Washington’s Missing China Strategy
To Counter Beijing, the Biden Administration Needs to Decide What It Wants
AT THE end of March a new Belgian government of national union was constituted, with the coöperation of the three chief Belgian parties -- Catholics, Socialists and Liberals -- and with Paul Van Zeeland as Prime Minister and Minister for Foreign Affairs. The program of economic recovery which this government presented to Parliament is inspired by new principles and utilizes new methods.
In its monetary policy the Van Zeeland government was obliged to take cognizance of the new situation created by the de facto suspension of the gold standard on the day when the late Theunis government had taken over control of exchange. The Premier therefore announced that he was forced to devaluate the belga slightly, in order to obviate a serious economic and banking crisis. This new orientation of the monetary policy was a direct challenge to current public opinion and to the ideas held by the majority of Parliament.
In order to restore confidence in the banking system, which threatened to be badly shaken, a series of financial measures was proposed: a state guarantee of bank deposits, should that prove necessary; the creation of a National Institute for Rediscount and Guarantee; the creation of a Central Mortgage Institute; and, finally, the coördination of the banking system with government policy.
By way of general measures of economic expansion, the new government chiefly contemplated a rise in wholesale prices sufficient to put business once more on a profitable basis, a gradual and moderate rise in retail prices and the cost of living, a general lowering of interest rates as a preliminary to the conversion of government securities, the wholesale reduction of taxes, the supervision of stock exchange operations to prevent undesirable speculation, and the adoption of a public works program. A Bureau of Economic Reform, with the Prime Minister as chairman, was entrusted with the task of coördinating and harmonizing these efforts. As for social policy, the government announced a program for the gradual organization of the professions. And in the field of foreign economic policy, commercial relations with the Soviets were to be developed on a basis of reciprocity.
Inevitably there was criticism of the program which I have roughly outlined, on the score that it was a slavish copy of the American New Deal. In Parliament several speakers made this remark, among them Henri Jaspar, a former Prime Minister, who violently opposed the abandonment of the old gold parity. "This program is no novelty," he said. "Everything about it, even its title, is borrowed. We know the New Recovery Deal in America. We know where the inspiration came from. Elsewhere money has been devalued by decree, banks put under control, and economy controlled. I am very much afraid that the Prime Minister is being too deeply influenced by his reading and by his travels. Travelling educates youth, but sometimes distorts it. The United States devalued the dollar, as a result of the surplus of bank credit and the ruin of the farmers, with the intention of raising domestic prices. But the consequences did not correspond to the plan. The American unemployed have not been put back to work. Controlled economy has proved a fiasco. American foreign trade has shrunk 75 percent. Recent statistics show that there are twenty millions on relief in the United States and that one-third of the population of New York is now living on charity or public assistance. Devaluation and controlled economy are not the remedy for economic evils. The United States stretches over a whole continent, has all essential raw materials at its disposal, and is protected by formidable customs walls. Yet its experiment was unsuccessful. And we are much less fortunately situated."
Many articles in the Belgian and French press repeated the same theme. This was natural in view of the sympathy with which the new Prime Minister had followed the American experiment. He has lived in America and knows it well. He holds a degree as Master of Arts of Princeton University, and he returned to the United States in 1933 to give a series of lectures at Johns Hopkins University, at which time he watched the first phases of the Roosevelt experiment.
On his return to Belgium M. Van Zeeland made his impressions public on several occasions, but it is not to be concluded that his praise of President Roosevelt was entirely uncritical. Replying to the speech of M. Jaspar, which I have just quoted, he said: "Much has been said about the Roosevelt plan and its application. I maintain that President Roosevelt's action helped the situation with which he was confronted when he came to power. I have the greatest admiration for him. I say this with hesitation. I felt more than admiration for President Hoover. He made an extraordinary effort to save his country. He failed. President Roosevelt has succeeded. His country continues its orderly life, despite certain partial setbacks. I have two serious objections to the work of Mr. Roosevelt. The first concerns the reduction of working hours at the same time with a rise in wages. The second concerns his monetary policy. In the United States devaluation was voluntary. If he had adopted a policy of expansion, he would have put an end to the world crisis. I wrote this some time ago. Here, too, we defended the franc. I myself said that we must defend it. But the moment came when this was no longer possible as a primary objective."
