The blog provides a left-wing non-partisan perspective on socio-economic issues in Russia and throughout the world. The focus is on qualitative development of national economic systems and ensuring flexibility in economic policies to meet the challenges of the 21st century. Email: leftistobserver@gmail.com

WHAT OUR FATHERS DID NOT TELL US ABOUT THE ECONOMY

In my previous articles, I have expressed quite unequivocally my indignation that market fundamentalism had been accepted by emerging economies as the official economic ideology. As years go by, it becomes evident that the reckless opening of developing, and thus still fragile economies was serving the purposes of countries which have many decades, if not centuries, of deliberate protectionism to their names.

For this post, I am going take Russia, my home country, as an example again, but what I am going to address now relates to many developing countries and even to some of the developed ones.

The younger post-Soviet generations raised by TV commercials and glossy magazines appear to be at a loss as to what is happening to the global economy. As they grow older, a large portion of them begins to realize that, with the way things are going economically, their adult life will be no picnic at all. The temporary euphoria of the boom years has faded, but no new hope has come. Most young people do not see any light at the end of the tunnel, and this hopelessness acts as nationalist street gangs' best recruiter.

The economic reality does not match the elegant theories meticulously translated from English-language economics books. Economists recognize the existence of the massive gap between the prosperity of the economically-advanced countries, and the utter devastation of their own economy. But as they attempt to identify the underlying causes, they fall back on the same theories that made that devastation possible in the first place. The years of new post-communist economic propaganda have certainly left a trace, but very few realize that this trace only leads to the destitution.

The ironic thing is that some of the answers to today’s most fundamental economic questions these young people of my generation might have can be found in what our fathers eagerly put on the shelf of history, i.e. political economy. In the Soviet times, it suffered from excessive indoctrination and, as a result, was unsuitable for meaningful economic analysis. The numerous economic crimes committed in its name have discredited political economy in Russia. The desire for material possessions and comfort combined with unceasing, aggressive advertisement of consumerism fostered a new culture unwilling to heed the lessons of the past.

In that frenzied strive to pull themselves out of poverty and despair, our fathers forgot to pass to us the knowledge that they did possess back then, but considered irrelevant because they did not know how to improve their lives with it.

So these are some of the things about the economy that our fathers did know but did not tell us:



  1. Our fathers did not tell us that no market can be 100% free. Even though, with reservations, some markets back in the days were close to that ideal, most economies have never become free of any governmental influence. Look at the 19th-century Britain, considered by some the “cradle of free-market capitalism”, where the government did not interfere with market forces directly, but was the generator of a significant portion of the solvent demand on local markets by means of spending up to a quarter of the country’s budget on the famous Royal Navy. I hope it is clear what financed numerous orders with local entrepreneurs and craftsmen and made up for embezzlements by navy and treasury officials – the plundering of colonies did.


  2. Our fathers did not tell us that market is only a mechanism for distribution of material and financial resources within the economy, not a panacea for economic problems nor a condition for economic development. Markets work when there are resources to distribute, not when an economy is resource-barren.


  3. Our fathers did not tell us that any development of a capitalist economy is only possible in case of massive capital concentrations. Only countries that see significant inflows of material and financial resources for an extended time can show miracles of economic and social development. Technically, it does not matter where that capital should be coming from – foreign demand for local products, investments from others countries, an issue of money backed with national debt, foreign debt, the plundering of colonies, etc. No economy whose capital is being drained out has a chance of pulling itself out of the gutter. If the local solvent demand is low and does not generate sufficient profits while access to foreign markets remains limited, such an economy is doomed to debt slavery and living from hand to mouth by selling raw materials.


  4. Our fathers did not tell us that capitalism requires constant growth. If no further growth is possible for whatever reason, capitalism starts falling apart at the seams and looks for ways to expand by force regardless of how many thousands of human lives that expansion is going to ruin.


  5. Our fathers did not tell us that a bourgeois democracy is a democracy of the rich only. Figuratively speaking, the poor are never invited to the party in the first place. It is fat cats that make decisions in corridors of power, in corporate offices of industrial giants as well as on trading floors of stock and commodity exchanges.


  6. Our fathers did not tell us that social development is based on economic development and comes with a hefty price tag, which the impoverished masses cannot afford. Reforms get easily stalled when there is no one willing to foot the development bill. Besides, it turns out that mentality comes with a price tag too. It is not enough to adopt a new law or start one more bureaucratic initiative to effect positive changes in the way people think. Revolutionary ideas and innovative breakthroughs will require a substantial economic foundation and enormous expenditures. A civilized society with the rule of law and respect for a fellowman's property rights is never possible if it is only a minority that has any property and rights.


  7. Our fathers did not tell us that political freedom does not guarantee prosperity. It is one thing to have one's freedoms inscribed on an official piece of paper decorated with coats of arms and sprinkled with cheesy democratic slogans, but to exercise one's freedoms is quite another thing - especially when you are mired in abject poverty. The mighty golden calf opens up doors that will forever remain shut for the less fortunate. Paying your way through red tape solves things faster, connections with the right crowd protect better than a court ruling, and expensive PR compaigns usually generate higher turnouts at polling stations.


  8. Our fathers did not tell us that “business” and “economy” are not the same thing. The economy is a system developed by society to provide for their material and some spiritual needs, while business is merely the art of money-making and is only interested in financial returns at any cost. In prosperous times, businesses eagerly take what the economy can offer in order to thrive and proliferate. But when hard times come, businesses do not give a damn about the economy nor the society with its material and spiritual needs. They still care for returns, and that is true for both small and big businesses.


  9. Our fathers did not tell us that debt can be an effective way of postponing crises of over-production by stimulating fictitious demand, which I define as solvent demand beyond the natural limit of consumption, i.e. beyond one’s means. As credit rates fall as a result of boosted money supply, the economy continues to grow and everybody is happy – until the next crisis breaks out.

Boris Anisimov

DEBT AS AN ASSET

I am wondering how many people have noticed this peculiar thing – a considerable number of broadsheets do not have a column on economy. The closest match would be a column on Business or Money. If you were lucky to have an opportunity to meet with editors of highly respectable media outlets of our time and ask them why such a topic as economy is usually covered by a column on business, they would not even understand your question. “What other column is there to cover economy?” would be their surprised reply. In fact, almost everybody in the business community together with the general public would take sides with the editors. To them, economy is business.

If business prospers and proliferates, the economy is doing splendid, and is believed to be benefiting everybody. This attitude partially explains the reason why some felt that there must have been some kind of a villain to be blamed for the existing economic mess. Irresponsible banks must have granted one too many loans, while bad-faith customers must have defaulted on one too many mortgages. If the booming years preceding the crisis were beneficial to all, there must have been somebody secretly opposing the prosperity shared by numerous businesses and investors.

To my mind, seeking for the cause in the financial sector is a very superficial approach, like treating a broken bone with a Band-Aid. The recent craze for securitization has made an impression on some investors that finance will always remain independent from the rest of the economy. Although it is officially recognized that financial relations reflect the underlying economic processes centered on money-commodity relations, this understanding gets easily brushed off when greedy bulls take over financial markets. As a result market players forget that a debt, even if re-packaged many times, still remains a debt, likely to drop in value if a sufficient number of debtors behind it default on their payments.

Since some people’s liabilities are other people’s assets, the financial world has eventually taken this concept of “debt being an asset” to the extreme by transferring it into money-minting. What assets stand behind the fiat currency of an average developing country? Its central bank’s gold and foreign exchange reserves do, the gold obviously playing second fiddle in this duet. Developed countries convince emerging economies to accept their currencies as assets and scream blue murder when their free-market apprentices even dare to think about issuing local currency above their foreign exchange reserves. To satisfy their teacher’s demands, student countries have to continually sell something on world markets to bring in foreign exchange so that they can be allowed to print more local currency.

Central banks hold various financial assets including government bonds, which also back their currency issuance. Surprised? Technically, a central bank does not need any other “assets” but government bonds to issue money and lend it out to commercial banks. Then fractional-reserve banking does the rest as the debt-backed money gets lent on and on thus providing the financial resources that set capital reproduction cycles in motion throughout the economy. And this is exactly what occurs in developed countries. So much for the “economic might” that backs their currencies as economics books often claim! The US dollar being the most vivid and obvious example, I think we should leave this point and move further.

Thus, in our day and age, debt is money. In fact, debt is the very blood of modern capitalism. I trust that those who are now reading this article realize quite well who will ultimately pay off government debts. Both developed and emerging economies are learning this lesson the hard way at this present moment.

But if the widening wage-productivity gap is to be considered as the cause of the current global crisis, which has been already confirmed in a recent report by the United Nations Conference on Trade and Development, the reasons to be euphoric about the recent debt-generated economic growth are questionable. As the gap widens, ultimate consumers’ incomes tend to lessen, which reduces their ability to take out new loans and refinance previous ones. This places the entire financial system (and the entire economy as a result) in great danger as this Ponzi scheme of debt comes to be resting an ever-narrowing foundation.

Boris Anisimov

THE GOLDEN CALF OF GLOBALIZATION

Have you heard the rolling German-accented “I TOLD YOU SO” from up above the other day? I am almost certain I did. What day? September 14, 2010 – the day when the United Nations Conference on Trade and Development published a report (see the link here), in which the cause of the ongoing crisis was finally attributed to the global wage-productivity gap or, in other words, the crisis of over-production. For the last couple of years, the author of Das Kapital must have been laughing so hysterically up in heaven at all the mind-boggling explanations of the nature of the crisis that the Pearly Gates have probably run out of valerian drops to calm him down. Ironically, his name is not mentioned in the report. For academic circles and the business community, his economic concepts are still a taboo although the crisis has already spurred tremendous interest in alternative schools of economic thought.

The underlying cause of the crisis is recognized to lie in the sphere of commodity-money relations rather than in the financial sector, the most important conclusion being that this is not a financial crisis, but an economic one, which has, first and foremost, to do with supply and demand of commodities rather than availability of credit. The global wage-productivity gap, as it turned out, has been caused by – globalization!!!

