BOTH the state of the world and the state of the Union are forcing us to reëxamine and redefine our foreign economic policy, especially for Western Europe. Economic recovery for Western Europe within four years' time was both the premise and the promise of the Marshall Plan when it was launched in 1948. Only two years after the plan got under way that recovery was running ahead of schedule in many industries and many countries. But three months thereafter, starting from the invasion of South Korea on June 25, 1950, the pressure of new world events began to alter the political and economic landscape in which the E.R.P. had flourished.

The United States is now engaged in a massive preparedness program. Most of the E.R.P. countries are also rearming and they, too, already feel the effects of the effort. Its burden on our own economy is heavy; and, comparatively, the burden is almost as heavy upon the economies of our principal North Atlantic allies. We shall be spending during the fiscal year starting in 1951 an estimated 48.5 billion dollars for military purposes, or 15.7 percent of our gross national product. The United Kingdom is spending 3.6 billion dollars, or 9 percent, and France plans to spend $2,450,000,000, or 9.7 percent. At the moment, the United States is furnishing its partners in Western Europe with armament aid in the form of ships, tanks, planes, guns, machine tools, spare parts and raw materials at the rate of some $214,000,000 a month; this compares with the $283,000,000 rate at which help for reconstruction in the form of credits, grains and machinery was being furnished during the corresponding months of E.R.P.

All these changing conditions raise basic questions about the economy of Western Europe and the future of our own economic policy. Will the need to rearm extinguish the E.R.P. or merely cause it to redirect certain of its activities into new channels? Will rearming, paradoxically, bring full recovery more rapidly? What is the connection between continued economic aid under the Marshall Plan, and plant expansion and tooling up for military might? Can Western Europe increase its over-all productivity to such an extent that it will be able to divert its material and human resources to rearmament without again facing the grim prospect of guns without butter and even very little bread? Do the Western Europeans still require economic assistance beyond the military supplies which we are sending them or helping them to produce? In short, what henceforth should be the goals and nature of American economic relations with Western Europe?

II

For an understanding of economic conditions in Western Europe it is necessary to assess the reciprocal character of the three underlying economic problems with which Western Europe has been grappling since the end of World War II. The first, both in logical priority and in time, was the insufficiency of current production. In 1946 and 1947 Europe was simply not producing enough to live on. To be sure, the crisis took the form of a shortage of dollars. But everyone realized that dollars were short in part because exports to North America and other areas were so small; and that these exports in turn were limited by production rather than by financial dislocation or by the difficulty of selling European goods in American markets.

The second major problem might be called the "exchangeability of resources." By the middle of 1949 it occupied the center of the stage. Western Europe had become prosperous enough to export sufficient goods and services to pay its way. The question was no longer that of insufficient output but rather of the extreme difficulty of selling the things that Europe was making. One reason for the sales problem was that as world production began to catch up with demand, and excess productive capacity was starting to emerge, Europe's currencies were overvalued and its goods overpriced.

The devaluations in the fall of 1949 substantially corrected this impediment. But price was by no means the only obstacle; the European countries could not expand their exports to the United States virtually at will merely by the process of devaluation. This was soon recognized; and by the summer of 1950 the other aspects of selling, namely, product design, packaging, credit terms and advertising, were receiving major attention in Manchester, Brussels, Turin, Lyons and elsewhere. Although it cannot be said that the sales problem was "solved" in the sense in which the production problem was, the devaluations, plus the growing adoption of modern merchandising techniques, plus the boom in the United States in early 1950 indicated that this knot too would be unraveled far ahead of schedule.

The distinction between the ability to produce and the ability to sell must be emphasized because the two things are frequently lumped together under the single heading of "the dollar problem." The underdeveloped areas of the world, like the nations of Western Europe in 1947, have a perpetual "dollar problem" because they have to import capital from the United States. Their economic conditions are such that per capita income and output are too low to sustain a standard of living that can prevent the rise of dangerous social tensions, or support a rate of saving and investment that can insure an ever-increasing amount of productive capacity. The result is that they look to the United States as the likely source of capital to meet their needs. Many countries in the sterling area in 1949 had ample resources available for export but could not earn convertible exchange with their produce. This kind of dollar problem reflects the difficulty of exchanging the output of one economy for the output of others.

The confusion between the problem of the ability to produce and the problem of the ability to sell has sometimes also obscured the real nature of the economic assistance rendered by the United States during the last few years. It is obvious that economic assistance from abroad may both supplement and increase the current output and thus alleviate the first of the two economic difficulties. It is also clear that a grant in aid can relieve the dollar stringency of a country beset by acute troubles in acquiring markets for a sufficient volume of exports to the dollar area. What is confusing is that even where economic aid has been needed to improve a country's ability to sell, that aid has in fact enlarged the recipient's income. This holds true regardless of whether or not aid could be justified on grounds of sheer poverty. Hence the paradox that the United Kingdom, which has received the largest amount of American aid since the war, has been the country with the highest per capita real income in Europe; and hence the paradox of continued aid for countries after both the standard of living and the rate of investment in new productive facilities had risen above prewar levels.

