As long as the smaller states have not yet been taken 'firmly in hand' they become an arena for competition by foreign capital and in this case too a decision is sought by political means. In order to obtain arms Serbia, for example, has also to make a political decision about whether it should seek French and Russian or German and Austrian aid.¹ 1. "Conversely, when negotiating about loans, small states find it difficult to impose any conditions concerning the delivery of industrial products, partly because their own industries are less efficient. 'The Dutch banks have rightly been accused of providing foreign countries with capital without imposing any conditions at all . . . . The stock exchange provided foreign countries, most recently South America (in 1905) with large amounts of capital, without exacting any terms favourable to Dutch industries, as frequently happens in Belgium, Germany and England.' G. Hesselink, 'Holland', in Halle's Weltwirtschaft, part III, p. 118." Political power thus becomes a decisive factor in economic competition and finance capital acquires a direct profit interest in the power position of the state. The most important function of diplomacy now becomes the representation of finance capital. Purely political weapons are now reinforced by the weapons of commercial policy, and the provisions of a commercial agreement are no longer determined simply by the requirements of commodity exchange, but also by the extent to which a small state is willing to give preferential treatment to the finance capital of a larger state against its competitors. The smaller the economic territory the less power it has to sustain the competitive struggle successfully by means of large export subsidies, and the stronger is the urge to export capital in order to share in the economic development and higher profits of other, greater, powers. The larger the stock of previously accumulated wealth within the country the more readily can this desire be satisfied.

But here also there are opposing tendencies at work. The larger the economic territory and the greater the power of the state, the more favorable is the position of its national capital on the world market. That is why finance capital has come to champion the idea that the power of the state should be strengthened by every available means. But the greater the historically produced disparities between the power of difficult states, the more the conditions on which they engage in competition will vary, and the more bitter—because more rewarding—will be the struggle of the large economic territories to dominate the world market. This struggle is intensified the more developed finance capital is and the more vigorous its efforts to monopolize parts of the world market for its own national capital; and the more advanced this process of monopolization, the more bitter the struggle for the rest of the world market becomes. The English free trade system made this conflict bearable, but the transition to protectionism which is bound to occur very soon will necessarily exacerbate it to an extraordinary degree. The disparity which exists between the development of German capitalism and the relatively small size of its economic territory will then be greatly increased. At the same time as Germany is making rapid progress in its industrial development, its competitive territory will suddenly contract. This will be all the more painful because, for historical reasons which are irrelevant to present-day capitalism (indifferent to the past unless it is accumulated 'past labor') Germany has no colonial possessions worth mentioning,² 2. Here Hilferding footnotes something he wrote under a pseudonymwhereas not only its strongest competitors, England and the United States (for which an entire continent serves as a kind of economic colony), but also the smaller powers such as France, Belgium and Holland have considerable colonial possessions, and its future competitor, Russia, also possesses a vastly larger economic territory. This is a situation which is bound to intensify greatly the conflict between Germany and England and their respective satellites, and to lead towards a solution by force.It bears mentioning that this was published four years before the outbreak of World War I

Indeed this would have happened long ago if there had not been countervailing forces at work. The export of capital itself gives rise to tendencies which militate against such a solution by force. The unevenness of industrial development brings about a certain differentiation in the forms of capital export. Direct participation in opening up industrially backward or slowly developing countries can be undertaken only by those countries in which industrial development has attained its most advanced form, both technically and organizationally. Among them are, first, Germany and the United States, and in the second place England and Belgium. The other countries of long-standing capitalist development take part in the export of capital rather in the form of loan capital than of capital for the construction of factories. This has as a consequence that French, Dutch, and even to a great extent English capital, for example, constitute loan capital for industries which are under German and American management. Various tendencies thus emerge which make for solidarity among international capitalist interests. French capital, in the form of loan capital, acquires an interest in the progress of German industries in South America, etc. Moreover, connections of this kind, which greatly enhance the power of capital, make it possible to open up foreign territories much more rapidly and easily as a result of the increased pressure of the associated states.³ 3. "An example of such a development is afforded by the preliminary outcome of the conflict over Morocco in which the combine formed by Krupp and Schneider-Creuzot for the joint exploitation of Moroccan and Algerian ores resulted in an agreement between the two states (France and Germany). Morocco will not find it as easy to resist their pressure as it did when it could play one country off against the other."

Which of these tendencies prevails varies from case to case and depends primarily upon the opportunities for profit which emerge in the course of the struggle. The same considerations which decide whether competition should continue in a given branch of industry, or should be eliminated for a longer or shorter period of time by a cartel or trust, play a similar role here at the international and inter-state level. The greater the disparities of power the more likely it is, as a rule, that a struggle will occur. Every victorious struggle, however, would enhance the power of the victor and so change the power relationships in his favor at the expense of all the others. This accounts for the recent international policy of maintaining the status quo which is reminiscent of the balance of power policy of the early stages of capitalism. Moreover, the socialist movement has inspired a fear of the domestic political consequences which might follow from a war. On the other hand the decision as to war or peace does not rest solely with the advanced capitalist states, where the forces opposing militarism are most strongly developed. The capitalist awakening of the nations of Eastern Europe and Asia has been accompanied by a realignment of power relations which, through its effect upon the great powers, may well bring the existing antagonisms to the point where they erupt in war.

