THE SIMPLE LAWS OF INTERNATIONAL TRADE
AN ADDRESS BY
MR. A. C. WICKMAN
Chairman: The President, Mr. C. R. Conquergood
Thursday, October 26, 1944
MR. CONQUERGOOD: The men and women of Great Britain have earned the admiration of the entire Allied world for the magnificent fortitude and high courage which they have displayed throughout the years of this war. There were many battles to be won, battles on land, on the sea, and in the air. There were battles in the far-flung places of the earth. Battles against the enemy at home as well as abroad and, so often, the outcome of these battles depended upon the battle of production in the British Isles. Through long and weary hours, their workers toiled and wrought to equip and supply the battle forces, not only with enough material, but with material of high quality and efficient design.
We are honored today to have as our guest speaker a prominent British manufacturer and industrialist, a manufacturer of machine tools, which are the tools required to manufacture the tools of war.
Mr. A. C. Wickman is founder and chairman of the board of A. C. Wickman Limited, of Coventry, England, of A. C. Wickman (Canada) Limited and The Wickman Corporation of Detroit. He is a director of several other companies. He has business connections around the world.
While I present him as a British manufacturer, we also welcome him as a Canadian manufacturer. Gentlemen: I have much pleasure in presenting Mr. A. C. Wickman, of Coventry, England, who will speak to us on "The Simple Laws of International Trade".
MR. A. C. WICKMAN: Gentlemen: In speaking to you I am deeply conscious of the great compliment you have paid me in asking me to address you, and fully aware how delicate a subject finance is, whether of personal or international magnitude; also how easily misunderstandings arise about it.
Financial questions always touch our pocket books and I know no place where human nature is more sensitive. Financial misunderstandings remind me of the story of Ikey and Moses who were shipwrecked. Ikey could swim and Moses could not. After paddling about in the water for some hours supporting Moses, Ikey felt he needed a rest and said: "Moses, can you float alone?" Moses replied: "Ikey, for the love of Heaven, what a time to talk business!" I hope you won't think the same about this talk.
I want to discuss in as simple language as possible the fundamental economic laws which govern the exchange of goods between one country and another. There is no doubt that one of the chief problems after this war will be to assure the international economic health of the various countries comprising this world. There are certain very simple but fundamental laws which govern international trade. They are so simple as to be almost self-evident truths, but they seem not so much misunderstood as to be totally unrecognized by the bulk of both business men and politicians.
Let us take a quick review of trading since its inception. The first trading was obviously between individuals and was entirely in the form of barter, no money or token of exchange being then used. To obtain the goods he wanted this individual had either to make them himself, to make other articles that he could exchange for them, or he had to hire out his services in exchange for such goods. This individual found himself controlled by the first simple economic law. He could never obtain more goods or services from the community he dealt with than the goods and services he could supply them with. This, gentlemen, I want you to bear in mind. In this form of transaction we have the simplest type of goods exchange imaginable. Now, let us examine a step which was revolutionary in character. A body of individuals formed themselves into a community and, to facilitate trading amongst themselves, decided to use a standard of exchange. What that standard was does not concern us. This revolutionary change meant, however, that the value of every article dealt with had to be related to the standard used; in other words, we had prices on commodities for the first time. Other communities were formed, each of which had its own standard and the prices of its own commodities were fixed to that standard. The individuals of these communities traded amongst themselves in a much freer and easier way, credit became established, but again each individual in the long run could not obtain more goods and services from the community than he was prepared to give in return.
Certain individuals in these communities, by virtue of being better tradesmen and better craftsmen, were able to obtain more goods and services than they needed for their own livelihood and that of their family, and so began to amass wealth. With this wealth in the form of surplus goods and medium of exchange, they employed others and built up the type of social community which was the forerunner of what we have today. These individuals still had to provide the community with the same value of goods they obtained from it, the only difference being that what they could now provide was greatly in excess of their living needs and they could therefore accumulate wealth. These communities then wished to trade with each other, and of course found that there was no relation between the standard of exchange of one community with that of another, and further that the standard of one community was completely valueless in another community. This meant that business between any two communities was still limited to barter in the same form as it had been limited to individuals originally. A few of the more advanced communities had taken the precious metals, gold and silver, for their standards and had even minted coins in them. Gold gradually assumed precedence as a community exchange standard.