The third problem facing the E.R.P. is particularly complex. It is the question of the distribution of income within the European countries. The very use of this term is an oversimplification. The whole issue is hard to define neatly, since it is as much or more a problem of social structure and stratification than of economics. Its importance and form vary widely from country to country. However, three of its most significant aspects can perhaps be identified.

First, in the early phases of postwar recovery, there was powerful inflationary pressure in every European country which gave rise to familiar distortions in the distribution of the national wealth. Where direct controls were weak, or were removed, farmers and various entrepreneurs were greatly benefited at the expense of white collar employees, industrial labor and those living on fixed incomes. In the northern countries, where rigid and effective controls were maintained, the distortions took other forms. Current money income became less important than the amount and kind of food and apparel that the ration card could command. Work incentives were thus seriously impaired. As inflation was brought under control, this particular range of troubles tended to disappear.

Second, there is the persistent question of wider diffusion of immediate recovery gains. In a number of the continental countries industrial profits have been large and growing as recovery progressed; and agricultural revenues have gone up well above prewar levels. By contrast the industrial worker has done badly. Civil servants and the recipients of contractual income also continue to be in a relatively unfavorable position. It is no accident that in France and Italy, which historically have been characterized by great inequality of wealth and income, labor became predominantly Communist and that the pivotal union organizations are still Communist led.

In its third facet, the problem is also one of social structure. It is created by the enormous increase in social security payments, pension allowances and other so-called "transfer" disbursements. In most European countries today (and in the United States) a quite unprecedented proportion of the national income is routed through the fiscal machinery of the government, and paid out in various benefits to individuals. This process redistributes income as between the rich and the poor very imperfectly. The redistribution in fact is between the well and the sick, those of working age and those who are retired, the employed and the unemployed. Universally, the process converts income of the taxpayer into the income of the beneficiary. Even if the taxpayer and the beneficiary are the same person, this whole practice has real and perhaps profoundly important consequences. Just what it does to individual incentives is not clear. But clearly it places an extraordinarily heavy burden on the fiscal machinery. It renders even more onerous the task of the finance minister who has to raise additional revenue in order to be able to divert economic resources into, say, rearmament. In Western Europe today, from 20 to 35 percent of the national income is already being committed to "social security" programs. With such a high percentage of national income politically pledged, it becomes immensely more difficult to take another 10 percent for some new purpose, such as rearmament.

III

So much, then, for the attempt to explain the way in which grants of dollars have been used temporarily to compensate for the sheer lack of goods and services, or to make up for a country's inability to exchange its own products in sufficient volume for those of the rest of the world. The ultimate aim of the E.R.P. has been, of course, vastly more ambitious than that of merely trying to keep Europe going while the flow of aid continued. Both as between countries and within countries the recovery funds accomplished far more than merely to make up the deficiency in Europe's resources. They often achieved what would otherwise have been a political impossibility: they provided the more progressive and effective groups within each country with bargaining power they could use in an effort to carry through the often unpalatable measures of self-help that were so necessary.

The process of extending economic aid made it possible to influence ideas and actions by imparting strength to such notable international institutions as, for example, the Organization for European Economic Coöperation. It is doubtful whether this institution would have come into being without the Marshall Plan. Surely it would have had little force without the backing of the United States. But with this support, it has become a part of the machinery by which many key government decisions are made in Western Europe today. Its importance and effectiveness have nothing to do with constitutional powers, but lie rather in the fact that it provides a new kind of clearing house for plans and programs throughout Western Europe. It is a forum where any view on a matter of common concern, held by a considerable number of European governments, can be brought to bear persuasively on the others. In this respect it constantly promotes the democratic process.