There certainly are points at which the new Belgian policy and President Roosevelt's New Deal run parallel, but the analogy must not be pushed too far. Closer study shows essential divergencies between certain of the guiding concepts, and also between methods and the way in which they are applied. The Belgian reforms do not aim at a premature revival of business by the artificial manipulation of wages, hours of work, prices and currency. The aim is more limited and less ambitious. Our recovery program starts from the basic principle that, before the devaluation of the belga, Belgium's purchasing power was at a disadvantage of about 28 percent. This disparity had compelled previous governments to adopt a deflationary policy which worked out unfairly in practice and upset the country's economic equilibrium. The objective is to restore internal equilibrium and to favor economic expansion on this new basis.
All my references to American politics are made subject to reservations, as it is difficult at this distance to estimate the Roosevelt experiment accurately. Generally speaking, such news as we get from the United States is often incoherent. The comments of the leading newspapers seem mostly unfavorable. Public opinion is apparently baffled by the empirical character of the experiment, by its complexity, and by the elliptical nature of many of President Roosevelt's statements. Even those of us who follow events closely have the greatest difficulty in forming a precise idea of events as they occur on the other side of the Atlantic. Therefore, when I mention certain points of similarity and divergence between Belgian and American policy my remarks are subject to reservations so far as the United States is concerned.
II. WHY THE BELGA WAS DEVALUED
First of all I must try to place the new Belgian economic policy in its general setting.
The fundamental reason why our economic situation has been so difficult in recent years was the disparity in purchasing power between Belgium and most of the other nations which had abandoned the gold standard, especially those on sterling. Before September 1931 the disparity in purchasing power had been the other way about, being between 15 and 20 percent in our favor. But the depreciation of the pound sterling transformed the situation, and created in the end a disparity of purchasing power between Belgium and most of the rest of the world of some 28 percent. Now Belgium is a small country which is not self-sufficient. International trade is of primordial importance. The Belgian Government was therefore in a dilemma: either to devalue the currency or lower costs by the classic methods of the policy of deflation.
Remembering an experiment in currency inflation which terminated in the stabilization of the franc in 1926, public opinion was resolutely hostile to all currency manipulation, and the various governments which asked for special powers in the course of 1934 put the maintenance of the franc at its gold parity at the head of their deflation programs. In a strictly technical sense it is true that the currency problem did not arise; the gold reserve of the National Bank of Belgium amounted to about 65 percent. But, from an economic point of view, it was necessary for Belgian costs to be lowered in order to enable the export industries to meet international competition successfully.
Theoretically the deflation program was perfect. It included the reduction of fiscal and financial charges, taxation relief, a reduction in the cost of living, a cheap money policy, the maintenance of budgetary equilibrium. But in practice the policy encountered a formidable obstacle: the rigidity of the various elements in the cost of production. In spite of all efforts, and in spite of partial successes, the disparity between Belgian and English prices grew continually worse. As it was carried out, the policy of deflation was excessive and led to contradictions. The government wanted to discourage hoarding by stimulating purchases, but at the same time it announced further reductions in price, which encouraged hoarding. From the agricultural point of view, the comparison between Belgian costs and foreign costs, the latter lowered by the practice of monetary or other dumping, forced the Belgian Government to take protective measures and to establish quotas in favor of the farmers. This resulted in a rise in the cost of living, which was contrary to the general policy of the government. The same phenomenon occurred with coal, certain chemical products, and many manufactured goods.
It cannot be denied that in many fields the fall in Belgian prices had reached an exaggerated stage. Far from restoring an equilibrium, the policy of deflation was unequal in its effects, and most Belgian businesses showed a loss. In 1934, out of 7,334 joint stock companies more than 3,000 operated at a deficit. There naturally was an increase in unemployment. Because of this unemployment, even allowing for the reduction in the cost of living, the purchasing power of the working class was reduced one-fifth in comparison with 1929.
