation of agreements and other palpable injustices which may possibly occur with the connivance of government officials themselves. Second, is it socially desirable that he should be left to his own devices in such contingencies? The answer to both questions is "No."
The influence of the investing class, at least in some countries, is too strong, and the practice of national solidarity abroad is too deeply imbedded in moral tradition as well as legal doctrine, to expect national diplomatic protection to be superseded by any such negative policy as let-the-investor-take-his-chances. Such an expectation is all the more illusory in that no one government could afford to adopt a negative attitude toward requests for diplomatic aid from its investing citizens abroad unless other governments were doing likewise, for that negative policy could be interpreted as giving an unfair advantage to foreign business competitors abroad. No government can bear such an imputation. The adoption of a merely negative policy on diplomatic protection would have to be by practically unanimous agreement of the capital-exporting powers, and unanimous acceptance of the doctrine that the investor abroad must take his chances, is, to say the least, improbable.
Furthermore, it does not seem desirable, either from the standpoint of capital importers or capital exporters or the world at large, that such a doctrine should be accepted. If capital investments (whether by private individuals or socialist states) are to continue to be a form of international contact, they should be carried on under certain generally understood rules which should have a reasonably effective sanction behind them. One of the most elementary of these rules is that contracts entered into between two parties are not voidable at the wish of one party without the consent of the other. Others are that land, buildings, and equipment lawfully acquired by foreign investors are not subject to arbitrary seizure by governmental authorities; that the local police authorities and the courts must not be led by prejudice or interest to deny a reasonable measure of justice to foreigners; and that the power to tax may not be applied with gross discrimination against the property of foreigners. This is not to argue for a dogmatic and rigid application of such rules. They should be applied with wise flexibility and due regard for the realities of social situations, especially where a genuine social revolution seems to be in process. But they need to be applied, if there is to be a workable basis for peaceful investment contacts, and experience has abundantly shown that some organized means of enforcement is necessary from time to time in certain countries. National diplomatic protection is not the best and most impartial means of enforcement, but the mere negation of enforcement, leaving investors without recourse against no matter what arbitrary acts of no matter what sorts of government in countries where they have placed capital, is neither a workable nor a desirable alternative.
Consider, for a moment, what might be the results of a policy of laissez-faire toward the interests of investors in countries not their own. In many countries the withdrawal of all recourse for aliens would make very little practical difference. These are the countries where customs, political institutions, and legal standards are sufficiently like those of the capital-exporting nations so that they are impelled by their own views of what is proper to afford foreign investors a high degree of security. Trouble would arise mainly in those countries where unstable political conditions, frequent revolutions, non-industrialized cultures, or nationalistic flare-ups, make investment conflicts peculiarly difficult. One result might be that foreign investors would avoid such countries, lacking any assurance of outside support. That would mean much higher interest rates than those which now prevail on advances to governments or private persons in these countries, less investment of capital in productive developments, and loss of economic benefits both to the relatively undeveloped countries themselves and to those regions which would have bought their products. It would mean that operations in relatively insecure countries would be given over to the worst class of speculators, rather than bonafide investors with relatively sound plans. This would not make for peace and order. Another result would very likely be intensified interference by alien investors---those who could not withdraw investments already existing, or who would be attracted by the prospect of high, but risky, returns in the domestic political affairs of capital-receiving countries. The practice of fomenting revolutions, using private armies, launching filibustering expeditions, which has been by no means unknown in the past, would surely become much more common were powerful alien capital interests left to fend for themselves in investment regions. The consequence in weak countries might easily be an irresponsible, even piratical, rule by foreign exploiters, more repugnant to a sense of freedom and justice than even the present practice of diplomatic interposition by national governments.(3)
Similarly, great private investors are frequently in a position to exert more force than weak countries in which they operate. Consider the fleets and the economic resources of some of the large fruit companies and the oil companies. Is it better to have them take over their own protection than to have that function in the hands of governmental authorities who at least feel some responsibility to justify their actions under national and international law?