The acid test of the E.R.P.'s effectiveness, both in approach and in method, is to be found in its record. That record can be best evaluated by looking at the five primary accomplishments to date of the Western European countries with the help of the Marshall Plan. First has been the enormous increase in production--27 percent above prewar levels for industry and 9 percent for agriculture. Second has been the great progress in licking inflation. Indeed, by the first half of 1950, prices and living costs were stable or gently declining throughout most of Western Europe. With some few exceptions, rationing, together with price and other controls, had been abandoned. Third, internal trade was restored. Within each country confidence in the buying power of the national currency rose with the rising output in factory and field. As a result, that most vital trade of all, the exchange of the produce of the countryside for the wares of city and town, was completely restored. Fourth, trade among E.R.P. countries was lifted out of stagnation, and by the middle of 1950 was already 17 percent higher than in 1938. A substantial portion of this trade was freed from the crippling restraints of high tariffs and rigid import quotas. By means of the European Payments Union, and its precursor, currencies were rendered more freely convertible into one another than they had been in 20 years. Fifth was the improvement of Western Europe's external account. In the summer of 1948, Western Europe was importing goods and services from the rest of the world at the rate of 6 billion dollars a year in excess of her current earnings of foreign exchange. Yet by June 1950 this gap between receipts and payments had been reduced to less than 2 billion dollars a year.

These, then, were the five great achievements of the first two years of economic recovery under the Marshall Plan. But recovery can also be defined in terms of what these made possible, as well as in terms of the achievements themselves. By June 1950, for example, there were only a few countries where the volume of resources flowing into consumption was not surpassing prewar standards. Everywhere the most important element in consumption, the diet of the population, was at least quite adequate and, in general, fully up to prewar value nutritionally, if not in variety. In 1949 Europe's production had made possible a higher rate of investment--ranging from 13 percent in France to 18 percent in the United Kingdom to 31 percent in Norway--than had ever been attained before. And these results were possible in spite of (or, it may be argued, because of) a heavy absorption of resources by swollen government budgets. Europe was still, to be sure, well short of paying its own way. It was running a deficit in its current accounts with the rest of the world of nearly 2 billion dollars a year. Nevertheless the record remained impressive. The rate at which the United States was contributing resources to the European economy had been reduced by two-thirds along with an increase of 6 percent in total consumption and some 10 percent in the rate of investment.

High on the agenda of the Marshall Plan's unfinished business remains the more equitable distribution of income. The size of labor's pay envelope has grown to greater or less degree throughout Western Europe. Generally speaking, in the northern countries it is well above prewar and the discontents and discords of too-low wage scales hardly exist. But in France, labor's relative position is less favorable than before the war. And in both Italy and Germany wages hardly above subsistence standards prevail alongside of severe unemployment. For this and other reasons there is urgent need for increases in productivity, coupled with a wage and price policy that will improve the relative as well as the absolute position of labor and other groups that have suffered most through both postwar inflation and the persistence of archaic social attitudes. The importance of further progress on this front must be kept in mind in making plans for the future.

IV

The entirely new direction of economic events in the past eight months reflects, of course, the turn in political events. It has influenced prices, production and incomes by way of two economic developments which may be taken as first causes in analyzing the impact of rearmament on the European economy. The first of these developments is the rearmament program of the United States Government. This has generated a powerful inflationary impulse. The second development is the rearmament of Europe, which is beginning to generate an inflationary impulse of its own. The inflationary trend in the United States seems likely to be the larger and occurred nine months to a year ahead of the European. Up to date the inflationary pressure has not been released through the fiscal operations of the United States Goverment. On a cash basis, there was a surplus in the first three months of 1951 and the deficit will be only moderate in the second. For the current fiscal year as a whole, the cash deficit will be smaller than in the preceding 12 months. The rearmament program in the United States has tremendously quickened private capital formation, and consumer purchases. Both were fed by a rapid expansion of credit, running at an annual rate of 14 billion dollars at the end of 1950. As 1951 wears on, it is hoped that we can slow down the pace of our credit expansion.

But, at the same time, the direct impact of military expenditures will be felt increasingly. It is true that, if the budget is kept close to balance on a cash basis, rising tax revenues will curb the rising demand for goods. But a dollar taken out of the spending stream by taxes rarely cuts the demand for goods as much as a dollar put into the spending stream to buy military hardware cuts the supply of goods. Thus, the mere act of channeling 70 odd billions of dollars through the Federal Treasury is in itself inflationary. Moreover, the pressure to maintain or expand the rate of private investment will become explosive under conditions of full employment, plus. It is a safe forecast that we can expect a strong inflationary movement within the American economy for some time to come.

In assessing the impact of this first cause on the rest of the world, two familiar facts must be kept in mind. The first is that, within the United States, a rearmament boom is being superimposed on the roaring civilian boom that began in mid-1950. With only 5 percent of the civilian labor force unemployed, as compared to 17 percent in 1939, there was very little slack in the American economy when this new and massive preparedness burden was assumed. This carries obvious implications for us and the rest of the world. The demand for imports into the United States has risen along with the demand for everything else. But the United States will have difficulty in enlarging and perhaps maintaining any corresponding flow of exports.