Once the political power of the state has become a means of competition for finance capital on the world market, this naturally involves a complete change in the relation of the bourgeoisie to the state. In the struggle against economic mercantilism and political absolutism, the bourgeoisie was the champion of opposition to the state. Liberalism was in reality a destructive force involving the 'overthrow' of state power and the dissolution of old social bonds. The whole painfully constructed system of dependent relationships on the land, and of guild associations with their complex superstructure of privileges and monopolies in the towns, was thrown overboard. The victory of liberalism meant first of all an enormous reduction in the power of the state. Henceforth, at least in principle, economic life was to be excluded entirely from the sphere of state regulation, and politically the state was to confine itself to the maintenance of public order and the establishment of civil equality. Thus liberalism was purely negative, in sharp contrast to the state during the mercantilist period of early capitalism which in principle wanted to regulate everything, and also to all socialist systems which seek constructively rather than destructively to replace anarchy and the freedom of competition by a conscious regulation of economic life, and a self-organizing society. It is only natural that the liberal principle should have been realized first in England where it was championed by a bourgeoisie committed to free trade which had to appeal to the power of the state only for short periods of time in its conflict with the proletariat. But even in England its realization encountered opposition, not only from the old aristocracy which pursued a protectionist policy and therefore opposed the principle of liberalism, but also, to some extent, from commercial capital and from bank capital involved in investment abroad, which demanded above all the maintenance of England's control of the seas, a demand which was most vigorously supported by all those groups which had an interest in the colonies. On the continent, however, the liberal view of the state had to be considerably modified from the very outset before it was able to prevail. While continental liberalism—and this shows a characteristic contrast between ideology and reality—as formulated in classical fashion by the French deduced the theoretical consequences of liberalism in all spheres of political and intellectual life much more boldly and systematically than did its English counterpart, since it came upon the scene later with quite a different body of scientific knowledge, so that it was formulated in a far more comprehensive way, based upon a rationalist philosophy, English liberalism rested essentially upon political economy and its practical realization was subject from the very beginning to definite limitations. Indeed, how could the liberal demand for the restriction of state power be put into effect by a bourgeoisie which, in economic terms, needed the state as the most powerful lever of its development and for which it was a matter not of abolishing the state, but of transforming it from an obstacle into a vehicle of its own development? What the continental bourgeoisie needed above all was to overcome the plethora of petty states and to substitute for the impotence of these petty states the supreme power of a unified state. The need to create a national state was bound to make the bourgeoisie from the very beginning a champion of the state. On the continent, however, it was a matter of land power, not sea power. The modern army, however, is entirely different from a navy as a means of establishing the power of the state visa vis society. It means fundamentally that those who control the army have the state power in their hands without restraint. On the other hand, universal military service, which arms the mass of the people, was bound to persuade the bourgeoisie very quickly that if the army were not to become a menace to its rule, a strictly hierarchical organization was required, based upon an exclusive officers' corps which would be a pliable instrument of the state. If liberalism was thus unable to carry out its political program in countries such as Germany, Italy and Austria, its efforts were also circumscribed in France, where the French bourgeoisie could not dispense with the help of the state in matters of commercial policy. Furthermore, the victory of the French Revolution necessarily involved France in a war on two fronts. She had to defend the revolutionary achievements against continental feudalism; and on the other hand the creation of a new empire of modern capitalism was a threat to the established position which England held on the world market, and so France was obliged at the same time to contest England's domination of the world market. Her defeat enhanced the power of the landed gentry, and of commercial, bank, and colonial capital, in England, and along with it the power of the state over industrial capital, thus delaying the definitive accession of English industrial capital to a position of dominance and the triumph of free trade. On the other hand, England's victory necessarily led industrial capital in continental Europe to support the protective tariff, totally frustrated the advance of economic liberalism, and created the conditions needed for a rapid development of finance capital on the continent.

Thus from the outset, the ideology and the conception of the state of the bourgeoisie in Europe encountered few obstacles in their adaptation to the needs of finance capital. Moreover, the fact that the unification of Germany was accomplished in a counter-revolutionary way was bound to reinforce very strongly the position of the state in the consciousness of the people, whereas in France military defeat led to a concentration of all available forces upon the task of re-establishing state power. Thus the needs of finance capital found various ideological elements to hand which could easily be used for creating a new ideology in harmony with its own interests.