My, oh, my!!! What a surprise for neoclassical economists! The miraculous remedy for the world’s economic problems of the 1970’s has turned into a major economic problem itself. But let me address that a bit later.

The report has dealt neoclassical economists a blow in the face by destroying their commonplace concept that capital and labor as factors of economic growth are separate and interchangeable. “Employment performance in [Europe and the United States] cannot be explained using a neoclassical labour market model in which labour and capital are substituted at a given level of output according to their relative prices. Such a model is based on microeconomic reasoning and ignores the macroeconomic factors that determine the demand for goods and services, and labour.” (p. 82). The report recognizes the dialectically dual nature of wages and salaries as they raise a business owner’s costs at the time of production while boosting his or her profits at the time of consumption. “Labour compensation has a dual character. On the one hand, it constitutes the largest proportion of production costs…On the other hand, labour compensation determines, to a very large extent, the level of demand of private households.” (p. 88). I hope I do not need to explain what that entails. “In addition to playing a key role in employment creation, wage incomes are also closely related to the dynamics of real productive investment and innovation. This is because profits drive investment, and the level of profits is fundamentally driven by demand rather than by a reduction in production costs.”(p. 93).

In other words, it is solvent demand that determines the possibility of further reproduction of capital. Not free market, not cheap credit, but solvent demand. I addressed that point in one of my recent articles (see the link here) – thus further ability to invest capital depends on previously paid wages as those determine demand and bring about profits. Countries, whose national economies were too poor to generate sufficient demand, and thus profits, had no other choice but resort to foreign demand on outside markets. And this is how it is related to the wage-productivity gap: “… if wage growth does not keep pace with productivity growth, the expansion of domestic demand and employment creation will be constrained, and that this constraint can only be lifted temporarily, if at all, by reliance on external demand.”(p. 77). As countries entered the globalized economy, they had to apply downward pressure on domestic wages in order to compete with low-cost imports from countries like China. And this is where the problem began – “…globalization implies that 1.5 billion workers in developing and emerging-market economies which have a small endowment of capital have been added to the existing workforce for producing goods on world markets, thereby disturbing previous labour market equilibriums and exerting downward pressure on wage levels…” (p. 77). Both emerging economies and developed countries like the US, the global consumer of last resort, had a hard time finding sufficient demand for the ever-increasing supply due to rising global productivity. In developed countries, that resulted in households relying more and more on debt to sustain their existing consumption levels. The developing ones, due to meager domestic demand, were even more eager to explore external markets for profit-making opportunities.

“Indeed, the adoption of export-led growth strategies based on the advantage of labour costs appears to have changed the nature of competition between countries. This has led to calls for protectionist measures against goods produced under low-wage conditions, and to attempts in industrialized countries to prevent an increase in wages or even reduce them in order to withstand such competition. These responses are misguided. They are based on textbook neoclassical theory, which posits that relative factor price equalization through trade is possible under perfect competition. More importantly, models used in this context fail to recognize the critical role of effective demand in shaping both current economic activity and future growth possibilities, because they do not grasp the complex dynamics of investment, productivity growth, wage formation and employment.” (p. 78).

In other words, globalization has not only failed to resolve the crisis of over-production (or over-accumulation), but exacerbated it by taking it to the global level. The first contradiction of capitalism remained unaddressed – capital owners, totally unaware of the true fundamentals of the global economy, believed they were chasing the golden calf, figuratively speaking, but they were only chasing its shadow.

While productivity was sky-rocketing, wages in most countries remain stagnant. I also wrote about that in one of my articles (see the link here) with a reference to the International Labour Organization, which on November 3, 2009 also pointed to years of stagnating wages relative to productivity gains as one of the reasons for the crisis. The solution suggested in the above-mentioned report is going to strike free-market fundamentalists dumb the very second they hear it – “…distribution of the gains from productivity growth…” (p. 85).

Boom! I can already imagine heart-attacks among radical right-wingers, who, by some weird coincidence, happened to be reading my article. People, if you believe in free market, stay away from my scribblings – they are going to hurt!

To drive the nail further into the coffin of laissez-faire capitalism, let me share the rest of the passage I have just quoted: “Whether or not aggregate demand rises sufficiently to create net employment depends crucially on the distribution of the gains from productivity growth, which in turn is greatly influenced by policy choices. The policies generally adopted over the past 25 years have sought to keep wages low, and have served to translate productivity gains either into higher capital income or into lower prices. They are based on the assumption that the demand for labour will behave in the same way as the demand for most goods (i.e. the lower the price, the greater the demand). But keeping wages low in order to generate higher profits is self-defeating, because without a stronger purchasing power of wage earners, domestic demand will not rise sufficiently to enable owners of capital to fully employ their capacity and thereby translate the productivity gains into profits. A potentially more successful strategy would be one oriented towards ensuring that the gains from productivity growth also accrue to labour: wages rising in line with productivity growth will cause domestic effective demand to increase and nourish a virtuous cycle of growth, investment, productivity increases and employment over time.” (p.85).

Did I hear it right? Did they actually use the word "distribute"? So where is the enthusiasm for a self-regulating economy? Where is the euphoria for reckless lending practices and anticipation of enormous profits as soon as the government gets off your back? Where is the servile veneration for the “golden” calf on the corner of Bowling Green Park and Wall Street? Gone!!!

Political economy has prevailed again. The report confirms that the existing economic model is unsustainable. That long-needed sustainability, it is believed, can only be achieved through stimulating domestic demand by making sure that wage growth rates keep pace with productivity growth rates. “Therefore, in developing countries, as in developed countries, the ability to achieve sustained growth of income and employment on the basis of productivity growth depends critically on how the resulting gains are distributed within the economy, how much additional wage income is spent for the consumption of domestically produced goods and services, and whether higher profits are used for investment in activities that simultaneously create more employment, including in some service sectors, such as the delivery of health and education.” (p. 87).

But there another inconvenient truth revealed in the report – the one about the United States’ inability to act as the consumer of last resort for the global markets. “It is becoming clear that not all countries can rely on exports to boost growth and employment; more than ever they need to give greater attention to strengthening domestic demand. This is especially true today, because it is unlikely that the United States’ former role as the global engine of growth can be assumed by any other country or countries.” (Overview, p. 1).

Boom! Another set of free-market fundamentalists has just received their share of heart-attacks and is being transported to the nearest hospital. What is it saying? Did I hear the word "former"?

“In the United States, a downward adjustment of consumption will be unavoidable unless wages grow strongly, which seems unlikely. For almost 10 years before the financial crisis, personal consumption in that country had been rising considerably faster than GDP despite a decline in the share of labour compensation in GDP. Greater consumer spending by reducing savings and incurring debt was possible in a financial environment where credit was easily accessible and where a series of asset price bubbles created the illusion of increasing household wealth. But with the collapse of the United States housing market, households were forced to unwind their debt positions and cut consumer spending. This trend is set to continue. Consequently, the world economy cannot count on the sort of stimulus provided by the United States in the same way as it did prior to the crisis.” (Overview, p. 10).

Wait! Is it "the Oracle of Omaha" being carried in a stretcher to an ambulance car?

“More importantly, the increase in United States household consumption was largely debt financed. Facilitated by easy consumer credit, lax lending standards, a proliferation of exotic mortgage products, the growth of a global market for securitized loans and soaring house values, burgeoning household spending created strongly growing household debt and led to a sharp decline in the United States household savings rate to almost zero. The ratio of debt to personal disposable income reached an all-time high in 2007, exceeding 130 per cent.” (p. 41).

Can you hear the sirens? Oh, that must be Alan Greenspan in that ambulance car passing by.

“Buoyant consumer demand in the United States was the main driver of global economic growth for many years in the run-up to the current global economic crisis…Given that before the crisis household consumption in the United States accounted for about 16 per cent of global output and that imports constituted a sizeable proportion of that consumption, this would imply both a reduction in world output and a decline in other countries’ export opportunities. From 2000 to 2007, United States imports as a share of its GDP grew from 15 per cent to 17 per cent, boosting aggregate demand in the rest of the world by $937 billion, in nominal terms. Moreover, as a result of global production sharing, United States consumer spending increases global economic activities in many indirect ways as well (e.g. business investments in countries such as Germany and Japan to produce machinery for export to China and its use there for the manufacture of exports to the United States). In short, the future path of United States consumption spending has macroeconomic implications, not only for economic recovery in the United States but also for global growth.” (p. 43-44)

To top it all off, there are two more quotes for you: “…the United States consumer demand is likely to shrink – not just grow slower” (p. 44), and “It is unlikely that the sharp decline in United States imports of consumer goods could be compensated by an increase in consumer spending and associated imports of consumer goods by China or any other developing country.” (p. 45).

Now you can make conclusions for yourselves.

“And it came to pass, as soon as he came nigh unto the camp, that he saw the calf, and the dancing: and Moses' anger waxed hot, and he cast the tables out of his hands, and brake them beneath the mount. And he took the calf which they had made, and burnt [it] in the fire, and ground [it] to powder, and strawed [it] upon the water, and made the children of Israel drink [of it].” (Exodus 32:19-20).

Boris Anisimov

THE NATIONALIZATION OF THE RUBLE

This is a translation from Russian of an article by Nikolay Starikov, who addresses problems of Russia’s national economic development within the current global financial system. The article is not structured as logically as I usually prefer and the author’s suggestions require further analysis, but still it provides some fresh, out-of-the-box thinking, the main feature of which is the realization that the highly-promoted global financial system of our time prevents national economic development of entire countries.

What is it? Why? What for? There are a lot of questions. Let us answer them one at a time.