If one is seeking to move in the direction of the successful adjustment of conflicts connected with international private investment, mere anti-imperialism, whether in the form of demands for the prohibition of capital export or demands that investors should be left to take their own chances of unfair treatment abroad, is a false road. Many well-meaning people have assumed uncritically, often without giving conscious consideration to the issues involved, that world betterment might be sought along this line. Were it not for that fact, it would not have been necessary to devote so much space to such a hopelessly misdirected policy. Mere anti-imperialism is, indeed, essentially a protest rather than a policy.
Another form of anti-imperialist effort is sometimes directed to the end that official registration with some department of the national government should be required for concessions obtained or investments made by citizens abroad.(4) This, too, is a mistaken policy, if its authors hope to accomplish more thereby than the exposure of a certain amount of information. It would tend to emphasize and perpetuate the fundamentally unworkable principle of national responsibility for and supervision over the investments of citizens abroad. The official connections between national governments and private foreign investments need to be diminished rather than increased. This anticipates the argument of the next section, however, which discusses the practical possibilities of approaching the adjustment of international investment conflicts through national supervision.
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If it is neither possible nor desirable to call back the capital that has already migrated between nations or to prevent future capital migrations in the modern world, and if it is equally impossible and undesirable to secure the general adoption of a policy which would leave the investor to his own devices when he invests abroad, then our search for the most workable social technique to minimize international investment friction narrows down to a discussion of methods of organizing and supervising investment relationships. Capital will move. International investment contacts will exist and will occasion conflicts. An efficient process of adjustment for these conflicts must somehow be established. The process must be continuous, it must involve supervision and regulation of investment contacts, not merely settlement of disputes. In this section we are to explore the practical possibilities of methods of adjustment based on national supervision of citizens' investments abroad.
What methods of national supervision have been tried, or suggested? How successful have they been? What promise do they offer for future usefulness in the adjustment of investment conflicts? We shall examine three types of national supervision over private investments, all based upon the common working assumption that investment abroad is to be treated as a national interest: 1) National backing of competitive individualism; 2) Attempts to divide up fields of private investment operation abroad by agreements made between national governments or under their supervision---a) on a territorial basis ("sphere of interest" or colonial policy); b) on a basis of participation in joint enterprise (consortium policy); 3) More or less complete "étatism," meaning concentration of all external economic relationships under the direct control of the national state.
The national backing of competitive individualism in the international investment field is a practice which deserves little consideration here. This whole volume is, at most points, a commentary upon its stupidity and its dangers. It is characterized by scrambles for concessions and for other economic and political privileges, by rivalries which are at once rivalries of business firms and of governments. It is a policy which takes account only of what (correctly or mistakenly) is held to be "national advantage." It recognizes few or vague limitations on the pursuit of that advantage, regards private investments abroad as national interests, and uses them as tools of diplomatic policy. This practice of unrestrained economic nationalism has led, and is always bound to lead, to dangerous international investment friction. As a solution of the problem before us we must reject it out of hand.
Indeed, practical statesmen have long realized the dangers inherent in such a system, and it is in part due to their efforts to avert these dangers that we owe the development of the two devices now to be considered in connection with the second type of national supervision. It is probably a valid generalization that few modern statesmen have actually desired war, despite the fact that the compulsion of circumstances and blindness to the ultimate consequences of immediately desirable policies have often led them into paths which could have no other issue. Many of them have labored sincerely to maintain peace, and, specifically, have sought ways within the framework of national diplomatic protection to mitigate the conflicts associated with international private investment, especially where these threatened to bring about a break between major powers. They have particularly endeavored to mark out, and agree upon, boundaries to the respective politico-economic interests of national groups in conflict, with the hope of substituting mutually acknowledged rights for unrestrained rivalry. In the first of the two devices employed for this purpose the agreed limits have been territorial. This is the "sphere of interest," "sphere of influence," or colonial method.(5) The second device has depended upon a demarcation of national interest in terms of agreed shares in a joint undertaking and may be called the consortium policy.