This ideology, however, is completely opposed to that of liberalism. Finance capital does not want freedom, but domination; it has no regard for the independence of the individual capitalist, but demands his allegiance. It detests the anarchy of competition and wants organization, though of course only in order to resume competition on a still higher level. But in order to achieve these ends, and to maintain and enhance its predominant position, it needs the state which can guarantee its domestic market through a protective tariff policy and facilitate the conquest of foreign markets. It needs a politically powerful state which does not have to take account of the conflicting interests of other states in its commercial policy.⁴4. "Consider, for example, how important it was for Germany, in concluding recent international trade agreements, that Russia's political power was so weakened as a result of entanglements in the Far East that she could not exert any political pressure." It needs also a strong state which will ensure respect for the interests of finance capital abroad, and use its political power to extort advantageous supply contracts and trade agreements from smaller states ; a state which can intervene in every corner of the globe and transform the whole world into a sphere of investment for its own finance capital. Finally, finance capital needs a state which is strong enough to pursue an expansionist policy and the annexation of new colonies. Liberalism opposed international power politics, and only wanted to secure its own rule against the old forces of aristocracy and bureaucracy by granting them the least possible access to state power, but finance capital demands unlimited power politics, and this would be the case even if military and naval expenditures did not directly assure the most powerful capitalist groups of important markets, which provide in most cases monopolistic profits.

The demand for an expansionist policy revolutionizes the whole world view of the bourgeoisie, which ceases to be peace-loving and humanitarian. The old free traders believed in free trade not only as the best economic policy but also as the beginning of an era of peace. Finance capital abandoned this belief long ago. It has no faith in the harmony of capitalist interests, and knows well that competition is becoming increasingly a political power struggle. The ideal of peace has lost its lustre, and in place of the idea of humanity there emerges a glorification of the greatness and power of the state. The modern state arose as a realization of the aspiration of nations for unity. The national idea, which found a natural limit in the constitution of a state based upon the nation, because it recognized the right of all nations to independent existence as states, and hence regarded the frontiers of the state as being determined by the natural boundaries of the nation, is now transformed into the notion of elevating one's own nation above all others. The ideal now is to secure for one's own nation the domination of the world, an aspiration which is as unbounded as the capitalist lust for profit from which it springs. Capital becomes the conqueror of the world, and with every new country that it conquers there are new frontiers to be crossed. These efforts become an economic necessity, because every failure to advance reduces the profit and the competitiveness of finance capital, and may finally turn the smaller economic territory into a mere tributary of a larger one. They have an economic basis, but are then justified ideologically by an extraordinary perversion of the national idea, which no longer recognizes the right of every nation to political self-determination and independence, and ceases to express, with regard to nations, the democratic creed of the equality of all members of the human race. Instead the economic privileges of monopoly are mirrored in the privileged position claimed for one's own nation, which is represented as a 'chosen nation'. Since the subjection of foreign nations takes place by force—that is, in a perfectly natural way—it appears to the ruling nation that this domination is due to some special natural qualities, in short to its racial characteristics. Thus there emerges in racist ideology, cloaked in the garb of natural science, a justification for finance capital's lust for power, which is thus shown to have the specificity and necessity of a natural phenomenon. An oligarchic ideal of domination has replaced the democratic ideal of equality.

While this ideal appears to embrace the whole nation in the sphere of international politics, it becomes transformed in domestic politics by emphasizing the point of view of the rulers as against the working class. At the same time the increasing power of the workers intensifies the efforts of capital to reinforce the power of the state as a bulwark against proletarian demands.

Thus the ideology of imperialism arises on the ruins of the old liberal ideals, whose naivety it derides. What an illusion it is, in the world of capitalist struggle where superiority of weapons is the final arbiter, to believe in a harmony of interests. What an illusion to expect the reign of eternal peace and to preach international law in a world where power alone decides the fate of peoples. What stupidity to advocate the extension of the rule of law which prevails within nations beyond their frontiers, and what irresponsible interference with business this humanitarian fantasy which has turned workers into a labor problem, invented social reform at home, and now wants to abolish contract slavery in the colonies, the only possible form, of rational exploitation. Eternal justice is a beautiful dream, but morality builds no railways, not even at home. How are we to conquer the world if we have to wait for competition to undergo a spiritual conversion?

But imperialism only dissolves the faded ideals of the bourgeoisie in order to put in their place a new and greater illusion. It is clear-headed and sober in evaluating the real conflicts among capitalist interest groups, and it conceives all politics as a matter of capitalist syndicates either fighting or combining with each other. But it is carried away and becomes intoxicated when it unveils its own ideal. The imperialist wants nothing for himself, but he is also no visionary and dreamer who would dissolve the tangled profusion of races at every level of civilization and of potentiality for further development, into the bloodless concept of 'humanity', instead of seeing them in all their colorful reality. He observes with a cold and steady eye the medley of peoples and sees his own nation standing over all of them. For him this nation is real; it lives in the ever increasing power and greatness of the state, and its enhancement deserves every ounce of his effort. The subordination of individual interests to a higher general interest, which is a prerequisite for every vital social ideology, is thus achieved ; and the state alien to its people is bound together with the nation in unity, while the national idea becomes the driving force of politics. Class antagonisms have disappeared and been transcended in the service of the collectivity. The common action of the nation, united by a common goal of national greatness, has taken the place of class struggle, so dangerous and fruitless for the possessing classes.

This ideal, which seems to provide a new bond for the strife-ridden bourgeois society, will doubtless meet with an increasingly enthusiastic reception as the process of disintegration of bourgeois society continues.

Excerpted from Chapter 22, "The export of capital and the struggle for economic territory"