Why is it so vital to raise the issue of nationalization of the Russian monetary currency? To all appearance, it is already ours. But the point is that it is just that, an appearance. After World War II, bankers from the Anglo-Saxon world have created a very peculiar financial system, which contradicts any common sense. These days, we are witnessing its inevitable collapse. The essence of what Americans offered the world is very simple – since most of the gold stockpile “migrated” to the US after the war, the post-war economy was to be built on the basis of the dollar. This meant that only the dollar (and the British pound, but to a lesser degree) would be backed with gold while all other currencies of the world would have no gold content. They would be convertible into gold through their exchange rates to the dollars and pounds. So dollars would now serve as a scale to weigh currencies one with another. In order to make that happen, the entire world would have to accumulate dollars and pounds rather than gold. A particular country wound now be authorized to issue its national currency in proportion to the dollars and pound in its reserves. In a similar way, paper money would previously be backed with gold reserves, but as of 1944 the US and the UK displaces gold with their own currencies.

The dollar and the pound became key currencies (or global reserve currencies according to the modern terminology). What was the result? All other currencies became secondary at once. But the main outcome of the Bretton Woods arrangements was the ability to clone the American financial system throughout the world. The private Federal Reserve System monopolized the issue of US dollars in 1914. Now, since 1944, the right to print money in other countries was shifted from the government into the hands of private central banks. On the surface, the bankers’ logic was flawless. Since there would be little or no gold sitting in countries’ reserves, it would be easy to prevent any swindling in the form of an unsecured money supply. While gold, which is easy to count but hard to move around, ends up sitting in a “basement”, currency reserves can be stored on a correspondent account in a bank. Is there a better way of making sure that Norwegian krones or Mexican pesos are secured with dollars? Who would be the controller? Neither Norway nor Mexico can be objective in this matter. There is a need for independent bankers. In fact, quasi-independent is a better word since, while being independent from Norway and Mexico, their central banks are part of a system that controls the whole world. In other words, the US and Great Britain placed their people in each country in order to control adherence to international financial agreements. A central bank independent from a national government has thus become a norm, which had never been the case before. There would always be a state treasury with money being issued by the government rather than some quasi-independent entity. Thus, the pillars of the current financial system have been placed, and it is that same system, whose agony we are witnessing right now. The functional agents of the system are the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).

Any IMF member-country must ensure an instant exchange of all the national currency for the dollars and pounds from its reserves. This rule must be observed at any time. Otherwise, you will not be admitted into the IMF. You will not be counted among the “civilized” nations. It is important to remember that.

This is how the system works:
• Russia sells some commodity on the global market;
• $100 enters the country;
• The central bank buys these dollars at the currency exchange;
• These dollars enter the central bank’s reserves;
• RUB 3,000 enters the Russian economy.

The parity is thus observed. What if the price of that commodity climbs up? Russia now receives $110 instead of $100. The parity is disrupted, and the central bank needs to correct the situation. It lowers the dollar exchange rate, buys dollars cheaper and injects into the domestic economy a smaller amount of rubles per each incoming dollar. Quite the opposite occurs when the price of the commodity drops down – the central bank ends up raising the dollar exchange rate. In any case, there exists a strict correlation between the money supply inside Russia and the dollar supply coming from outside. Thus, we are quite vulnerable. We are not fully independent. In today’s world, a very ridiculous financial system is in operation. Several countries in the West are printing colorful pictures on pieces of paper considered money, which are used to purchase real goods while the rest of world collects them. So who is going to prosper in this case? The answer is obvious. And this situation is considered normal. Those who print money have the face to teach democracy and economics to those who work for that money. And there is another aspect to it – countries are obliged to live within their means. Russia, for example, spends what it has earned. Should needs increase (e.g. pensions have risen, new military equipment has been purchased, construction projects for the Sochi Olympics have been started), then new sources of funding must be identified. The country ends up entering international markets and earning additional dollars to print more rubles in order to pay out pensions or settle accounts with factories for completed orders. Without more dollars, the country cannot print more national currency.

In other words, countries of the world have to live within their means while the US and countries printing reserve currencies can afford living within their needs. Should a need arise to pay out pensions, build factories, assist “young democracies”, they simply print more money. To be exact, they borrow that money in exchange for their treasury bills, but that does not make any difference because no-one in the US is thinking about cutting their spending on wars, benefits and grants. On the contrary, the spending keeps growing to match the actual needs. The ever-expanding US national debt in the US is a perfect illustration – it is around $13 trillion. It was less than $10 trillion two years ago. How long can this madness continue? Ask yourself this question. How long would you be able to continue spending beyond your means? But Russia is obliged to be strict in preserving the parity and live within its means. The Russian central bank will be watching very closely. So is the Russian central bank a governmental agency or not? Partially, it is. Just as much as the Russian leadership is partially free in their actions. As the central bank lowers the refinancing rate today, it continues guarding the dollar parity. Ideally for the system, the central bank must not be state-owned, but in reality the authorities have it under their control. It is noteworthy that the authorities have given up the idea of “nationalizing” the central bank. So there is some kind of equilibrium – the central bank is “obedient” as long as there are no attempts to make it a full-fledged governmental office. But it is time to move on because a country that ties its money supply with external markets and some other country’s currency leaves its economy bound hand and foot. We are obliged to sell our commodities and accept dollars in order to simply have rubles in our own economy. That is why countries of the world line up for access to US markets even though it may entail dumping practices and forcing local populations to live from hand to mouth.

We are robbed twice. First, we are robbed when we sell our products on THEIR markets for THEIR prices. With the printing press at their disposal, the bankers control the money supply. By means of futures, they are capable of inflating or deflating prices on any commodity. Second, we are robbed when we, having received THEIR currency, are obliged to enter THEIR markets and purchase for THEIR prices what we need. On markets you cannot control, you tend to be robbed twice. It is akin to a peasant from a countryside, who is prevented from selling his potatoes himself and ends up selling his produce to a middleman for nothing but peanuts. Then he goes to another middleman and buys something paying the full price for it. You might ask why we have agreed to such a system. Why do we sell on such a market? Because there is no other market in the world. It is the only one, and those are its rules. We have “consented” to them after the collapse of the Soviet Union by joining the IMF and signing its enslaving agreements. Do you remember the monetary shortage at the time of Mr. Gaidar’s reforms? The reason for it was in the fact that the country could not print its national currency because it had no foreign currency. Think of the news we were hearing back then – the IMF approved a loan of several million dollars for Russia. That meant there would be money to pay pensions and liquidate public sector salary arrears. While IMF’s loans are in dollars, pensions are paid in rubles. What is the correlation between the incoming dollars and the domestically circulating rubles? Now you know. And all this constant talk of inflation in case more rubles are printed is nothing but a smoke screen for the system that sucks blood out of Russia and the entire world. As for the currency board (which requires a national currency to have a fixed exchange rate with a foreign currency), there is another destructive aspect.

Preservation of backwardness.
For example, Russia has sold its commodity to the amount of $100 on the global market. This allows us to print RUB 3,000 to construct a new pen factory. Let us pretend that the construction cost is exactly RUB 3,000. While the construction period is 3 years, there is an urgent need for pens now. What is Russia forced to do? It ends up buying pens from abroad for 3 years spending $30 a year. As a result, instead of $100, we are left with only $10. The construction period will have to be extended because we will have to be buying pens in subsequent years otherwise we will have nothing to write with. So this is how the process of modernization gets dragged out forever and ever. But that is us – they do not have such a problem. The USA and Great Britain recently joined by Europe can simply print necessary amounts for R&D, new technologies, or anything else. They are under no obligation to “save” their dollars or pounds – they can use their computers to come up with as much money as they need.

Under the current global market system, Russia is doomed to lag behind. Thus, we cannot be possible be content with such a system. As much as a soccer team, into whose goal a referee keeps awarding penalty kicks, cannot be content with him. Such a referee should be dismissed from the game. Similarly, it is time to change the global economic system. The time has come. There was a reason for the question posed above about how long one can continue spending beyond one’s means. How long will you be able to take out loans in exchange of your IOU’s? Sooner or later, the borrowing will have to come to an end. The same is true for the world economy. Both the US and other so-called “developed” countries live in this vicious system – they simply print more money when it becomes necessary. They are not in any way better than Greece. They are all bankrupt. The US, for example, is responsible for the largest debt ever while carrying the burden of a global superpower. So the United in its current form (economy-, politics- and probably territory-wise) is bound to disappear – it is only a matter of time. The collapse of the vicious system of printing money “out of thin air” is eminent and predetermined by the system itself corrupting entire nations and continents by turning them into consumption machines financed by debt. The US and their satellites are eminently bound to grow weak and get off the stage. There is no point in forecasting exact dates in this regard – instead, we should look into what is going to happen after that. As we all know, nature does not tolerate vacuum. The same can be applied to the field of finance. In order to prevent a major global economic breakdown stemming from the collapse of the dollar system, alternatives must be considered.

Things can only develop in three possible ways:
1. All countries may want the dollar status for their currencies. There will arise several reserve currencies with chaos and wars as a result of their rivalry.
2. Only one country may replace the dollar with its currency. For that country, it will entail a quick rise to prosperity and high living standards followed by a quick decline.
3. No currency may be able to attain the dollar status. This is the most acceptable variant, which implies that all countries on this planet will be living within their means.

Russia must set the example for that third variant, which is the most acceptable for the entire planet, whose resources are on the brink of being depleted as a result of this mindless consumption race occurring in countries capable of printing reserve currencies. The golden standard will be of no avail either. Trust in gold is not that different from the trust in the dollar. Besides, both the dollar and the global stock of gold are currently in the same hands.