The policy of territorial demarcation has been frequently applied over the last half century in such countries as Persia, China, and throughout most of Africa as a means of averting dangerous clashes between the politico-economic ambitions of rival powers, as well as for the purpose of obtaining monopolistic privileges. Thus, the Anglo-Russian Agreement of 1907 divided Persia into three sections, the northernmost of which was to be regarded as the peculiar sphere of Russian enterprise, the southernmost as the preserve of the English, and the middle section as open to both. This was an attempt of diplomacy to end the years of bitter strife between the governments and the nationals of the two powers in Persia. English and German bankers, under the supervision of their governments, agreed in 1898 that the former would concentrate their railroad projects and other interests in China in the Yangtze valley, while the latter would be supreme in Shantung. The object was to avoid economic and political competition and conflict. The French, Japanese, and Russians marked out their spheres of special interest in southern and northern China, and these were more or less definitely recognized by the other powers.(6) The list of territorial demarcations in Africa after 1880 is a long one, and most of the African spheres of influence developed into definitive colonial conquests.
Now it must be admitted that agreement among the powers as to the areas in which they shall encourage the investments and other interests of their nationals is preferable to war between them on such questions, and that is the form in which the issue sometimes confronted the statesmen of the last generation. The sphere of influence policy does bring order and settlement of a kind into the chaos created by anarchic pursuit of national interest. Save as an expedient to avoid something worse, however, it has little to recommend it for our consideration as a promising method of adjusting investment conflicts. In the first place, while assuring a certain degree of orderly division of the development field between the contracting powers, it threatens other powers with exclusion, not only from the glories and supposed economic advantages of imperial expansion, but even from opportunities for their commerce. The fear of this exclusion has been one of the main stimulants to the scramble for territorial possessions and spheres of influence which, pursued by means of economic and political penetration as well as by other means, has been perhaps the main source of serious investment conflicts between capital-exporting countries in the past. In the second place, the wishes and the interests of peoples in the less developed regions have ordinarily entered very slightly into the decisive calculations of a sphere of interest policy or a colonial policy. While the military impotence of the non-industrialized countries has made it impossible for them to raise very great disturbances and has thus rendered the potential conflicts between capital-importing and capital-exporting countries relatively less significant as causes of war, there are signs that this situation is already passing.(7) Our conclusion must be that both from the standpoint of past performance and future prospects the device of marking out national spheres for economic activity abroad cannot be regarded as a satisfactory long-run policy for minimizing international investment friction. Though its adoption as an expedient of the moment may have been justified at times in order to avoid worse alternatives, its ultimate effects are to multiply and intensify conflicts.
We turn now to the consortium policy---likewise a method of marking out agreed spheres for national investment interests abroad, but on a non-territorial basis. A British banker of wide international experience, writing with particular reference to the Chinese consortiums, has aptly characterized this device as a method of financing through the medium of "representative national groups working in concert for a common end under the supervision of their governments."(8) The consortium policy has at various times been hailed by intelligent and informed people as pointing the way to better international financial relations and a higher standard of international politics. Hence, it has a special claim to our careful attention and will receive rather detailed consideration.
The term "internationalization" has often been used in connection with. the consortium device, as in the phrase, "the internationalization of the Bagdad Railway," or "the internationalization of the Balkan railways." This fact doubtless tends of itself to win the favorable reaction of those who look to international organization and international coöperation as the roads to world peace. The terminology so employed is, moreover, strictly correct. The consortium device is a method of internationalization in the literal sense of the word. Its procedure is inter-national, for it is based on negotiations between national units-governments and their financial protégés, "representative national groups." It is inter-national, for the units participating in such consortiums as are here in question are always national groups, accredited and supervised by their respective governments. Nevertheless, the term "internationalization" in connection with the consortium policy may easily prove misleading unless care is taken to distinguish this particular type of "internationalization" from quite different policies sometimes called by the same name.
It is important to make this distinction because it must be stated that the type of "internationalization " of investments represented by the consortium device has been a failure wherever tried and is not likely to give good results in the future. It is based on a faulty principle which tends to vitiate certain good features of the method and to intensify rather than adjust investment conflicts. "Internationalization" built upon definitely national groups, each group bound to work for particular national interests, political as well as economic, will be found to be a wrong road rather than a right road to successful adjustment of foreign investment conflicts. Let us consider certain practical experiences with the consortium method.