The other fact, less generally appreciated, is that in recent years as the world's output of basic commodities, mainly raw materials but also foodstuffs, has expanded along with industrial production, it has become increasingly costly to develop new sources of food and raw materials. Consequently, it was apparent even a year ago that the non-Soviet world was threatened with substantial shortages in such commodities. Even as of last June, industrial production in the United States was 76 percent above the peak rate achieved in 1937, and 81 percent above 1929, the highest previous peacetime record. Meanwhile, in Western Europe as a whole, industrial production was about 27 percent above prewar. In Canada, Australia, Brazil and the Argentine, the percentage increases over prewar were likewise impressive. Japan was the only great industrial nation whose production lagged. Broadly, then, raw materials were being chewed up in the free world at a rate half again as great as ever before. By contrast, agricultural output was little higher than prewar anywhere except in the United States. Although the current output of most of the important metals had increased more or less proportionately with the industrial production indexes, there was reason for grave concern about the future. Attempts to raise current production could be thwarted by lack of raw materials. Our own great reserves of low-cost iron ore had been virtually depleted. Entirely new sources are being developed in Labrador and Venezuela. The pinch of limited supplies of iron ore was being felt in Europe and Japan as well. For many other materials, notably minerals, production will respond only with time, and after the prospect of high returns over a long term has provided sufficient inducement. The free world is similarly faced with at least temporary shortages in a long list of agricultural commodities.

The effect on prices and on the pattern of world trade of the other first cause--the process of rearmament in Europe itself--is yet to be felt. In most of Europe, the new orders for military equipment are just beginning to be placed. Their effect on government expenditures and individual production is scarcely visible. As in the United States, however, the actual expansion of military production has been preceded by an anticipatory spurt in private buying and in civilian production, and this has reinforced, but only in small degree, the world-wide effects of the boom in the United States.

As rearmament in Europe gathers momentum, its impact will be sharpened by circumstances very much like those prevailing in the United States. In France, the Netherlands, Scandinavia and Britain employment has steadily risen during the past three years especially, when very little unused industrial capacity remained. In broad terms, rearmament throughout Western Europe is being imposed on economies often as tightly strained as our own. To be sure, Italy and Germany still have a large amount of unemployment. In the middle of 1950 both countries had scope for considerable industrial expansion. But substantial as this latitude may still be, it is nowhere near so great as might be suggested by the unemployment figures. A good deal of that unemployment derives from a growth in the labor force that has never been matched by a corresponding growth in productive capacity. In Italy this has been the result of a rapid natural rise in population; in Germany of the enormous influx of refugees from the East. Both countries contain many more workers than can be employed very productively. It is also a pretty safe forecast, then, that Western Europe will be producing under forced draft by the middle of 1951. There, as here, the rearmament program will require both the diversion of resources from civilian to military production and a substantial increase in total output.

Only when the parallelism between the situation of Western Europe and that of the United States is recognized can one grasp the way in which rearmament in the Western World is likely to affect Europe's economy. Europe and North America (and, it may be added, Japan) are in the same boat, whether they like it or not, in more than a political sense. For these are the great industrial centers of the free world. And with the exception of the three ex-enemy countries, their economies have been sprinting and have kept their populations fully employed during more recent years. Even in Italy, Germany and Japan, near-capacity operation is being reached. The alignment of free nations must now begin to spend collectively at the rate of something like 70 billion dollars a year for rearmament. It is scarcely surprising that inflation is again the great internal problem. Nor is it surprising that the great external problem is how to maintain a sufficient supply of foods and raw materials on not too exorbitant terms.

What effect will United States and European rearmament have upon Europe's ability to trade, and to keep herself supplied with the goods and services which she must have from the rest of the world? It should be noted in passing that the control of internal inflation may be more important as well as more difficult for Europe than the question of her foreign trade. Indeed, internal inflation can be a serious threat to the military strength of the North Atlantic community. If inflation is not controlled, it can undo everything that has been accomplished in the last three years. It can again distort the pattern of income distribution and undermine the loyalty even of those now faithful to the idea of a free society. If carried far enough, inflation would begin to interfere with both production and trade. But this is largely an internal problem for the Europeans, as it is for us. It will probably be handled in a fashion far from perfect. But it will be handled well enough to avoid a serious hampering of production and trade and a renewed distortion of income. If we assume that this is what is going to happen, the actual and prospective changes in Europe's trading position can be set forth with considerable confidence.