Because of this lack of return on money invested, the money rate had to remain high, which made impossible the conversion of government securities. Furthermore, the disappearance of taxable sources of revenue reduced receipts, which seriously compromised the budgetary equilibrium. That the increase in real charges was even greater becomes evident when we consider that the bonded debt of the joint stock companies rose from 4,000 million Belgian francs to 10,500 million between 1929 and 1934. During the same period the index of retail prices fell 28 percent and that of wholesale prices 43 percent. From 1929 to 1934 the tonnage of Belgian exports fell 20 percent, while the value of exports fell 56 percent. These figures demonstrate the extent of the business losses incurred by Belgian enterprises. The annual index of production (based on the years 1923-1935) had declined 42 percent in 1934 compared to 1929. National activity decreased to a point lower than that reached at a time when economic recovery after the war was not yet complete, and this despite a considerable increase in the means of production.
Because of the relatively close ties between the banks and numerous industrial enterprises, the unfavorable economic situation necessarily involved the banks in difficulties. On several occasions previous governments had been obliged to help them out. The help had been useful, but it was temporary and insufficient. In the circumstances, the tendency to hoard could not but become more pronounced, and Belgian capital migrated to countries where a halt in the policy of deflation had restored a margin of profit to industry.
Here we come to the immediate reasons for the devaluation of the belga. A first wave of gold withdrawal from the National Bank of Belgium had occurred at the beginning of 1934, but an important part of this gold was subsequently recovered. A second wave occurred in June, and a third and much more important one in October and November, before the resignation of the de Broqueville government. Since October the National Bank has lost 2,000 millions of gold francs. On the day when the Theunis government received a vote of confidence from Parliament, this movement stopped; but contrary to what happened before, the gold that had been withdrawn did not return to the Bank.
A more serious fact was that the gold was not purchased with hoarded money. The public withdrew its deposits from private banks. But the banks were already short of available funds, and the loss of the deposits exhausted their assets. The weak point in the situation, which was the direct and immediate cause of the devaluation of the belga was, therefore, the difficult position of the private banks, arising out of the withdrawal of deposits, and not the technical position of the bank of issue, which remained solid. The export of capital had increased considerably at the beginning of March, because the further fall of the pound sterling in relation to the gold currencies had accentuated the divergence between Belgian and English cost prices, thereby almost nullifying the efforts of eight months of deflation in Belgium.
As the gold losses were particularly heavy on March 16, the Theunis government decided on the control of exchange, and next day resigned. This meant practically going off the gold standard, and M. Theunis realized that the corollary was the devaluation of the franc. A final effort had been made during the visit of the Belgian ministers to Paris on March 15, with a view to obtaining certain economic advantages. The result had been negative, and the government resigned to make way for the National Union Government. The modification of the Belgian monetary system was the result of economic difficulties. We had to choose between sacrificing the currency and sacrificing the national economy -- the banks, business, and industry.
There were no alternative solutions. If we had wished to preserve the gold parity of the franc, we should have had to engage in a policy of economic expansion on that monetary basis. This would have meant a system of autarchy, of economic nationalism. The Belgian economy, which is dependent for its existence upon exports, did not permit of our isolating ourselves from the rest of the world. On the other hand, it was absolutely impossible, from an economic no less than from a social and political point of view, to continue along the road of deflation followed by previous governments. The evidence already adduced is sufficient proof. Those who know the state of Belgian public opinion at the time when the Van Zeeland government came before Parliament realize how courageous it was to brave the feelings of the majority, who wished to maintain the franc at its gold parity, without suspecting what that would involve.