We have seen that in Morocco before the World War the statesmen of France and Germany attempted to smooth over the political and economic clash between their two countries by undertaking to "associate their nationals" in joint economic enterprises. This was the policy embodied in the accord of February 8, 1909. The result was not at all to remove private investments in Morocco from the list of Franco-German difficulties, but rather to involve them more decidedly than ever in international contention and bitterness. The French understood the recognition of French political supremacy in Morocco to be the heart of the Accord of 1909, while the Germans centered their attention on the pledge that attempts would be made to internationalize economic enterprise. Thus there was conflict from the beginning. One by one all the specific projects undertaken by French and German diplomats to "associate their nationals" in joint economic enterprises came to naught, and these successive failures added greatly to the political tension which produced the Agadir crisis of 1911.(9)
The first company created under the patronage of the French and German governments as the type of the new economic collaboration was the Société Marocaine des Travaux Publics. Its capital was held mainly by French and German nationals, but also in small amounts by citizens of England, Austria, Spain, Italy, Belgium, Sweden, and Portugal.(10) This public works company was to have constructed lighthouses, but that project met with the opposition of the English legation, which considered the English participation too small. It was to have installed tramway lines, electric lights, port improvements, and a waterworks in Tangier, but endless bickering over the shares in these enterprises to be accorded to France, to Germany, and to other countries blocked all operations. The business men involved in the affair could have reached agreement; it was the political preoccupations of the governments that made the least activity impossible. The merchants and industrialists "were not left in entire freedom to discuss the terms of their coöperation," said the French minister of foreign affairs in explaining the failure of the public works company to construct anything at all.(11)
Railroads, too, were to have been built by Franco-German joint enterprise. Here again negotiations dragged on and finally broke down, due to the dominance of uncompromisable political elements in the supposedly "economic" discussions. England objected that its interests were not sufficiently represented. The French cabinet could not view with equanimity the proposal of Foreign Minister Kiderlen, from the German side, that the operating personnel of the lines to be constructed should be of German and French nationality in the same proportion as the capital of the railway company. As M. Caillaux put it, "I shall not tolerate a German station master in Morocco."(12)
Likewise, in connection with the division of mining privileges in Morocco, the French and German diplomats were unable to "associate their nationals" upon terms at once acceptable to the business men and politically acceptable to the governments. In this case, contrary to the experience in most other cases of the sort, it was the business men who prevented agreement. But the stubbornness of the Mannesmann brothers, as we have seen in Chapter 7, rested not upon ordinary business considerations alone but upon political ideas of the type represented by the Pan-German League.
It may be said that conditions in Morocco were peculiarly unfavorable, and that the non-success of Franco-German economic collaboration there tells little about the merits of internationalization by the consortium method as a means of lessening investment conflicts. To be sure, the political circumstances in the Morocco case made the success of the policy almost impossible from the beginning, but that is just the point. Substantially similar political circumstances are likely to exist wherever the consortium policy is invoked, and the policy itself is one calculated to emphasize and intensify the political discords already existing, by solidifying national interests around particular economic projects, and by extending the stiffening influence of patriotic politics to the economic realm, where in ordinary circumstances compromise and bargain are relatively easy. It is fair to point out, furthermore, that at its inception the consortium policy was very hopefully regarded in its application to Morocco. Hailed as a means of supplanting conflicts by peaceful economic collaboration, the Accord of 1909 in actual practice contributed not a little to augmenting the political dangers of economic operations in Morocco. Those who believed that so-called economic disputes could be averted by setting up business groups under national political supervision and asking them to work together, proposed an unworkable plan based on a mistaken conception of international investment conflicts.