The first change has already occurred. Since the inflationary boom in the United States appeared earlier than it did in Europe, the first economic consequence of the Korean crisis was a sharp improvement in Europe's balance of payments with the dollar area. As recently as June 1950, it seemed likely that the dollar deficit would be at least 2 billion dollars for the fiscal year 1950-51. When the year is over it may well turn out to have been less than 1.5 billion dollars. Even before the current crisis, the United States market was booming, and the exports of the European countries to the United States expanded far more rapidly than had been expected. From a low of $82,000,000 per month in the first half of 1950 they rose to $151,000,000 per month in the fourth quarter for December. In less than a year, there was a larger increase in dollar earnings than had been hoped for by the very end of the Marshall Plan. At the same time, active demand and high prices in the United States helped to reduce the volume of exports to Europe. Moreover, this improvement in the ability to earn dollars will almost certainly last for the duration of the vast rearmament program in the United States. Temporarily at least, the exchangeability of European resources for those of the dollar area has been largely solved.

The second major change has also taken place. Inflationary pressure in the United States set off an explosive rise in commodity prices. From June 1950 to December 1950, the price per pound of crude rubber increased from 23.5 cents to 71.4 cents; the price of wool rose from 67.8 cents per pound to more than $1.13; tin mounted from 77.8 cents per pound to $1.46. The prices of many other raw materials went up in similar fashion. Though industrial prices have also been rising fast, the sharp shift in the terms of trade has favored the producers of raw materials. Such a shift in terms of trade means, of course, that Europe must export more industrial products than before to obtain the same imports.

These changes delineate Europe's economic problem for the next several years. The problem is not that of exchanging resources, but of turning out enough manufactured goods to produce a sufficient supply of food and raw materials. As in the early phase of postwar recovery, the question posed by rearmament is how Europe can double or triple its expenditures, maintain a tolerable standard of living, continue enough capital investment for the European economy to expand, and still pay its way in the world in the face of adverse terms of trade. Thus formulated, Europe's problem is identical with our own.

In one very important respect the problem today differs from that of the first two and a half years of the Marshall Plan. There were still a few scarce commodities in 1948. But dollars would buy most of the things Europe needed, and could therefore make possible the ultimate solution of Europe's difficulties. The situation faced by Europe today is different. The world-wide shortage of raw materials does not result merely in adverse terms of trade. If, in other words, it were possible to buy any amount of copper, aluminum, steel, wool, or sulphur merely by paying a high enough price, then Europe's problem (and ours) would be a financial problem, serious, but relatively easy to remedy. The sheer unavailability of needed commodities offers a problem of a quite different kind. Today an allocation ticket or an export license is becoming a more important kind of currency than a dollar bill. Even if the Europeans had dollars enough to buy, at current prices, all the raw materials they need, they would not now be able to do so, because raw material supplies cannot readily be expanded. Rationing to producers is already widespread. And there is no way in which a country (any more than an individual) can increase its supply of tickets by devaluation or any of the techniques of "earning" dollars. Whatever the United States is going to do about Europe must take this basic fact into account.

Before coming to grips with the question of an American policy to meet this circumstance, the importance of specific shortages must be emphasized. If these shortages appeared merely in particular consumer goods, it would be possible somehow to determine the appropriate shares of all the countries of the free world. If consumers have to substitute black sidewall tires for white, their disappointment will not bring the economy of Europe to a halt. An extreme shortage of meat is much more serious. And shortages of key components and of vital raw materials are apt to be lethal. A shortage of 20,000 tons of sulphur in the United Kingdom can cut output and result in idle plants and men in a whole range of industries. The shortage of a few spare parts or of certain essential pieces of equipment can paralyze many productive facilities and many skillful workmen. Second only to the danger of inflation, such shortages are the worst peril to Europe on the economic front. They can affect everything from ingots to shoes; they can thwart effective rearmament. For a year or so it might be possible to sustain rearmament out of a static or shrinking national income. But unless the European economy is dynamic and expanding, the time will never come when Europe can support itself at a decent level and still bear the cost of military strength. Yet this paralysis is a real possibility unless vigorous measures are taken to deal with specific shortages.

V

If this is the shape of Europe's economic problem for the next two or three years, what should the United States do about it? Any answer reflects an individual judgment, and the correctness of the answer cannot be conclusively demonstrated by objective evidence. Similarly the execution of any policy is subject to human fallibility. What follows, therefore, is a brief summary of the particular procedures which would seem to be indicated, offered in no oracular spirit and in recognition of the precept that the first law of life is change.

First: Europe will need further economic aid. But we must carefully weigh its amount, administration, purposes and methods. Its purpose must be to enable the Europeans to rearm without such setbacks in internal economic conditions as would weaken the existing fabric of European society or weaken its potentialities for acquiring greater strength. We must constantly remember that the fundamental difficulty at present is not that of selling goods and services for dollars, but the insufficiency of Europe's current output to meet her minimum needs, first for rearmament, second for export, and third to sustain the domestic economy. Here we must note a serious difference of approach between the American and European views.