What must we do?
We must nationalize the ruble. What does it mean? It means that we must separate the internal markets from the external ones. Today’s ruble is not entirely ours since the set of factors that conditions the ruble emission is not under our control. Think again about the example of the pen factory and the lack of funds to finish its construction since most of the funds ends up being allocated on purchasing pens from abroad. Let us do the same math again, but in new conditions. Given that the supply of rubles is no longer tied to the amount of the Russian Central Bank’s dollar reserves, the solution is obvious and simple: the dollars will buy pens from abroad, while the rubles will finance construction of facilities for manufacturing such pens domestically. In this exact way, China has separated its internal markets from external ones, and the results of such a policy are pretty evident – the Chinese are able to manufacture goods and sell them abroad. Even though they sell their products cheap, they still have means to finance further development. Why are they able to sell their products cheap? Do they not have bills to pay? Yes, they do, but domestic prices in China are meager. That is why the Chinese work for a pay that no American will be willing to work for. Should domestic prices in China rise to the world market level, the Chinese economy will be done for. This explains why the West keeps on insisting that China should allow the yuan to appreciate thus making it more expensive as compared to the dollar. As the yuan goes up, so will salaries, wages and prices in dollars.

Thus, the first step for Russia is secession from the IMF and others similar institutions designed to keep the entire world in bondage. The dollar noose must be cut. Now the amount of printed rubles will not be determined by how many dollars we have but by the actual needs of our economy. How can we calculate that? In exactly the same way as the United States calculates the amount of dollars needed for its economy. Just as the European Union does the same. The best justification would be that from now on Russia issues rubles based on the value (in rubles) of all natural resources explored on its territory. It is quite amusing that subsequent steps are no rocket science; they are dictated by common sense itself. Since we are breaking down the disadvantageous system, we have absolutely no need in the central bank in its current form, but we do need a financial regular. Under any regime, it was the Treasury that performed this function. Let it remain the same now regardless of the official name. It may continue to be called the Central Bank. If the essence is changed, there is no need in changing plaques.

The second step will be the nationalization of the central bank and amendment of laws regulating its functions and performance. Now the central bank will be responsible for the money in circulation and the stability of the national currency. The second step must occur simultaneously with the first one. Next comes the third one.

The third step will be to trade Russian goods for rubles only. Do you want to buy our oil or gas? Be my guest, here is a Russian currency exchange for you! No compulsion, no coercion, but pure and simple market economy. Go ahead and change your dollars for our rubles.

Let me provide several explanations. This “revolution” must be carried out when the US is the weakest, but prior to the actual collapse. What will be the reaction from the international community? Laughter and ridicule, most likely. They will not be eager to buy for rubles. But we can wait. One may refuse to buy French cheese for 150 years and bring France’s cheese-making industry to its utter ruin. But as for Russian oil and gas, one can do without them for not more than a month or even less. They have nowhere to go – they will have to comply sooner or later. That is when the ruble will become a currency backed with real assets. And those shooting for the dollar’s fame and honor would be in quite a fix since there had already appeared a real rather than virtual currency. Who would be interested in a new currency backed by nothing? Now let me calm down the troubled minds of the most suspicious – I do not mean another iron curtain. Nobody would be closing down currency exchange booths. If you need dollars, go ahead and buy them in Russia for Russian rubles. But you are not going to need them soon. Why? Is there anybody in Europe, who buys dollars when leaving the EU or keeps his or her savings in them? No, there is not. They take their euros and travel with them. Should the need arise, they can exchange them for local currencies of whatever countries they visit: the US, Russia, Egypt, etc. Only the most eccentric Germans will think of opening a dollar bank account in Germany. In exactly the same way, the need for foreign currencies inside Russia would come to naught and we would start travelling with our rubles in our pockets while the rest of the world would be willing to accept and exchange them because our rubles would buy them our natural resources and goods. For the ruble, this is exactly the path to full convertibility, which we have been talking about for so long but have been unable to achieve. And it is not going to until Russia starts trading with the rest of the world for rubles.

In other words, the nationalization of the ruble is the fastest and simplest way towards its full convertibility and strengthening. But we must understand that the nationalization of the ruble is only a vehicle rather than a destination. What does Russia need? A technological breakthrough. This will require purchasing technologies. Why does everybody sell those for dollars only? Because it is for dollars that one can buy real assets throughout the world. As soon as we start selling real assets rather than virtual ones, there will appear demand for our currency and the ruble will appreciate. Other countries will start stockpiling rubles just like they stockpile dollars to purchase US treasury bills. The ruble cost of technologies will be less, and that makes purchasing them much easier. And what is the most important is that we will be the ones to print rubles in quantities we will find necessary. This is what will provide the funding for the long-awaited technological breakthroughs, domestic R&D projects, and purchasing specialists from abroad. The technological modernization of Russia is impossible without attracting industrialists from the West. There was not a single time in our history that we carried out a modernization without any assistance from the West. Peter the Great used to invite foreigners. As a result of Stalin’s talks with the US, it was foreign specialists that used to work on most major industrialization projects under initial 5-year plans according to foreign designs until our own science was able to bring about domestic breakthroughs. So what is it that can encourage western technologies to come to Russia?

China attracts them with cheap labor. Do we have anything to offer? Only cheap natural resources. In the current situation, due to the dollar connection we end up raising prices for domestic consumers up to worldwide levels, while exactly the opposite must be occurring. Sounds paradoxical, doesn’t it? Who officially owns the deposits of natural resources in the Russian soil? The Russian people do. So the oil deposited deep below belongs to the entire society. But if some oil company extracts that oil and delivers it to the surface, the company miraculously ends up owning that oil and pays all possible taxes on it. And that is where the core of the problem gets lost entirely. The owner – the Russian people represented by the elected government – gets paid only a portion for its property. The contrary must be occurring. The provisions of our Constitution must be filled with substance again – it is the government that should be hiring an oil company as a contractor to extract the oil rather than allow the company to simply pay taxes on the oil, which miraculously changes its public status. When all the extracted oil in Russia becomes state-owned, the government will have full control in determining its domestic price. While the external price (in rubles) depends on the world market, the domestic price can be WHATEVER as long as extraction and processing costs are covered. As for profits, the government can easily go without them for a while. And all this will attract western industrialists to build factories here in Russia. Why will it be profitable to them to work in Russia? In fact, it will be profitable to anybody who will own or be willing to build an industrial enterprise in Russia regardless of their citizenship.

Simply because the domestic price on energy resources (oil, gas, etc.) for industrial enterprises must be significantly lower than the world market. The owner is entitled to selling his/her commodity at any price. Nobody can take away that right from him/her. But only one common owner in the form of the government can do that. This is how the Chinese government was able to provide cheap labor. This is the fourth step out of the mess that we are in now. Cheap energy, cheap raw materials, and cheap fuel are our competitive advantages, which are not being implemented because we are stuck in the current financial system, and we should get out of it as soon as possible. What I am suggesting here is not a ready-to-use program, but a set of theses, each one requiring further detailed analysis. But, if challenged by anyone anywhere, I am ready to defend each one of them as well as the need for development in the above-mentioned direction. I am convinced that these actions are right, but we can only talk of a general direction at this point. In spite of that, we must understand that actions aimed at pulling Russia out of the crisis can be of worldwide significance for further development of mankind currently entangled in the financial cobweb. Let us summarize the sequence of actions, remembering that they will work only if their entirety and order are preserved.

The nationalization of the ruble is the path to Russia’s prosperity.
The nationalization of the ruble is the decoupling of the ruble from world reserve currencies. Our national currency must become fully independent and cease to be a reflection of the foreign financial system.

• Step 1 is to secede from the IMF and others similar institutions designed to keep the entire world in bondage
• Step 2 is to nationalize of the central bank and amend of the laws regulating its functions and performance.
• Step 3 is to trade Russian goods for rubles only.
• Step 4 is to significantly reduce prices on Russia natural resources for all those who will be developing industrial production inside Russia. The way to accomplish this is to comply with the Constitution of the Russian Federation, which states that the interior of the Russian soil belongs to the Russian people, i.e. the Russian Government.

Just as the theater of the absurd is hardly conducive to staging a classical play, the current financial setting is hardly conducive to the wholesome development of our country. And we should not be afraid to correct the errors of the past. The ruble is waiting to be nationalized…

The original article in Russian can be found at http://nstarikov.livejournal.com/141088.html

HOW CENTRIFUGAL IS GLOBALIZATION?

“It’s the rich men’s world”, sang the Swedish quartet ABBA in 1976. And they were quite right about it. As the world struggles to find a way to boost global consumption, only the lazy did say nothing about the rich getting richer and the poor getting even poorer. The globalization viewed by some as an economic model able to solve numerous economic problems started cracking in the early 2000’s and finally burst in 2007-2008. The big business, closely connected with governments throughout the world, formed a long line of bailout recipients while the rest had to tighten their belts. Those calling for the government to get off their backs in the 1980's were now running head over heels for public funds. How ironic!

So the global economic system, like any national one, is not as expandable as modern economics thought. Again, the first element of the system that got at odds with the expansionary sentiments was consumption. There are many ways to boost supply, but ways to boost solvent demand are quite few. As a result, US citizens ended up shouldering the “heavy burden” of excessive consumption stimulated by cheap credit. The military-political system, which still supports the US dollar after the collapse of the Bretton Woods arrangements, made American consumption a rather unique resource to trade on the global market. Like a trump card pulled out of a sleeve during a game, it became an undisputable argument in political talks. Those controlling it could decide fates of entire nations.

Some have even claimed that the world was experiencing a new era of economic development with open markets and globalization leading entrepreneurs throughout the world to new successes without a need to look back on their national economies as those were no longer relevant for further growth. What an arrogant opinion! Considering the current architecture of the world economy, how can anybody honestly say that national economies were no longer relevant?

In fact, globalization is possible because there are national economies to expand into. As long as local economies’ production costs remain higher than the worldwide average, outsourcing is never going out of fashion. As long as there are national economies unable to process their own raw materials into cheap and high-quality consumer products, those capable of doing it will continue making a good buck making the former economies pay through the nose for the work and their own resources they had extracted.

Globalization seems to take no notice of certain economic and social processes leaving them for local economies to worry about. This does not only include environmental issues, but also things like rising costs of living, cultural shifts, the influence of media on youth, crimes, education, reproduction of labor force, etc. In other words, globalization is only viable if local economies are willing to solve local problems. On the global scale, there is nobody else to do that. International organizations claim to be involved, but their involvement is rather limited.