III. COMPARISONS WITH AMERICA: DEVALUATION
The devaluation of the belga, then, was not voluntary. As Prime Minister Van Zeeland said in his speech to Parliament, Belgium was pushed off the gold standard. The fundamental reason was the difference between international prices governed by the pound sterling and Belgian costs. This explains why the depreciation was fixed at between 25 and 30 percent. As a matter of fact, Belgium's disadvantage in purchasing power was estimated at 27 or 28 percent. By choosing this rate of devaluation Belgium approximates Belgian prices to the level of world prices and suppresses those tendencies which would have resulted in debasing the currency. For the present, the belga has been stabilized at 72 percent of its old parity. The definitive rate will be fixed later on, when an international arrangement has been made to stabilize the principal world currencies on a gold basis. The Belgian Government hopes that day will come as soon as possible. Meanwhile a fund for the equalization of exchange has been set up to maintain the stability of the belga on its present provisional basis.
The devaluation of the belga, therefore, cannot be compared to that of the dollar, which was undertaken voluntarily and with a more ambitious object in view. On several occasions President Roosevelt has declared his intention of causing a rise in American domestic prices in order to relieve the debt burden. If at the beginning it was the President's intention to obtain a general rise in prices approximately equal to the gradual increase in the price of gold, it would seem that the results so far must have caused a certain disappointment, since the general index of prices has increased only 30 percent, or thereabouts, whereas the price of gold had risen 70 percent. No doubt it is too early to draw conclusions. Agricultural and raw material prices have risen appreciably, and when we try to determine the reasons and the part played by devaluation we find the problem becoming highly complicated. A number of other factors, having no monetary significance, must be taken into account, particularly the drought of June 1934, the program of crop curtailment, and the policy of industrial codes. Without passing judgment on these diverse measures of President Roosevelt, I shall content myself with pointing out that the devaluation of the belga was effected in different circumstances, and that it cannot be compared to the devaluation of the dollar in respect to the principles which dictated the operation.
IV. COMPARISONS WITH AMERICA: THE RISE IN PRICES
The Belgian price policy also must be considered as a readaptation of conditions for a return to normal. The index of Belgian wholesale prices had particularly shown the pressure of world prices. Consequently, devaluation should cause them to rise rapidly. As for retail prices, which reflect the trend of costs in a more general way, the government feels that they should rise gradually and moderately. Their rise should not correspond to the rate of depreciation, since, as a result of devaluation, Belgian prices are merely joining the level of world prices. But as Belgium imports about 25 percent of her foodstuffs and raw materials (of wheat 75 percent), prices in these categories must rise. Previous governments wished to prevent an excessive fall in agricultural prices by means of licence taxes and quotas. The relaxing of these quotas and the abolition of licence taxes will make it possible to avoid a rise in prices proportionate to the rate of devaluation. Furthermore, the Belgian Government holds that the present level of retail prices is abnormally low, and that a rise of 10 to 15 percent would restore them to their 1931 level, thus permitting a revaluation of real property and stocks, which have been artificially depreciated.
The text of the government statement concerning its price policy is worth quoting:
Our entire policy will be turned in the direction of economic expansion, the only true method of ensuring the elimination of unemployment.
Business recovery depends upon the restoration of the profit margin. No business can continue to function at a permanent loss. Our efforts will be concerned with both prices and production costs.
So far as prices are concerned, we feel that the fall must be stopped, because in every category it has certainly gone beyond the point of economic equilibrium. Wholesale prices will rise certainly and rapidly, as a result of the monetary measures adopted. Thus will be reduced the abnormal disparity which persists, despite all our efforts, between wholesale and retail prices.
Regarding the latter, we feel that a gradual and moderate rise is desirable in the present state of affairs. We see in this a means of relieving the critical situation of the middle classes, particularly those engaged in retail trade. The ideal, of course, would be perfect stability. We shall see to it that there is no rapid rise, and to that end we shall use every means at our disposal. Without abandoning the legitimate protection of our agricultural interests, we shall take care that the system of quotas and licences does not cause an additional rise in prices.
It is, however, chiefly by means of sustained and energetic measures dealing with various factors in the cost of production that we propose to give business back the margin of profit which is indispensable to its continued activity. To this end we shall particularly strive to alleviate the financial and fiscal burdens which handicap enterprise. We shall pursue a definite policy of abundant and cheap credit. The measures which we have taken with a view to banking reorganization will have provided us with the necessary basis.