In the view of the Finance Ministers of Europe, the great purpose of American aid is to resolve the problem of balancing their respective budgets. This is not a standard the United States Government can afford to accept. When dollars are provided to a country as economic aid they go into the bank or stabilization fund, and an equivalent sum of local currency is available (in the form of counterpart or simply as government revenue) to cover the government expenditures. If the amount thus received is greater than the country's balance of payments deficit, then the central bank takes in more dollars than it has to pay out. It accumulates gold or dollar balances. What really happens, therefore, under these circumstances, is that the supply of local currency is increased, but the increase has the backing of larger gold or dollar holdings. To put the matter in less kindly terms, the government's expenditures are covered, in part, by printing more of its own currency, and the increase in gold or dollar balances serves to maintain confidence in the currency and to lend a cloak of financial respectability to the transaction. Gratifying though this may be, it hardly seems an appropriate use of funds supplied by the United States taxpayer. The burden on us will be heavy enough in the years immediately ahead if we rearm as we must, and, at the same time, finance the import surplus that our European allies will have to incur. There is no valid reason why we should, in addition, allow our allies to accumulate claims against us as backing for the expanded circulation of their own currency.

Second: The amount of economic aid may have to be fully as large as that actually furnished in the current fiscal year. The winter of 1950-51 has been a period in which the European countries already felt the beneficent effect of American inflation on their dollar supply. But they had only begun to feel the adverse effects of unfavorable terms of trade and of their own rearmament. To put this point concretely, Western Europe's exports to the United States began climbing in midsummer and reached a very high level by December, as already recorded. The imports from the United States have been falling continuously since 1948 and were lower during the summer than for many years; and they have stayed down. At the same time, exports to the rest of the world from the metropolitan countries of Europe held their own or went up during the last six months of 1950, and the value of Europe's imports had risen little by December. But this favorable turn of events may prove temporary. One reason that Europe's actual disbursements for imports remained as low as they did was because goods that were flowing in across Europe's frontiers in December were those for which contracts had been let months before. It is predictable, therefore, that the value of imports, especially from the primary producing areas, will rise as 1951 wears on and recent price increases have their effect.

Even more important in interpreting recent events is the fact that the expansion of military production in Europe had barely begun by the date of the latest available trade statistics. The diversion of raw materials, labor and industrial facilities to armaments is bound to cut into European supply. This is true not only as a matter of general economic logic but for particular reasons. As Europe recovered, the engineering and metal fabricating industries have, by and large, made the best export record. Automobiles, ships and all manner of capital goods have sold well. But these are the very lines that will be hardest hit by the conversion to military production. The central fact about Europe's trading position, therefore, is that the favorable developments of the last half of 1950 were temporary. The European economy cannot sustain the pace of recent trade, increase the pace, keep step with rising import prices, and, at the same time, rearm. Just as the unmanageable surplus in the United States balance of payments was converted in a comparatively few months into a $2,000,000 deficit, so it appears highly probable as of the date of writing that the balance of payments of the metropolitan countries of Europe will deteriorate sharply when the burden of rearmament begins to bite.

In general terms, this is the reason why continued aid to most of Europe cannot be ruled out. But this explanation leaves the ultimate query unanswered. Although Europe's current output may not be large enough to meet Europe's urgent needs, can the United States spare more aid from its own strained economy to make up the balance? Are we to become a new Atlas bearing the economic burdens of the whole world?

The answer to this question cannot be more than an expression of opinion. But one opinion at least rests on the following basis. There is no significant Communist movement in the United States. There is no large political group on the extreme right with the kind of feudal mentality which questions the fundamental principles of a democratic society. The labor and liberal movements have cleansed themselves, on the whole, of Communist influences. While the labor movement is vigorous and aggressive, it does not, despite some fears of "Socialism," seek fundamental change in the character and contours of American society. Indeed, the fabric of that society is far stronger and more closely knit today than virtually anywhere else in the free world. There is not only a spirit of underlying unity within American society, but the United States is by an enormous margin the wealthiest nation in the free world. Finally, the threat of Soviet invasion is less immediate and frightening in North America than in Europe.

Taking these considerations together, it is at least plausible to reason that since Europe cannot carry out the task of rearmament by drawing on its own resources alone, the cost to the United States of furnishing the needed aid would be less than the cost of failing to do so. The aid required would cost the United States less than 1 percent of our gross national product. The cost of refusing to lighten the burden on the Europeans by this amount would probably be either their failure to rearm, or a deterioration of their will to survive in freedom.