Other attempts to apply the consortium method of "internationalization " can be briefly mentioned. About the same time as the Moroccan events just discussed, and closely connected with them, official attempts were made to join French and German private interests in equatorial Africa for the joint exploitation of forest concessions. The proposed Congo consortium was directly related to the attempts of certain French concessionaires, with influential assistance, to collect indemnities from the French government for alleged infringement of their monopolistic rights by English and German traders. We have seen in an account of the N'Goko Sangha affair(13) that the project fell through, with unfortunate effects upon Franco-German diplomatic relations. The Congo-Cameroon railway project, the third attempt at economic collaboration by France and Germany in African territories, was undertaken when the failure of the Congo consortium became evident. It was to ease international relations by showing that France was not opposed to all coöperation with Germany. It foundered on nationalistic jealousies and the patriotic outcries of opposition parties, leaving Franco-German relations much worse than before the consortium ideas had been launched.(14) The Bagdad Railway was repeatedly the subject of extended negotiations looking to its internationalization as a means of removing the political difficulties which at once hampered the progress of the road and endangered European relations, but these schemes finally had to be abandoned. The upshot of two decades of Political antagonism and painful negotiations was a series of agreements signed in 1914, just before the outbreak of the war, which these very disputes had done so much to promote. The railway question was met at last, not by further application of the consortium device, but by another means of dividing up:---the creation of spheres of economic influence.(15)
French financiers were admitted to participation in the Bagdad Railway by agreement between the Deutsche Bank and the Ottoman Bank in 1899, and the effect was temporarily to remove French diplomatic opposition at Constantinople. But the continuous attacks of chauvinists in both countries---with their consequent effects on governmental policies---made this financial arrangement unworkable and eventually untenable. The Deutsche Bank was not at all averse to foreign participation in the huge enterprise, for one of its most arduous tasks was the provision of adequate capital, but in 1911 we find it nevertheless proposing a plan whereby the Deutsche Bank would buy back the Bagdad stock held by the French, thus doing away with a circumstance which "brings continued attacks on the Ottoman Bank from French chauvinists and similar attacks on us from the Pan-Germans."(16) The German financiers wanted to be free of a partner "which is prevented by its country's policy from fulfilling the engagements that fall to its share."(17) The general Bagdad Railway settlements of 1914 did include the repurchase of the French shares by the Deutsche Bank.
In 1903 the financiers of the nations concerned were eager to arrive at some satisfactory plan for internationalizing the Bagdad Railway, and there is no doubt that had they been left to themselves a tripartite arrangement for dividing the ownership and the provision of capital between German, French, and English groups would have been the result. The negotiations met an impassable barrier in England, however, despite the fact that the British government as well as British financiers were convinced of the political and economic advantages of participation. Simply "blind antagonism toward Germany,"(18) based on the rise of Germany's commercial and naval power and on irritations resulting from events a few years earlier in Venezuela and South Africa, kept public opinion from seeing the wisdom of not abandoning the Bagdad enterprise to the exclusive control of German and French capitalists. This antagonism was stirred to fever heat by an active anti-German agitation in the English press, which the Kaiser's government and at least one London banker thought was engineered by Russia (to defeat a project which would strengthen Turkey).(19) The British government dared not fly in the face of public opinion and reluctantly took a stand against the participation of its capitalists.(20)
Still other attempts were made between this failure and 1914 to bring about a settlement of Bagdad Railway difficulties on the consortium principle, but time after time the insistence of governments on political compensations defeated the agreements of financiers. In 1907, for example, the Kaiser proposed that England's fears regarding the penetration of other powers toward the Persian Gulf, the door to India, should be met by making the last section of the railway a joint enterprise, with the end station in British hands. This proposal was received with interest on the English side, but Sir Edward Grey suggested that France and Russia should share in the arrangement. Germany feared to be drawn into a minority position over against the solid phalanx of the newly formed Triple Entente, and negotiations broke down.(21) In 1908, at the request of the business men, the governments of England and Germany decided to stand aside temporarily to see what results might be reached by leaving, matters to the financiers alone (chiefly von Gwinner and Sir Ernest Cassel). The shadow of national interest and chauvinistic politics hovered near in the background, however. Thus, the German government informed its ambassador in London that even if the financiers did reach an agreement it would be impossible to approve its terms unless it contained something which could be offered to German public opinion as a quid pro quo for English participation in the Bagdad enterprise. Public opinion had to be satisfied that the advantage was not all on the side of England.(22)