We see, therefore, that the Belgian Government hopes to promote business recovery, and thereby increase the purchasing power of the masses, by restoring the margin of profit in business undertakings, which will be facilitated by the reduction of fiscal and financial burdens. In order to help this recovery and to hasten the return of the unemployed to work, a public works program is under consideration, but there is no question of stimulating mass purchasing power by artificial means. Thus it is stipulated in the government statement: "During the transition period we shall do all that lies in our power to give real hourly wages a stability which will facilitate business expansion. . . . By increasing the total of salaries paid the working class as a whole, that is, by putting the unemployed back to work and eliminating workless days, we hope to restore the former standard of living in Belgium."
Here, I believe, the Belgian policy perceptibly diverges from the principle which seems to have been the basis of various important measures adopted by the Roosevelt Administration. The latter appears to have aimed to increase the purchasing power of the people, not only by monetary manipulation, but also by artificially increasing wages while reducing working hours. As regards agricultural prices, the increase of these with a view to stimulating the purchasing power of the farmers was sought by a reduction of crops and the payment of a bonus to those consenting to reduce the area of cultivation. As regards industry, it would seem that the policy of N.R.A. codes has succeeded in assisting the production of consumers' goods, but has failed to stimulate producers' goods. In Belgium, on the contrary, the government is trying to assist immediately those industries which had suffered most from the pressure of world prices, in such wise as to restore a more equitable balance between producers' goods and consumers' goods. The mining, glass, and textile industries, all particularly hard hit since 1931, will certainly find their position improved during the course of the next few months, as a result of the increase in wholesale prices, which will not be followed by an equivalent rise in retail prices.
In agriculture, Belgium has no intention of adopting American methods. The adjustment of the currency favors Belgian agriculture directly by protecting it from the dumping of cheap-money countries. Nor is there any question of reducing crops artificially (they actually are insufficient to meet the needs of national consumption) in order to equalize the purchasing power of agriculture and industry on a pre-war price basis. That experiment is specifically American.
V. COMPARISONS WITH AMERICA: RELIEF
Now let us turn to social legislation. On this point it may be said that the United States is now trying to reach the level which Western European countries achieved a number of years ago. Unemployment insurance and old age pensions were organized in Belgium after the war. Belgian unemployed are directly supported on a daily dole; but the present government will try to some extent to substitute payments for useful public work for this direct dole, by means of a program of public works. It is out of the question, however, that public works expenditures in Belgium should ever reach the proportions of these now current in America, nor is the creation of work camps contemplated.
The financing of a too ambitious public works program would add to the public debt at a time when the latter already absorbs a third of the ordinary budget expenditures. Further, when public works expenditure reaches such dimensions, one may well ask whether it is not coming into direct competition with private enterprise, which thereby is discouraged instead of being stimulated. On the other hand, a moderate program of public works in Belgium would facilitate a return to the state of domestic equilibrium which is the present government's objective.
VI. COMPARISONS WITH AMERICA: THE STATE AND THE BANKS
From what I have already written it will have been evident that intervention by the state in the country's general economy has not gone so far in Belgium as in the United States. This is further confirmed by an examination of the banking reorganization in Belgium.
Until 1934 the structure of Belgian banking remained intact. Financial institutions had succeeded in surviving the crisis without outside help. But at the beginning of 1934 a panic caused by a sharpening of the crisis led to the withdrawal of deposits. The Belgian Socialist Workers' Bank, whose importance was secondary and whose situation was intrinsically unsound, got into difficulties, as did the socialist coöperative societies. To prevent the panic from spreading, the government decided to come to the assistance of the bank by a loan to the coöperatives. Repayment was to be made later by the coöperative societies out of their profits. But a strong reaction in public opinion prevented the bank from being saved, and the socialist coöperative societies received limited credits, subject to strict guarantees. In the summer of 1934 a new wave of uneasiness led the de Broqueville government to create a system of credit expansion. Two thousand millions in obligations were to help the National Society of Credit for Industry. As a matter of fact this expansion of credit did not occur, but the worst had been avoided. In November the Boerenbond and the Flemish Catholic coöperative societies needed government help.