As long as there are ways to externalize costs by pushing them onto the local economies, globalization works like clockwork. The primary source of what most people need (i.e. food, shelter, healthcare, education, jobs, incomes, etc.) is national economies. Those whose needs are completely covered by the global economy (if such exist at all) are in the minority and most likely belong to the super-rich. The majority of us still depends on local economic conditions, and it would be foolish to believe that the global economy is independent of them. On local markets, transnational corporations seek for what can only be obtained locally – capital, natural resources, labor, investments, etc. Although my readers may argue that some of those economic factors can come from international markets, no-one will dispute the fact that certain factors (e.g. labor) simply cannot be found anywhere else but on local markets. Even offshore companies offering various international services are all based in some local economies, whose leadership decided decades ago to turn a blind eye to their non-residents' international business activities. International business dances around local economies, figuratively speaking. In fact, is the world economy anything else but a combination of local economies working as a single mechanism? The world economy cannot isolated from local economies. In this interconnected world of ours, local economic problems sooner or later trigger global economic catastrophes.

In other words, globalization cannot be viewed outside the framework of national economies because it is in national economies that global corporations make their profits. Local economies generate the global growth, and, without it, globalization is nothing. In fact, globalization is a method of profit-extraction employed by a group of local economies at the expense of all other local economies. This goes against the popular talk of the multi-vector globalization bringing prosperity to all. In fact, its vector has a very clear direction – from the economic periphery to the economic centers. This centripetal direction is the very essence of globalization.
Boris Anisimov

MEMORANDUM TO IMPEROR NICOLAS II OF RUSSIA

MINISTER OF THE INTERIOR PETR DURNOVO’S MEMORANDUM TO EMPEROR NICHOLAS II OF RUSSIA (FEB. 1914)

A Future Anglo-German War Will Become an Armed Conflict between Two Groups of Powers

The central factor of the period of world history through which we are now passing is the rivalry between England and Germany. This rivalry must inevitably lead to an armed struggle between them, the issue of which will, in all probability, prove fatal to the vanquished side. The interests of these two powers are far too incompatible, and their simultaneous existence as world powers will sooner or later prove impossible. On the one hand, there is an insular State, whose world importance rests upon its domination of the sea, its world trade, and its innumerable colonies. On the other, there is a powerful continental empire, whose limited territory is insufficient for an increased population. It has therefore openly and candidly declared that its future is on the seas. It has, with fabulous speed, developed an enormous world commerce, built for its protection a formidable navy, and, with its famous trademark, "Made in Germany," created a mortal danger to the industrial and economic prosperity of its rival. Naturally, England cannot yield without a fight, and between her and Germany a struggle for life or death is inevitable.

The armed conflict impending as a result of this rivalry cannot be confined to a duel between England and Germany alone. Their resources are far too unequal, and, at the same time, they are not sufficiently vulnerable to each other. Germany could provoke rebellion in India, in South Africa, and, especially, a dangerous rebellion in Ireland, and paralyze English sea trade by means of privateering and, perhaps, submarine warfare, thereby creating for Great Britain difficulties in her food supply; but, in spite of all the daring of the German military leaders, they would scarcely risk landing in England, unless a fortunate accident helped them to destroy or appreciably to weaken the English navy. As for England, she will find Germany absolutely invulnerable. All that she may achieve is to seize the German colonies, stop German sea trade, and, in the most favorable event, annihilate the German navy, but nothing more. This, however, would not force the enemy to sue for peace. There is no doubt, therefore, that England will attempt the means she has more than once used with success, and will risk armed action only after securing participation in the war, on her own side, of powers stronger in a strategical sense. But since Germany, for her own part, will not be found isolated, the future Anglo-German war will undoubtedly be transformed into an armed conflict between two groups of powers, one with a German, the other with an English orientation.

It Is Hard to Discover Any Real Advantages to Russia in Rapprochement with England

Until the Russo-Japanese War, Russian policy has neither orientation. From the time of the reign of Emperor Alexander 111, Russia had a defensive alliance with France, so firm as to assure common action by both powers in the event of attack upon either, but, at the same time, not so close as to obligate either to support unfailingly, with armed force, all political actions and claims of the ally. At the same time, the Russian Court maintained the traditional friendly relations, based upon ties of blood, with the Court of Berlin. Owing precisely to this conjuncture, peace among the great powers was not disturbed in the course of a great many years, in spite of the presence of abundant combustible material in Europe. France, by her alliance with Russia, was guaranteed against attack by Germany; the latter was safe, thanks to the tried pacifism and friendship of Russia, from revanche ambitions on the part of France; and Russia was secured, thanks to Germany's need of maintaining amicable relations with her, against excessive intrigues by Austria-Hungary in the Balkan peninsula. Lastly, England, isolated and held in check by her rivalry with Russia in Persia, by her diplomats' traditional fear of our advance on India, and by strained relations with France, especially notable at the time of the well-known Fashoda incident, viewed with alarm the increase of Germany's naval power, without, however, risking an active step.

The Russo-Japanese War radically changed the relations among the great powers and brought England out of her isolation. As we know, all through the Russo-Japanese War, England and America observed benevolent neutrality toward Japan, while we enjoyed a similar benevolent neutrality from France and Germany. Here, it would seem, should have been the inception of the most natural political combination for us. But after the war, our diplomacy faced abruptly about and definitely entered upon the road toward rapprochement with England. France was drawn into the orbit of British policy; there was formed a group of powers of the Triple Entente, with England playing the dominant part; and a clash, sooner or later, with the powers grouping themselves around Germany became inevitable.

Now, what advantages did the renunciation of our traditional policy of distrust of England and the rupture of neighborly, if not friendly, relations with Germany promise us then and at present?

Considering with any degree of care the events which have taken place since the Treaty of Portsmouth, we find it difficult to perceive any practical advantages gained by us in rapprochement with England. The only benefit-improved relations with Japan-is scarcely a result of the Russo-English rapprochement. There is no reason why Russia and Japan should not live in peace; there seems to be nothing over which they need quarrel. All Russia's objectives in the Far East, if correctly understood, are entirely compatible with Japan's interests. These objectives, in their essentials, are very modest. The too broad sweep of the imagination of overzealous executive officials, without basis in genuine national interests, on the one hand, and the excessive nervousness and impressionability of Japan, on the other, which erroneously regarded these dreams as a consistently executed policy-these were the things that provoked a clash which a more capable diplomacy would have managed to avoid.

Russia needs neither Korea nor even Port Arthur. An outlet to the open sea is undoubtedly useful, but the sea in itself is, after all, not a market, but merely a road to a more advantageous delivery of goods at the consuming markets. As a matter of fact, we do not possess, and shall not for a long time possess any goods in the Far East that promise any considerable profits in exportation abroad. Nor are there any markets for the export of our products. We cannot expect a great supply of our export commodities to go to industrially and agriculturally developed America, to poor, but likewise industrial, Japan, or even to the maritime sections of China and remoter markets, where our exports would inevitably meet the competition of goods from the industrially stronger rival powers. There remains the interior of China, with which our trade is carried on, chiefly overland. Consequently, an open port would aid the import of foreign merchandise more than the export of our own products.

Japan, on her part, no matter what is said, has no desire for our Far Eastern possessions. The Japanese are by nature a southern people, and the harsh environment of our Far Eastern borderland cannot attract them. We know that even within Japan itself northern Yezo is sparsely populated, while apparently Japanese colonization is making little headway even in the southern part of Sakhalin Island, ceded to Japan under the Treaty of Portsmouth. After taking possession of Korea and Formosa, Japan will hardly go farther north, and her ambitions, it may be assumed, will turn rather in the direction of the Philippine Islands, Indo-China, Java, Sumatra, and Borneo. The most she might desire would be the acquisition, for purely commercial reasons, of a few more sections of the Manchurian railway.

In a word, peaceable coexistence, nay, more, a close rapprochement, between Russia and Japan in the Far East is perfectly natural, regardless of any mediation by England. The grounds for agreement are self-evident. Japan is not a rich country, and the simultaneous upkeep of a strong army and a powerful navy is hard for her. Her insular situation drives her to strengthen her naval power, and alliance with Russia would allow her to devote all her attention to her navy, especially vital in view of her imminent rivalry with America, leaving the protection of her interests on the continent to Russia. On our part, we, having the Japanese navy to protect our Pacific coast, could give up once for all the dream, impossible to us, of creating a navy in the Far East.

Thus, so far as our relations with Japan are concerned, the rapprochement with England has yielded us no real advantage. And it has gained us nothing in the sense of strengthening our position in Manchuria, Mongolia, or even the Ulianghai territory, where the uncertainty of our position bears witness that the agreement with England has certainly not freed the hands of our diplomats. On the contrary, our attempt to establish relations with Tibet met with sharp opposition from England.

In Persia, also, our position has been no better since the conclusion of this agreement. Every one recalls our predominant influence in that country under the Shah Nasr-Eddin, that is, exactly at a time when our relations with England were most strained. From the moment of our accord with the latter, we have found ourselves drawn into a number of strange attempts to impose upon the Persian people an entirely needless constitution, with the result that we ourselves contributed to the overthrow, for the benefit of our inveterate enemies, of a monarch who was devoted to Russia. That is, not only have we gained nothing, but we have suffered a loss all along the line, ruining our prestige and wasting many millions of rubles, even the precious blood of Russian soldiers, who were treacherously slain and, to please England, not even avenged.
The worst results, however, of the accord with England--and of the consequent discord with Germany--have been felt in the Near East. As we know, it was Bismarck who coined that winged phrase about the Balkan problem not being worth to Germany the bones of a single Pomeranian grenadier. Later the Balkan complications began to attract much more attention from German diplomacy, which had taken the "Sick Man" under its protection, but even then Germany, for a long time, failed to show any inclination to endanger relations with Russia in the interests of Balkan affairs. The proofs are patent. During the period of the Russo-Japanese War and the ensuing turmoil in our country, it would have been very easy for Austria to realize her cherished ambitions in the Balkan peninsula. But at that time Russia had not yet linked her destinies with England, and Austria-Hungary was forced to lose an opportunity most auspicious for her purposes.