GOLD AS EXCHANGE
Now, the communities that I am talking about were not necessarily nations. Some of them were powerful trading guilds and corporations, but later on the trading communities merged commercially into nations and we had a picture of nations doing business with each other based on an international standard of gold. In the early days of such trading credit was necessarily very curtailed, distances in the world from a travel point of view were enormous and information travelled very slowly, so that it was quite common to transfer physically the gold necessary to pay for a transaction from one community to another. The older banking houses had regular agents who travelled with coffers of gold and watched over them fully armed. In later years with the speed of the telegraph and telephone, and the immense shrinking of globular space through fast travel, credit was increased enormously. (I don't mean that that was the only reason, but obviously an intimate knowledge of the affairs of your debtor through fast communications helped to give a much better picture of his financial character and so made credit a much more acceptable proposition, so that later it was only occasionally necessary to ship gold from one country to another when the credit or debit balances became in need of physical adjustment.)
Having gold as an international standard, it was possible to evaluate each country's currency to a fine ounce of gold and therefore by direct comparison to determine the value of any one currency in relation to any other. A buying nation, instead of having to obtain the currency of a nation it wished to buy from, could pay such a nation in gold. The selling nation credited the gold to its reserve and credited the selling firm with the equivalent value in its own domestic currency. The actual purchaser in the buying nation only wrote out a cheque for that purchase to his bank, who debited his account with that amount and issued from its gold reserve the necessary gold credit to the selling nation's bank as before mentioned. The various national banks of the countries concerned, such as for example, the Bank of England, the Bank of Canada, the Federal Reserve Bank, etc., cleared these debits and credits, which were mere paper transactions, so that the unbalanced portion of them, either plus or minus, could be determined. It was these balances which sometimes caused; among other things, the actual physical transfer of gold from one country to another.
Now we have advanced greatly in our history of trading since our original individual transaction that we spoke of first. But, in spite of its increased complexity, you will notice that we have had to fulfil the same conditions as our original individual had to when he was bartering. You will remember he amassed wealth when the goods he could produce and exchange were in excess of those needed for his livelihood, and he was poor when his needs of livelihood could not be balanced by the goods he produced for exchange.
So it is with a nation today. It amasses international wealth all the time that it supplies more goods or services to the community of nations than it needs from them and it loses international wealth as long as it needs more goods and services from other nations than it can supply them with. Here, gentlemen, you will see our old fundamental laws were not so much misunderstood as not recognized.
The merchants and manufacturers, however, of countries that had been weak or had become weak in international credit soon learned a good deal about the mechanism of international financial procedure-not so much from choice as from dire necessity. The buyer of goods from abroad in such a country found he could no longer just write out a cheque to purchase such articles.
He was informed by the exchange control section of his national bank that such a purchase was not allowed as the gold credit f or its payment could not be spared, and similarly the manufacturer who wished to sell abroad was often told that he would have to scale down the price of his goods abroad to meet foreign competition, irrespective of what his domestic price was, so that he could obtain orders and foreign exchange could flow into that nation's coffers, the difference being made up to him by a national subsidy.
Little wonder then that we find that the business men of poor creditor nations are well informed as to the mechanics and machinery of international trade, and that the least recognition of these laws or principles lies within those countries whose international credit has been so high that their respective members have never been bothered with such things as exchange restrictions.
Two important changes have taken place in international trading due to our scientific and engineering developments. As I have said before, no nation can continue to buy more goods abroad than the value of the services it sells abroad. Now the services a nation can sell abroad are easily divided into three classes:
1. Sell any minerals which it has in the ground, including gold.
2. Sell partly or completely manufactured goods; this even includes dairy products, farm products, as well as machine products, etc.