At the beginning of 1935 wholesale withdrawals of capital were resumed on a still larger scale. The pressure of deflation was weighing more and more heavily on the country. Immediately the new Van Zeeland government took steps to avoid a banking moratorium. It declared that if necessary it would go so far as to guarantee bank deposits. But the new trend in economic policy induced huge returns of capital, thereby obviating the necessity for a decision of this kind.
In order so far as possible to avoid the recurrence of such difficulties, the Van Zeeland government is planning important reforms. To facilitate the expansion of credit, an Institute for Rediscount and Guarantee will enable the banks to undertake a more bold credit policy and to grant direct discount to producers without any other effective protection. The government also intends to develop the market for short-term private bills, following the British model. As an essential reform, the government intends to set up a control of banks. Its view is that the separation of deposit banks and business banks, decreed by the de Broqueville government on August 22, 1934, is not sufficient to prevent future mistakes.
Before joining the present government, the Socialist Party had adopted as their program the so-called "De Man Plan," the author of which is at present Minister of Public Works and Relief. This program, inspired by doctrinaire considerations, demanded the control of credit and the nationalization of the banks. In agreeing to coöperate with the government, the Socialists temporarily abandoned certain of their demands. The ministerial statement does not include state participation in the capital of the banks, as demanded by M. De Man. For the moment, the Socialists are satisfied with regulation of the banks and control of credit by the National Bank or some other organization. They thus have evinced a spirit of coöperation at a time when it was imperative that all agree on a minimum program.
Although the banking system of the United States is hardly comparable to that of Belgium, it would seem that under President Roosevelt intervention by the state has proceeded further in America than in Belgium. Long since regulated by legal statute, the American banks must comply more and more with Federal instructions, so far as the expansion of credit is concerned. They are compelled to accept large quantities of government securities, which makes their solidity and liquidity dependent on the Administration's financial policy. As a result of the governmental guarantee of deposits, their solvency also depends upon the state. The banking clean-up of April 1933 was conducted according to the classical rules; but it appears that since then nationalization of the banks has been pushed further ahead.
VII. COMPARISONS WITH AMERICA: THE STATE AND PROFESSIONAL ORGANIZATIONS
Without going so far as the American law of June 13, 1933, which instructed each profession to draw up a code of fair competition designed to safeguard the interests of employers, employees, and consumers, Belgian legislation is nevertheless moving in that direction. On January 13, 1935, the Theunis government permitted the institution of economic regulations governing production and distribution. Addressing the Minister of Economic Affairs, it directed: "Any group of producers or distributors may request that there be extended to all other producers or distributors belonging to the same branch of industry or commerce, a voluntary agreement regulating production, distribution, sale, exportation, or importation." In order to forestall sudden decisions which might favor particular interests, a precise form of procedure is provided. This Belgian law, therefore, is not so comprehensive as the American or Italian legislation in the same field.
The new government intends to proceed further in this direction. It proposes to create organizations of an intermediary nature, professional groups, which shall themselves fulfil the economic functions of which they are capable, without state intervention. At present it is difficult to foresee to what extent these projects will be realized.
It will be seen that very probably the new policy of the Belgian Government is to be a policy of controlled economy, particularly in view of the personal ideas of Premier Van Zeeland and the Minister of Public Works. Their doctrines will differ. The one, a Catholic, will be inspired by the teaching of the Encyclical Quadragesimo Anno; the other, a Socialist, is a partisan of a more advanced form of nationalization. But both agree as to the immediate necessity for state intervention in the economics of the country. It is hard to say to what extent a program of controlled economy can be put into practice in Belgium. Public opinion is in the main definitely hostile to it. As for the manner and methods of intervention, these will depart considerably from those employed in the United States, due principally to the fact that the conditions of application are different.