Of course, no generalization applies to all European countries. The present degree of recovery differs widely from country to country. Britain can probably stand the drain of devoting nearly as large a proportion of her resources to rearmament as we can, with no worse effects. But the major continental countries--France, Italy and Germany--have not regained full health. There is widespread disaffection on the left in two of these countries. In all three the extreme right displays a notable lack of loyalty to the aims of freedom and an equal lack of ability to accommodate itself to imperative social change. It may well be within our power to compel the governments of these countries to impose excessive strains upon themselves. But until necessary adjustments in European society have been made which restore health, stability and the confidence of the people in the future, it would be the greatest folly to attempt to exert such pressure.

Third: The United States must join the Europeans in an effort to increase the supply of scarce foods and raw materials, to utilize them with maximum efficiency, and to hold down their prices. In this endeavor, we obviously have a common interest. The Europeans certainly cannot accomplish these purposes alone and it is doubtful if we could safeguard ourselves without their help. Nevertheless, to be successful we shall have to bargain with the Europeans and with the primary producers in a tough-minded fashion.

To be effective any such policy must include at least three elements. To begin with, Europeans and American must find ways to prevent the terms of trade from continuing to shift against them. There are many devices they can jointly invoke. The most gentlemanly, if it will work, is the control of supplies and prices by agreement among exporting and importing countries. If this will not work, or if agreements require enforcement, import controls may be used and the industrial countries can resort to exclusive buying in particular markets as in World War II. The success of such a buying club will depend on the discipline of members in not breaking away for the sake of individual gain. The problem of securing discipline among ten important industrial countries when the occasion is rearmament is quite different from the problem facing an Anglo-American alliance during a shooting war.

Even if such a policy could successfully be enforced, however, it would be not only unfair to the primary producers but too austere for the industrial nations as well. Britain's stalemate with the Argentine over meat is a perfect example of the way in which the effort to drive too hard a bargain can dry up supply. The fact is that, rearmament aside, the world is facing a relative shortage of primary commodities. The purpose of international arrangements to control price should not be to milk the primary producers, or even to reduce the terms of trade to some traditional ratio, but rather to prevent a destructive rise in commodity prices. For this would provoke a damaging inflation in the primary producing areas as well as in the industrialized sectors of the free world.

If the first element in an effective policy is price control, the second must be a skillful and ordered use of consumer goods, capital goods and industrial products to elicit food and raw material supplies. The primary producing nations, at least, remember that trade is, ultimately, barter. In World War II they accumulated, in the aggregate, 30 or 40 billion dollars of dollar and sterling balances; that is, they sold goods to this prodigious value in exchange for I.O.U.'s. While the war continued, they found themselves in the grip of tight controls, enforced, ultimately, by the allied control over shipping. These controls made them unable to obtain what they regarded as the absolute necessities of life. Then the postwar inflation cut the value of their holding by one-third. It is altogether understandable that they will do everything in their power to avoid playing this particular game again.

Moreover, their power is considerable at this moment for two reasons. First, precisely because of the relative scarcity of the primary commodities. And second, because this time they have a wide market in which to trade. So long as the North Atlantic nations are in a state of only partial mobilization, so long as vessels carrying the Panamanian flag can still trade freely, controlled by no Ministry of War Transport or War Shipping Administration, the bargaining power of the primary producers is probably greater than that of the industrial nations. Under these circumstances, the refusal of one industrial country to supply its normal volume of coal, petroleum, steel, textiles and even a small flow of capital equipment is bound to cut in return the supply of meat, grains, coffee, non-ferrous metals, rubber and all the other primary commodities that are the sinews of rearmament.

This is not an argument for treating the primary producers with rash generosity. It is clearly to the interest of the North Atlantic allies collectively to drive a hard bargain in terms of quantities as well as in terms of prices. But it would be disastrous to fail to make any bargain or to fail to include Europe's industrial output as an element in that bargain. To view the problems as simply a series of bilateral trades for the United States or the United Kingdom or France would be to lose sight of their essential nature. What is needed is machinery to enable the North Atlantic countries to act in concert in making the best possible use of their exportable surplus of industrial goods to obtain the primary commodities they require. To help blueprint such machinery and put it to work is an inescapable part of our task today.

Fourth: The final element of an effective policy in this field must be a control over the use of scarce materials which will direct them to essential purposes in Europe as well as in North America. The United States must see to it that materials are not more freely available for relatively low priority uses in Europe than here. Yet we must avoid, if at all possible, a major dislocation of European industry. To pursue this latter course in a flexible, common-sense manner is one way in which the United States should extend aid to Europe in the years immediately ahead.

An inadequate supply of raw materials to Europe will not only impede rearmament directly, but will also cut back European production in general and reduce productivity in particular. This development could, therefore, both impair Europe's strength and widen the fissures in European society, thus gravely weakening our allies. Some dislocation of European industry is, no doubt, inevitable. But it should be the policy of the United States to prefer to curtail luxurious use of scarce materials here rather than to force a cutback in production abroad. In the long run, this procedure would reduce the real burdens on the American people and would contribute both to a spirit of coöperation and to larger output for the Western alliance.