3. It can sell its services by providing to other nations shipping, insurance, capital, etc.
Now, whatever the medium of international exchange happens to be, no nation in the world can obtain any of that medium except by completing with some other nation a transaction which falls within one of the three categories just mentioned.
PROFIT ON INTERNATIONAL TRADE
Just as an individual transaction within the borders of a nation has a profit attached to it which goes to the seller, so every international transaction has a national profit also, but it is an entirely different profit based on an entirely different set of conditions. The commercial profit of an individual transaction within the borders of a nation is the difference between the total cost of the article and its sales price. The national profit of an international transaction is the difference between what has had to be spent abroad to make the article compared to the currency it brings in when sold abroad.
I shall call this national profit or currency gain simply "the gain", to distinguish it from the profit of an individual transaction executed within the country itself. Now, let us take a few examples to make our argument clear.
If the services sold consist of minerals dug or pumped from the ground, it is obvious that these can be obtained by the country which has them without that country spending anything abroad to get them. Hence the gain is 100 per cent.
When we come to partially or completely manufactured goods, quite a difference begins to show. Here the gain depends entirely on whether the raw materials from which the goods are manufactured exist in the country or have to be purchased abroad. If they exist in the country then the gain is also 100 per cent; if they do not, then the cost of that proportion of them which has to be bought abroad must be subtracted from the currency brought in to establish the gain. If all the raw material has to be purchased abroad, then the gain will be limited to the value of the labour expended in producing the goods plus the manufacturing and sales profit.
In the third category, the gain varies according to the services rendered. If they are supplying capital, then the gain is the interest or dividend on that capital; if shipping, the gain might be 100 percent; if insurance, the gain would be the profit of the whole undertaking abroad.
You will see, therefore, that this figure of gain or the surplus currency obtained in any international transaction is a very different thing from what we in commerce know as profit. It will be obvious to you that a commercially profitable transaction might have very little gain to it, and a commercially unprofitable one might have a 100 per cent gain.
This gain can only come about by the sale of services abroad. Every domestic transaction which involves the sale domestically of any service whatsoever, be it raw material, partly or completely manufactured goods, or capital services, etc., involves the nation in a currency loss equivalent to the amount spent abroad or sent abroad to make up that service. It is obvious that for international solvency these losses must never aggregate more than the gains, otherwise we have a currency deficiency instead of a currency credit. Here we have, as mentioned before, the individual or nation needing more goods from the community or nations that it can supply them with.
EFFECT OF MODERN DEVELOPMENT
The new ideas and discoveries of the engineer and chemist, while increasing our world standard of living, extended the number of types of raw materials required to manufacture modern goods. An abundance of coal and iron, which was the original foundation of our world's industrial development, is now by itself insufficient to carry modern industry. Oil, bauxite, rubber, chromium, molybdenum, nickel, cobalt, vanadium, and a host of others are required today to carry out a complete manufacturing, programme.
Now the advent of these numerous new raw materials in making goods has had the effect of considerably curtailing the gain of nations that do not possess them, and considerably increasing the gain of those that do have them. Further, with the advent of mass production another serious change set in. In the early days of the industrial revolution, goods were made largely by hand or with very simple machinery. It was quite common for the cost of an article to be 20 per cent material and 80 per cent labour and profit. With modern methods of production, some of the mass produced articles have a cost of about 80 per cent material and only 20 per cent labour and profit.
Let us suppose that in both these cases 50 per cent of the material had to be imported by the manufacturer. In the first, case, where the material was 20 percent of the total, the gain on selling such an article abroad was 90 percent since only 10 percent of the total value had to be imported. In the second case, where the material was 80 percent of the total, 40 percent of the total value would have to be imported, the gain therefrom dropping to 60 percent. But you know as well as I do that to maintain a standard of living in a country, it is necessary to sell the same articles at home as those you wish to export; that not only is there no gain obtained by any of these domestic sales, but as mentioned before, there will be an actual currency loss.