No sooner had we taken the road to closer accord with England, however, than there immediately followed the annexation of Bosnia and Herzegovina, a step which might have been taken so easily and painlessly in 1905 or 1906. Next came the Albanian question and the combination with the Prince of Wied. Russian diplomacy attempted to answer Austrian intrigue by forming a Balkan league, but this combination, as might have been expected, proved to be quite unworkable. Intended to be directed against Austria, it immediately turned on Turkey and fell apart in the process of dividing the spoils taken from the latter. The final result was merely the definite attachment of Turkey to Germany, in whom, not without good reason, she sees her sole protector. In short, the Russo-British rapprochement evidently seems to Turkey as tantamount to England's renouncing her traditional policy of closing the Dardanelles to us, while the creation of the Balkan league, under the auspices of Russia, appeared as a direct threat to the continued existence of Turkey as a European power.

To sum up, the Anglo-Russian accord has brought us nothing of practical value up to this time, while for the future, it threatens us with an inevitable armed clash with Germany.

Fundamental Alignments in the Coming War

Under what conditions will this clash occur and what will be its probable consequences? The fundamental groupings in a future war are self-evident: Russia, France, and England, on the one side, with Germany, Austria, and Turkey, on the other. It is more than likely that other powers, too, will participate in that war, depending upon circumstances as they may exist at the war's outbreak. But, whether the immediate cause for the war is furnished by another clash of conflicting interests in the Balkans, or by a colonial incident, such as that of Algeciras, the fundamental alignment will remain unchanged.

Italy, if she has any conception of her real interests, will not join the German side. For political as well as economic reasons, she undoubtedly hopes to expand her present territory. Such an expansion may be achieved only at the expense of Austria, on one hand, and Turkey, on the other. It is, therefore, natural for Italy not to join that party which would safeguard the territorial integrity of the countries at whose expense she hopes to realize her aspirations. Furthermore, it is not out of the question that Italy would join the anti-German coalition, if the scales of war should incline in its favor, in order to secure for herself the most favorable conditions in sharing the subsequent division of spoils.

In this respect, the position of Italy is similar to the probable position of Rumania, which, it may be assumed, will remain neutral until the scales of fortune favor one or another side. Then, animated by normal political self-interest, she will attach herself to the victors, to be rewarded at the expense of either Russia or Austria. Of the other Balkan States, Serbia and Montenegro will unquestionably join the side opposing Austria, while Bulgaria and Albania (if by that time they have not yet formed at least the embryo of a State) will take their stand against the Serbian side. Greece will in all probability remain neutral or make common cause with the side opposing Turkey, but that only after the issue has been more or less determined. The participation of other powers will be incidental, and Sweden ought to be feared, of course, in the ranks of our foes.

Under such circumstances, a struggle with Germany presents to us enormous difficulties, and will require countless sacrifices. War will not find the enemy unprepared, and the degree of his preparedness will probably exceed our most exaggerated calculations. It should not be thought that this readiness is due to Germany's own desire for war. She needs no war, so long as she can attain her object-the end of exclusive domination of the seas. But, once this vital object is opposed by the coalition, Germany will not shrink from war, and, of course, will even try to provoke it, choosing the most auspicious moment.

The Main Burden of the War Will Fall on Russia

The main burden of the war will undoubtedly fall on us, since England is hardly capable of taking a considerable part in a continental war, while France, poor in man power, will probably adhere to strictly defensive tactics, in view of the enormous losses by which war will be attended under present conditions of military technique. The part of a battering-ram, making a breach in the very thick of the German defense, will be ours, with many factors against us to which we shall have to devote great effort and attention.

From the sum of these unfavorable factors we should deduct the Far East. Both America and Japan--the former fundamentally, and the latter by virtue of her present political orientation--are hostile to Germany, and there is no reason to expect them to act on the German side. Furthermore, the war, regardless of its issue, will weaken Russia and divert her attention to the West, a fact which, of course, serves both Japanese and American interests. Thus, our rear will be sufficiently secure in the Far East, and the most that can happen there will be the extortion from us of some concessions of an economic nature in return for benevolent neutrality. Indeed, it is possible that America or Japan may join the anti-German side, but, of course, merely as usurpers of one or the other of the unprotected German colonies.

There can be no doubt, however, as to an outburst of hatred for us in Persia, and a probable unrest among the Moslems of the Caucasus and Turkestan; it is possible that Afghanistan, as a result of that unrest, may act against us; and, finally, we must foresee very unpleasant complications in Poland and Finland. In the latter, a rebellion will undoubtedly break out if Sweden is found in the ranks of our enemies. As for Poland, it is not to be expected that we can hold her against our enemy during the war. And after she is in his power, he will undoubtedly endeavor to provoke an insurrection which, while not in reality very dangerous, must be considered, nevertheless, as one of the factors unfavorable to us, especially since the influence of our allies may induce us to take such measures in our relations with Poland as will prove more dangerous to us than any open revolt.

Are we prepared for so stubborn a war as the future war of the European nations will undoubtedly become? This question we must answer, without evasion, in the negative. That much has been done for our defense since the Japanese war, I am the last person to deny, but even so, it is quite inadequate considering the unprecedented scale on which a future war will inevitably be fought. The fault lies, in a considerable measure, in our young legislative institutions, which have taken a dilettante interest in our defenses, but are far from grasping the seriousness of the political situation arising from the new orientation which, with the sympathy of the public, has been followed in recent years by our Ministry of Foreign Affairs.

The enormous number of still unconsidered legislative bills of the war and navy departments may serve as proof of this: for example, the plan of the organization of our national defense proposed to the Duma as early as the days of Secretary of State Stolypin. It cannot be denied that, in the matter of military instruction, according to the reports of specialists, we have achieved substantial improvements, as compared with the time before the Japanese War. According to the same specialists, our field artillery leaves nothing to be desired; the gun is entirely satisfactory, and the equipment convenient and practical. Yet, it must be admitted that there are substantial shortcomings in the organization of our defenses.

In this regard we must note, first of all, the insufficiency of our war supplies, which, certainly, cannot be blamed upon the war department, since the supply schedules are still far from being executed, owing to the low productivity of our factories. This insufficiency of munitions is the more significant since, in the embryonic condition of our industries, we shall, during the war, have no opportunity to make up the revealed shortage by our own efforts, and the closing of the Baltic as well as the Black Sea will prevent the importation from abroad of the defense materials which we lack.

Another circumstance unfavorable to our defense is its far too great dependence, generally speaking, upon foreign industry, a fact which, in connection with the above noted interruption of more or less convenient communications with abroad, will create a series of obstacles difficult to overcome. The quantity of our heavy artillery, the importance of which was demonstrated in the Japanese War, is far too inadequate, and there are few machine guns. The organization of our fortress defenses has scarcely been started, and even the fortress of Reval, which is to defend the road to the capital, is not yet finished.

The network of strategic railways is inadequate. The railways possess a rolling stock sufficient, perhaps, for normal traffic, but not commensurate with the colossal demands which will be made upon them in the event of a European war. Lastly, it should not be forgotten that the impending war will be fought among the most civilized and technically most advanced nations. Every previous war has invariably been followed by something new in the realm of military technique, but the technical backwardness of our industries does not create favorable conditions for our adoption of the new inventions.

The Vital Interests of Germany and Russia Do Not Conflict

All these factors are hardly given proper thought by our diplomats, whose behavior toward Germany is, in some respects, even aggressive, and may unduly hasten the moment of armed conflict, a moment which, of course, is really inevitable in view of our British orientation.
The question is whether this orientation is correct, and whether even a favorable issue of the war promises us such advantages as would compensate us for all the hardships and sacrifices which must attend a war unparalleled in its probable strain.

The vital interests of Russia and Germany do not conflict. There are fundamental grounds for a peaceable existence of these two States. Germany's future lies on the sea, that is, in a realm where Russia, essentially the most continental of the great powers, has no interests whatever. We have no overseas colonies, and shall probably never have them, and communication between the various parts of our empire is easier overland than by water. No surplus population demanding territorial expansion is visible, but, even from the viewpoint of new conquests, what can we gain from a victory over Germany? Posen, or East Prussia? But why do we need these regions, densely populated as they are by Poles, when we find it difficult enough to manage our own Russian Poles? Why encourage centripetal tendencies, that have not ceased even to this day in the Vistula territory, by incorporating in the Russian State the restless Posnanian and East Prussian Poles, whose national demands even the German Government, which is more firm than the Russian, cannot stifle?

Exactly the same thing applies to Galicia. It is obviously disadvantageous to us to annex, in the interests of national sentimentalism, a territory that has lost every vital connection with our fatherland. For, together with a negligible handful of Galicians, Russian in spirit, how many Poles, Jews, and Ukrainian Uniates we would receive! The so-called Ukrainian, or Mazeppist, movement is not a menace to us at present, but we should not enable it to expand by increasing the number of turbulent Ukrainian elements, for in this movement there undoubtedly lies the seed of an extremely dangerous Little Russian separatism which, under favorable conditions, may assume quite unexpected proportions. The obvious aim of our diplomacy in the rapprochement with England has been to open the Straits. But a war with Germany seems hardly necessary for the attainment of this object, for it was England, and not Germany at all, that closed our outlet from the Black Sea. Was it not because we made sure of the cooperation of the later power, that we freed ourselves in 1871 from the humiliating restrictions imposed upon us by England under the Treaty of Paris?

Also, there is reason to believe that the Germans would agree sooner than the English to let us have the Straits, in which they have only a slight interest, and at the price of which they would gladly purchase our alliance.