It is not easy to see how the whole series of complex and interrelated bargains about commodities will be made by the United States Government. But it cannot be too strongly emphasized that skill in this activity can probably do more for the success of our cause than the furnishing and administering of financial aid. It is, of course, mandatory for us to continue to finance some transfer of resources to Europe. Yet the major preoccupation of American foreign economic policy must henceforth be to make the best use of the things we export in order to obtain the goods, and to induce the behavior that the American interest requires.

Fifth: In the administration of aid, and in our other contacts with Europe on economic concerns, we must do everything in our power to help raise productivity and improve the distribution of income in continental Europe. This is, as previously remarked, the unfinished business of the Marshall Plan. It has become even more crucial now than before the beginning of rearmament. For the next two or three years, the resources of the free world will simply not be adequate to support a further rise in the standard of living. The rate at which economic conditions improve for the average European is bound to slacken, even on the most optimistic assumptions. In some countries, the rapid gains which marked the last few years will be followed by a setback. It is vital for the strength of the free world that this setback be as limited as possible. Moreover, since some setback is inevitable, it is doubly necessary that distribution of income be more equitable, and that we help to generate among all Europeans a sense of progress and a hope for large and lasting advances over the long haul.

These advances must be rooted in an increase in productivity. The phrase is appealing; it would seem that everyone must favor an increase in productivity and that everything that would hasten this result must have the support of all parties and of all classes. But let there be no misunderstanding on this score. A great many people in Europe will have to face the hard cold facts if anything is to be accomplished. Higher productivity is unlikely if restrictionism continues to be the order of the day in finance, industry and commerce. To revive genuine competition in Europe means not only to eliminate most trade barriers at national frontiers but, in a very real sense, to revive the entrepreneur class. In plain terms, that means men willing to accept and to act on the central principle of modern capitalism, namely, that profits are the reward of risk, enterprise, efficiency, innovation and sound labor relations.

A vigorous and free labor movement is a prerequisite for that kind of industrial society. Today the Continent's labor movement is social democratic in Scandinavia and the lowlands, but Communist dominated in France and Italy. The minority of free unions in these countries cannot regain the leadership of the masses unless they are aggressive. And an aggressive labor union, at least over the short run, may seem to harm rather than help the interests of those against whom its aggressiveness is directed. There is no telling just what inroads a truly competitive industry in Europe would make against many institutions that are carryovers from feudal days. Higher productivity is as necessary in agriculture as in industry. And to increase output, reforms in land tenure as well as in agricultural methods must be adopted. In short, if a vigorous society is again to flourish in Europe, changes in the structure of the European economy must be carried through. The pressure of external political events lends an urgency to the need for change that vastly magnifies the difficulty of bringing it about. It may be argued that this is the design for a New Deal in Europe. But any such argument will be far from the truth. What is necessary is a peaceful revolution which can incorporate into the European economic system certain established and attractive features of our own, ranging from high volume production to collective bargaining.

What social forces can be unleashed in Europe to achieve this result? What leverage can the United States exert to foster them? The detailed answer would require a volume. The broad answer is that the United States must exploit to the full the example of its own accomplishments and their powerful appeal to Europeans (and others) among all groups. Coca-Cola and Hollywood movies may be regarded as two products of a shallow and crude civilization. But American machinery, American labor relations, and American management and engineering are everywhere respected. The hope is that a few European unions and entrepreneurs can be induced to try out the philosophy of higher productivity, higher wages and higher profits from the lower prices of lower unit cost. If they do, if restrictionism can be overcome at merely a few places, the pattern may spread. The forces making for such changes are so powerful that, with outside help and encouragement, they may become decisive. It will not require enormous sums of money (even of European capital) to achieve vaster increases in production. But it will require a profound shift in social attitudes, attuning them to the mid-twentieth century.

Finally, it cannot be said too often that an effective United States economic policy toward Europe cannot be passive; it must be affirmative and active. Consequently, the American interest demands constructive social and economic change in the free world. The United States Government cannot help being (as it has been for the last three years) concerned with such matters as the distribution of income in Germany, the wages of industrial labor in France, the ownership of land in southern Italy, and the commercial and financial policies of the British Government. A blundering interference in these matters would, of course, frustrate its own purpose. And it must remain a cardinal precept of our foreign policy that it is no business of ours to try to upset a deliberate and orderly democratic choice of the people of any country about the conduct of their own affairs. Affirmatively, however, the conduct of our foreign policy must consist in the use of all the elements of American strength to encourage, among other things, the progressive developments in the world that alone can make it peaceful and safe.

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