There were attempts to intern ationalize the financing of railways in the Balkans, but here, too, balance of power diplomacy called the tune, and the laying of a mile of track was disputed in a dozen foreign offices.(23) Detailed examination of these episodes would merely confirm the conclusions indicated by previous examples. The first and second Chinese consortiums naturally come to mind when one thinks of international consortiums. They were concerned wholly with government loans, which fall outside the scope of this study, but if there were any indication that detailed examination might lead to different conclusions respecting the merits of the consortium device than we have already reached from other instances it would be worth while to look at them more closely. There are no such indications. The first, or Six Power, consortium began as a tripartite railway loan agreement participated in by British, French, and German bankers, but soon room had to be made for interests from the United States (at the special request of President Taft, in a public telegram to the Emperor of China), and then Japan and Russia had to be admitted.(24) The latter had no important capital funds seeking export, but they had political interests in China and insisted upon a voice in any joint transactions. The second, or Four Power, consortium of 1920 encountered great difficulties on account of Japan's insistence upon special interests in Manchuria and Mongolia.(25) In practice, the consortium method in China, as elsewhere, was vitiated from the start by its tendency to intensify the association of investment operations with uncompromisable national political interests, and what was planned as "working in concert for common ends" soon gave place to a jockeying for national advantage. This was not the only reason, but one of the most important, for the failure of the first consortium to accomplish much and the failure of the second to accomplish anything at all.
These are the main instances of outright application of the consortium principle---representative national groups in joint enterprise under the supervision of their governments---in the field of international private investment. Their testimony is uniform. The attempt to solve the political problems connected with world-wide investments by "internationalization" under the eyes of national governments has not decreased the political dangers connected with such investments. Rather, it has drawn the lines of national interest more sharply, and it has intensified politico-economic conflict. "Internationalization" of this sort, if judged by its effects in conflict situations, is a failure. Nor has its failure been a mere accident. "Internationalization" of this kind connotes more nationalization, not less. It means a greater rather than a less degree of national political control over investments abroad, a still closer connection between private enterprise and nationalistic world politics. Questions of national prestige become more surely involved. Difficulties which could easily be surmounted by compromise between private business men prove to be sticking points when these same business men operate as the agents of politically conscious national governments under the eyes of chauvinistic presses. Workable internationalization in the investment field must not be founded on further nationalization; it must not solidify economic and political interests into the interests of opposing national groups.
There is one more possible form of national supervision over international investment relationships which merits attention. Competitive individualism with national backing we have rejected. Two devices for dividing up the investment field abroad by agreement between national units have likewise been found wanting. But suppose that the world tendencies of the moment toward increasing control over international trade and finance by governments of national states should be carried to their logical conclusion and should result in permanent state management of all external economic relations of every independent country---a world of national economic planning. In this case private investments abroad would be replaced by outright state-owned, or at least state-controlled, investments abroad. Would such a development provide a basis for the peaceful solution of investment conflicts? Or would it tend to make them still more dangerous sources of political friction?
The issue is not merely an academic one. "Etatism" ("state-ism ") as it has been called, is a tendency common to many diverse politico-economic movements now powerful in the world. Fascism, national socialism, socialism, communism, technocracy, national economic planning, state capitalism---whatever the name, and no matter how they differ in some respects, are alike in one thing. They require the unification of political and economic control under one authority. Their widespread adoption on a purely national basis would tend to create a world order in which a congeries of national economic units would confront each other, with the external economic relations of each unit concentrated in the hands of its government, much as the external economic relations of Soviet Russia today and (increasingly) of National Socialist Germany are in the hands of their governments.
Do the investigations of the present study throw any light on the probable result of such a development from the standpoint of international political friction---peace or war? They do, and the result would almost certainly be to foster war,(26) unless at the same time a world politico-economic organization were achieved which would be sufficiently supported by the loyalties of the peoples of the world so that it could exercise authority over the relations of the units to each other. Such a world-wide planning authority forms no part of the philosophies of fascism and national socialism, which emphasize national separateness rather than world unification. It would fit in with the doctrines of socialism and communism, however, for these emphasize the world solidarity of the working class. That is why a world of socialist or communist collectivities would more likely be a warless world than a world of fascist or national socialist collectivities. Even socialist or communist collectivities might have great difficulty in practice, however, in overcoming the national consciousness of the different peoples. Social ownership of great international trusts rather than social ownership of separate national economies would be much more conducive to peace from this standpoint. Socialists should bear constantly in mind that the displacement of capitalist profit-makers by collective ownership will not automatically solve the war problem. That depends upon world politico-economic organization supported by world loyalties, whether collective ownership or individual ownership is the rule.