In the first case, with a 90 per cent gain the country could afford to absorb ninety articles at home for every ten exported to break even. In other words, the gain on the ten made up for the loss on the ninety. In the second case, however, forty articles would have to be sold abroad for every sixty at home since it needs now the gain on forty to balance the loss on sixty. A colossal difference, and one that is almost impossible to maintain.
Further, due to the extension of the number of raw materials in the industrial field, it is reasonable to suppose that a non self-sufficient country, that is a country short of raw materials, might now have to buy 80 per cent of its raw materials abroad instead of 50 per cent, making the amount of raw materials purchased abroad 64 per cent of the total value of the article instead of 40 per cent. This, therefore, reduces the gain from 60 per cent to 36 per cent. Here, sixty-four articles would have to be sold abroad to balance the raw materials required for 36 articles sold domestically, an almost impossible condition.
You will see, therefore, that modern scientific development, with its expansion of raw materials, and modern manufacturing with its cheapening of production, while making the articles more desirable to purchasers, has greatly depleted the gain for countries which are not self-supporting in these raw materials.
Under the conditions just enumerated a nation that is blessed with a self-sufficiency of raw materials just cannot help amassing international wealth. Every transaction made with another nation brings in a currency gain; in fact currency flows in her direction like water downhill, even her domestic needs do not require an appreciable amount of spending abroad. The nation, however, without these necessary raw materials just cannot help losing its currency, as almost every domestic requirement forces her to spend some of her credit abroad, and the very exports, on which she should make the necessary gain to balance her domestic requirements, themselves require a large amount of foreign purchases, so that she is always losing currency just as the other country is always gaining it. There is no truer example than this of the old biblical adage that to those who have shall be given and from those who have not shall be taken away even that which they have.
These changes which I have outlined to you, having been themselves gradual in their own growth, worked unseen and unheard to accomplish the tremendous financial revolution which has overtaken the world.
As I explained to you previously, those nations, which are poor internationally and therefore cannot help, understand the problem and those, which are ultra-rich and therefore could help, do not. It is well known that the millionaire and the pauper do not speak the same language, that similar events affect them quite differently, since they judge them from different premises, and that neither understands the viewpoint of the other.
Now, what can be done to combat such a state of affairs? Firstly, the setting up of an international bank with an international standard, be it gold or bankor or unitas, is necessary. The currencies of the various nations must be so related to that standard that their respective values when compared to that standard can be either raised or depressed, according to the credit or debit currency balance which any particular nation has at that bank. This would have the effect of making the goods of a nation, low in currency, cheap compared to the goods of a nation with a large credit balance in currency. These cheaper goods would therefore be more attractive to other nations to buy and the gain in these transactions would tend to restore the adverse balance of such a nation.
Equally, the nation with a large credit balance would have its sales of goods restricted due to price until it had used up its credit balance in purchasing services from other nations. This arrangement is quite workable for such nations as stand near the borderline of self-sufficiency. I cannot see, however, that it can cater for two such opposite economic one-way streets as Great Britain and the United States of America, the one needing to buy a good deal more than it can ever export--as I explained to you, due to the tremendous shrinkage of gain--and the other being able and wishing to export without having to buy. I see no immediate answer to this problem.
Secondly, non self-sufficient nations, in order to bring themselves on a more even currency balance, will have to foster those industries for which they have the raw materials. They must also, as much as possible, develop the synthetic production of such raw materials as they lack and adapt those to their industrial needs. Even if the synthetic price is many times that of the natural product, it still will be preferable from a national gain point of view.
Thirdly, those nations almost self-sufficient should try and buy everything they can abroad so that they do not become choked with excess gold or currency credits. This is almost as bad as being bankrupt of them.