Moreover, we should not cherish any exaggerated hopes from our occupation of the Straits. Their acquisition would be advantageous to us only as they served to close the Black Sea to others, making it an inland sea for us, safe from enemy attack.

The Straits would not give us an outlet to the open sea, however, since on the other side of them there lies a sea consisting almost wholly of territorial waters, a sea dotted with numerous islands where the British navy, for instance, would have no trouble whatever in closing to us every inlet and outlet, irrespective of the Straits. Therefore, Russia might safely welcome an arrangement which, while not turning the Straits over to our direct control, would safeguard us against a penetration of the Black Sea by an enemy fleet. Such an arrangement, attainable under favorable circumstances without any war, has the additional advantage that it would not violate the interests of the Balkan States, which would not regard our seizure of the Straits without alarm and quite natural jealousy.

In Trans-Caucasia we could, as a result of war, expand territorially only at the expense of regions inhabited by Armenians, a move which is hardly desirable in view of the revolutionary character of present Armenian sentiment, and of its dream of a greater Armenia; and in this region, Germany, were we allied to her, would certainly place even fewer obstacles in our way than England. Those territorial and economic acquisitions which might really prove useful to us are available only in places where our ambitions may meet opposition from England, but by no means from Germany. Persia, the Pamir, Kuldja, Kashgar, Dzungaria, Mongolia, the Ulianghai territory-all these are regions where the interests of Russia and Germany do not conflict, whereas the interests of Russia and England have clashed there repeatedly.

And Germany is in exactly the same situation with respect to Russia. She could seize from us, in case of a successful war, only such territories as would be of slight value to her, and because of their population, would prove of little use for colonization; the Vistula territory, with a Polish-Lithuanian population, and the Baltic provinces, with a Lettish-Estonian population, are all equally turbulent and anti-German.

Russia's Economic Advantages and Needs Do Not Conflict with Germany's

It may be argued, however, that, under modern conditions in the various nations, territorial acquisitions are of secondary importance, while economic interests take first rank. But in this field, again, Russia's advantages and needs do not conflict with Germany's as much as is believed. It is, of course, undeniable that the existing Russo-German trade agreements are disadvantageous to our agriculture and advantageous to Germany's, but it would be hardly fair to ascribe this circumstance to the treachery and unfriendliness of Germany.

It should not be forgotten that these agreements are in many of their sections advantageous to us. The Russian delegates who concluded these agreements were confirmed protagonists of a development of Russian industry at any cost, and they undoubtedly made a deliberate sacrifice, at least to some extent, of the interests of Russian agriculture to the interests of Russian industry. Furthermore, we ought not to forget that Germany is far from being the direct consumer of the greater share of our agricultural exports abroad. For the greater share of our agricultural produce, Germany acts merely as middleman, and so it is for us and the consuming markets to establish direct relations and thus avoid the expensive German mediation. Lastly, we should keep in mind that the commercial relations of States depend on their political understandings, for no country finds advantage in the economic weakening of an ally but, conversely, profits by the ruin of a political foe. In short, even though it be obvious that the existing Russo-German commercial treaties are not to our advantage, and that Germany, in concluding them, availed herself of a situation that happened to be in her favor-in other words, forced us to the wall-this action should have been expected from Germany and thought of. It should not, however, be looked upon as a mark of hostility toward us, but rather as an expression of healthy national self-interest, worthy of our emulation. Aside from that, we observe, in the case of Austria-Hungary, an agricultural country that is in a far greater economic dependence upon Germany than ours, but nevertheless, is not prevented from attaining an agricultural development such as we may only dream of.

In view of what has been said, it would seem that the conclusion of a commercial treaty with Germany, entirely acceptable to Russia, by no means requires that Germany first be crushed. It will be quite sufficient to maintain neighborly relations with her, to make a careful estimate of our real interests in the various branches of national economy, and to engage in long, insistent bargaining with German delegates, who may be expected to protect the interests of their own fatherland and not ours.

But I would go still further and say that the ruin of Germany, from the viewpoint of our trade with her, would be disadvantageous to us. Her defeat would unquestionably end in a peace dictated from the viewpoint of England's economic interests. The latter will exploit to the farthest limit any success that falls to her lot, and we will only lose, in a ruined Germany without sea routes, a market which, after all, is valuable to us for our otherwise unmarketable products.
In respect to Germany's economic future, the interests of Russia and England are diametrically opposed. For England, it is profitable to kill Germany's maritime trade and industry, turning her into a poor and, if possible, agricultural country. For us, it is of advantage for Germany to develop her sea-going commerce and the industry which serves it, so as to supply the remotest world markets, and at the same time open her domestic market to our agricultural products, to supply her large working population.

But, aside from the commercial treaties, it has been customary to point out the oppressive character of German domination in Russian economic life, and the systematic penetration of German colonization into our country, as representing a manifest peril to the Russian State. We believe, however, that fears on these grounds are considerably exaggerated. The famous "Drang nach Osten" was in its own time natural and understandable, since Germany's land could not accommodate her increased population, and the surplus was driven in the direction of the least resistance, i.e., into a less densely populated neighboring country. The German Government was compelled to recognize the inevitability of this movement, but could hardly look upon it as to its own interests. For, after all, it was Germans who were being lost to the influence of the German State, thus reducing the man power of their own country. Indeed, the German Government made such strenuous efforts to preserve the connection between its emigrants and their old fatherland that it adopted even the unusual method of tolerating dual citizenship. It is certain, however, that a considerable proportion of German emigrants definitely and irrevocably settled in their new homes, and slowly broke their ties with the old country. This fact, obviously incompatible with Germany's State interests, seems to have been one of the incentives which started her upon a colonial policy and maritime commerce, previously so alien to her. And at present, as the German colonies increase and there is an attendant growth of German industry and naval commerce, the German colonization movement decreases, in a measure, and the day is not remote when the "Drang nach Osten" will become nothing more than a subject for history.
In any case, the German colonization, which undoubtedly conflicts with our State interests, must be stopped, and here, again, friendly relations with Germany cannot harm us. To express a preference for a German orientation does not imply the advocacy of Russian vassalage to Germany, and, while maintaining friendly and neighborly intercourse with her, we must not sacrifice our State interests to this object. But Germany herself will not object to measures against the continued flow of German colonists into Russia. To her, it is of greater benefit to turn the wave of emigration toward her own colonies. Moreover, even before Germany had colonies, when her industry was not yet sufficiently developed to employ the entire population, the German Government did not feel justified in protesting against the restrictive measures that were adopted against foreign colonization during the reign of Alexander III.

As regards the German domination in the field of our economic life, this phenomenon hardly justifies the complaints usually voiced against it. Russia is far too poor, both in capital and in industrial enterprise, to get along without a large import of foreign capital. A certain amount of dependence upon some kind of foreign capital is, therefore, unavoidable, until such time as the industrial enterprise and material resources of our population develop to a point where we may entirely forego the services of foreign investors and their money. But as long as we do require them, German capital is more advantageous to us than any other.

First and foremost, this capital is cheaper than any other, being satisfied with the lowest margin of profit. This, to a large extent, explains the relative cheapness of German products, and their gradual displacement of British products in the markets of the world. The lower demands of German capital, as regards returns, have for their consequence Germany's readiness to invest in enterprises which, because of their relatively small returns, are shunned by other foreign investor;. Also, as a result of that relative cheapness of German capital, its influx into Russia is attended by a smaller outflow of investors' profits from Russia, as compared with French and English investments, and so a larger amount of rubles remain in Russia. Moreover, a considerable proportion of the profits made on German investments in Russian industry do not leave our country at all, but are spent in Russia.

Unlike the English or French, the German capitalists, in most cases, come to stay in Russia, themselves, with their money. It is this very German characteristic which explains in a considerable degree the amazing number of German industrialists, manufacturers, and mill owners in our midst, as compared with the British and French.

The latter live in their own countries, removing from Russia the profits produced by their enterprises, down to the last kopek. The German investors, on the contrary, live in Russia for long periods, and not infrequently settle down permanently. Whatever may be said to the contrary, the fact is that the Germans, unlike other foreigners, soon feel at home in Russia and rapidly become Russianized. Who has not seen Frenchmen and Englishmen, for example, who have spent almost their whole lives in Russia and yet do not speak a word of Russian? On the other hand, are there many Germans here who cannot make themselves understood in Russian, even though it be with a strong accent and in broken speech? Nay, more-who has not seen genuine Russians, orthodox, loyal with all their hearts dedicated to the principles of the Russian State, and yet only one or two generations removed from their German emigrant ancestry? Lastly, we must not forget that Germany herself is, to a certain extent, interested in our economic well-being. In this regard, Germany differs, to our advantage, from other countries, which are interested exclusively in obtaining the largest possible returns from capital invested in Russia, even at the cost of the economic ruin of this country. Germany, however, in her capacity of permanent-although, of course, not unselfish-middleman for our foreign trade, has an interest in preserving the productive resources of our country, as a source of profitable intermediary operations for her.

Even a Victory over Germany Promises Russia an Exceedingly Unfavorable Prospect

In any case, even if we were to admit the necessity for eradicating German domination in the field of our economic life, even at the price of a total banishment of German capital from Russian industry, appropriate measures could be taken. it would seem, without war against Germany. Such a war will demand such enormous expenditures that they will many times exceed the more than doubtful advantages to us in the abolition of the German [economic] domination. More than that, the result of such a war will be an economic situation compared with which the yoke of German capital will seem easy.