To be sure, complete étatism would eliminate private investments, and in a purely formal sense would solve the problem of political friction connected with international private investment. But to substitute collective national ownership of investments abroad for the present combination of private ownership and national protection would not remove the fundamental sources of investment conflict investigated in Chapters 14 and 15, nor would it automatically improve on existing institutions of adjustment. Of course, it might be argued that to remove the pressure of private capitalists upon government would make it easier to find peaceful solutions for investment conflicts, and that might be granted; but as an offset one would have to reckon with a direct fusion of the former economic interests of the capitalists with the political and strategic interests of the state. When a conflict arose in 1929 between the Chinese and the Russians over the Chinese Eastern Railway---a line through Manchuria which the Soviets had inherited from the Tsarist regime---the socialist Soviet Union sprang to the defense of the railway rights with all the alacrity that a capitalist government might have shown.(27) Had the railway been owned by American capitalists there would have been vigorous pressure upon the government of the United States for its protection, but also counter-pressure from labor, pacifist, and liberal groups demanding that no American lives be risked to "pull the capitalists' chestnuts out of the fire." The Chinese Eastern, however, was a collective interest of the socialist state, and an attack upon it appeared as a direct attack upon the interests of every citizen. The sense of social ownership in such situations is a powerful psychological factor. Much greater danger of international friction than now results from the activities of private capitalist investors might result from the concentration of international investment interests under the immediate control of armed national states through collectivization. These are points which economic planners of every sort should think through. Herein lies the menace of étatism and purely national planning.(28)
In other words, the general analysis of the first part of this chapter applies in all severity to international economic relationships of a fairly permanent, investment-like character, whether ownership vests in private citizens or in politico-economic collectivities. All such contacts will occasion conflicts. Lacking adequate, continuously functioning institutions of adjustment these conflicts will turn into political frictions. Adequate institutions of adjustment must rest on political organization and political loyalties as wide in extent as the area covered by the contacts and conflicts with which it is necessary to deal. Etatism offers no exception to the general principle that a workable policy for preventing international investment friction cannot be based on national supervision of foreign investment contacts. Statesmen who proceed on the assumption that economic planning, whether inspired by socialist, communist, fascist, or "new deal" motives, can be carried on nationally without the development of immensely more effective international institutions than we have at present are sowing dragons' teeth.
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So far our appraisals of a variety of policies by which attempts might be made to deal with the problem of international investment friction have been entirely negative. Mere anti-imperialism was first rejected. National supervision in various forms, from national backing of competitive individualism, through dividing-up devices based either on territorial demarcation or joint participation in consortiums, to complete étatism, is unsuitable. Can a positive policy, at once reasonably practicable and intelligently oriented, be framed on the basis of the analysis of this chapter?
Any statesman-like attack on the problem of international investment friction must begin with recognition of the fact that economic contacts similar to those we nowadays call international investments will continue to be important, linking the various peoples and regions of the earth in relationships of mutual interdependence. Where there is interdependence the actions of one party may harm (as well as help) another, and occasions of conflict are bound to arise. Conflicts will always be associated with international investment relationships, whether capital is controlled by private persons and firms or by collectivities. The task of the statesman, then, is to develop institutions of adjustment capable of preventing these inevitable conflicts from becoming sources of great injustice or from issuing in acute political friction likely to disturb the public peace. Such institutions of adjustment must be based upon an authority having a jurisdiction and commanding loyalties as wide as the contacts to be supervised and the conflicts to be settled, which means, practically, that the basis must be world-wide. Furthermore, these institutions must not be mere devices for judicial settlement and arbitration. Of course, there must be provision for handling conflicts that have reached the stage of dispute, but really effective institutions of adjustment should begin further back. Such processes as the achievement of recognized agreement on general rules and taking action on specific problems before they lead to overt disputes-the processes of legislation and administration as well as adjudication---are vital to truly effective social adjustment. Some sort of a working balance must be maintained between the conflicting interests and attitudes of many individuals and groups, and since the balance cannot be a permanent or rigid one its readjustment is a continuous task---the function of political agencies. In short, the solution of the problem of international investment friction demands the development of continuously functioning political agencies on a world basis to supervise and regulate boundary-crossing investment contacts---a long step towards world government.