Lastly, I feel that the simple principles of economics which I have propounded to you today should be taught in every school so that the man in the street has a knowledge of the fundamentals of such things. He is not interested in the complicated curriculum of economics as a whole, nor is it necessary that he should know it. But just as a normal human being should have a knowledge of arithmetic to serve his normal daily course of life without having to delve into the higher planes of mathematics, so should the man in the street be taught the pure arithmetic of international economics. He would then be able to obtain a mental picture of what is necessary for any country to remain in business and to maintain within it a proper standard of living. And that, if we are to have international understanding, is vital.
To give you an example of the misunderstanding that exists through lack of knowledge of these fundamental principles, I am often told, particularly by members of the more wealthy nations, that we in Great Britain have nothing to complain of. We have the whole of the British Empire from which to draw our raw materials. It has never occurred to these people that since you and the other Dominions have complete political and economic freedom-and by the way, the one is not possible without the other-you have with that your own internal revenues, your own treasuries, and therefore your own national banks. London not being the final clearing house of your domestic debits and credits, the transactions between Great Britain and, for example, Canada are transactions just as between one sovereign state and another and are not paper transactions.
It has never occurred to these people that, for example, the buying of any commodity by Great Britain from Canada involves exactly the same kind of international exchange procedure as if it were purchased from, say, the United States of America.
An understanding of these economic principles will also explain to the man in the street that large international payments cannot be made in gold but only in goods and services, which is, unfortunately, usually the one way the creditor nation does not want to be paid. It will also show him that the only discrimination in the availability of raw materials in the past has been the same discrimination that a store shows to its customers: Those that have the money get the goods, and those that do not have the money don't get the goods.
You here with your unlimited. and in many cases undeveloped sources of raw materials, both old and modern, are one of the millionaires of the new era. We in Britain, who were the pioneers of industrial development, are now one of the new poor.
I do nut know anything which throws a heavier burden on a nation's economic resources than a war, and the magnitude of its war effort directly influences the weight of that burden. You have produced in this country a war effort second to none in the whole allied nations, yet in spite of this you have not had to have lend-lease. If anything, your currency position has grown stronger with your war effort. You have presented us in Great Britain with outright gifts of a magnitude that for the size of your population are almost unbelievable, and for which we are-and always will be-eternally grateful. There can be no better example of the economic strength given by the possession of raw materials.
In conclusion may I say that you are further ideally situated in having a benevolent and similarly wealthy neighbor.
Under these conditions, there must be a brilliant future for your country in the years to come. That you will have difficulties and set-backs there is no doubt, but anyone who lives long enough to see the trend of the curve, and who is not restricted to viewing the peaks and valleys in it, will be amazed at the progress that you will make in the future.
Further, throughout the world there will have to be a migration of population from areas of poor raw material facilities to areas of good raw material facilities. This is difficult and no doubt unpleasant, but must eventually happen if we are to live in peace on this earth. You, being one of the outstanding countries those population is away below the capacity of its mineral resources to supply, will automatically obtain population by migration. We in Britain, whose population is far above the ability of our domestic raw material sources to supply, should shed our population to countries like yours. This will have to be done gradually, and industries transplanted as well, so as to be able to absorb such population.
I can assure you that no act of legislation can change the march of progress. It can only accelerate or retard it and I suggest to you that, instead of having the increase of population you need come to you haphazardly, you look ahead and choose the origin from which it shall spring. I say this because population is the last link required in your economy. You have the raw materials, you have shown that you have the necessary production skill by your amazing war effort, the only remaining link in this economic chain is population.
I would like to tell you a story about an Englishman whose wife went to Canada after the last war. They had the old impression that your country was lacking in any kind of household comforts and was mostly populated by Indians. This man's wife had occasion to travel to the West Coast and arrangements had been made for her to stop on her way out in a certain hotel. Her husband had warned her that there would be no conveniences of any kind in the hotel, and that under no circumstances should she venture out in the dark. Days after her departure from London, he was astounded to get a cable from Toronto, reading, "Have arrived safely--I have "Running water" in my bedroom". He immediately replied, "Get that Indian out of there."