country to reject the German people as consumers and purchasers of non-German merchandise, or to attempt to dispense with those goods which with the peculiar combination of physical resources of Germany and mental traits of the German people can be most economically produced in Germany. The world will hasten its recovery if it removes all hindrances to the exchange of goods and services as before the war. The organic life of the world cannot freely be resumed so long as one limb is cut off, or the circulation in it dammed back. The plans for extensive tariff restrictions and anti-alien laws are a menace to the peace of the world.

One of the great lessons of the war is that the most important asset of a nation is its human resources. The revival of France depends not on how much more land she can acquire, but on how she can increase her population. Earth hunger may be satisfied at the expense of the national budget. For instance, Kamerun and Togoland were a fiscal burden to Germany. Italy's aspiration in the Adriatic may cost her dear. The support of foreign possessions is often the price of national vanity.

But even when colonies do not cause a financial loss to the mother country, their raw materials cannot be utilized by her alone. Raw materials move to the dense centers of population. Indian hemp, oil seeds, and hides moved to Germany, the United States, and Japan, as well as to Great Britain. Goods flow more readily than human beings migrate. The latter are bound by social ties to a fixed locus. While migration did to some extent move people from densely settled lands of Europe to North and South America, the centers of industry arose not at the source of production of raw materials, but at the points of aggregation of dense populations. Changes in the relative density of population may become one of the causes of war. The régime of peace on this planet will require that differences in the pressure of population be equalized, by the shifting of ownership of sionals excludes genuine popular leadership. Only the political leaders of the people can guide them who at great decisive moments adhere to party regardless of any autocratic system which sets up a fiction that it is superior to all parties. The creation of genuine political leadership is the ultimate problem of the world war."

territories, the migration of peoples, or the development of industry. If, in cases of unstable economic equilibrium, land cannot be transferred from country to country, men must move or goods must flow.

Restrictions on migration means increasing disparity in the density of population, in standards of living, in wages and the cost of production. If, in addition, the restriction on the exports of raw materials or tariffs on imports of finished goods prevent the free flow of the products of human labor, international strain cannot be avoided. If the yellow race is to remain out of the white man's lands-and biologically it appears desirable to prevent fusion and to preserve the distinctive characters of eachthe flow of raw materials must be unrestricted and the movement of finished goods not too greatly obstructed. Perhaps the diplomats may learn this elementary lesson in economics before the oft-predicted great war between the white and the yellow races comes to pass.*

(ii) Depreciated Exchange

The problem of foreign exchange is less puzzling than it seems. Few of our merchants are old enough to have experienced the days from 1862 to 1879, when paper dollars were not convertible into gold. But all of us can learn of the experience of France under the assignats and the United States under irredeemable paper. Depreciation arises from three factors: First, the trade balance determines the supply of and demand for bills and therefore the exchange rate. This is usually a temporary and variable element except in the cases of young raw-material countries, which

In this connection it may be of interest to cite the address of Marquis Okuma, formerly Premier of Japan, before the Japan Civilization Society. "It is a blot on justice that the whites who constitute less than one-third of the population of the world assume its control. ... The Japanese are considerably inferior to westerners in wealth, physical strength, and intellectual power, but they must show no hesitation in acquiring whatever is required to make them the equal of others. If efforts are made in this direction it is hoped that no difficulty will be experienced in surpassing the arrogant westerners and in bringing them to their knees." (Correspondence Associated Press, Yokohama, June 10, 1910.)

continuously import more than they export. Their exchange rate would therefore be continually depressed. They secure relief by funding their debt into long-term loans. As a result of foreign investments the country becomes developed, exports increase, and the volume of exports and imports strike a new balance. Incidentally, the devastated countries of Europe will for a long time be in an analogous position.

Secondly, from a fiscal point of view, the relation between the note issues and the gold reserve of the Government determines the extent of the depreciation of paper money. This was the case with most of the European belligerents during the war, notably Austria and Italy. So long as there is a great and continuous excess of imports over exports and a low gold reserve or an excess of paper currency, it is folly for any legislator to attempt to stabilize exchange rates, which are merely financial indicators. The treatment of symptoms will not cure an unsound condition.