This sets the goal, but admittedly the goal cannot be attained in a day, nor in a decade---not perfectly, it is safe to say, in many decades.(29) In the meantime, what can be offered as a sailing chart for puzzled statesmen and citizens who must make immediate, practical decisions while dealing with concrete international investment situations, but who wish to substitute consistent, rational, and directed policy for aimless drift? Two guiding principles are here suggested as beacons along the way, or, to change the metaphor, as touchstones by which details of policy and all specific proposals should be tested. These are denationalization and mondial supervision. The first is negative, the second positive; each is the complement of the other. The two together provide the key to constructive policy in dealing with the problem of international investment friction.
By denationalization it is meant that in every possible way functions connected with the promotion and protection of international private investment should be taken out of the hands of national governments. Our theoretical analysis shows that national governmental units, being smaller than the area of international investment contact and conflict, are not suitable basic areas for institutions of adjustment which must deal with international investment problems. The failure of national diplomatic protection in practical operation points to this same conclusion. If a long-run, workable solution of the problems represented by international investment friction is desired, then national states should have no more to do with the investments of their citizens in other states than the State of New York has to do with the investments of its citizens in Nevada. It must gradually become a matter of no significance whether the individuals and corporations investing in a foreign country claim English, French, or Norwegian citizenship. The factor of national allegiance must be detached from migratory capital, and the first test which should be applied to any proposed measure of policy for dealing with international investment conflicts is this: does it tend to denationalize international investments?
Mondial supervision implies that the functions of investment promotion and protection should be lodged in various agencies representing the world community and having a world-wide jurisdiction. The special term "mondial"(30) is adopted, despite the disadvantages of importing a strange word into the discussion, in order to make a very important distinction between two meanings of "international"---a distinction which ought to receive increased attention, and which may be made sharper by using an unambiguous word. Mondial will be used to mean international in the sense of "pertaining to the world as a whole," not international in the sense in which various consortiums have been international---that is, made up of national units. Mondial agencies are world-wide agencies with the national element filtered out; they are not made up of representatives of national states. They represent directly a world community composed of all sorts of boundary-crossing social and economic groupings: wheat growers, the shipping industry, industrial workers, professional groups, racial and linguistic groups, as well as nations. Some of the committees and commissions set up by the League of Nations are of this type, though the governing organs of the League itself are based on national states and must doubtless continue to be so for a considerable time in the future. Only through mondial agencies can the problem of international investment friction be effectively attacked, and the further development of such agencies is one of the tasks confronting world statesmanship.
Finally, it should be emphasized that the policy here proposed moves in the direction of more, not less, security and protection for legitimate international investment undertakings. The first reaction of most people whose thoughts are rooted in the traditional system of national diplomatic protection is that anyone who proposes the denationalization of international private investments and the abandonment of national diplomatic protection must be proposing to deprive investors of recourse against unjust treatment. That is not the case. So long as our social system recognizes international private investments and permits them they must be supervised and protected by the proper governmental authority. New mondial institutions for the guidance, encouragement, and protection of international investments must be developed, and in practice their development must be the means of making it possible to abandon the national agencies now discharging corresponding functions so inefficiently and with such baneful results. Private international investors have very little real protection now through national diplomatic support, despite all the bluster that often accompanies it. A better security and protection could be provided through continuous, regularized, and impartial administration by mondial authority, separate from the political ambitions and expediencies, the emotionality, and the fluctuating policies of particular national governments.
What specific measures might be suggested in line with the principles of denationalization and mondial supervision? That query provides the topic for the next, and final, chapter.