For there can be no doubt that the war will necessitate expenditures which are beyond Russia's limited financial means. We shall have to obtain credit from allied and neutral countries, but this will not be granted gratuitously. As to what will happen if the war should end disastrously for us, I do not wish to discuss now. The financial and economic consequences of defeat can be neither calculated nor fore-seen, and will undoubtedly spell the total ruin of our entire national economy.
But even victory promises us extremely unfavorable financial prospects; a totally ruined Germany will not be in a position to compensate us for the cost involved. Dictated in the interest of England, the peace treaty will not afford Germany opportunity for sufficient economic recuperation to cover our war expenditures, even at a distant time. The little which we may perhaps succeed in extorting from her will have to be shared with our allies, and to our share there will fall but negligible crumbs, compared with the war cost. Meantime, we shall have to pay our war loans, not without pressure by the allies. For, after the destruction of German power, we shall no longer be necessary to them. Nay, more, our political might, enhanced by our victory, will induce them to weaken us, at least economically. And so it is inevitable that, even after a victorious conclusion of the war, we shall fall into the same sort of financial and economic dependence upon our creditors, compared with which our present dependence upon German capital will seem ideal.

However, no matter how sad may be the. economic prospects which face us as a result of union with England, and, by that token, of war with Germany, they are still of secondary importance when we think of the political consequences of this fundamentally unnatural alliance.

A Struggle Between Russia and Germany Is Profoundly Undesirable to Both Sides, as It Amounts to a Weakening of the Monarchist Principle

It should not be forgotten that Russia and Germany are the representatives of the conservative principle in the civilized world, as opposed to the democratic principle, incarnated in England and, to an infinitely lesser degree, in France. Strange as it may seem, England, monarchistic and conservative to the marrow at home, has in her foreign relations always acted as the protector of the most demagogical tendencies, invariably encouraging all popular movements aiming at the weakening of the monarchical principle.

From this point of view, a struggle between Germany and Russia, regardless of its issue, is profoundly undesirable to both sides, as undoubtedly involving the weakening of the conservative principle in the world of which the above-named two great powers are the only reliable bulwarks. More than that, one must realize that under the exceptional conditions which exist, a general European war is mortally dangerous both for Russia and Germany, no matter who wins. It is our firm conviction, based upon a long and careful study of all contemporary subversive tendencies, that there must inevitably break out in the defeated country a social revolution which, by the very nature of things, will spread to the country of the victor.

During the many years of peaceable neighborly existence, the two countries have become united by many ties, and a social upheaval in one is bound to affect the other. That these troubles will be of a social, and not a political, nature cannot be doubted, and this will hold true, not only as regards Russia, but for Germany as well. An especially favorable soil for social upheavals is found in Russia, where the masses undoubtedly profess, unconsciously, the principles of Socialism. In spite of the spirit of antagonism to the Government in Russian society, as unconscious as the Socialism of the broad masses of the people, a political revolution is not possible in Russia, and any revolutionary movement inevitably must degenerate into a Socialist movement. The opponents of the government have no popular support. The people see no difference between a government official and an intellectual. The Russian masses, whether workmen or peasants, are not looking for political rights, which they neither want nor comprehend.

The peasant dreams of obtaining a gratuitous share of somebody else's land; the workman, of getting hold of the entire capital and profits of the manufacturer. Beyond this, they have no aspirations. If these slogans are scattered far and wide among the populace, and the Government permits agitation along these lines, Russia will be flung into anarchy, such as she suffered in the ever-memorable period of troubles in 1905-1906. War with Germany would create exceptionally favorable conditions for such agitation. As already stated, this war is pregnant with enormous difficulties for us, and cannot turn out to be a mere triumphal march to Berlin. Both military disaster,-partial ones, let us hope-and all kinds of shortcomings in our supply are inevitable. In the excessive nervousness and spirit of opposition of our society, these events will be given an exaggerated importance, and all the blame will be laid on the Government.

It will be well if the Government does not yield, but declares directly that in time of war no criticism of the governmental authority is to be tolerated, and resolutely suppresses all opposition. In the absence of any really strong hold on the people by the opposition, this would settle the affair. The people did not heed the writers of the Wiborg Manifesto, in its time, and they will not follow them now.

But a worse thing may happen: the government authority may make concessions, may try to come to an agreement with the opposition, and thereby weaken itself just when the Socialist elements are ready for action. Even though it may sound like a paradox, the fact is that agreement with the opposition in Russia positively weakens the Government. The trouble is that our opposition refuses to reckon with the fact that it represents no real force. The Russian opposition is intellectual throughout, and this is its weakness, because between the intelligentsia and the people there is a profound gulf of mutual misunderstanding and distrust. We need an artificial election law, indeed, we require the direct influence of the governmental authority, to assure the election to the State Duma of even the most zealous champions of popular rights. Let the Government refuse to support the elections, leaving them to their natural course, and the legislative institutions would not see within their walls a single intellectual, outside of a few demagogic agitators. However insistent the members of our legislative institutions may be that the people confide in them, the peasant would rather believe the landless government official than the Octobrist landlord in the Duma, while the workingman treats the wage-earning factory inspector with more confidence than the legislating manufacturer, even though the latter professes every principle of the Cadet party.

It is more than strange, under these circumstances, that the governmental authority should be asked to reckon seriously with the opposition, that it should for this purpose renounce the role of impartial regulator of social relationships, and come out before the broad masses of the people as the obedient organ of the class aspirations of the intellectual and propertied minority of the population. The opposition demands that the Government should be responsible to it, representative of a class, and should obey the parliament which it artificially created. (Let us recall that famous expression of V. Nabokov: "Let the executive power submit to the legislative power!" In other words, the opposition demands that the Government should adopt the psychology of a savage, and worship the idol which he himself made.

Russia Will be Flung into Hopeless Anarchy, the Issue of Which Will be Hard to Foresee
If the war ends in victory, the putting down of the Socialist movement will not offer any insurmountable obstacles. There will be agrarian troubles, as a result of agitation for compensating the soldiers with additional land allotments; there will be labor troubles during the transition from the probably increased wages of war time to normal schedules; and this, it is to be hoped, will be all, so long as the wave of the German social revolution has not reached us. But in the event of defeat, the possibility of which in a struggle with a foe like Germany cannot be overlooked, social revolution in its most extreme form is inevitable.

As has already been said, the trouble will start with the blaming of the Government for all disasters. In the legislative institutions a bitter campaign against the Government will begin, followed by revolutionary agitations throughout the country, with Socialist slogans, capable of arousing and rallying the masses, beginning with the division of the land and succeeded by a division of all valuables and property. The defeated army, having lost its most dependable men, and carried away by the tide of primitive peasant desire for land, will find itself too demoralized to serve as a bulwark of law and order. The legislative institutions and the intellectual opposition parties, lacking real authority in the eyes of the people, will be powerless to stem the popular tide, aroused by themselves, and Russia will be flung into hopeless anarchy, the issue of which cannot be foreseen.

Germany, in Case of Defeat, is Destined to Suffer Social Upheavals No Less than those of Russia
No matter how strange it may appear at first sight, considering the extraordinary poise of the German character, Germany, likewise, is destined to suffer, in case o defeat, no lesser social upheavals. The effect of a disastrous war upon the population will be too severe not to bring to the surface destructive tendencies, now deeply hidden. The peculiar social order of modern Germany rests upon the actually predominant influence of the agrarians, Prussian Junkerdom and propertied peasants.

These elements are the bulwark of the profoundly conservative German regime headed by Prussia. The vital interests of these classes demand a protective economic policy towards agriculture, import duties on grain, and consequently, high price for all farm products. But Germany, with her limited territory and increasing population, has long ago turned from an agricultural into an industrial State, so that protection of agriculture is, in effect, a matter of taxing the larger part of the population for the benefit of the smaller. To this majority, there is a compensation in the extensive development of the export of German industrial products to the most distant markets, so that the advantages derived thereby enable the industrialists and working people to pay the higher prices for the farm products consumed at home.

Defeated, Germany will lose her world markets and maritime commerce, for the aim of the war-on the part of its real instigator, England-will be the destruction of German competition. After this has been achieved, the laboring masses, deprived not only of higher but of any and all wages, having suffered greatly during the war, and being, naturally, embittered, will offer fertile soil for anti-agrarian and later anti-social propaganda by the Socialist parties.

These parties, in turn, making use of the outraged patriotic sentiment among the people, owing to the loss of the war, their exasperation at the militarists and the feudal burgher regime that betrayed them, will abandon the road of peaceable evolution which they have thus far been following so steadily, and take a purely revolutionary path. Some part will also be played, especially in the event of agrarian troubles in neighboring Russia, by the class of landless farmhands, which is quite numerous in Germany. Apart from this, there will be a revival of the hitherto concealed separatist tendencies in southern Germany, and the hidden antagonism of Bavaria to domination by Prussia will emerge in all its intensity. In short, a situation will be created which (in gravity) will be little better than that in Russia.

Peace Among the Civilized Nations is Imperiled Chiefly by the Desire of England to Retain Her Vanishing Domination of the Seas

A summary of all that has been stated above must lead to the conclusion that a rapprochement with England does not promise us any benefits, and that the English orientation of our diplomacy is essentially wrong. We do not travel the same road as England; she should be left to go her own way, and we must not quarrel on her account with Germany.

The Triple Entente is an artificial combination, without a basis of real interest. It has nothing to look forward to. The future belongs to a close and incomparably more vital rapprochement of Russia, Germany, France (reconciled with Germany), and Japan (allied to Russia by a strictly defensive union). A political combination like this, lacking all aggressiveness toward other States, would safeguard for many years the peace of the civilized nations, threatened, not by the militant intentions of Germany, as English diplomacy is trying to show, but solely by the perfectly natural striving of England to retain at all costs her vanishing domination of the seas. In this direction, and not in the fruitless search of a basis for an accord with England, which is in its very nature contrary to our national plans and aims, should all the efforts of our diplomacy be concentrated.

It goes without saying that Germany, on her part, must meet our desire to restore our well-tested relations and friendly alliance with her, and to elaborate, in closest agreement with us, such terms of our neighborly existence as to afford no basis for anti-German agitation on the part of our constitutional-liberal parties, which, by their very nature, are forced to adhere, not to a Conservative German, but to a liberal English orientation.

February, 1914
P. N. Durnovo