Thirdly, intangible and non-economic considerations regulate the rate of exchange. During the war German exchange sank lower than the French on the Swiss market, because of moral considerations and of the faith of the neutrals in the ultimate triumph of the Allies.

Now during the war the prime consideration governing America's action was to help win the victory. For this purpose we advanced credits to the Allies to the extent of about $10,000,000,000. We tried to keep their exchanges near par so as not to check the flow of munitions to the battle front. There were substantial reasons for pegging exchange during the war. But the operation was not feasible in peace times. A depreciated exchange tends to correct itself for it increases the cost of imports and decreases the cost of exports. To maintain in peace times an artificial value for foreign currency would therefore do an ill turn to the countries involved. It would prevent automatic correction of values in commerce. Until inflation is reduced and gold flows freely again, the exchanges will fall to a new point of equilibrium about which fluctuations will take place as they do around normal parity. Under a paper régime there are

also "gold points" in exchange to control the supply and demand. When exchange rates fall so that depreciation in exchange is greater than premium on gold or rather discount on paper, gold will flow into the country. The points in gold parity are shifted from normal and measure the extent of depreciation of the currency and not the relation of supply and demand in the market for bills of exchange. The "gold points," whether at par or below par, are determined by fiscal considerations. The variations from "gold points," normal or subnormal, are determined by commercial considerations.5

(iii) Credit for Commerce

There is a difficulty, which the United States will face. Our excess of exports of about $500,000,000 before the war was offset by invisible debits consisting of interest and dividends on American securities held in Europe, foreign charges for ship freights and marine insurance, fees for international commercial banking paid chiefly to Great Britain, expenses of Americans touring abroad, and remittances of our immigrants to their friends and families in Europe. Our invisible pre-war debit balance of $500,000,000 has been converted to a credit balance of about $200,000,000; as an offset we may have to import about $200,000,000 more than we export. This we can do by increasing imports above the pre-war figure or curtailing exports below the pre-war figure to the extent of $700,000,000. The achievement of this feat is quite questionable. Another counterpoise to this invisible credit balance of $200,000,000 a year would be created by an advance of credits to or by investments in foreign countries. At the time it is contracted a loan constitutes a debit of the lender and a credit of the borrower. At the time it is paid a loan is a credit of the lender and a debit of the borrower. The loans we make need not be confined to our customers, or our allies, to any power, or any group of powers, or to any continent. A nation's exchange rate is determined by the sum total of the

International Trade Under Depreciated Paper-Quarterly Journal of Economics. F. W. Taussig, May, 1917; A Rejoinder, Jacob H. Hollander, August, 1918.

supply of bills of exchange against it and of the demand for bills, regardless of the country offering or demanding the bills on it. By means of arbitrage, temporary inequalities in the rate of exchange of any one country on any two markets is eliminated. The level of exchange of a country is therefore relatively uniform on all the markets of the world. In brief, to maintain equilibrium in our foreign trade we must either sell less or buy or lend more.

(F) The Immediate Need-Extension of Credits to Exporters

(i) Europe's Need for Credit

Europe in part is devastated and everywhere is short of goods. The war-ravaged countries need machinery. But even the neutrals need raw materials which during the war the needs of the belligerents and the blockading of Germany prevented them from obtaining. Without food and raw materials Europe must fall into chaos, which may react on us. Europe must have our goods, and to get them she needs our credit.

But for purely selfish reasons we must lend. The alternative before the United States is either to curtail its excess of exports or to lend more. However, the choice of courses is purely theoretical. We cannot to any appreciable degree sell less. Extensions to plants have been built during the war, our industrial capacity has increased, new sources of labor have been tapped, and the country adjusted in an organic way to a new industrial situation. To curtail our foreign sales would mean stagnation of industry, and the paralysis of labor. We cannot buy more at present, for Europe has less to sell now than before the war. The only course open to us is to lend. The United States for its own sake must advance credit in order to move its goods. The need for credit to Europe is inevitable and must be met.

(ii) Supply of Credit

The supply of credit may be classified into two types, longterm and short-term. The neutrals, like Switzerland, and bel